DIEGO PELLICER WORLDWIDE, INC - Quarter Report: 2022 June (Form 10-Q)

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

FORM 10-Q

☒  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022

or

☐  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transitional period from _____________ to ______________

Commission File Number: 333-189731

6160 Plumas Street, Suite 100, Reno, NV 89519  

(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:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed 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 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). 

Yes ☒ No ☐

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 

Yes ☐ No ☒

As of August 10, 2022 there were 261,332,926 shares of common stock issued and outstanding.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

Diego Pellicer Worldwide, Inc.
Condensed Consolidated Balance Sheets

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

Diego Pellicer Worldwide, Inc. 

Condensed Consolidated Statements of Operations 

(Unaudited)

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

DIEGO PELLICER WORLDWIDE, INC 

Condensed Consolidated Statements of Stockholders' Deficit 

For the Three and Six Months Ended June 30, 2022 and 2021 

(Unaudited)

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

Diego Pellicer Worldwide, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.  

Diego Pellicer Worldwide, Inc. 

Notes to the Condensed Consolidated Financial Statements

June 30, 2022 and 2021

(Unaudited)

Note 1 – Organization and Operations

History

On March 13, 2015, Diego Pellicer Worldwide, Inc. (the Company) (f/k/a Type 1 Media, Inc.) closed on a merger and share exchange agreement by and among (i) the Company, and (ii) Diego Pellicer World-wide 1, Inc., a Delaware corporation, (“Diego”), and (iii) Jonathan White, the majority shareholder of the Company. Diego was merged with and into the Company with the Company to continue as the surviving corporation in the merger.

Business Operations

The Company leases real estate to licensed marijuana operators, providing complete turnkey growing space, processing space, recreational and medical retail sales space and related facilities to licensed marijuana growers, processors, dispensary and recreational store operators. Additionally, the Company plans to explore ancillary opportunities in the regulated marijuana industry, as well as offering for wholesale distribution branded non-marijuana clothing and accessories.

The properties generating rents in 2022 and 2021 are as follows:

The Company’s two properties in Denver, CO are leased to Royal Asset Management, LLC (“RAM”). RAM opened the Diego Denver branded flagship store in February 2017. This store is known as “Diego Colorado”. The retail facilities have shown steady growth in sales since opening. For the two properties subleased, RAM uses these properties for its cultivation facilities in Denver, CO. Production at these facilities began in late 2016. On July 27, 2021, the Company filed a lawsuit against Royal Asset Management, LLC (“RAM”) and Neil Demers (“Demers”) in the District Court, City and County of Denver, State of Colorado, alleging breach of contract on four subleases for which RAM has failed to make the required payments to the Company pursuant to the respective sublease agreements (see Note 4).

In August 2021, the master lease and sublease associated with the 14,800 sq. cultivation warehouse were extended through July 31, 2024 (see Note 9). On June 6, 2022, the Company, the lessor and the sublessee entered into termination agreements to terminate the master lease and the sublease for the cultivation warehouse property. The termination agreements are conditioned upon the closing of the sublessee’s sale of its assets at the location. The closing is expected to be in the second half of 2022, upon approval by the Colorado Marijuana Enforcement Division. Upon closing, the Company will receive either $625,000 or $650,000, depending upon the closing date.

Note 2 – Significant and Critical Accounting Policies and Practices

The management of the Company is responsible for the selection and use of appropriate accounting policies and for the appropriateness of accounting policies and their application. Critical accounting policies and practices are those that are both most important to the portrayal of the Company’s financial condition and results of operations and that require management’s most difficult, subjective, or complex judgments, often because of the need to make estimates about the effects of matters that are inherently uncertain. The Company’s significant and critical accounting policies and practices are disclosed below, as required by generally accepted accounting principles.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and presented in accordance with accounting principles generally accepted in the United States of America (US GAAP).

The accompanying consolidated balance sheet at December 31, 2021, has been derived from audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP. The accompanying unaudited condensed consolidated financial statements as of June 30, 2022 and for the three and six months ended June 30, 2022 and 2021 have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements, and should be read in conjunction with the audited consolidated financial statements and related notes to the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the SEC. In the opinion of management, all material adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been made to the condensed consolidated financial statements. The condensed consolidated financial statements include all material adjustments (consisting of normal recurring accruals) necessary to make the condensed consolidated financial statements not misleading as required by Regulation S-X Rule 10-01. Operating results for the three and six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022 or any future periods.

Principles of Consolidation

The financial statements include the accounts of Diego Pellicer Worldwide, Inc., and its wholly-owned subsidiary Diego Pellicer World-wide 1, Inc. Intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. These estimates and assumptions include valuing equity securities and derivative financial instruments issued in financing transactions and share based payment arrangements, the collectability of accounts receivable and other receivables (see Note 4), valuation of right of use assets and lease liabilities and deferred taxes and related valuation allowances.

Certain estimates, including evaluating the collectability of accounts receivable and notes receivable, could be affected by external conditions, including those unique to our industry, and general economic conditions. It is possible that these external factors could influence our estimates and could cause actual results to differ from our estimates. The Company intends to re-evaluate all its accounting estimates at least quarterly based on these conditions and record adjustments when necessary.

Accounts Receivable

Accounts receivable consist of rents receivable from the Company’s sublessee as disclosed in Note 4. Management periodically assesses the Company’s accounts receivable and, if necessary, establishes an allowance for estimated uncollectible amounts. Accounts determined to be uncollectible are charged to operations when that determination is made. The Company usually does not require collateral. We have not recorded an allowance for doubtful accounts as of June 30, 2022 and December 31, 2021. 

