Attached files
| file | filename |
|---|---|
| EX-32.2 - CERTIFICATION - GL Brands, Inc. | freedom_10q-ex3202.htm |
| EX-32.1 - CERTIFICATION - GL Brands, Inc. | freedom_10q-ex3201.htm |
| EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - GL Brands, Inc. | freedom_10q-ex3102.htm |
| EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - GL Brands, Inc. | freedom_10q-ex3101.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number: 000-55687
FREEDOM LEAF INC.
(Exact name of Registrant as specified in its charter)
| Nevada | 46-2093679 | |
| (State of incorporation) | (IRS Employer ID Number) |
3571 E. Sunset Road, Suite 420
Las Vegas, Nevada 89120
877-442-0411
(Registrant’s telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)
| Large accelerated filer o | Accelerated filer o | |
| Non-accelerated filer o | Smaller reporting company x | |
| Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of May 15, 2017, there were 105,171,035 shares of common stock, par value $0.001 per share issued, issuable, and outstanding.
FREEDOM LEAF, INC.
FORM 10-Q
MARCH 31, 2017
INDEX
| Page No. | |||
| PART I – FINANCIAL INFORMATION | 3 | ||
| Item 1. | Financial Statements | 4 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 19 | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 25 | |
| Item 4. | Controls and Procedures | 25 | |
| PART II – OTHER INFORMATION | 26 | ||
| Item 1. | Legal Proceedings | 26 | |
| Item 1A. | Risk Factors | 26 | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 26 | |
| Item 3. | Defaults Upon Senior Securities | 26 | |
| Item 4. | Mine Safety Disclosures | 26 | |
| Item 5. | Other Information | 26 | |
| Item 6. | Exhibits | 27 | |
| SIGNATURES | 28 | ||
| 2 |
PART I – FINANCIAL INFORMATION
TABLE OF CONTENTS
| 3 |
FREEDOM LEAF, INC.
| March 31, | June 30, | |||||||
| 2017 | 2016 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | 6,051 | $ | 1,758 | ||||
| Accounts receivable | – | 500 | ||||||
| Inventory | – | 2,465 | ||||||
| Other receivable | 401,685 | 2,399 | ||||||
| Total current assets | 407,736 | 7,122 | ||||||
| Intangible assets, net | 10,990 | 7,464 | ||||||
| Other assets | 233,375 | 3,584 | ||||||
| Total assets | $ | 652,101 | $ | 18,170 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
| Current liabilities | ||||||||
| Convertible notes payable, net of discount | $ | 38,112 | $ | 44,521 | ||||
| Notes payable | 2,450 | – | ||||||
| Accounts payable | 14,831 | 46,936 | ||||||
| Accounts payable to related parties | – | 10,000 | ||||||
| Accrued expenses | 117,585 | 29,853 | ||||||
| Accrued expenses to related parties | 158,405 | 45,000 | ||||||
| Derivative liabilities | 23,918 | – | ||||||
| Total current liabilities | 355,301 | 176,310 | ||||||
| Long-term liabilities | ||||||||
| Payable to related party | 203,190 | 126,250 | ||||||
| Total long-term liabilities | 203,190 | 126,250 | ||||||
| Total liabilities | 558,491 | 302,560 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders' equity (deficit) | ||||||||
| Preferred stock, $0.001 par value, 10,000,000 shares authorized Series A preferred stock, 1,000,000 shares authorized, 948,022 shares issued and outstanding at March 31, 2017 and June 30, 2016, respectively | 948 | 948 | ||||||
| Common stock, $0.001 par value, 500,000,000 shares authorized, 105,171,035 and 94,438,650 shares issued, issuable, and outstanding at March 31, 2017 and June 30, 2016, respectively | 105,171 | 94,439 | ||||||
| Additional paid-in capital | 4,536,837 | 3,800,699 | ||||||
| Unearned stock compensation | – | (170,137 | ) | |||||
| Accumulated deficit | (4,549,346 | ) | (4,010,338 | ) | ||||
| Total stockholders' equity (deficit) | 93,610 | (284,390 | ) | |||||
| Total liabilities and stockholders' equity (deficit) | $ | 652,101 | $ | 18,170 | ||||
See accompanying notes to unaudited condensed financial statements.
| 4 |
FREEDOM LEAF, INC.
(unaudited)
| For the three months ended | For the nine months ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Revenue, net | $ | 254,084 | $ | 68,762 | $ | 823,204 | $ | 100,412 | ||||||||
| Operating expenses | ||||||||||||||||
| Direct costs of revenue | 17,428 | 33,865 | 88,792 | 96,398 | ||||||||||||
| General and administrative (includes stock-based compensation of $83,750 and $160,000 for the three months ended March 31, 2017 and 2016, respectively, and $616,942 and $1,969,000 for the nine months ended March 31, 2017 and 2016, respectively.) | 247,578 | 462,296 | 1,171,906 | 2,453,314 | ||||||||||||
| Marketing and selling | 12,600 | 1,974 | 32,319 | 4,815 | ||||||||||||
| Operating loss | (23,522 | ) | (429,373 | ) | (469,813 | ) | (2,454,115 | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense | (6,026 | ) | (2,394 | ) | (11,276 | ) | (3,668 | ) | ||||||||
| Change in fair value of embedded conversion features | (2,905 | ) | – | (2,905 | ) | – | ||||||||||
| Beneficial conversion feature | 5,253 | (27,277 | ) | (55,014 | ) | (43,048 | ) | |||||||||
| Net loss | $ | (27,200 | ) | $ | (459,044 | ) | $ | (539,008 | ) | $ | (2,500,831 | ) | ||||
| Net loss per share - basic and diluted | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.01 | ) | $ | (0.01 | ) | ||||
| Weighted average number of shares outstanding - basic and diluted | 102,022,698 | 183,829,167 | 98,283,870 | 179,945,164 | ||||||||||||
See accompanying notes to unaudited condensed financial statements.
| 5 |
FREEDOM LEAF, INC.
For the Nine Months Ended March 31,
(unaudited)
| 2017 | 2016 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (539,008 | ) | $ | (2,500,831 | ) | ||
| Adjustments to reconcile net loss to net cash used in operations: | ||||||||
| Amortization of intellectual properties | 370 | 381 | ||||||
| Beneficial conversion feature | 55,014 | 43,048 | ||||||
| Issuance of common stock for services | 616,942 | 1,969,000 | ||||||
| Unearned stock compensation | – | (320,137 | ) | |||||
| Change in fair value of embedded conversion features | 2,905 | – | ||||||
| Bad debt expense | (1,500 | ) | – | |||||
| Issuance of warrants for services | – | 500,000 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 500 | (3,451 | ) | |||||
| Inventory | 2,465 | – | ||||||
| Other receivable | (399,286 | ) | – | |||||
| Other assets | (229,791 | ) | – | |||||
| Accounts payable | 77,353 | 38,078 | ||||||
| Accounts payable to related parties | (10,000 | ) | (27,466 | ) | ||||
| Accrued expenses | 87,732 | 964 | ||||||
| Accrued expenses to related parties | 113,405 | 81,026 | ||||||
| Net cash used in operating activities | (222,898 | ) | (219,388 | ) | ||||
| Cash flows used in investing activities | ||||||||
| Intangible asset acquired | (3,897 | ) | (3,235 | ) | ||||
| Net cash used in investing activities | (3,897 | ) | (3,235 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from capital contributed | 28,148 | 70,500 | ||||||
| Proceeds from related party | 76,940 | – | ||||||
| Proceeds from sale of common stock | 80,000 | 10,000 | ||||||
| Proceeds from notes payable | 46,000 | 142,500 | ||||||
| Net cash provided by financing activities | 231,088 | 223,000 | ||||||
| Net increase in cash | 4,293 | 377 | ||||||
| Cash at beginning of period | 1,758 | 901 | ||||||
| Cash at end of period | $ | 6,051 | $ | 1,278 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | – | $ | – | ||||
| Cash paid for taxes | $ | – | $ | – | ||||
| Non-cash investing and financing activities: | ||||||||
| Conversion of debt into common stock | $ | 115,065 | $ | – | ||||
| Conversion of common stock into licensing agreement | $ | 25,000 | $ | – | ||||
| Derivatives liability | $ | 23,918 | $ | – | ||||
See accompanying notes to unaudited condensed financial statements.
| 6 |
FREEDOM LEAF INC.
Notes to Condensed Financial Statements
March 31, 2017
(unaudited)
NOTE 1 – NATURE OF BUSINESS, PRESENTATION AND GOING CONCERN
Organization
Freedom Leaf Inc. (the “Company,” “we,” “us,” “our,” or “Freedom Leaf”) was incorporated in the State of Nevada on February 21, 2013, under the name of Arkadia International, Inc. The Company was originally engaged in the business of the acquisition of in demand equipment, cars, and goods with the intent to resale these in the U.S. territory or export to overseas countries.
On October 3, 2014, the Company experienced a change in control. Richard C. Cowan acquired a majority of the issued and outstanding common stock of the Company in accordance with stock purchase agreements by and between Mr. Cowan and Vladimir and Galina Shekhtman (“Sellers”). On the closing date, October 3, 2014, pursuant to the terms of the agreements with the Sellers, Cowan purchased from the Sellers 6,950,100 shares of the Company’s outstanding restricted common stock for $100,000, representing 93% of the then-outstanding common stock of the Company.
On November 6, 2014, the Company merged with Freedom Leaf Inc., a private Nevada corporation (“Private Company”). The Company changed its name from Arkadia International, Inc., to Freedom Leaf Inc. As a result of the merger, the Private Company was dissolved. See Note 2 for related discussion.
