DIEGO PELLICER WORLDWIDE, INC - Annual Report: 2018 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2018

or

For the transitional period from _____________ to ______________

Commission file number 333-189731

DIEGO PELLICER WORLDWIDE, INC.

(Exact name of registrant as specified in its charter)

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 ☒

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 ☒

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 ☒

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 ☒ 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 ☒

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 12, 2019, the registrant had 47,038,274 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, 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 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.

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 accomplished management team with extensive industry experience 

Value Proposition

Value proposition 1: By providing branding, management experience, 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, management, 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 2018:

In 2018, Diego operated three Colorado facilities, and a Washington facility having received prestigious awards for “Most Valuable Brand of the Year” and “Best Retail Center” by the 2018 National Cannabis Business Awards. Diego now has four facilities generating rent in 2018 for the full year. The tenants in their first and second years of operations were quickly growing their sales and improving operational efficiency. Diego worked with these tenants, partially forbearing on their rent so as to allow these operators to strengthen their position and become capable of paying full rents. The properties generating rents in 2018 are as follows:

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. 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, royalties, management fees, 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, new store management opportunities, 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 growing revenues quickly. This is proving the initial Diego concept.

The Industry: Retail Sales Continue to Rise Rapidly

Legalization of marijuana is a very recent movement. California was the first to legalize in 1996 when medical marijuana was approved. Nine states and the District of Columbia have legalized the drug for recreational purposes, according to the National Conference of State Legislatures. More than half the states (31) – plus the District of Columbia, Guam and Puerto Rico – have legalized it for medical purposes. The list of states that have legalized marijuana could expand this November. Voters in Michigan and North Dakota will decide whether to allow recreational use. Marijuana remains illegal under U.S. federal law.

Source: 2018 Marijuana Business Daily, a division of Anne Holland Ventures Inc.

The growth in public support for legal marijuana comes as a growing number of states have legalized the drug for medical or recreational purposes in recent years.

About six-in-ten Americans (62%) say the use of marijuana should be legalized, reflecting a steady increase over the past decade, according to a new Pew Research Center survey. The share of U.S. adults who support marijuana legalization is little changed from about a year ago – when 61% favored it – but it is double what it was in 2000 (31%).

As in the past, there are wide generational and partisan differences in views of marijuana legalization. Majorities of Millennials (74%), Gen Xers (63%) and Baby Boomers (54%) say the use of marijuana should be legal. Members of the Silent Generation continue to be the least supportive of legalization (39%), but they have become more supportive in the past year.

Source: Pew Research Center

Annual cannabis retail sales continue to grow year-over-year as new markets emerge and more states legalize medical and recreational marijuana. Sales in 2018 are projected to increase by roughly 35% from 2017, on pace to reach more than $8 billion by the end of the year.

By 2022, annual retail marijuana sales in the United States could top $22 billion, which would represent more than a 250% increase from 2017.

Source: 2018 Marijuana Business Daily, a division of Anne Holland Ventures Inc.

In 2018, retail marijuana sales in the United States are expected to increase by roughly 35%, on pace to reach over $8 billion by the end of the year. Despite the rocky rollout of California's new recreational industry, the market is massive and will be a major driver of sales growth this year. In mature markets like Washington state and Colorado, rec sales have continued rising - though at a slower rate than in previous years. In 2018, combined sales in those two states will easily eclipse $2 billion. Ongoing growth in Nevada's red-hot recreational market and the launch of adult-use sales in Massachusetts in late 2018 will further buoy sales in 2018. Based on our estimates, recreational sales will surpass medical sales for the first time in 2018, a major milestone for the cannabis industry. 

Overall, medical marijuana sales are expected to decrease for the first time in 2018 - driven by the massive transition taking place in California. Prior to 2018, all sales in the state were in the MMJ market, but now that recreational sales are underway, early reports suggest the vast majority of purchases taking place in licensed, regulated stores are to adult-use customers.

Outside of California, however, sales are expected to continue climbing, bolstered by ongoing growth in mature markets like New Mexico and Arizona, increased patient access in Florida and new MMJ programs coming online in Maryland and Pennsylvania. The transition to fully regulated, state-licensed MMJ sales in Michigan has caused some short-term instability, but it remains one of the largest medical markets in the country and will likely continue to form the foundation of the MMJ industry for years to come.

