Table of Contents

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 September 30, 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.

 

Large accelerated filer    o	Accelerated filer   o
Non-accelerated filer    o  (Do not check if a smaller reporting company)	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 November 14, 2017, there were 130,567,123 shares of common stock, par value $0.001 per share issued, issuable, and outstanding.

 

 

 

FREEDOM LEAF, INC.

FORM 10-Q

SEPTEMBER 30, 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	28
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.		Controls and Procedures	32
PART II – OTHER INFORMATION			34
Item 1.		Legal Proceedings	34
Item 1A.		Risk Factors	34
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.		Defaults Upon Senior Securities	35
Item 4.		Mine Safety Disclosures	35
Item 5.		Other Information	35
Item 6.		Exhibits	35
SIGNATURES			36

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PART I – FINANCIAL INFORMATION

 

TABLE OF CONTENTS

 

Index to Financial Statements		Page
Condensed Consolidated Balance Sheets as of September 30, 2017 (unaudited) and June 30, 2017		4
Condensed Consolidated Statements of Operations for the three months ended September 30, 2017 and 2016 (unaudited)		5
Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2017 and 2016 (unaudited)		6
Notes to Condensed Consolidated Financial Statements.		7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

Item 1. Financial Statements.

 

FREEDOM LEAF, INC.

and Subsidiaries

Condensed Consolidated Balance Sheets

(unaudited)

 

 

		September 30,				June 30,
		2017				2017
ASSETS
Current assets
Cash		$	20,009			$	2,498
Prepaid expense			–				1,600
Other receivable, net of discount			479,447				637,817
Total current assets			499,456				641,915
Fixed assets, net			142,313				–
Intangible assets, net			14,053				10,820
Other assets			365,084				338,084
Total assets		$	1,020,906			$	990,819
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Convertible notes payable, net of discount		$	171,910			$	70,678
Notes payable			2,693				3,141
Accounts payable			154,850				15,789
Accrued expenses			66,278				31,891
Accrued expenses to related parties			33,000				–
Derivative liabilities			157,743				52,757
Total current liabilities			586,474				174,256
Non-current liabilities
Other payables			–				188,075
Payable to related party			318,871				290,670
Total non-current liabilities			318,871				478,745
Total liabilities			905,345				653,001
Commitments and contingencies			174,000				150,000
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 September 30, 2017 and June 30, 2017, respectively			948				948
Common stock, $0.001 par value, 500,000,000 shares authorized,124,591,272 and 111,101,795 shares issued, issuable, and outstanding at September 30, 2017 and June 30, 2017, respectively			124,591				111,102
Additional paid-in capital			5,444,594				4,996,756
Accumulated deficit			(5,628,572	)			(4,920,988	)
Total stockholders' equity (deficit)			(58,439	)			187,817
Total liabilities and stockholders' equity (deficit)		$	1,020,906			$	990,818

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

 

FREEDOM LEAF, INC.

and Subsidiaries

Condensed Consolidated Statements of Operations

For the Three Months Ended September 30,

(unaudited)

   

 

		2017				2016
Revenue, net		$	1,327			$	120,554
Operating expenses
Direct costs of revenue			33,146				25,265
General and administrative (includes stock-based compensation of $294,330 and $256,900 for the three months ended September 30, 2017 and 2016, respectively)			647,640				451,671
Marketing and selling			2,583				13,794
Operating loss			(682,042	)			(370,176	)
Other income (expense)
Interest expense			(5,209	)			(2,401	)
Interest income			5,162				–
Change in fair value of embedded conversion features			2,105				–
Beneficial conversion feature			(27,600	)			(29,315	)
Provision for income taxes			–				–
Net loss		$	(707,584	)		$	(401,892	)
Net loss per share - basic and diluted		$	(0.01	)		$	(0.00	)
Weighted average number of shares outstanding - basic and diluted			119,027,797				95,012,563

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

 

FREEDOM LEAF, INC.

and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the Three Months Ended September 30,

 

 

		2017				2016
Cash flows from operating activities:
Net loss		$	(707,584	)		$	(401,892	)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization			6,391				140
Beneficial conversion feature			27,600				29,315
Issuance of common stock for services			294,330				256,900
Change in fair value of embedded conversion features			(2,105	)			–
Bad debt expense			158,370				–
Changes in operating assets and liabilities:
Inventory			–				1,075
Prepaid expense			1,600				–
Other receivable			–				2,399
Accounts payable			52,205				14,220
Accrued expenses			34,387				120,966
Accrued expenses to related parties			33,000				(45,000	)
Net cash used in operating activities			(101,805	)			(21,877	)
Cash flows used in investing activities
Fixed asset acquired			(30,000	)			–
Intangible asset acquired			(3,437	)			(850	)
Net cash used in investing activities			(33,437	)			(850	)
Cash flows from financing activities:
Proceeds from capital contributed			–				22,030
Proceeds from related party			28,201				–
Repayments on notes payable			(7,745	)
Payments to related party			–				(3,462	)
Proceeds from notes payable			132,297				5,400
Net cash provided by financing activities			152,753				23,968
Net increase in cash			17,511				1,241
Cash at beginning of period			2,498				1,758
Cash at end of period		$	20,009			$	2,999
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		$	53,764			$	–
Issuance of notes payable for financing fees		$	(37,249	)		$	–
Contingent liability		$	51,000			$	–
Derivatives liability		$	275,123			$	–
Fixed asset additions		$	(118,500	)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

 

Freedom Leaf Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(unaudited)

 

 

NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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, 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. The Company changed its name from Arkadia International, Inc., to Freedom Leaf Inc. As a result of the merger, the private company was dissolved, the sole officer, director and shareholder of the private company, Clifford J. Perry, became an officer and director of the Company, and Mr. Perry received approximately 48.1% of the Company’s common stock post-merger. See Note 2 for related discussion.