For financial reporting purposes, the acquisition of the Private Company via the merger transaction represents a "reverse merger" rather than a business combination, and Private Company is deemed to be the accounting acquirer in the transaction. The merger is being accounted for as a reverse-merger and recapitalization. Private Company is treated as the acquirer for financial reporting purposes, and the predecessor public company (Freedom Leaf Inc., f/k/a Arkadia International, Inc.) is treated as the acquired company. Consequently, the assets and liabilities and the operations that are reflected in the historical financial statements of the Company prior to the merger are those of the Private Company, and were recorded at the historical cost basis of the Private Company, and the financial statements after completion of the merger include the assets and liabilities of both the predecessor public company and Private Company, the historical operations of Private Company, and the operations of both companies from the date of the merger.
Nature of Operations
The Company is focused on being the premium national and international news source for the Cannabis/Industrial Hemp industry. Through our online and print media channels, our efforts are in dissemination of current legislation and legal news, arts and entertainment. Additional websites and online partnerships are in the development stage that are intended to give the Freedom Leaf brand greater exposure. The Company generates revenue from paid advertising on both online and print publications as well as consulting fees and incubator fees for companies that want to participate in the Cannabis/Industrial Hemp industry. Another segment of income generation by the Company is brand management for both profit and non-profit organizations. An example is the contract with NORML which was entered into on May 26, 2015. This contract authorizes the Company to undertake all of the commercial activities of NORML, earning income for both the non-profit and the Company. The Company also sells licenses to use the Freedom Leaf brand in different countries and states. We have entered into two license agreements: for Spain and Portugal, for The Netherlands, and for Florida.
Basis of Presentation
The accompanying unaudited condensed financial statements of Freedom Leaf Inc. have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 8 of Regulation S-X. The results of operations for the interim period ended March 31, 2017 shown in this report are not necessarily indicative of results to be expected for the full fiscal year ending June 30, 2017. In the opinion of the Company’s management, the information contained herein reflects all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the Company’s results of operations, financial position and cash flows. The unaudited interim financial statements should be read in conjunction with the audited financial statements in the Company’s Form 10-K for the year ended June 30, 2016 filed on October 7, 2016 and Management’s Discussion and Analysis of Financial Condition and Results of Operations therein.
| 7 |
FREEDOM LEAF INC.
Notes to Condensed Financial Statements
March 31, 2017
(unaudited)
Impairment of Long-Lived Assets
The Company accounts for long-lived assets in accordance with the provisions of Statement of Financial Accounting Standards ASC 360-10, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in accordance with generally accepted accounting principles. For certain of our financial instruments, including cash, accounts payable, accrued expenses, and short term loans the carrying amounts approximate fair value due to their short maturities.
We follow accounting guidance for financial and non-financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. This guidance does not apply to measurements related to share-based payments. This guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.
We currently measure and report at fair value our intangible assets (due to our impairment analysis) and derivative liabilities. The fair value of intangible assets has been determined using the present value of estimated future cash flows method. The fair value of derivative liabilities is measured using the Black-Scholes option pricing method. The following table summarizes our non-financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2017:
| Balance at December 31, | Quoted Prices in Active Markets for Identical | Significant Other Observable | Significant Unobservable | |||||||||||||
| 2016 | Assets | Inputs | Inputs | |||||||||||||
| (Level 1) | (Level 2) | (Level 3) | ||||||||||||||
| Assets: | ||||||||||||||||
| Trademarks | $ | 12,244 | $ | – | $ | – | $ | 12,244 | ||||||||
| Total Financial Assets | $ | 12,244 | $ | – | $ | – | $ | 12,244 | ||||||||
Following is a summary of activity through March 31, 2017 of the fair value of intangible assets valued using Level 3 inputs:
| Accumulated | ||||||||||||
| Asset | Amortization | Net | ||||||||||
| Intangibles - June 30, 2016 | $ | 8,148 | $ | (684 | ) | $ | 7,464 | |||||
| Additions | 4,096 | – | 4,096 | |||||||||
| Amortization | – | (570 | ) | (570 | ) | |||||||
| Intangibles - March 31, 2017 | $ | 12,244 | $ | (1,254 | ) | $ | 10,990 | |||||
| 8 |
FREEDOM LEAF INC.
Notes to Condensed Financial Statements
March 31, 2017
(unaudited)
The Company evaluates its convertible debt, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for. The result of this accounting treatment is that under certain circumstances the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Equity instruments that are initially classified as equity that become subject to reclassification under this accounting standard are reclassified to liability at the fair value of the instrument on the reclassification date.
The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis at March 31, 2017:
| Balance at March 31, 2017 | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||||||
| (Level 1) | (Level 2) | (Level 3) | ||||||||||||||
| Liabilities: | ||||||||||||||||
| Derivative Liabilities | $ | 23,918 | $ | – | $ | – | $ | 23,918 | ||||||||
| Total Financial Assets | $ | 23,918 | $ | – | $ | – | $ | 23,918 | ||||||||
Following is a summary of activity through March 31, 2017 of the fair value of derivative liabilities valued using Level 3 inputs:
| Balance at June 30, 2016 | $ | – | ||
| Note inception date fair value | 21,013 | |||
| Change in fair value during 2017 | 2,905 | |||
| Balance at March 31, 2017 | $ | 23,918 |
Stock-Based Compensation
The Company accounts for stock-based instruments issued to employees in accordance with ASC Topic 718. ASC Topic 718 requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity based compensation issued to employees. The value of the portion of an award that is ultimately expected to vest is recognized as an expense over the requisite service periods using the straight-line attribution method. The Company accounts for non-employee share-based awards in accordance with the measurement and recognition provisions ASC Topic 505-50. The Company estimates the fair value of stock options at the grant date by using the Black-Scholes option-pricing model.
Going Concern
The accompanying financial statements and the factors within it, have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business and the substantial doubt of the Company to continue as a going concern for a reasonable period of time. The Company sustained net losses of $539,008 and cash used in operating activities of $222,898 for the nine months ended March 31, 2017. The Company had working capital, stockholders’ equity and accumulated deficit of $52,435, $93,610 and $4,549,346, respectively, at March 31, 2017. The Company’s continuation as a going concern is dependent upon its ability to generate revenues and its ability to continue receiving investment capital and loans from third parties to sustain its current level of operations. The Company is in the process of securing working capital from investors for common stock, convertible notes payable, and/or strategic partnerships. No assurance can be given that the Company will be successful in these efforts. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates in the accompanying financial statements include the amortization period for intangible assets, valuation and impairment valuation of intangible assets, depreciable lives of the web site and property and equipment, valuation of warrants and beneficial conversion feature debt discounts, valuation of derivatives, valuation of share-based payments and the valuation allowance on deferred tax assets.
| 9 |
FREEDOM LEAF INC.
Notes to Condensed Financial Statements
March 31, 2017
(unaudited)
Reclassifications
Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported losses, total assets, or stockholders’ equity as previously reported.
Development Stage Company
Since inception, the Company became a “development stage company” as defined in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 915 “Development Stage Entities.” On June 10, 2014, the FASB issued authoritative guidance which eliminates the concept of a development stage entity. The incremental reporting requirements for presenting the development stage operations and cash flows since inception will no longer apply to development stage entities. The amendments of Topic 915 are to be applied retrospectively and are effective for fiscal years beginning after December 15, 2014. The Company has elected early adoption of this guidance effective with the filing of its previous quarterly report.
On November 6, 2014, the Company merged with Freedom Leaf Inc., a private Nevada corporation. The Company changed its name from Arkadia International, Inc., to Freedom Leaf Inc. As a result of the merger, the private company was dissolved. See Note 2 for related discussion.
Net Earnings (Loss) Per Share
In accordance with ASC 260-10, “Earnings Per Share,” basic net earnings (loss) per common share is computed by dividing the net earnings (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share are computed using the weighted average number of common and dilutive common stock equivalent shares outstanding during the period. Dilutive common stock equivalent shares which may dilute future earnings per share consist of convertible notes and warrants convertible into 6,172,169 common shares as of March 31, 2017. Equivalent shares are not utilized when the effect is anti-dilutive.
Segment Information
In accordance with the provisions of ASC 280-10, “Disclosures about Segments of an Enterprise and Related Information,” the Company is required to report financial and descriptive information about its reportable operating segments. The Company does not have any operating segments as of March 31, 2017.
Effect of Recent Accounting Pronouncements
The Company reviews new accounting pronouncements as issued. No new pronouncements had any material effect on these unaudited financial statements. The accounting pronouncements issued subsequent to the date of these unaudited financial statements that were considered significant by management were evaluated for the potential effect on these unaudited financial statements. Management does not believe any of the subsequent pronouncements will have a material effect on these unaudited financial statements as presented and does not anticipate the need for any future restatement of these unaudited financial statements because of the retro-active application of any accounting pronouncements issued subsequent to March 31, 2017 through the date these unaudited financial statements were issued.
Revenue Recognition
The Company recognizes revenue for our services in accordance with ASC 605-10, “Revenue Recognition in Financial Statements.” Under these guidelines, revenue is recognized on transactions when all of the following exist: persuasive evidence of an arrangement did exist, delivery of service has occurred, the sales price to the buyer is fixed or determinable and collectability is reasonably assured. The Company has no revenue streams at this time.
Income Taxes
The Company adopted the provisions of ASC 740-10, “Accounting for Uncertain Income Tax Positions.” When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above should be reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company believes its tax positions are all highly certain of being upheld upon examination. As such, the Company has not recorded a liability for unrecognized tax benefits. As of March 31, 2017, tax years 2012 - 2016 remain open for IRS audit. The Company has received no notice of audit from the IRS for any of the open tax years.
| 10 |
FREEDOM LEAF INC.
Notes to Condensed Financial Statements
March 31, 2017
(unaudited)
NOTE 2 – ENTRY INTO A DEFINITIVE AGREEMENT
Freedom Leaf Inc. f/k/a Arkadia International, Inc., a Nevada corporation and the public company (the “Company,” “Public Company,” “we,” “us,” “our”) entered into a merger agreement with a private Nevada corporation, Freedom Leaf Inc. (the “Private Company”). Prior to the reverse merger, Richard C. Cowan, the officer and director of the Public Company, had acquired the majority of its outstanding common stock. Clifford J. Perry, the Private Company’s sole officer and director pre-merger (“Perry”), was the owner of record of all of the outstanding common shares of the Private Company (the “Private Company Stock”) prior to the merger. Pursuant to the merger, the Private Company was merged into the Public Company, and Perry, the Private Company’s shareholder, received 83,401.2 shares of Public Company common stock for each share of Private Company stock pre-merger, or 83,401,200 total shares of the Company’s common stock.
