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, 2018

 

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, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 November 19, 2018, there were 221,588,236 shares of common stock, par value $0.001 per share issued, issuable, and outstanding.

 

 

 

 

FREEDOM LEAF INC.

FORM 10-Q

SEPTEMBER 30, 2018

 

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	18
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	21
Item 4.		Controls and Procedures	21
PART II – OTHER INFORMATION			23
Item 1.		Legal Proceedings	23
Item 1A.		Risk Factors	23
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3.		Defaults Upon Senior Securities	23
Item 4.		Mine Safety Disclosures	23
Item 5.		Other Information	23
Item 6.		Exhibits	24
SIGNATURES			25

 

 

 

 

 

 

 

 

 

 

 

PART I – FINANCIAL INFORMATION

 

TABLE OF CONTENTS

 

Index to Financial Statements		Page
Condensed Consolidated Balance Sheets as of September 30, 2018 (unaudited) and June 30, 2018		4
Condensed Consolidated Statements of Operations and Comprehensive Income for the three months ended September 30, 2018 and 2017 (unaudited)		5
Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2018 and 2017 (unaudited)		6
Notes to Condensed Consolidated Financial Statements		8

 

 

 

 

 

 

 

 

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

FREEDOM LEAF INC.

and Subsidiaries

Condensed Consolidated Balance Sheets

 

		September 30,				June 30,
		2018				2017
		(Unaudited)
ASSETS
Current assets
Cash		$	34,232			$	54,380
Accounts receivable, net			290,756				161,975
Inventory, net			326,205				201,689
Prepaid expense			642,157				578,864
Due from related parties			–				28,606
Total current assets			1,293,350				1,025,514
Fixed assets, net			4,621,073				4,786,050
Intangible assets, net			1,767,060				1,522,574
Goodwill			70,000				70,000
Cost method investments			1,370,400				995,400
Total assets		$	9,121,883			$	8,399,538
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses		$	961,956			$	557,654
Current portion of long-term notes payable			284,654				95,000
Short-term notes payable, net of debt discounts			97,580				286,575
Payable to related party			16,095				–
Total current liabilities			1,360,285				939,229
Non-current liabilities
Long-term notes payable, net of discount, net of current portion			4,462,890				4,441,911
Total liabilities			5,823,175				5,381,140
Commitments and contingencies			–				–
Stockholders' equity
Series A convertible preferred stock, $0.001 par value, 10,000,000 shares authorized, 1,000,000 shares authorized, 948,022 shares issued and outstanding			948				948
Common stock, $0.001 par value, 500,000,000 shares authorized, 221,090,815 and 185,369,365 shares issued, issuable, and outstanding at September 30, 2018 and June 30, 2018, respectively			221,090				185,370
Additional paid-in capital			16,485,417				12,377,907
Stock subscriptions receivable			(2,750,000	)			–
Accumulated other comprehensive income			2,679				3,833
Accumulated deficit			(10,643,599	)			(9,540,976	)
Total Freedom Leaf Inc. stockholders' equity			3,316,535				3,027,082
Non-controlling interest			(17,827	)			(8,684	)
Total stockholders' equity			3,298,708				3,018,398
Total liabilities and stockholders' equity		$	9,121,883			$	8,399,538

 

  

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

FREEDOM LEAF INC.

and Subsidiaries

Condensed Consolidated Statements of Operations

(unaudited)

 

 

		For the Three Months Ended September 30,
		2018				2017
Revenues, net		$	608,658			$	1,327
Operating expenses
Direct costs of revenue			269,125				33,146
General and administrative			1,114,332				482,879
Depreciation and amortization			362,884				6,391
Bad debt expense			19,755				158,370
Marketing and selling			38,424				2,583
Total operating expenses			1,804,520				683,369
Operating loss			(1,195,862	)			(682,042	)
Other income (expense)
Interest expense			(6,769	)			(5,209	)
Interest income			8				5,162
Gain on forgiveness of debt			100,000				–
Change in fair value of derivative liabilities			–				2,105
Beneficial conversion features			–				(27,600	)
Total other income (expense)			93,239				(25,542	)
Provision for income taxes			–				–
Net loss before non-controlling interest			(1,102,623	)			(707,584	)
Loss attributable to non-controlling interest			(9,143	)			–
Net loss attributable to common stockholders		$	(1,111,766	)		$	(707,584	)
Net loss attributable to common stockholders per share - basic and diluted		$	(0.01	)		$	(0.01	)
Weighted average number of shares
outstanding - basic and diluted			194,698,293				119,027,797
Other Comprehensive Income (Loss)
Foreign currency translation adjustment			(1,154	)			–
Total Comprehensive Loss		$	(1,112,920	)		$	(707,584	)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

