Notes
to the Condensed Consolidated Financial Statements
June
30, 2021 and 2020
Note
1 – Organization and Operations
History
On
March 13, 2015, Diego Pellicer Worldwide, Inc. (the Company) (f/k/a Type 1 Media, Inc.) closed on a merger and share exchange
agreement by and among (i) the Company, and (ii) Diego Pellicer World-wide 1, Inc., a Delaware corporation, (“Diego”),
and (iii) Jonathan White, the majority shareholder of the Company. Diego was merged with and into the Company with the Company
to continue as the surviving corporation in the merger.
Business
Operations
The
Company leases real estate to licensed marijuana operators, providing complete turnkey growing space, processing space, recreational
and medical retail sales space and related facilities to licensed marijuana growers, processors, dispensary and recreational store
operators. Additionally, the Company plans to explore ancillary opportunities in the regulated marijuana industry, as well as
offering for wholesale distribution branded non-marijuana clothing and accessories.
The
properties generating rents in 2021 and 2020 are as follows:
|
Purpose
|
|
Size
|
|
City
|
|
State
|
|
Retail store (recreational
and medical)
|
|
3,300 sq.
|
|
Denver
|
|
CO
|
|
Cultivation warehouse
– terminated October 2020
|
|
18,600 sq.
|
|
Denver
|
|
CO
|
|
Cultivation warehouse
|
|
14,800 sq.
|
|
Denver
|
|
CO
|
The
Company’s three properties in Denver, CO (one terminated in October 2020) are leased to Royal Asset Management, LLC (“RAM”).
RAM opened the Diego Denver branded flagship store in February 2017. This store is known as “Diego Colorado”. The
retail facilities have shown steady growth in sales since opening. For the other two properties subleased (one terminated in October
2020), RAM uses these properties for its cultivation facilities in Denver, CO. Production at these facilities began in late 2016.
The Company is currently exploring the acquisition of this entity, and the parties are in negotiations (see Note 4).
In
October 2020, the master lease and sublease associated with the 18,600 sq. cultivation warehouse in Denver were terminated (see
Note 4).
Note
2 – Significant and Critical Accounting Policies and Practices
The
management of the Company is responsible for the selection and use of appropriate accounting policies and for the appropriateness
of accounting policies and their application. Critical accounting policies and practices are those that are both most important
to the portrayal of the Company’s financial condition and results of operations and that require management’s most
difficult, subjective, or complex judgments, often because of the need to make estimates about the effects of matters that are
inherently uncertain. The Company’s significant and critical accounting policies and practices are disclosed below, as required
by generally accepted accounting principles.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements and related notes have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission (the “SEC”) and presented in accordance with accounting
principles generally accepted in the United States of America (US GAAP).
The
accompanying consolidated balance sheet at December 31, 2020, has been derived from audited consolidated financial statements,
but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S.
GAAP”). The accompanying unaudited condensed consolidated financial statements as of June 30, 2021 and for the three and
six months ended June 30, 2021 and 2020 have been prepared in accordance with U.S. GAAP for interim financial information and
with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by U.S. GAAP for complete financial statements, and should be read in conjunction with the audited consolidated
financial statements and related notes to the financial statements included in the Company’s Annual Report on Form 10-K
for the year ended December 31, 2020 as filed with the U.S. Securities and Exchange Commission (“SEC”). In the opinion
of management, all material adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation
have been made to the condensed consolidated financial statements. The condensed consolidated financial statements include all
material adjustments (consisting of normal recurring accruals) necessary to make the condensed consolidated financial statements
not misleading as required by Regulation S-X Rule 10-01. Operating results for the three and six months ended June 30, 2021 are
not necessarily indicative of the results that may be expected for the year ending December 31, 2021 or any future periods.
Principles
of Consolidation
The financial statements include the accounts
of Diego Pellicer Worldwide, Inc., and its wholly-owned subsidiaries, Diego Pellicer World-wide 1, Inc. and DPWW Management Company,
LLC, both of which are inactive at this time. Intercompany balances and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those
estimates. These estimates and assumptions include valuing equity securities and derivative financial instruments issued in financing
transactions and share based payment arrangements, the collectability of accounts receivable and other receivables (See Note 4),
valuation of right of use assets and lease liabilities and deferred taxes and related valuation allowances.
Certain
estimates, including evaluating the collectability of accounts receivable, could be affected by external conditions, including
those unique to our industry, and general economic conditions. It is possible that these external factors could influence our
estimates and could cause actual results to differ from our estimates. The Company intends to re-evaluate all its accounting estimates
at least quarterly based on these conditions and record adjustments when necessary.
Fair
Value Measurements
The
Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify
as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument
is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported
in the consolidated statements of operations. The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities
are classified in the balance sheet as current or non-current based on whether net-cash settlement of the derivative instrument
could be required within 12 months of the balance sheet date.
Fair
Value of Financial Instruments
As
required by the Fair Value Measurements and Disclosures Topic of the FASB ASC, fair value is measured based on a three-tier fair
value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level
1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or
liabilities;
Level
2: Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially
the full term of the asset or liability; and
Level
3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable
(supported by little or no market activity).
Fair
value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as
of June 30, 2021 and December 31, 2020. The respective carrying value of certain on-balance-sheet financial instruments approximated
their fair values. These financial instruments include cash, prepaid expenses and accounts payable. Fair values were assumed to
approximate carrying values for cash and payables because they are short term in nature and their carrying amounts approximate
fair values or they are payable on demand.
