DIEGO PELLICER WORLDWIDE, INC. The following discussion and analysis of the results of operations and financial condition for the years endedDecember 31, 2021 and 2020 should be read in conjunction with our consolidated financial statements and the notes to those consolidated financial statements that are included elsewhere in this Annual Report. Our 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. See "Forward-Looking Statements." 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 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 2022. 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 2022. OverviewDiego 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:
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The industry is operating under stringent regulations within the various state
jurisdictions. The Company's primary business plan is twofold: First to lease
various properties to licensed operators in these jurisdictions to grow, process
and sell cannabis and related products, and the second the Diego Pellicer
Management Company , will license the upscale Diego Pellicer brand to qualified
operators and receive royalty payments, while providing expertise in retail,
product and manufacturing from Diego's management team. The Company will also
provide educational training, compliance consultation, branding, and related
accessories to their tenants. These leases and management agreements are
expected to provide substantial streams of income. We believe that as laws
evolve, it is possible that we will have the opportunity to participate directly
in these operations. Accordingly, the Company will selectively negotiate an
option on our tenants' operating company.
Source: Headset & 2020
The legalization taking place in other states such asCalifornia andFlorida present opportunities many times that ofWashington andColorado . The Company is exploring opportunities inOregon ,California andFlorida and is getting inquiries from other potential operators in other jurisdictions. 17 Summary
The Company's primary business objective is to lease various properties to licensed operators to grow, process and retail cannabis and related products. By developing a premium brand name, building upscale facilities, and providing quality accessories to a market where financing is difficult to obtain, these subleases are designed to provide a substantial stream of income. We believe that as laws evolve, it is possible that we will have the opportunity to participate directly in these operations as well. 2019 was a time of continued growth and a change of focus for the Company. An effective and experienced team was assembled from within our operators to develop our newly formed management company, and to complement the current executives with knowledge and experience in real estate operations, banking, site selection, branding, facility design, corporate finance, investor relations, store management, and grow expertise, Additional capital needed to be raised in order to have sufficient capital to help support our operators expand within their markets, and to begin the expansion into different markets in the US. Much of the Company's debt was renegotiated, and additional commitments were formalized for the expansion in theColorado market. New markets had to be explored, new alliances forged, and opportunities prioritized. 2020 was a year of strategic alliances and developing a strong operating structure that would be used to compliment any new acquisition, and guiding our branded tenants. An effective and experienced team was developed from within our operators to develop our management company. The Company has been working diligently to renegotiate our debt and lower our convertible debt in anticipation of the merger and acquisition phase of the Company. The Company divested itself from a poor performing lease and secured all the potential future premium rents from our branded tenant, at the same time as securitizing deferred rents from this tenant in the form of a note with specific short term repayment functions. The Company has started numerous introductory discussions with potential acquisitions that would follow one of the key requirements at being additive to our consolidated financial statements. 2021 was a year where the Company took advantage of the changes in the continued advancement of cannabis legalization in theUSA , and the growth in the hemp industry to mid year pivot the main focus of the Company to expand its branding and management businesses. The company actively searched for viable acquisitions in both the legal cannabis and hemp industries, that would be additive to our consolidated financial statements. The Company opened negotiations with a company in the hemp and CBD industry to acquire all their operations for a combination of company stock and cash. Plans of Operation
Diego is currently exploring opportunities in
Recent Developments
OnFebruary 8, 2022 , the Company entered into an Equity Purchase Agreement (the "Purchase Agreement"), withHemp Choice Distribution, LLC , aColorado limited liability company ("HCD"), its owners (the "Sellers"), andGabriela Vergara (the "Sellers' Representative"), pursuant to which the Company has agreed to acquire all of the issued and outstanding equity interests of HCD ("Membership Interests"). The closing of the transaction is expected to occur within 90 days from the date of the Purchase Agreement (the "Closing"). The purchase price for the Membership Interests shall be the aggregate amount of$4,400,000 payable at the Closing as follows: (i)$250,000 in cash by wire transfer of immediately available funds; (ii) the number of restricted shares of the Company's common stock that is equal to$250,000 divided by the current market price at the time of Closing, but such price shall not be greater than$.05 per share or less than$.02 per share: and (iii) three million nine hundred thousand dollars ($3,900,000 ) in the form of 390,000 shares of redeemable preferred stock (with a stated value of$10.00 per share) of the Company. The terms of the redeemable preferred shares shall be specifically and fully set forth in a Certificate of Designations to be filed with theState of Delaware at the time of Closing. After the Closing, the Company agrees to provide HCD with a line of credit or assist it in obtaining a line of credit from a third party of up to$1,000,000 . In addition, the business of HCD shall continue to be managed by Sellers' Representative subject to the conditions of an employment agreement to be entered into by the Company and Sellers' Representative prior to the
Closing.
