[X] ANNUAL REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 333-172850
Indicate by check mark if the registrant is
a well-known seasoned issuer as defined by Rule 405 of the Securities Act
Indicate by check mark if the registrant is
not required to file reports pursuant to Rule 13 or Section 15(d) of the Act
Indicate by checkmark whether the issuer:
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [X]
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 and post
such files). Yes[ ] No [X]
Indicate by check mark if disclosure of delinquent
filers in response to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained,
to the best knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerate filer, a non-accelerated filer, a smaller reporting company or, an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting
company”, and “emerging growth company”, in Rule 12b-2 of the Exchange Act.
Indicate by checkmark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State the aggregate market value of the voting
and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or
the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed
second fiscal quarter: $10,018,744.
Indicate the number of shares outstanding
of each of the issuer’s classes of common stock, as of the most practicable date:
Item 9A(T). Controls and Procedures
This annual report contains forward-looking
statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements relate to future events
or our future financial performance. Some discussions in this report may contain forward-looking statements that involve risk and
uncertainty.
A number of important factors could cause our
actual results to differ materially from those expressed in any forward-looking statements made in this report. Forward-looking
statements are often identified by words like: “believe”, “expect”, “estimate”, “anticipate”,
“intend”, “project” and similar expressions or words which, by their nature, refer to future events. In
some cases, you can also identify forward-looking statements by terminology such as “may”, “will”, “should”,
“plans”, “predicts”, “potential” or “continue” or the negative of these terms or
other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other
factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different
from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected
in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity 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 cautions outlined made in this statement
and elsewhere in this document should not be construed as complete or exhaustive. In many cases, we cannot predict factors
which could cause results to differ materially from those indicated by the forward-looking statements. Additionally, many
items or factors that could cause actual results to differ materially from forward-looking statements are beyond our ability to
control. The Company will not undertake an obligation to further update or change any forward-looking statement, whether
as a result of new information, future developments, or otherwise.
Our financial statements are stated in United
States Dollars (US$) and are prepared in accordance with United States Generally Accepted Accounting Principles. References to
common shares refer to common shares in our capital stock.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2018 and 2017
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 June 9, 2014, the Board of Directors and
consenting shareholders holding a majority of issued and outstanding Common Stock approved a change in domicile of the Company
from Texas to Nevada. The change of domicile, or reincorporation, was effected by means of a merger between the Company and a newly
formed wholly-owned Nevada subsidiary of the Company in name of JunkieDog.com Inc., in which the subsidiary was the surviving entity.
On September 19, 2014, a Plan of Exchange (the
“Exchange”) was executed between and among the Company and First Choice Apparel LLC (“First Choice”), a
limited liability company organized in the State of North Carolina on June 20, 2013, specializing in the online sales of clothing
and other quality items via a wholesale website. Pursuant to the Exchange, the Company acquired 100% of the membership interests
of First Choice in exchange for an issuance by the Company of 40,000,000 shares of Common Stock to First Choice Members, and/or
their assigns. The above issuance gave First Choice Members and/or their assigns a 'controlling interest' in the Company representing
approximately 98.1% of the then issued and outstanding shares of the Company’s Common Stock. The transaction resulted in
a change in control of the Company. The Company and First Choice were reorganized, such that the Company acquired 100% of the membership
interests of First Choice, and First Choice became a wholly-owned subsidiary of the Company.
As a result of the Exchange with First Choice
Apparel, the Company’s business model was changed from insurance sales to e-commerce
In March 2016, the Company’s management
decided to discontinue the operations of First Choice Apparel due to the significant adverse change in the business climate for
internet based retail and wholesale virtual stores. Accordingly, both segments with respect to insurance sales and e-commerce were
reported as discontinued operations.
On December 19, 2016, Grand Havana LLC, organized
as a Limited Liability Company under the laws of the State of Florida having its articles of organization filed and effective on
April 2, 2015, merged into Grand Havana Master LLC, (“GHM”) a Limited Liability Company organized and existing under
the laws of the State of Florida having its Articles of Organization filed and effective on August 20, 2015.
On February 5, 2017, an Agreement for the Exchange
of Stock (the “Exchange”) was entered into between the Company and GHM, and the members of GHM, pursuant to which 50,000,000
shares of the Company’s common stock were issued to the members of GHM in exchange for 100% of the membership interests of
GHM. Upon completion of the Exchange, Grand Havana Master LLC became the Company’s wholly-owned subsidiary and the members
of GHM own a controlling interest in the Company. Simultaneously upon the Closing of the Exchange, Mr. Roberto Luciano, the Company’s
Chief Executive Officer, returned his 39,500,000 shares of the Company’s common stock for cancellation in exchange for certain
assets of the business. As a result, the Company became GHM’s wholly owned subsidiary and assumed a total of $866,011 in
net liabilities. This transaction is being accounted for as a reverse merger and GHM is deemed to be the acquirer. Consequently,
the assets and liabilities and the historical operations that will be reflected in the consolidated financial statements prior
to the Reverse Merger will be those of GHM.
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.
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 are
hereinafter referred to as the “Company”.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
BASIS OF PRESENTATION
The Company’s consolidated financial
statements and related disclosures for the periods ended December 31, 2018 and 2017, have been prepared using the accounting principles
generally accepted in the United States (“GAAP”).
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements reflect
the consolidation of the individual 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.
USE OF ESTIMATES
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions
which affect the reporting of assets and liabilities as of the dates of the financial statements and revenues and expenses during
the reporting period. These estimates primarily relate to the sales recognition, allowance for doubtful accounts, inventory obsolescence
and asset valuations. Actual results could differ from these estimates. Management’s estimates and assumptions are reviewed
periodically, and the effects of revisions are reflected in the consolidated financial statements in the periods they are determined
to be necessary.