The
following table reflects assets and liabilities that are measured at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2021
|
|
Fair Value Measurement Using
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Derivative liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,777
|
|
|
$
|
4,777
|
|
|
Stock warrant liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
|
2
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,779
|
|
|
$
|
4,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
Fair Value Measurement Using
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Derivative liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,998
|
|
|
$
|
5,998
|
|
|
Stock warrant liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,999
|
|
|
$
|
5,999
|
|
Derivative
liabilities and stock warrant liabilities were valued using the Binomial Option Pricing Model in calculating the embedded conversion
features for the three and six months ended June 30, 2021 and the year ended December 31, 2020.
Cash
The
Company maintains cash balances at various financial institutions. Accounts at each institution are insured by the Federal Deposit
Insurance Corporation, and the National Credit Union Share Insurance Fund, up to $250,000. The Company’s accounts at these
institutions may, at times, exceed the federal insured limits. The Company has not experienced any losses in such accounts. Uninsured
balances were approximately $136,000 and $73,000 at June 30, 2021 and December 31, 2020, respectively.
Revenue
recognition
In
accordance with ASC 842, Leases, the Company recognizes rent income on a straight-line basis over the lease term to
the extent that collection is considered probable. As a result the Company been recognizing rents as they become payable.
During
the initial term of the lease, management has a policy of partial rent forbearance when the tenant first opens the facility to
assure that the tenant has the opportunity for success. Management may be required to exercise considerable judgment in estimating
revenue to be recognized.
When
management concludes that the Company is the owner of tenant improvements, the Company records the cost to construct the tenant
improvements as a capital asset. In addition, the Company records the cost of certain tenant improvements paid for or reimbursed
by tenants as capital assets when management concludes that the Company is the owner of such tenant improvements. For these tenant
improvements, the Company records the amount funded or reimbursed by tenants as deferred revenue, which is amortized as additional
rental income over the term of the related lease. When management concludes that the tenant is the owner of tenant improvements
for accounting purposes, we record the Company’s contribution towards those improvements as a lease incentive, which is
amortized as a reduction to rental revenue on a straight-line basis over the term of the lease.
The
Company analyzes its contracts to assess that they are within the scope and in accordance with ASC 606. In determining the appropriate
amount of revenue to be recognized as the Company fulfills its obligations under each of its agreements, whether for goods and
services or licensing, the Company performs the following
steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods
or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement
of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the
performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) the Company satisfies each
performance obligation.
Advertising
Advertising
expense was $7,928 and $8,237 for the three months ended June 30, 2021 and 2020, respectively, and was $17,809 and $15,041 for
the six months ended June 30, 2021 and 2020, respectively.
Income
Taxes
Income
taxes are provided for using the liability method of accounting in accordance with the Income Taxes Topic of the FASB ASC. Deferred
tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation
allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized and when, in the opinion
of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The computation
of limitations relating to the amount of such tax assets, and the determination of appropriate valuation allowances relating to
the realizing of such assets, are inherently complex and require the exercise of judgment. As additional information becomes available,
the Company continually assesses the carrying value of their net deferred tax assets.
Common
Stock Purchase Warrants and Other Derivative Financial Instruments
The
Company classifies as equity any contracts that require physical settlement or net-share settlement or provide us a choice of
net cash settlement or settlement in our own shares (physical settlement or net-share settlement) provided that such contracts
are indexed to our own stock as defined in ASC Topic 815-40 “Contracts in Entity’s Own Equity.” The Company
classifies as assets or liabilities any contracts that require net-cash settlement including a requirement to net cash settle
the contract if an event occurs and if that event is outside our control or give the counterparty a choice of net-cash settlement
or settlement in shares. The Company assesses classification of its common stock purchase warrants and other free-standing derivatives
at each reporting date to determine whether a change in classification between assets and liabilities is required.
Stock-Based
Compensation
The
Company recognizes compensation expense for stock-based compensation in accordance with ASC Topic 718. The Company calculates
the fair value of the award on the date of grant using the Black-Scholes method for stock options and the quoted price of our
common stock for common shares; the expense is recognized over the service period for awards expected to vest. The estimation
of stock-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ
from original estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised. The Company
considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience.
Income
(loss) per common share
The
Company utilizes ASC 260, “Earnings per Share” for calculating the basic and diluted loss per share. In accordance
with ASC 260, the basic and diluted loss per share is computed by dividing net loss available to common stockholders by the weighted
average number of common shares outstanding. Diluted net loss per share is computed similar to basic loss per share except that
the denominator is adjusted for the potential dilution that could occur if stock options, warrants, and other convertible securities
were exercised or converted into common stock. Potentially dilutive securities are not included in the calculation of the diluted
loss per share if their effect would be anti-dilutive. The Company has 231,135,631 and 699,197,733 common stock equivalents at
June 30, 2021 and 2020, respectively. For the six months ended June 30, 2020, these potential shares were excluded
from the shares used to calculate diluted earnings per share as their inclusion would reduce net loss per share.
Legal
and regulatory environment
The
cannabis industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations
include, but are not limited to, matters such as licensure, accreditation, and different taxation between federal and state. Federal
government activity may increase in the future with respect to companies involved in the cannabis industry concerning possible
violations of federal statutes and regulations.
Management
believes that the Company is in compliance with local, state and federal regulations and, while no regulatory inquiries have been
made, compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory
actions unknown or unasserted at this time.
