DIEGO PELLICER WORLDWIDE, INC. Special Note Regarding Forward-Looking Information
The following discussion and analysis of the results of operations and financial condition ofDiego Pellicer Worldwide, Inc. should be read in conjunction with the financial statements ofDiego Pellicer Worldwide, Inc. and the notes to those financial statements that are included elsewhere in this Form 10-Q. References in this Management's Discussion and Analysis of Financial Condition and Results of Operations to "us", "we", "our" and similar terms refer to the Company. This Quarterly Report contains forward-looking statements as that term is defined in the federal securities laws. The events described in forward-looking statements contained in this Quarterly Report may not occur. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, projected or anticipated benefits from acquisitions to be made by us, or projections involving anticipated revenues, earnings or other aspects of our operating results. The words "may," "will," "expect," "believe," "anticipate," "project," "plan," "intend," "estimate," and "continue," and their opposites and similar expressions, are intended to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based. Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. Except as required by federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.
COVID-19 OnJanuary 30, 2020 , theWorld Health Organization ("WHO") announced a global health emergency in response to a new strain of a coronavirus (the "COVID-19 outbreak"). InMarch 2020 , theWHO classified the COVID-19 outbreak as a pandemic based on the rapid increase in exposure globally. The COVID-19 pandemic is a highly fluid situation and it is not currently possible for us to reasonably estimate the impact it may have on our financial and operating results. We will continue to evaluate the impact of the COVID-19 pandemic on our business as we learn more and the impact of COVID-19 on our industry becomes clearer. We are complying health guidelines regarding safety procedures, including, but are not limited to, social distancing, remote working, and teleconferencing. The extent of the future impact of the COVID-19 pandemic on our business is uncertain and difficult to predict. Adverse global economic and market conditions as a result of COVID-19 could also adversely affect our business. If the pandemic continues to cause significant negative impacts to economic conditions, our results of operations, financial condition and liquidity could be adversely impacted. Overview of the MarketDiego Pellicer Worldwide, Inc. was established onAugust 26, 2013 to take advantage of growing market for legalized cannabis being made possible by the escalating legislation allowing for the legalization of cannabis operations in the majority of states. The cannabis market has a multi-billion dollar potential. The industry is still in a development stage, and is being rapidly propelled towards its potential by the state legalization and the rush by suppliers to meet the pent-up demand. Most suppliers are small, unsophisticated but capable operators. The federal legal constraints provide an opportunity to those companies early to the market to gain a first mover advantage and to the successful ones, an opportunity to be a consolidator in the industry.
What is Diego's Strategy, Phases One and Two?
Diego is a real estate and a consumer retail development company that is focused on high quality recurring revenues resulting from leasing real estate to licensed cannabis operators, and the management of operations for these and other third party cannabis operators deriving income from management and royalty fees. Diego provides a competitive advantage to these operators by developing "Diego Pellicer" as the world's first premium marijuana brand and by establishing the highest quality standards for its facilities and products. The Company's first phase strategy is to lease and develop the most prominent and convenient real estate locations for the purposes of leasing them to state licensed operators in the cannabis industry. Diego's first phase revenues result from leasing real estate and selling non-cannabis related accessories to our tenants. The Company has developed a brand name strategy, providing training, design services, branded accessories, systems and systems training, locational selection, and other advisory services to their tenants. We enter into branding agreements with our tenants. In addition, part of the vetting process in finding the proper tenant is selecting a tenant that shares the Company's values and strictly complies with respective state laws, follows strict safety and testing requirements and provides consistent, high-quality products. If the tenants do not comply, they will not be allowed to use the brand. The second phase of our strategy is to secure options to purchase the tenant's operations. When mutually advantageous for Diego and the tenant, Diego will negotiate acquisition contracts with selected Diego operators/tenants. When it becomes federally legal to do so, Diego will execute the acquisition contracts, consolidate our selected tenants and become a nationally branded marijuana retailer and producer concurrent with the change of federal law.Diego Pellicer Management Company , a wholly owned subsidiary, will license the upscaleDiego Pellicer ("DP") brand to qualified operators and receive royalty payments, while providing expertise in retail, product and manufacturing from Diego's management team. Recent Developments
During the fiscal quarter, the Company continued its focus on seeking complimentary acquisitions that are additive to the Company's overall strategic plan.