 

For financial reporting purposes, the merger was accounted for as a "reverse merger" and recapitalization rather than a business combination, and private company was deemed to be the accounting acquirer in the transaction, with the Company deemed to be the acquired company for financial reporting purposes. Consequently, the assets and liabilities and the operations that are reflected in the historical consolidated 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 consolidated 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.

 

Cannabis Business Solutions Inc. (“Cannabis Business Solutions”), a Nevada corporation, was formed on February 5, 2014, and is a wholly-owned subsidiary of the Company. This subsidiary had no activity until the agreement with Valencia Web Technology S.L., B-97183354 (see Note 2).

 

Leafceuticals Inc. (“Leafceuticals”), formerly known as Cannabiz U, Inc., a Nevada corporation, was formed on February 13, 2014, and is a wholly-owned subsidiary of the Company. This subsidiary has had no activity to date.

 

Freedom Leaf Cares Inc. (“Freedom Leaf Cares”), a Nevada corporation, was formed on October 1, 2014, and is a wholly-owned subsidiary of the Company. Freedom Leaf Cares was dissolved in 2016. Until dissolution, this subsidiary had no activity.

 

Freedom Leaf International Inc. (“Freedom Leaf International”), a Nevada corporation, was formed on November 27, 2015, and is a wholly-owned subsidiary of the Company. This subsidiary has had no activity to date.

 

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 operating revenue class 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.

 

 

 

 

Freedom Leaf Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(unaudited)

 

 

Basis of Presentation

 

The Company prepares its consolidated financial statements in conformity with generally accepted accounting principles in the United States of America.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Freedom Leaf and its wholly-owned subsidiaries, Cannabis Business Solutions, Leafceuticals, Freedom Leaf Cares, and Freedom Leaf International. All significant inter-company balances and transactions have been eliminated in consolidation.

 

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.

 

 

 

Freedom Leaf Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(unaudited)

 

 

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 September 30, 2017 and June 30, 2017:

 

Quoted

Prices in

Active

Significant

Balance at

Markets

Other

Significant

September 30,

for Identical

Observable

Unobservable

2017

Assets

Inputs

Inputs

(Level 1)

(Level 2)

(Level 3)

Assets:

Trademarks

$

14,053

$

–

$

–

$

14,053

Total Financial Assets

$

14,053

$

–

$

–

$

14,053

  

Quoted

Prices in

Active

Significant

Balance at

Markets

Other

Significant

June 30,

for Identical

Observable

Unobservable

2017

Assets

Inputs

Inputs

(Level 1)

(Level 2)

(Level 3)

Assets:

Trademarks

$

10,820

$

–

$

–

$

10,820

Total Financial Assets

$

10,820

$

–

$

–

$

10,820

 

Following is a summary of activity through September 30, 2017 of the fair value of intangible assets valued using Level 3 inputs:

 

						Accumulated
		Asset				Amortization				Net
Balance at June 30, 2017		$	12,245			$	(1,425	)		$	10,820
Additions			3,437				–				3,437
Amortization			–				(204	)			(204	)
Balance at September 30, 2017		$	15,682			$	(1,629	)		$	14,053

 

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.

 

 

 

Freedom Leaf Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(unaudited)

 

 

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis at September 30, 2017:

 

		Balance at September 30, 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		$	157,743			$	–			$	–			$	157,743
Total Financial Assets		$	157,743			$	–			$	–			$	157,743

 

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis at June 30, 2017:

 

		Balance at June 30, 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		$	52,757			$	–			$	–			$	52,757
Total Financial Assets		$	52,757			$	–			$	–			$	52,757

 

 

Following is a summary of activity through September 30, 2017 of the fair value of derivative liabilities valued using Level 3 inputs:

  

Balance at June 30, 2017		$	52,757
Note inception date fair value			107,090
Change in fair value during fiscal year 2018			(2,104	)
Balance at September 30, 2017		$	157,743

 

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.

 

Use of Estimates

 

The preparation of consolidated 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 consolidated 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 consolidated 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.

 

 

 

Freedom Leaf Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(unaudited)

 

 

Reclassifications

 

Certain amounts in the prior period consolidated 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.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.

 

Accounting for Derivatives

 

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.

 

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 five primary revenue streams as follows:

 

	·	Consulting services.
	·	Advertising services.
	·	Branding, marketing and selling products for companies.
	·	Educational seminars.
	·	Selling branded products.

 

Advertising and Marketing

 

Advertising and marketing is expensed as incurred and is included in selling, general and administrative expenses on the accompanying statement of operations. For the three months ended September 30, 2017 and 2016 advertising expense was $2,583 and $13,794, respectively.

 

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 consolidated 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 June 30, 2017, all previous tax years remain open for IRS audit. The Company has received no notice of audit from the IRS for any of the open tax years.