 

 

 

FREEDOM LEAF INC.

and Subsidiaries

Consolidated Statement of Shareholders' Deficit

 

 

 

		Preferred Stock								Common Stock Issuable								Common Stock								Stock Sub				Additional Paid In				Non-Controlling				Accumulated Comprehensive				Accumulated
		Shares				Amount				Shares				Amount				Shares				Amount				Rec				Capital				Interest				Income				Deficit				Total
Balance at June 30, 2018			948,022			$	948				660,752			$	663				184,708,613			$	184,707			$	–			$	12,377,907			$	(8,684	)		$	3,833			$	(9,540,976	)			3,018,398
Issuance of common stock and warrants for cash			–				–				–				–				4,702,424				4,702				–				323,798				–				–				–				328,500
Issuance of common stock for services			–				–				(492,242	)			(493	)			1,511,268				1,511				–				138,082				–				–				–				139,100
Issuance of common stock for stock subscriptions			–				–				25,000,000				25,000				–				–				(2,750,000	)			2,975,000				–				–				–				250,000
Issuance of common stock in business combinations			–				–				–				–				2,000,000				2,000				–				298,630				–				–				–				300,630
Issuance of common stock for cost method investment			–				–				–				–				3,000,000				3,000				–				372,000				–				–				–				375,000
Accumulated comprehensive income			–				–				–				–				–				–				–				–				–				(1,154	)			–				(1,154	)
Net loss for the period ended			–				–				–				–				–				–				–				–				(9,143	)			–				(1,102,623	)			(1,111,766	)
Balance at September 30, 2018			948,022			$	948				25,168,510			$	25,170				195,922,305			$	195,920			$	(2,750,000	)		$	16,485,417			$	(17,827	)		$	2,679			$	(10,643,599	)		$	3,298,708

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

FREEDOM LEAF INC.

and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

  

		2018				2017
Cash flows from operating activities:
Net loss		$	(1,102,623	)		$	(707,584	)
Adjustments to reconcile net loss to net cash used in operations:
Bad debt expense			–				158,370
Depreciation and amortization			342,495				6,391
Beneficial conversion features			–				27,600
Change in fair value of derivative liabilities			–				(2,105	)
Gain on forgiveness of debt			(100,000	)			–
Amortization of debt discounts			2,902				–
Common stock issued for services			139,592				294,330
Changes in operating assets and liabilities:
Accounts receivable			(128,781	)			–
Inventory			(124,517	)			–
Prepaid expenses			(110,574	)			1,600
Accounts payable and accrued expenses			511,006				86,593
Due to related parties			44,700				33,000
Net cash used in operating activities			(525,800	)			(101,805	)
Cash flows from (used in) investing activities
Cash acquired in business combination			1,210				–
Purchases of property and equipment			(2,699	)			(30,000	)
Purchases of intangible assets			–				(3,437	)
Net cash from (used in) investing activities			(1,489	)			(33,437	)
Cash flows from financing activities:
Proceeds from notes payable			60,000				132,297
Payments on notes payable			(168,073	)			(7,745	)
Proceeds from related party payables			–				28,201
Proceeds from the sale of common stock and warrants			578,500				–
Net cash provided by financing activities			470,427				152,753
Effects of exchange rates on cash			36,714				–
Net change in cash			(20,148	)			17,511
Cash at beginning of period			54,380				2,498
Cash at end of period		$	34,232			$	20,009
Supplemental disclosure of cash flow information:
Cash paid for interest		$	–			$	–
Cash paid for taxes		$	–			$	–
Non-cash investing and financing activities:
Financed purchases of property and equipment		$	–			$	(118,500	)
Initial debt discounts		$	6,000			$	(37,249	)
Common stock issued for settlement of debt		$	–			$	53,764
Common stock issued for cost method investment		$	375,000			$	–
Common stock issued in business combination		$	300,630			$	–
Common stock issued for subscriptions receivable		$	2,750,000			$	–
Contingent liability		$	–			$	51,000
Derivative liabilities on convertible debentures		$	–			$	275,123

 

See accompanying notes to unaudited condensed consolidated financial statements.

