Notes to Financial
Statements
June 30, 2016
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, pursuant to the terms of the Stock Purchase Agreement, Cowan purchased from the Sellers 6,950,100
shares of the Company’s outstanding restricted common stock for $100,000, representing 93%.
On November 6, 2014,
the Company merged with Freedom Leaf, Inc., a private Nevada corporation. The Company changed its name from Arkadia International,
Inc., to Freedom Leaf, Inc. As a result of the merger, the private company was dissolved. See Note 2 for related discussion.
For financial
reporting purposes, the Share Exchange represents a "reverse merger" rather than a business combination and Private Company
is deemed to be the accounting acquirer in the transaction. The Share Exchange 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 Share Exchange 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 Share Exchange will include the assets and liabilities
of the Public Company and the Private Company, and the historical operations of Private Company and operations of both companies
from the closing date of the Share Exchange.
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 will 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.
Basis of Presentation
The Company prepares
its financial statements in conformity with generally accepted accounting principles in the United States of America.
Use of Estimates
The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Significant estimates in the accompanying financial statements include the amortization period
for intangible assets, valuation and impairment valuation of intangible assets, allowance for accounts receivable, depreciable
lives of the web site, valuation of warrants and beneficial conversion feature debt discounts, valuation of derivatives, and valuation
of share-based payments.
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.
Property, Equipment
and Depreciation
Property and equipment
is recorded at cost. Depreciation is computed using the straight-line method based on the estimated useful lives of the related
assets of three years for computer equipment, five years for office furniture and fixtures, and the lesser of the lease term or
the useful life of the leased equipment. Leasehold improvements, if any, would be amortized over the lesser of the lease term or
the useful life of the improvements. Expenditures for maintenance and repairs along with fixed assets below our capitalization
threshold are expensed as incurred.
Freedom Leaf, Inc.
(f/k/a Arkadia International,
Inc.)
Notes to Financial
Statements
June 30, 2016
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.
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, deposits received from customers for layaway sales and short term
loans the carrying amounts approximate fair value due to their short maturities.
We follow accounting
guidance for financial and non-financial assets and liabilities. This standard defines fair value, provides guidance for measuring
fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies
to all other accounting pronouncements that require or permit fair value measurements. This guidance does not apply to measurements
related to share-based payments. This guidance discusses valuation techniques, such as the market approach (comparable market prices),
the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity
of an asset or replacement cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques
used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Observable
inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs
other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets or
liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable
inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect
those that a market participant would use.
We currently measure
and report at fair value our intangible assets (due to our impairment analysis) and derivative liabilities. The fair value of intangible
assets has been determined using the present value of estimated future cash flows method. The fair value of derivative liabilities
is measured using the Black-Scholes option pricing method. The following table summarizes our non-financial assets and liabilities
measured at fair value on a recurring basis as of June 30, 2016:
|
|
Balance at
|
|
|
Quoted Prices in Active Markets
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
June 30,
|
|
|
for Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
2016
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
7,464
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
7,464
|
|
Total Financial Assets
|
|
$
|
7,464
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
7,464
|
|
Freedom Leaf, Inc.
(f/k/a Arkadia International,
Inc.)
Notes to Financial
Statements
June 30, 2016
Following is a summary
of activity through June 30, 2016 of the fair value of intangible assets valued using Level 3 inputs:
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Asset
|
|
|
Amortization
|
|
|
Net
|
|
Intangibles - June 30, 2014
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Additions
|
|
|
4,913
|
|
|
|
–
|
|
|
|
4,913
|
|
Amortization
|
|
|
–
|
|
|
|
(169
|
)
|
|
|
(169
|
)
|
Intangibles - June 30, 2015
|
|
|
4,913
|
|
|
|
(169
|
)
|
|
|
4,744
|
|
Additions
|
|
|
3,235
|
|
|
|
–
|
|
|
|
3,235
|
|
Amortization
|
|
|
–
|
|
|
|
(515
|
)
|
|
|
(515
|
)
|
Intangibles - June 30, 2016
|
|
$
|
8,148
|
|
|
$
|
(684
|
)
|
|
$
|
7,464
|
|
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.
|
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.
