See accompanying notes to unaudited condensed consolidated financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
Notes to Condensed Consolidated Financial
Statements
December 31, 2017
(unaudited)
NOTE 1 – NATURE OF OPERATIONS
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Freedom Leaf Inc. (the “Company,”
“we,” “us,” “our,” or “Freedom Leaf”) was incorporated in the State of Nevada on
February 21, 2013, under the name of Arkadia International, Inc. The Company was originally engaged in the business of the acquisition
of in demand equipment, cars, and goods with the intent to resale these in the U.S. territory or export to overseas countries.
On October 3, 2014, the Company experienced
a change in control. Richard C. Cowan acquired a majority of the issued and outstanding common stock of the Company in accordance
with stock purchase agreements by and between Mr. Cowan and Vladimir and Galina Shekhtman (“Sellers”). On the closing
date, October 3, 2014, Cowan purchased from the Sellers 6,950,100 shares of the Company’s outstanding restricted common stock
for $100,000, representing 93% of the then-outstanding common stock of the Company.
On November 6, 2014, the Company merged
with Freedom Leaf Inc., a private Nevada corporation. The Company changed its name from Arkadia International, Inc., to Freedom
Leaf Inc. As a result of the merger, the private company was dissolved, the sole officer, director and shareholder of the private
company, Clifford J. Perry, became an officer and director of the Company, and Mr. Perry received approximately 48.1% of the Company’s
common stock post-merger. See Note 2 for related discussion.
For financial
reporting purposes, the merger was accounted for as a "reverse merger" and recapitalization rather than a business
combination, and 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
are reflected in the historical consolidated financial statements of the Company prior to the merger are those of the private
company, and were recorded at the historical cost basis of the private company, and the consolidated financial statements
after completion of the merger include the assets and liabilities of both the predecessor public company and private company,
the historical operations of private company, and the operations of both companies from the date of the merger.
Cannabis Business Solutions Inc. (“Cannabis
Business Solutions”), a Nevada corporation, was formed on February 5, 2014, and is a subsidiary of the Company.
This subsidiary had no activity until the agreement with Valencia Web Technology S.L., B-97183354 (see Note 2).
Leafceuticals Inc.
(“Leafceuticals”), formerly known as Cannabiz U, Inc., a Nevada corporation, was formed on February 13, 2014, and
is a wholly-owned subsidiary of the Company. This subsidiary has begun activity in January 2018.
Freedom Leaf Cares Inc. (“Freedom
Leaf Cares”), a Nevada corporation, was formed on October 1, 2014, and is a wholly-owned subsidiary of the Company. Freedom
Leaf Cares was dissolved in 2016. Until dissolution, this subsidiary had no activity.
Freedom Leaf International Inc. (“Freedom
Leaf International”), a Nevada corporation, was formed on November 27, 2015, and is a wholly-owned subsidiary of the Company.
This subsidiary has had no activity to date.
Nature of Operations
The Company is a leading go-to resource
in the cannabis, medical marijuana, and industrial hemp industry. It is involved in mergers and acquisitions, and business consulting
in the marijuana industry, including incubation/acceleration and spinoffs of new cannabis/hemp related companies. The Company’s
flagship publication is Freedom Leaf Magazine “The Good News in Marijuana Reform.” The Company produces a portfolio
of news, print and digital multi-media verticals, websites, blogs, and web advertising, for the ever-changing emerging cannabis,
medical marijuana and industrial hemp industry. Through our online and print media channels, our efforts are in dissemination
of current legislation and legal news, arts and entertainment. The Company does not handle, grow, sell, or dispense marijuana.
Freedom Leaf Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
December 31, 2017
(unaudited)
The Company is making strides in the
industrial hemp sector of the industry with the acquisition of Green Market Europe S.L. (“Green Market,” see Note
15), located in Elche Spain, relying on its quality organic growing of hemp for flower and seeds and developing new genetic strains
that will deliver other rare cannabinoids (“CBD”). Leafceuticals is operating in North Las Vegas, Nevada, as a CO2
extraction and processing facility for hemp flower. Once the raw material is derived from the extraction process, it is then taken
to a lab to create Full Spectrum CBD Oil to be sold to formulators to process into cosmetics, topical creams, vapes, and other
Cannabidiol, CBD-based beauty and wellness products. Leafceuticals has also launched an e-commerce site, www.MyHempology.com,
that markets through direct sales and retail distribution of full spectrum CBD products.
The Company also sells licenses to use
the Freedom Leaf brand in different countries and states. We have entered into three license agreements: for Spain and Portugal,
for The Netherlands, and for Florida.
Basis of Presentation
The Company prepares its consolidated financial
statements in conformity with generally accepted accounting principles in the United States of America.
Principles of Consolidation
The consolidated financial statements
include the accounts of Freedom Leaf and its subsidiaries, Cannabis Business Solutions, Leafceuticals, Freedom Leaf Cares, and
Freedom Leaf International. All significant inter-company balances and transactions have been eliminated in consolidation.
Impairment of Long-Lived Assets
The Company accounts for long-lived assets
in accordance with the provisions of Statement of Financial Accounting Standards ASC 360-10, “Accounting for the Impairment
or Disposal of Long-Lived Assets.” This statement requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted
net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to sell.
Fair Value of Financial Instruments
The Company measures its financial assets
and liabilities in accordance with generally accepted accounting principles. For certain of our financial instruments, including
cash, accounts payable, accrued expenses, and short-term loans the carrying amounts approximate fair value due to their short maturities.
We follow accounting guidance for financial
and non-financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires
certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting
pronouncements that require or permit fair value measurements. This guidance does not apply to measurements related to share-based
payments. This guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach
(present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement
cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value
into three broad levels. The following is a brief description of those three levels:
Freedom Leaf Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
December 31, 2017
(unaudited)
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 December 31, 2017 and June 30, 2017:
|
|
Balance at
December 31,
2017
|
|
|
Quoted
Prices in
Active
Markets
for Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
|
(Level 2)
|
|
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
13,766
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
13,766
|
|
Exclusive Rights
|
|
|
10,291
|
|
|
|
|
|
|
|
|
|
|
|
10,291
|
|
Total Financial Assets
|
|
$
|
24,057
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
24,057
|
|
|
|
Balance at
June 30,
2017
|
|
|
Quoted
Prices in
Active
Markets
for Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
|
(Level 2)
|
|
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
10,820
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
10,820
|
|
Total Financial Assets
|
|
$
|
10,820
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
10,820
|
|
Following is a summary of activity through
December 31, 2017 of the fair value of intangible assets valued using Level 3 inputs:
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Asset
|
|
|
Amortization
|
|
|
Net
|
|
Balance at June 30, 2017
|
|
|
$
|
12,245
|
|
|
$
|
(1,425
|
)
|
|
$
|
10,820
|
|
Additions
|
|
|
|
22,936
|
|
|
|
–
|
|
|
|
22,936
|
|
Amortization
|
|
|
|
–
|
|
|
|
(9,699
|
)
|
|
|
(9,699
|
)
|
Balance at December 31, 2017
|
|
|
$
|
35,181
|
|
|
$
|
(11,124
|
)
|
|
$
|
24,057
|
|
Freedom Leaf Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
December 31, 2017
(unaudited)
The Company evaluates its convertible debt,
options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives
to be separately accounted for. The result of this accounting treatment is that under certain circumstances the fair value of the
derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded
as a liability, the change in fair value is recorded in the statement of operations as other income or expense. Upon conversion
or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value
is reclassified to equity. Equity instruments that are initially classified as equity that become subject to reclassification under
this accounting standard are reclassified to liability at the fair value of the instrument on the reclassification date.
The following table summarizes our financial
assets and liabilities measured at fair value on a recurring basis at December 31, 2017:
|
|
Balance at
December 31,
2017
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
|
(Level 2)
|
|
|
|
(Level 3)
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities
|
|
$
|
40,349
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
40,349
|
|
Total Financial Assets
|
|
$
|
40,349
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
40,349
|
|
The following table summarizes our financial
assets and liabilities measured at fair value on a recurring basis at June 30, 2017:
|
|
Balance at
June 30,
2017
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
|
(Level 2)
|
|
|
|
(Level 3)
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities
|
|
$
|
52,757
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
52,757
|
|
Total Financial Assets
|
|
$
|
52,757
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
52,757
|
|
Following is a summary of activity through
December 31, 2017 of the fair value of derivative liabilities valued using Level 3 inputs:
Balance at June 30, 2017
|
|
$
|
52,757
|
|
Note inception date fair value
|
|
|
43,866
|
|
Change in fair value during fiscal year 2018
|
|
|
(56,274
|
)
|
Balance at December 31, 2017
|
|
$
|
40,349
|
|
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.
