Notes to Consolidated Financial Statements
June 30, 2019 and 2018
NOTE 1 – NATURE OF OPERATIONS
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The Company was incorporated in the State
of Nevada on February 21, 2013, under the name of Arkadia International, Inc. The Company was originally engaged in the business
of the acquisition of in demand equipment, cars, and goods with the intent to resell these in the U.S. territories or export to
overseas countries. On October 3, 2014, the Company experienced a change in control. Richard C. Cowan acquired approximately 93%
of the issued and outstanding common stock of the Company at the time. On November 6, 2014, the Company merged with Freedom Leaf
Inc., a private Nevada corporation, and the Company changed its name to Freedom Leaf Inc. In connection with the merger, the sole
officer, director and stockholder of the private company, Clifford J. Perry, became an officer and director of the Company, and
Mr. Perry received approximately 48.1% of the Company’s common stock post-merger. For financial reporting purposes,
this merger was accounted for as a "reverse acquisition" rather than a business combination, and the private company
was deemed to be the accounting acquirer in the transaction, with the Company deemed to be the acquired company for financial reporting
purposes. Consequently, the assets and liabilities and the operations that were reflected in the historical financial statements
of the Company prior to the merger are those of the private company, and they were recorded at the historical cost basis of the
private company, and the financial statements after completion of the merger include the combined assets and liabilities of the
Company and the private company, the historical operations of the private company only, and the operations of both companies from
the closing date of the merger.
On May 21, 2019, Freedom Leaf Inc. entered
into a Membership Interest Purchase Agreement with Carlos Frias, Daniel Nguyen, Alex Frias, and Chris Fagan to purchase all
of the issued and outstanding membership interests and other ownership or beneficial interests of ECS Labs LLC, a Texas limited
liability company. The transaction closed on May 31, 2019. And as of the closing of, Carlos Frias became Chief Executive Officer
of the Company, and Carlos Frias and Daniel Nguyen joined the Board of Directors of the Company. ECS Labs LLC owns all of
the issued and outstanding membership interests and other ownership or beneficial interests of B&B Labs, LLC, a Texas limited
liability company, and Texas Wellness Center, LLC, a Texas limited liability company.
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.
Subsidiary Entities:
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Cannabis Business Solutions Inc. (“Cannabis Business Solutions”), a Nevada corporation,
was formed on February 5, 2014, and is a wholly owned subsidiary of the Company. This subsidiary had no activity until the agreement
with Valencia Web Technology S.L., B-97183354 (see Note 2).
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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.
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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.
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Leafceuticals Europe, SL, a wholly owned subsidiary of the Company operated our Valencia greenhouse
operations through a lease/purchase agreement. On May 16, 2019, Leafceuticals Europe, SL informed the owner of the facility through
a notarial deed of its intent to withdraw from the agreement. Freedom Leaf Inc. and Leafceuticals Europe, SL have no obligation
relating to the agreed price for the purchase of the greenhouse, as both companies have withdrawn from the contract and the other
party has accepted it.
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ECS Labs LLC, a wholly owned subsidiary of the Company, is a Texas limited liability company and
was formed July 21, 2017.
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Texas Wellness Center, LLC, a wholly owned Texas limited liability company, was formed March 16,
2016. Texas Wellness Center, LLC conducts sales, market and administrative functions for the Company.
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B&B Labs, LLC, a wholly owned Texas limited liability company, was formed July 30, 2015 and
conducts manufacturing and production activities for the Company.
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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.
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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. Tierra was sold
back to its original owners in July 2019.
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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.
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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:
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Legal Industrial Hemp Cultivation
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Cannabidiol Extraction, Distillation & Processing
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Expert Product Formulation
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Nutraceutical Brand Marketing
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Ancillary Products & Niche Markets
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Affiliate Marketing Programs
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E-Commerce Solutions
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Global Media & Advertising Networks
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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 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.
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. The Company recorded a loss on impairment of assets of $780,884 and $-0- for the years ended June 30, 2019 and 2018, respectively.
Fair Value of Financial Instruments
The Company measures its financial assets
and liabilities in accordance with generally accepted accounting principles. For certain of our financial instruments, including
cash, accounts payable, accrued expenses, and short-term loans the carrying amounts approximate fair value due to their short maturities.
We follow accounting guidance for financial
and non-financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires
certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting
pronouncements that require or permit fair value measurements. This guidance does not apply to measurements related to share-based
payments. This guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach
(present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement
cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value
into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted
prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices
that are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets
and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs in which little
or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market
participant would use.
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.
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.