Advertising
Advertising is expensed
as incurred and is included in selling, general and administrative expenses on the accompanying statement of operations. For the
years ended June 30, 2016 and 2015 advertising expense was $18,335 and $65,250, 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 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, 2016, 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.
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 financial statements.
Freedom Leaf, Inc.
(f/k/a Arkadia International,
Inc.)
Notes to Financial
Statements
June 30, 2016
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.
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 June 30, 2016 and 2015.
Effect of Recent Accounting
Pronouncements
The Company reviews new
accounting standards and updates as issued. No new standards or updates had any material effect on these unaudited financial statements.
The accounting pronouncements and updates issued subsequent to the date of these audited financial statements that were considered
significant by management were evaluated for the potential effect on these audited financial statements. Management does not believe
any of the subsequent pronouncements will have a material effect on these audited financial statements as presented and does not
anticipate the need for any future restatement of these audited financial statements because of the retro-active application of
any accounting pronouncements issued subsequent to June 30, 2016 through the date these audited financial statements were issued.
NOTE 2 – ENTRY
INTO A DEFINITIVE AGREEMENT
Freedom Leaf, Inc., (f/k/a
Arkadia International, Inc., the “Public Company,” “we,” “us,” “our”) entered into
a share exchange agreement (the “Exchange Agreement”) with Freedom Leaf, Inc. (the “Public Company”), a
Nevada corporation. Prior to the reverse merger, Richard C. Cowan, an officer and director of the Company, post-merger, acquired
89,808,000, or 99.8% of the outstanding shares of Freedom Leaf, Inc., the public company. Clifford J. Perry, an individual, and
the Private Company’s sole officer and director (“Perry”), was the owner of record of all of the outstanding
common shares of the Private Company (the “Private Company Stock”). Pursuant to the Exchange Agreement, upon surrender
by the Shareholders and the cancellation by the Private Company of the certificates evidencing the Private Company Stock as registered
in the name of the Shareholder, and pursuant to the registration of the Public Company in the register of Shareholders maintained
by Private Company as the new holder of the Public Company Stock and the issuance of the certificates evidencing the aforementioned
registration of the Private Company Stock in the name of the Public Company, the Public Company will issue 83,401,200 shares (the
“New Shares”) (subject to adjustment for fractionalized shares as set forth below) of the Company’s common stock
to the Shareholders (or their designees), and Perry will cause 100% of the shares of the Private Company’s common stock that
he owns (the “ Perry Stock ,” together with the New Shares, the “Acquisition Stock”) to be transferred
to the Shareholders (or their designees), which collectively shall represent 48.1% of the issued and outstanding common stock of
the Public Company immediately after the Closing, in exchange for the Private Company Stock, representing 100% of the issued share
capital of the Private Company. As a result of the exchange of the Private Company Stock for the Acquisition Stock (the
“Share Exchange”), the Private Company will be dissolved.
The closing of the Exchange
Agreement 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, on November 6, 2014, we consummate
the Share Exchange contemplated by the Exchange Agreement. As a result, the shareholders of Private Company own approximately 48.1%
of our issued and outstanding common stock.
Prior to the execution
and delivery of the Exchange Agreement, our board of directors approved the Share Exchange and the transactions contemplated thereby.
Similarly, the board of directors of Private Company approved the Share Exchange. Reference is hereby made regarding the completion
of the Share Exchange.
Following the Share Exchange,
we have abandoned our prior business plan and we are now pursuing Private Company’s historical businesses and proposed businesses.
Private Company is in the business of advertising in industry publications related to marijuana.
The foregoing description
of the Exchange Agreement does not purport to be complete and is qualified in its entirety by the Share Exchange Agreement, a copy
of which has been filed on Form 10-Q/A for the period ended December 31, 2014 which is incorporated herein by reference.
Freedom Leaf, Inc.
(f/k/a Arkadia International,
Inc.)
Notes to Financial
Statements
June 30, 2016
Accounting Treatment
of the Merger
For financial reporting
purposes, the Share Exchange represents a “reverse merger” rather than a business combination and Private Company is
deemed to be the accounting acquirer in the transaction. The Share Exchange 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 Share Exchange 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 Share Exchange will include the assets and liabilities
of the Public Company and the Private Company, and the historical operations of Private Company and operations of both companies
from the closing date of the Share Exchange.