Freedom Leaf Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
December 31, 2017
(unaudited)
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.
Reclassifications
Certain amounts in the prior period consolidated
financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect
on reported losses, total assets, or stockholders’ equity as previously reported.
Cash and Cash Equivalents
The Company considers all highly liquid
investments with an original maturity of three months or less when purchased to be cash equivalents.
Inventory
Inventory is recorded at the lower of
cost or market and the cost of sales are recorded utilizing the first in first out (“FIFO”) method.
Accounting for Derivatives
The Company evaluates its convertible debt,
options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives
to be separately accounted for. The result of this accounting treatment is that under certain circumstances the fair value of the
derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded
as a liability, the change in fair value is recorded in the statement of operations as other income or expense. Upon conversion
or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value
is reclassified to equity. Equity instruments that are initially classified as equity that become subject to reclassification under
this accounting standard are reclassified to liability at the fair value of the instrument on the reclassification date.
Revenue Recognition
The Company recognizes revenue for our
services in accordance with ASC 605-10, "Revenue Recognition in Financial Statements." Under these guidelines, revenue
is recognized on transactions when all of the following exist: persuasive evidence of an arrangement did exist, delivery of service
has occurred, the sales price to the buyer is fixed or determinable and collectability is reasonably assured. The Company has five
primary revenue streams as follows:
|
·
|
Consulting services.
|
|
·
|
Advertising services.
|
|
·
|
Branding, marketing and selling products for companies.
|
|
·
|
Educational seminars.
|
|
·
|
Selling branded products.
|
Freedom Leaf Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
December 31, 2017
(unaudited)
Advertising and Marketing
Advertising and marketing is expensed as
incurred and is included in selling, general and administrative expenses on the accompanying statement of operations. For the six
months ended December 31, 2017 and 2016 advertising expense was $4,317 and $19,719, respectively.
Income Taxes
The Company accounts for income taxes in
accordance with FASB ASC 740, “Income Taxes”. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to temporary differences between the financial statements carrying amounts of existing assets and
liabilities and loss carry-forwards and their respective tax bases.
Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income (loss) in the years in which those temporary differences are
expected to be recovered or settled.
The effect of a change in tax rules on
deferred tax assets and liabilities is recognized in operations in the year of change. A valuation allowance is recorded when it
is “more likely-than-not” that a deferred tax asset will not be realized.
Tax benefits of uncertain tax positions
are recognized only if it is more likely than not that the Company will be able to sustain a position taken on an income tax return.
The Company has no liability for uncertain tax positions as of December 31, 2017 and June 30, 2017. Interest and penalties
in any, related to unrecognized tax benefits would be recognized as interest expense. The Company does not have any accrued interest
or penalties associated with unrecognized tax benefits, nor was any significant interest expense recognized during the period ended
December 31, 2017 and the period ended December 31, 2016.
On December 22, 2017, the United
States Government passed new tax legislation that, among other provisions, will lower the corporate tax rate from 35% to 21%.
In addition to applying the new lower corporate tax rate in 2018 and thereafter to any taxable income we may have, the
legislation affects the way we can use and carry forward net operating losses previously accumulated and results in a
revaluation of deferred tax assets recorded on our balance sheet. Given that the deferred tax assets are offset by a
full valuation allowance, these changes will have no net impact on the Company’s financial position and net loss.
However, if and when we become profitable, we will receive a reduced benefit from such deferred tax assets. Had this
legislation passed prior to our June 30, 2017, fiscal year-end, the effect of the legislation would have been a reduction in
deferred tax assets and the corresponding valuation allowance.
Net Earnings (Loss) Per Share
In accordance with ASC 260-10, “Earnings
Per Share,” basic net earnings (loss) per common share is computed by dividing the net earnings (loss) for the period by
the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share are computed using
the weighted average number of common and dilutive common stock equivalent shares outstanding during the period. Dilutive common
stock equivalent shares which may dilute future earnings per share consist of warrants to purchase 1,918,167 shares of common stock
at December 31, 2017 and convertible notes convertible into 8,881,954 common shares. Equivalent shares are not utilized when the
effect is anti-dilutive.
Segment Information
In accordance with the provisions of ASC
280-10, “Disclosures about Segments of an Enterprise and Related Information”, the Company is required to report financial
and descriptive information about its reportable operating segments. The Company does not have any operating segments as of December
31, 2017 and June 30, 2017.
Freedom Leaf Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
December 31, 2017
(unaudited)
Effect of Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting
Standards Update No. 2014-09 (“ASU No. 2014-09”), which requires an entity to recognize the amount of revenue to which
it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue
recognition guidance in GAAP when it becomes effective. The new standard is effective for annual reporting periods beginning after
December 15, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative
effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements
and related disclosures. The Company has not yet selected a transition method, nor has it determined the effect of the standard
on its ongoing financial reporting.
In August 2014, the FASB issued ASU
No. 2014-15,
Presentation of Financial Statements (Topic 205) Disclosure of Uncertainties about an Entity’s
Ability to Continue as a Going Concern.
The guidance requires management to perform an evaluation each annual and interim
reporting period of whether there are conditions or events, considered in the aggregate, that raise substantial doubt about
the entity’s ability to continue as a going concern within the one-year period after the date that the financial
statements are issued. If such conditions are identified, the guidance requires an entity to provide certain disclosures
about the principal conditions or events that gave rise to the substantial doubt about the entity’s ability to continue
as a going concern, management’s evaluation of the significance of those conditions or events in relation to the
entity’s ability to meet its obligations and management’s plans to alleviate or mitigate substantial doubt about
the entity’s ability to continue as a going concern. The guidance is effective for the first annual period ending after
December 15, 2016 and interim periods thereafter.
In February 2016, the Financial Accounting
Standards Board (“FASB”) issued an ASU on lease accounting. The ASU requires the lease rights and obligations arising
from lease contracts, including existing and new arrangements, to be recognized as assets and liabilities on the balance sheet.
The ASU is effective for reporting periods beginning after December 15, 2018 with early adoption permitted. While the Company is
still evaluating the ASU, the Company expects the adoption of the ASU to have a material effect on the Company’s financial
condition due to the recognition of the lease rights and obligations as assets and liabilities. The Company does not expect the
ASU to have a material effect on the Company’s results of operations, and the ASU will have no effect on cash flows.
The Company has evaluated all other recent
accounting pronouncements and believes that none of them will have a significant effect on the Company’s financial statement.
NOTE 2 – ENTRY INTO A DEFINITIVE
AGREEMENT
Freedom Leaf Inc. f/k/a Arkadia International,
Inc., a Nevada corporation and the public company (the “Company,” “Public Company,” “we,” “us,”
“our”) entered into a merger agreement with a private Nevada corporation, Freedom Leaf Inc. (the “Private Company”).
Prior to the reverse merger, Richard C. Cowan, the officer and director of the Public Company, had acquired the majority of its
outstanding common stock. Clifford J. Perry, the Private Company’s sole officer and director pre-merger (“Perry”),
was the owner of record of all of the outstanding common shares of the Private Company (the “Private Company Stock”)
prior to the merger. Pursuant to the merger, the Private Company was merged into the Public Company, and Perry, the Private Company’s
shareholder, received 83,401.2 shares of Public Company common stock for each share of Private Company stock pre-merger, or 83,401,200
total shares of the Company’s common stock.
The closing of the merger was conditioned
upon certain, limited customary representations and warranties, as well as the satisfaction or waiver of specified conditions to
closing. As the parties satisfied all of the closing conditions, we filed Articles of Merger in Nevada consummating the merger,
and shareholders of the Private Company pre-merger (Perry) owned approximately 48.1% of our issued and outstanding common stock
post-merger. Following the merger, the Company focused on pursuing Private Company’s historical businesses.
Freedom Leaf Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
December 31, 2017
(unaudited)
The foregoing description of the merger
agreement and transaction does not purport to be complete and is qualified in its entirety by the merger agreement, a copy of
which has been filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q/A for the period ended December 31, 2014, which is incorporated
herein by reference.
Accounting Treatment of the Merger
For financial reporting purposes, the merger
represents a “reverse merger” rather than a business combination, and Private Company is deemed to be the accounting
acquirer in the transaction. The merger is being accounted for as a reverse-merger and recapitalization. Private Company is the
acquirer for financial reporting purposes and the Public Company (Freedom Leaf Inc., f/k/a Arkadia International, Inc.) is the
acquired company. Consequently, the assets and liabilities and the operations that will be reflected in the historical financial
statements prior to the merger will be those of the Private Company and will be recorded at the historical cost basis of the Private
Company, and the financial statements after completion of the merger will include the assets and liabilities of the Public Company
and the Private Company, the historical operations of the Private Company and operations of both companies from the closing date
of the Merger.
