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GRAND HAVANA INC. - Quarter Report: 2019 June (Form 10-Q)

 

 
 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarter ended June 30, 2019

 

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

For the transition period from ________ to ________

Commission file number: 333-172850

GRAND HAVANA INC.

(Exact Name of Registrant as Specified in Its Charter)

Nevada   27-0631947
(State or Other Jurisdiction of Incorporation or Organization)   (I.R.S. Employer Identification No.)

 

761 NW 23rd Street, Miami, Florida 33127

(Address of Principal Executive Offices, including Zip Code)

 

Tel No.: 800-608-5441

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, par value $0.001 per share GHAV OTC Pink Market Exchange

 

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  þ

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 þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer ¨ Smaller reporting company þ
 

Emerging growth company þ

 

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 Act).  Yes ¨    No þ

The number of shares outstanding of the registrant’s classes of common stock as of November 3, 2020 was 132,224,189 shares.

 

 
 

 

INDEX

 

 

      Page
   PART I.   FINANCIAL INFORMATION     
         
Item 1.  Financial Statements   F-1 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations   1 
Item 3.  Quantitative and Qualitative Disclosures about Market Risk   4 
Item 4.  Controls and Procedures   4 
         
   PART II.   OTHER INFORMATION     
         
Item 1.  Legal Proceedings   5 
Item 1A.  Risk Factors   5 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds   5 
Item 3.  Defaults Upon Senior Securities   5 
Item 4.  Mine Safety Disclosures   5 
Item 5.  Other Information   5 
Item 6.  Exhibits   6 
SIGNATURES      7 

 

 

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

 

The information contained in this Report, including in the documents incorporated by reference into this Report, includes some statements that are not purely historical and that are “forward-looking statements.” Such forward-looking statements include, but are not limited to, statements regarding our Company and management’s expectations, hopes, beliefs, intentions or strategies regarding the future, including our financial condition, results of operations, and the expected impact of the offering on the parties’ individual and combined financial performance. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipates,” “believes,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “possible,” “potential,” “predicts,” “projects,” “seeks,” “should,” “will,” “would” and similar expressions, or the negatives of such terms, may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.

 

The forward-looking statements contained in this Report are based on current expectations and beliefs concerning future developments and the potential effects on the parties and the transaction. There can be no assurance that future developments actually affecting us will be those anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond the parties’ control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date stated, or if no date is stated, as of the date hereof.

 

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results. The following discussion should be read in conjunction with our unaudited financial statements and the related notes included in this Report.

 

 

  

PART I. FINANCIAL INFORMATION

 

Item 1. Unaudited Financial Statements

 

Index To Unaudited Consolidated Financial Statements

 

      
Unaudited Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018   F-2 
Unaudited Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2019 and 2018   F-3 
Unaudited Consolidated Statements of Changes in Stockholders’ Deficit for the Three and Six Months Ended June 30, 2019 and 2018   F-4 
Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018   F-6 
Notes to Unaudited Consolidated Financial Statements   F-7 

 

 

 F-1 
Index   

 

Grand Havana, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
   June 30  December 31
   2019  2018
ASSETS          
           
CURRENT ASSETS:          
Cash  $417,613   $1,463 
Accounts receivable, net   14,719   $4,302 
Inventory, net   1,558   $1,549 
Prepaid expenses and other current assets   16,292   $10,514 
Total Current Assets   450,182    17,828 
           
Property and equipment, net   300,886   $224,219 
Right-of-use asset - operating lease   44,268    —   
Security deposits   1,400   $1,400 
Intangible assets, net   16,342   $16,978 
Certificate of deposit   5,300   $5,300 
TOTAL ASSETS  $818,378   $265,725 
           
LIABILITIES AND STOCKHOLDERS' DEFICIT          
           
CURRENT LIABILITIES:          
Accounts payable and accrued expenses  $426,177   $390,569 
Accrued interest   283,673   $180,684 
Convertible notes, net   905,188   $755,043 
Notes payable   153,022   $102,188 
Loans payable - related parties   426,918   $417,018 
Right-of-use liabilities - operating lease   33,570   $—   
Line of credit   5,001   $4,995 
Derivative liabilities   14,499,037   $12,244,301 
Payroll liabilities - related parties   316,730   $282,543 
Payroll liabilities   46,196   $52,160 
Preferred stock liability   —     $125,000 
Total Current Liabilities   17,095,512    14,554,501 
           
Long term portion of convertible loans, net   270,000   $170,000 
Long term portion of notes payable   76,304   $83,486 
Long term Right-of-use liabilities - operating lease   11,032    —   
TOTAL LIABILITIES   17,452,848    14,807,987 
           
Commitments and contingencies          
           
STOCKHOLDERS' DEFICIT:          
     Undesignated Preferred stock, $0.001 par value, 19,999,900 shares authorized; no shares issued and outstanding, respectively   —      —   
     Preferred Series A stock, $0.001 par value, 200 and 100 shares authorized, respectively; 146 and 100 shares issued and outstanding, respectively   1   $1 
     Preferred Series B stock, $0.001 par value, 10,000,000 shares authorized; no shares issued and outstanding, respectively   —     $—   
     Common stock, $0.001 par value, 400,000,000 shares authorized; 95,386,473 and 74,116,845 shares issued and outstanding, respectively   95,386   $74,117 
Additional paid-in capital   10,183,534   $2,567,250 
Accumulated deficit   (27,075,587)  $(17,347,076)
Total Grand Havana stockholders' deficit   (16,796,666)   (14,705,708)
           
Non-controlling interest   162,196   $163,446 
           
TOTAL STOCKHOLDERS' DEFICIT   (16,634,470)   (14,542,262)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT  $818,378   $265,725 
           
The accompanying notes are an integral part of these unaudited consolidated financial statements

 

 

 

 

 F-2 
Index   

 

Grand Havana, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
             
   For the three months  For the six months
   ended June 30,  ended June 30,
   2019  2018  2019  2018
             
NET REVENUES:                    
Revenues, net  $60,265   $48,281   $103,100   $98,908 
TOTAL NET REVENUES   60,265    48,281    103,100    98,908 
                     
COST OF GOODS SOLD:                    
Cost of goods sold   49,218    24,688    77,855    51,714 
TOTAL COST OF GOODS SOLD   49,218    24,688    77,855    51,714 
                     
GROSS PROFIT   11,047    23,593    25,245    47,194 
                     
OPERATING EXPENSES:                    
General and administrative expenses   775,518    35,127    953,945    174,040 
Depreciation and amortization   14,571    3,406    26,567    7,675 
Payroll and related expenses   5,953,173    85,385    6,056,568    280,185 
TOTAL OPERATING EXPENSES   6,743,262    123,918    7,037,080    461,900 
                     
(LOSS) FROM OPERATIONS   (6,732,215)   (100,325)   (7,011,835)   (414,706)
                     
OTHER INCOME (EXPENSE):                    
Interest expense, net   (182,574)   (149,543)   (419,307)   (431,095)
Change in derivative liabilities   (1,347,995)   83,535    (2,298,565)   3,586,582 
Other (expense) income   (54)   237    (54)   427 
TOTAL OTHER INCOME (EXPENSE)   (1,530,623)   (65,771)   (2,717,926)   3,155,914 
                     