Ohio could begin MMJ sales at the very end of 2018, though it will take time for the program to fully develop. The state's MMJ market is particularly noteworthy, as it has the potential to generate upwards of $300 million in annual retail sales a few years down the road.

Setbacks in Arkansas and Maine have pushed back the start of their MMJ and adult-use sales, respectively, until 2019. More states will legalize marijuana in the near future, as New Jersey is on the short list to pass a recreational marijuana measure through the legislature and Arizona is likely to have an adult-use cannabis initiative on the 2020 ballot.

By 2022, we project total retail marijuana sales in the United States will reach approximately $22 billion annually - more than a threefold increase from estimated annual sales in 2017. Our estimates account for the fact that more states will likely legalize medical or adult-use marijuana in the coming years - though it's difficult to predict when that will happen and how big those markets will be. Using a range of estimates that incorporate several factors - such as the likelihood of a given state passing a legalization measure, the size of the customer/patient base and time frame for the launch of sales - helps account for this uncertainty. Our approach is refined over time as more information becomes available.

It's important to point out that the marijuana industry has a big and growing impact on the economy at large as the revenue it generates ripples across a community, city and/ or state - as well as the nation. To understand an industry's economic impact, traditional macroeconomic multipliers can range anywhere from 10 to 20 times the original dollar spent. Based on new data from other industries, we've settled on a standard multiplier of 3.5 for the marijuana industry - a slight revision from last year's multiplier of four.

In other words, for every $1 consumers/patients spend at dispensaries and rec stores, an additional $2.50 of economic value will be injected into the economy - much of it at the local level.

Source: 2018 Marijuana Business Daily, a division of Anne Holland Ventures Inc. (Note that our goal is to provide conservative, realistic financial forecasts that reflect the high degree of uncertainty in the industry. Total cannabis sales in any given calendar year are highly dependent upon progress made - or not made - in each individual state. California is currently the big wild card, as the slow rollout of its statewide regulatory system makes it difficult to get a handle on the exact size of this enormous market. As more information comes to light over time, it could change our estimates for California and, therefore, the industry at large.)

Where are the Greatest Market Opportunities?

All eyes are on California.

That's the reality for nearly everyone involved in the global marijuana market. Companies around the world - from Europe to Canada to Israel and beyond - want a piece of the California market. But there are plenty of practical ramifications. No other state or federal government in the world has tried to implement such a wide-ranging regulatory system that affects tens of thousands of existing black- and gray-market businesses.

The bottom line: The sheer immensity of the California cannabis market is topped only by its complexity. And that complexity has led to major struggles and big wait times for entrepreneurs looking to tap the California market potential. California's MJ regulatory system covers a population of 40 million and includes incentives for existing businesses to transition to the licit tax-paying industry.

There are plenty of other hurdles for existing and future businesses as well, including local license caps from towns and counties that are hesitant to grant permits to any type of cannabis companies. As of early October 2018, only a fraction of local governments had opted to allow rec companies to set up shop within their borders, and state business permits are dependent on a company first obtaining local authorization of some sort. Plenty of companies are striving to play by the rules, but they're often unable to stay in business while doing so because they haven't been able to find locations that fit all the legal parameters for licensing.

The same is true for thousands of small-scale growers in California, as well as edibles makers, concentrate producers and other plant-touching businesses. One option for such companies, at least for now, is to focus on the medical marijuana market instead of rec. Far more local governments allow limited medical companies than adult-use businesses. Obtaining such permits could be a stopgap move, because as time goes on, it's likely that more and more local governments will decide to permit rec. Another option could be to pivot into an alternate cannabis sector, such as distribution or testing labs, given that there's a dearth of both key business types in the state.

Hemp and CBD

Hemp was once prized for making rope. Two hundred years later, the plant still has us tied in knots. From a patchwork of state hemp rules to confusion among cannabis entrepreneurs about the definition of hemp, uncertainty reigns in the hemp industry. Hemp has long been bedeviled by its conflation with marijuana, and the Controlled Substances Act banned its production for decades. That changed in 2014, when the U.S. Farm Bill opened the door for a hemp revival in states willing to experiment (and control) the crop's return to legal production. The federal government defines hemp as cannabis sativa with a THC content at or below 0.3%.