Licensing Rights
On February 8, 2016, the Company and Freedom
Leaf Netherlands, B.V. (“FLNL”), a company located in the Netherlands, executed a Memorandum of Understanding (“MOU”),
wherein the Company granted FLNL a right of first refusal to license certain rights from the Company described below in exchange
for a payment of $25,000, and the parties agreed to negotiate a definite license agreement for such rights with the terms of the
definitive agreement incorporating the material terms set forth in the MOU. Such rights include FLNL’s rights to use various
trademarks of the Company, primarily “Freedom Leaf,” and other related rights, for use in the Netherlands by FLNL,
including FLNL’s right to publish a Freedom Leaf magazine in the Netherlands, sell Freedom Leaf products and perform other
activities related to the business of the Company. FLNL is a shareholder (common stock and warrants to purchase additional common
stock) of the Company. On December 15, 2016, the Company and FLNL executed the license agreement. The agreement provided for a
licensing fee of $250,000 with a payment schedule as follows: $70,869 which has been paid from the date of the MOU until the date
of the agreement; $25,000 payment every two months, commencing on April 10, 2017 with the last payment on April 10, 2018, and a
final payment of $4,131 on June 10, 2018. As the Company is allowing for progress payments, the balance is shown net of imputed
interest on the balance sheet. The Company also provided FLNL with warrants to purchase up to 1,000,000 shares of common stock.
The warrants have an exercise price of $0.05. The warrants can be exercised as follows:
250,000 warrants between June 2017 and
August 2017; 250,000 warrants between September 2017 and November 2017; 250,000 warrants between December 2017 and February 2018;
and 250,000 warrants between March 2018 and May 2018. See Notes 7 and 11.
On December 15, 2016, the Company and Freedom
Leaf Iberia, B.V. (“FLI”), a company incorporated under the laws of the Netherlands, executed a license agreement.
The licensing agreement provides FLI the distribution rights to the Company’s magazine and other “Freedom Leaf”
branded merchandise. The territory of the agreement is Spain and Portugal. The agreement provided for a license fee of $250,000
payable to the Company. The payment schedule provides for a $25,000 payment every two months, beginning on April 20, 2017, concluding
on April 20, 2018, with a final payment of $75,000 on June 20, 2018. As the Company is allowing for progress payments, the balance
is shown net of imputed interest on the balance sheet. The Company also provided FLI with warrants to purchase up to 1,000,000
shares of common stock. The warrants have an exercise price of $0.05. The warrants can be exercised as follows: 250,000 warrants
between June 2017 and August 2017; 250,000 warrants between September 2017 and November 2017; 250,000 warrants between December
2017 and February 2018; and 250,000 warrants between March 2018 and May 2018. See Notes 7 and 11.
Freedom Leaf Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
December 31, 2017
(unaudited)
On March 31, 2017, the Company entered
into a license agreement with BBD Healthcare Strategies, LLC, a Florida limited liability company (“BBDHS”), pursuant
to which BBDHS received distribution rights to the Company’s magazine and other “Freedom Leaf” branded merchandise
for the State of Florida, in consideration of (1) a license fee of $250,000, paid $25,000 at execution, and $25,000 due August
2017, October 2017, December 2017, February 2018, March 2018, April 2018, May 2018 and concluding June 2018, with a final payment
of $50,000, (2) ongoing royalties of 5% for sales of Company merchandise purchased from the Company, (3) ongoing royalties of 10%
for sales of Company merchandise purchased from a third-party supplier, and (4) ongoing royalties of 33% for Company seminars and
conferences. As the Company is allowing for progress payments, the balance is shown net of imputed interest on the balance sheet.
The Company also provided BBDHS with warrants to purchase 1,200,000 shares of Company common stock at an exercise price of $0.05,
exercisable as follows: 240,000 shares between September 1, 2017 and October 31, 2017, 240,000 shares between November 1, 2017
and December 31, 2017, 240,000 shares between January 1, 2018 and February 28, 2018, 240,000 shares between March 1, 2018 and May
30, 2018, and 240,000 shares between June 1, 2018 and July 30, 2018. See Notes 7 and 11.
Incubation Agreement
On January 18, 2016, the Company and Plants
to Paper, LLC (“PTP”), a New Jersey limited liability company, executed an Incubation Agreement. PTP owned the patent
pending application 62/245,153 (the “Patent”) with the title being “Rolling Papers and Blunt Wraps made from
100% Marijuana.” PTP agreed to transfer its ownership rights in the patent application to the Company, as well as PTP’s
Medical Marijuana / Cannabis / Hemp Industry Incubator program. The Company agreed to supply management services and to fund the
early stage development of PTP. The Incubation Agreement is for a period of twelve months. PTP will provide the Company with 20%
of the outstanding membership shares of PTP in exchange for its services. The costs of patent registrations in the United States
and other countries will be the liability of PTP. As of December 31, 2017, PTP had no activity. On February 1, 2017, the Agreement
was modified for the following items: a) to provide 25% of the outstanding membership shares of PTP; b) require that the Patent
be assigned to PTP; and c) acknowledge that the ownership rights have not been transferred to the Company as of December 31, 2017.
Sales Representation Contract
On December 22, 2016, the Company and NuAxon
BioScience, Inc. (“NuAxon”), a Delaware corporation, executed a Sales Representation Contract. NuAxon is a manufacturer
and distributor for bulk extracts, Rebel Herbs brand products, and Intelligence Tree brand products. The contract appoints the
Company as NuAxon’s sales representative worldwide. The contract is for a period of one year and shall automatically renew
for successive terms of the same duration. The contract provides a commission for sales by the Company at rates as follows: a)
bulk extracts is 9% with a 2% bonus on annual sales above $500,000; b) Rebel Herbs and Intelligence Tree brand products is 10%
with a 3% bonus on annual sales above $1,000,000. As of December 31, 2017, there have been no sales or commissions earned.
Equipment Sales Representative Contract
On December 22, 2016, the Company and NuAxon
executed an Equipment Sales Representative Contract. NuAxon is a manufacturer and distributor for extraction equipment. The contract
appoints the Company as NuAxon’s equipment sales representative worldwide. The contract is for a period of one year and shall
automatically renew for successive terms of the same duration. The contract provides a commission for sales by the Company at various
rates ranging from 3% to 10%, dependent on the cumulative annual sales. On March 15, 2017, the Company entered into an Exclusive
Distribution Agreement with NuAxon to sell NuAxon’s CO2 extraction equipment pursuant to which the Company would be paid
increasing commissions depending on gross sales of the equipment. On March 16, 2017, the Company issued a purchase order (the “Purchase
Order”) to NuAxon to purchase extraction equipment for one of the Company’s customers. As of December 31, 2017, there
were no sales.
Freedom Leaf Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
December 31, 2017
(unaudited)
LaMarihuana Purchase
On May 30, 2017, with an effective date
of April 8, 2017 as per the Bill of Sale, Cannabis Business Solutions Inc. (the “Buyer”), a wholly-owned Nevada subsidiary
of the registrant, Freedom Leaf Inc., entered into an Asset Purchase Agreement with Valencia Web Technology S.L., B-97183354,
a Spanish limited liability company (Sociedad de Responsabilidad Limitada) (the “Seller,” or “Valencia”)
to purchase the Seller’s assets, including its cash and cash equivalents, equipment, inventory, receivables, and two of
its websites www.lamarihuana.com and www.marihuana-medicinal.com (but not including the Seller’s website cannabislandia.com),
for a purchase price consisting of a 10% interest in the Buyer, and 3,000,000 shares of common stock of the registrant, valued
at $300,000 (the “Initial FRLF Shares”), with additional shares of the registrant’s common stock due six months
(October 8, 2017) following closing if, at such time, the average closing price of the registrant’s common stock during
the previous five trading days is less than $0.10/share. Such additional shares shall be calculated as follows: $300,000 minus
the product of (a) the Initial FRLF Shares multiplied by (b) the average closing price of the registrant’s common stock
during the five trading days immediately preceding the True-Up Date (the “True-Up Price”), with such difference divided
by the True-Up Price. On October 8, 2017, the Company removed the previously recorded contingent liability and recorded 4,142,857
shares of common stock as issuable, with a value of $126,000. On February 7, 2018, the Company and the Buyer agreed that with
the increase in the value of the Company’s common stock, the Buyer waived its rights for additional issuance of common stock,
as stated herein. Therefore, on February 7, 2018, the Company reversed its recording of the 4,142,857 shares of common stock recorded
as issuable. See Note 16.