 

 

 

Freedom Leaf Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(unaudited)

 

 

The Company adopted ASC 740-10, “Definition of Settlement in FASB Interpretation No. 48,” (“ASC 740-10”), which was issued on May 2, 2007. ASC 740-10 amends FIN 48 to provide guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. The term “effectively settled” replaces the term “ultimately settled” when used to describe recognition, and the terms “settlement” or “settled” replace the terms “ultimate settlement” or “ultimately settled” when used to describe measurement of a tax position under ASC 740-10. ASC 740-10 clarifies that a tax position can be effectively settled upon the completion of an examination by a taxing authority without being legally extinguished. For tax positions considered effectively settled, an entity would recognize the full amount of tax benefit, even if the tax position is not considered more likely than not to be sustained based solely on the basis of its technical merits and the statute of limitations remains open. The adoption of ASC 740-10 did not have an impact on the accompanying consolidated financial statements.

  

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 warrants to purchase 1,918,167 shares of common stock at September 30, 2017 and convertible notes convertible into 7,310,824 common shares. 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 September 30, 2017 and June 30, 2017.

 

Effect of Recent Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (“ASU No. 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for annual reporting periods beginning after December 15, 2017.  Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method, nor has it determined the effect of the standard on its ongoing financial reporting.

 

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements (Topic 205) Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.  The guidance requires management to perform an evaluation each annual and interim reporting period of whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within the one-year period after the date that the financial statements are issued. If such conditions are identified, the guidance requires an entity to provide certain disclosures about the principal conditions or events that gave rise to the substantial doubt about the entity’s ability to continue as a going concern, management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations and management’s plans to alleviate or mitigate substantial doubt about the entity’s ability to continue as a going concern. The guidance is effective for the first annual period ending after December 15, 2016 and interim periods thereafter. The Company did not adopt ASU 2014-15 as it would not have a material impact on its financial statements.

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued an ASU on lease accounting. The ASU requires the lease rights and obligations arising from lease contracts, including existing and new arrangements, to be recognized as assets and liabilities on the balance sheet. The ASU is effective for reporting periods beginning after December 15, 2018 with early adoption permitted. While the Company is still evaluating the ASU, the Company expects the adoption of the ASU to have a material effect on the Company’s financial condition due to the recognition of the lease rights and obligations as assets and liabilities. The Company does not expect the ASU to have a material effect on the Company’s results of operations, and the ASU will have no effect on cash flows.

 

The Company has evaluated all other recent accounting pronouncements and believes that none of them will have a significant effect on the Company’s financial statement. 

 

Freedom Leaf Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 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 merger, 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 Notes 7 and 11.

 

 

 

Freedom Leaf Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(unaudited)

 

 

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 Notes 7 and 11.

 

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 Notes 7 and 11.

 

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 June 30, 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 September 30, 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 September 30, 2017, there have been no sales or commissions earned.

 

 

 

Freedom Leaf Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(unaudited)

 

 

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 September 30, 2017, there were no sales.

 

LaMarihuana Purchase

 

On May 30, 2017, Cannabis Business Solutions Inc. (the “Buyer”), a wholly-owned Nevada subsidiary of the registrant, Freedom Leaf Inc., entered into an Asset Purchase Agreement with Valencia Web Technology S.L., B-97183354, a Spanish limited liability company (Sociedad de Responsabilidad Limitada) (the “Seller”) to purchase the Seller’s assets, including its cash and cash equivalents, equipment, inventory, receivables, and two of its websites www.lamarihuana.com and www.marihuana-medicinal.com (but not including the Seller’s website cannabislandia.com), for a purchase price consisting of a 10% interest in the Buyer, and 3,000,000 shares of common stock of the registrant, valued at $300,000 (the “Initial FRLF Shares”), with additional shares of the registrant’s common stock due six months following closing if, at such time, the average closing price of the registrant’s common stock during the previous five trading days is less than $0.10/share. Such additional shares shall be calculated as follows: $300,000 minus the product of (a) the Initial FRLF Shares multiplied by (b) the average closing price of the registrant’s common stock during the five trading days immediately preceding the True-Up Date (the “True-Up Price”), with such difference divided by the True-Up Price. As of September 30, 2017, the common stock issued was valued at $184,500 therefore a contingent liability of $174,000 was recorded (see Note 4).

 

The Company is in the process of meeting international requirements for the complete use of the web sites by the Company. This process is expected to be completed before the end of this fiscal year.

 

NOTE 3 – GOING CONCERN

 

The Company has a net loss for the three months ended September 30, 2017 of $707,584 and working capital deficit as of September 30, 2017 of $87,018, and has used cash in operations of $101,805 for the three months ended September 30, 2017. In addition, as of September 30, 2017, the Company had a stockholders’ deficit and accumulated deficit of $58,439 and $5,628,572, respectively. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

 

The accompanying consolidated financial statements have been prepared in conformity with U.S. GAAP, which contemplate continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The ability of the Company to continue its operations is dependent on the execution of management’s plans, which include the raising of capital through the debt and/or equity markets, until such time that funds provided by operations are sufficient to fund working capital requirements. If the Company were not to continue as a going concern, it would likely not be able to realize its assets at values comparable to the carrying value or the fair value estimates reflected in the balances set out in the preparation of the consolidated financial statements.

 

There can be no assurances that the Company will be successful in generating additional cash from the equity/debt markets or other sources to be used for operations. The consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary. Based on the Company’s current resources, the Company will not be able to continue to operate without additional immediate funding. Should the Company not be successful in obtaining the necessary financing to fund its operations, the Company would need to curtail certain or all operational activities and/or contemplate the sale of its assets, if necessary. 