Accounts Receivable
Accounts receivable consisted of amounts
due from customers primarily for term sales. The Company considered accounts more than 30 days old to be past due. The Company
used the allowance method for recognizing bad debts. When an account was deemed uncollectible, it was written off against the allowance.
The Company generally does not require collateral for its accounts receivable. Management has recorded an allowance for doubtful
accounts as of June 30, 2019 and 2018 of $129,525 and $20,261, respectively.
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. The Company periodically
evaluates the value of items in inventory and provides write-downs to inventory based on its estimate of market conditions. The
Company estimated it needed an obsolescence allowance of $21,007 and $36,039 for the years ended June 30, 2019 and 2018, respectively,
which was charged to cost of goods sold.
Investments
The Company uses the cost method to account
for investments in businesses that are not publicly traded and for which the Company does not control or have the ability to exercise
significant influence over operating and financial policies. In accordance with the cost method, these investments are recorded
at lower of cost or fair value, as appropriate, and are classified as long-term. Under this method, the Company’s share
of the earnings or losses of such investee companies is not included in the consolidated balance sheet or consolidated statements
of operations and comprehensive income or loss. However, impairment charges are recognized in the consolidated statements of operations
and comprehensive income or loss. If circumstances suggest that the value of the investee company has subsequently recovered, such
recovery is not recorded.
Investments held by the Company in businesses
that are not publicly traded and for which the Company has the ability to exercise significant influence over operating and financial
management are accounted for under the equity method. In accordance with the equity method, these investments are originally recorded
at cost and are adjusted for the Company’s proportionate share of earnings, losses and distributions. The Company holds no
such investments as of June 30, 2019 or 2018.
The Company assesses and records impairment
losses when events and circumstances indicate the investments might be impaired. Gains and losses are recognized when realized
and recorded in other income (expense) in the accompanying Consolidated Statements of Operations and Comprehensive Loss.
Property, Equipment, and Depreciation
Property and equipment are recorded at
cost. Depreciation is computed using the straight-line method based on the estimated useful lives of the related assets of three
years for computer equipment, five years for office furniture and fixtures, five years for machinery and equipment, thirty-nine
years for buildings, and the lesser of the lease term or the useful life of the leased equipment. Leasehold improvements, if any,
would be amortized over the lesser of the lease term or the useful life of the improvements. Expenditures for maintenance and repairs
along with fixed assets below our capitalization threshold are expensed as incurred. Variances between the two reporting periods
are primarily due to foreign currency translation calculations.
Goodwill and Intangible Assets
In applying the acquisition method of accounting,
amounts assigned to identifiable assets and liabilities acquired were based on estimated fair values as of the date of acquisition,
with the remainder recorded as goodwill. Identifiable intangible assets are initially valued at fair value using generally accepted
valuation methods appropriate for the type of intangible asset. Identifiable intangible assets with definite lives are amortized
over their estimated useful lives and are reviewed for impairment if indicators of impairment arise. Intangible assets with indefinite
lives are tested for impairment within one year of acquisitions or annually as of March 31, and whenever indicators of impairment
exist. The fair values of intangible assets are compared with their carrying values, and an impairment loss would be recognized
for the amount by which a carrying amount exceeds its fair value. Goodwill is reviewed for impairment annually, and more frequently
as circumstances warrant, and written down only in the period in which the recorded value of such assets exceeds their fair value.
The Company does not amortize goodwill in accordance with Financial Accounting Standards Board (the "FASB") Accounting
Standards Codification ("ASC") 350, "Intangibles—Goodwill and Other" ("ASC 350"). Goodwill
is tested for impairment at the reporting unit level. The Company's operating segments comprise the reporting unit for goodwill
impairment testing purposes.
The amortization of the intangible assets
is computed using the straight-line method based on the estimated useful lives of the related assets of three years for website
development, fifteen years for trademarks, one year for exclusive rights, nine years for trade names, two years for customer lists,
one year for assembled workforce, and five years for patent.
Revenue Recognition
On July 1, 2018, the Company adopted
Topic 606. The Company elected to use the modified retrospective approach for contracts that were not completed as of July 1,
2018. Results for reporting periods beginning after January 1, 2018 are presented in accordance with Topic 606, while prior
period amounts are not adjusted and continue to be reported in accordance with our historic accounting method under Topic 605.
As a result of applying the new standard, there were no changes to any financial statement line items.
Performance Obligations. Our performance
obligations include providing product and servicing our product. The Company recognize product revenue performance obligations
in most cases when the product is delivered to the customer. Occasionally, the Company ships product on a customer’s account.