Fair Value Measurements

The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

Fair Value of Financial Instruments

As required by the Fair Value Measurements and Disclosures Topic of the FASB ASC, fair value is measured based on a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2: Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of June 30, 2022 and December 31, 2021. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash, accounts receivable, prepaid expenses, notes receivable, accounts payable and notes payable. Fair values were assumed to approximate carrying values for cash, receivables, notes receivable, payables and notes payable because they are short term in nature and their carrying amounts approximate fair values or they are payable on demand.

The following table reflects assets and liabilities that are measured at fair value on a recurring basis (in thousands): 

Derivative liabilities and stock warrant liabilities were valued using the Binomial Option Pricing Model in calculating the embedded conversion features for the three and six months ended June 30, 2022 and the year ended December 31, 2021.

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. There were no uninsured balances at June 30, 2022 and December 31, 2021.

Revenue recognition

In accordance with ASC 842, Leases, the Company recognizes rent income on a straight-line basis over the lease term to the extent that collection is considered probable. As a result, the Company has been recognizing rents as they become payable.

During the initial term of the lease, management has a policy of partial rent forbearance when the tenant first opens the facility to assure that the tenant has the opportunity for success. Management may be required to exercise considerable judgment in estimating revenue to be recognized.

When management concludes that the Company is the owner of tenant improvements, the Company records the cost to construct the tenant improvements as a capital asset. In addition, the Company records the cost of certain tenant improvements paid for or reimbursed by tenants as capital assets when management concludes that the Company is the owner of such tenant improvements. For these tenant improvements, the Company records the amount funded or reimbursed by tenants as deferred revenue, which is amortized as additional rental income over the term of the related lease. When management concludes that the tenant is the owner of tenant improvements for accounting purposes, we record the Company’s contribution towards those improvements as a lease incentive, which is amortized as a reduction to rental revenue on a straight-line basis over the term of the lease.

The Company analyzes its contracts to assess that they are within the scope and in accordance with ASC 606. In determining the appropriate amount of revenue to be recognized as the Company fulfills its obligations under each of its agreements, whether for goods and services or licensing, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

Leases

We have elected the practical expedient provided by ASC 842 that allows lessees to choose to not separate lease and non-lease components by class of underlying asset and are applying this expedient to all relevant asset classes. We have also elected the practical expedient package to not reassess at adoption (i) expired or existing contracts for whether they are or contain a lease, (ii) the lease classification of any existing leases or (iii) initial indirect costs for existing leases.

Advertising

Advertising expense was $4,471 and $7,928 for the three months ended June 30, 2022 and 2021, respectively, and was $12,936 and $17,809 for the six months ended June 30, 2022 and 2021, respectively.

Income Taxes

Income taxes are provided for using the liability method of accounting in accordance with the Income Taxes Topic of the FASB ASC. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized and when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The computation of limitations relating to the amount of such tax assets, and the determination of appropriate valuation allowances relating to the realizing of such assets, are inherently complex and require the exercise of judgment. As additional information becomes available, the Company continually assesses the carrying value of their net deferred tax assets.

Common Stock Purchase Warrants and Other Derivative Financial Instruments

The Company classifies as equity any contracts that require physical settlement or net-share settlement or provide us a choice of net cash settlement or settlement in our own shares (physical settlement or net-share settlement) provided that such contracts are indexed to our own stock as defined in ASC Topic 815-40 “Contracts in Entity’s Own Equity.” The Company classifies as assets or liabilities any contracts that require net-cash settlement including a requirement to net cash settle the contract if an event occurs and if that event is outside our control or give the counterparty a choice of net-cash settlement or settlement in shares. The Company assesses classification of its common stock purchase warrants and other free-standing derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required.

Stock-Based Compensation

The Company recognizes compensation expense for stock-based compensation in accordance with ASC Topic 718. The Company calculates the fair value of the award on the date of grant using the Black-Scholes method for stock options and the quoted price of our common stock for common shares; the expense is recognized over the service period for awards expected to vest. The estimation of stock-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from original estimates, such amounts are recorded as a cumulative adjustment in the period estimates are revised. The Company considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience.

Income (loss) per common share

The Company utilizes ASC 260, “Earnings per Share” for calculating the basic and diluted loss per share. In accordance with ASC 260, the basic and diluted loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted net loss per share is computed similar to basic loss per share except that the denominator is adjusted for the potential dilution that could occur if stock options, warrants, and other convertible securities were exercised or converted into common stock. Potentially dilutive securities are not included in the calculation of the diluted loss per share if their effect would be anti-dilutive. The Company has 1,385,640,469 and 231,135,631 common stock equivalents at June 30, 2022 and 2021, respectively. For the six months ended June 30, 2022, these potential shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would reduce net loss per share. There are 840,000,000 shares authorized resulting in 806,973,395 insufficient shares as of June 30, 2022. Substantially all of these excess shares are included in the derivative liability calculations for convertible notes payable and warrants and are therefore accounted for at fair value.

Legal and regulatory environment

The cannabis industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not limited to, matters such as licensure, accreditation, and different taxation between federal and state. Federal government activity may increase in the future with respect to companies involved in the cannabis industry concerning possible violations of federal statutes and regulations.