   

 

 

Freedom Leaf Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2018

(Unaudited)

 

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

 

Organization

 

The Company 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 resell these in the U.S. territories or export to overseas countries. On October 3, 2014, the Company experienced a change in control. Richard C. Cowan acquired approximately 93% of the issued and outstanding common stock of the Company at the time. On November 6, 2014, the Company merged with Freedom Leaf Inc., a private Nevada corporation, and the Company changed its name to Freedom Leaf Inc. In connection with the merger, the sole officer, director and stockholder 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. For financial reporting purposes, this merger was accounted for as a "reverse acquisition" rather than a business combination, and the 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 were reflected in the historical financial statements of the Company prior to the merger are those of the private company, and they were recorded at the historical cost basis of the private company, and the financial statements after completion of the merger include the combined assets and liabilities of the Company and the private company, the historical operations of the private company only, and the operations of both companies from the closing date of the merger.

 

Freedom Leaf Inc. is a reporting public company traded under the symbol (OTCQB: FRLF) with corporate headquarters located at 3571 E. Sunset Road, Las Vegas, Nevada, 89120.

 

Subsidiary Entities:

 

☐

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.

 

☐

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.

 

☐

Leafceuticals Europe, SL, a wholly-owned subsidiary of the Company’s owns our Valencia greenhouse operations.

 

☐

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.

  

☐

Tierra Science Global, LLC. (“Tierra”), a Nevada corporation, was formed on August 23, 2017, and, as of its acquisition by Freedom Leaf on July 26, 2018 with an effective date of August 1, 2018, is a wholly-owned subsidiary of the Company.

 

 

 

 

 

 

Nature of Operations

 

Freedom Leaf Inc. is a group of diversified, multinational, vertically-integrated hemp businesses and cannabis media companies. Freedom Leaf has strived to be a leading go-to resource in the cannabis, medical marijuana, and industrial hemp industries since 2014, founded by professionals with Decades of combined experience in cannabis legalization advocacy. The Company is continuously building a diverse, global portfolio of valuable businesses and enterprises through strategic mergers, acquisitions, and acceleration projects across the hemp and cannabis industry. Utilizing these mergers and acquisitions, Freedom Leaf is building a solid foundation for our vertically-integrated hemp company to maximize both stockholder value and revenue growth. Our cultivation and extraction divisions allow FRLF to grow and source our own hemp extract, which allows dramatically lower production costs for our wholly-owned hemp product lines, thereby generating more revenue for each product sold. We also formulate and manufacture the majority of our products in our own in-house formulation centers, also greatly reducing our costs and increasing revenue. In addition, our extensive domestic and international media companies ensure we can continuously direct traffic to our many ecommerce sites and nationwide retail locations. For valuation purposes, the Company’s focus is on developing and implementing multiple, mutually-reinforcing revenue streams; through which revenue, net income and stockholder value are maximized by cross-marketing across its brands and advertising through its media properties. The Company’s major business lines are:

 

☐	Legal Industrial Hemp Cultivation

 

☐	Cannabidiol Extraction, Distillation, and Processing

 

☐	Expert Product Formulation

 

☐	Nutraceutical Brand Marketing

 

☐	Ancillary Products & Niche Markets

 

☐	Affiliate Marketing Programs

 

☐	E-Commerce Solutions

 

☐	Global Media & Advertising Networks

 

Basis of Presentation

 

The Company prepares its consolidated financial statements in conformity with generally accepted accounting principles in the United States of America. The unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of such statements. These unaudited condensed consolidated financial statements have been prepared in accordance with GAAP pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Additionally, the results of operations for the three months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the entire year. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended June 30, 2018 included in the Company’s 2018 Annual Report on Form 10-K, filed with the SEC on October 15, 2018.

 

Principles of Consolidation

 

The Company consolidates any variable interest entities of which it is the primary beneficiary. Equity investments through which the Company exercises significant influence over but does not control the investee and is not the primary beneficiary of the investee’s activities are accounted for using the equity method. Investments through which the Company is not able to exercise significant influence over the investee and which do not have readily determinable fair values are accounted for under the cost method. All material inter-company accounts have been eliminated in the consolidation.

 

 

 

 

 

 

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.

 

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.

