Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2019

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _________ to _________

 

Commission File Number: 000-55687

 

 

FREEDOM LEAF INC.

(Exact name of Registrant as specified in its charter)

 

Nevada   46-2093679
(State of incorporation)   (IRS Employer ID Number)

 

3571 E. Sunset Road, Suite 420

Las Vegas, Nevada 89120

 

877-442-0411

(Registrant’s telephone number)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
Emerging growth company ☐  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

As May 15, 2019, there were 223,180,095 shares of common stock, par value $0.001 per share issued, issuable, and outstanding.

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered
Common Stock FRLF OTCQB

 

 

     

 

 

FREEDOM LEAF INC.

FORM 10-Q

MARCH 31, 2019

 

INDEX

 

  Page No.
PART I – FINANCIAL INFORMATION 3
Item 1.   Financial Statements 4
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations 21
Item 3.   Quantitative and Qualitative Disclosures About Market Risk 25
Item 4.   Controls and Procedures 25
       
PART II – OTHER INFORMATION 26
Item 1.   Legal Proceedings 26
Item 1A.   Risk Factors 26
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 3.   Defaults Upon Senior Securities 26
Item 4.   Mine Safety Disclosures 26
Item 5.   Other Information 26
Item 6.   Exhibits 27
       
SIGNATURES 28

 

 

 

 

 

 

 

 

 

 

 

  2  

 

 

PART I – FINANCIAL INFORMATION

 

TABLE OF CONTENTS

 

Index to Financial Statements   Page
     
Condensed Consolidated Balance Sheets as of March 31, 2019 (unaudited) and June 30, 2018   4
     
Condensed Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended March 31, 2019 and 2018 (unaudited)   5
     
Consolidated Statements of Shareholders’ Equity for the nine months ended March 31, 2019 and 2018 (unaudited)   6
     
Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2019 and 2018 (unaudited)   7
     
Notes to Condensed Consolidated Financial Statements   9

 

 

 

 

 

 

 

 

 

 

 

  3  

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

FREEDOM LEAF INC.

And Subsidiaries

Condensed Consolidated Balance Sheets

 

    March 31, 2019,     June 30, 2018,  
    (Unaudited)        
ASSETS            
Current assets                
Cash   $ 268,658     $ 54,380  
Accounts receivable, net     341,889       161,975  
Inventory, net     557,933       201,689  
Prepaid expenses     234,898       567,280  
Due from related party     –       28,606  
Total current assets     1,403,378       1,013,930  
                 

Property and Equipment, net

    4,189,751       4,786,050  
Intangible assets, net     1,624,518       1,522,574  
Goodwill     189,000       70,000  
Cost method investments     1,370,400       995,400  
Other assets     95,985       11,584  
                 
Total assets   $ 8,873,032     $ 8,399,538  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY                
                 
Current liabilities                
Accounts payable and accrued expenses   $ 625,036     $ 557,654  
Accounts payable and accrued expenses to related parties     107,035       –  
Current portion of long-term notes payable     542,503       95,000  
Short-term notes payable     301,300       286,575  
Deferred revenue     9,045       –  
                 
Total current liabilities     1,584,919       939,229  
                 
Non-current liabilities                
Long-term notes payable, net of current portion     3,904,627       4,441,911  
                 
                 
Total non-current liabilities     3,904,627       4,441,911  
                 
                 
Total liabilities     5,489,546       5,381,140  
                 
Commitments and contingencies     –       –  
                 
Stockholders' equity                
Preferred stock, $0.001 par value, 10,000,000 shares authorized     –       –  
Series A preferred stock, 1,000,000 shares authorized, 948,022 shares issued and outstanding at March 31, 2019 and June 30, 2018, respectively     948       948  
Common stock, $0.001 par value, 500,000,000 shares authorized, 223,180,095 and 185,369,365 shares issued, issuable, and outstanding at March 31, 2019 and June 30, 2018, respectively     223,177       185,370  
Additional paid-in capital     16,880,262       12,377,907  
Accumulated other comprehensive income     28,410       3,833  
Accumulated deficit     (13,773,630 )     (9,540,976 )
Total Freedom Leaf Inc. stockholders' equity     3,359,167       3,027,082  
Non-controlling interest     24,319       (8,684 )
Total stockholders' equity     3,383,486       3,018,398  
                 
Total liabilities and stockholders' equity   $ 8,873,032     $ 8,399,538  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

  4  

 

 

FREEDOM LEAF INC.

And Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income/ (Loss)  

(Unaudited)

 

    For three months ending     For nine months ending  
    March 31,     March 31,  
    2019     2018     2019     2018  
Revenue, net   $ 835,293     $ 56,254     $ 2,193,515     $ 63,913  
Operating expenses                                
Direct costs of revenue     503,869       81,045       1,310,887       150,871  
General and administrative     1,163,283       337,409       3,793,540       1,186,222  
Depreciation and amortization     605,067       84,935       1,069,050       108,251  
Bad debt expense     23,223       221,294       5,895       637,817  
Marketing and selling     33,796       54,237       207,556       58,554  
Total operating expenses     2,087,402       778,920       6,386,929       2,141,715  
Operating loss     (1,252,109 )     (722,666 )     (4,193,414 )     (2,077,802 )
Other income (expense)                                
Interest expense     (2,420 )     (1,659 )     (14,411 )     (14,439 )
Loss on settlement of debt     –       (113,936 )     –       (419,098 )
Interest income     56       7       171       10,331  
Loss on conversion of debt into common stock     –       (781,523 )     –       (781,523 )
Gain on extinguishment of liabilities     –       54,157       –       54,157  
Gain on forgiveness of debt     –       –       100,000       –  
Loss on expiration of option     (125,000 )     –       (125,000 )     –  
Change in fair value of embedded conversion features     –       (36,575 )     –       (59,127 )
Beneficial conversion feature     –       34,178       –       (45,416 )
Total other income (expense)     (127,364 )     (845,351 )     (39,240 )     (1,255,115 )
Provision for income taxes     –       –       –       –  
Net loss before non-controlling interest     (1,379,473 )     (1,568,017 )     (4,232,654 )     (3,332,917 )
Loss attributable to non-controlling interest     3,454       6,876       33,003       6,876  
Net loss attributable to common stockholders   $ (1,376,019 )   $ (1,561,141 )   $ (4,199,651 )   $ (3,326,041 )
Net loss attributable to common stockholders per share - basic and diluted   $ (0.01 )   $ (0.01 )   $ (0.02 )   $ (0.02 )
Weighted average number of shares outstanding - basic and diluted     221,396,199       158,509,748       213,163,928       137,114,271  
Other Comprehensive Income (Loss)                                
Foreign currency translation adjustment     15,774       102       24,577       22  
Total Comprehensive Loss   $ (1,360,245 )   $ (1,561,039 )   $ (4,175,074 )   $ (3,326,019 )

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

  5  

 

 

FREEDOM LEAF, INC.