Management believes that the Company is in compliance with local, state and federal regulations and, while no regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation, as well as regulatory actions unknown or unasserted at this time.

Recent accounting pronouncements.     

The Company believes recently issued accounting pronouncements and other authoritative guidance for which the effective date is in the future either will not have an impact on its accounting or reporting or that such impact will not be material to its financial position, results of operations and cash flows when implemented.  

Note 3 – Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred losses since inception, its current liabilities exceed its current assets by $11,638,959 at June 30, 2022, and it has an accumulated deficit of $55,414,976 at June 30, 2022. These factors raise substantial doubt about its ability to continue as a going concern over the next twelve months. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The Company believes that it has sufficient cash on hand and cash generated by real estate leases to sustain operations provided that management and board members continue to agree to be paid company stock in exchange for accrued compensation. There are other future noncash charges in connection with financings such as a change in derivative liability that will affect income but have no effect on cash flow.

Although the Company has been successful raising additional capital, there is no assurance that the company will sell additional shares of stock or borrow additional funds. The Company’s inability to raise additional cash could have a material adverse effect on its financial position, results of operations, and its ability to continue in existence. These financial statements do not include any adjustments that might result from the outcome of this uncertainty. Management believes that the Company’s future success is dependent upon its ability to achieve profitable operations, generate cash from operating activities and obtain additional financing. There is no assurance that the Company will be able to generate sufficient cash from operations, sell additional shares of stock or borrow additional funds. However, cash generated from lease revenues is currently exceeding lease costs, but is insufficient to cover operating expenses.

Note 4 – Accounts Receivables and Other Receivables

As disclosed in Note 1, the Company subleases two properties in Colorado to Royal Asset Management at June 30, 2022. At June 30, 2022 and December 31, 2021, the Company had outstanding receivables from the subleases totaling $748,724 and $598,667, respectively, and during the three and six months ended June 30, 2022 and 2021 the Company’s subleases with RAM accounted for 100% of the Company’s revenues.

In addition to the receivables from the subleases, the Company has agreed to provide RAM and affiliates of RAM up to an aggregate amount of $1,030,000 in financing. These notes accrue interest at the rates ranging from 12% to 18% per annum. As of June 30, 2022 and December 31, 2021, the outstanding balance of these notes receivable total $650,481 and $620,781, respectively, including accrued interest of $320,481 and $290,781, respectively. The notes are secured by a UCC filing and also $400,000 of the balance was personally guaranteed by the managing member of RAM. Our position was subordinate to the CEO’s note described in Note 5. We have recorded interest income of $14,850 and $27,579 during the three months ended June 30, 2022 and 2021, respectively. We have recorded interest income of $29,700 and $54,429 during the six months ended June 30, 2022 and 2021, respectively. In April 2021, we received a payment of $400,000 of note principal and $93,770 of related accrued interest.

On September 9, 2020, we closed on a Membership Interest Purchase Agreement dated September 4, 2020, and obtained the right to acquire a 15.13% membership interest in Blue Bronco, LLC. The purchase of the 15.13% interest in Blue Bronco LLC is subject to the approval of the Colorado Marijuana Enforcement Division. Necessary approval by governing authorities is expected to be received in the third or fourth quarter of 2022 pending the resolution of a lawsuit between the RAM and other parties related to the transaction. Accrued interest receivable of approximately $68,000 will be applied to the purchase of the membership interest upon approval of the purchase by the Colorado Marijuana Enforcement Division.

Lease Termination

On October 1, 2020, the master and sublease associated with the 18,600 sq. cultivation warehouse in Denver were terminated. In connection with that termination, we entered into a Sublease Termination Agreement (“Termination Agreement”) with RAM and an affiliate of RAM Venture Product Consulting, LLC (“VPC”). Pursuant to this agreement, RAM acknowledged a debt of deferred rent to the Company in the amount of $1,418,480 and VPC acknowledged a debt of deferred rent to the Company in the amount of $64,344. RAM and VPC executed promissory notes for these amounts, respectively. The notes accrue interest on the unpaid balance at a rate equal to the Applicable Federal Rate for mid-term obligations as published by the Internal Revenue Service. No payment under the promissory notes will be due to the Company until the earlier of (i) the date on which RAM and the Company consummate a change of control event, which is defined as: the acquisition of RAM by the Company or an affiliated entity by means of any transaction or series of related transactions to which RAM is a party (including, without limitation, any membership interest acquisition, reorganization, merger or consolidation, (generally, a “Merger”), or, (ii) the date one (1) business day following the earlier of (x) at any time, receipt by the Company from RAM or VPC of a written notice stating such party no longer desires to pursue the Merger, or (y) beginning eighteen (18) months after the date of this Agreement, receipt by RAM or VPC from the Company of a written notice stating that the Company no longer desires to pursue the Merger (the “Maturity Date”).

We have recorded the promissory notes as long term notes receivable of $1,482,824 at June 30, 2022 and December 31, 2021. Due to the uncertainty of the collectability, we have also recorded a long term deferred credit in the same amount. We will record income under the deferred rent notes as payments are received or deemed collectible. This asset and related credit have been netted on the accompanying condensed consolidated balance sheet.