 

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:

 

	·	Advertising Services – Revenue from advertising is recognized over the contracted period in which advertising services are performed. Advertising services are considered performed when an ad is displayed to users.
	·	Product Sales – Revenue from the sale of the Company’s branded products is recognized in the period in which product is shipped. Sales billed or cash received in advance of actual shipment are deferred and recorded as income in the period in which shipment is made. Shipping and handling fees billed to customers is included in net sales. Shipping and handling costs are expensed as incurred and included in cost of sales. All sales are presented net of sales taxes, which are excluded from revenue.
	·	Licensing Revenue – Revenue from licensing arrangements is recognized when earned, estimable and realizable. The timing of revenue recognition is dependent on the terms of each license agreement and on the timing of sales of licensed products. The Company generally recognizes royalty revenue when it is reported to the Company by its licensees, which is generally one quarter in arrears from the licensees’ sales of licensed products. For licensing fees that are not determined by the licensees’ sales, the Company generally recognizes license fee revenue on a straight-line basis over the life of the license.

 

 

 

 

 

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 that may dilute future earnings per share consist of Series A convertible preferred stock and warrants to purchase common stock. As of September 30, 2018, there were 94,830,801 such common stock equivalents. Equivalent shares are not utilized when the effect is anti-dilutive.

 

Going Concern

 

The Company has a net loss attributable to common stockholders for the nine months ended September 30, 2018 of $1,111,766 and working capital deficit as of September 30, 2018 of $66,935 and has used cash in operations of $525,800 for the three months ended September 30, 2018. In addition, as of September 30, 2018, the Company had an accumulated deficit of $10,643,599. These conditions raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year from the date of the issuance of these financial statements.

 

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.

 

NOTE 2 – INVENTORY

 

Inventories at September 30, 2018 and June 30, 2018 consisted of the following:

 

		September 30,				June 30,
		2018				2018
Raw materials		$	–			$	–
Work-in-process			101,794				126,047
Finished goods			260,450				111,681
Inventory reserve			(36,039	)			(36,039)
Inventory, net		$	326,205			$	201,689

 

NOTE 3 – PROPERTY AND EQUIPMENT

 

Property and equipment at September 30, 2018 and June 30, 2018 consisted of the following:

 

		September 30, 2018				June 30, 2018
Machinery and equipment		$	2,015,099			$	2,022,980
Furniture and fixtures			25,000				25,000
Land			625,980				630,805
Buildings			2,154,359				2,170,963
Total property and equipment			4,820,438				2,975,268
Less: Accumulated depreciation			(199,365	)			(63,698	)
Property and equipment, net		$	4,621,073			$	4,786,050

 

The depreciation expense for the three months ended September 30, 2018 and 2017, was $143,619 and $6,187, respectively.

 

 

 

 

 

NOTE 4 – INTANGIBLE ASSETS

 

Intangible assets at September 30, 2018 and June 30, 2018 consisted of the following:

 

		September 30, 2018				June 30, 2018
Websites and other intangible assets		$	599,674			$	519,923
Trademarks and trade names			397,682				342,682
Customer relationships			1,041,000				712,000
Patents and intellectual property			264,160				264,160
Total intangible assets			2,302,516				1,838,765
Less: Accumulated amortization			(535,454	)			(316,191	)
Intangible assets, net		$	1,767,060			$	1,522,574

  

The amortization expense for the three months ended September 30, 2018 and 2017, was $219,265 and $204, respectively.

 

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

 

2019			813,346
2020			544,755
2021			173,301
2022			171,965
2023 and thereafter			63,693
Total		$	1,767,060

  

NOTE 5 – BUSINESS COMBINATION

 

Tierra Science Global

 

On July 26, 2018, the Company acquired 100% of the membership interests of Tierra Science Global, LLC (“Tierra”), a nutraceutical business, for which it: (i) issued to that Company’s owners 2,000,000 shares of the Company’s common stock, valued at $246,000 based on the closing price of the common stock on that day and (ii) entered into employment agreements with the Company’s principal executives. Pursuant to those employment agreements, each of the Tierra’s two sellers was contacted to receive: (i) the greater of $2,000 per month or 2.5% of the prior month’s gross margin from sales and (ii) $25,000 of Company common stock for each $500,000 in cumulative net profits. The Company intends to expand Tierra’s product offering to include various cannabidiol products branded as “powered by Freedom Leaf. 