Licensing Rights
On February 8, 2016,
the Company and Freedomleaf 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 and with proposed terms of the definitive agreement 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. Except for the grant of the right of first refusal, and the required payment
has not been received by the Company. FLNL is a shareholder (common stock and warrants to purchase additional common stock) of
the Company.
Incubation Agreement
On January 18, 2016,
the Company and Plants to Paper, LLC (“PTP”), executed an Incubation Agreement. PTP owns the patent pending application
62/245,153 with the title being “Rolling Papers and Blunt Wraps made from 100% Marijuana.” PTP transferred its ownership
rights to the Company and its Medical Marijuana / Cannabis / Hemp Industry Incubator program. The Company will 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, 2016, PTP had no activity.
NOTE 3 – GOING
CONCERN
The accompanying financial statements 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. The Company sustained net losses of $3,011,220 and used cash in operating activities of $50,831 for
the year ended June 30, 2016. The Company had a working capital deficit, stockholders’ deficit and accumulated deficit of
$169,188, $284,390 and $4,010,338, respectively, at June 30, 2016. These factors raise substantial doubt about the ability of
the Company to continue as a going concern for a reasonable period of time. 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.
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
October 5, 2016, 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 April 15, 2019. This facility serves
as our corporate headquarters.
Freedom Leaf, Inc.
(f/k/a Arkadia International,
Inc.)
Notes to Financial
Statements
June 30, 2016
Future minimum lease
payments under these leases are as follows:
2017
|
|
$
|
23,928
|
|
2018
|
|
|
23,928
|
|
2019
|
|
|
18,943
|
|
|
|
|
|
|
Total
|
|
$
|
66,799
|
|
Rent expense for the
years ended June 30, 2016 and 2015 was $33,919 and $22,172, respectively.
NOTE 5 – RELATED
PARTIES
Richard C. Cowan (“Cowan”),
Director and former officer of the Company, has payables and accruals due to him of $100,000 and $194,355 as of June 30, 2016 and
2015, respectively.
Clifford J. Perry (“Perry”),
chief executive officer, chief financial officer, and director of the Company, has payables and accruals due to him of $26,250
and $26,666 as of June 30, 2016 and 2015, respectively.
Raymond P. Medeiros (“Medeiros”),
a director of the Company, has payables and accruals due to him of $10,500 and $0 as of June 30, 2016 and 2015, respectively.
A shareholder of the
Company is owed $10,000 as of June 30, 2016.
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 2,509,914 shares of common stock. The conversion was at a 50% discount or $0.09
per share. As of June 30, 2016, these shares had not been issued and were recorded as issuable. See Note 7.
NOTE 6 – CONVERTIBLE
NOTES PAYABLE, NET OF PREMIUMS AND NOTES PAYABLE
Convertible notes payable,
all classified as current at June 30, 2016, consists of the following:
Convertible notes, net of discounts and notes payable
|
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
Principal,
|
|
|
|
|
|
|
Debt
|
|
|
net of
|
|
|
|
Principal
|
|
|
Discounts
|
|
|
Discounts
|
|
Swiss Allied Trust, Inc. (a)
|
|
$
|
50,000
|
|
|
$
|
(24,794
|
)
|
|
$
|
25,206
|
|
Swiss Allied Trust, Inc. (a)
|
|
|
50,000
|
|
|
|
(30,685
|
)
|
|
|
19,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
100,000
|
|
|
$
|
(55,479
|
)
|
|
$
|
44,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
On July 7, 2015, the
Company executed a convertible promissory note for $5,000 with Bruce Perlowin. The note is for one year, 12% interest rate, and
convertible at $0.10 per share. The current price at that date was $0.085, which is less than the conversion price. The stock price
for our common stock as of September 30, 2015 was $0.40. Our common stock is thinly traded therefore our price, as management has
determined, is not indicative of our valuation. In October 2015, the Company issued common stock for services to unrelated parties
and the common stock was values at $0.20, therefore, the $0.20 was used for valuation purposes for this note. A beneficial conversion
feature of $5,000 was recorded and, as of March 31, 2016, $3,671 was amortized. The Company has recorded accrued interest of $467
as of June 30, 2016. 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.