Additionally, in connection with the termination of the sublease, RAM will continue to pay the remaining future sublease premium payments due to the company on the Denver sublease (the “Future Rent Debt”) beginning on the termination date, and until the earlier of the Maturity Date or June 30, 2024, notwithstanding the termination of the Subleases. However, no payment under the Future Rent Debt agreement will be due to the Company until the Maturity Date, at which time the entire Future Rent Debt shall be due and payable in full, except for any month in which RAM earns $725,000 of gross sales revenue, including taxes, at its Alameda location, in which case RAM shall pay the Future Rent Debt for the following month to the Company on or before the 5th day of the following month, and such amount will not accrue as a Future Rent Debt. RAM shall continue to accrue debt to the company, assessed on the first day of each month, according to the schedule below:

We will record income pursuant to the Future Rent Debt as payments are received based on the Company’s analysis of collectability including, but not limited to, the potential application toward the purchase price. We have recorded $34,866 and $33,852 as Lease Termination Payments in the Statement of Operations for the three months ended June 30, 2022 and 2021, respectively, and $69,732 and $67,703 as Lease Termination Payments for the six months ended June 30, 2022 and 2021, respectively.

Notes Receivable

During 2022 and 2021, the Company entered into four promissory notes with an unrelated party, aggregating $244,000 (see Note 9). The notes all mature 11 months after issuance and have an effective interest rate of 8.33%. Payments of principal and interest are due monthly, beginning 30 days after the date of issuance. Principal repayments of $67,238 were received during the six months ended June 30, 2022. Payments on the notes are in arrears at June 30, 2022, and we have recorded an allowance for uncollectable notes receivables of $82,781 at June 30, 2022.

Note 5 – Related Party Transactions

As of June 30, 2022 and December 31, 2021, the Company has accrued compensation to its CEO and director and to its CFO aggregating $305,789 and $263,289, respectively. As of June 30, 2022 and December 31, 2021, accrued payable due to former officers was $916,986 and $946,986, respectively. For each of the six months ended June 30, 2022 and 2021, total cash-based compensation to related parties was $180,000. For the three months ended June 30, 2022 and 2021, total share-based compensation to related parties was $5,041 and $60,811, respectively. For the six months ended June 30, 2022 and 2021, total share-based compensation to related parties was $13,224 and $85,654, respectively. These amounts are included in general and administrative expenses in the accompanying financial statements.

From 2017 to 2019, Mr. Gonfiantini, CEO, personally and through his Company, Crystal Bay Financial LLC, loaned an aggregate amount of $1,020,000 to Royal Asset Management. These notes accrued interest at 17% - 18% per annum, and required monthly payments of approximately $5,000 to $20,000. These notes were personally guaranteed by the managing member of Royal Asset Management, and were secured by certain equipment and other tangible properties of Royal Asset Management. Among these notes, $500,000 was also secured by the medical marijuana licenses held by Royal Asset Management. As of October 20, 2021 these notes were fully paid by Royal Asset Management and the security was released.

At June 30, 2022 and December 31, 2021, the Company owed Mr. Throgmartin, former CEO (See Note 9), $140,958 pursuant to a promissory note dated August 12, 2016. This note accrues interest at the rate of 8% per annum and was past the maturity date, however the Company has not yet received a default notice. The balance of related party note was $140,958 at June 30, 2022 and December 31, 2021 and accrued interest on the note was $66,269 and $60,677 at June 30, 2022 and December 31, 2021, respectively.

The Company leases its office space from an entity controlled by its CEO. The lease may be terminated by either party with 30 days’ notice. Rent expense pursuant to the lease was $4,500 for each of the three month periods ended June 30, 2022 and 2021 and was $9,000 for each of the six month periods ended June 30, 2022 and 2021. 

Note 6 – Notes Payable

On August 31, 2015, the Company issued a note in the amount of $126,000 to a third party for use as operating capital. The note was amended to include accrued interest on October 31, 2016 and extend the maturity date to October 31, 2018. As of June 30, 2022 and December 31, 2021, the outstanding principal balance of the note was $133,403, and accrued interest on the note was $80,079 and $76,772 at June 30, 2022 and December 31, 2021, respectively. As of June 30, 2022 the note was past the maturity date, however the Company has not yet received a default notice.

On April 22, 2020, the Company was granted a loan from Numerica Credit Union, in the aggregate amount of $56,444, pursuant to the Paycheck Protection Program, (the “PPP”) under Division A, Title I of the CARES Act. The loan, which was in the form of a note dated April 22, 2020 issued by the Borrower, was scheduled to mature on April 22, 2022 and bore interest at a rate of 1.0% per annum, payable monthly commencing October 22, 2020. No payments made towards this loan, as the full amount of the loan and accrued interest was forgiven in full during February 2021 and the Company recorded income of $56,908.

On June 30, 2020, the Company was granted a loan from the Small Business Association, in the aggregate amount of $150,000, pursuant to the Economic Injury Disaster Loan, (the “EIDL”) under Division A, Title I of the CARES Act. The loan, which is in the form of a note dated June 30, 2020 issued by the Borrower, matures on June 30, 2050 and bears interest at a rate of 3.75% per annum, payable monthly commencing July 1, 2023.

Note 7 – Convertible Notes Payable

The Company has issued several convertible notes which are outstanding. The note holders have the right to convert principal and accrued interest outstanding into shares of common stock at a discounted price to the market price of our common stock. The conversion features were recognized as embedded derivatives and are valued using a Binomial Option Pricing Model that resulted in a derivative liability of $5,800,562 and $2,733,803 at June 30, 2022 and December 31, 2021, respectively. The notes accrue interest at 8% - 10% and the majority of the notes had matured at June 30, 2022.