 

 

 

 

 

 

Purchase Consideration:

 

The provisional fair value of the purchase consideration issued to the sellers of Tierra was allocated to the net tangible assets acquired. We accounted for the acquisition of Tierra as the purchase of a business under GAAP under the acquisition method of accounting, the assets and liabilities acquired were recorded as of the acquisition date, at their respective fair values and consolidated with those of our company. The fair value of the net assets acquired, net of liabilities assumed, was approximately $300,630. The excess of the aggregate fair value of the net tangible and intangible assets has been treated as goodwill. The purchase price allocation was based, in part, on management’s knowledge of Tierra’s business and is preliminary. Once the Company completes its analysis to finalize the purchase price allocation, which includes finalizing the valuation report from a third-party appraiser and a review of potential intangible assets, it is reasonably possible that there could be significant changes to the preliminary values below.

 

Provisional consideration given:

Cash Consideration
Common stock shares given			300,630
Notes payable assumed			129,800
Total consideration given		$	430,430

 

Assets acquired and liabilities assumed at preliminary fair value:

Current assets		$	1,210
Current liabilities			33,780
Net Working Capital			(32,570	)
Property and equipment			15,000
Trade names and trademarks *			55,000
Customer contracts and relationships*			209,000
Other intangible assets *			184,000
Total Consideration		$	430,430

 

*

We are reviewing for potential intangible assets, which potentially may change the intangible assets.

 

The following presents the pro-forma combined results of operations of the Company with Tierra as if the entities were combined on July 1, 2017.

 

		For the Three Months Ended
		September 30,
		2018
Revenues, net		$	644,039
Net loss allocable to common stockholders			(1,131,157	)
Net loss per common share		$	(0.01	)
Weighted-average number of share outstanding			195,296,119

 

Revenue recognized by Tierra from acquisition through September 30, 2018 was $118,643. The pro-forma results of operations are presented for information purposes only. The pro-forma results of operations are not intended to present actual results that would have been attained had the acquisitions been completed as of July 1, 2018 or to project potential operating results as of any future date or for any future periods.

 

NOTE 6 – 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 19, 2018, there were no pending or threatened lawsuits.

 

 

 

 

NOTE 7 – RELATED PARTIES

 

Cowan, a former director and officer of the Company, has payables and accruals due to him of $15,485 and $15,485 as of September 30, 2018 and June 30, 2018, respectively, which amounts were recorded in Payable to related party. The payable, as agreed upon verbally, has a maturity date 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 $25,013 ($609 of which was recorded as Payable to related party and the remainder of which (accrued salaries) was recorded as Accounts payable and accrued expenses) and $32,813 as of September 30, 2018 and June 30, 2018, respectively. Imputed interest is immaterial.

 

Raymond P. Medeiros (“Medeiros”), a director of the Company, has payables and accruals due to him of $76,227 (all of which was recorded as Accounts payable and accrued expenses) and $63,000 as of September 30, 2018 and June 30, 2018, respectively. Imputed interest is immaterial.

 

NOTE 8 – NOTES PAYABLE

 

		September 30,				June 30,
		2018				2018
Note payable bearing interest at 0.0%, originated March 3, 2017, due on March 3, 2020			97,500				99,000
Note payable bearing interest at 5.0%, originated May 17, 2018, due on December 31, 2022			4,650,044				4,629,486
Note payable bearing interest at 0.0%, originated June 5, 2018, due on September 5, 2018			–				95,000
Note payable bearing interest at 8.0%, originated July 3, 2018, due on January 3, 2019, net of original issuance discounts of $3,098 and $-0- respectively			62,902				–
Note payable, assumed in acquisition of Tierra Sciences, bearing interested at 0.0% originated on October 23, 2017, due on demand			10,000				–
Note payable, assumed in acquisition of Tierra Sciences, bearing interested at 0.0% originated on February 21, 2018, due on demand			14,000				–
Note payable, assumed in acquisition of Tierra Sciences, bearing interested at 0.0% originated on July 26, 2018, due on demand			4,000				–
Total notes payable		$	4,838,446			$	4,823,486
Less: current portion			(375,556	)			(381,575	)
Long-term notes payable		$	4,462,890			$	4,441,911

 

In connection with the IRIE acquisition, the Company assumed a $100,000 promissory note, which bears no interest and is payable at the rate of $500 per month with the balance due on March 3, 2020. The note was forgiven in full by the note holder on September 1, 2018 which has been recorded as a gain on forgiveness of debt on the Company’s consolidated statement of operations and comprehensive loss.