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 tables summarize our financial
instruments measured at fair value as of December 31, 2018 and 2017:
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Fair Value Measurements at December 31, 2018
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Total
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Level 1
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Level 2
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Level 3
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Convertible notes payable
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$
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11,108,445
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$
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—
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$
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—
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$
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11,108,445
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Warrants
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$
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826,176
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$
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—
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$
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—
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$
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826,176
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Fair Value Measurements at December 31, 2017
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Total
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Level 1
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Level 2
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Level 3
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Convertible notes payable
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$
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1,619,049
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$
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—
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$
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—
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$
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1,619,049
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Warrants
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$
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3,341,691
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$
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—
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$
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—
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$
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3,341,691
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December 31,
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Description
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2018
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2017
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Beginning balance
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$
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4,960,740
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—
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Proceeds, payments and conversions
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622,112
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736,109
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Total change in fair value
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6,661,449
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4,224,631
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Ending balance
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$
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12,244,301
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4,960,740
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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 following assumptions were used for the valuation of the derivative liability related to the convertible notes for 2018
and 2017:
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•
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The underlying stock price $0.0047 to $0.0825 and $0.0085 to $.0615,
respectively, was used as the fair value of the common stock;
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•
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The note face amounts are in the range $12,500 to $302,612 and $12,970
and $172,000, respectively, with the same terms as at issuance and effectively convert at discounts in the range of (9.1%) to 2,646.5%.
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•
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Capital raising events would not occur in any quarter generating dilutive
reset events at prices below the current variable rates for the Notes;
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•
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The holder would redeem based on availability of alternative financing,
10% of the time increasing 1.0% monthly to a maximum of 20%;
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•
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The holder would automatically convert the note at maturity if the
registration was effective and the company was not in default;
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•
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An event of default would occur 0% of the time, increasing 1.00% per
month to a maximum of 20% – to–date many notes are in default and partially converted by the holder’s post assignment;
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•
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The projected annual volatility was based on the historical volatility
of comparable companies in a range from 340% to 700% and 112% to 243%, respectively.
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The following assumptions were used for the
valuation of the derivative liability related to the warrants for 2018 and 2017:
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•
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The holder would automatically exercise the warrants at a stock price
above the exercise price at expiration;
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•
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The projected annual volatility was based on the historical volatility
of comparable companies of 340% to 982% and 123% to 175%, respectively;
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•
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Risk-free rates were based on the remaining term
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•
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Dilutive reset events (March 15, 2017 to $0.027 and April 7, 2017 to
$0.012) projected to occur based on future projected capital needs and projected debt/liability settlements resulting in adjusted
warrants to 3,341,691 as of December 31, 2017;
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CASH AND CASH EQUIVALENTS
The Company considers highly liquid
investments with original maturities of three months or less when purchased as cash equivalents. The Company had cash equivalents
of $1,463 and $0 as of December 31, 2018 and 2017, respectively. At times throughout the year, the Company might maintain bank
balances that may exceed Federal Deposit Insurance Corporation insured limits. Periodically, the Company evaluates the credit worthiness
of the financial institutions, and has not experienced any losses in such accounts. At December 31, 2018 and 2017, the Company
had $0 over the insurable limit.
ACCOUNTS RECEIVABLE
Accounts receivable are presented net of an
allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses. The Company reviews
the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability
of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors,
including the age of the balance, a customer’s historical payment history, its current credit-worthiness and current economic
trends. Accounts are written off after exhaustive efforts at collection. At December 31, 2018 and 2017, the Company has established,
based on a review of its outstanding balances, that no allowance is necessary.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially expose
the Company to concentrations of credit risk, are primarily comprised of cash and cash equivalents, investments, accounts receivable
and unbilled accounts receivable, if any. The Company places its cash in highly rated financial institutions. Management believes
its credit policies reflect normal industry terms and business risk.
CONVERTIBLE INSTRUMENTS AND DERIVATIVES
The Company evaluates and accounts for conversion
options embedded in its convertible instruments in accordance with professional standards for FASB ASC 815, Derivatives and
Hedging (“ASC 815”).
Professional standards generally provide three
criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free
standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics
and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of
the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not
re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported
in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered
a derivative instrument. Professional standards also provide an exception to this rule when the host instrument is deemed to be
conventional as defined under professional standards as “The Meaning of Conventional Convertible Debt Instrument”.
The Company accounts for convertible instruments
(when it has determined that the embedded conversion options should not be bifurcated from their host instruments) in accordance
with professional standards when “Accounting for Convertible Securities with Beneficial Conversion Features,” as those
professional standards pertain to “Certain Convertible Instruments.” Accordingly, the Company records, when necessary,
discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences
between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion
price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their earliest
date of redemption. The Company also records when necessary deemed dividends for the intrinsic value of conversion options embedded
in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of
the note transaction and the effective conversion price embedded in the note.
ASC 815 provides that, among other things,
generally, if an event is not within the entity’s control could or require net cash settlement, then the contract shall
be classified as an asset or a liability.
GOODWILL
Goodwill represents the excess of cost over
net assets of acquired businesses that are consolidated. The Company performs its annual assessment of goodwill on December 31
of each fiscal year and whenever events or changes in circumstances or a triggering event indicate that the carrying amount may
not be recoverable. Determining whether a triggering event has occurred often involves significant judgment from management. An
entity is permitted to first assess qualitatively whether it is necessary to perform a goodwill impairment test. The quantitative
impairment test is required only if the entity concludes that it is more likely than not that a reporting unit’s fair value
is less than its carrying amount. The Company determines the fair value of a reporting unit based on an income approach utilizing
a discounted cash flow adjusted for entity specific factors. In evaluating whether it is more likely than not that the fair value
of a reporting unit is less than its carrying amount, an entity should consider the totality of all relevant events or circumstances
that affect the fair value or carrying amount of a reporting unit. If the carrying value of a reporting unit’s goodwill exceeds
its implied fair value, then an impairment loss equal to the difference is recorded. See Note 7, "Acquisition and Related
Goodwill" for further information and discussion.
The Company performed its annual assessment
of goodwill on December 31, 2017 and determined that a full impairment to goodwill of $553,980 was necessary.
INTANGIBLE ASSETS
The Company records intangible assets at cost
or based on the fair value of the assets acquired. Intangible assets consist of customer lists and trademarks. The Company amortizes
intangible assets over their estimated useful lives or in proportion to expected yearly revenue generated from the intangibles
that were acquired.
In accordance with ASC 350, Intangibles-Goodwill
and Other, the Company assesses intangible assets for potential impairments at the end of each fiscal year, or during the year
if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. In evaluating
goodwill and intangible assets for impairment, the Company first assesses qualitative factors to determine whether it is more likely
than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount.