On these occasions, revenue is recognized when the product has been shipped. At that point in time, the control of the product
is transferred to the customer. The Company does not engage in transactions for services or in transactions acting as an agent. The
Company typically satisfies its performance obligations within a few months of entering into the contract. Depending on the size
of the project, the performance obligations could be satisfied sooner or later.
The Company provides a 30-day warranty
on product sales. The amount accrued for expected returns and warranty claims was immaterial as of June 30, 2019.
The Company’s sole revenue type going
forward is product sales, through its primary brands Green Lotus Hemp and IRIE. Advertising and licensing revenues are not expected
to recur.
Significant Judgements. For most
revenue contracts, the Company invoices the customer when the performance obligation is satisfied, and payment is due 30 days
later. Occasionally, other terms such as progress billings or longer terms are agreed to on a case-by-case basis. The Company does
not have significant financing components, non-cash consideration, or variable consideration. The Company estimates the transaction
price between performance obligations based on stand-alone product prices. The Company elected the practical expedient by which
disclosures are not required regarding the value of unsatisfied performance obligations for contracts with an original expected
duration of one year or less.
Advertising and Marketing
Advertising and marketing costs are expensed
as incurred and is included in selling, general and administrative expenses on the accompanying statement of operations. For the
years ended June 30, 2019 and 2018, advertising expense was $636,634 and $49,656, respectively.
Income Taxes
The Company adopted the provisions of ASC
740-10, “Accounting for Uncertain Income Tax Positions.” When tax returns are filed, it is highly certain that some
positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the
merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance
of ASC 740-10, the benefit of a tax position is recognized in the consolidated financial statements in the period during which,
based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination,
including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other
positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit
that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of
the benefits associated with tax positions taken that exceeds the amount measured as described above should be reflected as a liability
for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be
payable to the taxing authorities upon examination. The Company believes its tax positions are all highly certain of being upheld
upon examination. As such, the Company has not recorded a liability for unrecognized tax benefits. As of June 30, 2019, all previous
tax years remain open for IRS audit. The Company has received no notice of audit from the IRS for any of the open tax years.
The Company adopted ASC 740-10, “Definition
of Settlement in FASB Interpretation No. 48,” (“ASC 740-10”), which was issued on May 2, 2007. ASC
740-10 amends FIN 48 to provide guidance on how an entity should determine whether a tax position is effectively settled for the
purpose of recognizing previously unrecognized tax benefits. The term “effectively settled” replaces the term “ultimately
settled” when used to describe recognition, and the terms “settlement” or “settled” replace the terms
“ultimate settlement” or “ultimately settled” when used to describe measurement of a tax position under
ASC 740-10. ASC 740-10 clarifies that a tax position can be effectively settled upon the completion of an examination by a taxing
authority without being legally extinguished. For tax positions considered effectively settled, an entity would recognize the full
amount of tax benefit, even if the tax position is not considered more likely than not to be sustained based solely on the basis
of its technical merits and the statute of limitations remains open. The adoption of ASC 740-10 did not have an impact on the accompanying
consolidated financial statements.
Net Earnings (Loss) Per Share
In accordance with ASC 260-10, “Earnings
Per Share,” basic net earnings (loss) per common share is computed by dividing the net earnings (loss) for the period by
the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share are computed using
the weighted average number of common and dilutive common stock equivalent shares outstanding during the period. Dilutive common
stock equivalent shares that may dilute future earnings per share consist of warrants to purchase 48,444,444 shares of common stock
at June 30, 2019. Equivalent shares are not utilized when the effect is anti-dilutive.
Foreign Currency Translation and
Transactions
The Euro (“EUR,” or “€”)
is the functional currency of Leafceuticals Europe S.L.U., whereas the consolidated financial statements are reported in United
States Dollar (“USD,” or “$”). Assets and liabilities are translated based on the exchange rates at the
balance sheet date, while revenue and expense accounts are translated at the average exchange rates prevailing during the period.
Equity accounts are translated at historical exchange rates. The resulting translation gain and loss adjustments are accumulated
as a component of stockholders’ equity and other comprehensive income.
Comprehensive Income (Loss)
The Company reports comprehensive income
(loss) and its components in its consolidated financial statements. Comprehensive income (loss) consists of net loss and foreign
currency translation adjustments affecting stockholders’ equity that, under U.S. GAAP, are excluded from net loss. As of
June 30, 2019, the exchange rate between U.S. Dollars and the Euro was USD $1.14 = €1.00, and the weighted average exchange
rate for the period (acquisition date to end of fiscal year) ended June 30, 2019 was USD $1.15 = €1.00.
Segment Information
In accordance with the provisions of ASC
280-10, “Disclosures about Segments of an Enterprise and Related Information”, the Company is required to report financial
and descriptive information about its reportable operating segments. The Company does not have any operating segments as of June
30, 2019 and 2018.
