GHAV Grand Havana Inc (PK)

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”.

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.

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 March 31, 2019 and December 31, 2018:

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:

The following table presents a summary of the Company’s derivative liabilities as of March 31, 2019 and 2018:

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 March 31, 2019, the ROU asset is $51,862. As of March 31, 2019, the current and long-term portion of lease liabilities are $32,021, and $19,996, respectively. For the three months ended March 31, 2019, the Company recognized amortization of ROU assets of $6,128 and reduction of lease related liability in the amount of $5,973.

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 months ended March 31, 2019, there were 266,355,844 shares issuable upon exercise of outstanding convertible notes, warrants and Series A preferred stock which have been excluded as anti-dilutive. For the three months ended March 31, 2018, there were 25,161,417 shares issuable upon exercise of outstanding convertible notes, 2,646,577 shares issuable upon exercise of outstanding warrants, and 131,171,374 shares issuable upon exercise of outstanding Series A Preferred stock considered for their dilutive effects.

The reconciliation of basic and diluted earnings (loss) per share is as follows:

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.

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 $1,467,150 for the three months ended March 31, 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 consolidated balance sheet date. As of March 31, 2019 and December 31, 2018, the Company had working capital deficits $15,804,233 and $14,536,673, respectively. Our historical operating results raise substantial doubt exists 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.

Depreciation expense for the three months ended March 31, 2019 and 2018 were $11,678 and $3,102, respectively. During the first quarter of 2019, the Company purchased property and equipment for $42,734.

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 quarter of 2019, the principal increased by $2,500 as a result of default penalty. As of March 31, 2019 and December 31, 2018, the outstanding balance of the note was $27,500 and $25,000, respectively and the related accrued interest was $8,850 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 quarter of 2019, the principal increased by $9,500 as a result of default penalty. As of March 31, 2019 and December 31, 2018, the outstanding balance of the note was $104,500 and $95,000, respectively, and the related accrued interest was $31,603 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 quarter of 2019, the principal increased by $6,000 as a result of default penalty. As of March 31, 2019 and December 31, 2018, the outstanding balance of the note was $66,000 and $60,000, respectively, and the related accrued interest was $20,200 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 quarter of 2019, the principal was increased by $6,000 as a result of default penalty. As of March 31, 2019 and December 31, 2018, the outstanding balance of the note was $66,000 and $60,000, respectively, and the related accrued interest was $11,680 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 quarter of 2019, the principal was increased by $2,000 as a result of default penalty. As of March 31, 2019, and December 31, 2018, the outstanding balance of the note was $22,000 and $20,000, respectively, and the related accrued interest was $6,413 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 quarter of 2019, the principal was increased by $2,000 as a result of default penalty. As of March 31, 2019, and December 31, 2018, the outstanding balance of the note was $22,000 and $20,000, and the related accrued interest was $4,806 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 quarter of 2019, the principal was increased by $6,000 as a result of default penalty. As of March 31, 2019, and December 31, 2018, the outstanding balance of the note was $66,000 and $60,000, respectively, and the related accrued interest was $14,418 and $13,573, respectively. This note is currently in default bearing a default interest rate of 24%.

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 quarter 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 March 31, 2019, and December 31, 2018, the outstanding balance of the note was $84,625 and $78,750, respectively, and the related accrued interest was $15,221 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 quarter of 2019, the principal was increased by $6,000 as a result of default penalty. As of March 31, 2019, and December 31, 2018, the outstanding balance of the note was $66,000 and $60,000, respectively, and the related accrued interest was $7,938 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 March 31, 2019, the outstanding balance of the note was $35,000, and the related accrued interest was $667. 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 March 31, 2019, the outstanding balance of the note was $63,309, and the related accrued interest was $1,221. As of filling date, this note is in default bearing a default interest rate of 16%.

As of March 31, 2019 and December 31, 2018, the Company has outstanding convertible notes, net of debt discount, in the amount of $1,061,392 and $925,043, respectively. During the three months ended March 31, 2019, the Company amortized $138,974 of debt discount while recognizing $146,809 in additional debt discount on convertible notes payable.

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 $93,821 and $96,717 as of March 31, 2019 and December 31, 2018, respectively.

On March 12, 2019, the Company entered into a secured 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 March 31, 2019, the outstanding balance of the note was $50,000, and the related accrued interest was $219. This 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 quarter of 2019, the Company entered into various stock purchase agreements with various members of the Board of Directors to issue a total of 300,000 share of common stock for totaling $14,500.

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. These notes are due on demand and bear no interest. As of March 31, 2019 and December 31, 2018, the outstanding balance on these related party notes were $102,018, and the related accrued interest was $11,216 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 quarter of 2019 and the full year of 2018. As of March 31, 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 March 31, 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.

Common Stock

As of March 31, 2019, and December 31, 2018, the Company has 400,000,000 authorized shares of common stock, par value $0.001, of which 76,569,065 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, the Company issued 500,000 shares as settlement of $40,000 of accounts payable with a current director. The Company issued 460,000 shares of common stock in exchange for cash totaling $21,000.

During the first quarter of 2019, the Company issued 1,551,820 shares of common stock totaling $68,977 for services rendered, of which 342,143 shares totaling $59,232 were issued to related parties. In addition, 500,000 shares of common stock were issued in exchange for cash totaling $19,500, of which 300,000 shares were issued to a related party for $14,500. There were 400,400 shares of common stock issued for conversion of convertible notes and accrued interest valued at $2,000, and as a result settled $50,400 of derivative liabilities through additional paid in capital. Please refer to Note 5 for further discussion.

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 quarter of March 31, 2019, the Company granted 73,046 warrants to acquire shares of common stock from $0.13 per share. These tranches of stock purchase warrant were issued to note holder in connection with the issuance of convertible notes.

A summary of the status of the Company’s warrants as of March 31, 2019 is presented below:

As of March 31, 2019, all of the 6,554,304 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, 17^th 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.