 

 

 

 

Freedom Leaf Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(unaudited)

 

 

NOTE 4 – COMMITMENTS AND CONTINGENCIES

 

Legal Matters

 

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of November 14, 2017, there were no pending or threatened lawsuits.

 

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.

 

Future minimum lease payments under these leases are as follows:

 

2018		$	17,946
2019			18,943
Total		$	36,889

 

Rent expense for the three months ended September 30, 2017 and 2016 was $8,724 and $10,511, respectively.

  

NOTE 5 – RELATED PARTIES

 

Richard C. Cowan (“Cowan”), a former director and officer of the Company, has payables and accruals due to him of $321,885 and $269,225 as of September 30, 2017 and June 30, 2017, 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 $19,486 and $133,944 as of September 30, 2017 and June 30, 2017, respectively. Imputed interest is immaterial. On July 31, 2017, the Company issued 5,784,061 shares of common stock to Cliff Perry for accrued compensation of $112,500. See Note 14.

 

Raymond P. Medeiros (“Medeiros”), a director of the Company, has payables and accruals due to him of $10,500 and $52,500 as of September 30, 2017 and June 30, 2017, respectively. Imputed interest is immaterial. On July 31, 2017, the Company issued 2,699,228 shares of common stock to Raymond Medeiros for accrued compensation of $52,500. See Note 14.

 

On May 25, 2016, Perry converted 68,401,200 shares of common stock into 684,012 shares of Series A preferred stock. See Note 7.

 

On May 25, 2016, Cowan converted 26,401,000 shares of common stock into 264,010 shares of Series A preferred stock. See Note 7.

 

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. See Note 7.

 

Freedom Leaf Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(unaudited)

 

 

 

NOTE 6 – OTHER RECEIVABLES

 

The Company has three licensing agreements with the following: FLNL, FLI and BBDHS (see Note 2). The net present value, per entity, as recorded in Other Receivables as of September 30, 2017, is as follows:

 

FLNL		$	176,173
FLI			245,053
BBDHS			221,754
Subtotal			642,980
Less: Allowance			163,533
Net Balance		$	479,447

 

As of September 30, 2017, FLNL, FLI and BBDHS are behind on payments of $75,000, $75,000, and $25,000, respectively. The Company granted deferment on the payments with each entity. The Company has recorded an allowance of $163,533.

 

The balances will be fully amortized by June 30, 2018.

 

NOTE 7 – FIXED ASSETS

 

The Company has fixed assets related to equipment. The depreciation of the fixed assets is over a five-year period. As of September 30, 2017, and June 30, 2017, the Company had fixed assets, net of accumulated depreciation, of $142,313 and $0, respectively. The fixed assets are as follows:

 

		September 30,				June 30,
		2017				2017
Equipment		$	148,500			$	–
Total fixed assets			148,500				–
Less: Accumulated depreciation			6,187				–
Fixed assets, net		$	142,313			$	–

 

The depreciation expense for the three months ended September 30, 2017 and 2016, was $6,187 and $0, respectively.

 

NOTE 8 – INTANGIBLE ASSETS

 

 

The Company has intangible assets related to website development. The amortization of the intangible assets is over a fifteen-year period. As of September 30, 2017, and June 30, 2017, the Company had intangible assets, net of accumulated amortization, of $14,053 and $10,820, respectively. The intangible assets are as follows:

 

		September 30,				June 30,
		2017				2017
Website development		$	15,682			$	12,245
Total intangible assets			15,682				12,245
Less: Accumulated amortization			1,629				1,425
Intangible assets, net		$	14,053			$	10,820

 

The amortization expense for the three months ended September 30, 2017 and 2016, was $204 and $140, respectively.

 

 

 

Freedom Leaf Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(unaudited)

 

 

The following table presents the amortization for the next five years:

 

2018		$	612
2019			816
2020			816
2021			816
2022 and thereafter			10,993
Total		$	14,053

 

NOTE 9 – DERIVATIVES

 

Embedded Conversion Option Derivatives

 

Due to the conversion terms of certain promissory notes, the embedded conversion options met the criteria to be bifurcated and presented as derivative liabilities. The Company calculated the estimated fair values of the liabilities for embedded conversion option derivative instruments at the original note inception date and as of September 30, 2017 and June 30, 2017, using the Black-Scholes option pricing model using the share prices of the Company’s stock on the dates of valuation and using the following ranges for volatility, expected term and the risk-free interest rate at each respective valuation date, no dividend has been assumed for any of the periods:

 

						Note
		September 30,		June 30,		Inception
		2017		2017		Date
Volatility		189%		141%		170% - 232%
Expected Term		0.09 - 0.99 years		0.33 - 0.96 years		0.75 - 1.0 years
Risk-Free Interest Rate		1.31%		0.84%		1.07% - 1.33%

 

The following reflects the initial fair value on the note inception date and changes in fair value through September 30, 2017:

 

Note inception date fair value allocated to debt discount		$	122,500
Change in fair value in fiscal year 2016			(122,500	)
Embedded conversion option derivative liability fair value on June 30, 2016			–
Note inception date fair value allocated to debt discount			163,000
Note modifications adjustment			(88,737	)
Change in fair value in fiscal year 2017			(21,506	)
Embedded conversion option derivative liability fair value on June 30, 2017			52,757
Note modifications adjustment			107,090
Change in fair value in fiscal year 2018			(2,104	)
Embedded conversion option derivative liability fair value on September 30, 2017		$	157,743