The Farm Bill set off an explosion of hemp production and experimentation and has given cannabis entrepreneurs new opportunities to grow, sell and buy cannabis in a nonintoxicating form. As of October 2018, hemp production is legal under at least limited circumstances in 41 states. The Farm Bill allows limited interstate commerce for hemp - something still off-limits to marijuana entrepreneurs. And hemp businesses report fewer banking and regulatory headaches (though barriers certainly exist in these areas), compared to their marijuana-producing colleagues.

The U.S. hemp experiment is still unfolding. Market conditions vary widely. Some states ban all hemp production; others allow some but not all farmers to grow it; and a handful of states invite all farmers to try hemp and even offer to help market the crop and find companies to process it. U.S. agriculture authorities consider hemp legal only if it is grown as part of a state-backed pilot project, so the USDA keeps no records of the nation's nascent hemp industry.

Not all U.S. states use the federal THC guidelines to define hemp, and the 0.3% THC threshold has little basis in science, meaning that scientists don't agree how much THC a plant needs to produce a high when heated and consumed. Cannabis plants have more than 100 cannabinoids, of which THC is only one, and hemp products with no detectable THC can still be considered psychoactive if they contain cannabinoids that relieve anxiety or depression. At least one state, Iowa, explicitly dictates that cannabidiol is legal but highTHC marijuana is not legal - then goes on to say it accepts cannabidiol with a THC limit 10 times higher than the federal threshold for legal hemp.

Still, the 0.3% THC threshold is a useful metric for dividing marijuana from hemp, and it is the standard used in this Factbook.

Longtime hemp prohibition in the United States has left the industry frozen in time. There is little modern agricultural equipment appropriate for hemp harvesting and processing, and the crop likely won't match the market share it enjoyed before the Industrial Revolution, when hemp fibers were commonly used in commercial fabrics. Today, hemp's value comes mostly from its flower, rich in cannabinoids beyond THC. The most valuable as of this report is CBD, a cannabinoid with established therapeutic uses including pain relief and reducing muscle spasms associated with epilepsy or muscular sclerosis.

Hemp Industry Daily estimates that the U.S. market for hemp-derived CBD will hit approximately $500 million in 2018, with the potential to eclipse $3 billion annually by 2022 - a 500% increase in just four years.

Expect hemp-derived cannabinoid products low in THC to take increasing market share (and media attention) in the overall cannabis industry.

Source: 2018 Marijuana Business Daily, a division of Anne Holland Ventures Inc. 

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, pre-negotiated acquisition contracts, and most importantly a branded management company. Table 4 provides a financial benchmark of other cannabis. 

Table 4: Financial Benchmark-millions

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.

Attorney General Jeff Sessions' January 2018 decision to rescind the Cole Memo raised some concerns in the marijuana industry that federal officials may try to interfere with legal cannabis. Those concerns, for the most part, haven't materialized, but the scare did get many marijuana businesses thinking about the possibility of federal interference and what could be done about it.

The memo was drafted during the Obama administration by former U.S. Deputy Attorney General James Cole in 2013 as a way to minimize the threat of federal crackdowns against legal marijuana businesses. The document essentially instructed federal law enforcement not to interfere with state-licensed marijuana businesses complying with state laws and certain conditions, such as not selling product to minors or into the black market.

While the Cole Memo clearly expressed an Obama administration policy of leaving legal marijuana businesses alone, it was not a legal change - which only Congress can do. Therefore, the Cole Memo technically allowed U.S. attorneys to go after marijuana businesses if they wanted. With the sending of the Cole Memo to the proverbial shredder, U.S. attorneys no longer have guidelines on how to deal with state-licensed marijuana businesses. But in an April 2018 conversation with Republican U.S. Sen. Cory Gardner, President Donald Trump pledged to keep the Department of Justice from interfering with state cannabis laws and, perhaps more significantly, support legislation protecting state-legal marijuana businesses. White House officials later confirmed the president's policy stance.

The news is being celebrated by advocates working to reform marijuana laws, but many are wary of taking President Trump at his word as nothing has been codified that would prevent him from reversing course.