Recent
accounting pronouncements.
The
Company believes recently issued accounting pronouncements and other authoritative guidance for which the effective date is in
the future either will not have an impact on its accounting or reporting or that such impact will not be material to its financial
position, results of operations and cash flows when implemented.
Note
3 – Going Concern
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has
incurred losses since inception, its current liabilities exceed its current assets by $9,963,647 at June 30, 2021, and it has
an accumulated deficit of $54,673,240 at June 30, 2021. These factors raise substantial doubt about its ability to continue as
a going concern over the next twelve months. The financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
The
Company believes that it has sufficient cash on hand and cash generated by real estate leases to sustain operations provided that
management and board members continue to agree to be paid company stock in exchange for accrued compensation. There are other
future noncash charges in connection with financings such as a change in derivative liability that will affect income but have
no effect on cash flow.
Although
the Company has been successful raising additional capital, there is no assurance that the company will sell additional shares
of stock or borrow additional funds. The Company’s inability to raise additional cash could have a material adverse effect
on its financial position, results of operations, and its ability to continue in existence. These financial statements do not
include any adjustments that might result from the outcome of this uncertainty. Management believes that the Company’s future
success is dependent upon its ability to achieve profitable operations, generate cash from operating activities and obtain additional
financing. There is no assurance that the Company will be able to generate sufficient cash from operations, sell additional shares
of stock or borrow additional funds. However, cash generated from lease revenues is currently exceeding lease costs, but is insufficient
to cover operating expenses.
Note
4 – Accounts Receivables and Other Receivables
As
disclosed in Note 1, the Company subleases two properties in Colorado to Royal Asset Management at June 30, 2021. At June 30,
2021 and December 31, 2020, the Company had outstanding receivables from the subleases totaling $543,319 and $523,958, respectively,
and during the six months ended June 30, 2021 and 2020 the Company’s subleases with RAM accounted for 100% of the Company’s
revenues.
In
addition to the receivables from the subleases, the Company has agreed to provide RAM and affiliates of RAM up to an aggregate
amount of $1,030,000 in financing. These notes accrue interest at the rates ranging from 12% to 18% per annum. As of June 30,
2021 and December 31, 2020, the outstanding balance of these notes receivable total $591,081 and $1,030,422, respectively, including
accrued interest of $261,081 and $300,422, respectively. The notes are secured by a UCC filing and also $400,000 of the balance
was personally guaranteed by the managing member of RAM. Our position is subordinate to the CEO’s note described in Note
6. We have recorded interest income of $27,579 and $32,846 during the three months ended June 30, 2021 and 2020, respectively.
We have recorded interest income of $54,429 and $65,692 during the six months ended June 30, 2021 and 2020, respectively. In April
2021, we received a payment of $400,000 of note principal and $93,770 of related accrued interest.
If
we do consummate any agreement to acquire Royal Asset Management, part of the purchase price will be paid through receivables
that are owed to us (see below).
On
September 9, 2020, we closed on a Membership Interest Purchase Agreement dated September 4, 2020, and obtained the right to acquire
a 15.13% membership interest in Blue Bronco, LLC. The purchase of the 15.13% interest in Blue Bronco LLC is subject to the approval
of the Colorado Marijuana Enforcement Division. Necessary approval by governing authorities is expected to be received in the
fourth quarter of 2021. Accrued interest receivable of approximately $68,000 will be applied to the purchase of the membership
interest upon approval of the purchase by the Colorado Marijuana Enforcement Division.
Lease
Termination
On
October 1, 2020, the master and sublease associated with the 18,600 sq. cultivation warehouse in Denver were terminated. In connection
with that termination, we entered into a Sublease Termination Agreement (“Termination Agreement”) with RAM and an
affiliate of RAM Venture Product Consulting, LLC (“VPC”). Pursuant to this agreement, RAM acknowledged a debt of deferred
rent to the Company in the amount of $1,418,480 and VPC acknowledged a debt of deferred rent to the Company in the amount of $64,344.
RAM and VPC executed promissory notes for these amounts, respectively. The notes accrue interest on the unpaid balance at a rate
equal to the Applicable Federal Rate for mid-term obligations as published by the Internal Revenue Service. No payment under the
promissory notes will be due to the Company until the earlier of (i) the date on which RAM and the Company consummate a change
of control event, which is defined as: the acquisition of RAM by the Company or an affiliated entity by means of any transaction
or series of related transactions to which RAM is a party (including, without limitation, any membership interest acquisition,
reorganization, merger or consolidation, (generally, a “Merger”), or, (ii) the date one (1) business day following
the earlier of (x) at any time, receipt by the Company from RAM or VPC of a written notice stating such party no longer desires
to pursue the Merger, or (y) beginning eighteen (18) months after the date of this Agreement, receipt by RAM or VPC from the Company
of a written notice stating that the Company no longer desires to pursue the Merger (the “Maturity Date”).
We
have recorded the promissory notes as long term notes receivable of $1,482,824 at June 30, 2021. Due to the uncertainty of the
collectability, we have also recorded a long term deferred credit in the same amount. We will record income under the deferred
rent notes as payments are received or deemed collectible. This asset and related credit have been netted on the accompanying
condensed consolidated balance sheet.