OnJune 6, 2022 , the Company, the lessor, and the sublessee entered into termination agreements to terminate the master lease and the sublease for our 14,800 square foot cultivation warehouse property. The termination agreements were conditioned upon the closing of the sublessee's sale of its assets at the location. The closing occurred inSeptember 2022 . Upon closing, the Company received$650,000 from the sublessee, in settlement of past deferred rents and receivables of$377,568 and$272,432 in future rents and fees. 15 RESULTS OF OPERATIONS
Three months ended
After rental expense the gross margins on the lease were as follows:
Three Months Three Months
Ended Ended Increase (Decrease)
September 30, September 30,
2022 2021 $ %
Revenues
Net rental revenue $ 188,084 $ 198,505 $ (10,421 ) -5 %
Rental expense (148,364 ) (157,466 ) (9,102 ) -6 %
Gross profit 39,720 41,039 (1,319 ) -3 %General and administrative expenses 228,481 221,289
7,192 3 %
Selling expense 6,453 8,870 (2,417 ) -27 %
Loss from operations $ (195,214 ) $ (189,120 ) $ (6,094 ) -3 %
Revenues. For the three months ended September 30, 2022 and 2021, the Company
leased two facilities to a licensee in Colorado . Total revenue for the three
months ended September 30, 2022 was $188,506 , as compared to $198,505 for the
three months ended September 30, 2021 , a decrease of $10,421 , primarily due to a
lease extension in the third quarter of 2021. During September of 2022, one of
our two leases was terminated. As a result, future rental revenue will decrease
by approximately 50%.
Gross profit. Rental revenue and rental expense for the period ended September
30, 2022 decreased over the prior three months ended September 30 , 20201
resulting in a gross profit of $39,720 , a decrease of $1,319 from a gross profit
of $41,039 for the three months ended September 30, 2021 , resulting from a lease
extension in the third quarter of 2021 which reduced both sublease income and
rental expense. During September of 2022, one of our two leases was terminated.
As a result, future rental revenue and expense will decrease by approximately
50%.
General and administrative expense. Our general and administrative expenses for the three months endedSeptember 30, 2022 were$228,481 , compared to$221,289 for the three months endedSeptember 30, 2021 . The increase of$7,192 was largely attributable to increases in professional fees, travel, and public company expense, partially offset by a decrease in executive stock compensation expense during the three months endedSeptember 30, 2022 . Selling expense. Our selling expenses for the three months endedSeptember 30, 2022 were$6,453 , compared to$8,870 for the three months endedSeptember 30, 2021 . The decrease of$2,417 was due to reduced brand development costs. Three Months Three Months Ended Ended Increase (Decrease) September 30, September 30, 2022 2021 $ % Other income (expense) Interest income$ 14,856 $ 14,931 $ (75 ) -1 % Interest expense (376,845 ) (150,487 ) (226,358 ) -150 % Lease termination payments 35,913 33,851 2,062 6 % Gain on termination of lease 489,771 - 489,771 100 % Extinguishment of debt 31,246 - 31,246 100 %
Change in derivative liabilities 598,492 1,093,766
(495,274 ) -45 % Change in value of warrants 107 1,678 (1,571 ) -94 % Total other income (loss)$ 793,540 $ 993,739 $ (200,199 ) -20 % The decrease in net other income resulted primarily from the effects that the changes in market value of the Company's stock had on the derivative liability associated with our convertible debt and preferred stock, including a reduction in gain resulting from the extinguishment of derivative liabilities during the period, and from increased financing costs of new debt incurred by the Company. These decreases were partially offset by a gain realized on the termination of one of our leases and the related sublease.
Nine months ended
After rental expense the gross margins on the lease were as follows:
Nine Months Nine Months
Ended Ended Increase (Decrease)
September 30, September 30,
2022 2021 $ %
Revenues
Net rental revenue $ 561,096 $ 582,010 $ (20,914 ) -4 %
Rental expense (445,155 ) (475,521 ) (30,366 ) -6 %
Gross profit 115,941 106,489 9,452 9 %General and administrative expenses 586,888 695,787
(108,899 ) -16 %
Selling expense 19,389 26,679 (7,290 ) -27 %
Loss from operations $ (490,336 ) $ (615,977 ) $ 125,641 20 %
16
Revenues. For the nine months ended September 30, 2022 and 2021, the Company
leased two facilities to a licensee in Colorado . Total revenue for the nine
months ended September 30, 2022 was $561,096 , as compared to $582,010 for the
nine months ended September 30, 2021 , a decrease of $20,914 , primarily due to a
lease extension in the third quarter of 2021. During September of 2022, one of
our two leases was terminated. As a result, future rental revenue will decrease
by approximately 50%.