 

 

 

 

NOTE 9 – 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.

 

As of September 30, 2018, 684,012 shares of Series A preferred stock were held by Mr. Perry and 264,010 shares of Series A preferred stock were held by Mr. Cowan.

 

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.

  

As of September 30, 2018, 221,090,815 shares of common stock were issued, issuable and outstanding. During the quarter ended September 30, 2018, the Company agreed to issue 35,721,450 shares of common stock, as detailed below, resulting in there being 22,090,815 shares outstanding as of September 30, 2018:

 

		Shares				Value ($)				Price Per Share
Stock issued for business combination			2,000,000			$	300,630				$0.15
Stock issued for cost method investment			3,000,000				375,000				$0.13
Issuance of common stock for cash and warrants			29,702,424				548,799				$0.02-$0.13
Issuance of common stock for services			1,019,026				139,100				$0.08-$0.16
Total			35,721,450			$	1,382,017

 

Warrants

 

As of June 30, 2018, warrants to acquire 7,494,444 shares of common stock were outstanding.

 

The following warrants were issued during the quarter:

 

In connection with the September 28, 2018 Securities Purchase Agreement (the “Securities Purchase Agreement”) the Company entered into with Merida and seven other investors (Merida and the seven other investors collectively the “Investors”), pursuant to which the Investors purchased, for an aggregate purchase price of $3,000,000 (the “Purchase Price”), 25,000,000 shares of the Company’s common stock (the “Common Shares”), the following Warrants were issued:

 

1.

the Investors received a three-year, non-cashless warrants to acquire 25,000,000 shares of the Company’s common stock at $0.18/share (the “Warrants”), and

 

2.

for leading the syndicate and providing 68% of the funds in the offering, Merida received a three-year, non-cashless warrants to acquire 17,000,000 shares of the Company’s common stock at $0.25/share (the “Bonus Warrants”).

 

As of September 30, 2018, warrants to acquire 50,794,444 shares of common stock were outstanding.

 

 

 

 

 

A summary of the status of the options and warrants granted as at September 30, 2018 and June 30, 2018, and changes during the years then ended is presented below:  

 

								Weighted-
								Average
								Exercise
				Number of				Price per
				Warrants				Share
	Outstanding at June 30, 2018				8,794,444
	Granted				42,000,000			$	0.21
	Exercised				–			$	–
	Cancelled				–			$	–
	Outstanding at September 30, 2018				50,764,444			$	0.19
	Exercisable at September 30, 2018				50,794,444			$	0.19

 

A summary of the status of the warrants outstanding at September 30, 2018 is presented below:

 

Range of Exercise Prices					Number Outstanding				Weighted-Average Remaining Contractual Life				Number Exercisable			Weighted-Average Exercise Price
	$0.01 – $0.09				2,200,000				1.64 years				2,200,000			$	0.05
	$0.01 – $0.09				30,594,444				2.72 years				30,594,444			$	0.17
	$0.01 – $0.09				18,000,000				2.96 years				18,000,000				0.25
	$0.01 – $0.29				50,794,444				2.76 years				50,794,444			$	0.10

 

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. There are no stock options outstanding as of September 30, 2018.

  

NOTE 10 – REVENUE CLASSES

 

Selected financial information for the Company’s operating revenue classes for the three months ended September 30, 2018 and 2017, are as follows:

  

		For the three months ended
Revenues:		September 30,
		2018				2017
Magazine related		$	472			$	–
Referral fees			–				–
Licensing fees			–				–
Product sales			608,186				1,327
Equipment sales commissions			–				–
Total		$	608,658			$	1,327

  

 

 

 

 

		For the three months ended
Direct costs of revenue:		September 30,
		2018				2017
Magazine related		$	14,053			$	33,146
Extraction			–				–
Referral fees			–				–
Licensing fees			–				–
Product sales			255,072				–
Equipment sales commissions			–				–
Total		$	269,125			$	33,146

  

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

 

NOTE 11 – 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 29, 2018, the Company issued 36,350 shares of common stock, at $0.144 per share, to an accounting firm for services rendered in July and August totaling $5,225.