Freedom Leaf, Inc.
(f/k/a Arkadia International,
Inc.)
Notes to Financial
Statements
June 30, 2016
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, as of March 31, 2016, $3,178 was amortized. The Company has recorded accrued interest of $408
as of June 30, 2016. 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 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 $12,500 was recorded and, as of March 31, 2016, $12,500 was amortized. The Company has recorded
accrued interest of $986 as of June 30, 2016. 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.
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. As of March 31, 2016, both tranches were received
by the Company. The term on each installment is for one year from the date of receipt of each tranche. Each installment is recorded
and presented separately. For the initial tranche of $50,000, the Company recorded a beneficial conversion feature of $50,000 and,
as of March 31, 2016, $14,795 was amortized. A beneficial conversion feature of $50,000 was recorded and, as of March 31, 2016,
$8,904 has been amortized. For the initial tranche, the Company has recorded accrued interest of $1,195 as of March 31, 2016. For
the second tranche, the Company has recorded accrued interest of $1,195 as of June 30, 2016. 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 (see Note 4). 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 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.
NOTE 7 – 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.
Freedom Leaf, Inc.
(f/k/a Arkadia International,
Inc.)
Notes to Financial
Statements
June 30, 2016
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.
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 it’s
authorized to 500,000,000 shares of common stock. Each outstanding share of common stock entitles the holder to one vote per share
on all matters submitted to a stockholder vote. All shares of common stock are non-assessable and non-cumulative, with no pre-emptive
rights.
On November 6, 2014,
the Company merged with Freedom Leaf, Inc., a private Nevada corporation (see Note 1). After the completion of the merger, there
were 173,401,200 shares of common stock issued, issuable and outstanding.
On November 10, 2014,
the Company issued 780,000 shares of common stock to Vincent Moreno for consulting services from November 10, 2014 through April
10, 2015. The Company’s stock is thinly traded therefore the valuation of the issuance was based on the value of the services,
which was $12,500.
On October 12, 2015, the Company issued 1,700,000
shares of common stock to various employees as part of compensation. The current price at that date was $0.20. Our common stock
is thinly traded therefore our price, as management has determined, may not be indicative of our valuation. Previously, the Company
issued common stock for services to unrelated parties and the common stock was valued at $0.20, therefore, the stock was valued
at $0.20 or $340,000 was recorded.
On October 12, 2015, the Company issued 2,000,000
shares of common stock to Raymond Medeiros, a director of the Company, for his past services. The current price at that date was
$0.20. Our common stock is thinly traded therefore our price, as management has determined, may not be indicative of our valuation.
Previously, the Company issued common stock for services to unrelated parties and the common stock was valued at $0.20, therefore,
the stock was valued at $0.20 or $400,000 was recorded.
On October 12, 2015, the Company issued 3,000,000
shares of common stock to Raymond Medeiros, a director of the Company, for his future services. The issuance will vest over a period
of twelve months. The current price at that date was $0.20. Our common stock is thinly traded therefore our price, as management
has determined, may not be indicative of our valuation. Previously, the Company issued common stock for services to unrelated parties
and the common stock was valued at $0.20, therefore, the stock was valued at $0.20 or $600,000 was recorded.
On October 12, 2015, the Company issued 2,010,000
shares of common stock to various subcontractors for their services. The current price at that date was $0.20. Our common stock
is thinly traded therefore our price, as management has determined, may not be indicative of our valuation. Previously, the Company
issued common stock for services to unrelated parties and the common stock was valued at $0.20, therefore, the stock was valued
at $0.20 or $402,000, was recorded.
In October 2015, the Company issued 50,000
shares of common stock for services to unrelated parties and the common stock was valued at $0.20, therefore, the stock was valued
at $0.20 or $10,000, was recorded.
On November 2, 2015, the Company issued 125,000
shares of common stock to various subcontractors for their services. The current price at that date was $0.45. Our common stock
is thinly traded therefore our price, as management has determined, may not be indicative of our valuation.
