INTRODUCTORY STATEMENT

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

Cautionary Statement Concerning Forward-Looking Information

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

Use of GAAP Financial Measures

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

Off-Balance Sheet Arrangements

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

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

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

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





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Revenues

We had revenue of $63,585 and $33,349 for the three months periods ended September 30, 2019 and 2018, respectively. The change was mainly due to the increase in sales volume of wholesale coffee, services revenue, and parts.





Cost of Sales

Costs of sales was $47,961 for the three months period ended September 30, 2019 or 75.43% of revenues. The cost of sales was $12,340, or 37.00% of revenues for the three months period ended September 30, 2018. Cost of sales includes the costs directly attributable to revenue recognition, such as equipment costs, purchased costs, and payments to vendors. The increase in cost of sales was mainly due to the $14,666, $8,351, and $6,167 increases in cost of sales of equipment, cost of coffee sales, and delivery cost, respectively.





Operating Expenses

We had operating expenses of $825,633 for the three months period ended September 30, 2019 compared to operating expenses of $384,245 for the three months period ended September 30, 2018. The increase in operating expense was mainly due to $296,796 increase in advertising expense and $61,301 increase in professional fees, respectively.





Other Expenses/ Income

We had other income of $3,635,299 for the three months period ended September 30, 2019 compared to other expense of $989,383 for the for the three-month period ended September 30, 2018. The decrease in other expense was mainly due to the gain in the change in fair value of derivative liabilities of $3,847,256 as compared to the loss in change in the fair value of derivative liabilities of $818,267 during the three - months period ended September 30, 2018.".

Results of Operations for the Nine months ended September 30, 2019 and 2018





Revenues

We had revenue of $166,685 and $132,257 for the nine months periods ended September 30, 2019 and 2018, respectively. The change was mainly due to the $21,463 increase in sales of equipment.





Cost of Sales

Costs of sales was $125,816 for the nine months period ended September 30, 2019 or 75.48% of revenues. The cost of sales was $64,054, or 48.43% of revenues for the nine months period ended September 30, 2018. Cost of sales includes the costs directly attributable to revenue recognition, such as equipment costs, purchase costs, and payments to vendors. The increase in cost of sales was mainly due to the $21,724, $18,931, and $16,368 increase in cost of delivery and shipping, cost of equipment of sales, and cost of sales of coffee, respectively.





 Operating Expenses

We had operating expenses of $7,862,713 for the nine months period ended September 30, 2019 compared to operating expenses of $846,145 for the nine months period ended September 30, 2018. The increase in operating expense was mainly due to $5,708,190, $809,194, and $275,695 increases to stock-based compensation, professional fees, and advertising fee.





Other Expenses/ Income

We had other income of $917,373 for the nine months period ended September 30, 2019 compared to $2,166,531 for the nine months period ended September 30, 2018. The decrease in other income was mainly due to the change in fair value of derivative liabilities. For the nine months ended September 30, 2019 the Company recorded a loss in change in fair value of derivative liabilities of $1,548,691 compared to a gain in change in fair value of derivative liabilities of $2,768,315 recorded during the nine months ended September 30, 2018.



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Liquidity and Capital Resources





Operating Activities

Net cash used in operating activities was $628,553 for the nine months period ended September 30, 2019, compared to $256,578 during the same period in 2018. During the first three quarters of 2019, the net cash used in operating activities was due to net loss of $6,904,471, which was increased by $1,548,691 change in derivative liabilities, $7,676 change in accounts receivable, $18,765 change in inventory, $386 change in prepaid expense and other current assets, $21,249 to change in lease liability, $8,107 to change in payroll and related liabilities, and was offset by $7,068,344 in stock -based compensation, $41,235 in depreciation expense, $54 loss on sale of equipment, $954 in amortization of intangible asset, $394,390 in amortization of debt discount, $47,875 in default interest capitalized into convertible note payable, $21,606 in amortization of right-of-use assets for operating lease, $63,935 change in accounts payable and accrued expenses, $179,027 change in accrued interest, and $63,372 change in related party payroll and related.

During the nine months ended 2018, the net cash used in operating activities was due to net income of $1,388,589, which was increased by $11,547 in depreciation expense, $1,425 loss on sale of equipment, $1,803 in amortization of intangible assets, $2,000 loss on settlement of related party account payable, $512,774 in

amortization of debt discount, $70,000 convertible note issued for services rendered, $327,529 in stock based compensation, $1,009 change in account receivable, $10,252 change in inventory, $67,855 change in accounts payable and accrued expenses, $33,622 change in accrued interest, $90,258 change in related party payroll and related liabilities, and was offset by $2,768,315 change in derivative liabilities, $200 change in prepaid expenses and other current assets, and $6,726 change in payroll and related liabilities.





Investing Activities

During the first three quarters of 2019, net cash used in investing activities was $131,708 due to purchase of property and equipment for $135,298 offset by proceeds from sale of equipment for $3,590. During the first three quarters of 2018, net cash used in investing activities was $45,891 due to purchase of property and equipment for $57,281 offset by proceeds from sale of equipment for $11,390.





Financing Activities

During the first three quarters of 2019, net cash provided by financing activities was $1,022,020. During this period, the Company received $316,874 in proceeds from issuance of convertible notes payable, $16,400 in proceeds from loans payable from related parties, $40,355 in net proceeds from notes payable, $28,000 in proceeds from sale of preferred stock and $620,500 in proceeds from sale of common stock and $109 in repayments toward line of credit.

During the first three quarters of 2018, net cash provided by financing activities was $310,346. During this period, the Company received $118,000 in net proceeds from issuance of convertible notes payable, $100,000 in proceeds from sale of preferred stock and $93,100 in proceeds from sale of common stock and $157 in repayments toward line of credit.

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