Additionally,
in connection with the termination of the sublease, RAM will continue to pay the remaining future sublease premium payments due
to the company on the Denver sublease (the “Future Rent Debt”) beginning on the termination date, and until the earlier
of the Maturity Date or June 30, 2024, notwithstanding the termination of the Subleases. However, no payment under the Future
Rent Debt agreement will be due to the Company until the Maturity Date, at which time the entire Future Rent Debt shall be due
and payable in full, except for any month in which RAM earns $725,000 of gross sales revenue, including taxes, at its Alameda
location, in which case RAM shall pay the Future Rent Debt for the following month to the Company on or before the 5th day of
the following month, and such amount will not accrue as a Future Rent Debt. RAM shall continue to accrue debt to the company,
assessed on the first day of each month, according to the schedule below:
|
Monthly Payments Accrued
|
|
|
|
|
October 1, 2020 to June 30, 2021
|
|
$
|
11,284
|
|
|
July 1, 2021 to June 30, 2022
|
|
|
11,622
|
|
|
July 1, 2022 to June 30, 2023
|
|
|
11,971
|
|
|
July 1, 2023 to June 30, 2024
|
|
|
12,330
|
|
We
will record income pursuant to the Future Rent Debt as payments are received based on the Company’s analysis of collectability
including, but not limited to, the potential application toward the purchase price. During 2021, we received six months of payments
and have recorded $67,703 as Lease Termination Payments in the Statement of Operations.
Note
5 – Other Assets
Security
deposits: Security deposits reflect the deposits on various property leases, most of which require two months’ rental
expense in the form of a deposit.
Note
6 – Related Party Transactions
As
of June 30, 2021 and December 31, 2020, the Company has accrued compensation to its CEO and director and to its CFO aggregating
$222,097 and $289,897, respectively. As of June 30, 2021 and December 31, 2020, accrued payable due to former officers was $985,954
and $1,042,859, respectively. For each of the three month periods ended June 30, 2021 and 2020, total cash-based compensation
to related parties was $90,000. For each of the six month periods ended June 30, 2021 and 2020, total cash-based compensation
to related parties was $180,000. For the three months ended June 30, 2021 and 2020, total share-based compensation to related
parties was $60,811 and $59,406, respectively. For the six months ended June 30, 2021 and 2020, total share-based compensation
to related parties was $85,654 and $127,027, respectively. These amounts are included in general and administrative expenses in
the accompanying financial statements.
From
2017 to 2019, Mr. Gonfiantini, CEO, personally and through his Company, Crystal Bay Financial LLC, loaned an aggregate amount
of $1,020,000 to Royal Asset Management. These notes accrue interest at 17% - 18% per annum, and require monthly payment approximately
from $5,000 to $20,000. These notes are personally guaranteed by the managing member of Royal Asset Management, and are secured
by certain equipment and other tangible properties of Royal Asset Management. Among these notes, $500,000 is also secured
by the medical marijuana licenses held by Royal Asset Management.
At
June 30, 2021 and December 31, 2020, the Company owed Mr. Throgmartin, former CEO (See Note 10), $140,958 pursuant to a promissory
note dated August 12, 2016. This note accrues interest at the rate of 8% per annum and was past the maturity date at June 30,
2021, however the Company has not yet received a default notice. Accrued interest on the note was $54,993 and $49,401 at June
30, 2021 and December 31, 2020, respectively.
Note
7 – Notes Payable
On
August 31, 2015, the Company issued a note in the amount of $126,000 to a third party for use as operating capital. The note was
amended to include accrued interest on October 31, 2016 and extend the maturity date to October 31, 2018. As of June 30, 2021
and December 31, 2020 the outstanding principal balance of the note was $133,403, and accrued interest on the note was $73,409
and $70,101, respectively. As of June 30, 2021 the note was past the maturity date, however
the Company has not yet received a default notice.
On
April 22, 2020, the Company was granted a loan from Numerica Credit Union, in the aggregate amount of $56,444, pursuant to the
Paycheck Protection Program, (the “PPP”) under Division A, Title I of the CARES Act. The loan, which was in the form
of a note dated April 22, 2020 issued by the Borrower, was scheduled to mature on April 22, 2022 and bore interest at a rate of
1.0% per annum, payable monthly commencing October 22, 2020. There have not been any payments made towards this loan, as the full
amount of the loan and accrued interest was forgiven in full during February 2021 and the Company recorded income of $56,908.
On
June 30, 2020, the Company was granted a loan from the Small Business Association, in the aggregate amount of $150,000, pursuant
to the Economic Injury Disaster Loan, (the “EIDL”) under Division A, Title I of the CARES Act. The loan, which is
in the form of a note dated June 30, 2020 issued by the Borrower, matures on June 30, 2050 and bears interest at a rate of 3.75%
per annum, payable monthly commencing June 30, 2021.
Note
8 – Convertible Notes Payable
The
Company has issued several convertible notes which are outstanding. The note holders have the right to convert principal and accrued
interest outstanding into shares of common stock at a discounted price to the market price of our common stock. The conversion
features were recognized as embedded derivatives and are valued using a Binomial Option Pricing Model that resulted in a derivative
liability of $4,368,763 and $5,997,865 at June 30, 2021 and December 31, 2020, respectively. All notes accrue interest at 10%
and the notes had all matured at June 30, 2021. In connection with the issuance of certain of these notes, the Company also issued
warrants to purchase its common stock.