Several bills have been introduced to Congress seeking to reform federal marijuana laws in different ways, including the removal of cannabis from the list of controlled substances, allowing MJ companies to access traditional banking services and amending the IRS code to more fairly tax cannabis businesses. Similar bills have been introduced in previous sessions of Congress, but none have gained significant traction. This time, however, may be different, as marijuana reform has become a bipartisan issue that has the support of many prominent Republicans.

Senate Majority Leader Mitch McConnell, for example, introduced a bill in April to remove federal barriers on hemp, while former Republican House Speaker John Boehner recently disclosed his involvement with a large, multistate cannabis company.

Whether any significant reform of federal marijuana policy happens in 2018 and what shape it could take remains an open question, but it's clear that attitudes toward cannabis on Capitol Hill are shifting.  

 Source: 2018 Marijuana Business Daily, a division of Anne Holland Ventures Inc.

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

We currently are not a party to any material litigation or other material legal proceedings. 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 11,176,493 shares of common stock of the Registrant.

Record Holders

As of April 12, 2019, there were approximately 193 shareholders of record holding a total of 47,423,790 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 

We sold 41,054 shares of common stock and received proceeds of $20,872. Additionally 5,000 valued at $2,648 were not issued as of December 31, 2018. We issued 16,804 shares of common stock that were sold in 2017 and classified as shares to be issued at December 31, 2017.

Holders of convertible notes converted $1,019,933 of notes and $78,107 of accrued interest into 15,230,423 shares of common stock valued at $2,726,567. Additionally, 85,110 shares, valued at $168,862, for the conversion of notes, were authorized but not issued as of December 31, 2018.

2,116,857 shares of common stock were returned in connection with Debt Restructure Agreements dated On July 17, 2018, additionally 675,759 shares of common stock, valued at $108,121, were agreed to be cancelled, has not been returned as of December 31, 2018.

We issued 40,500 common shares as security for the payment of convertible notes. The shares, valued at $26,730 are held in escrow, are refundable and are recorded in a contra equity account.

We issued 1,780,074 shares of common stock, valued at $618,532, for services. Additionally, 1,980,179 shares, valued at $322,433 for services, were authorized but not issued as of December 31, 2018.

We issued 669,082 shares of common stock for payment of a former employee note in the amount of $166,354, plus accrued interest of $21,658. In addition, 273,245 excessive shares of common stock were issued, these shares are in the process of being cancelled.

We issued 75,000 shares of common stock, valued at $47,254, to settle accounts payable to a consultant. 

We issued 125,000 shares of common stock, valued at $20,500, for an inducement of extension of sublease.

We issued 2,308,938 shares of common stock, valued at $202,443 as share-based compensation to related parties. Additionally, 29,486 shares, valued at $95,983 were authorized to be issued for related party services, but were not issued as of December 31, 2018.

As a condition of management employment, the Board of Directors approved employment agreements with two key executives. This agreement provided that additional shares will be granted each year at February 1 over the term of the agreement should their shares as a percentage of the total shares outstanding fall below prescribed ownership percentages. The CEO received an annual grant of additional shares each year to maintain his ownership percentage at 10% of the outstanding stock. The other two executives receive a similar grant to maintain each executive’s ownership percentage at 7.5% of the outstanding stock. During the year ended December 31, 2018, 2,732,106 shares were issued. At December 31, 2018, there is $229,031 accrued for the annual grants, representing 649,541 shares authorized not issued. The Company recorded compensation expense of $610,284 for the year ended December 31, 2018.

In connection with the issuances of the foregoing securities, the Company relied on the exemptions from registration provided by Section 4(a) (2) of, and Rule 506 of Regulation D promulgated under, the Securities Act of 1933, as amended, for transactions not involving a public offering. 

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 under sections in the financial statements and footnotes included in the Company’s Form 10-K filed on March 31, 2018 for the year ended December 31, 2018. Words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions are used to identify forward-looking statements.

Overview

Diego Pellicer Worldwide, Inc. was established on August 26, 2013 to take advantage of 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 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 accomplished management team with extensive industry experience, 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.

The Company has already established four facilities in markets that have experienced high growth, Washington and Colorado. This growth is illustrated in the tables below:

Source: Headset & 2018 Marijuana Business Daily, a division of Anne Holland Ventures Inc. 