Effect of Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting
Standards Update No. 2014-09 (“ASC 606”), 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 permitted. The standard permits the use of either the retrospective or cumulative effect transition
method.
In August 2014, the FASB issued ASU No.
2014-15, Presentation of Financial Statements (Topic 205) Disclosure of Uncertainties about an Entity’s Ability to
Continue as a Going Concern. The guidance requires management to perform an evaluation each annual and interim reporting
period of whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s
ability to continue as a going concern within the one-year period after the date that the financial statements are issued. If such
conditions are identified, the guidance requires an entity to provide certain disclosures about the principal conditions or events
that gave rise to the substantial doubt about the entity’s ability to continue as a going concern, management’s evaluation
of the significance of those conditions or events in relation to the entity’s ability to meet its obligations and management’s
plans to alleviate or mitigate substantial doubt about the entity’s ability to continue as a going concern. The guidance
is effective for the first annual period ending after December 15, 2016 and interim periods thereafter. The Company currently does
not expect the adoption of ASU 2014-15 to have a material impact on its financial statements and does not anticipate early adoption
of this pronouncement.
In January 2017, the FASB issued ASU No.
2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. To simplify the subsequent
measurement of goodwill, the update requires only a single-step quantitative test to identify and measure impairment based on the
excess of a reporting unit’s carrying amount over its fair value. A qualitative assessment may still be completed first for
an entity to determine if a quantitative impairment test is necessary. The update is effective for fiscal year 2021 and is to be
adopted on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing
dates after January 1, 2017. The Company will test goodwill for impairment within one year of the acquisition or annually as of
December 1, and whenever indicators of impairment exist.
In February 2016, the FASB issued ASU 2016-02, Leases.
This ASU is a comprehensive new leases standard that amends various aspects of existing guidance for leases and requires additional
disclosures about leasing arrangements. It will require companies to recognize lease assets and lease liabilities by lessees for
those leases classified as operating leases under previous GAAP. Topic 842 retains a distinction between finance leases and operating
leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to
the classification criteria for distinguishing between capital leases and operating leases in the previous leases guidance. The
ASU is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years; earlier
adoption is permitted. In the financial statements in which the ASU is first applied, leases shall be measured and recognized at
the beginning of the earliest comparative period presented with an adjustment to equity. Practical expedients are available for
election as a package and if applied consistently to all leases. The Company is currently evaluating the impact of the adoption
of this guidance on its consolidated financial condition, results of operations and cash flows.
In June 2016, the FASB issued ASU 2016-13 Financial
Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments which requires the measurement
and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred
loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13
is effective for annual reporting periods, and interim periods within those years beginning after December 15, 2019. We are currently
in the process of evaluating the impact of the adoption of ASU 2016-13 on our consolidated financial statements.
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
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 stockholder (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 of June 30, 2018, the Company has written the receivable of $179,131 off to bad debt.
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 were exercisable 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 12. None of the warrants were exercised and, thus, have expired. The agreement was terminated
on April 3, 2018.
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 $25,000 payment payable 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. The warrants have expired and are unexercised
as of June 30, 2018. See Notes 8 and 12. As of June 30, 2019, the Company has written the receivable of $190,000 off to bad debt.
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. 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 8 and 12. As of June 30, 2018, the Company
has written the receivable of $200,000 off to bad debt. As of June 30, 2019, all warrants are unexercised and expired.
On May 15, 2018, the Company issued to
Cowan a License Agreement that grants him exclusive licensee distribution rights to the Freedom Leaf Inc. magazine, as well as
other “Freedom Leaf” branded merchandise and services in the Southern California area. In consideration of such license,
Cowan cancelled $240,000 of payables owed to him by the Company. Also, in connection with this transaction, the Company issued
to Cowan a warrant, exercisable between July 1, 2018 and November 15, 2019, to acquire 1,000,000 shares at an exercise price of
$0.25 per share. This has been reflected as other income (“Licensing income – related party”) in the consolidated
statement of operations and comprehensive loss.
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 June 30, 2019, there have been no sales or commissions earned and the contract
has been canceled.
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 June 30, 2019, there has
been one sale and the contract has been canceled. The Company owes $51,735 to NuAxon at June 30, 2019.
Loss on Disposition of Assets
During the year ended June 30, 2019, the Company disposed of
Freedom Leaf Europe, Tierra Sciences Global, as well as its interests in two cost method investments, Cicero Transact Group and
Cicero Platform Group. As a result of the dispositions, the Company recognized a net loss on disposition of assets of $580,458.