If the Company concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying
value, then no further testing of the intangible assets assigned to the reporting unit is required. However, if the Company concludes
that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then the Company will
perform a two-step intangible assets impairment test to identify potential intangible assets impairment and measure the amount
of intangible assets impairment to be recognized, if any.
In the first step of the review process, the
Company compares the estimated fair value of the reporting unit with its carrying value. If the estimated fair value of the reporting
unit exceeds its carrying amount, no further analysis is needed. If the estimated fair value of the reporting unit is less than
its carrying amount, the Company proceeds to the second step of the review process to calculate the implied fair value of the reporting
unit intangible assets in order to determine whether any impairment is required. The Company calculates the implied fair value
of the reporting unit intangible assets by allocating the estimated fair value of the reporting unit to all of the assets and liabilities
of the reporting unit as if the reporting unit had been acquired in a business combination. If the carrying value of the reporting
unit's intangible assets exceeds the implied fair value of the intangible assets, the Company recognizes an impairment loss for
that excess amount. In allocating the estimated fair value of the reporting unit to all of the assets and liabilities of the reporting
unit, the Company uses industry and market data, as well as knowledge of the industry and the Company’s past experiences.
The Company bases its calculation of the estimated
fair value of a reporting unit on the income approach. For the income approach, the Company uses internally developed discounted
cash flow models that include, among others, the following assumptions: projections of revenues and expenses and related cash flows
based on assumed long-term growth rates and demand trends; expected future investments to grow new units; and estimated discount
rates. The Company bases these assumptions on its historical data and experience, third-party appraisals, industry projections,
micro and macro general economic condition projections, and its expectations.
The Company had no intangible assets impairment
charges for the years ended December 31, 2018 and 2017.
INVENTORY
Inventory is stated at the lower of cost or
net realizable value using the FIFO method. Inventory consists primarily of only finished goods, which represents the final product
ready for sale. A periodic inventory system is maintained by 100% count. Inventory is replaced periodically to maintain the optimum
stock on hand available for immediate shipment. The Company assesses whether an inventory reserve is necessary at the end of each
fiscal period. For the years ended December 31, 2018 and 2017 no inventory reserve was deemed necessary.
INCOME TAXES
The Company, along with its consolidated subsidiaries,
are deemed a corporation and thus is a taxable entity. Prior to the reverse merger on February 5, 2017 the Company filed a U.S.
Return of Partnership Income, whereby the members of the Company were taxed on their share of the Company’s taxable income,
and the Company was not subject to federal and state income taxes. No provision for income taxes was reflected in the accompanying
consolidated financial statements, as the Company did not have income through December 31, 2018. There were no uncertain tax positions
that would require recognition in the consolidated financial statements through December 31, 2018.
Generally, federal, state and local authorities
may examine the Company’s tax returns for three years from the date of filing, and the current and prior three years remain
subject to examination as of December 31, 2018.
The Company’s conclusions regarding uncertain
tax positions may be subject to review and adjustment at a later date based upon ongoing analyses of tax laws, regulations and
interpretations thereof as well as other factors.
The Company accounts for income taxes under
ASC 740-10-30, Income Taxes. Deferred income tax assets and liabilities are determined based upon differences between the
financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent
management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements
of operations in the period that includes the enactment date.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost.
Expenditures for major renewals and improvements are capitalized while expenditures for minor replacements, maintenance and repairs
are expensed as incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets.
Upon retirement or disposal of assets, the accounts are relieved of cost and accumulated depreciation and the related gain or loss,
if any, is reflected in loss on disposal of assets in the consolidated statement of income and comprehensive income.
At least annually, the Company evaluates, and
adjusts when necessary, the estimated useful lives. The changes in estimated useful lives would not have a material impact on depreciation
in any period. The estimated useful lives are:
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Equipment
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7 years
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Vehicles
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5 years
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LONG LIVED ASSETS
The Company evaluates the carrying value and
recoverability of its long-lived assets when circumstances warrant such evaluation by applying the provisions of ASC 360-35, Property,
Plant and Equipment, Subsequent Measurement (“ASC 360-35”). ASC 360-35 requires that long-lived assets be reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable
through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever
any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.
RECOGNITION OF REVENUE
The
Company adopted ASU 2014-09 Revenue from Contracts with Customers and all subsequent amendments to the ASU (collectively, “ASC
606”), which creates a single framework for recognizing revenue from contracts with customers. The Company’s revenue
is primarily derived from the sale of coffee, tea and accessories. Sales are recorded once an order has been received from the
customer (contract), the price is determined and allocated, the sole performance obligation is satisfied when goods sold passes
to customers , based on shipping terms, which
generally occurs when the product is shipped to the customer and collectability is reasonably assured. Sales are presented net
of discounts and allowances. Discounts and allowances are determined when a sale is negotiated. The Company does not grant price
adjustments after a sale is complete.
STOCK BASED COMPENSATION
The Company follows FASB ASC 718, Compensation
– Stock Compensation, which prescribes accounting and reporting standards for all share-based payment transactions in
which employee services are acquired. Transactions include incurring liabilities, or issuing or offering to issue shares,
options, and other equity instruments such as employee stock ownership plans and stock appreciation rights. Share-based
payments to employees, including grants of employee stock options, are recognized as compensation expense in the unaudited condensed
consolidated financial statements based on their fair values. That expense is recognized over the period during which an employee
is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period).
The Company accounts for stock-based compensation
issued to non-employees and consultants in accordance with the provisions of FASB ASC 505-50, Equity–based Payments to
Non-Employees. Measurement of share-based payment transactions with non-employees is based on the fair value of whichever
is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The fair value of
the share-based payment transaction is determined at the earlier of performance commitment date or performance completion date.
For the years ended December 31, 2018 and 2017,
the Company had stock-based compensation totaling $184,250 and $2,883,032, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"). ASU 2014-09 affects any entity using U.S. GAAP
that either enters into contracts with customers to transfer goods or services, or enters into contracts for the transfer of nonfinancial
assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). ASU 2014-09
is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted
ASU 2014-09 on January 1, 2018. The adoption had no impact on the financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842) (“ASU 2016-02”), which modifies lease accounting for lessees to increase transparency and
comparability by recording lease assets and liabilities for operating leases and disclosing key information about leasing arrangements.