NET INCOME (LOSS)   (8,262,838)   (166,096)   (9,729,761)   2,741,208 
                     
LESS: NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST   (1,477)   (189)   (1,250)   —   
                     
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS  $(8,261,361)  $(165,907)  $(9,728,511)  $2,741,208 
                     
NET INCOME (LOSS) PER COMMON SHARE:                    
Basic  $(0.10)  $(0.00)  $(0.12)  $0.04 
Diluted   (0.10)  $(0.00)  $(0.12)  $(0.00)
                     
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:                    
Basic   85,991,483    65,626,302    80,745,900    62,862,129 
Diluted   85,991,483    65,626,302    80,745,900    227,103,031 
                     
The accompanying notes are an integral part of these consolidated unaudited financial statements

 

 

 

 

 F-3 
Index   

 

Grand Havana, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Deficit
For the Six Months Ended June 30, 2019 and 2018
(Unaudited)
                               
   Preferred Stock        Additional     Non-   
   Class A  Class B  Common Stock  Paid in  Accumulated  controlling   
   Shares  Amount  Shares  Amount  Shares  Amount  Capital  Deficit  Interest  Total
                               
Balances, December 31, 2018   100   $1    —     $—      74,116,845   $74,117   $2,567,250   $(17,347,076)   163,446   $(14,542,262)
                                                   
Issuance of preferred class A shares as settlement of liability   5    —      —      —      —      —      125,000    —      —      125,000 
                                                   
Shares issued as compensation   41    —      —      —      2,089,277    2,089    6,595,423    —      —      6,597,512 
                                                   
Issuance of shares for cash   —      —      —      —      15,667,858    15,668    534,832    —      —      550,500 
                                                   
Issuance of shares as settlement of debt   —      —      —      —      3,512,493    3,512    10,391    —      —      13,903 
                                                   
Resolution of derivative liability through APIC   —      —      —      —      —      —      350,638    —      —      350,638 
                                                   
Net (Loss)   —      —      —      —      —      —      —      (9,728,511)   (1,250)   (9,729,761)
                                                   
Balances, June 30, 2019   146   $1    —     $—      95,386,473   $95,386   $10,183,534   $(27,075,587)   162,196   $(16,634,470)
                                                   
Balances, December 31, 2017   100   $1    —     $—      61,125,687   $61,126   $1,991,817   $(8,776,179)   167,435   $(6,555,800)
                                                   
Issuance of shares for cash   —      —      —      —      516,000    516    23,284    —      —      23,800 
                                                   
Issuance of shares as settlement of accounts payable - related party   —      —      —      —      500,000    500    39,500    —      —      40,000 
                                                   
Shares issued as compensation   —      —      —      —      3,500,000    3,500    189,750    —      —      193,250 
                                                   
Net Income   —      —      —      —      —      —      —      2,741,208    —      2,741,208 
                                                   
Balances, June 30, 2018   100   $1    —     $—      65,641,687   $65,642   $2,244,351   $(6,034,971)   167,435   $(3,557,542)
                                                   
The accompanying notes are an integral part of these unaudited consolidated financial statements

 

 

Grand Havana, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Deficit
For the Three Months Ended June 30, 2019 and 2018
(Unaudited)
                               
   Preferred Stock        Additional     Non-   
   Class A  Class B  Common Stock  Paid in  Accumulated  controlling   
   Shares  Amount  Shares  Amount  Shares  Amount  Capital  Deficit  Interest  Total
                               
Balances, March 31, 2019   105   $1    —     $—      76,569,065   $76,569   $2,830,315   $(18,814,226)   163,673   $(15,743,668)
                                                   
Shares issued as compensation   41    —      —      —      537,457    537    6,527,998    —      —      6,528,535 
                                                   
Issuance of shares for cash   —      —      —      —      15,167,858    15,168    515,832    —      —      531,000 
                                                   
Issuance of shares as settlement of debt   —      —      —      —      3,112,093    3,112    8,791    —      —      11,903 
                                                   
Resolution of derivative liability through APIC   —      —      —      —      —      —      300,598    —      —      300,598 
                                                   
Net (Loss)   —      —      —      —      —      —      —      (8,261,361)   (1,477)   (8,262,838)
                                                   
Balances, June 30, 2019   146   $1    —     $—      95,386,473   $95,386   $10,183,534   $(27,075,587)   162,196   $(16,634,470)
                                                   
Balances, March 31, 2018   100   $1    —     $—      65,585,687   $65,586   $2,241,607   $(5,869,064)   167,624   $(3,394,246)
                                                   
Issuance of shares for cash   —      —      —      —      56,000    56    2,744    —      —      2,800 
                                                   
Net (Loss)   —      —      —      —      —      —      —      (165,907)   (189)   (166,096)
                                                   
Balances, June 30, 2018   100   $1    —     $—      65,641,687   $65,642   $2,244,351   $(6,034,971)   167,435   $(3,557,542)
                                                   
The accompanying notes are an integral part of these unaudited consolidated financial statements

 

 

 

 F-4 
Index   

 

Grand Havana, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
   For the six months
   ended June 30,
   2019  2018
       
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income (loss) before non-controlling interest  $(9,729,761)  $2,741,208 
Adjustment to reconcile change in net loss to net cash and cash equivalents used in operating activities:          
Depreciation expense   25,931    6,190 
(Gain) loss on sale of equipment   54    (427)
Amortization of intangibles   636    1,485 
Loss on settlement of accounts payable - related party   —      2,000 
Amortization of debt discount   262,512    383,748 
Change in derivative liabilities   2,298,565    (3,586,582)
Default interest capitalized into convertible note payable   47,875    —   
Stock-based compensation   6,597,512    193,250 
Amortization of right-of-use assets - operating lease   13,722    —   
           
Changes in operating assets and liabilities:          
Accounts receivable   (10,417)   1,510 
Inventory   (9)   10,606 
Prepaid expenses and other current assets   (5,778)   (4,171)
Accounts payable and accrued expenses   35,608    66,310 
Accrued interest   105,151    (6,039)
Lease Liability   (13,388)   —   
Payroll and related liabilities   (5,964)   (8,387)
Payroll and related liabilities - related parties   34,187    73,957 
           
NET CASH USED IN OPERATING ACTIVITIES   (343,564)   (125,342)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of property and equipment   (106,242)   (10,452)
Proceeds from sale of equipment   3,590    8,790 
           
NET CASH USED IN INVESTING ACTIVITIES   (102,652)   (1,662)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Net proceeds from convertible notes payable   258,308    13,500 
Net proceeds of loans payable - related parties   9,900    —   
Net proceeds from secured borrowings   43,652    —   
Net proceeds (repayments) line of credit   6    (114)
Net proceeds from the sale of preferred stock   —      75,000 
Net proceeds from the sale of common stock   550,500    23,800 
           
NET CASH PROVIDED BY FINANCING ACTIVITIES   862,366    112,186 
           
Net increase in cash   416,150    (14,818)
           
Cash, beginning of year   1,463    30,185 
           
Cash, end of period  $417,613   $15,367 
           
SUPPLEMENTAL CASH FLOW INFORMATION:          
Cash paid for interest  $3,536   $—   
Cash paid for taxes  $—     $—   
           
NON-CASH ACTIVITIES:          
Initial recognition of right-of-use asset and lease liability  $57,990   $—   
Debt discounts on convertible notes payable  $306,809   $369,612 
Resolution of derivative liability through APIC  $350,638   $—   
Issuance of preferred stock for settlement of preferred stock liability  $125,000   $—   
Conversion of debt and accrued interest into common stock  $13,903   $—   
Common stock issued for settlement of accounts payable - related party  $—     $38,000 
Increase in principal of convertible notes due to default provisions  $—     $53,362 
           
The accompanying notes are an integral part of these unaudited consolidated financial statements

 

 

 F-5 
Index   

 

GRAND HAVANA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

NOTE 1 – ORGANIZATION

 

Grand Havana Inc. f/k/a Junkiedog.com, Inc. (the “Company”) was incorporated in the State of Texas in 2009 as Unique Underwriters, Inc.