 

 

 

Freedom Leaf Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(unaudited)

 

 

NOTE 10 – CONVERTIBLE NOTES PAYABLE, NET OF PREMIUMS AND NOTES PAYABLE

 

Convertible notes, net of discounts and notes payable
		September 30, 2017												June 30, 2017
										Principal,												Principal,
						Debt				net of								Debt				net of
		Principal				Discounts				Discounts				Principal				Discounts				Discounts
PureEnergy		$	15,475			$	(1,436	)		$	14,039			$	15,475			$	(7,489	)		$	7,986
PureEnergy			–				–				–				13,480				(5,565	)			7,915
PowerUp			–				–				–				75,000				(39,330	)			35,670
PowerUp			38,000				(12,284	)			25,716				38,000				(18,893	)			19,107
PowerUp			53,000				(24,892	)			28,108				–				–				–
PowerUp			38,000				(11,175	)			26,825				–				–				–
PureEnergy			33,842				(16,817	)			17,025				–				–				–
PureEnergy			78,427				(38,972	)			39,455				–				–				–
LG			42,000				(21,258	)			20,742				–				–				–
Total		$	298,744			$	(126,834	)		$	171,910			$	141,955			$	(71,277	)		$	70,678

 

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 September 30, 2017. On April 15, 2016, Mr. Perlowin converted the principal of this promissory note into 50,000 shares of common stock (see Note 7). The accrued interest was not converted.

 

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 September 30, 2017. On April 15, 2016, Mr. Perlowin converted the principal of this promissory note into 50,000 shares of common stock (see Note 7). 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 September 30, 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 7). The accrued interest was not converted.

 

 

 

Freedom Leaf Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(unaudited)

 

 

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 June 30, 2016, $14,795 was amortized. A beneficial conversion feature of $50,000 was recorded and, as of June 30, 2016, $8,904 has been amortized. For the initial tranche, the Company has recorded accrued interest of $0 as of September 30, 2017. For the second tranche, the Company has recorded accrued interest of $0 as of September 30, 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 June 30, 2017, had recorded $12,123 of amortization. The note matures on October 10, 2017 and bears interest at 8%. On April 6, 2017, the Company prepaid Adar $38,400 for full settlement of this note.

 

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 September 30, 2017, had recorded $25,000 of amortization. The note matures on November 1, 2017 and bears interest at 8%. On April 26, 2017, Eagle sold its convertible note to PureEnergy 714 LLC (“PureEnergy”) with no change in terms. As of September 30, 2017, there is $0 of accrued interest. On June 29, 2017, the Company issued 791,140 shares of common stock to PureEnergy for the conversion of $12,501 (see Note 7). On July 19, 2017, the Company issued 748,934 shares of common stock to PureEnergy related to the conversion of $13,481 (see Note 14). On November 3, 2017, the Company issued 1,006,768 shares of common stock to PureEnergy for the conversion of $14,497 of a convertible promissory note (see Note 14).

 

On May 23, 2017, the Company executed a convertible promissory note with PureEnergy for $15,475. 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 $8,481 and as of September 30, 2017, had recorded $14,039 of amortization. The note matures on February 23, 2018 and bears interest at 8%. As of September 30, 2017, there is $502 of accrued interest.

 

 

 

Freedom Leaf Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(unaudited)

 

 

On May 10, 2017, the Company executed a convertible promissory note with Power Up for $75,000. The note has a conversion discount of 35% based on the lowest closing price of the 20 days prior to conversion. The Company recorded a debt discount of $47,865 and as of September 30, 2017, had recorded $23,932 of amortization. The note matures on February 23, 2018 and bears interest at 8%. As of June 30, 2017, there is $1,282 of accrued interest. On September 28, 2017, Pure Energy purchased the May 10, 2017 convertible promissory note between the Company and Power Up (see Note 14). The Power Up convertible promissory note was for $75,000. The Company and Pure Energy entered into a revised convertible promissory note to replace the Power Up convertible promissory note as stated below.

 

On June 20, 2017, the Company executed a convertible promissory note with Power Up for $38,000. The note has a conversion discount of 35% based on the lowest closing price of the 20 days prior to conversion. The Company recorded a debt discount of $19,611 and as of September 30, 2017, had recorded $7,327 of amortization. The note matures on February 23, 2018 and bears interest at 8%. As of September 30, 2017, there is $1,286 of accrued interest.

 

On July 20, 2017, the Company executed a convertible promissory note with Power Up for $38,000. The note has a conversion discount of 35% based on the lowest closing price of the 20 days prior to conversion. The Company recorded a debt discount of $14,829 and as of September 30, 2017, had recorded $449 of amortization. The note matures on August 11, 2018 and bears interest at 8%. As of September 30, 2017, there is $912 of accrued interest.

 

On August 11, 2017, the Company executed a convertible promissory note with LG Capital (“LG”) for $42,000. The note has a conversion discount of 35% based on the lowest closing price of the 12 days prior to conversion. The Company recorded a debt discount of $21,707 and as of September 30, 2017, had recorded $3,654 of amortization. The note matures on March 20, 2018 and bears interest at 8%. As of September 30, 2017, there is $469 of accrued interest.