The Company is in the process of meeting
international requirements for the complete use of the web sites by the Company. This process is expected to be completed before
the end of this fiscal year.
NOTE 3 – GOING CONCERN
The Company has a net loss for the six
months ended December 31, 2017 of $1,449,997 and working capital deficit as of December 31, 2017 of $142,668, and has used cash
in operations of $173,252 for the six months ended December 31, 2017. In addition, as of December 31, 2017, the Company had a stockholders’
deficit and accumulated deficit of $111,584 and $6,370,985, respectively. These conditions raise substantial doubt about the Company’s
ability to continue as a going concern.
The accompanying consolidated financial
statements have been prepared in conformity with U.S. GAAP, which contemplate continuation of the Company as a going concern and
the realization of assets and satisfaction of liabilities in the normal course of business. The ability of the Company to continue
its operations is dependent on the execution of management’s plans, which include the raising of capital through the debt
and/or equity markets, until such time that funds provided by operations are sufficient to fund working capital requirements. If
the Company were not to continue as a going concern, it would likely not be able to realize its assets at values comparable to
the carrying value or the fair value estimates reflected in the balances set out in the preparation of the consolidated financial
statements.
There can be no assurances that the Company
will be successful in generating additional cash from the equity/debt markets or other sources to be used for operations. The consolidated
financial statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities
that might be necessary. Based on the Company’s current resources, the Company will not be able to continue to operate without
additional immediate funding. Should the Company not be successful in obtaining the necessary financing to fund its operations,
the Company would need to curtail certain or all operational activities and/or contemplate the sale of its assets, if necessary.
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 February 20, 2018, there were
no pending or threatened lawsuits.
Freedom Leaf Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
December 31, 2017
(unaudited)
Lease Commitment
We lease approximately 2,800 square feet
of office space in Las Vegas, Nevada, pursuant to a lease that will expire on December 31, 2019. This facility serves as our corporate
headquarters. After December 31, 2017, the Company has the option to opt out of the lease.
Future minimum lease payments under these
leases are as follows:
|
2018
|
|
|
$
|
11,964
|
|
|
2019
|
|
|
|
18,943
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
30,907
|
|
Rent expense for the six months ended December
31, 2017 and 2016 was $14,604 and $19,309, respectively.
NOTE 5 – RELATED PARTIES
Richard C. Cowan (“Cowan”),
a former director and officer of the Company, has payables and accruals due to him of $318,445 and $269,226 as of December 31,
2017 and June 30, 2017, respectively. The payable, as agreed upon, is greater than one year, without any other set terms for repayment.
Imputed interest is immaterial.
Clifford J. Perry (“Perry”),
Chief Executive officer, Chief Financial Officer, and a director of the Company, has payables and accruals due to him of $45,000
and $21,444 as of December 31, 2017 and June 30, 2017, respectively. Imputed interest is immaterial. On July 31, 2017, the Company
issued 5,784,061 shares of common stock to Cliff Perry for accrued compensation of $112,500. See Note 15.
Raymond P. Medeiros (“Medeiros”),
a director of the Company, has payables and accruals due to him of $21,000 and $0 as of December 31, 2017 and June 30, 2017, respectively.
Imputed interest is immaterial. On July 31, 2017, the Company issued 2,699,228 shares of common stock to Raymond Medeiros for
accrued compensation of $52,500. See Note 16.
On October 31, 2017, the Company issued
850,000 shares of common stock to Paul F. Pelosi, Jr. (“Pelosi”), in regards to his appointment as Chairman of the
Board on November 1, 2017, for compensation for the period November 1, 2017 through January 31, 2018. The Company is obligated
to issue on February 1, 2018, an additional 1,250,000 options for common stock with an exercise price of $0.04, with an expiration
eighteen months after the issuance.
On November 9, 2017, the Company sold 967,000
shares of common stock to Pelosi for $14,500, based on a per share price of $0.01499.
On January 18, 2018, the Company
appointed Richard Groberg (“Groberg”), via his company, RSGroberg Consulting, LLC, as its Chief Financial Officer
to serve for an initial, two-year term. In consideration of the services to be performed by Groberg, the Company: (i) issued
800,000 shares of common stock, and (ii) $5,000 per month compensation payable: (1) prior to the date that the Company is
paying monthly compensation to its directors primarily in cash, in 600,000 shares of common stock (representing the first 12
months’ compensation), and (2) payable in cash thereafter. See Note 16. The 800,000 and 600,000 shares of common stock
were issuable as of January 18, 2018.
Freedom Leaf Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
December 31, 2017
(unaudited)
NOTE 6 – OTHER RECEIVABLES
The Company has three licensing agreements
with the following: FLNL, FLI and BBDHS (see Note 2). The receivable, per entity, as recorded in Other Receivables as of December
31, 2017, is as follows:
FLNL
|
|
$
|
176,779
|
|
FLI
|
|
|
246,178
|
|
BBDHS
|
|
|
225,186
|
|
Subtotal
|
|
|
648,143
|
|
Less: Allowance
|
|
|
426,849
|
|
Net Balance
|
|
$
|
221,294
|
|
As of December 31, 2017, FLNL, FLI and BBDHS are behind on payments of $75,000, $75,000, and $25,000, respectively. The Company
and FLI agreed to a legal right of offset in regards to a balance of $60,000 owed by the Company to FLI. The Company granted deferment
on the payments with each entity as FLNL and FLI both have revenue streams that will begin in March 2018, which will facilitate
the past due payments accordingly. The revenue streams as stated herein were delayed due to unforeseen circumstances. This has
been rectified therefore the Company believes that payments will commence accordingly, starting in March 2018. The Company has
recorded an allowance of $426,849. The balances are projected to be paid in full by September 2018.
NOTE 7 – FIXED ASSETS
The Company has fixed assets related to
equipment and capital improvements. The depreciation of the equipment and capital improvements is over a five-year and two-year
period, respectively. As of December 31, 2017, and June 30, 2017, the Company had fixed assets, net of accumulated depreciation,
of $135,788 and $0, respectively. The fixed assets are as follows:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2017
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
148,500
|
|
|
$
|
–
|
|
Capital improvements
|
|
|
900
|
|
|
|
–
|
|
Total fixed assets
|
|
|
149,400
|
|
|
|
–
|
|
Less: Accumulated depreciation
|
|
|
13,612
|
|
|
|
–
|
|
Fixed assets, net
|
|
$
|
135,788
|
|
|
$
|
–
|
|
The depreciation expense for the six months ended December 31,
2017 and 2016, was $13,612 and $0, respectively.
Freedom Leaf Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
December 31, 2017
(unaudited)
NOTE 8 – INTANGIBLE ASSETS
The Company has intangible assets related
to website development. The amortization of the intangible assets is over a fifteen-year period. As of December 31, 2017, and June
30, 2017, the Company had intangible assets, net of accumulated amortization, of $24,057 and $10,820, respectively. The intangible
assets are as follows:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2017
|
|
|
|
|
|
|
|
|
Website development
|
|
$
|
15,682
|
|
|
$
|
12,245
|
|
Exclusive rights
|
|
|
19,500
|
|
|
|
–
|
|
Total intangible assets
|
|
|
35,182
|
|
|
|
12,245
|
|
Less: Accumulated amortization
|
|
|
11,125
|
|
|
|
1,425
|
|
Intangible assets, net
|
|
$
|
24,057
|
|
|
$
|
10,820
|
|
The amortization expense for the six months ended December
31, 2017 and 2016, was $9,700 and $370, respectively.