 

On April 25, 2017, the Company entered into an agreement to purchase 70% of the issued and outstanding capital stock of Cafesa Co., a Florida corporation that is a coffee wholesaler. Cafesa became a majority owned subsidiary of Grand Havana Master LLC. During the fourth quarter of 2019, the Company determined to shut down Cafesa Co. and started to build up customer base on its own effort for the same coffee distribution business in the same geographical area. After analyzing the affect by the criteria provided by ASC 205-20-55, the Company has concluded that the abandonment of Cafesa Co. should not be considered as “discontinued operations” since the abandonment does not represent a strategic shift that has (or will have) a major affect on the Company’s operations and financial results.

 

On June 3, 2019, the Company filed Articles of Organization as a Domestic Limited Liability Company with the Florida Secretary of State creating a new wholly-owned subsidiary, Grand Master Brands LLC (“GMB”). The business purpose of GMB is to provide marketing and sales services for the Company’s products to retail businesses.

 

Grand Havana, Inc. and its subsidiaries, Grand Havana Master LLC, Cafesa Co., Grand Master Brands LLC, Unique Underwriters, Inc., are hereinafter referred to as the “Company”.

 

 F-6 
Index   

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

BASIS OF PRESENTATION

 

The interim unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and should be read in conjunction with the audited financial statements and notes thereto for the years ended December 31, 2018 and 2017 which are included on a Form 10-K filed on February 10, 2020. In the opinion of management, all adjustments which include normal recurring adjustments, necessary to fairly present the Company’s financial position, results of operations and cash flows for the periods shown have been reflected herein. The results of operations for such periods are not necessarily indicative of the results expected for a full year or for any future period. Notes to the financial statements which would substantially duplicate the disclosures contained in the audited financial statements for years ended December 31, 2018 have been omitted.

 

PRINCIPLES OF CONSOLIDATION

 

The accompanying unaudited financial statements reflect the consolidation of the individual unaudited financial statements of Grand Havana, Inc., Grand Havana Master LLC, Unique Underwriters, Inc. and Cafesa Co. All significant intercompany accounts and transactions have been eliminated.

 

RECLASSIFICATION

 

Certain prior year amounts have been reclassified to conform to the current period presentation. These reclassifications had no impact on net earnings and the financial position of the Company.

 

FAIR VALUE OF FINANCIAL INSTRUMENTS

 

GAAP requires certain disclosures regarding the fair value of financial instruments. The fair value of financial instruments is made as of a specific point in time, based on relevant information about financial markets and specific financial instruments. As these estimates are subjective in nature, involving uncertainties and matters of significant judgment, they cannot be determined with precision. Changes in assumptions can significantly affect estimated fair values.

 

GAAP defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal, or most advantageous market in which it would transact, and it considers assumptions that market participants would use when pricing the asset or liability.

 

GAAP establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument's categorization within the fair value hierarchy is based upon the degree of subjectivity that is necessary to estimate the fair value of a financial instrument. GAAP establishes three levels of inputs that may be used to measure fair value:

 

Level 1 – Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

 

Level 2 – Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

 

Level 3 – Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

 F-7 
Index   

 


The following table presents the derivative financial instruments, recorded at fair value on the Company’s balance sheets on a recurring basis, and their level within the fair value hierarchy as of June 30, 2019 and December 31, 2018: 

 

  Fair Value Measurements at June 30, 2019
    Total   Level 1   Level 2   Level 3
Convertible notes payable   $ 13,672,528   $ —     $ —     $ 13,672,528
Warrants   $ 826,509   $ —     $ —     $ 826,509

 

 

  Fair Value Measurements at December 31, 2018
    Total   Level 1   Level 2   Level 3
Convertible notes payable   $ 11,418,125   $ —     $ —     $ 11,418,125
Warrants   $ 826,176   $ —     $ —     $ 826,176

  

The Company uses a multinomial lattice model that values the derivative liability within the convertible notes and warrants based on probability weighted discounted cash flow model. The fair values of the conversion option and the attached warrants were estimated using a binomial model with the following assumptions: 

 

    June 30, 2019
    Conversion     Warrants
Option
Volatility     151.71%-468.92%       151.71%-755.94%
Dividend Yield     0%       0%
Risk-free rate     1.75%-2.18%       1.71%-2.09%
Expected term     0.07-1.33 years       0.62-3.73  years
Stock price   $ 0.14     $ 0.14
Exercise price   $ 0.0047-0.0675     $ 0.01-0.13
Derivative liability fair value   $ 13,672,528     $ 826,509

 

 

    December 31, 2018
    Conversion     Warrants
Option
Volatility     207.03%-699.96%       339.96%-982.13%
Dividend Yield     0%       0%
Risk-free rate     2.48%-2.63%       2.46%-2.63%
Expected term     0.18-1.82 years       1.12-4.23 years
Stock price   $ 0.13     $ 0.13
Exercise price   $ 0.005-0.083     $ 0.012-0.10
Derivative liability fair value   $ 11,418,125     $ 826,176

 

 

The following table presents a summary of the Company’s derivative liabilities as of June 30, 2019 and 2018:

 

   June 30,  June 30,
Description  2019  2018
Beginning balance  $12,244,301   $4,960,740 
Proceeds, payments and conversions   (43,829)   255,266 
Total change in fair value   2,298,565    (3,586,582)
Ending balance  $14,499,037   $1,629,424 

 

 

 F-8 
Index   

LEASES

 

On January 1, 2019, the Company adopted ASU 2016-02(Topic 842) using the modified retrospective method. The Company leases approximately 1,800 square feet of office and warehouse space located at 2300 NW 7th Place, Miami, LF 33127. We have a 2-year lease at a cost of $1,495 per month for the first year and $1,548 per month for the second year of the lease. The lease expires in June 2020. On January 13, 2019, the Company entered into a two-year lease for office and warehouse space located at 761 NW 23 Street, Miami, FL 33127, effective February 1, 2019 through January 31, 2021. The monthly rental payments are $1,607 per month for the first year and $1,657 per month for the second year of the lease. At the time of adoption, the Company recognized a right of use asset and corresponding liability in the amount of $57,990, respectively. The incremental borrowing rate, used for this calculation, which is the rate of interest that a lessee would have to pay to borrow the funds to acquire a similar underlying asset, is 15.27%. The new standard also provides practical expedients for a company’s ongoing accounting. The Company elected the short-term lease recognition exemption under which leases with a lease term of 12 months or less are not recorded on the Consolidated Balance Sheet, but rather, lease expense is recognized over the lease term on a straight-line basis. The Company also made an accounting policy election to combine lease and non-lease components of operating leases for all asset classes. As of June 30, 2019, the ROU asset is $44,268. As of June 30, 2019, the current and long-term portion of lease liabilities are $33,570, and $11,032, respectively. For the six months ended June 30, 2019, the Company recognized amortization of ROU assets of $13,722 and reduction of lease related liability in the amount of $13,388.