 

On September 26, 2017, the Company executed a convertible promissory note with Power Up for $53,000. The note has a conversion discount of 35% based on the lowest closing price of the 10 days prior to conversion. The Company recorded a debt discount of $14,898 and as of September 30, 2017, had recorded $9,995 of amortization. The note matures on June 30, 2018 and bears interest at 12%. As of September 30, 2017, there is $87 of accrued interest.

 

On September 27, 2017, the Company executed a convertible promissory note with Pure Energy for $78,427 to replace the May 10, 2017 convertible note with Power Up, as reflected above. The note has a conversion discount of 35% based on the lowest closing price of the 12 days prior to conversion. The Company recorded a debt discount of $38,880 and as of September 30, 2017, had recorded $93 of amortization. The note matures on September 27, 2018 and bears interest at 8%. As of September 30, 2017, there is $69 of accrued interest.

 

On September 27, 2017, in conjunction with the payoff of the May 10, 2017 Power Up convertible note, the Company incurred a prepayment penalty of $28,496, which Pure Energy paid to Power Up. The Company issued a second convertible promissory note for $33,842, which included the prepayment penalty and legal fees of $5,346. The second convertible promissory note matures on September 27, 2018 and bears interest of 8%. The Company recorded a debt discount of $16,777 and as of September 30, 2017, had recorded $40 of amortization. As of September 30, 2017, there is $30 of accrued interest.

 

NOTE 11 – STOCKHOLDERS’ EQUITY

 

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 designate 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 5.

 

On May 25, 2016, Cowan converted 26,401,000 shares of common stock into 264,010 shares of Series A preferred stock. See Note 5.

 

 

 

Freedom Leaf Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(unaudited)

 

 

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 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.

 

 

 

Freedom Leaf Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(unaudited)

 

 

On January 30, 2017, the Company entered into an agreement with CorporateAds.com, LLC (“CorporateAds.com”) 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.

 

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.

 

On April 25, 2017, the Company issued 200,000 shares of common stock to CorporateAds.com, in regards to the January 30, 2017 agreement.

 

On May 30, 2017, the Company issued 3,000,000 shares of common stock to Valencia Web Technology for intellectual property with a value set at $300,000. The shares were valued at $0.04, or $184,500. The agreement requires for a value at a later date of $300,000. Therefore, the Company recorded a contingent liability of $112,500.

 

On June 12, 2017, the Company issued 119,900 shares of common stock to Sandra Newman for the settlement of accounts payable of $5,995. The shares were valued at $5,395 and the Company recognized a gain of $600.

 

On June 12, 2017, the Company authorized the issuance 200,000 shares of common stock to Jason Edwards for services valued at $10,000. The shares were valued at $9,000 and the Company recognized a gain of $1,000. As of June 30, 2017, the shares remained as issuable.

 

On June 23, 2017, the Company issued 226,881 shares of common stock to Louis Yovino for the settlement of accounts payable of $8,803. The shares were valued at $8,395 and the Company recognized a gain of $408.

 

On June 23, 2017, the Company issued 177,032 shares of common stock to Rene Velez for services valued at $7,500. The shares were valued at $8,586 and the Company recognized a loss of $1,086.

 

On June 23, 2017, the Company issued 596,163 shares of common stock to Michael Ostrander for services valued at $22,500. The shares were valued at $22,058 and the Company recognized a gain of $442.

 

On June 29, 2017, the Company issued 791,140 shares of common stock to PureEnergy in conjunction with a convertible promissory note (see Note 7).

 

On June 30, 2017, the Company issued 300,000 shares of common stock to Michael Ostrander for services valued at $15,000. The shares were valued at $15,150 and the Company recognized a loss of $150.

 

On June 30, 2017, the Company issued 400,000 shares of common stock to Jason Edwards for services valued at $20,000. The shares were valued at $20,200 and the Company recognized a loss of $200.

 

 

 

Freedom Leaf Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(unaudited)

 

 

On July 5, 2017, the Company issued 200,000 shares of common stock to Jason Edwards for services.

 

On July 19, 2017, the Company issued 748,934 shares of common stock to PureEnergy related to the conversion of $13,481 of a convertible promissory note (see Note 4).

 

On July 31, 2017, the Company issued 5,784,061 shares of common stock to Cliff Perry for accrued compensation of $112,500. See Note 5.

 

On July 31, 2017, the Company issued 2,699,228 shares of common stock to Raymond Medeiros for accrued compensation of $52,500. See Note 5.

 

On August 11, 2017, the Company issued 500,000 shares of common stock to Frank Dobrucki for services.

 

On August 14, 2017, the Company issued 400,000 shares of common stock to Jason Edwards for services.

 

On August 14, 2017, the Company issued 500,000 shares of common stock to Nuaxon Bioscience as part of the agreement for exclusive rights to market and sell their equipment.

 

On August 17, 2017, the Company issued 345,451 shares of common stock to Lakeport Business Services, Inc. for accounts payable of $9,450.

 

On August 25, 2017, the Company issued 600,000 shares of common stock to Christopher Thompson for services in August 2017.

 

On August 25, 2017, the Company issued 550,000 shares of common stock to Joshua Halford for services in August 2017.

 

On August 28, 2017, the Company issued 1,061,500 shares of common stock to Christopher Sloan for services in May 2017 (600,000 shares of common stock) and for accrued expenses of $23,075 (461,500 shares of common stock).

 

On August 28, 2017, the Company issued 530,303 shares of common stock to Neil Dutson for services valued at $17,500.

 

On August 29, 2017, the Company issued 100,000 shares of common stock to Marc Hatch for services valued at $5,000.