Several convertible note holders elected to convert their notes to stock during the six months ended June 30, 2021. The tables below provide the note payable activity for the six months ended June 30, 2022 and 2021, and also a reconciliation of the beginning and ending balances for the derivative liabilities measured using fair significant unobservable inputs (Level 3) for the six months ended June 30, 2022 and 2021:

During the six months ended June 30, 2022, the Company entered into three convertible promissory notes with an investor in the aggregate amount of $495,000, and received aggregate proceeds of $465,000, after deducting OID and costs. The notes mature one year from issue and bear interest at 8% per year. Upon a default, the holder shall have the right from time to time, and at any time following an event of default, and ending on the date of payment of the default amount (as defined), to convert all or any part of the outstanding and unpaid principal, interest, penalties, and all other amounts under the notes into fully paid and non-assessable shares of common stock at a conversion price equal to 65% of the three lowest trading prices of the Company common stock for the 15 trading days immediately preceding the delivery of a notice of conversion resulting from such default, for two of the notes, and at 65% of the lowest price for the preceding 15 days for the third note. The Company issued a total of 3,400,000 shares of common stock, valued at $29,580, to the investor in connection with the issuance of two of the notes, and the Company is to issue 2,500,000 shares of common stock, valued at $16,500, for the third note (these shares were issued in July 2022 and are recorded as shares to be issued at June 30, 2022) . The Company recorded a derivative liability associated with the notes of $699,488, valued using a Binomial Option Pricing Model, of which $418,920 was recorded as debt discount and $280,568 was charged to expense. We have recorded a total debt discount of $495,000 related to the notes, which will be amortized over the one year term of each note. During the three and six months ended June 30, 2022, we amortized $91,681 and $149,092, respectively, of debt discount to interest expense.

As of June 30, 2022, convertible notes in the aggregate principal amount of $2,941,274 were past their maturity dates; however, the Company has not yet received any default notices. No default or penalty was paid or required to be paid.

During the six months ended June 30, 2022, we repaid an aggregate of $64,888 of note principal and $5,112 of accrued interest. A gain on extinguishment of debt of $44,344 and reduction of derivative liabilities of $81,194 and reduction of discount of $36,850 have been recorded related to these payments.

During the six months ended June 30, 2021, $100,000 of notes was converted into 4,444,444 shares of common stock with a value of $697,779. A gain on extinguishment of debt of $59,999 and reduction of derivative liabilities of $657,778 have been recorded related to these conversions.

During the six months ended June 30, 2021, $6,256 of accrued interest was converted into 581,969 shares of common stock with a value of $7,856. A gain on extinguishment of debt of $1,709 and reduction of derivative liabilities of $3,309 have been recorded related to these conversions.

During the six months ended June 30, 2021, we repaid an aggregate of $200,000 of note principal. A gain on extinguishment of debt of $177,116 and reduction of derivative liabilities of $177,116 have been recorded related to these payments.

During the six months ended June 30, 2021, we paid an aggregate of $70,000 in settlement of accrued interest in the amount of $95,390. A gain on extinguishment of debt of $150,726 and reduction of derivative liabilities of $125,336 have been recorded related to these payments. 

During the six months ended June 30, 2021, we recorded noncash additions to convertible notes aggregating $2,000.

The following assumptions were used in the Binomial Option Pricing Model in calculating the embedded conversion features and current liabilities for the three months ended June 30, 2022 and 2021:

Note 8 – Stockholders’ Equity (Deficit)

Series C Preferred Stock

On February 24, 2021, the Company sold 179,850 of its Series C Convertible Preferred Shares, with an annual accruing dividend of 8%, to Geneva Roth Remark Holdings, Inc. (“Geneva”), for $163,500 pursuant to a Series C Preferred Purchase Agreement with Geneva. The Company may redeem the Series C Shares at various increased prices at time intervals up to the 6-month anniversary of the closing and must redeem any outstanding shares on the 24-month anniversary. Geneva may convert the Series C Shares into our common shares, commencing on the 6-month anniversary of the closing at a 25% discount to the public market price. The Company recorded a derivative liability associated with Series C Preferred Shares of $1,208,971, valued using a Binomial Option Pricing Model. On March 16, 2021, the Company sold an additional 113,850 shares for $103,500 and recorded a derivative of $165,142. The Series C Preferred Stock is classified as temporary equity due to the fact that the shares are redeemable at the option of the holder. The holder converted the entire amount of $293,700 of the February and March preferred shares plus accrued dividends of $11,748 into 26,159,396 shares of common stock during the year ended December 31, 2021. As of June 30, 2022 and December 31, 2021, there were no shares of Series C Convertible Preferred Stock outstanding.

The table below provides the preferred stock activity for the six months ended June 30, 2021 (there was no preferred stock activity during the six months ended June 30, 2022), and also a reconciliation of the beginning and ending balances for the derivative liabilities measured using Level 3 fair value inputs for the six months ended June 30, 2021.

The following assumptions were used in the Binomial Option Pricing Model in calculating the embedded conversion features and current liabilities for the six months ended June 30, 2021:  

Common Stock

2022 Transactions

During the six months ended June 30, 2022, we issued 3,400,000 shares of common stock, valued at $29,580, in connection with the issuance of convertible notes payable. 