 

EARNINGS (LOSS) PER SHARE

 

The Company utilizes the guidance per ASC 260, Earnings Per Share. Basic earnings per share is calculated on the weighted effect of all common shares issued and outstanding and is calculated by dividing net income(loss) available to common stockholders by the weighted average shares outstanding during the period. Diluted earnings per share is calculated by dividing net income(loss) available to common stockholders by the weighted average number of common shares used in the basic earnings per share calculation, plus the number of common shares that would be issued assuming conversion of all potentially dilutive securities outstanding. For the three and six months ended June 30, 2019, there were 106,047,169 shares issuable upon conversion of outstanding convertible notes, 4,058,631 shares issuable upon exercise of outstanding warrants, and 278,528,502 shares issuable upon conversion of  Series A preferred stock excluded for their anti-dilutive effects. For the three and six months ended June 30, 2018, there were 30,586,927 shares issuable upon conversion of outstanding convertible notes, 2,370,061 shares issuable upon exercise of outstanding warrants, and 131,283,374 shares issuable upon conversion of Series A Preferred stock. For the six months ended June 30, 2018, these outstanding instruments were excluded from diluted earnings per share calculation for their anti-dilutive effects, however, were included for the three months ended June 30, 2018 calculation for their dilutive effects.

 

 F-9 
Index   

 

The reconciliations of basic and diluted earnings (loss) per share is as follow:

 

   For three months ended
   June 30,
   2019  2018
 Basic net (loss)  $(8,261,361)  $(165,907)
  (Less): Change in derivative liabilities   —      —   
 Add Back: Amortization of Debt discount   —      —   
 Diluted Net (Loss)  $(8,261,361)  $(165,907)
           
 Basic and dilutive shares          
 Weight average basic shares outstanding   85,991,483    65,626,302 
 Shares issuable from Convertible notes   —      —   
 Shares issuable from Warrants   —      —   
 Shares issuable from Series A Preferred Stock   —      —   
 Dilutive Shares   85,991,483    65,626,302 
           
 (Loss) Per Share:          
 Basic  $(0.10)  $(0.00)
 Diluted  $(0.10)  $(0.00)

  

   For six months ended
   June 30,
   2019  2018
 Basic net income (loss)  $(9,728,511)  $2,741,208 
  (Less): Change in derivative liabilities   —      (3,586,582)
 Add Back: Amortization of Debt discount   —      383,748 
 Diluted Net (Loss)  $(9,728,511)  $(461,626)
           
 Basic and dilutive shares          
 Weight average basic shares outstanding   80,745,900    62,862,129 
 Shares issuable from Convertible notes   —      30,586,927 
 Shares issuable from Warrants   —      2,370,601 
 Shares issuable from Series A Preferred Stock   —      131,283,374 
 Dilutive Shares   80,745,900    227,103,031 
           
 Income (Loss)\ Per Share:          
 Basic  $(0.12)  $0.04 
 Diluted  $(0.12)  $(0.00)

 

 

NEW ACCOUNTING PRONOUNCEMENTS

 

In January 2017, the FASB issued guidance within ASU 2017-04, Intangibles-Goodwill and Other. The amendments in ASU 2017-04 simplify the subsequent measurement of goodwill by comparing the fair value of a reporting unit with its carrying amount. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019. We are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in ASU 2018-13 provide for increased effectiveness of the disclosures made around fair value measurements while including consideration for costs and benefits. The ASU is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those periods. The Company is currently evaluating the impact the adoption of ASU 2018-13 may have on its consolidated financial statements.

 

Other pronouncements issued by the FASB or other authoritative accounting standards groups with future effective dates are either not applicable or are not expected to be significant to our financial position, results of operations or cash flows.

 F-10 
Index   

 

 

NOTE 3 – GOING CONCERN

 

The Company’s unaudited consolidated financial statements have been prepared using generally accepted accounting principles in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has incurred net loss of $9,728,511 for the six months ended June 30, 2019. Cash on hand will not be sufficient to cover debt repayments, operating expenses and capital expenditure requirements for at least twelve months from the date of these financial statements. As of June 30, 2019 and December 31, 2018, the Company had working capital deficits $16,645,330 and $14,536,673, respectively. Our historical operating results raise substantial doubt related to the Company’s ability to continue as a going concern. In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s plan is to seek equity and/or debt financing. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans.

 

There are no assurances that the Company will be able to either (1) achieve a level of revenues adequate to generate sufficient cash flow from operations; or (2) obtain additional financing through either private placements, public offerings and/or bank financing necessary to support the Company's working capital requirements. To the extent that funds generated from operations, any private placements, public offerings and/or bank financing are insufficient, the Company will have to raise additional working capital. No assurance can be given that additional financing will be available, or if available, will be on terms acceptable to the Company. The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying unaudited consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

NOTE 4 – FIXED ASSET

 

Property and equipment consisted of the following As of June 30, 2019 and December 31, 2018:

 

   June 30,  December 31,
   2019  2018
Equipment  $253,053   $151,177 
Vehicles   106,080    106,080 
Less: Accumulated depreciation   (58,247)   (33,038)
Property and equipment, net  $300,886   $224,219 

 

 

Depreciation expense for the three and six months ended June 30, 2019 and 2018 were $14,253 and $25,931, and $3,088 and $6,190, respectively. During the first two quarters of 2019, the Company sold equipment for $3,590 and recognized a loss on sale of equipment for $54. During the first two quarters of 2019, the Company purchased property and equipment for $106,242. During the first two quarters of 2018, the Company sold equipment for $8,790 and recognized a gain on sale of equipment for $427. During the first two quarters of 2018, the Company purchased property and equipment for $10,452.

 

 F-11 
Index   

 

 

NOTE 5 –CONVERTIBLE NOTES

 

On February 13, 2017, the Company entered into an unsecured convertible promissory note for $25,000, due on February 13, 2018, bearing interest at 8% per annum. This convertible promissory note contains a provision for conversion at the holder's option including accrued interest, into the Company's common stock at a rate of 55% of the lowest trading price during the last fifteen trading day period, including the date of conversion. During the first two quarters of 2019, the principal increased by $2,500 as a result of default penalty, and the Company converted $7,000 principal and $2,162 accrued interest to 2,395,231 shares of common stock at a conversion price of $0.003825 per share, please see Note 8 for further discussion. As of June 30, 2019 and December 31, 2018, the outstanding balance of the note was $20,500 and $25,000, respectively and the related accrued interest was $7,918 and $7,200, respectively. This note is currently in default bearing a default interest rate of 24%.