And Subsidiaries

Consolidation Statement of Stockholders' Equity

March 31, 2018

 

    Preferred Stock   Common Stock Issuable   Common Stock   Stock Sub Rec   Additional paid in Capital   Non Controlling Interest   Accumulated Comprehensive Income   Subscription Receivable   Accumulated Deficit   Total  
    Shares    Amount   Shares   Amount   Shares     Amount   Amount   Amount   Amount   Amount   Amount   Amount   Amount  
Balance at June 30, 2017     948,022   948     1,793,195     1,793     109,308,600       109,309     –   4,996,756     –     –     –     (4,920,988 )   187,818  
Issuance of common stock for services     –     –     (1,793,195 )   (1,793 )   15,282,672       15,283     –     447,838     –     –     –     –     461,328  
Net loss for the period ended September 30, 2017     –     –     –     –     –       –     –     –     –     –     –     (708,031 )   (708,031 )
Balance at September 30, 2017     948,022     948     –     –     124,591,272       124,592     –     5,444,594     –     –     –     (5,629,019 )   (58,885 )
Issuance of common stock and warrants for cash     –     –     –     –     967,000       967     –     13,533     –     –     –     –     14,500  
Issuance of common stock for services     –     –     –     –     22,062,426       22,062     –     652,705     –     –     –     –     674,767  
Net loss for the period ended December 31, 2017     –     –     –     –     –       –     –     –     –     –     –     (741,966 )   (741,966 )
Balance at December 31, 2017     948,022     948     –     –     147,620,698       147,621     –     6,110,832     –     –     –     (6,370,985 )   (111,584 )
Issuance of common stock and warrants for cash     –     –     –     –     6,318,801       6,319     –     541,494     –     –     –     –     547,813  
Issuance of common stock in business combinations     –     –     –     –     4,220,000       4,220     –     291,180     –     –     –     –     295,400  
Issuance of common stock for services     –     –     –     –     3,581,213       3,581     –     1,573,090     –     –     –     –     1,576,671  
Accumulated comprehensive income     –     –     –     –     –       –     –     –     –     (6,854 )   –     –     (6,854 )
Net loss for the period ended March 31, 2018     –     –     –     –     –       –     –     –     –     –     –     (1,876,044 )   (1,876,044 )
Balance at March 31, 2018     948,022     948     –     –     161,740,712       161,741     –     8,516,596     –     (6,854 )   –     (8,247,029 )   425,402  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

  6  

 

 

FREEDOM LEAF INC.

and Subsidiaries

Consolidation Statements of Stockholders' Equity

March 31, 2019

 

  Preferred Stock   Common Stock Issuable   Common Stock   Stock Sub Rec   Additional paid in Capital   Non Controlling Interest   Accumulated Comprehensive Income   Subscription Receivable   Accumulated Deficit   Total  
  Shares   Amount   Shares   Amount   Shares   Amount   Amount   Amount   Amount   Amount   Amount   Amount   Amount  
Balance at June 30, 2018   948,022     948     660,752      663     184,708,613     184,707     –     12,377,907     (8,684 )   3,833     –     (9,540,976 )   3,018,398  
Issuance of common stock and warrants for cash   –     –     –     –     4,702,424     4,702     –     323,798     –     –     –     –     328,500  
Issuance of common stock for cost method investment   –     –     –     –     3,000,000     3,000     –     372,000     –     –     –     –     375,000  
Issuance of common stock in business combinations   –     –     –     –     2,000,000     2,000     –     298,630     –     –     –     –     300,630  
Issuance of common stock for services   –     –     (492,242 )   (493 )   1,511,268     1,511     –     138,082     –     –     –     –     139,100  
Issuance of common stock for stock subscription   –     –     25,000,000     25,000     –     –     (2,750,000 )   2,975,000     –     –     –     –     250,000  
Accumulated comprehensive income   –     –     –     –     –     –     –     –     –     (1,154 )   –     –     (1,154 )
Net loss for the period ended September 30, 2018   –     –     –     –     –     –     –     –     (9,143 )   –     –     (1,102,623 )   (1,111,766 )
Balance at September 30, 2018   948,022     948     25,168,510     25,170     195,922,305     195,920     (2,750,000 )   16,485,417     (17,827 )   2,679     –     (10,643,599 )   3,298,708  
Issuance of common stock and warrants for cash   –     –     895,522     895     25,000,000     25,000     –     2,974,105     –     –     –     –     3,000,000  
Issuance of common stock in business combinations   –     –     –     –     496,667     497     –     154,711     –     –     –     –     155,208  
Issuance of common stock for services   –     –     (87,650 )   (89 )   475,622     475     –     161,338     –     –     –     –     161,724  
Issuance of common stock for stock subscription   –     –     (25,000,000 )   (25,000 )   –     –     2,750,000     (2,975,000 )   –     –     –     –     (250,000 )
Accumulated comprehensive income   –     –     –     –     –     –     –     –     38,692     9,957     –     –     48,649  
Net loss for the period ended December 31, 2018   –     –     –     –     –     –     –     –     –     –     –     (1,750,558 )   (1,750,558 )
Balance at December 31, 2018   948,022     948     976,382     976     221,894,594     221,892     –     16,800,571     20,865     12,636     –     (12,394,157 )   4,663,731  
Issuance of common stock for services   –     –     –     –     309,119     309     –     79,691     –     –     –     –     80,000  
Accumulated comprehensive income   –     –     –     –     –     –     –     –     –     15,774     –     –     15,774  
Net loss for the period ended March 31, 2019   –     –     –     –     –     –     –     –     3,454     –     –     (1,370,473 )   (1,376,019 )
Balance at March 31, 2019   948,022     948     976,382     976     222,203,713     222,201     –     16,880,262     24,319     28,410     –     (13,773,630 )   3,383,486  

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

  7  

 

 

FREEDOM LEAF INC.

And Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the Nine Months Ended March 31,

(Unaudited)

 

    2019     2018  
Cash flows from operating activities:                
Net loss   $ (4,232,654 )   $ (3,332,917 )
Adjustments to reconcile net loss to net cash used in operations:                
Depreciation and amortization     1,070,922       108,251  
Gain on forgiveness of debt     (100,000 )     –  
Amortization of debts discounts     6,000       –  
Beneficial conversion feature     –       187,902  
Gain on settlement of contingent liabilities     –       (150,000 )
Loss on common stock issued for accounts payable     –       189,114  
Issuance of common stock for services     380,823       571,858  
Loss on conversion of debt     –       710,447  
Loss on revaluation of derivative liabilities     –       59,217  
Bad debt expense     –       637,817  
Loss on expiration of option     125,000       –  
                 
Changes in operating assets and liabilities:                
Accounts receivable     (179,897 )     (21,451 )
Inventory     (247,579 )     (55,285 )
Prepaid expense     204,835       (119,138 )
Deposit     (95,985 )     –  
Other assets     –       (40,600 )
Accounts payable and accrued expenses     145,937       607,198  
Accounts payable and accrued expenses to related parties     28,606       127,499  
Net cash used in operating activities     (2,894,063 )     (520,088 )
Cash flows from (used in) investing activities                
Cash received in acquisition of GME     –       3,546  
Intangible asset acquired     –       (27,938 )
Cash received in acquisition - Tierra     1,210       –  
Cash paid in acquisition - Accuvape     (83,899 )     –  
Capitalized website development costs     (170,600 )     –  
Purchases of property and equipment     (3,449 )     –  
Net cash from (used in) investing activities     (256,738 )     (24,392 )
Cash flows from financing activities:                
Proceeds from sale of common stock     3,328,500       646,058  
Repayments on notes payable     (284,826 )     (97,382 )
Proceeds from notes payable     360,000       166,842  
Net cash provided by financing activities     3,403,673       715,518  
Change in Cash - Pre FX     252,872       –  
Effects of exchange rates on cash     (38,594 )     (7,992 )
Net increase in cash     214,278       163,046  
Cash at beginning of period     54,380       2,498  
Cash at end of period   $ 268,658     $ 165,544  
Supplemental disclosure of cash flow information:                
Cash paid for interest   $ –     $ –  
Cash paid for taxes   $ –     $ –  
Non-cash investing and financing activities:                
Issuance of common stock for accounts payable and accrued expenses   $ –     $ 662,459  
Issuance of common stock for inventory   $ –     $ 27,200  
Issuance of notes payable for financing fees   $ –     $ –  
Financed purchases of property and equipment   $ –     $ 148,500  
Initial debt discounts   $ 6,000     $ –  
Common stock issued for cost method investment   $ 375,000     $ –  
Common stock issued in business combination - GME   $ –     $ 396,728  
Common stock issued in business combination - Tierra   $ 300,630     $ –  
Common stock issued in business combination - Accuvape   $ 155,208     $ –  
Exercise of warrants for the issuance of common stock   $ –     $ 215  
Notes assigned between holders   $ –     $ 118,602  
Initial debt discounts   $ –     $ 116,625  
Common stock issued for settlement of debt   $ –     $ 1,346,520  
Common stock issued for rights agreement   $ –     $ 22,000  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

  8  

 

 

Freedom Leaf Inc.

And Subsidiaries

Notes to Condensed Consolidated Financial Statements

March 31, 2019

(Unaudited)

 

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

 

Organization

 

The Company was incorporated in the State of Nevada on February 21, 2013, under the name of Arkadia International, Inc. The Company originally was engaged in the business of the acquisition of in demand equipment, cars, and goods with the intent to resell these in the U.S. territories or export to overseas countries. On October 3, 2014, the Company experienced a change in control. Richard C. Cowan acquired approximately 93% of the issued and outstanding common stock of the Company at the time. On November 6, 2014, the Company merged with Freedom Leaf Inc., a private Nevada corporation, and the Company changed its name to Freedom Leaf Inc. In connection with the merger, the sole officer, director and stockholder of the private company, Clifford J. Perry, became an officer and director of the Company, and Mr. Perry received approximately 48.1% of the Company’s common stock post-merger. For financial reporting purposes, this merger was accounted for as a "reverse acquisition" rather than a business combination, and the private company was deemed to be the accounting acquirer in the transaction, with the Company deemed to be the acquired company for financial reporting purposes. Consequently, the assets and liabilities and the operations that were reflected in the historical financial statements of the Company prior to the merger are those of the private company, and they were recorded at the historical cost basis of the private company, and the financial statements after completion of the merger include the combined assets and liabilities of the Company and the private company, the historical operations of the private company only, and the operations of both companies from the closing date of the merger.

 

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

 

Freedom Leaf Inc. ( OTCQB: FRLF ), dba Freedom Leaf Health, is a diversified, innovator in plant-based care providing premium Hemp CBD health products across advanced care, consumer and pet markets to promote greater health and wellness. FRLF is a clean-health company, establishing a new direction in care with plant-based products designed to naturally restore and revitalize. FRLF’s consumer promise of “ your health first ” underscores its universal commitment to produce premium-quality HEMP-derived CBD health products.

 

FRLF is a diverse enterprise of branded business lines dedicated to meeting the needs of people who face health challenges and those who are healthy. Freedom Leaf’s “ Leafceuticals ” brand is the company’s most advanced product line for health care practitioners, caregivers and patients. “ IrieCBD” and “ Hempology” are the company’s flagship lines of premium full-spectrum, Hemp-derived CBD products rich in CBD’s, terpenes and flavonoids and integrated with potent health botanicals. The Company is soon to launch a THC-free line of Hemp CBD health products under the “ NatureBorn” brand, and developing performance CBD beverage and CBD beauty product lines.

 

For over 30 years, the founders of FRLF fought for citizen rights to access plant-based care, and pioneered premium hemp health products as a first step to clean health. Today, FRLF produces premium hemp products from seed to shelf using proprietary science-backed formulations and rigorous product testing FRLF is a socially conscious, vertically-integrated company maintaining all of the highest standards in quality and safety, with a focus on continual innovation to deliver ever-better plant-based care products.

 

Subsidiary Entities:

 

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

 

 

 

  9  

 

 

  ☐ 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.  It operates the Company’s Hempology and IRIE brands.

 

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

 

  ☐ Leafceuticals Europe, SL, formed on June 28, 2018, is a wholly-owned subsidiary of the Company. It owns our Valencia greenhouse operations.

 

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

   

  ☐

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

 

  ☐ FL – Accuvape, LLC (“Accuvape”) a Nevada corporation, was formed on November 26, 2017, is a wholly-owned subsidiary the Company and operates the Accuvape business acquired by the Company effective November 16, 2018.

 

Nature of Operations

 

Freedom Leaf Inc. ( OTCQB: FRLF ), dba Freedom Leaf Health, is a diversified, innovator in plant-based care providing premium Hemp CBD health products across advanced care, consumer and pet markets   to promote greater health and wellness. FRLF is a clean-health company, establishing a new direction in care   with plant-based products designed to naturally restore and revitalize.  FRLF’s consumer promise of “ your health first ” underscores its universal commitment to produce premium-quality HEMP-derived CBD health products.