The legalization taking place in other states such as California and Florida present opportunities many times that of Washington and Colorado. The Company is exploring opportunities in Oregon, California and Florida and is getting inquiries from other potential operators in other jurisdictions.

This market is projected to grow rapidly in the future as this chart below illustrates:

Source: Marijuana Business Daily

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.

2018 has been a year of growth for Diego Pellicer Worldwide. Four tenants were open and generating lease revenue. The tenants were showing steady revenue increases and operating improvements. The business model was being proven. The brand name was getting national recognition and garnered the “Most Valuable Brand of the Year” at the 2018 National Cannabis Business Awards beating out tough national competition including MedMen™, The Clinic, Lightshade and Olio. Diego was also honored as the “Best Retail Center” for the second year in a row, defeating other highly regarded names including LiveWell, The Clinic, The Green Solutions, Euflora and Kind Love.

Following this stabilization and growth, in 2019 Diego expects that its revenues from existing tenants, new management agreements and retail acquisitions by the Company and, or it’s tenants will continue to improve the bottom line for the Company. General and administrative expenses should continue to decline also resulting in improved operating results.

Diego is exploring opportunities in California, Colorado, Nevada, Washington and other states. The Company will continue to raise capital to finance that expansion. This should result in increased revenues for the future and increased opportunities into new markets.

Opportunity in an untapped industry with multi-billion-dollar potential

The demand for marijuana products is a multi-billion-dollar market that has only recently begun to become mainstream. Many challenges face the marijuana entrepreneur. Therein lies the opportunity.

Regulation and reality

Total demand for marijuana in the United States, including the black market, is around $52.5 billion, according to the estimates.. That becomes a very conservative estimate of the size of the market in the United States. Distribution was driven underground for years by the Controlled Substance Act passed by Congress nearly 50 years ago. The favorable public opinion towards the legalization is rapidly changing the political attitude toward marijuana not only on the state level but on the federal level. If the Federal Government legalized marijuana nationwide, sales might start out around that level, but would likely rise as cannabis gained mainstream acceptance and the market evolved. Eventually, marijuana could surpass cigarette sales with the potential to rival beer in terms of overall sales.

Financing and banking

As doubts remain, financing is still a challenge for this industry with banks in many states not only avoiding lending to these businesses but also refusing deposits because of complicated FDIC requirements. Financing has been largely equity raises, vendor financing, and expensive convertible debt. However, with the legalization and subsequent public capital raises in Canada and the change in the political attitude, there has been an indication of more interest by institutional investors in providing capital to this industry and more banks are accepting deposits.

A fragmented industry

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 less expensive capital, lower costs, better merchandising, brand name recognition, and more efficient operations. This what we offer our tenants when negotiating the lease: an agreement to acquire them when marijuana is federally legalized. This gives the tenant the ultimate opportunity to participate in the rapid consolidation that we believe will happen when marijuana is federally 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.

The opportunity

The first mover advantage will continue to be possible for those willing to deal with the regulatory, banking, and financial challenges in today’s market. The fragmented market, the shortage of executives skilled in challenges of the industry, scarcity of brand names, provides a company like Diego, who has proven their business model, to be a consolidator in this industry.

States with legalized marijuana

Thirty three states and the District of Columbia have laws broadly legalizing marijuana in some form. Ten states and the District of Columbia have legalized marijuana for recreational use with the largest market by far, California, becoming legal.

The majority of all states allow for use of medical marijuana under certain circumstances. Some states have also decriminalized the possession of small amounts of marijuana. The industry is operating under stringent regulations within the various state jurisdictions.

This map shows current state laws and recently approved ballot measures legalizing marijuana for medical or recreational purposes. ²

There are 9,397 active licenses for marijuana businesses in the U.S., according to Ed Keating, chief data officer for Cannabiz Media, which tracks marijuana licenses. This includes cultivators, manufacturers, retailers, dispensaries, distributors, deliverers and test labs. Now 306 million Americans live in a jurisdiction that has legalized some form of cannabis use. ³ BDS Analytics estimates that the industry paid $1 billion in state taxes in 2016 and owes another $1.4 billion for 2017. ⁴

¹ “Illegal Pot Sales Topped $46.4 Billion in 2016, and that’s Good News for Marijuana Entrepreneurs,” Inc., January 17, 2017, Will Yakowicz.