 

On February 13, 2017, the Company entered into an unsecured convertible promissory note for $95,000, due on February 13, 2018, bearing interest at 8% per annum. This convertible promissory note contains a provision for conversion at the holder's option including accrued interest, into the Company's common stock at a rate of 55% of the lowest trading price during the last fifteen trading day period, including the date of conversion. During the first two quarters of 2019, the principal increased by $9,500 as a result of default penalty. As of June 30, 2019 and December 31, 2018, the outstanding balance of the note was $104,500 and $95,000, respectively, and the related accrued interest was $37,873 and $25,333, respectively. This note is currently in default bearing a default interest rate of 24%.

 

On March 15, 2017, the Company entered into a secured convertible promissory note for $60,000, due on March 15, 2018, bearing interest at 8% per annum and secured by the assets of the Company. This convertible promissory note contains a provision for conversion at the holder's option including accrued interest, into the Company's common stock at a rate of 55% of the lowest trading price during the last fifteen trading day period, including the date of conversion. During the first two quarters of 2019, the principal increased by $6,000 as a result of default penalty. As of June 2019, the note holder converted $2,742 of principal to 716,862 shares of common stock at $0.00383 per share, please refer to Note 8 for further discussion. As of June 30, 2019 and December 31, 2018, the outstanding balance of the note was $63,258 and $60,000, respectively, and the related accrued interest was $23,831 and $16,240, respectively. This note is currently in default bearing a default interest rate of 24%.

 

On March 17, 2017, the Company entered into an unsecured convertible promissory note for $60,000, due on March 17, 2018, bearing interest at 8% per annum. This convertible promissory note contains a provision for conversion at the holder's option including accrued interest, into the Company's common stock at a rate of 55% of the lowest trading price during the last fifteen trading day period, including the date of conversion. During the first two quarters of 2019, the principal was increased by $6,000 as a result of default penalty. As of June 30, 2019 and December 31, 2018, the outstanding balance of the note was $66,000 and $60,000, respectively, and the related accrued interest was $16,960 and $9,040, respectively. This note is currently in default bearing a default interest rate of 24%.

 

On April 7, 2017, the Company entered into an unsecured convertible promissory note for $20,000, due on April 7, 2018, bearing interest at 8% per annum. This convertible promissory note contains a provision for conversion at the holder's option including accrued interest, into the Company's common stock at a rate of 55% of the lowest trading price during the last fifteen trading day period, including the date of conversion. During the first two quarters of 2019, the principal was increased by $2,000 as a result of default penalty. As of June 30, 2019, and December 31, 2018, the outstanding balance of the note was $22,000 and $20,000, respectively, and the related accrued interest was $7,733 and $5,093, respectively. This note is currently in default bearing a default interest rate of 24%.

 

On May 3, 2017, the Company entered into an unsecured convertible promissory note for $20,000, due on May 3, 2018, bearing interest at 8% per annum. This convertible promissory note contains a provision for conversion at the holder's option including accrued interest, into the Company's common stock at a rate of 55% of the lowest trading price during the last fifteen trading day period, including the date of conversion. During the first two quarters of 2019, the principal was increased by $2,000 as a result of default penalty. As of June 30, 2019, and December 31, 2018, the outstanding balance of the note was $22,000 and $20,000, and the related accrued interest was $5,684 and $4,524, respectively. This note is currently in default bearing a default interest rate of 24%.

 

On May 3, 2017, the Company entered into a secured convertible promissory note for $60,000, due on May 3, 2018, bearing interest at 8% per annum and secured by the assets of the Company. This convertible promissory note contains a provision for conversion at the holder's option including accrued interest, into the Company's common stock at a rate of 55% of the lowest trading price during the last fifteen trading day period, including the date of conversion. During the first two quarters of 2019, the principal was increased by $6,000 as a result of default penalty. As of June 30, 2019, and December 31, 2018, the outstanding balance of the note was $66,000 and $60,000, respectively, and the related accrued interest was $17,051 and $13,573, respectively. This note is currently in default bearing a default interest rate of 24%.

 F-12 
Index   

 

 

On August 7, 2017, the Company entered into a secured convertible promissory note for $78,750, due on August 7, 2018, bearing interest at 8% per annum and secured by the assets of the Company. This convertible promissory note contains a provision for conversion at the holder's option including accrued interest, into the Company's common stock at a rate of 55% of the lowest trading price during the last fifteen trading day period, including the date of conversion. During the first two quarters of 2019, the principal was increased by $7,875 as a result of default penalty and the company converted $2,000 of the principal to 400,400 shares of common stock at $0.005 per shares. Please refer to Note 8 for further discussion. As of June 30, 2019, and December 31, 2018, the outstanding balance of the note was $84,625 and $78,750, respectively, and the related accrued interest was $18,596 and $12,600, respectively. This note is currently in default bearing a default interest rate of 24%.

 

On December 13, 2017, the Company entered into a secured convertible promissory note for $60,000, due on September 14, 2018, bearing interest at 8% per annum and secured by the assets of the Company. This convertible promissory note contains a provision for conversion at the holder's option including accrued interest, into the Company's common stock at a rate of 55% of the lowest trading price during the last fifteen trading day period, including the date of conversion. During the first two quarters of 2019, the principal was increased by $6,000 as a result of default penalty. As of June 30, 2019, and December 31, 2018, the outstanding balance of the note was $66,000 and $60,000, respectively, and the related accrued interest was $10,571 and $5,520, respectively. This note is currently in default bearing a default interest rate of 24%.

 

On January 8, 2019, the Company entered into a secured convertible promissory note for $35,000, due on December 31, 2019, bearing interest at 8% per annum and secured by the assets of the Company. This convertible promissory note contains a provision for conversion at the holder's option including accrued interest, into the Company's common stock at a rate of 55% of the lowest trading price during the last fifteen trading day period, including the date of conversion. As of June 30, 2019, the outstanding balance of the note was $35,000, and the related accrued interest was $1,365. As of filling date, this note is in default bearing a default interest rate of 16%.

 

On January 3, 2019, the Company entered into a secured convertible promissory note for $63,309, due on January 3, 2020, bearing interest at 8% per annum and secured by the assets of the Company. This convertible promissory note contains a provision for conversion at the holder's option including accrued interest, into the Company's common stock at a rate of 55% of the lowest trading price during the last fifteen trading day period, including the date of conversion. In connection with the issuance of convertible notes, the Company also granted 73,046 warrants to acquire common stock at $0.13 per share, please refer to Note 9 for further discussion. As of June 30, 2019, the outstanding balance of the note was $63,309, and the related accrued interest was $2,484. As of filling date, this note is in default bearing a default interest rate of 16%.

 

On April 12, 2019, the Company entered into a secured convertible promissory note for $100,000 due on October 26, 2020, bearing interest at 12% per annum and secured by the assets of the Company. This convertible promissory note contains a provision for conversion at the holder's option including accrued interest, into the Company's common stock at a rate of $0.02 per share. As of June 30, 2019, the outstanding balance of the note was $100,000, and the related accrued interest was $2,630.

