NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

3 Months Ended

Mar. 31, 2019

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:

	Fair Value Measurements at March 31, 2019
	Total		Level 1		Level 2		Level 3
Convertible notes payable	$	12,488,225	$	—	$	—	$	12,488,225
Warrants	$	803,415	$	—	$	—	$	803,415

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

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

	As of March 31, 2019
	Conversion		Warrants
	Option		Warrants
Volatility		126.00%-486.65%		225.42%-748.56%
Dividend Yield		0%		0%
Risk-free rate		2.27%-2.44%		2.21%-2.40%
Expected term		0.11-1.58 years		0.87-3.98 years
Stock price	$	0.13	$	0.13
Exercise price	$	0.005-0.072	$	0.01-0.13
Derivative liability fair value	$	12,488,225	$	803,415

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

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

	March 31,		March 31,
Description	2019		2018
Beginning balance	$	12,244,301	$	4,960,740
Proceeds, payments and conversions		96,769		316,112
Total change in fair value		950,570		(3,503,047	)
Ending balance	$	13,291,640	$	1,773,805

LEASE

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:

	For three months ended
	March 31,
	2019			2018
Basic net income (loss)	$	(1,467,150	)	$	2,907,115
(Less) Back: Change in derivative liabilities		—			(3,503,047	)
Add Back: Amortization of Debt discount		—			266,269
Diluted Net Income (Loss)	$	(1,467,150	)	$	(329,663	)

Basic and dilutive shares
Weight average basic shares outstanding		75,442,347			64,505,244
Shares issuable from Convertible notes		—			25,161,417
Shares issuable from Warrants		—			2,646,577
Shares issuable from Series A Preferred Stock		—			131,171,374
Dilutive Shares		75,442,347			223,484,612

Income (Loss) Per Share:
Basic	$	(0.02	)	$	0.05
Diluted	$	(0.02	)	$	(0.00	)

NEW ACCOUNTING PRONOUNCEMENTS

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

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

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

GRAND HAVANA INC. 10-Q