The closing of the merger was conditioned upon certain, limited customary representations and warranties, as well as the satisfaction or waiver of specified conditions to closing. As the parties satisfied all of the closing conditions, we filed Articles of Merger in Nevada consummating the merger, and shareholders of the Private Company pre-merger (Perry) owned approximately 48.1% of our issued and outstanding common stock post-merger. Following the Share Exchange, the Company focused on pursuing Private Company’s historical businesses.
The foregoing description of the merger agreement and transaction does not purport to be complete and is qualified in its entirety by the merger agreement, a copy of which has been filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q/A for the period ended December 31, 2014, which is incorporated herein by reference.
Accounting Treatment of the Merger
For financial reporting purposes, the merger represents a “reverse merger” rather than a business combination, and Private Company is deemed to be the accounting acquirer in the transaction. The merger is being accounted for as a reverse-merger and recapitalization. Private Company is the acquirer for financial reporting purposes and the Public Company (Freedom Leaf Inc., f/k/a Arkadia International, Inc.) is the acquired company. Consequently, the assets and liabilities and the operations that will be reflected in the historical financial statements prior to the merger will be those of the Private Company and will be recorded at the historical cost basis of the Private Company, and the financial statements after completion of the merger will include the assets and liabilities of the Public Company and the Private Company, the historical operations of the Private Company and operations of both companies from the closing date of the Merger.
Licensing Rights
On February 8, 2016, the Company and Freedom Leaf Netherlands, B.V. (“FLNL”), a company located in the Netherlands, executed a Memorandum of Understanding (“MOU”), wherein the Company granted FLNL a right of first refusal to license certain rights from the Company described below in exchange for a payment of $25,000, and the parties agreed to negotiate a definite license agreement for such rights with the terms of the definitive agreement incorporating the material terms set forth in the MOU. Such rights include FLNL’s rights to use various trademarks of the Company, primarily “Freedom Leaf,” and other related rights, for use in the Netherlands by FLNL, including FLNL’s right to publish a Freedom Leaf magazine in the Netherlands, sell Freedom Leaf products and perform other activities related to the business of the Company. FLNL is a shareholder (common stock and warrants to purchase additional common stock) of the Company. On December 15, 2016, the Company and FLNL executed the license agreement. The agreement provided for a licensing fee of $250,000 with a payment schedule as follows: $70,869 which has been paid from the date of the MOU until the date of the agreement; $25,000 payment every two months, commencing on April 10, 2017 with the last payment on April 10, 2018, and a final payment of $4,131 on June 10, 2018. As the Company is allowing for progress payments, the balance is shown net of imputed interest on the balance sheet. The Company also provided FLNL with warrants to purchase up to 1,000,000 shares of common stock. The warrants have an exercise price of $0.05. The warrants can be exercised as follows: 250,000 warrants between June 2017 and August 2017; 250,000 warrants between September 2017 and November 2017; 250,000 warrants between December 2017 and February 2018; and 250,000 warrants between March 2018 and May 2018. See Note 6.
On December 15, 2016, the Company and Freedom Leaf Iberia, B.V. (“FLI”), a company incorporated under the laws of the Netherlands, executed a license agreement. The licensing agreement provides FLI the distribution rights to the Company’s magazine and other “Freedom Leaf” branded merchandise. The territory of the agreement is Spain and Portugal. The agreement provided for a license fee of $250,000 payable to the Company. The payment schedule provides for a $25,000 payment every two months, beginning on April 20, 2017, concluding on April 20, 2018, with a final payment of $75,000 on June 20, 2018. As the Company is allowing for progress payments, the balance is shown net of imputed interest on the balance sheet. The Company also provided FLI with warrants to purchase up to 1,000,000 shares of common stock. The warrants have an exercise price of $0.05. The warrants can be exercised as follows: 250,000 warrants between June 2017 and August 2017; 250,000 warrants between September 2017 and November 2017; 250,000 warrants between December 2017 and February 2018; and 250,000 warrants between March 2018 and May 2018. See Note 6.
| 11 |
FREEDOM LEAF INC.
Notes to Condensed Financial Statements
March 31, 2017
(unaudited)
On March 31, 2017, the Company entered into a license agreement with BBD Healthcare Strategies, LLC, a Florida limited liability company (“BBDHS”), pursuant to which BBDHS received distribution rights to the Company’s magazine and other “Freedom Leaf” branded merchandise for the State of Florida, in consideration of (1) a license fee of $250,000, paid $25,000 at execution, and $25,000 due August 2017, October 2017, December 2017, February 2018, March 2018, April 2018, May 2018 and concluding June 2018, with a final payment of $50,000, (2) ongoing royalties of 5% for sales of Company merchandise purchased from the Company, (3) ongoing royalties of 10% for sales of Company merchandise purchased from a third party supplier, and (4) ongoing royalties of 33% for Company seminars and conferences. As the Company is allowing for progress payments, the balance is shown net of imputed interest on the balance sheet. The Company also provided BBDHS with warrants to purchase 1,200,000 shares of Company common stock at an exercise price of $0.05, exercisable as follows: 240,000 shares between September 1, 2017 and October 31, 2017, 240,000 shares between November 1, 2017 and December 31, 2017, 240,000 shares between January 1, 2018 and February 28, 2018, 240,000 shares between March 1, 2018 and May 30, 2018, and 240,000 shares between June 1, 2018 and July 30, 2018. See Note 6.
Incubation Agreement
On January 18, 2016, the Company and Plants to Paper, LLC (“PTP”), a New Jersey limited liability company, executed an Incubation Agreement. PTP owned the patent pending application 62/245,153 (the “Patent”) with the title being “Rolling Papers and Blunt Wraps made from 100% Marijuana.” PTP agreed to transfer its ownership rights in the patent application to the Company, as well as PTP’s Medical Marijuana / Cannabis / Hemp Industry Incubator program. The Company agreed to supply management services and to fund the early stage development of PTP. The Incubation Agreement is for a period of twelve months. PTP will provide the Company with 20% of the outstanding membership shares of PTP in exchange for its services. The costs of patent registrations in the United States and other countries will be the liability of PTP. As of March 31, 2017, PTP had no activity. On February 1, 2017, the Agreement was modified for the following items: a) to provide 25% of the outstanding membership shares of PTP; b) require that the Patent be assigned to PTP; and c) acknowledge that the ownership rights have not been transferred to the Company as of February 1, 2017.
Sales Representation Contract
On December 22, 2016, the Company and NuAxon BioScience, Inc. (“NuAxon”), a Delaware corporation, executed a Sales Representation Contract. NuAxon is a manufacturer and distributor for bulk extracts, Rebel Herbs brand products, and Intelligence Tree brand products. The contract appoints the Company as NuAxon’s sales representative worldwide. The contract is for a period of one year and shall automatically renew for successive terms of the same duration. The contract provides a commission for sales by the Company at rates as follows: a) bulk extracts is 9% with a 2% bonus on annual sales above $500,000; b) Rebel Herbs and Intelligence Tree brand products is 10% with a 3% bonus on annual sales above $1,000,000. As of March 31, 2017, there have been no sales or commissions earned.
Equipment Sales Representative Contract
On December 22, 2016, the Company and NuAxon executed an Equipment Sales Representative Contract. NuAxon is a manufacturer and distributor for extraction equipment. The contract appoints the Company as NuAxon’s equipment sales representative worldwide. The contract is for a period of one year and shall automatically renew for successive terms of the same duration. The contract provides a commission for sales by the Company at various rates ranging from 3% to 10%, dependent on the cumulative annual sales. On March 15, 2017, the Company entered into an Exclusive Distribution Agreement with NuAxon to sell NuAxon’s CO2 extraction equipment pursuant to which the Company would be paid increasing commissions depending on gross sales of the equipment. On March 16, 2017, the Company issued a purchase order (the “Purchase Order”) to NuAxon to purchase extraction equipment for one of the Company’s customers. As of March 31, 2017, there were sales of $210,000.
NOTE 3 – COMMITMENTS AND CONTINGENCIES
Legal Matters
From time to time, the Company may become subject to legal proceedings, claims and litigation arising in the ordinary course of its business. The Company is not currently a party to any material legal proceedings, nor is the Company aware of any other pending or threatened litigation that would have a material adverse effect on the Company’s business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.
Lease Commitment
We lease approximately 2,800 square feet of office space in Las Vegas, Nevada, pursuant to a lease that will expire on December 31, 2019. This facility serves as our corporate headquarters. After December 31, 2017, the Company has the option to opt out of the lease.
| 12 |
FREEDOM LEAF INC.
Notes to Condensed Financial Statements
March 31, 2017
(unaudited)
Future minimum lease payments under these leases are as follows:
| 2017 | $ | 5,982 | ||
| 2018 | 23,928 | |||
| 2019 | 18,943 | |||
| Total | $ | 48,853 |
Rent expense for the nine months ended March 31, 2017 and 2016 was $28,021 and $31,721, respectively.
NOTE 4 – RELATED PARTIES
Richard C. Cowan (“Cowan”), a director and former officer of the Company, has payables and accruals due to him of $203,190 and $100,000 as of March 31, 2017 and June 30, 2016, respectively. The payable, as agreed upon, is greater than one year, without any other set terms for repayment. Imputed interest is immaterial.
Clifford J. Perry (“Perry”), Chief Executive officer, Chief Financial Officer, and a director of the Company, has payables and accruals due to him of $116,405 and $34,500 as of March 31, 2017 and June 30, 2016, respectively. Imputed interest is immaterial.