Several
convertible note holders elected to convert their notes to stock during the six months ended June 30, 2021 and 2020. The tables
below provide the note payable activity for the six months ended June 30, 2021 and 2020, and also a reconciliation of the beginning
and ending balances for the derivative liabilities measured using Level 3 fair value inputs for the six months ended June 30,
2021 and 2020:
|
|
|
Convertible
Notes
|
|
|
Discount
|
|
|
Convertible
Notes, Net of
Discount
|
|
|
Derivative
Liabilities
|
|
|
Balance, December 31, 2020
|
|
$
|
3,239,274
|
|
|
$
|
—
|
|
|
$
|
3,239,274
|
|
|
$
|
5,997,865
|
|
|
Issuance of convertible notes
|
|
|
2,000
|
|
|
|
—
|
|
|
|
2,000
|
|
|
|
200,147
|
|
|
Conversion of convertible notes
|
|
|
(100,000
|
)
|
|
|
—
|
|
|
|
(100,000
|
)
|
|
|
(661,087
|
)
|
|
Repayment of convertible notes
|
|
|
(200,000
|
)
|
|
|
—
|
|
|
|
(200,000
|
)
|
|
|
(302,452
|
)
|
|
Change in fair value of derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(865,710
|
)
|
|
Amortization
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Balance June 30, 2021
|
|
$
|
2,941,274
|
|
|
$
|
—
|
|
|
$
|
2,941,274
|
|
|
$
|
4,368,763
|
|
|
|
|
Convertible
Notes
|
|
|
Discount
|
|
|
Convertible
Notes, Net of
Discount
|
|
|
Derivative
Liabilities
|
|
|
Balance, December 31, 2019
|
|
$
|
3,266,775
|
|
|
$
|
914,245
|
|
|
$
|
2,352,530
|
|
|
$
|
4,834,190
|
|
|
Issuance of convertible notes
|
|
|
103,000
|
|
|
|
103,000
|
|
|
|
—
|
|
|
|
309,251
|
|
|
Conversion of convertible notes
|
|
|
(89,000
|
)
|
|
|
(25,377
|
)
|
|
|
(63,623
|
)
|
|
|
(97,848
|
)
|
|
Repayment of convertible notes
|
|
|
(2,500
|
)
|
|
|
—
|
|
|
|
(2,500
|
)
|
|
|
—
|
|
|
Change in fair value of derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,457,459
|
)
|
|
Amortization
|
|
|
—
|
|
|
|
(916,804
|
)
|
|
|
916,804
|
|
|
|
—
|
|
|
Balance June 30, 2020
|
|
$
|
3,278,275
|
|
|
$
|
75,064
|
|
|
$
|
3,203,211
|
|
|
$
|
3,588,134
|
|
During
the six months ended June 30, 2021, $100,000
of notes was converted into 4,444,444
shares of common stock with a value of $697,779.
A gain on extinguishment of debt of $59,999
and reduction of derivative liabilities of $657,778
have been recorded related to these conversions.
During
the six months ended June 30, 2021, $6,256
of accrued interest was converted into 581,969
shares of common stock with a value of $7,856.
A gain on extinguishment of debt of $1,709
and reduction of derivative liabilities of $3,309
have been recorded related to these conversions.
During
the six months ended June 30, 2021, we repaid an aggregate of $200,000 of note principal. A gain on extinguishment of debt of
$177,116 and reduction of derivative liabilities of $177,116 have been recorded related to these payments.
During
the six months ended June 30, 2021, we paid an aggregate of $70,000 in settlement of accrued interest in the amount of $95,390. A gain
on extinguishment of debt of $150,726 and reduction of derivative liabilities of $125,336 have been recorded related to these payments.
During
the six months ended June 30, 2021, we recorded noncash additions to convertible notes aggregating $2,000.
As
of June 30, 2021, convertible notes in the aggregate principal amount of $2,941,274 were past their maturity dates; however the
Company has not yet received any default notices. No default or penalty was paid or required to be paid.
The
following assumptions were used in the Binomial Option Pricing Model in calculating the embedded conversion features and current
liabilities for the six months ended June 30, 2021 and 2020
|
|
|
June 30,
2021
|
|
|
June 30,
2020
|
|
|
Risk-free interest rates
|
|
|
0.02 –
0.09
|
%
|
|
|
0.11 –
1.58
|
%
|
|
Expected life (years)
|
|
|
0.25
|
|
|
|
0.25 – 1.0
|
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Expected volatility
|
|
|
154 – 544
|
%
|
|
|
064 – 214
|
%
|
Note
9 – Stockholders’ Equity (Deficit)
Series
C Preferred Stock
On
February 24, 2021, the Company sold 179,850 of its Series C Convertible Preferred Shares, with an annual accruing dividend of
10%, to Geneva Roth Remark Holdings, Inc. (“Geneva”), for $163,500 pursuant to a Series C Preferred Purchase Agreement
with Geneva. The Company may redeem the Series C Shares at various increased prices at time intervals up to the 6-month anniversary
of the closing and must redeem any outstanding shares on the 24-month anniversary. Geneva may convert the Series C Shares into
our common shares, commencing on the 6-month anniversary of the closing at a 30% discount to the public market price. The Company
recorded a derivative liability associated with Series C Preferred Shares of $1,082,441, valued using a Binomial Option Pricing
Model. On March 16, 2021, the Company sold an additional 113,850 shares for $103,500 and recorded a derivative of $177,231. The
Series C Preferred Stock is classified as temporary equity due to the fact that the shares are redeemable at the option of the
holder. There were 293,700 shares outstanding at June 30, 2021, with an associated derivative liability of $407,812.