 

On November 15, 2018, the Company consummated the acquisition of the assets of AccuVape, Inc. (www.accuvape.net), which produce and sell various vape-related products. Accuvape was founded in 2013 as a vaporizer company to fill the growing needs of the emerging vape market. Today, Accuvape: distributes to all 50 states, Canada, the UK and EU and has Midwest and West Coast distribution centers and over 550 authorized retailers that carry Accuvape products.

 

 

 

 

 

 

 

 

 

 

 

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

 

Freedom Leaf Inc. (“Freedom Leaf,” “FRLF,” and the “Company”) began as a media company in 2013 and has since steadily evolved into a multinational, vertically-integrated corporation primarily focused on the development and sale of premium hemp-based nutraceutical health, wellness and longevity products to a rapidly growing international market. The Company cultivates, researches, and manufactures hemp products with operations Leafceuticals Europe S.L.U. and Leafceuticals Inc. The Company then markets and sells plant-based wellness products under the Freedom Leaf, IRIE, and Hempology brands. Market awareness, customer relationships and distribution channels are reinforced in carefully-targeted demographic niches through the Company’s multiple global media properties, including Marijuana News, LaMarihuana.com, Marihuana-Medicinal.com, and Freedom Leaf Magazine. The Company also cross-markets via B2B and B2C entities such as Cicero Transact LLC, through international affiliate marketing programs under the Tierra Sciences Global brand, and through a soon-to-be introduced, nationwide, online nationwide marketing initiative with KSW Marketing Group.

 

The Company 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 resell these in the U.S. territories or export to overseas countries. On October 3, 2014, the Company experienced a change in control. Richard C. Cowan acquired approximately 93% of the issued and outstanding common stock of the Company at the time. On November 6, 2014, the Company merged with Freedom Leaf Inc., a private Nevada corporation, and the Company changed its name to Freedom Leaf Inc. In connection with the merger, the sole officer, director and stockholder 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. For financial reporting purposes, this merger was accounted for as a "reverse acquisition" rather than a business combination, and the 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 were reflected in the historical financial statements of the Company prior to the merger are those of the private company, and they were recorded at the historical cost basis of the private company, and the financial statements after completion of the merger include the combined assets and liabilities of the Company and the private company, the historical operations of the private company only, and the operations of both companies from the closing date of the merger.

 

 

 

 

Freedom Leaf Inc. is an audited and reporting public company traded under the symbol (OTCQB: FRLF) with corporate headquarters located at 3571 E. Sunset Road, Las Vegas, Nevada 89120.

   

Results of Operations

 

For the Three Months Ended September 30, 2018 and September 30, 2017

 

Revenues

 

Our revenue was $608,658 for the three months ended September 30, 2018, compared to $1,327 for the three months ended September 30, 2017. Revenue, by class, is as follows:

 

		For the three months ended
Revenues:		September 30,
		2018				2017
Magazine related		$	472			$	–
CBD oil			31,533				–
Sale of products			576,653				1,327
Total		$	608,658				1,327

 

Note that, the Company has been shifting its focus away from licensing revenues, its primary source of revenue in fiscal 2017, and toward the sale of products. Until the recently-consummated IRIE acquisition, we had 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. In connection with the IRIE acquisition and recent launch of various CBD products through our Leafceuticals subsidiary, we are increasing our focus on utilizing our web sites and other means to sell CBD products.

 

Operating Expenses

 

Direct costs of revenues were $269,125 and $33,146 for the three months ended September 30, 2018 and 2017, respectively. Direct costs of revenues, by class, is as follows:

 

		For the three months ended
Direct costs of revenue:		September 30,
		2018				2017
Magazine related		$	14,053			$	32,170
Sale of products			255,072				976
Total		$	269,125			$	33,146

 

For the three months ended September 30, 2018 our general and administrative expenses and marketing and selling expenses were $1,114,332 compared to $482,879 for the three months ended September 30, 2017, resulting in an increase of $631,453, attributable primarily to stock-based compensation of $139,592 for the three months ended September 30, 2018, compared to $294,330 for the three months ended September 30, 2017, and bad debt expense of $19,755 for the three months ended September 30, 2018, compared to $158,370 for the three months ended September 30, 2017. The increases were largely attributable to increased overhead associated with IRIE’s operations, the ramp up of sales, and increasing general and administrative expenses and marketing and selling expenses in anticipation of expanding product sales various planned activities.