 

FRLF is a diverse enterprise of branded business lines dedicated to meeting the needs of people who face health challenges and those who are healthy. Freedom Leaf’s “ Leafceuticals ” brand is the company’s most advanced product line for health care practitioners, caregivers and patients. “ IrieCBD” and “ Hempology” are the company’s flagship lines of premium full-spectrum, Hemp-derived CBD products rich in CBD’s, terpenes and flavonoids and integrated with potent health botanicals. The Company is soon to launch a THC-free line of Hemp CBD health products under the “ NatureBorn” brand, and developing performance CBD beverage and CBD beauty product lines.

 

For over 30 years, the founders of FRLF fought for citizen rights to access plant-based care, and pioneered premium hemp health products as a first step to clean health. Today, FRLF produces premium hemp products from seed to shelf using proprietary science-backed formulations and rigorous product testing FRLF is a socially conscious, vertically-integrated company maintaining all of the highest standards in quality and safety, with a focus on continual innovation to deliver ever-better plant-based care products.

 

The Company’s major business lines are:

 

☐ Legal Industrial Hemp Cultivation

 

☐ Cannabidiol Extraction, Distillation, and Processing

 

☐ Expert Product Formulation

 

☐ Nutraceutical Brand Marketing

 

☐ Ancillary Products & Niche Markets

 

 

 

  10  

 

 

☐ Affiliate Marketing Programs

 

☐ E-Commerce Solutions

 

☐ Global Media & Advertising Networks

  

Basis of Presentation

 

The Company prepares its consolidated financial statements in conformity with generally accepted accounting principles in the United States of America. The unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of such statements. These unaudited condensed consolidated financial statements have been prepared in accordance with GAAP pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Additionally, the results of operations for the nine months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the entire year. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended June 30, 2018 included in the Company’s 2018 Annual Report on Form 10-K, filed with the SEC on October 15, 2018.

 

Principles of Consolidation

 

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

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates in the accompanying consolidated financial statements include the amortization period for intangible assets, valuation and impairment valuation of intangible assets, depreciable lives of the web site and property and equipment, valuation of warrants and beneficial conversion feature debt discounts, valuation of derivatives, valuation of share-based payments and the valuation allowance on deferred tax assets.

 

Fair Value of Financial Instruments

 

The Company measures its financial assets and liabilities in accordance with generally accepted accounting principles. For certain of our financial instruments, including cash, accounts payable, accrued expenses, and short-term loans the carrying amounts approximate fair value due to their short maturities.

 

 

 

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We follow accounting guidance for financial and non-financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. This guidance does not apply to measurements related to share-based payments. This guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

 

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

Level 2: Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

 

Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.

 

Revenue Recognition

 

The Company recognizes revenue for our services in accordance with ASC 606, "Revenue from Contracts with Customers." Under these guidelines, revenue is recognized on transactions when all of the following exist: persuasive evidence of an arrangement did exist, delivery of service has occurred, the sales price to the buyer is fixed or determinable and collectability is reasonably assured. The Company has five primary revenue streams as follows:

 

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

 

Net Income (Loss) Per Share

 

In accordance with ASC 260-10, “Earnings per Share,” basic net earnings (loss) per common share is computed by dividing the net earnings (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share are computed using the weighted average number of common and dilutive common stock equivalent shares outstanding during the period. Dilutive common stock equivalent shares that may dilute future earnings per share consist of Series A convertible preferred stock and warrants to purchase common stock. As of March 31, 2019, there were 49,444,444 such potential common stock equivalents from warrants that were excluded from the diluted EPS calculation. Equivalent shares are not utilized when the effect is anti-dilutive.

 

 

 

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Going Concern

 

The Company has a net loss attributable to common stockholders for the nine months ended March 31, 2019 of $4,203,105 and has used cash in operations of $2,894,063 for the nine months ended March 31, 2019. In addition, as of March 31, 2019, the Company had an accumulated deficit of $13,773,630.

 

The accompanying condensed 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, as well as through acquisitions, until such time that funds provided by operations are sufficient to fund working capital requirements.

 

NOTE 2 – INVENTORY

 

Inventories at March 31, 2019 and June 30, 2018 consisted of the following:

   

    March 31,     June 30,  
    2019     2018  
Raw materials   $ –     $ –  
Work-in-process     110,802       126,047  
Finished goods     483,170       111,681  
Inventory reserve     (36,039 )     (36,039 )
Inventory, net   $ 557,933     $ 201,689  

 

NOTE 3 – PROPERTY AND EQUIPMENT

 

Property and equipment at March 31, 2019 and June 30, 2018 consisted of the following:

  

   

March 31,

2019

   

June 30,

2018

 
Machinery and equipment   $ 1,949,594     $ 2,022,980  
Furniture and fixtures     25,000       25,000  
Land     464,976       630,805  
Buildings     2,223,069       2,170,963  
Total property and equipment     4,662,639       4,849,478  
                 
Less: Accumulated depreciation     (472,888 )     (63,698 )
Property and equipment, net   $ 4,189,751     $ 4,786,050  

 

Depreciation expense for the nine months ended March 31, 2019 and 2018, was $418,644 and $24,569, respectively.

  

 

 

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NOTE 4 – INTANGIBLE ASSETS

 

Intangible assets at March 31, 2019 and June 30, 2018 consisted of the following:

 

   

March 31,

2019

   

June 30,

2018

 
Websites and other intangible assets   $ 914,273     $ 519,923  
Trademarks and trade names     389,000       342,682  
Customer relationships     921,000       712,000  
Patents and intellectual property     366,842       264,160  
Total intangible assets     2,591,115       1,838,765  
                 
Less: Accumulated amortization     (966,597 )     (316,191 )
Intangible assets, net   $ 1,624,518     $ 1,522,574  

 

Amortization expense for the nine months ended March 31, 2019 and 2018 was $650,406 and $83,722 respectively.

 

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

 

2019 remaining     199,644  
2020     622,209  
2021     249,685  
2022     225,252  
2023     204,336  
2024 and thereafter     123,392  
Total   $ 1,624,518  

 

NOTE 5 – INVESTMENTS

 

On July 26, 2018, the Company issued 3,000,000 Shares of the common stock to Messers. Michael Woloshin and Joseph Abrams (existing stockholders and owners of the Company’s 25%-owned  Cicero Transact Group, LLC) , in return of a 25% ownership interest in Cicero Platform Group LLC, a crypto-currency company. The closing stock price on that date was $0.125 per share, valuing the shares issued at $375,000. The Company has recorded the investment under the cost method given that the Company does not control or have the ability to exercise significant influence over operating and financial policies. The cost method investments for March 31, 2019 and June 30, 2018, was $1,370,400 and $995,400, respectively.