The
tables below provide the preferred stock activity for the six months ended June 30, 2021 and 2020, and also a reconciliation of
the beginning and ending balances for the derivative liabilities measured using Level 3 fair value inputs for the six months ended
June 30, 2021 and 2020:
|
|
|
Preferred
Stock and
Accrued
Dividends
|
|
|
Discount
|
|
|
Preferred
Stock and
Accrued
Dividends,
Net of
Discount
|
|
|
Derivative
Liabilities
|
|
|
Balance , December 31, 2020
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Issuance of Series C Preferred shares
|
|
|
293,700
|
|
|
|
293,700
|
|
|
|
—
|
|
|
|
1,259,672
|
|
|
Accretion of discount
|
|
|
—
|
|
|
|
(47,574
|
)
|
|
|
47,574
|
|
|
|
—
|
|
|
Accretion of dividend on Series C preferred stock
|
|
|
9,515
|
|
|
|
—
|
|
|
|
9,515
|
|
|
|
12,714
|
|
|
Change in fair value of derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(864,574
|
)
|
|
Balance June 30, 2021
|
|
$
|
303,215
|
|
|
$
|
246,126
|
|
|
$
|
57,089
|
|
|
$
|
407,812
|
|
|
|
|
Preferred
Stock and
Accrued
Dividends
|
|
|
Discount
|
|
|
Preferred
Stock and
Accrued
Dividends,
Net of
Discount
|
|
|
Derivative
Liabilities
|
|
|
Balance , December 31, 2019
|
|
$
|
140,000
|
|
|
$
|
131,250
|
|
|
$
|
8,750
|
|
|
$
|
190,131
|
|
|
Issuance of Series C Preferred shares
|
|
|
111,600
|
|
|
|
111,600
|
|
|
|
—
|
|
|
|
164,586
|
|
|
Conversion of Series C Preferred shares
|
|
|
(39,048
|
)
|
|
|
(26,872
|
)
|
|
|
(12,176
|
)
|
|
|
(96,968
|
)
|
|
Accretion of discount
|
|
|
49,886
|
|
|
|
—
|
|
|
|
49,886
|
|
|
|
—
|
|
|
Accretion of dividend on Series C preferred stock
|
|
|
9,827
|
|
|
|
—
|
|
|
|
9,827
|
|
|
|
—
|
|
|
Change in fair value of derivatives
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,551
|
|
|
Balance June 30, 2020
|
|
$
|
272,265
|
|
|
$
|
215,978
|
|
|
$
|
56,287
|
|
|
$
|
268,300
|
|
The
following assumptions were used in the Binomial Option Pricing Model in calculating the embedded conversion features and current
liabilities for the six months ended June 30, 2021 and 2020:
|
|
|
2021
|
|
|
2020
|
|
|
Risk-free interest rates
|
|
|
0.12 –
0.25
|
%
|
|
|
0.16 –
0.71
|
%
|
|
Expected life (years)
|
|
|
1.7 – 2.0
|
|
|
|
1.45 – 2.0
|
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Expected volatility
|
|
|
188 – 196
|
%
|
|
|
172 – 262
|
%
|
Common
Stock
2021
Transactions
During
the six months ended June 30, 2021, $100,000 of notes and $6,256 of accrued interest and fees were converted into 5,026,413 shares
of common stock with a value of $705,635.
During
the six months ended June 30, 2021, 2,931,647 shares of common stock, valued at $85,654, were accrued for related party services,
and 1,967,714 shares of common stock, valued at $30,976, were issued. At June 30, 2021 and December 31, 2020, shares to be issued
for related party services were 2,695,620 and 1,731,687, respectively, and the value of shares to be issued at June 30, 2021 and
December 31, 2020 was $68,042 and $13,364, respectively.
During
the six months ended June 30, 2021, 87,252 shares of common stock, valued at $4,000, were accrued for services, and 1,137,553
shares of common stock, valued at $16,000, were issued. At June 30, 2021 and December 31, 2020, shares to be issued for services
were 55,556 and 1,105,857, respectively, and the value of shares to be issued at June 30, 2021 and December 31, 2020 was $2,000
and $14,000, respectively.
At
June 30, 2021 and December 31, 2020, shares to be issued for debt conversions were 31,960, and the value of shares to be issued
was $21,861.
During
the six months ended June 30, 2021, we issued 30,000 shares of common stock, valued at $1,915, for consulting services.
2020
Transactions
During
the six months ended June 30, 2020, $89,000 of notes, $6,282 of accrued interest and $210 additional fee was converted into 13,767,631
shares of common stock. A loss on extinguishment of debt of $1,931, extinguishment of debt discount of $25,377 and reduction of
derivative liabilities of $97,838 have been recorded related to these conversions. As of June 30, 2020, 35,844 shares, valued
at $35,844 for debt conversion were authorized, but not issued as of June 30, 2020.
As
of June 30, 2020, 1,442,004 shares, valued at $59,645 for services were authorized, but not issued as of June 30, 2020. These
were classified as shares to be issued at June 30, 2020.
During
the six months ended June 30, 2020, 2,553,969 shares of common stock were issued for related party services valued at $65,633.
These shares have been removed from shares to be issued as of June 30, 2020.
During
the six months ended June 30, 2020, 4,939,759 shares of common stock were issued as a result of the conversion of 39,048 shares
of Series C Preferred shares.