Raymond P. Medeiros (“Medeiros”), a director of the Company, has payables and accruals due to him of $42,070 and $10,500 as of March 31, 2017 and June 30, 2016, respectively. Imputed interest is immaterial.
A shareholder of the Company is owed $0 and $10,000 as of March 31, 2017 and June 30, 2016, respectively.
On May 25, 2016, Perry converted 68,401,200 shares of common stock into 684,012 shares of Series A preferred stock. See Note 6.
On May 25, 2016, Cowan converted 26,401,000 shares of common stock into 264,010 shares of Series A preferred stock. See Note 6.
On June 30, 2016, Cowan converted $225,892 of payables and accruals into 2,226,154 shares of common stock. The conversion was at a 50% discount or $0.09 per share. As of March 31, 2017, these shares had not been issued and were recorded as issuable. The shares were issued in May 2017. See Note 6.
NOTE 5 – CONVERTIBLE NOTES PAYABLE, NET OF PREMIUMS AND NOTES PAYABLE
Convertible notes payable, all classified as current at March 31, 2017, consist of the following:
| Convertible notes, net of discounts and notes payable | ||||||||||||||||||||||||
| March 31, 2017 | June 30, 2016 | |||||||||||||||||||||||
| Principal, | Principal, | |||||||||||||||||||||||
| Debt | net of | Debt | net of | |||||||||||||||||||||
| Principal | Discounts | Discounts | Principal | Discounts | Discounts | |||||||||||||||||||
| Swiss Allied Trust, Inc. (a) | $ | – | $ | – | $ | – | $ | 50,000 | $ | (24,794 | ) | $ | 25,206 | |||||||||||
| Swiss Allied Trust, Inc. (a) | – | – | – | 50,000 | (30,685 | ) | 19,315 | |||||||||||||||||
| Adar Bays, LLC (a) | 25,000 | (4,799 | ) | 20,201 | – | – | – | |||||||||||||||||
| Eagle Equities, LLC (a) | 25,000 | (7,089 | ) | 17,911 | – | – | – | |||||||||||||||||
| Total | $ | 50,000 | $ | (11,888 | ) | $ | 38,112 | $ | 100,000 | $ | (55,479 | ) | $ | 44,521 | ||||||||||
(a) Convertible
On July 7, 2015, the Company executed a convertible promissory note for $5,000 with Bruce Perlowin. The note is for one year, 12% interest rate, and convertible at $0.10 per share. The current price at that date was $0.085, which is less than the conversion price. The stock price for our common stock as of September 30, 2015 was $0.40. Our common stock is thinly traded therefore our price, as management has determined, is not indicative of our valuation. In October 2015, the Company issued common stock for services to unrelated parties and the common stock was values at $0.20, therefore, the $0.20 was used for valuation purposes for this note. A beneficial conversion feature of $5,000 was recorded and subsequently amortized. The Company has recorded accrued interest of $467 as of March 31, 2017. On April 15, 2016, Mr. Perlowin converted the principal of this promissory note into 50,000 shares of common stock (see Note 6). The accrued interest was not converted.
| 13 |
FREEDOM LEAF INC.
Notes to Condensed Financial Statements
March 31, 2017
(unaudited)
On August 12, 2015, the Company executed a convertible promissory note for $5,000 with Bruce Perlowin. The note is for one year, 12% interest rate, and convertible at $0.10 per share. The current price at that date was $0.10, which is less than the conversion price. The stock price for our common stock as of September 30, 2015 was $0.40. Our common stock is thinly traded therefore our price, as management has determined, is not indicative of our valuation. In October 2015, the Company issued common stock for services to unrelated parties and the common stock was values at $0.20, therefore, the $0.20 was used for valuation purposes for this note. A beneficial conversion feature of $5,000 was recorded and subsequently amortized. The Company has recorded accrued interest of $408 as of March 31, 2017. On April 15, 2016, Mr. Perlowin converted the principal of this promissory note into 50,000 shares of common stock (see Note 6). The accrued interest was not converted.
On August 20, 2015, the Company executed a convertible promissory note for $12,500 with Svetlana Ogorodnikova. The note matures on February 19, 2016, 12% interest rate, and convertible at $0.10 per share. The current price at that date was $0.085, which is less than the conversion price. The stock price for our common stock as of December 31, 2015 was $0.40. Our common stock is thinly traded therefore our price, as management has determined, is not indicative of our valuation. In October 2015, the Company issued common stock for services to unrelated parties and the common stock was values at $0.20, therefore, the $0.20 was used for valuation purposes for this note. A beneficial conversion feature of $12,500 was recorded and subsequently amortized. The Company has recorded accrued interest of $986 as of March 31, 2017. On February 19, 2016, Ms. Ogorodnikova granted the Company an extension on the due date to June 30, 2016. On April 15, 2016, Ms. Ogorodnikova converted the principal of this promissory note into 125,000 shares of common stock (see Note 6). The accrued interest was not converted.
On December 14, 2015, the Company executed a convertible promissory note for $100,000 with Swiss Allied Trust, Inc. (“Swiss Allied”). The note has two funding dates; December 14, 2015 and January 15, 2016, each for $50,000. On January 26, 2016, the Company received $50,000 from Swiss Allied as the second tranche of the convertible promissory note. The term on each installment is for one year from the date of receipt of each tranche. Each installment is recorded and presented separately. For the initial tranche of $50,000, the Company recorded a beneficial conversion feature of $50,000 and, as of March 31, 2016, $14,795 was amortized. A beneficial conversion feature of $50,000 was recorded and, as of March 31, 2016, $8,904 has been amortized. For the initial tranche, the Company has recorded accrued interest of $3,211 as of March 31, 2017. For the second tranche, the Company has recorded accrued interest of $2,739 as of March 31, 2017. The beneficial conversion features were calculated on the conversion price of $0.005, as further discussed below. The Company maintained the common stock to be valued at $0.20, as discussed in prior notes, as the Company’s common stock continues to be thinly traded. Additionally, the Company issued Swiss Allied four warrants as an incentive to the note, each for 20,000,000 shares of the Company’s common stock, for a total of 80,000,000 warrants. On March 10, 2017, Swiss Allied and the Company entered into an agreement to convert all outstanding balances due to Swiss Allied into 3,000,000 shares of common stock.
The four warrants, each for 20,000,000 shares of common stock, mature on March 31, 2016, June 30, 2016, October 31, 2016, and December 31, 2016, respectively. If Swiss Allied exercises all warrants, the Company would receive an additional $400,000 for said shares of common stock. If Swiss Allied does not exercise all 80,000,000 warrants, by the maturation dates, as described herein, the exercise price shall be adjusted to $0.06, an increase of $0.055 per share as a penalty, which is payable to the Company at the time Swiss Allied requests to have the Rule 144 restriction removed. The interest rate for each loan tranche is 8% and is accrued with a payment date of December 15, 2016 for the first tranche and January 15, 2017 for the second tranche. The conversion price for the $100,000, which may happen any time prior to December 14, 2016, shall be the greater of $0.03 or 50% of the lowest closing price on the primary trading market on which the Company’s common stock is quoted for the five trading days immediately prior to, but not including, the conversion date, assuming that Swiss Allied has not exercised all 80,000,000 warrants for common stock. The conversion price for the $100,000, assuming that Swiss Allied has exercised all 80,000,000 warrants for common stock, shall be $0.005 per share. Swiss Allied has a right of first refusal on any future funding to the Company. Swiss Allied has the right to name a party to serve as a member of the Company’s board of directors if Swiss Allied owns at least 40,000,000 shares of the Company’s common stock. If Swiss Allied owns at least 80,000,000 shares of the Company’s common stock, they have the right to name two parties to the Company’s board of directors. The two directors will remain as long as Swiss Allied owns 55,000,000 shares of the Company’s common stock. As of March 31, 2016, Swiss Allied had not exercised the first warrant therefore, the warrant had expired as of said date. On April 8, 2016, Swiss Allied converted warrants for 4,800,000 shares of common stock in exchange for $24,000. The Company agreed to amend the obligations of Swiss Allied to accommodate the extension of the warrant until June 5, 2016. As of June 30, 2016, the warrant had expired.
On October 10, 2016, the Company executed a collateralized secured promissory note with Adar Bays, LLC (“Adar”) for $25,000. The Company netted $23,000 due to legal fees of $2,000. The note has a conversion discount of 45% based on the lowest closing price of the 20 days prior to conversion. The Company recorded a debt discount of $25,000 and as of March 31, 2017, had recorded $11,712 of amortization. The note matures on October 10, 2017 and bears interest at 8%. As of March 31, 2017, the accrued interest was $1,320. On April 6, 2017, the Company prepaid Adar $38,400 for full settlement of this note (see Note 8).
| 14 |
FREEDOM LEAF INC.
Notes to Condensed Financial Statements
March 31, 2017
(unaudited)
On November 1, 2016, the Company executed a collateralized secured promissory note with Eagle Equities, LLC (“Eagle”) for $25,000. The Company netted $23,000 due to legal fees of $2,000. The note has a conversion discount of 45% based on the lowest closing price of the 20 days prior to conversion. The Company recorded a debt discount of $25,000 and as of March 31, 2017, had recorded $10,274 of amortization. The note matures on November 1, 2017 and bears interest at 8%. As of March 31, 2017, the accrued interest was $1,100. On April 26, 2017, Eagle sold its convertible note to PureEnergy 714 LLC with no change in terms (see Note 8).
NOTE 6 – STOCKHOLDERS’ DEFICIT
Series A Preferred Stock
On May 24, 2016, the Board of Directors of the Company authorized amending the Company’s Articles of Incorporation to authorize 10,000,000 shares of “blank check” preferred stock and designating 1,000,000 of the shares as Series A Preferred Stock. Each share of the Series A Preferred Stock is entitled to 500 votes and is convertible into 100 shares of common stock.
On May 25, 2016, Perry converted 68,401,200 shares of common stock into 684,012 shares of Series A preferred stock. See Note 4.