During the six months ended June 30, 2022, 463,637 shares of common stock, valued at $13,224, were accrued for related party service, and 671,805 shares of common stock, valued at $6,833, were issued. At June 30, 2022 and December 31, 2021, shares to be issued for related party services were 386,364 and 594,532, respectively, and the value of shares to be issued at June 30, 2022 and December 31, 2021 was $9,977 and $3,586, respectively.

During the six ended June 30, 2022, 482,163 shares of common stock, valued at $4,000, were accrued for services. At June 30, 2022 and December 31, 2021, shares to be issued for services were 977,279 and 495,116, respectively, and the value of shares to be issued at June 30, 2022 and December 31, 2021 was $10,000 and $6,000, respectively.

During the six ended June 30, 2022, 2,500,000 shares of common stock, valued at $16,500, were accrued for financing cost. At June 30, 2022 and December 31, 2021, shares to be issued for financing cost were 2,500,000 and 0, respectively, and the value of shares to be issued at June 30, 2022 and December 31, 2021 was $16,500 and $0, respectively.

At June 30, 2022 and December 31, 2021, shares to be issued for debt conversions were 31,960, and the value of shares to be issued was $21,861.

2021 Transactions

During the six months ended June 30, 2021, $100,000 of notes and $6,256 of accrued interest and fees were converted into 5,026,413 shares of common stock with a value of $705,635. 

During the six months ended June 30, 2021, 2,931,647 shares of common stock, valued at $85,654, were accrued for related party services, and 1,967,714 shares of common stock, valued at $30,976, were issued. At June 30, 2021 and December 31, 2020, shares to be issued for related party services were 2,695,620 and 1,731,687, respectively, and the value of shares to be issued at June 30, 2021 and December 31, 2020 was $68,042 and $13,364, respectively.

During the six months ended June 30, 2021, 87,252 shares of common stock, valued at $4,000, were accrued for services, and 1,137,553 shares of common stock, valued at $16,000, were issued. At June 30, 2021 and December 31, 2020, shares to be issued for services were 55,556 and 1,105,857, respectively, and the value of shares to be issued at June 30, 2021 and December 31, 2020 was $2,000 and $14,000, respectively.

At June 30, 2021 and December 31, 2020, shares to be issued for debt conversions were 31,960, and the value of shares to be issued was $21,861.

During the six months ended June 30, 2021, we issued 30,000 shares of common stock, valued at $1,915, for consulting services.

Common stock warrant activity:

The Company has determined that certain of its warrants are subject to derivative accounting. The table below provides a reconciliation of the beginning and ending balances for the warrant liabilities measured using fair significant unobservable inputs (Level 3) for the six months ended June 30, 2022 and 2021: 

The following assumptions were used in the Binomial Option Pricing Model in calculating the embedded conversion features and current liabilities for the six months ended June 30, 2022 and 2021:

 Schedule of assumptions were used in the Binomial Option Pricing Model in calculating the embedded conversion features and current liabilities

Note 9 – COMMITMENTS AND CONTINGENCIES

Leases

The Company leases property under operating leases. Property leases include retail and warehouse space with fixed rent payments and lease terms ranging from three to five years. The Company is obligated to pay the lessor for maintenance, real estate taxes, insurance and other operating expenses on certain property leases. These expenses are variable and are not included in the measurement of the lease asset or lease liability. These expenses are recognized as variable lease expense when incurred.

In August 2021, the master lease and sublease associated with the 14,800 sq. cultivation warehouse were extended through July 31, 2024. Monthly base rent payments range from $20,000 to $21,118. Monthly sublease base rent payments range from $26,300 to $28,622.

The Company records the lease asset and lease liability at the present value of lease payments over the lease term. The leases typically do not provide an implicit rate; therefore, the Company uses its estimated incremental borrowing rate at the time of lease commencement to discount the present value of lease payments. The Company’s discount rate for operating leases at June 30, 2022 was 12%. Leases often include rental escalation clauses, renewal options and/or termination options that are factored into the determination of lease payments when appropriate. Lease expense is recognized on a straight-line basis over the lease term to the extent that collection is considered probable. As a result the Company been recognizing rents as they become payable. Our weighted-average remaining lease term is 2.42 years.

As of June 30, 2022, the maturities of operating leases liabilities are as follows (in thousands):

Rent expense is recognized on a straight-line basis over the life of the lease. Rent expense consists of the following:  

As of June 30, 2022, the aggregate remaining minimal annual lease payments under these operating leases plus NNN were as follows: (in thousands):   

Other information related to leases is as follows:  

The Company recognized sublease income of $186,506 and $191,752 during the three months ended June 30, 2022 and 2021, respectively. The Company recognized sublease income of $373,012 and $383,505 during the six months ended June 30, 2022 and 2021, respectively.

These two leases have 2.1 year and 2.7 year terms with optional extensions, expiration dates range from July 2024 to February 2025, and monthly base rent of approximately $20,000-$22,500 plus variable NNN.

As of June 30, 2022, the maturities of expected base sublease income are as follows (in thousands): 

Legal Proceedings

On May 10, 2021, a lawsuit was filed against the Company, along with other defendants, by plaintiff Erin Turoff in the District Court, City and County of Denver, State of Colorado. The specific allegations against the Company include civil theft and civil conspiracy and the plaintiff is seeking actual and compensatory damages. No specific monetary amount was demanded in the lawsuit. On July 8, 2021, the Company filed an answer to the complaint, denying the allegations. The proceedings are ongoing and the Company believes that the suit is without merit and that it will ultimately prevail in any litigation.