The following table presents the amortization for the next five
years:
|
2018
|
|
|
$
|
10,273
|
|
|
2019
|
|
|
|
1,587
|
|
|
2020
|
|
|
|
1,045
|
|
|
2021
|
|
|
|
1,045
|
|
|
2022 and thereafter
|
|
|
|
10,107
|
|
|
Total
|
|
|
$
|
24,057
|
|
NOTE 9 – DERIVATIVES
Embedded Conversion Option Derivatives
Due to the conversion terms of certain
promissory notes, the embedded conversion options met the criteria to be bifurcated and presented as derivative liabilities. The
Company calculated the estimated fair values of the liabilities for embedded conversion option derivative instruments at the original
note inception date and as of December 31, 2017 and June 30, 2017, using the Black-Scholes option pricing model using the share
prices of the Company’s stock on the dates of valuation and using the following ranges for volatility, expected term and
the risk-free interest rate at each respective valuation date, no dividend has been assumed for any of the periods:
|
|
December 31,
2017
|
|
|
June 30,
2017
|
|
|
Note
Inception
Date
|
|
Volatility
|
|
|
204%
|
|
|
|
141%
|
|
|
|
170% - 232%
|
|
Expected Term
|
|
|
0.22 - 0.74 years
|
|
|
|
0.33 - 0.96 years
|
|
|
|
0.75 - 1.0 years
|
|
Risk-Free Interest Rate
|
|
|
1.76%
|
|
|
|
0.84%
|
|
|
|
1.07% - 1.33%
|
|
Freedom Leaf Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
December 31, 2017
(unaudited)
The following reflects the initial fair
value on the note inception date and changes in fair value through December 31, 2017:
Note inception date fair value allocated to debt discount
|
|
$
|
122,500
|
|
Change in fair value in fiscal year 2016
|
|
|
(122,500
|
)
|
Embedded conversion option derivative liability fair value on June 30, 2016
|
|
|
–
|
|
Note inception date fair value allocated to debt discount
|
|
|
163,000
|
|
Note modifications adjustment
|
|
|
(88,737
|
)
|
Change in fair value in fiscal year 2017
|
|
|
(21,506
|
)
|
Embedded conversion option derivative liability fair value on June 30, 2017
|
|
|
52,757
|
|
Note modifications adjustment
|
|
|
46,791
|
|
Change in fair value in fiscal year 2018
|
|
|
(56,274
|
)
|
Embedded conversion option derivative liability fair value on December 31, 2017
|
|
$
|
47,289
|
|
NOTE 10 – CONVERTIBLE NOTES PAYABLE,
NET OF PREMIUMS AND NOTES PAYABLE
Convertible notes, net of discounts and notes payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
Principal,
|
|
|
|
|
|
|
|
|
Principal,
|
|
|
|
|
|
|
Debt
|
|
|
net of
|
|
|
|
|
|
Debt
|
|
|
net of
|
|
|
|
Principal
|
|
|
Discounts
|
|
|
Discounts
|
|
|
Principal
|
|
|
Discounts
|
|
|
Discounts
|
|
PureEnergy
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
15,475
|
|
|
$
|
(7,489
|
)
|
|
$
|
7,986
|
|
PureEnergy
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
13,480
|
|
|
|
(5,565
|
)
|
|
|
7,915
|
|
PowerUp
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
75,000
|
|
|
|
(39,330
|
)
|
|
|
35,670
|
|
PowerUp
|
|
|
38,000
|
|
|
|
(7,374
|
)
|
|
|
30,626
|
|
|
|
38,000
|
|
|
|
(18,893
|
)
|
|
|
19,107
|
|
PowerUp
|
|
|
33,842
|
|
|
|
(12,410
|
)
|
|
|
21,432
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
PowerUp
|
|
|
53,000
|
|
|
|
(15,964
|
)
|
|
|
37,036
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
LG
|
|
|
42,000
|
|
|
|
(13,262
|
)
|
|
|
28,738
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Total
|
|
|
166,842
|
|
|
|
(49,010
|
)
|
|
|
117,832
|
|
|
|
141,955
|
|
|
|
(71,277
|
)
|
|
|
70,678
|
|
Less: current portion
|
|
|
95,000
|
|
|
|
(29,226
|
)
|
|
|
65,774
|
|
|
|
141,955
|
|
|
|
(71,277
|
)
|
|
|
70,678
|
|
Non-current portion
|
|
$
|
71,842
|
|
|
$
|
(19,784
|
)
|
|
$
|
52,058
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
On July 7, 2015, the Company executed a
convertible promissory note for $5,000 with Bruce Perlowin. The note is for one year, 12% interest rate, and convertible at $0.10
per share. The current price at that date was $0.085, which is less than the conversion price. The stock price for our common stock
as of September 30, 2015 was $0.40. Our common stock is thinly traded therefore our price, as management has determined, is not
indicative of our valuation. In October 2015, the Company issued common stock for services to unrelated parties and the common
stock was values at $0.20, therefore, the $0.20 was used for valuation purposes for this note. A beneficial conversion feature
of $5,000 was recorded and subsequently amortized. The Company has recorded accrued interest of $467 as of December 31, 2017. On
April 15, 2016, Mr. Perlowin converted the principal of this promissory note into 50,000 shares of common stock. The accrued interest
was not converted.
Freedom Leaf Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
December 31, 2017
(unaudited)
On August 12, 2015, the Company executed
a convertible promissory note for $5,000 with Bruce Perlowin. The note is for one year, 12% interest rate, and convertible at $0.10
per share. The current price at that date was $0.10, which is less than the conversion price. The stock price for our common stock
as of September 30, 2015 was $0.40. Our common stock is thinly traded therefore our price, as management has determined, is not
indicative of our valuation. In October 2015, the Company issued common stock for services to unrelated parties and the common
stock was values at $0.20, therefore, the $0.20 was used for valuation purposes for this note. A beneficial conversion feature
of $5,000 was recorded and subsequently amortized. The Company has recorded accrued interest of $408 as of December 31, 2017. On
April 15, 2016, Mr. Perlowin converted the principal of this promissory note into 50,000 shares of common stock. The accrued interest
was not converted.
On August 20, 2015, the Company executed
a convertible promissory note for $12,500 with Svetlana Ogorodnikova. The note matures on February 19, 2016, 12% interest rate,
and convertible at $0.10 per share. The current price at that date was $0.085, which is less than the conversion price. The stock
price for our common stock as of December 31, 2015 was $0.40. Our common stock is thinly traded therefore our price, as management
has determined, is not indicative of our valuation. In October 2015, the Company issued common stock for services to unrelated
parties and the common stock was values at $0.20, therefore, the $0.20 was used for valuation purposes for this note. A beneficial
conversion feature of $12,500 was recorded and subsequently amortized. The Company has recorded accrued interest of $986 as of
December 31, 2017. On February 19, 2016, Ms. Ogorodnikova granted the Company an extension on the due date to June 30, 2016. On
April 15, 2016, Ms. Ogorodnikova converted the principal of this promissory note into 125,000 shares of common stock. The accrued
interest was not converted.
On November 1, 2016, the Company executed
a collateralized secured promissory note with Eagle Equities, LLC (“Eagle”) for $25,000. The Company netted $23,000
due to legal fees of $2,000. The note has a conversion discount of 45% based on the lowest closing price of the 20 days prior to
conversion. The Company recorded a debt discount of $25,000 and as of December 31, 2017, had recorded $25,000 of amortization.
The note matures on November 1, 2017 and bears interest at 8%. On April 26, 2017, Eagle sold its convertible note to PureEnergy
714 LLC (“PureEnergy”) with no change in terms. As of December 31, 2017, there is $0 of accrued interest. On June 29,
2017, the Company issued 791,140 shares of common stock to PureEnergy for the conversion of $12,501. On July 19, 2017, the Company
issued 748,934 shares of common stock to PureEnergy related to the conversion of $13,481.
On May 23, 2017, the Company executed a
convertible promissory note with PureEnergy for $15,475. The note has a conversion discount of 45% based on the lowest closing
price of the 20 days prior to conversion. The Company recorded a debt discount of $8,481. The note matures on February 23, 2018
and bears interest at 8%. On November 3, 2017, the balance of the note and the accrued interest was converted into 1,006,768 shares
of common stock. See Note 11.
On May 10, 2017, the Company executed a
convertible promissory note with Power Up for $75,000. The note has a conversion discount of 35% based on the lowest closing price
of the 20 days prior to conversion. The note matures on February 23, 2018 and bears interest at 8%. On September 28, 2017, Pure
Energy purchased the May 10, 2017 convertible promissory note between the Company and Power Up. The Power Up convertible promissory
note was for $78,427. The Company and Pure Energy entered into a revised convertible promissory note to replace the Power Up convertible
promissory note as stated below. On November 9, 2017, Pure Energy converted the entire note and accrued interest into 5,764,490
shares of common stock. See Note 11.
On June 20, 2017, the Company executed
a convertible promissory note with Power Up for $38,000. The note has a conversion discount of 35% based on the lowest closing
price of the 20 days prior to conversion. The Company recorded a debt discount of $19,611 and as of the date of pay off, had recorded
$6,609 of amortization. The note matures on February 23, 2018 and bears interest at 8%. On December 15, 2017, the principal and
accrued interest was paid in full.
Freedom Leaf Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
December 31, 2017
(unaudited)
On July 20, 2017, the Company executed
a convertible promissory note with Power Up for $38,000. The note has a conversion discount of 35% based on the lowest closing
price of the 20 days prior to conversion. The Company recorded a debt discount of $14,829 and as of December 31, 2017, had recorded
$6,284 of amortization. The note matures on August 11, 2018 and bears interest at 8%. As of December 31, 2017, there is $2,061
of accrued interest.