 

NOTE 6 – BUSINESS COMBINATIONS

 

Tierra Science Global, LLC

 

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

 

 

 

  14  

 

 

Purchase Consideration:

 

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

 

Provisional consideration given:

 

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

  

Assets acquired and liabilities assumed at preliminary fair value:

 

Current assets   $ 1,210  
Current liabilities     33,780  
Net Working Capital     (32,570 )
         
Property and equipment     15,000  
Trade names and trademarks     55,000  
Non-Compete Agreements     120,000  
Customer contracts and relationships     209,000  
Assembled Workforce     64,000  
Total Consideration   $ 430,430  

 

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

 

    For the
Nine Months Ended 		 
    March 31, 2019  
Revenues, net   $ 2,228,896  
Net loss allocable to common stockholders   $ (4,248,591 )
Net loss per common share   $ (0.02 )
Weighted-average number of share outstanding     213,163,928  

 

Revenue recognized by Tierra from acquisition through March 31, 2019 was $718,276. The pro-forma results of operations are presented for information purposes only. The pro forma results of operations are not intended to present actual results that would have been attained had the acquisitions been completed as of July 1, 2018 or to project potential operating results as of any future date or for any future periods.

 

 

 

  15  

 

 

AccuVape, Inc.

 

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

 

In consideration of the transaction the Company issued to that Company’s owners: (i) $126,000 in cash plus (ii) 496,667 shares of the Company’s common stock, valued at $155,208 based on the closing price of the common stock on that day. Additionally, the Company entered into a two-year employment agreement with the Company’s principal executive, pursuant to which she is contacted to receive: (i) $2,000 per month in cash plus (ii) annual incentive compensation equal to 22% of any “Gross Margin” increase over the prior 12 months, all of which incentive compensation shall be paid in Company common stock. Apart from the purchase price, the company agrees to reimburse the seller the sum of $27,500 in full satisfaction of itemized expenses.

 

Purchase Consideration:

 

The provisional fair value of the purchase consideration issued to the sellers of AccuVape was allocated to the net tangible assets acquired. We accounted for the acquisition of AccuVape as the purchase of a business under GAAP under the acquisition method of accounting, the assets and liabilities acquired were recorded as of the acquisition date, at their respective fair values and consolidated with those of our company. The fair value of the net assets acquired, net of liabilities assumed, and was approximately $18,642. The excess of the aggregate fair value of the net tangible and intangible assets has been treated as goodwill. The purchase price allocation was based, in part, on management’s knowledge of AccuVape business and is preliminary. Once the Company completes its analysis to finalize the purchase price allocation, which includes finalizing the valuation report from a third-party appraiser and a review of potential intangible assets, it is reasonably possible that there could be significant changes to the preliminary values below.

 

Provisional consideration given:

 

Cash consideration   $ 126,000  
Fair value of common stock     155,208  
Liabilities assumed     27,500  
Total consideration given   $ 308,708  

 

Assets acquired and liabilities assumed at provisional fair value:

 

Current assets   $ 69,837  
Property and equipment     1,871  
Patents     87,000  
Trade Name     7,000  
Non-Complete Agreement     19,000  
Assembled Workforce     5,000  
Goodwill     119,000  
Total Consideration   $ 308,708  

 

 

 

  16  

 

 

The following presents the pro forma combined results of operations of the Company with AccuVape as if the entities were combined on July 1, 2018.

 

    For the
Nine months
ended 		 
    March 31,  
    2019  
Revenues, net   $ 2,232,518  
Net loss allocable to common stockholders     (4,232,634 )
Net loss per common share   $ (0.02 )
Weighted-average number of share outstanding     213,163,928  

 

Revenue recognized by AccuVape from acquisition through March 31, 2019 was $42,670. The pro-forma results of operations are presented for information purposes only. The pro forma results of operations are not intended to present actual results that would have been attained had the acquisitions been completed as of July 1, 2018 or to project potential operating results as of any future date or for any future periods.

 

NOTE 7 – 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 March 31, 2019, there were no pending or threatened lawsuits.

 

NOTE 8 – RELATED PARTIES

 

Cowan, a former director and officer of the Company, has payables and accruals due to him of $0 and $15,485 as of March 31, 2019 and June 30, 2018, respectively, which amounts were recorded in Payable to related party. The payable, as agreed upon verbally, has a maturity date greater than one year, without any other set terms for repayment. Imputed interest is immaterial.

 

Clifford J. Perry (“Perry”), Chief Executive officer and a director of the Company, has accruals due to him of $79,859 (all of which was recorded as Accounts payable and accrued expenses) and $32,813 as of March 31, 2019 and June 30, 2018, respectively. Imputed interest is immaterial.

 

Raymond P. Medeiros (“Medeiros”), a director of the Company, has payables and accruals due to him of $27,176 (all of which was recorded as Accounts payable and accrued expenses) and $63,000 as of March 31, 2018 and June 30, 2018, respectively. Imputed interest is immaterial.

 

 

 

  17  

 

 

NOTE 9 – NOTES PAYABLE

 

On March 15, 2019, the Company executed a promissory note for $300,000 with Paul Pelosi, Jr. a former Director of the Company. The note pays interest of 10% of the note amount, or $30,000, which amount is payable at the maturing date of the Note – 100 days after availability of funds.

 

    March 31,     June 30,  
 Notes payable as of March 31, 2019 and June 30, 2018 consist of the following:   2019     2018  
                 
Note payable bearing interest at 0.0%, originated March 3, 2017, due on March 3, 2020   $ 94,500     $ 99,000  
                 
Note payable bearing interest at 5.0%, originated May 17, 2018, due on December 31, 2022     4,342,630       4,629,486  
                 
Note payable bearing interest at 0.0%, originated June 5, 2018, due on September 5, 2018     –       95,000  
                 
Note payable bearing interest at 8.0%, originated July 3, 2018, due on January 3, 2019, net of original issuance discounts of $3,098 and $-0- respectively     –       –  
                 
Note payable, assumed in acquisition of Tierra Sciences, bearing interested at 0.0% originated on October 23, 2017, due on demand     –       –  
                 
Note payable being interest at 10% originated March 15, 2019, due on
July 05, 2019 		    300,000       –  
                 
Note payable, assumed in acquisition of Tierra Sciences, bearing interested at 0.0% originated on February 21, 2018, due on demand     –       –  
                 
Note payable, assumed in acquisition of Tierra Sciences, bearing interested at 0.0% originated on July 26, 2018, due on demand     1,300       –  
                 
Total notes payable   $ 4,748,430     $ 4,823,486  
Less: current portion     (843,803 )     (381,575 )
                 
Long-term notes payable   $ 3,904,627     $ 4,441,911  

  

NOTE 10 – STOCKHOLDERS’ EQUITY

 

Series A Preferred Stock

 

On May 24, 2016, the Board of Directors of the Company authorized amending the Company’s Articles of Incorporation to authorize 10,000,000 shares of “blank check” preferred stock and designate 1,000,000 of the shares as Series A preferred stock. Each share of the Series A preferred stock is entitled to 500 votes and is convertible into 100 shares of common stock.