On July 27, 2021, the Company filed a lawsuit against Royal Asset Management, LLC (“RAM”) and Neil Demers (“Demers”) in the District Court, City and County of Denver, State of Colorado, alleging breach of contract on subleases for which RAM has failed to make the required payments to the Company pursuant to the respective sublease agreements. The alleged damages under the sublease terms and other ancillary agreements amount to $1,480,881, $377,568, $1,027,635, and $1,418,480, respectively. In addition, the lawsuit alleges that RAM failed to make payments pursuant to a promissory note (the “Note”) in which the Company and RAM entered into on April 3, 2018. The Note was for the principal amount of $330,000 with interest at 18% per annum. The Note had a maturity date of April 2, 2019. The lawsuit seeks payment from RAM and Demers for the total balance due on the Note of $330,000 plus the interest due therein. On October 8, 2021, RAM and Demers filed a joint answer to the lawsuit, and the parties are now engaged in the discovery process.

Equity Purchase Agreement

On February 8, 2022, the Company entered into an Equity Purchase Agreement (the “Purchase Agreement”), with Hemp Choice Distribution, LLC, a Colorado limited liability company (“HCD”), its owners (the “Sellers”), and Gabriela Vergara (the “Sellers’ Representative”), pursuant to which Purchaser has agreed to acquire all of the issued and outstanding equity interests of HCD (“Membership Interests”). On April 22, 2022, the Company sent a termination notice of the Purchase Agreement to HCD, the Sellers and the Sellers' Representative pursuant to the terms of the Purchase Agreement. The Company has made loans to HCD in the aggregate original amount of $244,000, as described in Note 4. The balance due to the Company on the loans is $165,561 at June 30, 2022. Payments on the notes are in arrears at June 30, 2022, and we have recorded an allowance for uncollectable notes receivables of $82,781 at June 30, 2022.

COVID-19

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency in response to a new strain of a coronavirus (the “COVID-19 outbreak”). In March 2020, the WHO classified the COVID-19 outbreak as a pandemic based on the rapid increase in exposure globally. The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. Management is actively monitoring the global situation and its effects on the Company’s industry, financial condition, liquidity, and operations. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2022. However, if the pandemic continues, it may have a material adverse effect on the Company’s results of future operations, financial position, and liquidity in fiscal year 2022.

Employment Agreements

As a condition of their employment, the Board of Directors approved employment agreements with three key executives. These agreements provided that additional shares will be granted each year over the term of the agreements should their shares as a percentage of the total shares outstanding fall below prescribed ownership percentages. Nello Gonfiantini III, who became the Company’s CEO in October 2019 receives an annual grant of additional shares each year to maintain his ownership percentage at 10% of the outstanding stock. The Company’s CFO received a similar grant each to maintain his ownership percentage at 2% of the outstanding stock. During the six months ended June 30, 2022, the Company accrued compensation expense of approximately $13,000 on 463,637 shares of common stock under these agreements. During the six months ended June 30, 2021, the Company accrued compensation expense of approximately $86,000 on 2,931,647 shares of common stock.  As of June 30, 2022 and December 31, 2021, the ending balance of accrued compensation was $9,977 and $3,586, respectively. The number of shares accrued to be issued was 386,364 at June 30, 2022.

Departure of Executive Officer

On January 30, 2019, the Company executed a Separation Agreement and Release with David Thompson, its former Senior Vice President- Finance, finalizing his departure from the Company as an employee. During the six months ended June 30, 2022 and 2021, $0 and $26,904, respectively, was paid under this agreement. As of June 30, 2022 and December 31, 2021, the outstanding balance was $126,389, and is included in Accrued payable – related party in the accompanying condensed consolidated balance sheet.

On October 29, 2019, the Company accepted the resignation of Ron Throgmartin from his positions as CEO, President and Director. Mr. Throgmartin signed a 5-year term Separation Agreement which, among other matters, terminated his Employment Agreement, as amended. On the date of the Separation Agreement, the Company acknowledged it owed Mr. Throgmartin the amount of $517,252 in principal and accrued interest of note payable, salary and fees, accrued during the 5 years of his employment. In addition, the Corporation further acknowledged that it will pay Mr. Throgmartin fifty (50%) percent of his compensation due under the remaining Employment Agreement, or $614,583 under certain conditions, which the Company accrued in full as the date of Mr. Throgmartin’s separation. This agreement provides that the Registrant will pay him $5,000 monthly against his accrued salary/fees and 50% of future compensation due under his terminated Employment Agreement, with certain accelerated payments in the event Registrant’s financial results attain certain EBITA benchmarks. The Company shall have the right to require Mr. Throgmartin to provide consulting services to the Company for a per diem fee of $500. During the six months ended June 30, 2022 and 2021, $30,000 and $30,000, respectively, was paid under this agreement. As of June 30, 2022 and December 31, 2021, the outstanding balance was $790,597 and $820,597, respectively, and is included in Accrued payable – related party in the accompanying condensed consolidated balance sheet.

Note 10 – Subsequent Events

The Company evaluated subsequent events and transactions that occur after the balance sheet date up to the date that the consolidated financial statements are available to be issued. Any material events that occur between the balance sheet date and the date that the consolidated financial statements were available for issuance are disclosed as subsequent events, while the consolidated financial statements are adjusted to reflect any conditions that existed at the balance sheet date. Based upon this review, except as disclosed within the footnotes or as discussed below, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the consolidated financial statements.