NOTE 3 –BUSINESS COMBINATIONS AND ASSET ACQUISITIONS
IRIE Acquisition
On April 16, 2018,
Leafceuticals consummated the acquisition, with an effective date of April 1, 2018 (date of change in control), of substantially
all of the assets of: Earth Born, Inc., a California corporation (“Earth Born California”), Earth Born, Inc., a Delaware
corporation (“Earth Born Delaware”), Irie Living, a California nonprofit mutual benefit corporation (“Irie”),
and Genesis Media Works, LLC, a Utah limited liability company doing business as “Terra’s Way,” “Irie Hemp
Company,” “Earth Born Botanicals,” and “Santa Cruz Hemp Company” (“Genesis” and together
with Earth Born California, Earth Born Delaware, and Irie, collectively referred to herein as the “Sellers” or IRIE).
Irie CBD is a California-based product line owned by the Sellers that has been operating since 2015 that formulates, manufactures
and distributes CBD tinctures, CBD edibles, CBD topicals and CBD concentrates to retail markets across the country. IRIE leases
a full manufacturing and processing facility in Oakland, California. In addition to the IRIE CBD line and associated assets and
trademarks, the acquisition also includes the product lines, websites and other assets of Earth Born California, Earth Born Delaware,
Irie, and Genesis.
In connection with this acquisition, Leafceuticals
assumed approximately $100,000 of liabilities associated with the assets and paid the Sellers’ principals as follows: $356,080
in cash and $999,000 via the issuance of an aggregate of 8,118,886 shares of the Company’s common stock. The purchase price
is to be reduced if: (i) the Sellers’ aggregate pre-closing revenues for the year ending December 31, 2017, were less than
$1,500,000 or (ii) the Buyer’s average monthly revenues resulting from the Acquisition of the Assets for the three months
following closing are less than $120,000 per month. Additionally, 1,250,000 of the Shares were to be escrowed for four months following
Closing as the Buyer’s security for (i) any indemnification claims against the Sellers pursuant to the Agreement, or (ii)
any pre-closing or post-closing revenue deficiency resulting in the purchase price reductions described above. There was no adjustment
to the purchase price based on this clause.
The purchase price was allocated as follows:
Consideration given:
|
|
|
|
Cash Consideration
|
|
$
|
356,000
|
|
Common stock shares given
|
|
|
999,000
|
|
Notes Assumed
|
|
|
100,000
|
|
Total consideration given
|
|
$
|
1,455,000
|
|
|
|
|
|
|
Fair value of identifiable assets acquired, and liabilities assumed:
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
$
|
226,000
|
|
Current Liabilities
|
|
|
44,000
|
|
Net Working Capital
|
|
|
182,000
|
|
|
|
|
|
|
Property, Plant & Equipment
|
|
|
25,000
|
|
Trade Names/Trademarks
|
|
|
327,000
|
|
Customer Contracts/Relationships
|
|
|
712,000
|
|
Assembled Workforce
|
|
|
139,000
|
|
Goodwill
|
|
|
70,000
|
|
Total Consideration
|
|
$
|
1,455,000
|
|
Revenue
recognized by IRIE from acquisition through June 30, 2018 was $393,480.
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.
Purchase Consideration:
The 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 $430,430. The excess of the aggregate
fair value of the net tangible and intangible assets has been treated as goodwill.
The purchase price was allocated as follows:
Consideration given:
Cash Consideration
|
|
|
|
Common stock shares given
|
|
|
300,630
|
|
Notes payable
|
|
|
129,800
|
|
Total consideration given
|
|
$
|
430,430
|
|
Assets acquired and liabilities
assumed at fair value:
Current assets
|
|
$
|
1,210
|
|
|
|
|
|
|
Identifiable intangible assets:
|
|
|
|
|
Trade names and trademarks
|
|
|
55,000
|
|
Customer contracts and relationships
|
|
|
252,000
|
|
Assembled Workforce
|
|
|
64,000
|
|
Goodwill
|
|
|
58,220
|
|
Total Consideration
|
|
$
|
430,430
|
|
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 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 was allocated as follows:
Consideration given:
Cash consideration
|
|
$
|
126,000
|
|
Accounts payable
|
|
|
72,827
|
|
Fair value of common stock
|
|
|
155,208
|
|
Total consideration given
|
|
$
|
312,535
|
|
Assets acquired and liabilities assumed at fair value:
Current assets
|
|
$
|
40,407
|
|
Property and equipment
|
|
|
1,871
|
|
Other assets
|
|
|
33,257
|
|
|
|
|
|
|
Identifiable intangible assets:
|
|
|
|
|
Patents
|
|
|
87,000
|
|
Trade Name
|
|
|
7,000
|
|
Non-Complete Agreement
|
|
|
19,000
|
|
Assembled Workforce
|
|
|
5,000
|
|
Goodwill
|
|
|
119,000
|
|
Total Consideration
|
|
$
|
312,535
|
|
Revenue
recognized by AccuVape from acquisition through June 30, 2019 was $72,080.