On May 25, 2016, Cowan converted 26,401,000 shares of common stock into 264,010 shares of Series A preferred stock. See Note 4.
Common Stock
The Company was authorized to issue up to 75,000,000 shares of common stock, par value $0.001 per share. On January 21, 2015, the Company increased its authorized capital to 500,000,000 shares of common stock. Each outstanding share of common stock entitles the holder to one vote per share on all matters submitted to a stockholder vote. All shares of common stock are non-assessable and non-cumulative, with no pre-emptive rights.
On November 6, 2014, the Company merged with Freedom Leaf Inc., a private Nevada corporation (see Note 1). After the completion of the merger, there were 173,401,200 shares of common stock issued, issuable and outstanding.
On November 10, 2014, the Company issued 780,000 shares of common stock to Vincent Moreno for consulting services from November 10, 2014 through April 10, 2015. The Company’s stock is thinly traded therefore the valuation of the issuance was based on the value of the services, which was $12,500.
On October 12, 2015, the Company issued 1,700,000 shares of common stock to various employees as part of compensation. The current price at that date was $0.20. Our common stock is thinly traded therefore our price, as management has determined, may not be indicative of our valuation. Previously, the Company issued common stock for services to unrelated parties and the common stock was valued at $0.20, therefore, the stock was valued at $0.20 or $340,000 was recorded.
On October 12, 2015, the Company issued 2,000,000 shares of common stock to Raymond Medeiros, a director of the Company, for his past services. The current price at that date was $0.20. Our common stock is thinly traded therefore our price, as management has determined, may not be indicative of our valuation. Previously, the Company issued common stock for services to unrelated parties and the common stock was valued at $0.20, therefore, the stock was valued at $0.20 or $400,000 was recorded.
On October 12, 2015, the Company issued 3,000,000 shares of common stock to Raymond Medeiros, a director of the Company, for his future services. The issuance will vest over a period of twelve months. The current price at that date was $0.20. Our common stock is thinly traded therefore our price, as management has determined, may not be indicative of our valuation. Previously, the Company issued common stock for services to unrelated parties and the common stock was valued at $0.20, therefore, the stock was valued at $0.20 or $600,000 was recorded.
On October 12, 2015, the Company issued 2,010,000 shares of common stock to various subcontractors for their services. The current price at that date was $0.20. Our common stock is thinly traded therefore our price, as management has determined, may not be indicative of our valuation. Previously, the Company issued common stock for services to unrelated parties and the common stock was valued at $0.20, therefore, the stock was valued at $0.20 or $402,000, was recorded.
In October 2015, the Company issued 50,000 shares of common stock for services to unrelated parties and the common stock was valued at $0.20, therefore, the stock was valued at $0.20 or $10,000, was recorded.
| 15 |
FREEDOM LEAF INC.
Notes to Condensed Financial Statements
March 31, 2017
(unaudited)
On November 2, 2015, the Company issued 125,000 shares of common stock to various subcontractors for their services. The current price at that date was $0.45. Our common stock is thinly traded therefore our price, as management has determined, may not be indicative of our valuation.
On February 2, 2016, Dobrucki exercised a warrant for 500,000 shares of common stock for $10,000, the exercise price of the warrants at $0.02 per share.
On February 15, 2016, the Company issued 750,000 shares of common stock to various subcontractors for their services. The current price at that date was $0.227. Our common stock is thinly traded therefore our price, as management has determined, may not be indicative of our valuation. Previously, the Company issued common stock for services to unrelated parties and the common stock was valued at $0.20, therefore, the stock was valued at $0.20, therefore, the issuance on was valued at $150,000, was recorded.
On February 15, 2016, the Company issued 50,000 shares of common stock to an employee for their services. The current price at that date was $0.227. Our common stock is thinly traded therefore our price, as management has determined, may not be indicative of our valuation. Previously, the Company issued common stock for services to unrelated parties and the common stock was valued at $0.20, therefore, the stock was valued at $0.20 or $10,000, was recorded.
On February 24, 2016, the Company issued 100,000 shares of common stock to various subcontractors for their services. The current price at that date was $0.227. Our common stock is thinly traded therefore our price, as management has determined, may not be indicative of our valuation. Previously, the Company issued common stock for services to unrelated parties and the common stock was valued at $0.20, therefore, the stock was valued at $0.20 or $20,000, was recorded.
On March 17, 2016, the Company issued 50,000 shares of common stock to various subcontractors for their services. The current price at that date was $0.20. Our common stock is thinly traded therefore our price, as management has determined, may not be indicative of our valuation.
On March 18, 2016, the Company issued 10,000 shares of common stock to an employee for their services. The current price at that date was $0.20. Our common stock is thinly traded therefore our price, as management has determined, may not be indicative of our valuation. In October 2015, the Company issued common stock for services to unrelated parties and the common stock was valued at $0.20, therefore, the stock was valued at $0.20 or $2,000, was recorded. As of June 30, 2016, the stock was not issued therefore recorded as issuable.
On April 8, 2016, Swiss Allied exercised a portion of a warrant for common stock into 400,000 shares of common stock of the Company in exchange for $24,000. As of June 30, 2016, the stock was not issued therefore recorded as issuable.
On April 15, 2016, Bruce Perlowin converted the principal ($5,000) of his promissory note into 50,000 shares of common stock (see Note 5).
On April 15, 2016, Bruce Perlowin converted the principal ($5,000) of his promissory note into 50,000 shares of common stock (see Note 5).
On April 15, 2016, Svetlana Ogorodnikova converted the principal ($12,500) of her promissory note into 125,000 shares of common stock (see Note 5).
On May 2, 2016, Freedom Leaf Iberia, B.V. exercised a cashless conversion of its 1,000,000 warrants for common stock of the Company into 889,868 shares of common stock of the Company. As of June 30, 2016, the stock was not issued therefore recorded as issuable.
On May 2, 2016, Freedomleaf Netherlands, B.V. exercised a cashless conversion of its 1,000,000 warrants for common stock of the Company into 889,868 shares of common stock of the Company. As of June 30, 2016, the stock was not issued therefore recorded as issuable.
On May 25, 2016, Perry converted 68,401,200 shares of common stock into 684,012 shares of Series A preferred stock. See Note 4.
On May 25, 2016, Cowan converted 26,401,000 shares of common stock into 264,010 shares of Series A preferred stock. See Note 4.
On June 30, 2016, Cowan converted $225,892 of payables and accruals into 2,226,154 shares of common stock. The conversion was at a 50% discount or $0.09 per share. As of June 30, 2016, these shares had not been issued and were recorded as issuable. See Note 4.
On June 30, 2016, the Company determined that on February 15, 2016, there was a duplicate issuance to an entity, as they were already issued on October 12, 2015. The Company cancelled 200,000 shares on June 30, 2016, thereby reducing the stock-based compensation previously recorded by $40,000.
| 16 |
FREEDOM LEAF INC.
Notes to Condensed Financial Statements
March 31, 2017
(unaudited)
On July 1, 2016, the Company hired an employee and, as a condition of the employment contract, the Company is obligated to issue 500,000 shares of common stock to the employee. The shares were valued at $0.175 per share. The Company recorded an expense of $87,500.
On July 19, 2016, the Company issued 100,000 shares of common stock to its transfer agent, Globex Transfer, LLC. The shares were valued at $0.194 per share. The Company recorded an expense of $19,400.
On July 21, 2016, the Company issued 1,385,000 shares of previously issuable common stock.
On October 17, 2016, the Company issued 268,167 shares of common stock and 268,167 warrants for common stock to Weintraub Law Group, LLC for the settlement of payables of $15,065.
On October 18, 2016, the Company issued 24,000 shares of common stock to William Guarino for consulting. The shares were valued at $0.095. Stock-based compensation of $2,280 was recorded.
On October 18, 2016, the Company issued 24,000 shares of common stock to Anthony Catalano for consulting. The shares were valued at $0.095. Stock-based compensation of $2,280 was recorded.
On October 18, 2016, the Company issued 2,501,000 shares of common stock to Trends Investments, Inc. for consulting. The shares were valued at $0.095. Stock-based compensation of $237,595 was recorded.
On November 3, 2016, the Company sold 500,000 shares for $25,000 to PB, LLC. The shares were valued at $0.05.
On November 25, 2016, the Company issued 50,000 shares of common stock to Dr. Robert Melamede for consulting. The shares were valued at $0.14. Stock-based compensation of $7,000 was recorded.
On November 25, 2016, the Company issued 50,000 shares of common stock to Dr. David Barton for consulting. The shares were valued at $0.14. Stock-based compensation of $7,000 was recorded.
On November 2, 2016, the Company sold 500,000 shares for $30,000 to Reese. The shares were valued at $0.06.
On November 3, 2016, the Company sold 312,500 shares for $25,000 to Dorothy Herbst. The shares were valued at $0.08.
On January 4, 2017, the Company sold 133,334 shares of common stock for $10,000 to Robert J. Kane at a price of $0.075 per share.
On January 9, 2017, the Company sold 166,667 shares of common stock for $10,000 to Robert J. Kane at a price of $0.06 per share.
On January 11, 2017, the Company sold 1,000,000 shares of common stock for $25,000 to Felipe Menezes at a price of $0.025 per share.
On January 11, 2017, the Company issued 90,000 shares of common stock to one of the Company’s attorneys as settlement of payables of $7,312. The shares were valued at $0.1122.
On January 18, 2017, the Company sold 1,000,000 shares of common stock for $25,000 to Felipe Menezes at a price of $0.025 per share.
On January 30, 2017, the Company entered into an agreement with CorporateAds.com, LLC for services. The compensation provides a minimal $500 per week payment, 150,000 shares of common stock, and 150,000 warrants for common stock. The warrants have an exercise price of $0.10 per share with an expiration 18 months after issuance. The agreement is for 15 days and has an auto renewal feature for an additional 75 days. During the 75-day period, the Company will pay $500 for each additional week. On February 1, 2017, both parties agreed to an addendum to the agreement to change the exercise price of $0.10 for the warrants to the following: 50,000 of the warrants have an exercise price of $0.10 per share; 50,000 of the warrants have an exercise price of $0.125 per share; and 50,000 of the warrants have an exercise price of $0.15 per share.