Common
stock warrant activity:
The
Company has determined that certain of its warrants are subject to derivative accounting. The table below provides a reconciliation
of the beginning and ending balances for the warrant liabilities measured using fair significant unobservable inputs (Level 3)
for the six months ended June 30, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months ended June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Balance at beginning of period
|
|
$
|
476
|
|
|
$
|
967
|
|
|
Additions to derivative instruments
|
|
|
—
|
|
|
|
—
|
|
|
Loss on change in fair value of derivative liability
|
|
|
2,065
|
|
|
|
28
|
|
|
Balance at end of period
|
|
$
|
2,541
|
|
|
$
|
995
|
|
The
following assumptions were used in the Binomial Option Pricing Model in calculating the embedded conversion features and current
liabilities for the six months ended June 30, 2021 and 2020:
|
|
|
June 30, 2021
|
|
|
June 30, 2020
|
|
|
Annual dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Expected life (years)
|
|
|
1.5 – 5.88
|
|
|
|
0.17 – 7.13
|
|
|
Risk-free interest rate
|
|
|
0.16 – 1.16
|
%
|
|
|
0.11 – 0.55
|
%
|
|
Expected volatility
|
|
|
195 – 243
|
%
|
|
|
172 – 262
|
%
|
Note
10 – COMMITMENTS AND CONTINGENCIES
Leases
The
Company leases property under operating leases. Property leases include retail and warehouse space with fixed rent payments and
lease terms ranging from three to five years. The Company is obligated to pay the lessor for maintenance, real estate taxes, insurance,
and other operating expenses on certain property leases. These expenses are variable and are not included in the measurement of
the lease asset or lease liability. These expenses are recognized as variable lease expense when incurred.
The
Company records the lease asset and lease liability at the present value of lease payments over the lease term. The leases typically
do not provide an implicit rate; therefore, the Company uses its estimated incremental borrowing rate at the time of lease commencement
to discount the present value of lease payments. The Company’s discount rate for operating leases at June 30, 2021 was 12%.
Leases often include rental escalation clauses, renewal options and/or termination options that are factored into the determination
of lease payments when appropriate. Lease expense is recognized on a straight-line basis over the lease term to the extent that
collection is considered probable. As a result the Company been recognizing rents as they become payable. Our weighted-average
remaining lease term is 3.5 years.
As
of June 30, 2021, the maturities of operating leases liabilities are as follows (in thousands):
|
|
|
Operating
Leases
|
|
|
2021
|
|
|
160
|
|
|
2022
|
|
|
270
|
|
|
2023
|
|
|
270
|
|
|
2024
|
|
|
270
|
|
|
2025
|
|
|
45
|
|
|
Total
|
|
|
1,015
|
|
|
Less: amount representing interest
|
|
|
(185
|
)
|
|
Present value of future minimum lease payments
|
|
|
830
|
|
|
Less: current obligations under leases
|
|
|
211
|
|
|
Long-term lease obligations
|
|
$
|
619
|
|
Rent
expense is recognized on a straight-line basis over the life of the lease. Rent expense consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Operating lease costs
|
|
$
|
225,713
|
|
|
$
|
498,453
|
|
|
Variable rent costs
|
|
|
92,342
|
|
|
|
75,166
|
|
|
Total rent expense
|
|
$
|
318,055
|
|
|
$
|
573,619
|
|
As
of June 30, 2021, the aggregate remaining minimal annual lease payments under these operating leases
plus NNN were as follows: (in thousands):
|
|
|
|
|
|
|
|
2021
|
|
|
$
|
115
|
|
|
2022
|
|
|
|
197
|
|
|
2023
|
|
|
|
222
|
|
|
2024
|
|
|
|
250
|
|
|
2025
|
|
|
|
46
|
|
|
Total
|
|
|
$
|
830
|
|
Other
information related to leases is as follows:
|
|
|
Six Months ended
June 30, 2021
|
|
|
Other
information:
|
|
|
|
|
|
Cash
paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
Operating
cash flows from operating leases
|
|
$
|
212,863
|
|
|
Weighted-average
remaining lease term - operating leases
|
|
|
3.5yr
|
|
|
Weighted-average
discount rate - operating leases
|
|
|
12
|
%
|
The
Company recognized sublease income of $191,752 and $344,849 during the three months ended June 30, 2021 and 2020, respectively.
The Company recognized sublease income of $383,505 and $728,880 during the six months ended June 30, 2021 and 2020, respectively.
These
two leases have one month and 3.6 year terms with optional extension, expiration dates range from July 2021 to June 2025, and
monthly base rent of approximately $22,000-$25,000 plus variable NNN.
As
of June 30, 2021, the maturities of expected base sublease income are as follows (in thousands):
|
|
|
Operating
Leases
|
|
|
2021
|
|
$
|
209
|
|
|
2022
|
|
|
346
|
|
|
2023
|
|
|
346
|
|
|
2024
|
|
|
346
|
|
|
2025 and beyond
|
|
|
58
|
|
|
Total
|
|
$
|
1,305
|
|
COVID-19
On
January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency in response to a new strain
of a coronavirus (the “COVID-19 outbreak”). In March 2020, the WHO classified the COVID-19 outbreak as a pandemic
based on the rapid increase in exposure globally. The full impact of the COVID-19 outbreak continues to evolve as of the date
of this report. Management is actively monitoring the global situation and its effects on the Company’s industry, financial
condition, liquidity, and operations. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its
spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition,
or liquidity for fiscal year 2021. However, if the pandemic continues, it may have a material adverse effect on the Company’s
results of future operations, financial position, and liquidity in fiscal year 2021.