On February 2, 2016, Dobrucki exercised a warrant
for 500,000 shares of common stock for $10,000, the exercise price of the warrants at $0.02 per share.
On February 15, 2016, the Company issued 750,000
shares of common stock to various subcontractors for their services. The current price at that date was $0.227. Our common stock
is thinly traded therefore our price, as management has determined, may not be indicative of our valuation. Previously, the Company
issued common stock for services to unrelated parties and the common stock was valued at $0.20, therefore, the stock was valued
at $0.20, therefore, the issuance on was valued at $150,000, was recorded.
On February 15, 2016, the Company issued 50,000
shares of common stock to an employee for their services. The current price at that date was $0.227. Our common stock is thinly
traded therefore our price, as management has determined, may not be indicative of our valuation. Previously, the Company issued
common stock for services to unrelated parties and the common stock was valued at $0.20, therefore, the stock was valued at $0.20
or $10,000, was recorded.
On February 24, 2016, the Company issued 100,000 shares of common stock to various subcontractors for their
services. The current price at that date was $0.227. Our common stock is thinly traded therefore our price, as management has determined,
may not be indicative of our valuation. Previously, the Company issued common stock for services to unrelated parties and the common
stock was valued at $0.20, therefore, the stock was valued at $0.20 or $20,000, was recorded.
Freedom Leaf, Inc.
(f/k/a Arkadia International,
Inc.)
Notes to Financial
Statements
June 30, 2016
On March 17, 2016, the
Company issued 50,000 shares of common stock to various subcontractors for their services. The current price at that date was $0.20.
Our common stock is thinly traded therefore our price, as management has determined, may not be indicative of our valuation.
On March 18, 2016, the Company issued 10,000
shares of common stock to an employee for their services. The current price at that date was $0.20. Our common stock is thinly
traded therefore our price, as management has determined, may not be indicative of our valuation. In October 2015, the Company
issued common stock for services to unrelated parties and the common stock was valued at $0.20, therefore, the stock was valued
at $0.20 or $2,000, was recorded. As of June 30, 2016, the stock was not issued therefore recorded as issuable.
On April 8, 2016, Swiss Allied exercised a
portion of a warrant for common stock into 400,000 shares of common stock of the Company in exchange for $24,000. As of June 30,
2016, the stock was not issued therefore recorded as issuable.
On April 15, 2016, Bruce
Perlowin converted the principal ($5,000) of his promissory note into 50,000 shares of common stock (see Note 6).
On April 15, 2016, Bruce
Perlowin converted the principal ($5,000) of his promissory note into 50,000 shares of common stock (see Note 6).
On April 15, 2016, Svetlana
Ogorodnikova converted the principal ($12,500) of her promissory note into 125,000 shares of common stock (see Note 6).
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. As of June 30, 2016, the stock was not issued therefore recorded as issuable.
On May 2, 2016, Freedomleaf
Netherlands, b.v. exercised a cashless conversion of its 1,000,000 warrants for common stock of the Company into 889,868 shares
of common stock of the Company. As of June 30, 2016, the stock was not issued therefore recorded as issuable.
On May 25, 2016, Perry
converted 68,401,200 shares of common stock into 684,012 shares of Series A preferred stock. See Note 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.
On June 30, 2016, Cowan
converted $225,892 of payables and accruals into 2,509,914 shares of common stock. The conversion was at a 50% discount or $0.09
per share. As of June 30, 2016, these shares had not been issued and were recorded as issuable. See Note 5.
On June 30, 2016, the
Company determined that on February 15, 2016, there was a duplicate issuance to an entity, as they were already issued on October
12, 2015. The Company cancelled 200,000 shares on June 30, 2016, thereby reducing the stock-based compensation previously recorded
by $40,000.
Warrants
On November 2, 2015,
the Company issued 1,000,000 warrants for common stock to Freedom Leaf Iberia, in regards to a contemplated future transaction
between the Company and Freedom Leaf Iberia. 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 Freedomleaf Netherlands, b.v., in regards to a contemplated future transaction
between the Company and Freedomleaf 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, Freedomleaf Netherlands, b.v. exercised a cashless conversion of its 1,000,000 warrants for
common stock of the Company into 889,868 shares of common stock of the Company.