On March 10, 2017, the Company issued 3,000,000 shares of common stock to Swiss Allied, as a conversion of notes payable of $100,000. The shares were valued $0.07.
| 17 |
FREEDOM LEAF INC.
Notes to Condensed Financial Statements
March 31, 2017
(unaudited)
On March 15, 2017, the Company issued 211,267 shares of common stock to one of the Company’s attorneys as settlement of payables of $7,000. The shares were valued at $0.0699.
On March 17, 2017, the Company issued 224,000 shares of common stock to a consultant of the Company as settlement of payables of $11,230. The shares were valued at $0.0736.
On March 29, 2017, the Company issued 211,267 shares of common stock to a consultant of the Company as settlement of payables of $15,000. The shares were valued at $0.0585.
Warrants
On November 2, 2015, the Company issued 1,000,000 warrants for common stock to Freedom Leaf Iberia, B.V., in regards to a contemplated future transaction between the Company and Freedom Leaf Iberia, B.V. The warrants mature on May 2, 2016. The exercise price is $0.02 and the warrant has a cashless exercise option. The warrants were valued at $0.20 per share, as defined in the section. The Company recorded an expense of $200,000. On May 2, 2016, Freedom Leaf Iberia exercised a cashless conversion of its 1,000,000 warrants for common stock of the Company into 889,868 shares of common stock of the Company.
On November 2, 2015, the Company issued 1,000,000 warrants for common stock to Freedom Leaf Netherlands, B.V., in regards to a contemplated future transaction between the Company and Freedom Leaf Netherlands, B.V. The warrants mature on May 2, 2016. The exercise price is $0.02 and the warrant has a cashless exercise option. The warrants were valued at $0.20 per share, as defined in the section. The Company recorded an expense of $200,000. On May 2, 2016, Freedom Leaf Netherlands, B.V. exercised a cashless conversion of its 1,000,000 warrants for common stock of the Company into 889,868 shares of common stock of the Company.
On November 2, 2015, the Company issued 500,000 warrants for common stock to a subcontractor as an incentive to their services. The warrants mature on May 2, 2016. The exercise price is $0.02 and the warrant has a cashless exercise option. The warrants were valued at $0.20 per share, as defined in the section. The Company recorded an expense of $100,000. On February 2, 2016, Dobrucki exercised a warrant for 500,000 shares of common stock for $10,000, the exercise price of the warrants at $0.02 per share. As of March 31, 2016, the shares were not issued therefore they are recorded as issuable.
On December 14, 2015, the Company executed a convertible promissory note for $100,000 with Swiss Allied (see Note 5). The Company issued Swiss Allied four warrants as an incentive to the note, each for 20,000,000 shares of the Company’s common stock, for a total of 80,000,000 warrants. Each warrant has an exercise price of $0.005 per share. The four warrants, each for 20,000,000 shares of common stock, mature on March 31, 2016, June 30, 2016, October 31, 2016, and March 31, 2017, respectively. The warrants, as an incentive to the note, should have a beneficial conversion feature. As the note’s beneficial conversion feature is at the maximum, there is no beneficial conversion feature to record. If Swiss Allied exercises all warrants, the Company would receive an additional $400,000 for said shares of common stock. If Swiss Allied does not exercise all 80,000,000 warrants, by the maturation dates, as described herein, the exercise price shall be adjusted to $0.06, an increase of $0.055 per share as a penalty, which is payable to the Company at the time Swiss Allied requests to have the Rule 144 restriction removed. The interest rate for each loan tranche is 8% and is accrued with a payment date of December 15, 2016 for the first tranche and January 15, 2017 for the second tranche. The conversion price for the $100,000, which may happen any time prior to December 14, 2016, shall be the greater of $0.03 or 50% of the lowest closing price on the primary trading market on which the Company’s common stock is quoted for the five trading days immediately prior to, but not including, the conversion date, assuming that Swiss Allied has not exercised all 80,000,000 warrants for common stock. The conversion price for the $100,000, assuming that Swiss Allied has exercised all 80,000,000 warrants for common stock, shall be $0.005 per share. Swiss Allied has a right of first refusal on any future funding to the Company. Swiss Allied has the right to name a party to serve as a member of the Company’s board of directors if Swiss Allied owns at least 40,000,000 shares of the Company’s common stock. If Swiss Allied owns at least 80,000,000 shares of the Company’s common stock, they have the right to name two parties to the Company’s board of directors. The two directors will remain as long as Swiss Allied owns 55,000,000 shares of the Company’s common stock. See Note 5 for amendment on the warrant that matured on March 31, 2016.
On October 17, 2016, the Company issued 268,167 shares of common stock and 268,167 warrants for common stock to Weintraub Law Group, LLC for the settlement of payables of $15,065.
On December 15, 2016, the Company and FLNL executed a license agreement (see Note 2). As part of the agreement, the Company provided FLNL with warrants to purchase up to 1,000,000 shares of common stock. The warrants have an exercise price of $0.05. The warrants can be exercised as follows: 250,000 warrants between June 2017 and August 2017; 250,000 warrants between September 2017 and November 2017; 250,000 warrants between December 2017 and February 2018, and; 250,000 warrants between March 2018 and May 2018. The warrants will be expensed according to their respective vesting schedule.
| 18 |
FREEDOM LEAF INC.
Notes to Condensed Financial Statements
March 31, 2017
(unaudited)
On December 15, 2016, the Company and FLI executed a license agreement (see Note 2). The Company provided FLI with warrants to purchase up to 1,000,000 shares of common stock. The warrants have an exercise price of $0.05. The warrants can be exercised as follows: 250,000 warrants between June 2017 and August 2017; 250,000 warrants between September 2017 and November 2017; 250,000 warrants between December 2017 and February 2018, and; 250,000 warrants between March 2018 and May 2018. The warrants will be expensed according to their respective vesting schedule.
On January 16, 2017, the Company issued 1,000,000 warrants for common stock to Vincent Moreno for future consulting services. The warrants have an exercise price of $0.05 and expire in five years.
On January 30, 2017, the Company entered into an agreement with CorporateAds.com, LLC for services. The compensation provides a minimal $500 payment, 150,000 shares of common stock, and 150,000 warrants for common stock. The warrants have an exercise price of $0.10 per share with an expiration 18 months after issuance. The agreement is for 15 days and has an auto renewal feature for an additional 75 days. During the 75-day period, the Company will pay $500 for each additional 15 days. On February 1, 2017, both parties agreed to an addendum to the agreement to change the exercise price of $0.10 for the warrants to the following: 50,000 of the warrants have an exercise price of $0.10 per share; 50,000 of the warrants have an exercise price of $0.125 per share; and 50,000 of the warrants have an exercise price of $0.15 per share.
Stock Option Plan
On June 27, 2016, the Board of Directors approved the 2016 Stock Option Plan which has reserved 10,000,000 shares of common stock.
NOTE 7 – REVENUE CLASSES
Selected financial information for the Company’s operating revenue classes as of March 31, 2017 and 2016, are as follows:
| For the nine months ended | ||||||||
| Revenues: | March 31, | |||||||
| 2017 | 2016 | |||||||
| Magazine related | $ | 29,939 | $ | 72,112 | ||||
| Referral fees | 11,474 | 3,300 | ||||||
| Licensing fees | 763,549 | 25,000 | ||||||
| Equipment sales commissions | 18,242 | – | ||||||
| Total | $ | 823,204 | $ | 100,412 | ||||
| For the nine months ended | ||||||||
| Direct costs of revenue: | March 31, | |||||||
| 2017 | 2016 | |||||||
| Magazine related | $ | 88,792 | $ | 96,398 | ||||
| Referral fees | – | – | ||||||
| Licensing fees | – | – | ||||||
| Equipment sales commissions | – | – | ||||||
| Total | $ | 88,792 | $ | 96,398 | ||||
The Company’s four revenue classes are magazine related, referral fees, licensing fees (see Note 2) and equipment sales commissions (see Note 2).
NOTE 8 – SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the date the financial statements were issued and filed with the Securities and Exchange Commission. The Company has determined that there are no other such events that warrant disclosure or recognition in the financial statements, except as stated herein.
On April 1, 2017, the Company entered into a one year agreement with Eighth Day Create to provide creative services for the Company’s magazine and web site and prepare the advertisements for the advertisers of the magazine. The Company will compensate the vendor with monthly cash payments of $2,000 and an additional $6,000 in cash or the Company’s common stock, valued at $0.10 per share.
On April 6, 2017, the Company prepaid Adar $38,400 for full settlement of this note (see Note 5).
On April 26, 2017, Eagle sold its convertible note to PureEnergy 714 LLC with no change in terms (see Note 5).
On May 10, 2017, the Company executed a convertible promissory note with Power Up Lending Group Ltd. in the amount of $75,000. The note matures on February 20, 2018 and bears interest at 12%. The note is convertible with a 35% discount. The applicable discounts and derivative calculations will be recorded.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS
We believe that it is important to communicate our future expectations to our security holders and to the public. This report, therefore, contains statements about future events and expectations which are “forward-looking statements” within the meaning of Sections 27A of the Securities Act of 1933 and 21E of the Securities Exchange Act of 1934, including the statements about our plans, objectives, expectations and prospects under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” You can expect to identify these statements by forward-looking words such as “may,” “might,” “could,” “would,” “will,” “anticipate,” “believe,” “plan,” “estimate,” “project,” “expect,” “intend,” “seek” and other similar expressions. Any statement contained in this report that is not a statement of historical fact may be deemed to be a forward-looking statement. Although we believe that the plans, objectives, expectations and prospects reflected in or suggested by our forward-looking statements are reasonable, those statements involve risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements, and we can give no assurance that our plans, objectives, expectations and prospects will be achieved.