ECS Labs, LLC Acquisition
On May 31, 2019, the Company closed the
acquisition of Dallas, Texas based ECS Labs LLC (the “Acquisition”), including its two-wholly owned operating subsidiaries,
B&B Labs, LLC, a Texas limited liability company and Texas Wellness Center, a Texas limited liability company, which constitute
the “Green Lotus” premium hemp CBD products brand.
Green Lotus™
Hemp (“Green Lotus”) is a rapidly growing premium hemp oil products brand that manufactures and distributes
premium cannabinoid products including tinctures, gel caps, edibles, topicals vape cartridges, and beverages made
from organic industrial hemp. Green Lotus™ has grown rapidly since its inception in 2016 and now has a national
presence with a presence in over 1,200 locations in the U.S. and is a first mover in the Mexican CBD market, with 4,000
points of initial distribution.
The Company has performed a valuation analysis
of the fair market value of Green Lotus’ assets and liabilities. The provisional fair value of the purchase consideration
issued to the sellers of Green Lotus was allocated to the net tangible assets acquired. We accounted for the acquisition of Green
Lotus 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 excess
of the aggregate fair value of the net tangible assets has been allocated to an intangible asset, value of customer accounts and
the remainder to goodwill. The purchase price allocation was based, in part, on management’s knowledge of Green Lotus’
business and is preliminary. Once we complete our 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.
The provisional purchase price was allocated
as follows:
Provisional consideration given:
|
|
|
|
Cash consideration
|
|
$
|
–
|
|
Fair value of common stock
|
|
|
14,000,000
|
|
Liabilities assumed
|
|
|
2,795,430
|
|
Total consideration given
|
|
$
|
16,795,430
|
|
Assets acquired and liabilities assumed at fair value:
Current assets
|
|
$
|
1,632,348
|
|
Property and equipment
|
|
|
105,333
|
|
Goodwill
|
|
|
15,057,749
|
|
Total Consideration
|
|
$
|
16,795,430
|
|
Revenue recognized by Green Lotus from
acquisition through June 30, 2019 was $204,021.
The following table summarizes our consolidated
results of operations for the years ended June 30, 2019, and 2018, as well as unaudited pro forma consolidated results of operations
as though each acquisition had occurred on July 1, 2017:
|
|
For the Year Ended
June 30, 2019
|
|
|
For the Year Ended
June 30, 2018
|
|
|
|
As Reported
|
|
|
Pro Forma
|
|
|
As Reported
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,318,749
|
|
|
$
|
5,087,683
|
|
|
$
|
411,272
|
|
|
$
|
3,762,602
|
|
Net loss
|
|
|
(12,605,233
|
)
|
|
|
(15,888,680
|
)
|
|
|
(4,628,673
|
)
|
|
|
(5,119,821
|
)
|
Loss per common share
|
|
$
|
(0.06
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
The
unaudited pro forma information set forth above is for informational purposes only and includes adjustments related to the step-up
of acquired inventories, amortization expense of acquired intangible assets, and interest expense on long-term debt. The pro forma
information should not be considered indicative of actual results that would have been achieved if each acquisition had occurred
on July 1, 2017, or results that may be obtained in any future period.
The
goodwill arising from the acquisitions discussed above consists largely of the synergies and economies of scale we hope to achieve
from combining the acquired assets and operations with our historical operations.
Green Market Europe Purchase
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 Europe, S.L. (“GME”), a Spanish producer of hemp products. GME’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. GME 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. From its inception to-date, GME has had negligible operations.
Purchase Consideration:
In consideration for the acquisition, the
Company paid to GME’s seller $320,205 in cash and Company common stock as follows:
|
(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 valued on the Company’s Balance Sheet at $295,400.
|
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 GME have the option to repurchase all of the assets of GME for €100 (and the
assumption of GME’s 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.
Assets acquired, and liabilities assumed, at fair value:
The provisional fair value of the purchase
consideration issued to the sellers of GME was allocated to the net tangible assets acquired. We accounted for the acquisition
of GME as the purchase of a business under GAAP under the acquisition method of accounting, the assets and liabilities acquired
were recorded as of the acquisition date, at their respective fair values and consolidated with those of our company. The fair
value of the net assets acquired, net of Liabilities assumed, was approximately $20,285. The excess of the aggregate fair value
of the net tangible assets has been treated as Goodwill. The purchase price allocation was based, in part, on management’s
knowledge of GME’s business and is preliminary. Once we complete our 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.