 

On April 25, 2019, the Company entered into a secured convertible promissory note for $33,000 due on April 25, 2020, bearing interest at 12% per annum and secured by the assets of the Company. This convertible promissory note contains $3,000 original issue discount and a provision for conversion at the holder's option including accrued interest, into the Company's common stock at a rate of the lesser of $0.11 or 50% of the lowest trading price during the last twenty trading day period prior to date of conversion, including the date of conversion. In connection with the issuance of convertible notes, the Company also granted 75,000 warrants to acquire common stock at $0.11 per share, please refer to Note 9 for further discussion. As of June 30, 2019, the outstanding balance of the note was $33,000, and the related accrued interest was $727. As of filling date, this note is in default bearing a default interest rate of 16%.

 

On April 25, 2019, the Company entered into a secured convertible promissory note for $33,000 due on April 25, 2020, bearing interest at 12% per annum and secured by the assets of the Company. This convertible promissory note contains $3,000 original issue discount and a provision for conversion at the holder's option including accrued interest, into the Company's common stock at a rate of the lesser of $0.11 or 50% of the lowest trading price during the last twenty trading day period prior to date of conversion, including the date of conversion. In connection with the issuance of convertible notes, the Company also granted 75,000 warrants to acquire common stock at $0.11 per share, please refer to Note 9 for further discussion. As of June 30, 2019, the outstanding balance of the note was $33,000, and the related accrued interest was $727, respectively. As of filling date, this note is in default bearing a default interest rate of 16%.

 

As of June 30, 2019 and December 31, 2018, the Company had outstanding convertible notes, net of debt discount, in the amount of $1,175,188 and $925,043, respectively. During the six months ended June 30, 2019, the Company amortized $265,512 of debt discount while recognizing $306,809 in additional debt discount on convertible notes payable.

 

 F-13 
Index   

 

 

NOTE 6 – NOTES PAYABLES

 

During 2018, the Company entered into four loans for the purchase of and secured by vehicles with terms of 72 to 75 months and interest rates ranging from 6.99% to 8.94%. The combining outstanding balance on these notes is $90,369 and $96,717 as of June 30, 2019 and December 31, 2018, respectively.

 

On March 12, 2019, the Company entered into a secured convertible promissory note for $50,000, due on October 11, 2019, bearing interest at 8% per annum and secured by the assets of the Company. As of June 30, 2019, the outstanding balance of the note was $50,000, and the related accrued interest was $1,216. This convertible note was repaid subsequent to period end.

 

NOTE 7 – RELATED PARTIES TRANSACTIONS

 

During 2018, the Company entered into various stock purchase agreements with various members of the Board of Directors to issue a total of 137,000 share of common stock for $0.05 per share and 5 shares of Preferred Series A stock for $25,000 per share for a total of $131,850.

 

During the first two quarters of 2019, the Company entered into various stock purchase agreements with various members of the Board of Directors to issue a total of 325,000 share of common stock for totaling $15,500.

 

During 2017, the Company received loans totaling $102,018, from related parties for working capital purposes. These unsecured loans bear interest at a rate of 6% per annum and have no repayment terms. During the first two quarters of 2019, the Company entered into two unsecured loans totaling $9,900 from related parties for working capital resources. These notes are due on demand and bear no interest. As of June 30, 2019 and December 31, 2018, the outstanding balance on these related party notes were $111,918 and $102,018, respectively, and the related accrued interest was $12,729, and $9,703, respectively.

 

As part of the Cafesa acquisition on April 25, 2017, the Company is required to make cash and stock payments totaling $315,000 to a related party. No repayments or borrowings were made during the first two quarters of 2019 and the full year of 2018. As of June 30, 2019 and December 31, 2018, the outstanding balance due to this related party was $315,000. The Company is currently involved in a lawsuit with the note holder. Please refer to Note 10 for further discussion. 

 

NOTE 8 – EQUITY

 

Preferred Stock

 

As of June 30, 2019, and December 31, 2018, The Company has 19,999,900 undesignated shares of preferred stock authorized, respectively. The preferred stock has no par value, of which nil shares are issued and outstanding.

 

During 2018, The Company entered stock purchase agreements to sell 5 Preferred Series A shares for $25,000 per share, totaling $125,000 to related parties. Payment for the shares was received during 2018. These shares of Preferred Series A were issued during the first quarter of 2019.

 

On March 4, 2019, The Company amended the Certificate of Designation of the Series A Preferred Stock of the Company to increase the number of authorized A Series Preferred Stock of the Company to 200 shares. During the first two quarters of 2019, the company issued 41 shares of Preferred Series A, with estimated valuation of $6,446,352 or $157,228 per shares, for compensation, of which 37 shares of Preferred Series A, totaling $5,817,440, were issued to related parties.

 

Common Stock

 

As of June 30, 2019, and December 31, 2018, the Company has 400,000,000 authorized shares of common stock, par value $0.001, of which 95,386,473 and 74,116,845 shares are issued and outstanding, respectively.

 

During 2018, the Company issued a total of 3,500,000 shares of common stock totaling $193,250 for services rendered. In addition, 516,000 shares of common stock were issued for cash totaling $23,800. The Company also issued 500,000 shares as settlement of $40,000 of accounts payable with a current director.

 

During the first two quarters of 2019, the Company issued 2,089,277 shares of common stock totaling $151,160 for services rendered, of which 879,600 shares totaling $141,415 were issued to related parties. In addition, 15,667,858 shares of common stock were issued in exchange for cash totaling $550,500, of which 325,000 shares were issued to a related party for $15,500. There were 3,512,493 shares of common stock issued for conversion of convertible notes and accrued interest, and as a result settled $350,638 of derivative liabilities through additional paid in capital. Please refer to Note 5 for further discussion.

 F-14 
Index   

  

NOTE 9 – WARRANTS

 

During the year ended December 31, 2018, the Company granted a total of 4,088,874 warrants to acquire shares of common stock at a range of $0.015 to $0.13 per share, respectively. All tranches of stock purchase warrants were issued to various note holders in connection with the issuance of convertible debt. During the first two quarters of June 30, 2019, the Company granted 223,046 warrants to acquire shares of common stock from $0.11 to $0.13 per share. These tranches of stock purchase warrants were issued to note holders in connection with the issuance of convertible notes.

 

A summary of the status of the Company’s warrants as of June 30, 2019 is presented below:

 

   Number of Options and Warrants  Range of Exercise Prices  Weighted Average Remaining Contractual Life (in years)  Weighted Average Exercise Price
Outstanding at December 31, 2018   6,481,258    $0.01 to $0.10     2.27    0.05 
Warrants granted   223,046    $0.11 to $0.13    2.72    0.12 
Warrants exercised   —      —      —      —   
Warrants forfeited or expired   —      —      —      —   
Outstanding as of June 30, 2019   6,704,304    $0.01 to $0.13    1.80    0.05 
Exercisable as of June 30, 2019   6,704,304    $0.01 to $0.13    1.80    0.05 

 

 

As of June 30, 2019, all of the 6,704,304 outstanding warrants are exercisable.     