The amendment is effective from December 15, 2018. The Company adopted ASU 2016-02 on January 1, 2019 along with the “package
of practical expedients”. At the time of adoption, the Company recognized ROU assets and liabilities in the amount of $34,967.
In May 2017, the FASB issued ASU 2017-09, Compensation
- Stock Compensation (Subtopic 718) Scope of Modification Accounting. The amendments in ASU 2017-09 provide clarity and reduce
both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation,
to a change to the terms or conditions of a share-based payment award. The ASU is effective for annual reporting periods beginning
after December 15, 2017, including interim periods within those periods. The Company has determined that this ASU will have an
immaterial impact on its consolidated financial statements.
In July 2017, the FASB issued ASU 2017-11, Earnings
per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), and Derivatives and Hedging (Topic 815).
The amendments in ASU 2017-11 provide guidance for freestanding equity-linked financial instruments, such as warrants and conversion
options in convertible debt or preferred stock, and should no longer be accounted for as a derivative liability at fair value as
a result of the existence of a down round feature. The ASU is effective for annual reporting periods beginning after December 15,
2018, including interim periods within those periods. The Company has determined that this ASU will have an immaterial impact on
its consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, Compensation
- Stock Compensation (Topic 718): Improvements to Non-Employee Share Based Payment Accounting. The amendments in ASU 2018-07
provide for the simplification of the measurement of share-based payment transactions for acquiring goods and services from non-employees.
The ASU is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those periods.
The Company has early adopted ASU 2018-07 the impact was not material to the financial statements.
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.
NOTE 3 – GOING CONCERN
The Company’s 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 losses during the years ended December 31, 2018 and 2017, respectively. 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 December 31, 2018 and 2017, the Company had working capital deficits. Our historical operating results
indicate 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 financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern.
NOTE 4 – 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 available to common stockholders by the weighted average shares outstanding during the
period. Diluted earnings per share, which is calculated by dividing net income 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, is not presented separately as of December 31, 2018
and 2017 as it is anti-dilutive.
Such securities, shown below, presented on
a common share equivalent basis and outstanding as of December 31, 2018 and 2017 have been excluded from the per share computations:
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2018
|
|
2017
|
|
Convertible notes payable
|
|
|
91,816,868
|
|
|
|
44,437,745
|
|
|
Warrants
|
|
|
6,481,258
|
|
|
|
4,088,874
|
|
|
Series A preferred stock
|
|
|
122,251,400
|
|
|
|
122,251,400
|
|
|
|
|
|
|
|
|
|
|
|
|
Total diluted shares
|
|
|
220,549,526
|
|
|
|
170,778,019
|
|
NOTE 5 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31,
2018 and 2017:
|
|
|
December 31,
|
|
|
|
2018
|
|
2017
|
|
Equipment
|
|
$
|
151,176
|
|
|
$
|
74,404
|
|
|
Vehicles
|
|
|
106,080
|
|
|
|
—
|
|
|
Less: Accumulated depreciation
|
|
|
(33,038
|
)
|
|
|
(23,187
|
)
|
|
Property and equipment, net
|
|
$
|
224,219
|
|
|
$
|
51,217
|
|
Depreciation expense for the years ended December 31, 2018 and 2017
was $20,423 and $16,402, respectively.
NOTE 6 – ACQUISITION AND RELATED GOODWILL
Acquisition of Cafesa:
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 (the “Acquisition”). The Company will pay a total of $420,000 in cash and stock for the interest in Cafesa.
There were two initial cash payments in May and August 2017, followed by eight quarterly payments of cash and stock.
The following table summarizes the consideration
paid for Cafesa and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date, as well as the
fair value at the acquisition date:
|
|
|
April 25, 2017
|
|
Consideration
|
|
|
|
|
|
Notes issued for 70% acquisition of Cafesa
|
|
$
|
420,000
|
|
|
Non-controlling interest
|
|
|
180,000
|
|
|
Total Consideration
|
|
$
|
600,000
|
|
|
|
|
|
|
|
|
Recognized amounts of identifiable assets acquired and liabilities assumed:
|
|
|
|
|
|
Tangible assets acquired:
|
|
$
|
2,393
|
|
|
Cash
|
|
|
6,238
|
|
|
Inventory
|
|
|
24,906
|
|
|
Property and equipment
|
|
$
|
33,537
|
|
|
Total tangible assets acquired
|
|
|
|
|
|
|
|
|
|
|
|
Assumed liabilities:
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
6,617
|
|
|
Total assumed liabilities
|
|
$
|
6,617
|
|
|
|
|
|
|
|
|
Net tangible assets/liabilities
|
|
$
|
26,920
|
|
|
|
|
|
|
|
|
Intangible assets acquired:
|
|
|
|
|
|
Trademarks
|
|
$
|
7,100
|
|
|
Customer lists
|
|
|
12,000
|
|
|
Total intangible assets acquired
|
|
$
|
19,100
|
|
|
|
|
|
|
|
|
Goodwill recognized
|
|
$
|
553,980
|
|
Goodwill:
At the time of the Acquisition, the Company
allocated the purchase price to the assets acquired and liabilities assumed at their estimated fair values as of the date of Acquisition.
The excess of the purchase price paid by the Company over the estimated fair value of net assets acquired has been recorded as
goodwill. Goodwill represents the value associated with the acquired workforce and synergies related to the merger of the two companies.
The Company performed its annual assessment
of goodwill on December 31, 2017 and determined that a full impairment to goodwill of $553,980 was necessary.