Consideration given:
Common stock shares given
|
|
$
|
295,400
|
|
Total consideration given
|
|
|
295,400
|
|
Fair value of identifiable assets acquired, and liabilities
assumed:
Cash
|
|
|
3,546
|
|
Accounts receivable
|
|
|
7,430
|
|
Fixed assets, net
|
|
|
64,891
|
|
Intangible assets, net
|
|
|
5,176
|
|
Accounts payable
|
|
|
(71,478
|
|
Acquisition payable
|
|
|
(24,805
|
|
Payable to stockholders
|
|
|
(5,045
|
|
Total identifiable net liabilities
|
|
|
(20,285
|
|
Goodwill
|
|
|
315,685
|
|
Total consideration
|
|
$
|
295,400
|
|
During March, April and May of 2018, in
connection with the Company’s preliminary audit of GME, the Company’s management discovered several irregularities
regarding GME’s operations and its sellers’ activities before and after the consummation of the Company’s acquisition
of that business. Based on investigation of these discoveries, the Company, effective June 4, 2018, consummated a termination agreement
with GME’s seller. In connection with that agreement, GME’s sellers returned to the Company the 4,220,000 shares it
had previously issued to the sellers. The Company wrote off the approximately $33,000 it had invested cumulatively in GME in addition
to the stock issuance and recognized a non-cash loss of $295,400 upon disposition of this business.
Valencia Purchase
The Company, on May 17, 2018, consummated
the acquisition of an existing, approximately 430,000 square foot facility, that was converted from a dormant Poinsettia production
facility into a light deprivation hemp production greenhouse. The total purchase price was €4,000,000 (approximately US$4.8million).
The purchase consideration will be paid as follows: (i) €20,000 down, which amount already has been paid by the Company; (ii)
€20,000 a month for 25 months, and (iii) €100,000 per month thereafter until paid in full. Located in Valencia, the third
largest city in Spain with an average of 300 days of sun per year and agricultural setting, the facility previously was one of
the biggest Poinsettia producers in Europe. At its peak, it produced millions of Poinsettia clones and had more than 80 greenhouse
workers working 24/7. The Company chose this facility due to the similarities in growing Poinsettias and Hemp and because of its
light cycles and heavy machinery specific to industrial plant production. This turn-key facility includes: approximately 430,000
square feet of light deprivation greenhouse, growing supplies, polished concrete, and triple galvanized steel framework. It its
fully equipped with an automated irrigation system, a mist system, a refrigerated storage area, a light deprivation system to maximize
number of crops per year, a Dutch, hydroponic set up and heating system, its own gas pipe, and five sources of irrigation water
with reservoir. The facility also has office space that the Company intends to utilize to house: (i) our Spanish Media department
(lamarihuana.com) and (ii) a warehouse. The purchase also includes outdoor space and the necessary structural steel sufficient
to erect a new 64,000 sq. ft galvanized steel frame facility the Company intends to build to use as a GMP extraction, formulation
and bottling facility.
The agreement was in the form of a lease/purchase
and included a clause allowing for the cancellation of the agreement with notice and payment of 2 months lease payments. On May
16, 2019, Leafceuticals S.L.U. informed the owner of the facility through a notarial deed of its intent to withdraw from the agreement.
The required €40,000 (approximately US $48,000) was paid. Freedom Leaf Inc. and Leafceuticals S.L.U have no obligation relating
to the agreed price for the purchase of the greenhouse, as both companies have withdrawn from the contract and the other party
has accepted it. Accordingly, the remaining lease obligation no longer appears on the books of the Company
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. On February 7, 2018, the Company and the Buyer agreed that because of the increase in the value
of the Company’s common stock, the Buyer had waived its right to additional shares 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.
International requirements for the complete
use of the web sites by the Company have been met. LaMarihuana is now complete in use by the Company for both advertising and lead
generation.
NOTE 4 – GOING CONCERN
The Company has a net loss attributable
to common stockholders for the year ended June 30, 2019 of $12,730,872 and working capital deficit as of June 30, 2019 of $6,921,408
and has used cash in operations of $3,442,723 for the year ended June 30, 2019. In addition, as of June 30, 2019, the Company had
a stockholders’ equity and accumulated deficit of $8,890,990 and $22,323,223, 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 contemplates the 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.