² CNN Money, “The Legal Marijuana Market is Booming,” January 31, 2018, by Aaron Smith

³ Frontier Financial Group, ‘The Cannabis Industry Annual Report: 2017 Legal Marijuana Outlook,”

⁴ CNN Money, “The Legal Marijuana Market is Booming,” January 31, 2018, by Aaron Smith

The recent legalization in states such as California and probable legalization in Florida present opportunities many times that of Washington and Colorado. The Company is exploring opportunities in Oregon, California and Florida and is getting inquiries from other potential operators in other jurisdictions such as Michigan.

States introducing and expanding legalized marijuana laws

The legalized cannabis market has grown considerably bigger, with Canada federally legalizing recreational marijuana in 2018 and Eastern states in the U.S. rushing towards legalization.

Recent developments at the federal level

Pressures from the states with legalized cannabis industries have been exerted by those state’s Senators and Congressmen. Both informal and formal efforts have been increased by these states. The following are the most recent:

In an April 2018 conversation with Republican U.S. Sen. Cory Gardner, President Donald Trump pledged to keep the Department of Justice from interfering with state cannabis laws and, perhaps more significantly, support legislation protecting state-legal marijuana businesses. White House officials later confirmed the president's policy stance.

Several bills have been introduced to Congress seeking to reform federal marijuana laws in different ways, including the removal of cannabis from the list of controlled substances, allowing MJ companies to access traditional banking services and amending the IRS code to more fairly tax cannabis businesses.

Similar bills have been introduced in previous sessions of Congress, but none have gained significant traction. This time, however, may be different, as marijuana reform has become a bipartisan issue that has the support of many prominent Republicans.

Senate Majority Leader Mitch McConnell, for example, introduced a bill in April to remove federal barriers on hemp, while former Republican House Speaker John Boehner recently disclosed his involvement with a large, multistate cannabis company.

Whether any significant reform of federal marijuana policy happens in 2018 and what shape it could take remains an open question, but it's clear that attitudes toward cannabis on Capitol Hill are shifting.  

New York Democratic Senator Chuck Schumer introducing legislation to remove cannabis from the DEA’s list of controlled substances, to decriminalize pot at a federal level and effectively allow states to decide how to regulate the use of medical or recreational marijuana without concern for federal law.

President Trump cut a deal with Colorado Senator Corey Gardner, R-Colo. to allow states to decide what to do about cannabis.

Former Speaker of the House John Boehner became a director with cannabis company Acreage Holdings.

The Food and Drug Administration setting up for an approval of the first cannabis-based drug from GW Pharmaceuticals Plc (“GWPH”)

The Veteran’s Administration now wants to study the effectiveness of cannabis for chronic pain and PTSD. ⁽The Street, “Cannabis Industry Sits on Precipice of Major Expansion, March 28, 2018, by Bill Meagher) 

 Source: 2018 Marijuana Business Daily, a division of Anne Holland Ventures Inc. 

The projected U.S. cannabis industry’s growth

The Cannabis Industry’s Annual Report for 2017 projects the following robust growth of legal marijuana sales:  

New Frontier, “The Cannabis Industry Annual Report: 2017 Legal Marijuana Outlook,”

Diego’s value proposition

Value proposition 1: By providing branding, training, unique accessories, purchasing services, site selection, standardized design, and experienced construction supervision, the tenant reduces his startup time, reduces expenses, increases their efficiency, and builds their 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 a demonstrated profitability, Diego has the choice of selling the operations of a selected facility in combination with the tenant and then securing a management contract for that facility. The proceeds can be used to further expand our branded stores and production facilities.

Value proposition 3: On select leases, 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.

What is Diego’s Strategy?

Phase 1 - brand and develop facilities and lease to licensed operators

Diego is initially 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.

Simultaneous to the signing of the lease, Diego may secure an option to purchase the tenant’s operations with selected Diego operators/tenants.

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 accomplished management team with extensive industry experience. 

Phase 2 - Sell facilities and retain a management contract

Having developed a brand name and demonstrated operational excellence, the Company has facilities with a proven superior earning power. The Company, in combination with the licensed tenant, may choose to sell the real estate and the operating company and secure a management contract to manage the property the “Diego Way.” This will generate capital with which we can further expand our network of stores.