On August 11, 2017, the Company executed
a convertible promissory note with LG Capital (“LG”) for $42,000. The note has a conversion discount of 35% based on
the lowest closing price of the 12 days prior to conversion. The Company recorded a debt discount of $21,707 and as of December
31, 2017, had recorded $13,947 of amortization. The note matures on March 20, 2018 and bears interest at 8%. As of December 31,
2017, there is $1,316 of accrued interest.
On September 26, 2017, the Company executed
a convertible promissory note with Power Up for $53,000. The note has a conversion discount of 35% based on the lowest closing
price of the 10 days prior to conversion. The Company recorded a debt discount of $24,892 and as of December 31, 2017, had recorded
$8,627 of amortization. The note matures on June 30, 2018 and bears interest at 12%. As of December 31, 2017, there is $1,690 of
accrued interest.
On September 27, 2017, the Company executed
a convertible promissory note with Pure Energy for $78,427 to replace the May 10, 2017 convertible note with Power Up, as reflected
above. The note has a conversion discount of 35% based on the lowest closing price of the 12 days prior to conversion. The Company
recorded a debt discount of $38,880 and as of December 31, 2017, all of the debt discount had been of amortization as of the date
of conversion. The note matures on September 27, 2018 and bears interest at 8%. On November 9, 2018, the principal and accrued
interest was converted into 5,765,490 shares of common stock. See Note 11.
On September 27, 2017, in conjunction
with the payoff of the May 10, 2017 Power Up convertible note, the Company incurred a prepayment penalty of $28,496, which Pure
Energy paid to Power Up. The Company issued a second convertible promissory note for $33,842, which included the prepayment penalty
and legal fees of $5,346. The second convertible promissory note matures on September 27, 2018 and bears interest of 8%. The Company
recorded a debt discount of $16,777 and as of December 31, 2017, had recorded $4,367 of amortization. As of December 31, 2017,
there is $712 of accrued interest.
NOTE 11 – STOCKHOLDERS’
EQUITY
Series A Preferred Stock
On May 24, 2016, the Board of Directors
of the Company authorized amending the Company’s Articles of Incorporation to authorize 10,000,000 shares of “blank
check” preferred stock and designate 1,000,000 of the shares as Series A preferred stock. Each share of the Series A preferred
stock is entitled to 500 votes and is convertible into 100 shares of common stock.
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.
Freedom Leaf Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
December 31, 2017
(unaudited)
In the first quarter of fiscal year 2018,
the Company issued 1,793,195 shares of common stock which were recorded as issuable as of June 30, 2017.
On July 19, 2017, the Company issued 748,934
shares of common stock to PureEnergy related to the conversion of $13,481 of a convertible promissory note.
On July 31, 2017, the Company issued 5,784,061
shares of common stock to Cliff Perry for accrued compensation of $112,500. See Note 5.
On July 31, 2017, the Company issued 2,699,228
shares of common stock to Raymond Medeiros for accrued compensation of $52,500. See Note 5.
On August 23, 2017, the Company issued
500,000 shares of common stock to Frank Dobrucki for services valued at $22,000.
On August 14, 2017, the Company issued
500,000 shares of common stock to Nuaxon Bioscience as part of the agreement for exclusive rights to market and sell their equipment.
The shares were valued at $19,500.
On August 17, 2017, the Company issued
345,451 shares of common stock to Lakeport Business Services, Inc. for accounts payable $9,450.
On August 25, 2017, the Company issued
600,000 shares of common stock to Christopher Thompson as a bonus in August 2017. The shares were valued at $48,900.
On August 25, 2017, the Company issued
550,000 shares of common stock to Joshua Halford for services in August 2017. The shares were valued at $44,825.
On August 28, 2017, the Company issued
1,061,500 shares of common stock to Christopher Sloan for services in May 2017 (661,500 shares) and for accrued expenses of $23,075
(400,000 shares of common stock). The shares were valued at $52,175.
On August 28, 2017, the Company issued
500,303 shares of common stock to Neil Dutson for services valued at $37,173.
On August 29, 2017, the Company issued
100,000 shares of common stock to Marc Hatch for services valued at $7,430.
On August 29, 2017, the Company issued
100,000 shares of common stock to Marc Hatch for services valued at $7,430.
On October 6, 2017, the Company issued
400,000 shares of common stock to Jason Edwards for services in October 2017 valued at $16,280.
On October 6, 2017, the Company issued
600,000 shares of common stock to Michael Ostrander for services in October 2017 valued at $33,870.
On October 7, 2017, due to the agreement
with Valencia (see Note 2), the Company owed Valencia an additional 4,142,857 shares of common stock, which were recorded as issuable.
The Company recorded a contingent liability of $174,000 associated with this obligation. On January 29, 2018, because of the increase
of the Company’s common stock, Valencia agreed to the accept the initially issued 3,000,000 shares of common stock as satisfaction
of the obligation to pay to Valencia in connection with the Company’s May 30, 2017 Asset Purchase Agreement with Valencia
to acquire certain of its assets without the need to issue additional true-up shares of the Company’s common stock. The January
29, 2018 agreement relieved the Company of the contingent liability of issuing additional shares. See Note 16.
On October 23, 2017, the Company issued
1,001,250 shares of common stock to Timothy Puetz for services in October 2017 valued at $20,025.
On October 26, 2017, the Company issued
255,000 shares of common stock to Ronald Voight for services in October 2017 valued at $7,727.
Freedom Leaf Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
December 31, 2017
(unaudited)
On October 28, 2017, the Company issued
273,333 shares of common stock to Lakeport Business Services, Inc. for services in October 2017 valued at $8,200.
On October 28, 2017, the Company issued
30,000 shares to Neil Dutson for leasehold improvement performed in October 2017 valued at $900.
On October 30, 2017, the Company issued
122,500 shares of common stock to legal counsel for services in October 2017 valued at $3,225.
On October 31, 2017, the Company issued
850,000 shares of common stock to Paul F. Pelosi, Jr. (“Pelosi”), in regards to his appointment as Chairman of the
Board on November 1, 2017, for compensation for the period November 1, 2017 through January 31, 2018. The Company is obligated
to issue on February 1, 2018, an additional 1,250,000 options for common stock with an exercise price of $0.04, with an expiration
eighteen months after issuance.
On October 25, 2017, the Company issued
250,000 shares of common stock to Frank Dobrucki for services in October 2017 valued at $7,500.
On November 2, 2017, the Company issued
250,000 shares of common stock to Victor Park, a vendor, for services in October 2017 valued at $7,725.
On November 3, 2017, the Company issued
1,006,768 shares of common stock to PureEnergy for the conversion of $15,475 of a convertible promissory note (see Note 10).
On October 23, 2018, the Company issued
1,000,000 shares of Common Stock to Breadfruit Tree, Inc. for inventory received in October 2017 valued at $27,200.
On November 9, 2017, the Company issued
5,764,490 shares of common stock to Pure Energy for the conversion of $80,077 of principal and accrued interest of a convertible
promissory note (see Note 10).
On November 9, 2017, the Company sold 4,785,459
shares of common Stock to Pure Energy for $83,745.53, based on a per share price of $0.0175.
On November 10, 2017, the Company sold
967,000 shares of common stock to Pelosi for $14,500, based on a per share price of $0.01499.
On November 28, 2017, the Company issued
730,769 shares of common Stock to Michael Ostrander for services in October 2017 and November 2017. The shares for October 2017,
which were effective October 1, 2017, were 500,000, whereas the shares for November 2017, which were effective November 1, 2017,
were 230,769. The shares were valued at $40,119.
On November 30, 2017, the Company recorded
600,000 shares of common stock as issuable to Alan Stone & Co. (“Stone”) in connection with various consulting
services provided in 2017. The shares were valued at $36,750.
Warrants
On November 2, 2015, the Company issued
1,000,000 warrants for common stock to Freedom Leaf Iberia, B.V., in regards to a contemplated future transaction between the Company
and Freedom Leaf Iberia, B.V. The warrants mature on May 2, 2016. The exercise price is $0.02; and the warrant has a cashless exercise
option. The warrants were valued at $0.20 per share, as defined in the section. The Company recorded an expense of $200,000. On
May 2, 2016, Freedom Leaf Iberia exercised a cashless conversion of its 1,000,000 warrants for common stock of the Company into
889,868 shares of common stock of the Company.