Unaudited Pro Forma Financial Information:
The unaudited
pro forma consolidated statements of operations give effect to the acquisition as if it occurred at the beginning of 2017. These
unaudited pro forma consolidated statements of operations are prepared by management for informational purposes and are not necessarily
indicative of future results or of actual results that would have been achieved had the acquisition been consummated as of the
dates presented, and should not be taken as representative of future consolidated results of operations of the Company:
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
(Actual)
|
|
CAFESA
|
|
(Proforma)
|
|
NET REVENUES:
|
|
|
|
|
|
|
|
Revenues, net
|
|
$
|
47,418
|
|
|
$
|
211,246
|
|
|
$
|
258,664
|
|
|
TOTAL NET REVENUES
|
|
|
47,418
|
|
|
|
211,246
|
|
|
|
258,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF GOODS SOLD:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
32,146
|
|
|
|
102,204
|
|
|
|
134,350
|
|
|
TOTAL COST OF GOODS SOLD
|
|
|
32,146
|
|
|
|
102,204
|
|
|
|
134,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT (LOSS)
|
|
|
15,272
|
|
|
|
109,042
|
|
|
|
124,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
3,257,064
|
|
|
|
30,444
|
|
|
|
3,287,508
|
|
|
Depreciation and amortization
|
|
|
6,114
|
|
|
|
11,040
|
|
|
|
17,154
|
|
|
Impairment of goodwill
|
|
|
553,980
|
|
|
|
—
|
|
|
|
553,980
|
|
|
Payroll and related expenses
|
|
|
287,283
|
|
|
|
104,709
|
|
|
|
391,992
|
|
|
TOTAL OPERATING EXPENSES
|
|
|
4,104,441
|
|
|
|
146,193
|
|
|
|
4,250,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(4,089,169
|
)
|
|
|
(37,151
|
)
|
|
|
(4,126,320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(309,908
|
)
|
|
|
—
|
|
|
|
(309,908
|
)
|
|
Other (expense) income
|
|
|
(4,224,631
|
)
|
|
|
—
|
|
|
|
(4,224,631
|
)
|
|
TOTAL OTHER EXPENSE
|
|
|
(4,534,539
|
)
|
|
|
—
|
|
|
|
(4,534,539
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(8,623,708
|
)
|
|
$
|
(37,151
|
)
|
|
$
|
(8,660,859
|
)
|
NOTE 7 – INTANGIBLE ASSETS
The expected useful life of intangible
assets is 15 years. Intangible assets consisted of the following at December 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2018
|
|
2017
|
|
Trademarks
|
|
$
|
7,100
|
|
|
$
|
7,100
|
|
|
Customer lists
|
|
|
12,000
|
|
|
|
12,000
|
|
|
Subtotal
|
|
|
19,100
|
|
|
|
19,100
|
|
|
Amortization
|
|
|
(2,122
|
)
|
|
|
—
|
|
|
Intangible assets, net
|
|
$
|
16,978
|
|
|
$
|
19,100
|
|
There was $2,122 in amortization
expense for the year ended December 31, 2018 and none for the year ended December 31, 2017.
NOTE 8 – 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.
The principal amount of the note at December 31, 2018 and 2017 is $25,000, and the related accrued interest is $7,200 and $1,764,
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.
The principal amount of the note at December 31, 2018 and 2017 is $95,000, and the related accrued interest is $25,333 and $5,830,
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. The principal amount of the note at December 31, 2018 and 2017 is $60,000, and the related accrued interest
is $16,240 and $3,827, respectively. This note is currently in default bearing a default interest rate of 24%.
On March 17, 2017 the Company entered into
a secured convertible promissory note for $80,000, due on March 17, 2018, bearing interest at 15% 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 45% of the lowest trading price during the last fifteen trading day period,
including the date of conversion. The principal amount of the note at December 31, 2018 and 2017 is $80,000, and the related accrued
interest is $24,622 and $9,534, respectively. This note is currently in default bearing a default interest rate of 20%.
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. The principal amount of the note at December 31, 2018 and 2017 is $60,000, and the related accrued
interest is $9,040 and $3,814, 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 $25,000, due on March 17, 2018, bearing interest at 15% 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 45% of the lowest trading price during the last fifteen trading day period, including the date of conversion.
The principal amount of the note at December 31, 2018 and 2017 is $25,000, and the related accrued interest is $7,556 and $2,877,
respectively. This note is currently in default bearing a default interest rate of 20%.
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. The principal
amount of the note at December 31, 2018 and 2017 is $20,000, and the related accrued interest is $5,093 and $1,179, 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. The principal
amount of the note at December 31, 2018 and 2017 is $20,000, and the related accrued interest is $4,524 and $1,065, 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. The principal amount of the note at December 31, 2018 and 2017 is $60,000, and the related accrued interest
is $13,573 and $3,196, 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. The principal amount of the note at December 31, 2018 and 2017 is $78,750, and the related accrued interest
is $12,600 and $2,537, 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. The principal amount of the note at December 31, 2018 and 2017 is $60,000, and the related accrued
interest is $5,520 and $250, respectively. This note is currently in default bearing a default interest rate of 24%.
On March 5, 2018, the Company entered into
an unsecured convertible promissory note for $302,612 in settlement of previous convertible promissory notes from 2013 and 2014,
of which $249,250 was principal and $53,362 was interest accrued through the date of issuance of this note, due on March 5, 2019,
bearing interest at 8% per annum, with an original issuance discount of $1,500. 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 50% of the closing
price on the trading day immediately prior to the conversion date. The principal amount of the note at December 31, 2018 $302,612,
and the related accrued interest is $19,838, respectively. This note is currently in default.
On March 13, 2018 the Company entered into
an unsecured convertible promissory note for $15,000, due on March 23, 2019, bearing interest at 15% per annum, with an original
issuance discount of $1,500. 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 the lower of $0.01 per share or 45% of the lowest trading price
during the last twenty trading day period, including the date of conversion. In addition to this note, the Company granted 500,000
warrants to purchase common stock at an exercise price of $0.10 per share expiring on March 23, 2023. The principal amount of the
note at December 31, 2018 $15,000, and the related accrued interest is $1,731, respectively. This note is currently in default.
On May 10, 2018 the Company entered into a
secured convertible promissory note for $20,000, due on May 10, 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 twenty trading day period, including
the date of conversion. The principal amount of the note at December 31, 2018 $20,000, and the related accrued interest is $764,
respectively. This note is currently in default.
On June 25, 2018 the Company entered into a
secured convertible promissory note for $32,000, due on June 25, 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 twenty trading day period, including
the date of conversion. The principal amount of the note at December 31, 2018 $32,000, and the related accrued interest is $1,266,
respectively. This note is currently in default.