Phase 3 - Exercise the option to purchase and roll up licensed cannabis operations

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. We expect this to be a frantic time for larger companies to look for acquisitions, the opportunity to raise capital for further expansion or the exercise an exit strategy.

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 growing revenues quickly. This is proving the initial Diego concept.

We have proven this to be a winning strategy

Diego is positioning itself to be a dominate player in the marijuana marketplace. Diego has proven 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.

What we accomplished in 2018

2018 was a time of new growth for the Company. An effective and experienced team had to be 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 do 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 the Colorado market. New markets had to be explored, new alliances forged, and opportunities prioritized.

$1,173,750   in new capital was raised. New markets were explored. Four facilities continued to see year upon year increases in revenues, which lead to increased rental revenue cash-flow to the Company. All delinquent notes were renegotiated, consolidated, and extended. In 2018, Diego had received revenues from three Colorado facilities, and our Washington store. Diego now had four facilities generating rent in 2018 for the full year and we have actively been expanding in those markets with potential acquisitions for our tenants, and our management company. The tenants growing their sales and improving operational efficiency. Diego worked with these tenants, partially forbearing on their rent so as to allow these operators to strengthen their position and become capable of paying full rents. The properties generating rents in 2018 are as follows:

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. The retail facilities have shown steady growth in sales since their opening.

Diego Pellicer Seattle

Diego Pellicer Denver

Diego will continue this strategy in states where recreational or medical marijuana sales and cultivation are 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.

RESULTS OF OPERATIONS

Year ended December 31, 2018 compared to year ended December 31, 2017

After rental expense the gross margins on the lease were as follows:

Revenues. For the year ended December 31, 2018 and 2017, the Company leased three facilities to licensees in Colorado and one in Washington. The year ended December 31, 2018 is the beginning of the second year of operations for these licensees and Diego is now collecting some premium rents. Diego, however, is still forbearing on the premium rents contractually due from the tenant as a result of the cost of leasehold improvements and the deferral of preopening rents. These will become recorded as revenue when the Company considers the premium rents collectible considering the relative success of the tenant’s operations. These licensees have now had their opening year behind them and are experiencing increasing revenues in the second year of operations. This is a significant event for the Company. For the first time in the Company’s history there are four facilities generating some premium rental revenue. As a result, total revenue for the year ended December 31, 2018 was $1,456,939, as compared to $1,486,997 for the year ended December 31, 2017, a decrease of $30,058. The Company is assessing the potential impact of ASU 2018-10 Leases (Topic 842), Codification Improvements and ASU 2018-11 Leases (Topic 842), Targeted Improvements which will likely have an impact on revenue recognition during 2019.

Gross profit. Rental revenue for the periods ended December 31, 2018 increased over the prior year ended December 31, 2017, resulting in a gross profit of $326,804.

General and administrative expense. Our general and administrative expenses for the year ended December 31, 2018 were $2,786,615, compared to $5,704,621 for the year ended December 31, 2017. The decline of $2,918,006 was largely attributable a reduction in executive stock compensation and consulting fees during year ended December 31, 2018.

Selling expense. Our selling expenses for the year ended December 31, 2018 were $66,511, compared to $95,606 for the year ended December 31, 2017. The decline of $29,095 was due to reduction of services used related to selling and marketing 

The Net Other Income was the effect of the decline in market value of the Company’s stock had on the derivative liability of $6,000,830 offset by recording the cost of triggering technical default penalties on certain convertible notes and the financing costs of new debt incurred by the Company.

LIQUIDITY AND CAPITAL RESOURCES  

Operating Activities.  For the year ended December 31, 2018, the net cash used of $1,201,618 was an increase over the same period of the prior year of $1,040,532. The loss from operations after non-cash adjustments increased by $282,030 over the prior year, offset by a decrease in net assets and liabilities of $443,116.

Investing Activities. There were no investing activities for the year ended December 31, 2018.

Financing Activities. During the year ended December 31, 2018, $1,173,750 in proceeds were from convertible notes payable and $20,872 from the sale of common stock. Payments of convertible notes payable was $135,000 and debt cost was $16,000. For the year ended December 31, 2017, $1,403,500 in proceeds were from convertible notes payable and $65,951 were from sale of common stock. Payments of notes payable was $129,050 and debt cost was 58,500.