On November 2, 2015,
the Company issued 500,000 warrants for common stock to a subcontractor as an incentive to their services. The warrants mature
on May 2, 2016. The exercise price is $0.02 and the warrant has a cashless exercise option. The warrants were valued at $0.20
per share, as defined in the section. The Company recorded an expense of $100,000. On February 2, 2016, Dobrucki exercised a warrant
for 500,000 shares of common stock for $10,000, the exercise price of the warrants at $0.02 per share. As of March 31, 2016, the
shares were not issued therefore they are recorded as issuable.
Freedom Leaf, Inc.
(f/k/a Arkadia International,
Inc.)
Notes to Financial
Statements
June 30, 2016
On December 14,
2015, the Company executed a convertible promissory note for $100,000 with Swiss Allied (see Note 3). 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 December 31, 2016, 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 7 for amendment on the warrant that matured on
March 31, 2016.
Stock Option Plan
On June 27, 2016, the
Board of Directors approved the 2016 Stock Option Plan which has reserved 10,000,000 shares of common stock.
NOTE 8 – INCOME TAX
For the fiscal year 2015
and 2014, there was no provision for income taxes and deferred tax assets have been entirely offset by valuation allowances.
As of June 30, 2016 and 2015, the Company
has net operating loss carry forwards of $3,195,067 and $986,649, respectively. The carry forwards expire through the year 2034.
The Company’s net operating loss carry forwards may be subject to annual limitations, which could reduce or defer the utilization
of the losses as a result of an ownership change as defined in Section 382 of the Internal Revenue Code.
The Company’s tax expense differs from
the “expected” tax expense for Federal income tax purposes (computed by applying the United States Federal tax rate
of 34% to loss before taxes), as follows:
|
|
For the Years Ended
|
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Tax expense (benefit) at the statutory rate
|
|
$
|
(1,056,037
|
)
|
|
$
|
(339,700
|
)
|
State income taxes, net of federal income tax benefit
|
|
|
(15,766
|
)
|
|
|
(35,815
|
)
|
Change in valuation allowance
|
|
|
1,071,803
|
|
|
|
375,515
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
–
|
|
|
$
|
–
|
|
The tax effects of the
temporary differences between reportable financial statement income and taxable income are recognized as deferred tax assets and
liabilities.
The tax years 2014 through 2016 remain
to examination by federal agencies and other jurisdictions in which it operates.
Freedom Leaf, Inc.
(f/k/a Arkadia International,
Inc.)
Notes to Financial
Statements
June 30, 2016
The tax effect of significant
components of the Company’s deferred tax assets and liabilities at June 30, 2016 and 2015, respectively, are as follows:
|
|
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
1,071,797
|
|
|
$
|
371,276
|
|
Timing differences
|
|
|
908,366
|
|
|
|
4,239
|
|
Total gross deferred tax assets
|
|
|
1,980,163
|
|
|
|
375,515
|
|
Less: Deferred tax asset valuation allowance
|
|
|
(1,980,163
|
)
|
|
|
(375,515
|
)
|
Total net deferred tax assets
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
–
|
|
|
|
–
|
|
Total deferred tax liabilities
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Total net deferred taxes
|
|
$
|
–
|
|
|
$
|
–
|
|
In assessing the realizability
of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred
tax liabilities, projected future taxable income and tax planning strategies in making this assessment.
Because of the historical earnings history
of the Company, the net deferred tax assets for 2016 were fully offset by a 100% valuation allowance. The valuation allowance
for the remaining net deferred tax assets was $1,980,163 and $375,515 as of June 30, 2016 and 2015, respectively.
NOTE 9 – 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
June 30, 2016. There have been no losses in these accounts through June 30, 2016.
Concentration of
Revenue
In 2016, the Company had one customer that
made up 12% or more of its revenue. In 2015, the Company had one customer that made up 12% or more of its revenue.
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.
NOTE 10 – SUBSEQUENT EVENTS
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 will be expensed accordingly.
On July 19, 2016, the Company issued 100,000
shares of common stock to its transfer agent, Globex Transfer, LLC.
On July 21, 2016, the Company issued 1,385,000
shares of previously issuable common stock.