On July 24, 2018, the Company entered into
an unsecured convertible promissory note for $70,000, due on July 24, 2019, bearing interest at 12% 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 conversion price of $0.025 per share or 50% of the lowest trading price during the last twenty trading day period, not
including the date of conversion, whichever is lower. The principal amount of the note at December 31, 2018 $70,000, and the related
accrued interest is $6,222, respectively. This note is currently in default.
On September 2, 2018 the Company entered into
an unsecured convertible promissory note for $12,500, due on September 1, 2019, bearing interest at 10% 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 intraday trading price during the last five trading day period, including the date of conversion.
The principal amount of the note at December 31, 2018 $12,500, and the related accrued interest is $410, respectively. This note
is currently in default.
On September 17, 2018 the Company entered into
a secured convertible promissory note for $40,000, due on September 17, 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. The principal amount of the note at December 31,
2018 $40,000, and the related accrued interest is $1,373, respectively.
On October 26, 2018 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. The principal amount of the note at December 31, 2018 $100,000,
and the related accrued interest is $2,167, respectively.
On December 13, 2018 the Company entered into
a secured convertible promissory note for $30,000, 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. The principal amount of the note at December 31, 2018 $30,000,
and the related accrued interest is $180, respectively.
|
|
|
Maturity
|
|
|
2019
|
|
|
$
|
1,037,656
|
|
|
|
2020
|
|
|
|
170,000
|
|
|
|
Less: Debt discount
|
|
|
|
(282,613
|
)
|
|
|
Total
|
|
|
|
925,043
|
|
NOTE 9 – NOTE PAYABLE
During 2013
and 2014, the Company received unsecured advances from an investor totaling $88,957 for the
purchase of inventory. The note had no stated term and bears no interest.
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% with combined outstanding balance of $96,717 as of December 31, 2018.
|
|
|
|
|
|
|
Maturity
|
|
|
2019
|
|
|
$
|
102,188
|
|
|
|
2020
|
|
|
|
14,668
|
|
|
|
2021
|
|
|
|
15,822
|
|
|
|
2022
|
|
|
|
17,068
|
|
|
|
2023 and thereafter
|
|
|
|
35,928
|
|
|
|
Total
|
|
|
$
|
185,674
|
|
NOTE 10 – PREFERRED STOCK LIABILITY
During 2018, the Company entered stock purchase
agreements to sell 5 Preferred Series A shares for $25,000 per share, totaling $125,000. Payment for the shares was received during
2018, however the Article of Incorporation to increase the number of authorized share of Series A Preferred Stock from 100 shares
to 200 shares was not done until March 12, 2019.
NOTE 11 – RELATED PARTY TRANSACTIONS
On December 1, 2016, the Company entered into
employment agreements with certain key executives with initial terms of five years and call for compensation in cash and equity
in the Company as follows:
|
|
|
|
|
|
|
|
|
Employee
|
|
Position
|
|
Cash Compensation
|
|
Equity Compensation
|
|
Tanya Bredemeier
|
|
Chairman and COO
|
|
$
|
75,000
|
*
|
|
|
25
|
%
|
|
Robert Rico
|
|
Chief Executive Office
|
|
$
|
125,000
|
|
|
|
10
|
%
|
|
Steve Polisar
|
|
Chief Legal Officer
|
|
$
|
36,000
|
*
|
|
|
30
|
%
|
|
Jorge Moreno**
|
|
Chief Marketing Officer
|
|
$
|
40,000
|
*
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
*= Second and each subsequent year compensation
will increase by 20% after corporate financing milestones are met.
** = Terminated June 19, 2018
Additionally, an employment agreement was entered
into on May 5, 2017, with Luis Ravelo, Vice President of Operations. The agreement has a one-year renewable term with an annual
salary of $104,000. As of December 31, 2018, and 2017 related party payroll liabilities totaled $165,945, respectively. Mr. Ravelo's
employment agreement was not renewed.
Certain employees and shareholders were granted
shares of Series A preferred stock in 2017. For the years ended December 31, 2017 and 2016 employees and shareholders received
a total of 100 shares of Series A preferred stock valued at $2,811,782.
The Company has outstanding loans payable to
related parties totaling $417,018 as of December 31, 2018 and 2017. Firstly, the Company has received loans from related parties
for working capital purposes. These unsecured loans bear interest at a rate of 6% per annum and have no repayment terms. For the
years ended December 31, 2018 and 2017 the Company was loaned a net of $0 and $80,249, respectively. As of December 31, 2018, and
2017, the outstanding balance of these loans is $102,018, respectively. Secondly, as part of the Cafesa acquisition on April 25,
2017, the Company is required to make cash and stock payments to a related party. For the year ended December 31, 2017, the Company
made cash payments totaling $105,000. As of December 31, 2018, and 2017, the outstanding balance due to this related party is $315,000.
During 2017, the Company entered into contracts
with members of the Board of Directors to serve on the Company’s Board of Directors. As part of being a member of the Board,
the Company has agreed to provide each member 250,000 shares of restricted common stock, totaling 1,500,000 shares, as compensation.
On October 17, 2017, the Board entered into
an engagement agreement for financial data supporting schedule preparation with an existing member of the Board of Directors. Fees
relating to this agreement totaled $38,000. On February 27, 2018, the Company issued 500,000 shares of common stock with a fair
market value of $40,000 to a current member of the Board of Directors as settlement of accounts payable.
During 2018, the Company entered into various
stock purchase agreements with a member of the Board of Directors to issue a total of 137,000 share of common stock for $0.05 per
share for a total of $6,850.
NOTE 12 – LINE OF CREDIT
The Company has a revolving business credit
line of $5,000 with one of its banks with a variable interest rate of 5% above the Prime rate of the respective bank. As of December
31, 2018, and 2017 the balance due on the line of credit was $4,995 and $4,936, respectively. The line of credit is collateralized
by a certificate of deposit in the amount of $5,300, which matures on December 8, 2020.
NOTE 13 – INCOME TAXES
The provision for income taxes represents estimated
federal and state income taxes. From the Company’s inception on August 20, 2015 to February 4, 2017, the Company was not
subject to federal and state income taxes since it was operating as a Limited Liability Company. On February 5, 2017, as a result
of the reverse merger, the Company became subject to corporate federal and state income taxes as a C corporation. The effective
tax rate for the years ended December 31, 2018 and 2017 were 27% and 41%, respectively, and diverged from the combined federal
and state statutory rates strictly due to differences in the tax rates.