 

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.

  

 

 

Freedom Leaf Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(unaudited)

 

 

On December 14, 2015, the Company executed a convertible promissory note for $100,000 with Swiss Allied (see Note 6). 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 6 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.

 

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.

 

 

 

Freedom Leaf Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(unaudited)

 

 

NOTE 12 – REVENUE CLASSES

 

Selected financial information for the Company’s operating revenue classes for the three months ended September 30, 2017 and 2016, are as follows:

 

		For the three months ended
Revenues:		September 30,
		2017				2016
Magazine related		$	–			$	2,774
Referral fees			–				6,000
Seminars and training			–				838
Licensing fees			–				104,760
Sale of products			1,327				6,182
Total		$	1,327			$	120,554

 

 

		For the three months ended
Direct costs of revenue:		September 30,
		2017				2016
Magazine related		$	32,170			$	23,718
Referral fees			–				–
Seminars and training			–				–
Licensing fees			–				–
Sale of products			976				1,547
Total		$	33,146			$	25,265

 

The Company’s four revenue classes are magazine related, referral fees, licensing fees (see Note 2) and equipment sales commissions (see Note 2).

 

NOTE 13 – CONCENTRATIONS

 

Concentration of Credit Risk

 

Financial instruments, which potentially subject the Company to a concentration of credit risk, consist principally of temporary cash investments.

 

The Company places its temporary cash investments with financial institutions insured by the FDIC. No amounts exceeded federally insured limits as of September 30, 2017. There have been no losses in these accounts through September 30, 2017.

 

Concentration of Revenue

 

For the three months ended September 30, 2017, the Company had no material customer.

 

Concentration of Supplier

 

The Company does not rely on any particular suppliers for its services.

 

Concentration of Intellectual Property

 

The Company owns or has filed for the trademarks “Freedom Leaf,” “Hemp Inspired,” “Cannabizu,” and “Cannabiz” as filed with the United States Patent and Trademark Office. The Company has filed for “Freedom Leaf” in Jamaica and Uruguay.

 

 

 

Freedom Leaf Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017

(unaudited)

 

 

NOTE 14 – 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 October 6, 2017, the Company issued 400,000 shares of common stock to Jason Edwards for services in October 2017 valued at $20,000.

 

On October 6, 2017, the Company issued 600,000 shares of common stock to Michael Ostrander for services in October 2017 valued at $30,000.

 

On October 25, 2017, the Company issued 1,001,250 shares of common stock to Timothy Puetz for services in October 2017 valued at $20,025.

 

On October 25, 2017, the Company issued 255,000 shares of common stock to Ronald Voight for services in October 2017 valued at $5,100.

 

On October 25, 2017, the Company issued 250,000 shares of common stock to Victor Park, a vendor, for services in October 2017 valued at $7,500.

 

On October 28, 2017, the Company issued 273,333 shares of common stock to Lakeport Business Services, Inc. for services in October 2017 valued at $8,200.

 

On October 31, 2017, the Company issued 850,000 shares of common stock to Paul F. Pelosi, Jr. (“Pelosi”), in regards to his appointment as Chairman of the Board on November 1, 2017, for compensation for the period November 1, 2017 through January 31, 2018. The Company is obligated to issue on February 1, 2018, an additional 1,250,000 options for common stock with an exercise price of $0.04, with an expiration eighteen months after issuance.

 

On November 3, 2017, the Company issued 1,006,768 shares of common stock to PureEnergy for the conversion of $14,497 of a convertible promissory note (see Note 10).

 

On November 9, 2017, the Company issued 122,500 shares of common stock to legal counsel for services in October 2017 valued at $3,675.

 

On November 9, 2017, the Company issued 250,000 shares of common stock to Frank Dobrucki for services in October 2017 valued at $7,500.

 

On November 9, 2017, the Company sold 967,000 shares of common stock to Pelosi for $14,500, based on a per share price of $0.01499.

 

 

 

 

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, 2017 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 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, the sole officer, director and shareholder of the private company, Clifford J. Perry, became an officer and director of the Company, and Mr. Perry received approximately 48.1% of the Company’s common stock post-merger.

 

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 most of our efforts to the news, arts and entertainment niche, with both “in print” and online publications, as well as offering products and services to the cannabis industry.  

 

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.

 

Results of Operations

 

For the Three Months Ended September 30, 2017 and 2016

 

Revenues

 

 

Our revenue was $1,327 for the three months ended September 30, 2017, compared to $120,554 for the three months ended September 30, 2016. Revenue, by class, is as follows:

		For the three months ended
Revenues:		September 30,
		2017				2016
Magazine related		$	–			$	2,774
Referral fees			–				6,000
Seminars and training			–				838
Licensing fees			–				104,760
Sale of products			1,327				6,182
Total		$	1,327			$	120,554

 

Operating Expenses

 

Direct costs of revenues were $33,146 and $25,265 for the three months ended September 30, 2017 and 2016, respectively. Direct costs of revenues, by class, is as follows:

 

		For the three months ended
Direct costs of revenue:		September 30,
		2017				2016
Magazine related		$	32,170			$	23,718
Referral fees			–				–
Seminars and training			–				–
Licensing fees			–				–
Sale of products			976				1,547
Total		$	33,146			$	25,265

 

 

 

For the three months ended September 30, 2017 our general and administrative expenses and marketing and selling expenses were $641,451 compared to $451,671 for the three months ended September 30, 2016 resulting in an increase of $189,780, attributable primarily to stock-based compensation of $294,330 for the three months ended September 30, 2017, compared to $256,900 for the three months ended September 30, 2016. As a result, net loss was $601,397 for the three months ended September 30, 2017, compared to net loss of $401,892 for the three months ended September 30, 2016.