 

As of March 31, 2019 there were a total of 948,022 shares of Series A issued and outstanding of which, , 684,012 shares of Series A preferred stock were held by Mr. Perry and 264,010 shares of Series A preferred stock were held by Mr. Cowan.

 

 

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Common Stock

 

The Company is authorized to issue up to 500,000,000 shares of common stock par value $0.001 per share. Each outstanding share of common stock entitles the holder to one vote per share on all matters submitted to a stockholder vote. All shares of common stock are non-assessable and non-cumulative, with no pre-emptive rights.

 

As of March 31, 2019, 223,180,095 were outstanding. During the quarter ended March 31, 2019, the Company issued 309,119 shares of common stock.

  

    Shares     Fair Value     Average Price Per Share  
                   
Common stock issued for:                        
Business combinations     2,496,667     $ 455,838     $ 0.18  
Cost method investments     3,000,000     $ 375,000     $ 0.13  
Cash and warrants     30,597,946     $ 3,328,500     $ 0.11  
Services     1,716,117     $ 380,752     $ 0.22  
                         
Total     37,810,730     $ 4,540,090          

 

Warrants

 

As of March 31, 2019, warrants to acquire 49,444,444 shares of common stock were outstanding. No additional Warrants were issued during the quarter:

 

A summary of the status of the options and warrants granted as at March 31, 2019 and June 30, 2018, and changes during the years then ended is presented below:

 

          Weighted-  
          Average  
          Exercise  
    Number of     Price per  
    Warrants     Share  
Outstanding at June 30, 2018     8,794,444     $ 0.12  
Granted     42,000,000       0.21  
Exercised     (1,350,000)       0.06  
Outstanding at March 31, 2019     49,444,444     $ 0.20  
Exercisable at March 31, 2019     49,444,444     $ 0.20  

 

A summary of the status of the warrants outstanding at March 31, 2019 is presented below:

 

Range of Exercise
Prices 		    Number
Outstanding 		    Weighted-Average
Remaining
Contractual Life 		  Number
Exercisable 		    Weighted-Average
Exercise Price 		 
  $0.01 - $0.09       1,000,000     2.80 years     1,000,000     $ 0.05  
  $0.10 - $0.19       30,444,444     2.23 years     30,444,444     $ 0.17  
  $0.20 - $0.29       18,000,000     2.46 years     18,000,000     $ 0.25  
                                 
          49,444,444     2.33 years     49,444,444     $ 0.20  

 

 

 

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Stock Option Plan

 

On June 27, 2016, the Board of Directors approved the 2016 Stock Option Plan which has reserved 10,000,000 shares of common stock. There are no stock options outstanding as of March 31, 2019.

 

NOTE 11 – SUBSEQUENT EVENTS

 

The Company has evaluated subsequent events through the date the financial statements were issued and filed with the Securities and Exchange Commission. The Company has determined that there are no other such events that warrant disclosure or recognition in the financial statements, except as stated herein.

 

 

 

 

 

 

 

 

 

  20  

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS

 

We believe that it is important to communicate our future expectations to our security holders and to the public. This report, therefore, contains statements about future events and expectations which are “forward-looking statements” within the meaning of Sections 27A of the Securities Act of 1933 and 21E of the Securities Exchange Act of 1934, including the statements about our plans, objectives, expectations and prospects under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” You can expect to identify these statements by forward-looking words such as “may,” “might,” “could,” “would,” “will,” “anticipate,” “believe,” “plan,” “estimate,” “project,” “expect,” “intend,” “seek” and other similar expressions. Any statement contained in this report that is not a statement of historical fact may be deemed to be a forward-looking statement. Although we believe that the plans, objectives, expectations and prospects reflected in or suggested by our forward-looking statements are reasonable, those statements involve risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements, and we can give no assurance that our plans, objectives, expectations and prospects will be achieved.

 

Important factors that might cause our actual results to differ materially from the results contemplated by the forward-looking statements are contained in the “Risk Factors” section of and elsewhere in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018 and in our subsequent filings with the Securities and Exchange Commission. The following discussion of our results of operations should be read together with our financial statements and related notes included elsewhere in this report.

 

Company Overview

 

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

 

The Company was incorporated in the State of Nevada on February 21, 2013, under the name of Arkadia International, Inc. The Company was originally engaged in the business of the acquisition of in demand equipment, cars, and goods with the intent to resell these in the U.S. territories or export to overseas countries. On October 3, 2014, the Company experienced a change in control. Richard C. Cowan acquired approximately 93% of the issued and outstanding common stock of the Company at the time. On November 6, 2014, the Company merged with Freedom Leaf Inc., a private Nevada corporation, and the Company changed its name to Freedom Leaf Inc. In connection with the merger, the sole officer, director and stockholder of the private company, Clifford J. Perry, became an officer and director of the Company, and Mr. Perry received approximately 48.1% of the Company’s common stock post-merger. For financial reporting purposes, this merger was accounted for as a "reverse acquisition" rather than a business combination, and the private company was deemed to be the accounting acquirer in the transaction, with the Company deemed to be the acquired company for financial reporting purposes. Consequently, the assets and liabilities and the operations that were reflected in the historical financial statements of the Company prior to the merger are those of the private company, and they were recorded at the historical cost basis of the private company, and the financial statements after completion of the merger include the combined assets and liabilities of the Company and the private company, the historical operations of the private company only, and the operations of both companies from the closing date of the merger.

 

 

 

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Growth Strategy Initiative

 

Recently, in order to streamline operations, focus more on core competencies and help drive robust growth, the company has decided to focus more on developing and marketing its family of products and less on full vertical integration. With domestic and international hemp supplies on the rise, it’s become more cost effective to source good, clean hemp rather than cultivate it in-house. Because of this change in supply, and its foreseen continued ease of access, the company has decided to focus its resources on continuing to be one of the top hemp-based CPG companies in the industry. This move will allow for greater agility, quicker go-to-market strategies and will allow management to focus on key growth initiatives. This decision was aided by an ever-changing regulatory environment in Spain where the companies’ hemp cultivation is based. These changes in regulations made it cost prohibitive to cultivate in that particular market and subsequently the company has begun its exit strategy which will, in the near future, positively affect cash-flow and remove a large liability from its balance sheet.