Gross profit. Rental revenue and rental expense for the period ended September
30, 2022 decreased over the prior nine months ended September 30 , 20201
resulting in a gross profit of $115,941 , an increase of $9,451 from a gross
profit of $106,489 for the nine months ended September 30, 2021 , resulting from
a lease extension in the third quarter of 2021 which reduced both sublease
income and rental expense. During September of 2022, one of our two leases was
terminated. As a result, future rental revenue and expense will decrease by
approximately 50%.
General and administrative expense. Our general and administrative expenses for
the nine months ended September 30, 2022 were $586,888 , compared to $695,797 for
the nine months ended September 30, 2021 . The decrease of $108,899 was largely
attributable to a decrease in executive stock compensation expense during the
nine months ended September 30, 2022 , partially offset by increases in
professional fees and travel expense.
Selling expense. Our selling expenses for the nine months ended September 30,
2022 were $19,389 , compared to $26,679 for the nine months ended September 30,
2021 . The decrease of $7,290 was primarily due to reduced brand development
costs.
Nine Months Nine Months
Ended Ended Increase (Decrease)
September 30, September 30,
2022 2021 $ %
Other income (expense)
Interest income $ 49,299 $ 69,511 $ (20,212 ) -29 %Forgiveness of debt income - 56,908 (56,908 ) -100 % Allowance for loss on notes receivable (82,781 ) - (82,781 ) -100 % Interest expense (1,191,348 ) (534,070 ) (657,278 ) -123 % Lease termination payments 105,645 101,554 4,091 4 % Gain on termination of lease 489,771 - 489,771 100 % Extinguishment of debt 75,590 389,550 (313,960 ) -81 % Change in derivative liabilities (1,634,642 ) 2,824,050 (4,458,692 ) -158 % Change in value of warrants 134 (387 ) 521 135 %
Total other income (loss)
The increase in net other expense resulted primarily from the effects that the changes in market value of the Company's stock had on the derivative liability associated with our convertible debt and preferred stock, including a reduction in gain resulting from the extinguishment of derivative liabilities during the period, and from increased financing costs of new debt incurred by the Company. These increases were partially offset by a gain realized on the termination of one of our leases and the related sublease.
LIQUIDITY AND CAPITAL RESOURCES
Nine Months Nine Months
Ended Ended Increase (Decrease)
September 30, September 30,
2022 2021 $ %
Net Cash provided by (used in)
operating activities $ 76,865 $ (121,456 ) $ 198,321 163 %
Net Cash provided by financing
activities 465,273 67,000 398,273 594 %
Net Increase (Decrease) in Cash 542,138 (54,456 ) 596,594 1,096 % Cash - beginning of period 49,149 327,864 (278,715 ) Cash - end of period$ 591,287 $ 273,408 $ 317,879 116 %
Operating Activities. For the nine months endedSeptember 30, 2022 , the net cash provided by operations of$76,865 was an increase over the same period of the prior year of$198,321 . A decrease in loss from operations after non-cash adjustments of$447,742 was partially offset by a decrease in cash provided by operating assets and liabilities of$249,421 . Financing Activities. During the nine months endedSeptember 30, 2022 , we loaned an aggregate of$120,000 to an entity and received repayments of principal of$67,238 . We received$620,000 from the issuance of convertible notes payable and made repayments of convertible notes of$101,965 . During the nine months endedSeptember 30, 2021 , we received$267,000 in proceeds from the sale of preferred stock and we made$200,000 of principal repayments of convertible notes payable. Going Concern Qualification
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$10,831,194 atSeptember 30, 2022 , and it has an accumulated deficit of$54,816,650 atSeptember 30, 2022 . 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.
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.
17
Critical Accounting Policies
Our critical accounting policies are included in Note 2 - "Summary of Significant Accounting Policies" of Notes to Condensed Consolidated Financial Statements included in this Quarterly Report.
Recently Issued Accounting Standards
Our recently issued accounting standards are included in Note 2 - "Summary of Significant Accounting Policies" of Notes to Consolidated Financial Statements included in this Quarterly Report.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
© Edgar Online, source