Freedom Leaf Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
December 31, 2017
(unaudited)
On November 2, 2015, the Company issued
1,000,000 warrants for common stock to Freedom Leaf Netherlands, B.V., in regards to a contemplated future transaction between
the Company and Freedom Leaf Netherlands, B.V. The warrants mature on May 2, 2016. The exercise price is $0.02, and the warrant
has a cashless exercise option. The warrants were valued at $0.20 per share, as defined in the section. The Company recorded an
expense of $200,000. On May 2, 2016, Freedom Leaf Netherlands, B.V. exercised a cashless conversion of its 1,000,000 warrants for
common stock of the Company into 889,868 shares of common stock of the Company.
On November 2, 2015, the Company issued
500,000 warrants for common stock to a subcontractor as an incentive to their services. The warrants mature on May 2, 2016. The
exercise price is $0.02, and the warrant has a cashless exercise option. The warrants were valued at $0.20 per share, as defined
in the section. The Company recorded an expense of $100,000. On February 2, 2016, Dobrucki exercised a warrant for 500,000 shares
of common stock for $10,000, the exercise price of the warrants at $0.02 per share.
On December 14, 2015, the Company executed
a convertible promissory note for $100,000 with Swiss Allied. The Company issued Swiss Allied four warrants as an incentive to
the note, each for 20,000,000 shares of the Company’s common stock, for a total of 80,000,000 warrants. Each warrant has
an exercise price of $0.005 per share. The four warrants, each for 20,000,000 shares of common stock, mature on March 31, 2016,
June 30, 2016, October 31, 2016, and March 31, 2017, respectively. The warrants, as an incentive to the note, should have a beneficial
conversion feature. As the note’s beneficial conversion feature is at the maximum, there is no beneficial conversion feature
to record. If Swiss Allied exercises all warrants, the Company would receive an additional $400,000 for said shares of common
stock. If Swiss Allied does not exercise all 80,000,000 warrants, by the maturation dates, as described herein, the exercise price
shall be adjusted to $0.06, an increase of $0.055 per share as a penalty, which is payable to the Company at the time Swiss Allied
requests to have the Rule 144 restriction removed. The interest rate for each loan tranche is 8% and is accrued with a payment
date of December 15, 2016 for the first tranche and January 15, 2017 for the second tranche. The conversion price for the $100,000,
which may happen any time prior to December 14, 2016, shall be the greater of $0.03 or 50% of the lowest closing price on the
primary trading market on which the Company’s common stock is quoted for the five trading days immediately prior to, but
not including, the conversion date, assuming that Swiss Allied has not exercised all 80,000,000 warrants for common stock. The
conversion price for the $100,000, assuming that Swiss Allied has exercised all 80,000,000 warrants for common stock, shall be
$0.005 per share. Swiss Allied has a right of first refusal on any future funding to the Company. Swiss Allied has the right to
name a party to serve as a member of the Company’s board of directors if Swiss Allied owns at least 40,000,000 shares of
the Company’s common stock. If Swiss Allied owns at least 80,000,000 shares of the Company’s common stock, they have
the right to name two parties to the Company’s board of directors. The two directors will remain as long as Swiss Allied
owns 55,000,000 shares of the Company’s common stock.
On October 17, 2016, the Company issued
268,167 shares of common stock and 268,167 warrants for common stock to Weintraub Law Group, LLC for the settlement of payables
of $15,065.
On December 15, 2016, the Company and FLNL
executed a license agreement (see Note 2). As part of the agreement, the Company provided FLNL with warrants to purchase up to
1,000,000 shares of common stock. The warrants have an exercise price of $0.05. The warrants can be exercised as follows: 250,000
warrants between June 2017 and August 2017; 250,000 warrants between September 2017 and November 2017; 250,000 warrants between
December 2017 and February 2018, and; 250,000 warrants between March 2018 and May 2018. The warrants will be expensed according
to their respective vesting schedule.
On December 15, 2016, the Company and FLI
executed a license agreement (see Note 2). The Company provided FLI with warrants to purchase up to 1,000,000 shares of common
stock. The warrants have an exercise price of $0.05. The warrants can be exercised as follows: 250,000 warrants between June 2017
and August 2017; 250,000 warrants between September 2017 and November 2017; 250,000 warrants between December 2017 and February
2018, and; 250,000 warrants between March 2018 and May 2018. The warrants will be expensed according to their respective vesting
schedule.
Freedom Leaf Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
December 31, 2017
(unaudited)
On January 16, 2017, the Company issued
1,000,000 warrants for common stock to Vincent Moreno for future consulting services. The warrants have an exercise price of $0.05
and expire in five years.
On January 30, 2017, the Company entered
into an agreement with CorporateAds.com, LLC for services. The compensation provides a minimal $500 payment, 150,000 shares of
common stock, and 150,000 warrants for common stock. The warrants have an exercise price of $0.10 per share with an expiration
18 months after issuance. The agreement is for 15 days and has an auto renewal feature for an additional 75 days. During the 75-day
period, the Company will pay $500 for each additional 15 days. On February 1, 2017, both parties agreed to an addendum to the agreement
to change the exercise price of $0.10 for the warrants to the following: 50,000 of the warrants have an exercise price of $0.10
per share; 50,000 of the warrants have an exercise price of $0.125 per share; and 50,000 of the warrants have an exercise price
of $0.15 per share.
Stock Option Plan
On June 27, 2016, the Board of Directors
approved the 2016 Stock Option Plan which has reserved 10,000,000 shares of common stock.
NOTE 12 – REVENUE CLASSES
Selected financial information for the
Company’s operating revenue classes for the six months ended December 31, 2017 and 2016, are as follows:
|
|
For the six months ended
|
|
Revenues:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Magazine related
|
|
$
|
5,826
|
|
|
$
|
15,974
|
|
Referral fees
|
|
|
–
|
|
|
|
1,724
|
|
Licensing fees
|
|
|
–
|
|
|
|
536,864
|
|
Equipment sales commissions
|
|
|
–
|
|
|
|
9,750
|
|
Seminar and training
|
|
|
–
|
|
|
|
838
|
|
Sale of products
|
|
|
1,833
|
|
|
|
3,970
|
|
Total
|
|
$
|
7,659
|
|
|
$
|
569,120
|
|
|
|
For the six months ended
|
|
Direct costs of revenue:
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Magazine related
|
|
$
|
68,850
|
|
|
$
|
66,322
|
|
Referral fees
|
|
|
–
|
|
|
|
–
|
|
Licensing fees
|
|
|
–
|
|
|
|
–
|
|
Equipment sales commissions
|
|
|
–
|
|
|
|
–
|
|
Seminar and training
|
|
|
–
|
|
|
|
–
|
|
Sale of products
|
|
|
976
|
|
|
|
5,042
|
|
Total
|
|
$
|
69,826
|
|
|
$
|
71,364
|
|
The Company’s six revenue classes
are magazine related, referral fees, licensing fees (see Note 2), equipment sales commissions (see Note 2), seminar and training,
and sale of products.
Freedom Leaf Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
December 31, 2017
(unaudited)
NOTE 13 – CONCENTRATIONS
Concentration of Credit Risk
Financial instruments, which potentially
subject the Company to a concentration of credit risk, consist principally of temporary cash investments.
The Company places its temporary cash investments
with financial institutions insured by the FDIC. No amounts exceeded federally insured limits as of December 31, 2017. There have
been no losses in these accounts through December 31, 2017.
Concentration of Revenue
For the six months ended December 31, 2017,
the Company had no material customer.
Concentration of Supplier
The Company does not rely on any particular
suppliers for its services.
Concentration of Intellectual Property
The Company owns or has filed for the trademarks
“Freedom Leaf,” “Hemp Inspired,” “Cannabizu,” and “Cannabiz” as filed with the
United States Patent and Trademark Office. The Company has filed for “Freedom Leaf” in Jamaica and Uruguay.
NOTE 14 – INVENTORY
The Company has inventory consisting of
various CBD products. As of December 31, 2017, and June 30, 2017, the Company had inventory of $27,200 and $0, respectively. The
Company accounts for its inventory using the lower of cost or market and the cost of sales are recorded utilizing the first in
first out (“FIFO”) method.
NOTE 15 – INCOME TAX
As of December 31, 2017, and June 30,
2017, the Company has net operating loss carry forwards of $6,370,985 and $4,920,988, 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 21% to loss before taxes for fiscal year 2018 and 34% to loss before taxes for fiscal year 2017), as follows:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Tax expense (benefit) at the statutory rate
|
|
$
|
(304,499
|
)
|
|
$
|
(107,783
|
)
|
State income taxes, net of federal income tax benefit
|
|
|
–
|
|
|
|
–
|
|
Change in valuation allowance
|
|
|
304,499
|
|
|
|
107,783
|
|
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 2017 remain
to examination by federal agencies and other jurisdictions in which it operates.