 

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

 

Results of Operations

 

For the three months ended March 31, 2019 and March 31, 2018

 

Revenues

 

Our revenue was $835,293 for the three months ended March 31, 2019, compared to $56,254 for the three months ended March 31, 2018. Revenue, by class, is as follows:

  

    For the three months ended  
Revenues:   March 31,  
    2019     2018  
Magazine related   $ 201       –  
Sale of products     835,092       56,254  
Total   $ 835,293       56,254  

 

 

Comparative results for the quarter reflect the consummation of our IRIE and Tierra acquisitions and recent launch of various CBD products through our Leafceuticals subsidiary. Note that, the Company has been shifting its focus away from licensing revenues, its primary source of revenue in fiscal 2017, and toward the sale of products.

 

Operating Expenses

 

Direct costs of revenues were $503,869 and $81,045 for the three months ended March 31, 2019 and 2018, respectively. Direct costs of revenues, by class, is as follows:

  

    For the three months ended  
Direct costs of revenue:   March 31,  
    2019     2018  
Magazine related   $ 12,100       25,102  
Sale of products     491,769       55,943  
Total   $ 503,869       81,045  

 

The increase in direct costs reflects that the Company’s revenues now predominately derive from the sale of products.

 

 

 

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For the three months ended March 31, 2019 our general and administrative expenses and marketing and selling expenses were $1,583,533 compared to $697,875 for the three months ended March 31, 2018, resulting in an increase of $885,658. The increases were largely attributable to: (1) increased overhead associated with IRIE’s and Tierra’s operations; (2) one-time and recurring expenses related to the Company greenhouse operations in Spain; (3) development expenses related to various projects that the Company believes, when implemented, will expand web sales, and (5) increasing general and administrative expenses and marketing and selling expenses in anticipation of expanding product sales various planned activities.

 

Other income (expenses)

 

Other income (expense) was expense of $127,364 for the three months ended March 31, 2019, compared to an expense of $845,351 for the three months ended March 31, 2018. $125,000 of the other expense for the three months ended March 31, 2019 was a noncash charge related to shares previously granted in connection with an option to purchase real estate – which the Company did not exercise.

 

Net loss attributable to common shareholders was $1,379,473 for the three months ended March 31, 2019, compared to net loss of $1,561,141 for the three months ended March 31, 2018. The higher net loss for the three months ended March 31, 2019 as compared to the same period in 2018 is largely attributable to: (1) increased overhead associated with IRIE’s and Tierra’s operations; (2) one-time and recurring expenses related to the Company greenhouse operations in Spain; (3) one-time expenses relate to the launch of CBD and Hempology sales (such as pre-production research and development costs); (4) development expenses related to various projects that the Company believes, when implemented, will expand web sales, and (5) increasing general and administrative expenses and marketing and selling expenses in anticipation of expanding product sales various planned activities.

 

For the Nine months ended March 31, 2019 and March 31, 2018

 

Revenues

 

Our revenue was $2,193,515 for the nine months ended March 31, 2019, compared to $63,913 for the nine months ended March 31, 2018. Revenue, by class, is as follows:

 

    For the nine months ended  
Revenues:   March 31,  
    2019     2018  
Magazine related   $ 1,311       5,826  
Sale of products     2,192,204       58,087  
Total   $ 2,193,515       63,913  

 

Comparative results for the nine months reflect the consummation of our IRIE and Tierra acquisitions and recent launch of various CBD products through our Leafceuticals subsidiary. Note that, the Company has been shifting its focus away from licensing revenues, its primary source of revenue in fiscal 2018, and toward the sale of products.

 

Operating Expenses

 

Direct costs of revenues were $1,310,887 and $150,871 for the nine months ended March 31, 2019 and 2018, respectively. The increase in direct costs reflects that the Company’s revenues now predominately derive from the sale of products.

 

Direct costs of revenues, by class, is as follows:

  

    For the nine months ended  
Direct costs of revenue:   March 31,  
    2019     2018  
Magazine related   $ 39,515       77,218  
Sale of products     1,271,372       73,653  
Total   $ 1,310,887       150,871  

 

 

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The increases were largely attributable to: (1) increased overhead associated with IRIE’s and Tierra’s operations; (2) one-time and recurring expenses related to the Company greenhouse operations in Spain; (3) one-time expenses relate to the launch of CBD and Hempology sales (such as pre-production research and development costs); (4) development expenses related to various projects that the Company believes, when implemented, will expand web sales, and (5) increasing general and administrative expenses and marketing and selling expenses in anticipation of expanding product sales various planned activities.

 

For the nine months ended March 31, 2019, our general and administrative expenses and marketing and selling expenses were $5,076,042 compared to $1,990,844 for the nine months ended March 31, 2018, resulting in an increase of $3,085,198. The increases were largely attributable to: (1) increased overhead associated with IRIE’s and Tierra’s operations; (2) one-time and recurring expenses related to the Company greenhouse operations in Spain; (3) one-time expenses relate to the launch of CBD and Hempology sales (such as pre-production research and development costs); (4) development expenses related to various projects that the Company believes, when implemented, will expand web sales, and (5) increasing general and administrative expenses and marketing and selling expenses in anticipation of expanding product sales various planned activities.

 

Other income (expenses)

 

Other income (expense) was expense of $39,240 for the nine months ended March 31, 2019, compared to an expense of $1,255,115 for the nine months ended March 31, 2018.

 

Net loss attributable to common shareholders was $4,203,105 for the nine months ended March 31, 2019, compared to net loss of $3,326,041 for the nine months ended March 31, 2018. The higher net loss for the nine months ended March 31, 2019 as compared to the same period in 2018 is largely attributable to: (were largely attributable to: (1) increased overhead associated with IRIE’s and Tierra’s operations; (2) one-time expenses relate to the launch of CBD and Hempology sales (such as pre-production research and development costs); (3) development expenses related to various projects that the Company believes, when implemented, will expand web sales, and (4) increasing general and administrative expenses and marketing and selling expenses in anticipation of expanding product sales various planned activities.

 

Liquidity and Capital Resources  

 

Liquidity and Capital Resources during the nine months ended March 31, 2019 compared to the nine months ended March 31, 2018

 

As of March 31, 2019, the Company had $268,658 in cash. We used cash in operations of $2,894,063 for the nine months ended March 31, 2019, compared to cash used in operations of $520,088 for the nine months ended March 31, 2018. The negative cash flow from operating activities for the nine months ended March 31, 2019 was attributable to the Company's net loss attributable to common shareholders of primarily due to: (1) increased overhead associated with IRIE’s and Tierra’s operations; (2) one-time and recurring expenses related to the Company greenhouse operations in Spain; (3) one-time expenses relate to the launch of CBD and Hempology sales (such as pre-production research and development costs); (4) development expenses related to various projects that the Company believes, when implemented, will expand web sales; (5) increasing general and administrative expenses and marketing and selling expenses in anticipation of expanding product sales various planned activities, and (6) increased Inventory based on pending orders and in anticipation of growing sales.