 

NOTE 10 – COMMITMENTS AND CONTINGENCIES

 

Luis Ravelo and Lucia Ravelo v. Grand Havana Inc. and Grand Havana Master LLC, Case No. 2018-035017-CA-01 11th Judicial Circuit in and for Miami-Dade County, Florida. In May 2017 the Company acquired a 70% interest in Cafesa.co, a Florida corporation and a distributor of coffee to gas stations and convenience stores. In conjunction with the acquisition, Luis Ravelo became an employee and director of the Company. In June 2018, it became apparent that Mr. Ravelo had been misusing Company assets and had been diverting customers to a new venture he had created. On July 10, 2018, Mr. Ravelo resigned as a director of the Company. On October 31, 2018, Luis and Lucia Ravelo sued the Company and its wholly owned subsidiary, Grand Havana Master LLC, alleging breach of the Stock Purchase Agreement for the acquisition of Cafesa.co and Mr. Ravelo’s employment agreement with the Company. The Company filed a counterclaim alleging breach of the employment agreement, breach of the stock purchase agreement, fraud in the inducement and breach of fiduciary duty. The litigation is currently in the discovery stage and is currently set for trial in early 2021. The court has also ordered the parties to mediation. No determination can be made at this time with regard to the outcome of the litigation. The Company intends to continue to vigorously defend the action and to vigorously prosecute its counterclaims.

 

William Graubard v. Grand Havana Inc., Case No. CACE – 19-0201073, 17th Judicial Circuit in and for Broward County, Florida. Mr. Grabuard sued in the Company in October 2019 alleging breach of a consulting agreement. Mr. Graubard is claiming damages equal to the value of 250,000 shares of the Company’s common stock. The Company has filed a motion to dismiss the claim. At this early stage of the litigation, no determination can be made at this time with regard to the outcome of the litigation. The Company intends to continue to vigorously defend the action. 

 

NOTE 11 – SUBSEQUENT EVENTS

 

The Company entered into various, convertible or promissory, notes totaling $207,915. The notes bear interest rate ranging from 0% to 12%. The due dates for these notes are range from due on demand to May 20, 2022.

 

The company entered into various agreements to issue an aggregate of 10,221,323 shares of common stocks for services rendered to the Company. In addition, the Company entered into several subscription agreements to issue 4,179,761 shares of common stock and 5 shares of Class A preferred stock for cash totaling $153,750. A total of 22,047,324 shares of common stock were also issued for various debt conversion. 100,000 shares of Common stocks are issued for settlement of accounts payable. The Company also issued 289,318 shares of common stocks for cashless exercise of warrants.

 

On June 2, 2020, The Company entered into an agreement with third party to grant options to purchase up to 10 million shares of the Company’s common stock at $0.015 per share for an aggregate amount of $150,000. These options are granted in lieu of services rendered to the Company.

 F-15 
Index   

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

INTRODUCTORY STATEMENT

 

The following discussion should be read in conjunction with our unaudited consolidated financial statements and the notes to those unaudited consolidated financial statements that are included elsewhere in this Report. For ease of reference, “the Company”, “we,” “us” or “us” refer to Grand Havana, Inc. and subsidiaries unless otherwise stated.

 

Cautionary Statement Concerning Forward-Looking Information

 

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations, business strategies, operating efficiencies or synergies, competitive positions, growth opportunities for existing products, plans and objectives of management, markets for stock of Cardiff Lexington Corp. and other matters. Statements in this report that are not historical facts are hereby identified as “forward-looking statements” for the purpose of the safe harbor provided by Section 21E of the Exchange Act of 1934 and Section 27A of the Securities Act of 1933. Such forward-looking statements, including, without limitation, those relating to the future business prospects, revenue and income of Cardiff Lexington Corp., wherever they occur, are necessarily estimates reflecting the best judgment of the senior management of Cardiff Lexington Corp. on the date on which they were made, or if no date is stated, as of the date of this report. These forward-looking statements are subject to risks, uncertainties and assumptions, including those described in the “Risk Factors” in Item 1A of Part I of our most recent Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”), that may affect the operations, performance, development and results of our business. Because the factors discussed in this report could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any such forward-looking statements. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. The Company assumes no obligation and does not intend to update these forward-looking statements, except as required by law.

 

Use of GAAP Financial Measures

 

We use GAAP financial measures in the section of this annual report captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All of the GAAP financial measures used by us in this report relate to the inclusion of financial information.


Off-Balance Sheet Arrangements

 

We have no obligations, assets or liabilities which would be considered off-balance sheet arrangements as of June 30, 2019. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or purchased any non-financial assets.

 

 Results of Operations for the Three months ended June 30, 2019 and 2018

 

Our unaudited consolidated financial statements have been prepared assuming that we will continue as a going concern and, accordingly, do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should we be unable to continue in operation.

 

We expect we will require additional capital to meet our long-term operating requirements. We expect to raise additional capital through, among other things, the sale of equity or debt securities. 

 

 1 
Index   

  

 

Revenues  

 

We had revenue of $60,265 and $48,281 for the three months periods ended June 30, 2019 and 2018, respectively. The change was mainly due to the increase in sales volume of wholesale coffee, services revenue, and parts.

 

Cost of Sales

 

Costs of sales was $49,218 for the three months period ended June 30, 2019 or 81.67% of revenues. The cost of sales was $24,688, or 51.14% of revenues for the three months period ended June 30, 2018. Cost of sales includes the costs directly attributable to revenue recognition, such as equipment costs, purchased costs, and payments to vendors. The increase in cost of sales was mainly due to the $13,433, $5,112, and $4,064 increases in cost of sales of coffee, delivery cost, and cost of equipment, respectively. 

 

Operating Expenses 

 

We had operating expenses of $6,743,262 for the three months period ended June 30, 2019 compared to operating expenses of $123,918 during the three months period ended June 30, 2018. The increase in operating expense was mainly due to $5,817,440 increase in equity compensation and $714,743 increase in professional fees, respectively.

 

Other Expenses/ Income 

 

We had other expense of $1,530,623 for the three months period ended June 30, 2019 compared to other expense of $65,771 for the three-month period ended June 30, 2018. The increase in other expense was mainly due to the change in fair value of derivative liabilities. For the three months ended June 30, 2019 the Company recorded a derivative loss of $1,347,995 compared to the derivative gain of $83,535 recorded during the three months ended June 30, 2018.  

Results of Operations for the Six months ended June 30, 2019 and 2018 

 

Revenues  

 

We had revenue of $103,100 and $98,908 for the six months periods ended June 30, 2019 and 2018, respectively. The change was mainly due to the $21,023 increase in sales of equipment, which is offset by the $19,912 decrease in sales of coffee.

 

Cost of Sales

 

Costs of sales was $77,855 for the six months period ended June 30, 2019 or 75.51% of revenues. The cost of sales was $51,714, or 52.29% of revenues for the six months period ended June 30, 2018. Cost of sales includes the costs directly attributable to revenue recognition, such as equipment costs, purchase costs, and payments to vendors. The increase in cost of sales was mainly due to the $15,557 and $8,017 increase in cost of delivery as well as shipping and cost of sales of coffee, respectively.

 

Operating Expenses 

 

We had operating expenses of $7,037,080 for the six months period ended June 30, 2019 compared to operating expenses of $461,900 during the six months period ended June 30, 2018. The increase in operating expense was mainly due to $5,711,690 and $747,893 increases to stock-based compensation and professional fees, respectively.