Reconciliation between the statutory United
States corporate income tax rate and the effective income tax rates based on continuing operations is as follows:
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2018
|
|
2017
|
|
Income tax expense at Federal statutory rate of 21 and 35%, respectively
|
|
|
156,549
|
|
|
|
241,843
|
|
|
State income tax expense (benefit), net of Federal effect
|
|
|
43,387
|
|
|
|
40,216
|
|
|
Change in valuation allowance
|
|
|
(199,936
|
)
|
|
|
(282,059
|
)
|
|
Total
|
|
|
—
|
|
|
|
—
|
|
As of December 31, 2018 and 2017, the Company’s
deferred tax asset is $481,995 and 282,059, respectively, with an offsetting valuation allowance of $481,995 and 282,059, respectively,
resulting in a net deferred tax asset of $0 for both years.
At December 31, 2018, the Company has available
net operating losses of approximately $1,520,056 which may be carried forward to apply against future taxable income. These losses
will expire carryforward indefinitely. The net operating losses may be subject to limitations under Internal Revenue Code Section
382 should there be a 50% ownership change as determined under regulations. Deferred tax assets related to these losses have not
been recorded due to uncertainty regarding their utilization.
The provisions of ASC 740 require companies
to recognize in their unaudited consolidated financial statements the impact of a tax position if that position is more likely
than not to be sustained upon audit, based upon the technical merits of the position. ASC 740 prescribes a recognition threshold
and measurement attribute for the unaudited consolidated financial statement recognition and measurement of a tax position taken
or expected to be taken on a tax return. ASC 740 also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods and disclosure.
Management does not believe that the Company
has any material uncertain tax positions requiring recognition or measurement in accordance with the provisions of ASC 740. Accordingly,
the adoption of these provisions of ASC 740 did not have a material effect on the Company’s unaudited consolidated financial
statements. The Company’s policy is to record interest and penalties on uncertain tax positions, if any, as income tax expense.
The Company has not filed its applicable Federal
and State tax returns for the years ended December 31, 2018 and 2017 and may be subject to penalties for noncompliance.
NOTE 14 – EQUITY
Preferred Stock
As of December
31, 2018, and 2017, the Company has 19,999,900 undesignated
shares of preferred stock authorized, no par value, of which nil shares are issued and outstanding.
The Company
has designated 100 shares of Series A Preferred Stock for issuance. Each share of Series A Preferred Stock (i)
pays no dividends, (ii) is convertible into a number of common shares equal to 2% of the issued and outstanding shares at the
time of conversion, (iii) has no liquidation preference, and (v) has voting rights equal to the number of shares into which
they can be converted. For the year ended December 31, 2017, the Company issued 100 shares of Series A Preferred Stock to certain
employees and shareholders, respectively, valued on an as if converted basis of $28,118 per share. On
March 4, 2019, 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.
As of December 31, 2018, and 2017, the Company
has 10,000,000 authorized shares of Series B Preferred Stock, no par value, of which nil shares are issued and outstanding. The
Series B Preferred Stock carries super voting rights at a 1:1 ratio of the entire voting Common Stock eligible to vote at any time
until such Series B Preferred shares are either converted, redeemed, liquidated or cancelled. The Series B Preferred Stock is convertible
into common stock at a 1:1 ratio (i.e. – one share of common stock issued for each share of Series B Preferred Stock converted).
Common Stock
As of December 31, 2018, and 2017, the Company
has 400,000,000 authorized shares of common stock, par value $0.001, of which 74,116,845 and 61,125,687 shares are issued and outstanding,
respectively.
On February 5, 2017, as part of the reverse
merger, the Company issued 7,375,687 shares of common stock (see Note 1). During 2017, the Company issued a total of 3,750,000
shares of common stock totaling $71,250 for services rendered.
During 2018,
the Company issued a total of 4,809,678 shares of common totaling $266,073 for
services rendered. In addition, the Company issued 100,000 shares of common stock for the purchase of equipment valued at $5,000.
The Company also issued 3,852,000 shares of common stock for cash totaling $93,100, of which 137,000 common shares were issued
to related parties for $6,850. The Company issued 500,000 shares as settlement of $40,000 of accounts payable with a current director.
As compensation during 2018, the Company issued 3,729,480 shares of common stock. 1,500,000 shares of common stock totaling $73,500
were issued to members of the Board of Directors. The remaining 2,229,480 shares of common stock issued as compensation totaling
$109,250 was issued to non-management employees.
NOTE 15 – WARRANTS
During the years ended December 31, 2018 and
2017, the Company granted a total of 2,392,384 and 4,088,874, respectively, warrants to acquire shares of common stock at a range
of $0.02 to $0.03 and $0.01 to $0.03 per share, respectively. All tranches of stock purchase warrants were issued to various note
holders in connection with the issuance of convertible debt. The intrinsic value of the 4,088,874 warrants as of December 31, 2017
is $147,461.
A summary of the status of the Company’s
warrants as of December 31, 2018 is presented below:
|
|
|
Number of Options and Warrants
|
|
|
|
December 31,
|
|
|
|
2018
|
|
2017
|
|
Outstanding at beginning of year
|
|
|
4,088,874
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Options and warrants granted
|
|
|
2,392,384
|
|
|
|
4,088,874
|
|
|
Options and warrants exercised
|
|
|
—
|
|
|
|
—
|
|
|
Options and warrants forfeited or expired
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding at December 31, 2018
|
|
|
6,481,258
|
|
|
|
4,088,874
|
|
|
Exercisable at December 31, 2018
|
|
|
6,481,258
|
|
|
|
4,088,874
|
|
The following table summarizes information
about warrants as of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices
|
|
|
|
Number Outstanding
|
|
|
|
Weighted Average Remaining Contractual Life (in years)
|
|
|
|
Weighted Average Exercise Price
|
|
|
|
Number Exercisable
|
|
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.01 to $0.10
|
|
|
|
6,481,258
|
|
|
|
2.27
|
|
|
|
0.05
|
|
|
|
6,481,258
|
|
|
|
0.05
|
|
NOTE 16 – COMMITMENTS AND CONTINGENCIES
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 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.