During the period from July 1, 2022 through August 12, 2022: 

On July 29, 2022 the Company entered into a securities purchase agreement with an investor pursuant to which the investor purchased a promissory note (the “Note”) from the Company in the aggregate principal amount of $165,000. The Company intends to use the net proceeds ($160,000) from the Note for general working capital purposes.

The maturity date of the Note is July 29, 2023 (the “Maturity Date”). The Note shall bear interest at a rate of 8% per annum. Principal payments shall be made in ten (10) installments each in the amount of US$17,800 commencing on the ninetieth (90th) day anniversary following the issue date and continuing thereafter each thirty (30) days for ten months. Notwithstanding the forgoing, the final payment of principal and interest shall be due on the Maturity Date.

In the event of a default, the investor has the option to convert all or any amount of the principal face amount of the Note at the then-applicable conversion price. The conversion price for the Note shall be equal to the Variable Conversion Price (as defined herein). The “Variable Conversion Price” shall mean 65% multiplied by the Market Price (as defined herein) (representing a discount rate of 35%). “Market Price” means the average of the lowest three trading prices for the Common Stock during the fifteen-trading day period ending on the latest complete trading day prior to the Conversion Date. Notwithstanding the foregoing, the investor shall be restricted from effecting a conversion if such conversion, along with other shares of the Company’s common stock beneficially owned by the investor and its affiliates, exceeds 4.99% of the outstanding shares of the Company’s common stock. The Note may be prepaid by the Company.

Pursuant to the terms of the Purchase Agreement, the Company paid the investor’s legal fees in the aggregate amount of $5,000. The Note also contains an original issue discount of $5,000. The Company will also issue 4,500,000 shares of the Company’s common stock to the investor as additional consideration for the purchase of the Note. 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF OPERATIONS

Special Note Regarding Forward-Looking Information

The following discussion and analysis of the results of operations and financial condition of Diego Pellicer Worldwide, Inc. 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-Q. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to “us”, “we”, “our” and similar terms refer to the Company. This Quarterly Report contains forward-looking statements as that term is defined in the federal securities laws. The events described in forward-looking statements contained in this Quarterly Report may not occur. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, projected or anticipated benefits from acquisitions to be made by us, or projections involving anticipated revenues, earnings or other aspects of our operating results. The words “may,” “will,” “expect,” “believe,” “anticipate,” “project,” “plan,” “intend,” “estimate,” and “continue,” and their opposites and similar expressions, are intended to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based.

Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. Except as required by federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.

U.S. Dollars are denoted herein by “USD,” “$” and “dollars”.

COVID-19

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency in response to a new strain of a coronavirus (the “COVID-19 outbreak”). In March 2020, the WHO classified the COVID-19 outbreak as a pandemic based on the rapid increase in exposure globally. The COVID-19 pandemic is a highly fluid situation and it is not currently possible for us to reasonably estimate the impact it may have on our financial and operating results. We will continue to evaluate the impact of the COVID-19 pandemic on our business as we learn more and the impact of COVID-19 on our industry becomes clearer. We are complying health guidelines regarding safety procedures, including, but are not limited to, social distancing, remote working, and teleconferencing. The extent of the future impact of the COVID-19 pandemic on our business is uncertain and difficult to predict. Adverse global economic and market conditions as a result of COVID-19 could also adversely affect our business. If the pandemic continues to cause significant negative impacts to economic conditions, our results of operations, financial condition and liquidity could be adversely impacted. 

Overview of the Market

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 cannabis market has a multi-billion dollar potential. The industry is still in a development stage, and is being rapidly propelled towards its potential by the state legalization and the rush by suppliers to meet the pent-up demand. Most suppliers are small, unsophisticated but capable operators. The federal legal constraints provide an opportunity to those companies early to the market to gain a first mover advantage and to the successful ones, an opportunity to be a consolidator in the industry.

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

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

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

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

Diego Pellicer Management Company, a wholly owned subsidiary, will license the upscale Diego Pellicer (“DP”) brand to qualified operators and receive royalty payments, while providing expertise in retail, product and manufacturing from Diego’s management team.

Recent Developments

During the fiscal quarter, the Company continued its focus on seeking complimentary acquisitions that are additive to the Company’s overall strategic plan.

RESULTS OF OPERATIONS

Three months ended June 30, 2022 compared to three months ended June 30, 2021

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

Revenues. For the three months ended June 30, 2022 and 2021, the Company leased two facilities to a licensee in Colorado. Total revenue for the three months ended June 30, 2022 was $186,506, as compared to $191,752 for the three months ended June 30, 2021, a decrease of $5,246, primarily due to a lease extension in the third quarter of 2021.

Gross profit. Rental revenue and rental expense for the period ended June 30, 2022 decreased over the prior three months ended June 30, 20201 resulting in a gross profit of $38,117, an increase of $5,393 from a gross profit of $32,724 for the three months ended June 30, 2021, resulting from a lease extension in the third quarter of 2021 which reduced both sublease income and rental expense.

General and administrative expense. Our general and administrative expenses for the three months ended June 30, 2022 were $135,312, compared to $276,247 for the three months ended June 30, 2021. The decrease of $140,935 was largely attributable to decreases in professional fees and executive stock compensation expense during the three months ended June 30, 2022.

Selling expense. Our selling expenses for the three months ended June 30, 2022 were $4,471, compared to $7,928 for the three months ended June 30, 2021. The decrease of $3,457 was due to reduced brand development costs.