Freedom Leaf Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
December 31, 2017
(unaudited)
The tax effect of significant components
of the Company’s deferred tax assets and liabilities at December 31, 2017 and June 30, 2017, respectively, are as follows:
|
|
December 31,
2017
|
|
|
June 30,
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
1,337,907
|
|
|
$
|
1,073,183
|
|
Timing differences
|
|
|
974,778
|
|
|
|
908,366
|
|
Total gross deferred tax assets
|
|
|
2,312,685
|
|
|
|
1,981,549
|
|
Less: Deferred tax asset valuation allowance
|
|
|
(2,312,685
|
)
|
|
|
(1,981,549
|
)
|
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 2018 were fully offset by a 100% valuation allowance. The valuation allowance
for the remaining net deferred tax assets was $2,312,685 and $1,981,549 as of December 31, 2017 and June 30, 2017, respectively.
On December 22, 2017, the United States
Government passed new tax legislation that, among other provisions, will lower the corporate tax rate from 34% to 21%. In addition
to applying the new lower corporate tax rate in 2018 and thereafter to any taxable income we may have, the legislation affects
the way we can use and carry forward net operating losses previously accumulated and results in a revaluation of deferred tax assets
recorded on our balance sheet. Given that the deferred tax assets are offset by a full valuation allowance, these changes will
have no net impact on the Company’s financial position and net loss. However, if and when we become profitable, we will receive
a reduced benefit from such deferred tax assets. Had this legislation passed prior to our June 30, 2017, fiscal year-end, the effect
of the legislation would have been a reduction in deferred tax assets and the corresponding valuation allowance.
NOTE 16 – 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 January 5, 2018 as amended on
February 5, 2018, with an effective date of January 5, 2018, the Company consummated its previously-announced acquisition of
100% of the capital stock of Green Market, a Spanish producer of hemp products. In consideration for the acquisition, the
Company paid to Green Market’s seller: (i) $24,805 (which amount was paid by a third party, and to whom the Company
owes that amount), and (ii) 4,220,000 shares of the Company’s common stock. Additionally: (i) additional shares will be
issuable if the volume weighted-average price of the Company’s stock between January 5, 2018 and July 3, 2018 is less
than $0.10 per share, and (ii) the sellers of Green Market have the option to repurchase all of the assets of Green Market
for €100 (and the assumption of Green Market liabilities) if the volume weighted-average price of the Company’s
stock between January 5, 2018 and January 5, 2019 is less than $0.01 per share. Green Market’s facilities include: a
21,000 square foot light deprivation greenhouse; a 43,000 square foot indoor growing research facility, and over 200 acres of
outdoor production space. The light deprivation allows the increase of the number of yearly crops from 3 to 4 crops a year,
and the 43,000 square foot indoor grow facility is used for genetic research and cultivating additional hemp crops. Green
Market is strategically located in Elche, Alicante, an important Spanish business hub, with great year-round weather
conditions for agricultural growing and a long tradition of growing hemp. The Company will report proforma financials when
they are available.
On January 17, 2018, Pure Energy acquired
526,315 shares of the Company’s common stock for $25,000.
Freedom Leaf Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
December 31, 2017
(unaudited)
On January 18, 2018, the Company appointed
Richard Groberg (“Groberg”), via his company, RSGroberg Consulting, LLC, as its Chief Financial Officer to serve for
an initial, two-year term. In consideration of the services to be performed by Groberg, the Company: (i) issued 800,000 shares
of common stock, and (ii) $5,000 per month compensation payable: (1) prior to the date that the Company is paying monthly compensation
to its directors primarily in cash, in 600,000 shares of common stock (representing the first 12 months’ compensation),
and (2) payable in cash thereafter. The 800,000 and 600,000 shares of common stock were issuable on January 18, 2018. See Note
5.
On January 18, 2018, Pelosi entered into
a stock purchase agreement with the Company to purchase 1,050,000 shares of common stock.
On January 19, 2018, Pure Energy converted
into 2,008,740 shares of Company common stock: (i) the principal balance of the $38,000 convertible promissory note it previously
acquired from Power Up and (ii) $2,175 of accrued interest in connection with that note ($40,175 in total). That note, executed
by the Company on July 20, 2017, had a conversion discount of 35% based on the lowest closing price of the 20 days prior to conversion.
On January 19, 2018, in conjunction with
its conversion of that note, Pure Energy received 800,918 shares of common stock – (i) $19,826.19 in conjunction with the
settlement amount owed by the Company to Power Up at the time Pure Energy acquired that note from Power Up in connection with that
note, and (ii) $3,000 as a transaction fee ($22,826.19 in total).
On January 22, 2018, the Company issued
60,616 shares of common stock to Joseph Gurreri, an employee, in consideration of $8,550 of accrued wages.
On January 26, 2018, the Company issued
to Pure Energy 1,933,848 shares of common stock in consideration of its conversion of a second convertible promissory note for
$33,842 (see Note 10) that the Company issued to Pure Energy on September 27, 2017 in conjunction with Pure Energy’s payoff
of the May 10, 2017 Power Up convertible note.
On January 31, 2018, the Company issued
Reliable Steel 229,671 shares of common stock for a portion of its debt of $33,532.
On January 31, 2018, the Company issued
to Michael Ostrander: (i) 150,000 shares of common stock for services performed in December 2017 valued at $15,000, and (ii) 59,930
shares of common stock for services performed in January 2018 valued at $15,000.
On January 31, 2018, the Company issued
226,497 shares of common stock to Christopher Thompson, an employee, in connection with services provided in 2017 valued at $33,069.
On January 31, 2018, the Company issued
to Stone 600,000 shares of common stock which were recorded as issuable as of December 31, 2017.
On January 31, 2018, the Company issued
82,192 shares of common stock to Steven Bloom in connection with consulting services provided in 2017 totaling $12,000.
On January 31, 2018, the Company issued
16,952 shares of common stock to the Company’s legal counsel, in connection with services rendered from November 2017 through
January 2018 totaling $2,475.
On January 31, 2018, the Company issued
122,466 shares of common stock to Christopher Sloan, a former employee of the Company, in connection with services rendered by
him to the Company in 2017 totaling $17,880.
Freedom Leaf Inc.
and Subsidiaries
Notes to Condensed Consolidated Financial
Statements
December 31, 2017
(unaudited)
On January 31, 2018, the Company issued
47,945 shares of common Stock to Lakeport Business Services, Inc. in connection with services rendered to the Company in 2018
valued at $7,000. The stock was valued at $15,558 based on the current stock price.
On January 31, 2018, Pure Energy purchased
838,126 shares of common stock for $83,813.
On February 1, 2018, the Company paid LG
Capital $58,813 to retire the convertible promissory note it issued to LG Capital on August 11, 2017 for $42,000. The repayment
amount included $1,565 of accrued interest and a payment premium of $15,248.
On February 7, 2018, Neil Dutson acquired 624,000 shares of
common stock for $78,000.
On February 7, 2018, Valencia Web Technology
S.L. (“Valencia”) agreed to the accept the initially issued 3,000,000 shares of common stock as satisfaction of the
obligation to pay additional shares to Valencia in connection with the Company’s April 8, 2017 Asset Purchase Agreement with
Valencia to acquire certain of its assets. As of October 8, 2017, the True-Up Date (the six-month anniversary of the Asset Purchase
Agreement), the Company recorded 4,142,857 shares of common stock as issuable in regards to the true-up clause in the agreement.
The February 7, 2018 agreement relieved the Company of the obligation of issuing the additional 4,142,857 shares which will be
cancelled accordingly. See Notes 2 and 11.
On February 8, 2018, the Company paid Power
Up $71,913 to retire the convertible promissory it issued to Power Up on September 26, 2017 for $53,000.
On February 9, 2018, Weintraub
Law Group, LLC (“Weintraub”) surrendered 52,779 warrants at a value of $0.3048 per share, $16,090 in total, to effect
the cashless exercise of warrants to acquire 215,378 shares of common stock at $0.06 per share. The Company had issued to Weintraub
268,167 warrants to acquire common stock and 268,167 shares of common stock on October 17, 2016 for the settlement of payables
of $15,065.
On February 9, 2018, Douglas Montgomery, Greg
Montgomery and Lesley Montgomery acquired from the Company 160,000, 80,000 and 160,000, respectively, shares of the Company’s
common stock, in each case for a purchase price of $0.125 per share, for total proceeds of $50,000.