Important factors that might cause our actual results to differ materially from the results contemplated by the forward-looking statements are contained in the “Risk Factors” section of and elsewhere in our Annual Report on Form 10-K for the fiscal year ended June 30, 2016 and in our subsequent filings with the Securities and Exchange Commission. The following discussion of our results of operations should be read together with our financial statements and related notes included elsewhere in this report.
Company Overview
The Company was originally incorporated in Nevada under the name Arkadia International, Inc. on February 21, 2013.
On October 3, 2014, the Company experienced a change in control. Richard C. Cowan acquired a majority of the issued and outstanding common stock of the Company in accordance with stock purchase agreements by and between Mr. Cowan and Vladimir and Galina Shekhtman (“Sellers”). On the closing date, October 3, 2014, pursuant to the terms of the agreements with the sellers, Cowan purchased from the Sellers 6,950,100 shares of the Company’s outstanding restricted common stock for $100,000, representing 93% of the then-outstanding common stock of the Company.
On November 4, 2014, the Company's Board of Directors declared a twelve for one forward stock split of all outstanding shares of the Company’s common stock. As the stock split was approved by FINRA, the common share and per common share data in these financial statements and related notes hereto have been retroactively adjusted to account for the effect of the stock split. The total number of authorized common shares and the par value thereof was not changed by the split.
On November 6, 2014, the Company entered into a merger agreement (the “Merger Agreement”) with Freedom Leaf Inc., a Nevada corporation (the “Private Company”), and the Private Company’s officer and director, Clifford J. Perry (“Perry”), being the owner of record of all of the issued share capital of the Private Company (the “FL Stock”). Pursuant to the Merger Agreement, Perry received an aggregate of 83,401,200 shares (48.1%) of our common stock, the FL Stock was cancelled and the Private Company was merged into the Company. As a result of the merger, we assumed the operations of Freedom Leaf Inc., and there was a change of control of the Company.
Prior to the merger, we were a startup company that originally intended to engage in the business of the acquisition of in demand equipment, cars, and goods with the intent to resell these in the in the U.S. territories or export to overseas countries.
Since the merger, we have been devoting substantially all of our efforts to migrate to the news, arts and entertainment niche, with both “in print” and online publications.
We have had limited operations and have been issued a “going concern” opinion by our auditor, based upon our reliance on the sale of our securities as the primary source of funds for our future operations.
Plan of Operation
The Company is focused on being the premium national and international news source for the Cannabis/Industrial Hemp industry. Through our online and print media channels, our efforts are in dissemination of current legislation and legal news, arts and entertainment. Additional websites and online partnerships are in the development stage that are intended to give the Freedom Leaf brand greater exposure. The Company generates revenue from paid advertising on both online and print publications as well as consulting fees and incubator fees for companies that want to participate in the Cannabis/Industrial Hemp industry. Another segment of income generation by the Company is brand management for both profit and non-profit organizations. An example is the contract with NORML which was entered into on May 26, 2015. This contract authorizes the Company to undertake all of the commercial activities of NORML, earning income for both the non-profit and the Company. The Company also sells licenses to use the Freedom Leaf brand in different countries and states. As of the date of this report, we have entered into two license agreements: for Spain and Portugal, for The Netherlands, and for Florida.
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Results of Operations
For the Three Months Ended March 31, 2017 and 2016
Revenues
Our revenue was $254,084 for the three months ended March 31, 2017, compared to $68,762 for the three months ended March 31, 2016. Revenue, by class, is as follows:
| For the three months ended | ||||||||
| Revenues: | March 31, | |||||||
| 2017 | 2016 | |||||||
| Magazine related | $ | 9,157 | $ | 68,762 | ||||
| Referral fees | – | – | ||||||
| Licensing fees | 226,685 | – | ||||||
| Equipment sales commissions | 18,242 | – | ||||||
| Total | $ | 254,084 | $ | 68,762 | ||||
Operating Expenses
Direct costs of revenues were $17,428 and $33,865 for the three months ended March 31, 2017 and 2016, respectively. Direct costs of revenues, by class, is as follows:
| For the three months ended | ||||||||
| Direct costs of revenue: | March 31, | |||||||
| 2017 | 2016 | |||||||
| Magazine related | $ | 17,428 | $ | 33,865 | ||||
| Referral fees | – | – | ||||||
| Licensing fees | – | – | ||||||
| Equipment sales commissions | – | – | ||||||
| Total | $ | 17,428 | $ | 33,865 | ||||
For the three months ended March 31, 2017 our general and administrative expenses and marketing and selling expenses were $260,178 compared to $464,270 for the three months ended March 31, 2016 resulting in a decrease of $204,091, attributable primarily to stock-based compensation of $83,750 for the three months ended March 31, 2017, compared to $160,000 for the three months ended March 31, 2016. As a result, net loss was $27,199 for the three months ended March 31, 2017, compared to net loss of $459,044 for the three months ended March 31, 2016.
For the Nine Months Ended March 31, 2017 and 2016
Revenues
Our revenue was $823,204 for the nine months ended March 31, 2017, compared to $100,412 for the nine months ended March 31, 2016. Revenue, by class, is as follows:
| For the nine months ended | ||||||||
| Revenues: | March 31, | |||||||
| 2017 | 2016 | |||||||
| Magazine related | $ | 29,939 | $ | 72,112 | ||||
| Referral fees | 11,474 | 3,300 | ||||||
| Licensing fees | 763,549 | 25,000 | ||||||
| Equipment sales commissions | 18,242 | – | ||||||
| Total | $ | 823,204 | $ | 100,412 | ||||
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Operating Expenses
Direct costs of revenues were $88,792 and $96,398 for the nine months ended March 31, 2017 and 2016, respectively. Direct costs of revenue, by class, is as follows:
| For the nine months ended | ||||||||
| Direct costs of revenue: | March 31, | |||||||
| 2017 | 2016 | |||||||
| Magazine related | $ | 88,792 | $ | 96,398 | ||||
| Referral fees | – | – | ||||||
| Licensing fees | – | – | ||||||
| Equipment sales commissions | – | – | ||||||
| Total | $ | 88,792 | $ | 96,398 | ||||
For the nine months ended March 31, 2017, our general and administrative expenses and marketing and selling expenses were $1,204,225 compared to $2,458,129 for the nine months ended March 31, 2016, resulting in a decrease of $1,253,903, attributable primarily to stock-based compensation of $616,942 for the nine months ended March 31, 2017, compared to $2,148,863 for the nine months ended March 31, 2016. As a result, net loss was $539,008 for the nine months ended March 31, 2017, compared to net loss of $2,500,831 for the nine months ended March 31, 2016.
Liquidity and Capital Resources
Overview
As of March 31, 2017, the Company had $6,051 in cash. We do not have sufficient resources to effectuate our business. We expect to incur a minimum of $50,000 in expenses during the next twelve months of operations. We estimate that these expenses will be comprised primarily of general expenses including overhead, legal and accounting fees.
Liquidity and Capital Resources during the nine months ended March 31, 2017 compared to the nine months ended March 31, 2016
We used cash in operations of $222,898 for the nine months ended March 31, 2017, compared to cash used in operations of $219,388 for the nine months ended March 31, 2016. The negative cash flow from operating activities for the nine months ended March 31, 2017 is attributable to the Company's net loss from operations of $515,693 primarily due to the issuance of common stock for services. Cash used in operations of $219,388 for the nine months ended March 31, 2016 is attributable to the Company's net loss of $2,500,831 offset primarily by increase in stock-based compensation ($1,969,000) and the issuance of warrants for services ($500,000).
We used cash in investing or financing activities of $3,897 and $3,235 for the nine months ended March 31, 2017 and 2016.
We had cash provided by financing activities of $231,088 for the nine months ended March 31, 2017, compared to $223,000 for the same period in 2016.
We will have to raise funds to pay for our expenses. We may have to borrow money from shareholders or issue debt or equity or enter into a strategic arrangement with a third party. There can be no assurance that additional capital will be available to us. We currently have no arrangements or understandings with any person to obtain funds through bank loans, lines of credit or any other sources. Since we have no such arrangements or plans currently in effect, our inability to raise funds for our operations will have a severe negative impact on our ability to remain a viable company.
Going Concern
The accompanying financial statements and the factors within it, have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business and the ability of the Company to continue as a going concern for a reasonable period of time. The Company sustained net losses of $539,008 and cash used in operating activities of $222,898 for the nine months ended March 31, 2017. The Company had working capital, stockholders’ equity and accumulated deficit of $52,435, $93,610 and $4,549,346, respectively, at March 31, 2017. The Company’s continuation as a going concern is dependent upon its ability to generate revenues and its ability to continue receiving investment capital and loans from third parties to sustain its current level of operations. The Company is in the process of securing working capital from investors for common stock, convertible notes payable, and/or strategic partnerships. No assurance can be given that the Company will be successful in these efforts. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Off Balance Sheet Arrangements
We currently have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
| 22 |
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions affect the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experiences and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions and conditions. We continue to monitor significant estimates made during the preparation of our financial statements. On an ongoing basis, we evaluate estimates and assumptions based upon historical experience and various other factors and circumstances. We believe our estimates and assumptions are reasonable in the circumstances; however, actual results may differ from these estimates under different future conditions.
See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 1, “Summary of Significant Accounting Policies” in our audited financial statements for the year ended June 30, 2016, included in our Annual Report on Form 10-K as filed on October 7, 2016, for a discussion of our critical accounting policies and estimates.