 

 

 

 

Other income (expenses)

 

Other income (expense) was income of $93,239 for the three months ended September 30, 2018, compared to an expense of $25,542 for the three months ended September 30, 2017. Other Income for the quarter included $100,000 gain from the forgiveness of debt the Company assumed in connection with its Tierra acquisition.

 

Net loss attributable to common shareholders was $1,111,766 for the three months ended September 30, 2018, compared to net loss of $707,584 for the three months ended September 30, 2017. The higher net loss for the three months ended September 30, 2018 as compared to the same period in 2017 is largely attributable to: (1) one-time expenses relate to the launch of CBD and Hempology sales (such as pre-production research and development costs); (2) increasing general and administrative expenses and marketing and selling expenses in anticipation of expanding product sales, and (3) lower revenues – as the Company has shifted its focus from licensing revenues to product sales.

  

Liquidity and Capital Resources

 

Overview

 

As of September 30, 2018, the Company had $34,232 in cash. Note, however that shortly after the quarter ended September 30, 2018 the Company did receive $2,750,000 of proceeds from the sale of common stock prior to the quarter end. We expect to incur a minimum of $7,500,000 in expenses during the next twelve months of operations. We estimate that these expenses will be comprised primarily of general expenses including operating expenses associated with our businesses, corporate overhead, legal and accounting fees.

 

Liquidity and Capital Resources during the three months ended September 30, 2018 compared to the three months ended September 30, 2017

 

We used cash in operations of $525,800 for the three months ended September 30, 2018, compared to cash used in operations of $101,805 for the three months ended September 30, 2017. The negative cash flow from operating activities for the three months ended September 30, 2018 is attributable to the Company's net loss attributable to common shareholders of $1,111,766 primarily due to : (1) one-time expenses relate to the launch of CBD and Hempology sales (such as pre-production research and development costs); (2) increasing general and administrative expenses and marketing and selling expenses in anticipation of expanding product sales, and (3) lower revenues – as the Company has shifted its focus from licensing revenues to product sales.

 

We used cash in investing or financing activities of $1,489 and $33,437 for the three months ended September 30, 2018 and 2017.

 

We had cash provided by financing activities of $470,427 for the three months ended September 30, 2018, of which $578,500 was from the proceeds of the sale of common stock and warrants compared to $152,753 for the same period in 2017.

 

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 attributable to common shareholders of $1,111,766 and cash used in operating activities of $525,800 for the three months ended September 30, 2018. The Company had working capital surplus, accumulated deficit of $66,935, $10,643,599, respectively, at September 30, 2018. 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 for a period of one year from the date of issuance of these financial statements.

 

 

 

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, 2018, included in our Annual Report on Form 10-K as filed on October 15, 2018, for a discussion of our critical accounting policies and estimates.

 

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, 2018, 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.

 

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)
10.3		License Agreement with Freedom Leaf Iberia, B.V. (incorporated by reference to our Form 8-K filed on February 28, 2017)
10.4		License Agreement with Freedom Leaf Netherlands, B.V. (incorporated by reference to our Form 8-K filed on February 28, 2017)
10.5		Distribution Agreement with NuAxon Bioscience, Inc. (incorporated by reference to our Form 8-K filed on March 17, 2017)
10.6		License Agreement with BBD Healthcare Strategies, LLC (incorporated by reference to our Form 8-K filed on April 3, 2017)
10.7		LaMarihuana.com Asset Purchase Agreement (incorporated by reference to our Form 8-K filed on May 31, 2017)
10.8		LaMarihuana.com Asset Purchase Agreement Partial Waiver (incorporated by reference to our Form 10-Q filed on February 21, 2018)
10.9		Green Market Europe Purchase Agreement (incorporated by reference to our Form 8-K filed on February 7, 2018)
10.10		Green Market Europe Purchase Agreement Amendment (incorporated by reference to our Form 8-K filed on February 7, 2018)
10.11		Irie CBD Asset Purchase Agreement dated March 3, 2018 (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on March 8, 2018)
10.12 (1)		Cicero Exchange Agreement dated May 11, 2018
31.1 (1)		Certification of Principal Executive 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
31.2 (1)		Certification of 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 of Freedom Leaf Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 Of 18 U.S.C. 63
32.2 (1)		Certification of 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 19, 2018	By: /s/ Clifford J. Perry
	Clifford J. Perry
	Chief Executive Officer

Dated: November 19, 2018	By: /s/ Richard Groberg
	Richard Groberg
	Chief Financial Officer