  

 

 

 

Liquidity and Capital Resources

 

Overview

 

As of September 30, 2017, the Company had $20,009 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 three months ended September 30, 2017 compared to the three months ended September 30, 2016

 

We used cash in operations of $101,805 for the three months ended September 30, 2017, compared to cash used in operations of $21,877 for the three months ended September 30, 2016. The negative cash flow from operating activities for the three months ended September 30, 2017 is attributable to the Company's net loss from operations of $707,584 primarily due to the issuance of common stock for services. Cash used in operations of $21,877 for the three months ended September 30, 2016 is attributable to the Company's net loss of $401,892 offset primarily by increase in stock-based compensation of $256,900.

 

We used cash in investing or financing activities of $33,437 and $850 for the three months ended September 30, 2017 and 2016.

 

We had cash provided by financing activities of $152,753 for the three months ended September 30, 2017, compared to $23,968 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 $707,504 and cash used in operating activities of $101,805 for the three months ended September 30, 2017. The Company had working capital deficit, stockholders’ deficit and accumulated deficit of $87,018, $58,439 and $5,628,572, respectively, at September 30, 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.

 

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, 2017, included in our Annual Report on Form 10-K as filed on October 19, 2017, 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 Three Months Ended
		September 30,
		2017				2016
Net loss		$	(707,584	)		$	(401,892	)
Beneficial conversion feature expense			(25,495	)			(29,315	)
Adjusted net loss		$	(682,089	)		$	(372,577	)
Weighted average shares outstanding - basic and diluted			119,027,797				95,012,563
Adjusted basic and diluted net loss per share		$	(0.01	)		$	(0.00	)

 

 

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 Three Months Ended
		September 30,
		2017				2016
Net loss from operations		$	(707,584	)		$	(401,892	)
Interest expense			(5,209	)			(2,401	)
Depreciation			(6,188	)			–
Amortization			(204	)			(140	)
Stock-based compensation			(294,330	)			(256,900	)
Bad debt expense			(163,533	)			–
Beneficial conversion feature expense			(25,495	)			(29,315	)
Adjusted EBITDA		$	(212,625	)		$	(113,136	)
Weighted average shares outstanding - basic and diluted			119,027,797				95,012,563
Adjusted basic and diluted net loss per share		$	(0.00	)		$	(0.00	)

 

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.

  

 

 

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

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.

 

Item 1A. Risk Factors

 

Not required.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

During the quarter ending September 30, 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 July 5, 2017, the Company issued 200,000 shares of common stock to Jason Edwards for future services.

 

On July 5, 2017, the Company issued 177,032 shares of common stock to Rene Velez for future services.

 

On July 19, 2017, the Company issued 748,934 shares of common stock to PureEnergy related to the conversion of $13,481 of a convertible promissory note.

 

On July 31, 2017, the Company issued 5,784,061 shares of common stock to Cliff Perry for accrued compensation of $112,500.

 

On July 31, 2017, the Company issued 2,699,228 shares of common stock to Raymond Medeiros for accrued compensation of $52,500.

 

On August 14, 2017, the Company issued 400,000 shares of common stock to Jason Edwards for future services.

 

On August 14, 2017, the Company issued 500,000 shares of common stock to Nuaxon Bioscience as part of the agreement for exclusive rights to market and sell their equipment.

 

On August 17, 2017, the Company issued 345,451 shares of common stock to Lakeport Business Services, Inc. for accounts payable of $9,450.

 

On August 23, 2017, the Company issued 500,000 shares of common stock to Frank Dobrucki for future services.

 

On August 25, 2017, the Company issued 600,000 shares of common stock to Christopher Thompson for services in August 2017.

 

On August 25, 2017, the Company issued 550,000 shares of common stock to Joshua Halford for services in August 2017.

 

On August 28, 2017, the Company issued 1,061,500 shares of common stock to Christopher Sloan for services in August 2017 (600,000 shares of common stock) and for accrued expenses of $23,075 (461,500 shares of common stock).

 

On August 28, 2017, the Company issued 500,303 shares of common stock to Neil Dutson for services valued at $17,500.

 

On August 29, 2017, the Company issued 100,000 shares of common stock to Marc Hatch for services valued at $5,000.

 

On October 6, 2017, the Company issued 400,000 shares of common stock to Jason Edwards for services valued at $20,000.

 

On October 6, 2017, the Company issued 600,000 shares of common stock to Michael Ostrander for services valued at $30,000.

 

 

 

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

Number		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 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 Form 10-Q/A for the period ended December 31, 2014, filed on September 11, 2015)
31.1 (1)		Certification of Principal Executive Officer and Principal Accounting Officer of Freedom Leaf Inc. required by Rule 13a-14(1) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 (1)		Certification of Principal Executive Officer and Principal Accounting Officer of Freedom Leaf Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 Of 18 U.S.C. 63
101.INS		XBRL Taxonomy Extension 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

 

 

 

 

 

SIGNATURES

 

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: November 20, 2017	By: /s/ Clifford J. Perry
	Clifford J. Perry
	Chief Executive Officer and Chief Financial Officer