DIEGO PELLICER WORLDWIDE, INC - Annual Report: 2016 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2016

or

For the transitional period from _____________ to ______________

Commission file number 333-189731

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

(Address of principal executive offices) (Zip Code)

(516) 900-3799

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

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

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

None.

TABLE OF CONTENTS

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

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

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

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

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

PART I

Item 1. Business

Overview of the Market

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

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

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

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

The second phase of our strategy is to secure options to purchase the tenant’s operations when it becomes legal on a federal level to operate cannabis distribution operations. When mutually advantageous for Diego and the tenant, Diego will negotiate acquisition contracts with selected Diego operators/tenants. When it becomes federally legal to do so, Diego will execute the acquisition contracts, consolidate our selected tenants and become a nationally branded marijuana retailer and producer concurrent with the change of federal law.

Value Proposition

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

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

Revenue Generation and Growth

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

Why We Believe this is a Winning Strategy

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

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

What we accomplished in 2016:

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

Table 1: Property Portfolio

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

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

Diego Pellicer Seattle

Diego Pellicer Denver

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

What does our premium branding accomplish?

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

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

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

The Industry: What is the Evidence of Rapid Growth?

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

Medical Marijuana Begins

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

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

1998: Oregon, Alaska, and Washington legalized medical cannabis

1999: Maine legalized medical cannabis

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

2004: Montana and Vermont legalized medical cannabis.

2007: New Mexico legalized medical cannabis.

2008: Michigan legalized medical cannabis. Massachusetts decriminalized cannabis.

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

2010: California decriminalizes possession to a civil infraction

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

Recreational Marijuana begins

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

2014: Minnesota and New York legalized medical

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

2014: Oklahoma legalizes trials of CBD oil.

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

2015: Georgia and Texas legalized CBD oil.

2015: Louisiana legalized medical cannabis.

2015: Delaware decriminalized cannabis.

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

2016: Illinois decriminalized cannabis.

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

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

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

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

¹ CNN 2015

² Marijuana Business Daily, November 14, 2016

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

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

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

Table 1⁷

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

³ Marijuana Business Daily 2016, 2016 Brain Research Institute

⁴ NBTC Holland Marketing, 2009

⁵ Washington State Department of Revenue, 2014

⁶ Drug Policy Alliance, Steven Gutwillig, 2014

⁷ USA Today May 21, 2016

Where are the Greatest Market Opportunities?

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

Table 2: Registered Medical Marijuana Patients 2015⁸

⁸ Marijuana Business Daily 2016

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

Table 3: Registered Medical Marijuana Dispensaries⁹

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

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

What Benchmarks could Diego be Measured Against?

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

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

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

Status of Federal Law

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

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

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

¹⁰ Finance Yahoo and EDGAR

Newsweek recently reported:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Employees

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

Item 1A. Risk Factors

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

Item 1B. Unresolved items

None.

Item 2. Location

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

Item 3. Legal proceedings

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

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

Item 4. Mine Safety

Not applicable.

PART II

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

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

Record Holders

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

Dividends

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

Unregistered Sale of Equity Securities

Item 6. Selected Financial Data

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

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

The following discussion and analysis of the results of operations and financial condition of Diego Pellicer Worldwide, Inc. (the “Company”, “we”, “us” or “our”) should be read in conjunction with the financial statements of Diego Pellicer Worldwide, Inc. and the notes to those financial statements that are included elsewhere in this Form 10-K. This discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors and Business sections in the financial statements and footnotes included in the Company’s Form 10-K/A filed on May 6, 2016 for the year ended December 31, 2015. Words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions are used to identify forward-looking statements.

Overview

Diego Pellicer Worldwide, Inc. was established on August 26, 2013 to provide commercial support services, retail and grow facilities, and accessories to the market created by the legislation allowing for the legalization of cannabis operations for recreational use in several states. These markets currently include Colorado and Washington, with a number of other states giving consideration to this market as well. It is expected that the industry will operate under stringent regulations within the various state jurisdictions.

The Company’s primary business plan is to lease various properties to licensed operators to grow, process and retail cannabis and related products. By developing a premium brand name, building upscale facilities, and providing quality accessories to a market where financing is difficult to obtain, these subleases leases are designed to provide a substantial stream of income. We believe that as laws evolve, it is possible that we will have the opportunity to participate directly in these operations as well.

Results of Operations

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

* Not divisible by zero

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

Total revenue for the year ended December 31, 2016 was $374,179, as compared to $104,530 for the year ended December 31, 2015, an increase of $269,649, and represents recognition of income on the Plandai Biotechnology license of $54,000 for both periods, and licensing income of $54,000 and $54,000, respectively. In January 2014, the Company entered into a licensing agreement with Plandai Biotechnology, a publicly traded company, to license their Diego Pellicer brand in exchange for 1,666,667 warrants with a 10-year term, to purchase Plandai’s common stock. At the time of the licensing agreement, the publicly traded shares in Plandai were valued at $525,567. In October 2014, the Company filed a Notice of Exercise to obtain the shares, and have recorded their value as deferred income. For the year ended December 31, 2016 and 2015, $54,000 was recognized as licensing revenue.

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

* Not divisible by zero

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

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

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

* Not divisible by zero

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

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

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

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

Item 8. Financial Statements and Supplementary Data.

Diego Pellicer Worldwide, Inc.

December 31, 2016 and 2015

Index to the Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

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

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

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

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

Hackensack, NJ
April 29, 2017

Diego Pellicer Worldwide, Inc.

Consolidated Balance Sheets

See accompanying notes to the consolidated financial statements

Diego Pellicer Worldwide, Inc.

Consolidated Statements of Comprehensive Loss

See accompanying notes to the consolidated financial statements

Diego Pellicer Worldwide, Inc.

Consolidated Statement of Stockholders’ Deficit

For the Years Ended December 31, 2016 and 2015