NON-GAAP FINANCIAL MEASURES
Adjusted Net Earnings
In addition to reporting net loss from operations as defined under generally accepted accounting principles (“GAAP”), the Company presents adjusted net earnings from operations (adjusted net earnings), which is a non-GAAP performance measure. Adjusted net earnings consist of net loss from operations after adjustment for those items shown in the table below. Adjusted net earnings does not represent, and should not be considered an alternative to, GAAP measurements such as net loss from operations (its most comparable GAAP financial measure), and the Company’s calculations thereof may not be comparable to similarly titled measures reported by other companies. By eliminating the items shown below, the Company believes that the measure is useful to investors because similar measures are frequently used by securities analysts, investors, and other interested parties in their evaluation of companies. The Company’s management does not view adjusted net earnings in isolation and also uses other measurements, such as net loss from operation and revenues to measure operating performance. The following table provides a reconciliation of net loss from operations, the most directly comparable GAAP measure, to adjusted net earnings for the periods presented:
| Adjusted Net Loss | For the Nine Months Ended | |||||||
| March 31, | ||||||||
| 2017 | 2016 | |||||||
| Net loss | $ | (539,0083 | ) | $ | (2,500,831 | ) | ||
| Change in fair value of embedded conversion features | (2,905 | ) | – | |||||
| Beneficial conversion feature expense | (55,014 | ) | (43,048 | ) | ||||
| Adjusted net loss | $ | (481,089 | ) | $ | (2,457,783 | ) | ||
| Weighted average shares outstanding - basic and diluted | 98,283,870 | 179,945,164 | ||||||
| Adjusted basic and diluted net loss per share | $ | (0.00 | ) | $ | (0.01 | ) | ||
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Adjusted EBITDA
In addition to reporting net loss from operations as defined under GAAP, the Company also presents adjusted net earnings before interest, income taxes, depreciation, depletion, and amortization from operations (adjusted EBITDA), which is a non-GAAP performance measure. Adjusted EBITDA consists of net loss from operations after adjustment for those items shown in the table below. Adjusted EBITDA does not represent, and should not be considered an alternative to, GAAP measurements such as net loss from operations (its most comparable GAAP financial measure), and the Company’s calculations thereof may not be comparable to similarly titled measures reported by other companies.
By eliminating the items shown below, the Company believes the measure is useful in evaluating its fundamental core operating performance. The Company also believes that adjusted EBITDA is useful to investors because similar measures are frequently used by securities analysts, investors, and other interested parties in their evaluation of companies. The Company’s management uses adjusted EBITDA to manage its business, including in preparing its annual operating budget and financial projections. The Company’s management does not view adjusted EBITDA in isolation and also uses other measurements, such as net loss from operations and revenues to measure operating performance. The following table provides a reconciliation of net loss from operations, the most directly comparable GAAP measure, to adjusted EBITDA for the periods presented:
| Adjusted EBITDA | For the Nine Months Ended | |||||||
| March 31, | ||||||||
| 2017 | 2016 | |||||||
| Net loss from operations | $ | (539,008 | ) | $ | (2,500,831 | ) | ||
| Interest expense | (11,276 | ) | (3,668 | ) | ||||
| Amortization | (570 | ) | – | |||||
| Stock-based compensation | (616,942 | ) | (2,148,863 | ) | ||||
| Change in fair value of embedded conversion features | (2,905 | ) | – | |||||
| Beneficial conversion feature expense | (55,014 | ) | (43,048 | ) | ||||
| Adjusted EBITDA | $ | 147,699 | $ | (305,252 | ) | |||
| Weighted average shares outstanding - basic and diluted | 98,283,870 | 179,945,164 | ||||||
| Adjusted basic and diluted net loss per share | $ | 0.00 | $ | (0.00 | ) | |||
| 24 |
Item 3. Quantitative and Qualitative Disclosures About Market Risk
A smaller reporting company, as defined by Item 10 of Regulation S-K, is not required to provide the information required by this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Securities and Exchange Commission defines the term “disclosure controls and procedures” to mean a company's controls and other procedures of an issuer that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the issuer’s management, including its chief executive and chief financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Company maintains such a system of controls and procedures in an effort to ensure that all information which it is required to disclose in the reports it files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified under the SEC's rules and forms and that information required to be disclosed is accumulated and communicated to the chief executive and interim chief financial officer to allow timely decisions regarding disclosure.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are not effective as of such date. The Chief Executive Officer and Chief Financial Officer have determined that the Company continues to have the following deficiencies which represent a material weakness:
| 1. | The Company intends to appoint additional independent directors; |
| 2. | Lack of in-house personnel with the technical knowledge to identify and address some of the reporting issues surrounding certain complex or non-routine transactions. With material, complex and non-routine transactions, management has and will continue to seek guidance from third-party experts and/or consultants to gain a thorough understanding of these transactions; |
| 3. | Insufficient personnel resources within the accounting function to segregate the duties over financial transaction processing and reporting; |
| 4. | Insufficient written policies and procedures over accounting transaction processing and period end financial disclosure and reporting processes. |
To remediate our internal control weaknesses, management intends to implement the following measures:
| · | The Company will add sufficient number of independent directors to the board and appoint additional member(s) to the Audit Committee. | |
| · | The Company will add sufficient accounting personnel to properly segregate duties and to effect a timely, accurate preparation of the financial statements. | |
| · | The Company will hire staff technically proficient at applying U.S. GAAP to financial transactions and reporting. | |
| · | Upon the hiring of additional accounting personnel, the Company will develop and maintain adequate written accounting policies and procedures. |
The additional hiring is contingent upon The Company’s efforts to obtain additional funding through equity or debt and the results of its operations. Management expects to secure funds in the coming fiscal year but provides no assurances that it will be able to do so.
Changes in Internal Control Over Financial Reporting
There are no changes in our internal controls over financial reporting other than as described elsewhere herein.
Limitations on the Effectiveness of Controls
The Company’s management, including the CEO and CFO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of the control system must reflect that there are resource constraints and that the benefits must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
| 25 |
There are no pending legal proceedings in which we are a party or in which any of our directors, officers or affiliates, any owner of record or beneficiary of more than 5% of any class of our voting securities is a party adverse to us or has a material interest adverse to us. Our property is not the subject of any pending legal proceedings.
Not required.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the quarter ending March 31, 2017, the Company issued the following unregistered securities. These securities were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, Regulation D promulgated thereunder as there was no general solicitation, and the transactions did not involve a public offering.
On January 4, 2017, the Company sold 133,334 shares of common stock for $10,000 to Robert J. Kane at a price of $0.075 per share.
On January 9, 2017, the Company sold 166,667 shares of common stock for $10,000 to Robert J. Kane at a price of $0.06 per share.
On January 11, 2017, the Company sold 1,000,000 shares of common stock for $25,000 to Felipe Menezes at a price of $0.025 per share.
On January 18, 2017, the Company sold 1,000,000 shares of common stock for $25,000 to Felipe Menezes at a price of $0.025 per share.
On January 30, 2017, the Company entered into an agreement with CorporateAds.com, LLC for services. The compensation provides a minimal $500 payment, 150,000 shares of common stock, and 150,000 warrants for common stock. The warrants have an exercise price of $0.10 per share with an expiration 18 months after issuance. The agreement is for 15 days and has an auto renewal feature for an additional 75 days. During the 75-day period, the Company will pay $500 for each additional 15 days. On February 1, 2017, both parties agreed to an addendum to the agreement to change the exercise price of $0.10 for the warrants to the following: 50,000 of the warrants have an exercise price of $0.10 per share; 50,000 of the warrants have an exercise price of $0.125 per share; and 50,000 of the warrants have an exercise price of $0.15 per share.
On March 10, 2017, the Company issued 3,000,000 shares of common stock to Swiss Allied, as a conversion of notes payable of $100,000.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
None.
| 26 |
| Exhibit No. | Description | |
| 3.1 | Articles of Incorporation (incorporated by reference to our Registration Statement on Form S-1, filed on July 22, 2013) | |
| 3.2 | Bylaws (incorporated by reference to our Registration Statement on Form S-1, filed on July 22, 2013) | |
| 3.3 | Articles of Merger (incorporated by reference to our Current Report on Form 8-K, filed on February 25, 2015) | |
| 3.4 | Certificate of Amendment (incorporated by reference to our Current Report on Form 8-K, filed on June 9, 2016) | |
| 10.1 | Merger Agreement dated November 6, 2014 (incorporated by reference to our Quarterly Report on Form 10-Q/A for the period ended December 31, 2014, filed on September 11, 2015) | |
| 10.2 | Audit for the Period Ended November 6, 2014 of Freedom Leaf Inc., the private company (incorporated by reference to our Quarterly Report on Form 10-Q/A for the period ended December 31, 2014, filed on September 10, 2015) | |
| 10.3 | Purchase Order with Hemp, Inc. (incorporated by reference to our Current Report on Form 8-K filed on February 28, 2017) | |
| 10.4 | License Agreement with Freedom Leaf Iberia, B.V. (incorporated by reference to our Current Report on Form 8-K filed on February 28, 2017) | |
| 10.5 | License Agreement with Freedom Leaf Netherlands, B.V. (incorporated by reference to our Current Report on Form 8-K filed on February 28, 2017) | |
| 10.6 | License Agreement with Freedom Leaf Netherlands, B.V. (incorporated by reference to our Current Report on Form 8-K filed on February 28, 2017) | |
| 10.7 | Distribution Agreement with NuAxon Bioscience, Inc. (incorporated by reference to our Current Report on Form 8-K filed on March 17, 2017) | |
| 10.8 | Purchase Order with NuAxon Bioscience, Inc. (incorporated by reference to our Current Report on Form 8-K filed on March 17, 2017) | |
| 10.9 | License Agreement with BBD Healthcare Strategies, LLC (incorporated by reference to our Current Report on Form 8-K filed on April 3, 2017) | |
| 31 (1) | Certification by the Principal Executive Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)). | |
| 32 (1) | Certification by the Principal Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
__________
(1) Filed herewith
| 27 |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Freedom Leaf Inc. | |
| Dated: May 22, 2017 | By: /s/ Clifford J. Perry |
| Clifford J. Perry | |
| Chief Executive Officer | |
| Dated: May 22, 2017 | By: /s/ Charles Grigsby |
| Charles Grigsby | |
| Chief Financial Officer |
| 28 |