 

We used cash in investing activities of $256,738 and $24,392 for the nine months ended March 31, 2019 and 2018, respectively. The increase in cash used in investing activities of $232,346 was due to the acquisition of two companies (Tierra Sciences and AccuVape), as well as the investment of $170,600 in website development costs.

 

We had cash provided by financing activities of $3,403,673 and $715,518 for the nine months ended March 31, 2019 and 2018, of which $3,328,500 was from the proceeds of the sale of common stock and warrants compared to $646,058 for the same period in 2018.

 

We will have to raise funds to pay for our expenses. We may have to borrow money from shareholders or issue debt or equity or enter into a strategic arrangement with a third party. There can be no assurance that additional capital will be available to us.

 

Going Concern

 

The accompanying financial statements and the factors within it, have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business and the ability of the Company to continue as a going concern for a reasonable period of time. The Company sustained net losses attributable to common shareholders of $4,203,105 and cash used in operating activities of $2,894,063 for the nine months ended March 31, 2019. In recent months the company has made great strides in reducing overall expenses and focusing on both top and bottom line growth. This progress is on-going but starting to directly affect cash flow positively. However, 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.

 

 

 

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Off Balance Sheet Arrangements

 

We currently have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

Critical Accounting Policies

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions affect the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experiences and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions and conditions. We continue to monitor significant estimates made during the preparation of our financial statements. On an ongoing basis, we evaluate estimates and assumptions based upon historical experience and various other factors and circumstances. We believe our estimates and assumptions are reasonable in the circumstances; however, actual results may differ from these estimates under different future conditions.

 

See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 1, “Summary of Significant Accounting Policies” in our audited financial statements for the year ended June 30, 2018, included in our Annual Report on Form 10-K as filed on October 15, 2018, for a discussion of our critical accounting policies and estimates.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

A smaller reporting company, as defined by Item 10 of Regulation S-K, is not required to provide the information required by this item.

  

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

The Securities and Exchange Commission defines the term “disclosure controls and procedures” to mean a company's controls and other procedures of an issuer that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the issuer’s management, including its chief executive and chief financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Company maintains such a system of controls and procedures in an effort to ensure that all information which it is required to disclose in the reports it files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified under the SEC's rules and forms and that information required to be disclosed is accumulated and communicated to the chief executive and chief financial officer to allow timely decisions regarding disclosure.

 

As of the end of the period covered by this report an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are not effective as of such date.

 

Changes in Internal Control over Financial Reporting

 

There are no changes in our internal controls over financial reporting other than as described elsewhere herein.

 

Limitations on the Effectiveness of Controls

 

The Company’s management, including the CEO and CFO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of the control system must reflect that there are resource constraints and that the benefits must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

 

 

 

 

 

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

There are no pending legal proceedings in which we are a party or in which any of our directors, officers or affiliates, any owner of record or beneficiary of more than 5% of any class of our voting securities is a party adverse to us or has a material interest adverse to us. Our property is not the subject of any pending legal proceedings.

 

Item 1A. Risk Factors

 

Not required.

 

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

 

During the quarter ending March 31, 2019, the Company issued 309,119 shares unregistered securities. These securities were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, Regulation D promulgated thereunder as there was no general solicitation, and the transactions did not involve a public offering.

 

Item 3. Defaults upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

 

 

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Item 6. Exhibits

 

Number   Description
     
3.1   Articles of Incorporation (incorporated by reference to our Registration Statement on Form S-1, filed on July 22, 2013)
3.2   Bylaws (incorporated by reference to our Registration Statement on Form S-1, filed on July 22, 2013)
3.3   Articles of Merger (incorporated by reference to our Current Report on Form 8-K, filed on February 25, 2015)
3.4   Certificate of Amendment (incorporated by reference to our Current Report on Form 8-K, filed on June 9, 2016)
10.1   Merger Agreement dated November 6, 2014 (incorporated by reference to our Form 10-Q/A for the period ended December 31, 2014, filed on September 11, 2015)
10.2   Audit for the Period Ended November 6, 2014 of Freedom Leaf Inc., the private company (incorporated by reference to our Form 10-Q/A for the period ended December 31, 2014, filed on September 11, 2015)
10.3   License Agreement with Freedom Leaf Iberia, B.V. (incorporated by reference to our Form 8-K filed on February 28, 2017)
10.4   License Agreement with Freedom Leaf Netherlands, B.V. (incorporated by reference to our Form 8-K filed on February 28, 2017)
10.5   Distribution Agreement with NuAxon Bioscience, Inc. (incorporated by reference to our Form 8-K filed on March 17, 2017)
10.6   License Agreement with BBD Healthcare Strategies, LLC (incorporated by reference to our Form 8-K filed on April 3, 2017)
10.7   LaMarihuana.com Asset Purchase Agreement (incorporated by reference to our Form 8-K filed on May 31, 2017)
10.8   LaMarihuana.com Asset Purchase Agreement Partial Waiver (incorporated by reference to our Form 10-Q filed on February 21, 2018)
10.9   Green Market Europe Purchase Agreement (incorporated by reference to our Form 8-K filed on February 7, 2018)
10.10   Green Market Europe Purchase Agreement Amendment (incorporated by reference to our Form 8-K filed on February 7, 2018)
10.11   Irie CBD Asset Purchase Agreement dated March 3, 2018 (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on March 8, 2018)
10.12   Cicero Exchange Agreement dated May 11, 2018 incorporated by reference to our Form 10-Q filed on June 29, 2018
31.1 (1)   Certification of Principal Executive Officer of Freedom Leaf Inc. required by Rule 13a-14(1) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 (1)   Certification of Principal Accounting Officer of Freedom Leaf Inc. required by Rule 13a-14(1) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 (1)   Certification of Principal Executive Officer of Freedom Leaf Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 Of 18 U.S.C. 63
32.2 (1)   Certification of Principal Accounting Officer of Freedom Leaf Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 Of 18 U.S.C. 63
101.INS (2)   XBRL Taxonomy Extension Instance Document
101.SCH (2)   XBRL Taxonomy Extension Schema Document
101.CAL (2)   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF (2)   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB (2)   XBRL Taxonomy Extension Label Linkbase Document
101.PRE (2)   XBRL Taxonomy Extension Presentation Linkbase Document

__________

(1) Filed herewith

(2) To be filed by Amendment

 

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  Freedom Leaf Inc.
   
   
Dated: May 15, 2019 By: /s/ Clifford J. Perry                   
         Clifford J. Perry
         Chief Executive Officer 

 

Dated: May 15, 2019 By: /s/ Laurence Ruhe                
         Laurence Ruhe
         Chief Financial Officer

 

 

 

 

 

 

 

 

 

 

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