Non-Cash Investing and Financing Activities. Non-cash activities for the year ended December 31, 2018 was the conversion of convertible notes of $1,019,933 plus interest of $78,107 to common stock valued at $2,431,547. The issuance of common stock for accounts payable, and the assuming of a tenant’s liabilities for leasehold improvements of $228,866.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Item 7A. Quantitative and Qualitative Disclosure 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, 2018 and 2017

Index to the Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of

Diego Pellicer Worldwide, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Diego Pellicer Worldwide, Inc. (the “Company”), as of December 31, 2018 and 2017, and the related consolidated statements of operations, stockholders’ deficit and cash flows for each of the two-years in the period ended December 31, 2018 and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

The Company’s Ability to Continue as a Going Concern

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 3 to the accompanying consolidated financial statements, the Company has suffered recurring losses from operations, generated negative cash flows from operating activities, has an accumulated deficit and that raised substantial doubt exists about Company’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans in regarding these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of the Company’s internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, 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.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provides a reasonable basis for our opinion.

/s/ RBSM LLP

RBSM LLP

We have served as the Company’s auditor since 2017

Larkspur, CA

April 16, 2019

Member of ANTEA with affiliated offices worldwide

Diego Pellicer Worldwide, Inc.

Consolidated Balance Sheets

See accompanying notes are integral to these consolidated financial statements

Diego Pellicer Worldwide, Inc.

Consolidated Statements of Operations

See accompanying notes are integral to these consolidated financial statements

Diego Pellicer Worldwide, Inc.

Consolidated Statements of Stockholders' Deficit

For the Years Ended December 31, 2018 and 2017 

See accompanying notes are integral to these consolidated financial statements 

Diego Pellicer Worldwide, Inc.

Consolidated Statements of Cash Flows

See accompanying notes are integral to these consolidated financial statements

Diego Pellicer Worldwide, Inc.

December 31, 2018 and 2017

Notes to the Consolidated Financial Statements

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. The Company succeeded to and assumed all the rights, assets, liabilities, debts, and obligations of Diego.

Prior to the merger, 3,135,000 shares of Type 1 Media, Inc. were issued and outstanding. The principal owners of the Company agreed to transfer their 2,750,000 issued and outstanding shares to a third party in consideration for $169,000 and cancellation of their 2,750,000 shares. The remaining issued and outstanding shares are still available for trading in the marketplace. At the time of the merger, Type 1 Media, Inc. had no assets or liabilities. Accordingly, the business conducted by Type 1 prior to the merger is not being operated by the combined entity post-merger.

At the closing of the merger, Diego common stock issued and outstanding immediately prior to the closing of the merger was exchanged for the right to receive one share of the surviving corporation for each share of Diego. An aggregate of 1,081,613 common shares of the surviving corporation were issued to the holders of Diego in exchange for their common shares representing approximately 74% of the combined entity.

The merger has been accounted for as a reverse merger and recapitalization in which Diego is treated as the accounting acquirer and Diego Pellicer Worldwide, Inc. is the surviving corporation. 

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.

Until Federal law allows, the Company will not grow, harvest, process, distribute or sell marijuana or any other substances that violate the laws of the United States of America or any other country.

Note 2 - Significant and Critical Accounting Policies and Practices

The management of the Company is responsible for the selection and use of appropriate accounting policies and 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 and 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 consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).  

Reclassifications

Certain prior year amounts were reclassified to conform to the manner of presentation in the current period. These reclassifications had no effect on the Company's balance sheet, net loss or stockholders' equity.

Use of Estimates

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. These estimates and assumptions include valuing equity securities and derivative financial instruments issued in financing transactions and share based payment arrangements, determining the fair value of the warrants received for a licensing agreement, the collectability of accounts receivable 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 that 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 December 31, 2018 and December 31, 2017. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash, prepaid expenses and accounts payable. Fair values were assumed to approximate carrying values for cash and payables because they are short term in nature and their carrying amounts approximate fair values or they are payable on demand.

Cash

The Company maintains cash balances at various financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation, 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.

Revenue recognition