 

Other Expenses/ Income 

 

We had other expense of $2,717,926 for the six months period ended June 30, 2019 compared to other income of $3,155,914 during the six months period ended June 30, 2018. The decrease in other income was mainly due to the change in fair value of derivative liabilities. For the six months ended June 30, 2019 the Company recorded a derivative loss of $2,298,565 compared to the derivative gain of $3,586,582 recorded during the six months ended June 30, 2018. 

 2 
Index   

 

 

Liquidity and Capital Resources

 

Operating Activities

 

Net cash used in operating activities was $343,564 the for the six months period ended June 30, 2019, compared to $125,342 during the same period in 2018. During the first two quarters of 2019, net cash used in operating activities was due to net loss of $9,729,761, $10,417 change in accounts receivable, $9 change in inventory, $5,778 change in prepaid expense and other current assets, $13,388 change in lease liability, $5,964 change in payroll and related liabilities, and was offset by $25,931 in depreciation  expense, $54 loss on sale of equipment, $636 in amortization  of intangible asset, $262,512 amortization of debt discount, $2,298,565 change in derivative liabilities, $47,875 default interest capitalized into convertible note payable, $6,597,512 stock-based compensation, $13,722 amortization of right-of-use assets for operating lease, $35,608 change in accounts payable and accrued expenses, $105,151 change in accrued interest, and $34,187 change in related party payroll and

related.

 

During the six months ended 2018, net cash used in operating activities was due to net income of $2,741,208, which was increased by $6,190 in depreciation expense , $1,485 in amortization  of intangible assets, $2,000 loss on settlement of related party account payable, $383,748 amortization of debt discount, $193,250 stock based compensation, $1,510 change in account receivable, $10,606 change in inventory, $66,310 change in accounts payable and accrued expenses, $73,957 change in related party payroll and related liabilities, and was offset by $427 gain on sale of equipment, $3,586,582 change in derivative liabilities, $4,171 change in prepaid expenses and other current assets, and the $8,387 change in payroll and related

liabilities.

 

Investing Activities

 

During the first two quarters of 2019, net cash used in investing activities was $102,652 due to purchase of property and equipment for $106,242 offset by proceeds from sale of equipment for $3,590. During the first two quarters of 2018, net cash used in investing activities was $1,662 due to purchase of property and equipment for $10,452 offset by proceeds from sale of equipment for $8,790 and $6 in net advances from line of credit.

 

Financing Activities

 

During the first two quarters of 2019, net cash provided by financing activities was $862,366. During this period, the Company received $258,308 in proceeds from issuance of convertible notes payable, $9,900 in proceeds from loans payable from related parties, $43,652 in net proceeds from notes payable, $550,500 in proceeds from sale of common stock and $114 in repayments toward line of credit.

 

During the first two quarters of 2018, net cash provided by financing activities was $112,186. During this period, the Company received $13,500 in proceeds from issuance of convertible notes payable, $75,000 in proceeds from sale of preferred stock and $23,800 in proceeds from sale of common stock.

 3 
Index   

 

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

As required under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we carried out an evaluation under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2019. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of June 30, 2019 were not effective, for the same reasons as previously disclosed under Item 9A. “Controls and Procedures” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2018. 

 

Changes in Internal Controls over Financial Reporting

 

There have been no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-(f) of the Exchange Act) that occurred during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 4 
Index   

 

 


PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

Luis Ravelo and Lucia Ravelo v. Grand Havana Inc. and Grand Havana Master LLC, Case No. 2018-035017-CA-01 11th Judicial Circuit in and for Miami-Dade County, Florida. In May 2017 the Company acquired a 70% interest in Cafesa.co, a Florida corporation and a distributor of coffee to gas stations and convenience stores. In conjunction with the acquisition, Luis Ravelo became an employee and director of the Company. In June 2018, it became apparent that Mr. Ravelo had been misusing Company assets and had been diverting customers to a new venture he had created. On July 10, 2018, Mr. Ravelo resigned as a director of the Company. On October 31, 2018, Luis and Lucia Ravelo sued the Company and its wholly owned subsidiary, Grand Havana Master LLC, alleging breach of the Stock Purchase Agreement for the acquisition of Cafesa.co and Mr. Ravelo’s employment agreement with the Company. The Company filed a counterclaim alleging breach of the employment agreement, breach of the stock purchase agreement, fraud in the inducement and breach of fiduciary duty. The litigation is currently in the discovery stage. No determination can be made at this time with regard to the outcome of the litigation. The Company intends to continue to vigorously defend the action and to vigorously prosecute its counterclaims.

 

William Graubard v. Grand Havana Inc., Case No. CACE – 19-0201073, 17th Judicial Circuit in and for Broward County, Florida. Mr. Grabuard sued in the Company in October 2019 alleging breach of a consulting agreement. Mr. Graubard is claiming damages equal to the value of 250,000 shares of the Company’s common stock. The Company has filed its answer to Plaintiff’s amended complaint and a counterclaim. At this early stage of the litigation, no determination can be made at this time with regard to the outcome of the litigation. The Company intends to continue to vigorously defend the action. 

 

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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The information set forth below relates to our issuances of securities without registration under the Securities Act of 1933 during the reporting period which were not previously included in an Annual Report on Form 10-K, Quarterly Report on Form 10-Q, or Current Report on Form 8-K.

 

During the first two quarters of 2019, the Company issued a total of 15,667,858 shares of common stock in exchange for cash. In addition, the company issued a total of 2,089,277 shares of common stock and 41 shares of preferred class A stock for services rendered to the Company. The Company also issued a total of 3,512,493 shares of common stock for conversion of convertible notes.

 

These securities were issued pursuant to Section 4(a)(2) of the Securities Act and/or Rule 506 promulgated thereunder. The holders represented their intention to acquire the securities for investment only and not with a view towards distribution. The investors were given adequate information about us to make an informed investment decision. We did not engage in any general or advertising. We directed our transfer agent to issue the stock certificates with the appropriate restrictive legend affixed to the restricted stock. 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4. MINE SAFETY DISCLOSURES

 

N/A

 

ITEM 5. OTHER INFORMATION

 

None

 5 
Index   

 

 

ITEM 6. EXHIBITS

 

EXHIBIT INDEX

 

          Incorporated by Reference   Filed or Furnished
Exhibit #   Exhibit Description     Form   Date Filed     Exhibit #   Herewith
                         
3.3   Amend to Designation of Series A Preferred Stock                   *
10.1   Secured Convertible Promissory Note dated January 3, 2019                   *
10.2   Secured Convertible Promissory Note dated March 12, 2019                   *
31.1   Certification of Principal Executive Officer (Section 302)                   *
31.2   Certification of Principal Financial Officer (Section 302)                   *
32.1   Certification of Principal Executive Officer and Principal Financial Officer (Section 906)                   *

 

 

 6 
Index   

 

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

  GRAND HAVANA INC.  
     
Dated: November 6, 2020 By: /s/ Robert Rico  
    Robert Rico  
    Chief Executive Officer
(Principal Executive Officer)
 

 

 7 
Index