The Company has a one-year lease for approximately 225 square
feet of office space located at 407 Lincoln Road, Miami Beach, FL 33139. The lease started May 1, 2017 and ended April 30, 2018.
The monthly rental payments are $600 per month. This lease was extended on a month to month basis through July 2018 with the same
terms. During 2018, the Company entered into a 2-year lease agreement for approximately 1,800 square feet of office space located
at 2300 NW 7th Place, Miami, FL 33127. The lease started July 12, 2018 and ends July 11, 2020. The monthly rental payments are
$1,495 per month for the first year and $1,548 for the second year.
Future minimum rentals on non-cancelable leases for the year ending
December 31, 2018 are as follows:
|
|
2019
|
|
|
$
|
35,869
|
|
|
|
2020
|
|
|
|
29,116
|
|
|
|
2021
|
|
|
|
1,657
|
|
|
|
Total
|
|
|
$
|
64,985
|
|
NOTE 17 – SUBSEQUENT EVENTS
On January 1, 2019, the Company engaged a current
member of the Board to perform accounting and tax services relating to 2018 and 2019 for the Company, payment for monthly services
is done in the Company’s common stock at a rate of $0.035 per share.
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 twenty trading day period,
including the date of conversion.
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. The lease began February 1, 2019
and ends January 31, 2021. The monthly rental payments are $1,601 per month for year 1 and $1,657 per month for year 2 of the lease.
On January 29, 2019, the Company issued 194,892
shares of common stock at a price of $0.05 per share as part of an October 1, 2018 amendment to a consulting services agreement.
On February 6, 2019, the Company issued 100,000
shares of common stock at a price of $0.05 per share for $5,000 cash.
On February 25, 2019, the Company issued 150,000
shares of common stock at a price of $0.04667 per share for $7,000 cash.
On March 1, 2019, the Company issued 50,000
shares of common stock at a price of $0.05 per share for $2,500 cash.
On March 12, 2019, the Company entered into
a secured promissory note for $50,000, due on July 12, 2019, bearing interest at 8% per annum and secured by 60 shares of Series
A preferred stock. This note was further extended through October 12, 2019 and paid in full on October 4, 2019.
On March 12, 2019, the Company filed an amendment
to their Articles of Incorporation to increase the number of authorized shares of Series A Preferred Stock from 100 shares to 200
shares.
On March 28, 2019, the Company issued 200,000
shares of common stock at a price of $0.025 per share for $5,000 cash.
On April 1, 2019, the Company issued 25,000
shares of common stock at a price of $0.04 per share for $1,000 cash.
On April 12, 2019, the Company entered into
a secured senior 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 conversion prices per share of $0.02.
On April 25, 2019, the Company entered into
two secured convertible promissory notes for $33,000 each totaling $66,000, due on April 25, 2020, bearing interest at 10% per
annum, each with an original issuance discount of $3,000 and secured by the assets of the Company. Both convertible promissory
notes contain a provision for conversion at the holder's option including accrued interest, into the Company's common stock at
a rate equal to the lower of $.11 per share or 50% of the lowest trading price during the last twenty trading day period, including
the date of conversion. In addition to the notes, the Company granted 75,000 warrants to purchase common stock at an exercise price
of $0.11 per share expiring on April 25, 2022.
On May 1, 2019, The Board of Directors approved
a bonus to three of the Company's executives in the form of 37 Series A Preferred Shares.
On May 2, 2019, the Company issued 5,714,286
shares of common stock at a price of $0.035 per share for $200,000 cash.
On May 13, 2019, the Company issued 142,857
shares of common stock at a price of $0.035 per share for $5,000 cash.
On May 16, 2019, the Company issued 5,714,286
shares of common stock at a price of $0.035 per share for $200,000 cash.
On May 21, 2019, the Company issued 2,857,143
shares of common stock at a price of $0.035 per share for $100,000 cash.
On May 22, 2019, the Company issued 285,714
shares of common stock at a price of $0.035 per share for $10,000 cash.
On June 1, 2019, the Company entered into a
six-month consulting agreement including a commencement bonus of 250,000 shares of common stock valued at $0.19 per share for a
total of $47,500. This agreement was terminated by the Company on August 8, 2019 with cause and common shares were not issued.
On June 26, 2019, the Company issued 571,429
shares of common stock at a price of $0.035 per share for $20,000 cash.
On June 30, 2019, the Company entered into
a six-month marketing services and social media marketing agreement including a commencement bonus of 1,250,000 share of common
stock valued at $0.135 per share for a total of $168,750 plus monthly payments of $6,500, totaling $39,000.
On July 8, 2019, the Company issued 285,714
shares of common stock at a price of $.035 per share of $10,000 cash.
On July 18, 2019, the Company issued 285,714
shares of common stock at a price of $.035 per share of $10,000 cash.
On July 19, 2019, the Company issued 4 shares
of Series A Preferred Stock for services rendered.
On August 10, 2019, the Company entered into
a twelve month public relations agreement including a commencement bonus of 100,000 shares of common stock and monthly payment
of between $4,000-$7,500 per month, totaling $71,250.
On August 16, 2019, the Company entered into
a secured convertible promissory note for $30,565, due on August 16, 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 twenty trading day period,
including the date of conversion.
On September 9, 2019, the Company issued 1,750,000
shares of common stock at a price of $.035 per share of $50,000 cash.
On September 16, 2019, the Company entered
into a secured convertible promissory note for $28,000, due on September 16, 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 twenty trading day
period, including the date of conversion.
On October 1, 2019, the Company entered into
subscription agreements with four shareholders to purchase 1.25 shares of Series A Preferred shares each at a price of $5,600 per
share, totaling 5 Series A Preferred Shares for $28,000.
On December 30, 2019, the Company entered into
an unsecured short-term promissory note for $10,000, due on January 29, 2019, bearing interest at 6% per annum.
On December 30, 2019, the Company entered into an unsecured short-term
promissory note for $5,000 with a member of the Board of Directors, due on January 29, 2019, bearing interest at 6% per annum
Management has evaluated all transactions and
events after the balance sheet date through the date on which these financials were available to be issued, and except as already
included in the notes to these consolidated financial statements, has determined that no additional disclosures are required.