18
RESULTS OF OPERATIONS
Year ended
After rental expense the gross margins on the lease were as follows:
Year Ended Year Ended Increase (Decrease)
December 31,
2021 December 31, 2020 $ %
Revenues
Net rental revenue $ 768,516 $ 1,265,137 $ (496,621 ) -39 %
Rental expense (624,619 ) (1,006,581 ) 381,962 38 %
Gross profit 143,897 258,556 (114,659 ) -44 %General and administrative expenses 857,260 1,029,185
(171,925 ) -17 %
Selling expense 35,486 32,940 2,546 8 %
Loss from operations $ (748,849 ) $ (803,569 ) $ 54,720 7 %
Revenues. For the year ended December 31, 2021 the Company leased two facilities
to licensees in Colorado . For the year ended December 31, 2020 , the company
leased three facilities until October 2020 . The year ended December 31, 2021 is
the beginning of the fourth year of operations for these licensees. Diego, is no
longer forbearing the premium rents contractually due from the tenant as a
result of the cost of leasehold improvements, but is still forbearing the
deferral of preopening rents. These will become recorded as revenue when the
Company considers all the premium rents collectible considering the relative
success of the tenant's operations. In October 2020 one of the leases and the
related sublease was terminated. As a result, total revenue for the year ended
December 31, 2021 was $768,516 , as compared to $1,265,137 for the year ended
December 31, 2020 , a decrease of $496,621 . The cultivation warehouse lease was
extended during 2021 through July 31, 2024 .
Gross profit. Rental revenue for the period ended
General and administrative expense. Our general and administrative expenses for the year endedDecember 31, 2021 were$857,260 , compared to$1,029,185 for the year endedDecember 31, 2020 . The decrease of$171,925 was largely attributable to a reduction in stock based executive compensation and a decrease in professional fees. Selling expense. Our selling expenses for the year endedDecember 31, 2021 were$35,486 , compared to$32,940 for the year endedDecember 31, 2020 . The increase of$2,546 was due to increased services used related to selling and marketing. Year Ended Year Ended Increase (Decrease) December 31, December 31, 2021 2020 $ % Other income (expense) Interest income$ 85,341 $ 150,577 $ (65,236 ) -43 % Other income 46,065 236,705 (190,640 ) -81 % Forgiveness of debt income 56,908 - 56,908 100 % Interest expense (662,721 ) (1,994,199 ) 1,331,478 67 % Lease termination payments 137,434 33,851 103,583 306 % Gain on termination of lease - 55,256 (55,256 ) -100 % Extinguishment of debt 330,576 (9,387 ) 339,963 3,622 % Change in derivative liabilities 3,727,226 (670,152 ) 4,397,378 656 % Change in value of warrants 38 491 (453 ) -92 % Total other income (loss)$ 3,720,867 $ (2,196,858 ) $ 5,917,725 269 % The increase 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, plus a decrease in interest expense and financing costs of debt incurred by the Company.
LIQUIDITY AND CAPITAL RESOURCES
Year Ended Year Ended Increase (Decrease)
December 31, December 31,
2021 2020 $ %
33 %
Net Cash provided by investing
activities - - - - %
Net Cash provided (used) by financing
activities (45,800 ) 356,866 (402,666 ) 113 %
Net Increase (Decrease) in Cash (278,715 ) 10,418 (289,133 ) -2,775 % Cash - beginning of year 327,864 317,446 10,418 Cash - end of year$ 49,149 $ 327,864 $ (278,715 ) -85 % 19 Operating Activities. For the year endedDecember 31, 2021 , the net cash used of$232,915 was a decrease over the same period of the prior year of$113,533 . The loss from operations after non-cash adjustments increased by$124,079 from
the prior year.
Investing Activities. There were no investing activities for the years ended
Financing Activities. During the year endedDecember 31, 2021 , we loaned an aggregate of$124,000 to an entity and received repayments of principal of$11,200 . We received$267,000 from the sale of preferred stock. Payments of convertible notes payable was$200,000 . During the year endedDecember 31, 2020 , we received$306,444 in proceeds from notes payable and convertible notes payable and$100,000 from the sale of preferred stock. Payments of convertible notes payable was$49,578 . Going Concern Qualification The accompanying consolidated 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$8,372,169 atDecember 31, 2021 , and it has an accumulated deficit of$52,137,982 atDecember 31, 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. 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. Critical Accounting Policies
Our critical accounting policies are included in Note 2 - "Summary of Significant Accounting Policies" of Notes to Consolidated Financial Statements included in this Annual Report.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
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 Annual Report.
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