Employment
Agreements
As
a condition of their employment, the Board of Directors approved employment agreements with three key executives. These agreements
provided that additional shares will be granted each year over the term of the agreements should their shares as a percentage
of the total shares outstanding fall below prescribed ownership percentages. Nello Gonfiantini III, who became the Company’s
CEO in October 2019 receives an annual grant of additional shares each year to maintain his ownership percentage at 10% of the
outstanding stock. The Company’s CFO received a similar grant each to maintain his ownership percentage at 2% of the
outstanding stock. During the six months ended June 30, 2021, the Company accrued compensation expense of approximately $86,000
on 2,931,647 shares of common stock under these agreements. During the six months ended June 30, 2020, the Company accrued compensation
expense of approximately $46,000 on 2,244,887 shares of common stock. As of June 30, 2021 and December 31, 2020, the ending balance
of accrued compensation was $68,042 and $13,364, respectively. The number of shares accrued to be issued was 2,695,620 at June
30, 2021.
Departure
of Executive Officer
On
January 30, 2019, the Company executed a Separation Agreement and Release with David Thompson, its former Senior Vice President-
Finance, finalizing his departure from the Company as an employee. Pursuant to its material terms, the Company agreed to pay Mr.
Thompson aggregate cash payments of $206,250, based upon the Company’s receipt of certain gross sales receipts derived from
its Alameda Store in Colorado, and certain stock grants based upon the Company’s outstanding common shares as of February
1, 2019, including a stock grant of 53,717 restricted common shares for accrued salary and 122,934 restricted common shares in
exchange for his approximate 122,000 of stock options. During the six months ended June 30, 2021 and 2020, $26,904 and $7,634,
respectively, was paid under this agreement. As of June 30, 2021, the outstanding balance was $135,357, and is included in Accrued
payable – related party in the accompanying consolidated balance sheet.
On
October 29, 2019, the Company accepted the resignation of Ron Throgmartin from his positions as CEO, President and Director. Mr.
Throgmartin’s resignation was not the result of any disagreements with the Company’s plan of operations, policies,
or management. On the same date, we appointed Christopher D. Strachan, our Chief Financial Officer, to membership on our Board
of Directors and appointed Nello Gonfiantini III, our Chief Operations Officer, to the additional post of Chief Executive Officer.
Ron
Throgmartin signed a 5-year term Separation Agreement which, among other matters, terminated his Employment Agreement, as amended.
On the date of the Separation Agreement, the Company acknowledged it owed Mr. Throgmartin the amount of $517,252 in principal
and accrued interest of note payable, salary and fees, accrued during the 5 years of his employment. In addition, the Company
further acknowledged that it will pay Mr. Throgmartin fifty (50%) percent of his compensation due under the remaining Employment
Agreement, or $614,583 under certain conditions, which the Company accrued in full as the date of Mr. Throgmartin’s separation.
This agreement provides that the Company will pay him $5,000 monthly against his accrued salary/fees and 50% of future compensation
due under his terminated Employment Agreement, with certain accelerated payments in the event our financial results attain certain
EBITA benchmarks. The Company shall have the right to require Mr. Throgmartin to provide consulting services to it for a per diem
fee of $500. During the six months ended June 30, 2021 and 2020, $30,000 and $25,000, respectively, were paid under this agreement.
As of June 30, 2021, the outstanding balance was $850,597, and is included in Accrued payable – related party in the accompanying
consolidated balance sheet.
Legal Proceedings
On May 10, 2021, a lawsuit was filed against
the Company, along with other defendants, by plaintiff Erin Turoff in the District Court, City and County of Denver, State of Colorado.
The specific allegations against the Company include civil theft and civil conspiracy and the plaintiff is seeking actual and compensatory
damages. No specific monetary amount was demanded in the lawsuit. On July 8, 2021, the Company filed an answer to the complaint,
denying the allegations. The Company believes that the suit is without merit and that the Company will ultimately prevail in any
litigation.
Note
11 – Subsequent Events
The
Company evaluated subsequent events and transactions that occur after the balance sheet date up to the date that the consolidated
financial statements are available to be issued. Any material events that occur between the balance sheet date and the date that
the consolidated financial statements were available for issuance are disclosed as subsequent events, while the consolidated financial
statements are adjusted to reflect any conditions that existed at the balance sheet date. Based upon this review, except as disclosed
within the footnotes or as discussed below, the Company did not identify any recognized or non-recognized subsequent events that
would have required adjustment or disclosure in the consolidated financial statements.
On July 27, 2021, the Company filed a lawsuit
against Royal Asset Management, LLC (“RAM”) and Neil Demers (“Demers”) in the District Court, City and
County of Denver, State of Colorado, alleging breach of contract on four subleases for which RAM has failed to make the required
payments to the Company pursuant to the respective sublease agreements. The alleged damages under the sublease terms amount to
$1,480,881, $377,568, $1,027,635, and $1,418,480, respectively. In addition, the lawsuit alleges that RAM failed to make payments
pursuant to a promissory note (the “Note”) in which the Company and RAM entered into on April 3, 2018. The Note was
for the principal amount of $330,000 with interest at 18% per annum. The Note had a maturity date of April 2, 2019. Defendant Demers
personally guaranteed the Note. The lawsuit seeks payment from RAM and Demers for the total balance due on the Note of $330,000
plus the interest due therein.