Management has evaluated these conditions and has developed
a plan which, in part, address these obligations as follows:
|
·
|
The Company is partnering with established distributors and retailers. Several examples include:
|
|
o
|
The Company has received PO’s in the aggregate amount of $26,425,500, from CBD Life, SA, all of which are deliverable
in the fiscal year ended June 30, 2020. The first delivery of product to CBD Life, SA is reflected in a Form 8-K Current Report
dated August 13, 2019. This arrangement is believed to provide cash flow to satisfy the companies remaining debt service.
|
|
o
|
On October 1, 2019 the Company announced that it had entered into a distribution agreement with Greenlane Holdings. Greenlane
distributes to 11,000 retail locations across the United States. The Company has received PO’s totaling $591,159, deliverable
in the fiscal year ended June 30, 2020.
|
|
·
|
The Company has approved a strategic plan and has affected corporate restructuring. These actions include:
|
|
o
|
Focusing on the Green Lotus and IrieCBD brands in the United States and Mexico, rather than building a vertically integrated
hemp company in the U.S. and Europe.
|
|
o
|
Selling or shutting down non-core and non-accretive business segments.
|
|
o
|
Consolidating the Company’s manufacturing, sales, distribution and corporate functions into the newly acquired Green
Lotus infrastructure, resulting in operational synergies and cost savings.
|
|
o
|
Formulating a comprehensive corporate rebranding plan for the Company.
|
|
·
|
Taken together, the Management of the Company believes that these actions, along with anticipated capital raises with equity
partners, will mitigate the Going Concern.
|
NOTE 5 – 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. Other than disclosed herein, there
were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of our operations.
In May 2019, the Company received a demand letter from a former employee for employment-related claims, but this the employee has
since signed an agreement waiving all claims. In October of 2019, the Company settled a potential dispute regarding its Accuvape
brand with the original seller of that brand. If the Company is unable to honor the terms of the settlement agreement, which require
the Company to make payments to two Accuvape employees in the aggregate amount of $12,000, and to make vendor payments in the aggregate
amount of approximately $35,000 by the middle of November of 2019, the counterparty’s release of the Company would not be
effective.
Lease Commitment
We lease approximately 2,800 square feet
of office space in Las Vegas, Nevada, pursuant to a lease that expired on March 14, 2019 and was extended through March 14, 2022.
Rent expense for the years ended June 30,
2019 and 2018 was $35,703 and $34,128, respectively. There are $107,055 of future minimum lease payments under this lease.
We also lease approximately 1,777 square
feet of office and production space, used by Irie in Oakland, California, pursuant to a lease that expired on June 1, 2019 and was not renewed.
Rent expense for the years ended June 30,
2019 and 2018 was $44,400 and $10,900, respectively. There are no future minimum lease payments under this lease.
We lease space for our Texas lab in Carrollton,
Texas. This 8,800 square foot facility lease will expire April 30, 2021 and is used predominately for manufacturing and storage
of products under the Green Lotus brand.
Rent expense for the year ended June 30,
2019 (post acquisition) was $3,000.
Future minimum lease payments under these
leases are as follows:
2020
|
|
$
|
36,000
|
|
2021
|
|
|
30,000
|
|
2022
|
|
|
–
|
|
2023
|
|
|
–
|
|
2024 and thereafter
|
|
|
–
|
|
Total
|
|
$
|
96,000
|
|
An additional lab facility located in Denver,
Colorado, composed of approximately 1,800 square feet, has a lease term through September 30, 2019.
Rent expense for the year ended June 30,
2019 (post acquisition) was $1,890.
Future minimum lease payments under these
leases are as follows:
2020
|
|
$
|
5,670
|
|
2021
|
|
|
–
|
|
2022
|
|
|
–
|
|
2023
|
|
|
–
|
|
2024 and thereafter
|
|
|
–
|
|
Total
|
|
$
|
5,670
|
|
Our headquarters office suite is located
in Addison, Texas and is composed of an original and an expansion space of approximately 3,322 and 2,656 square feet, respectively,
totaling 5,978 square feet. Lease terms expire June 30, 2024 for both leases.
Rent expense for the year ended June 30,
2019 (post acquisition) was $4,291 and $3,431.
Future minimum lease payments under these
leases are as follows:
2020
|
|
$
|
94,541
|
|
2021
|
|
|
97,530
|
|
2022
|
|
|
100,519
|
|
2023
|
|
|
103,508
|
|
2024 and thereafter
|
|
|
106,497
|
|
Total
|
|
$
|
502,595
|
|
The company has a storage unit in Denver,
Colorado. This 625 square foot facility is leased on a month to month basis.
Rent expense for the year ended June 30,
2019 (post acquisition) was $71. There are no future minimum lease payments under this lease.
Finally, the company has 4 storage units
in Carrollton, Texas that are all leased on month to month terms and each unit is a 625 square feet space.
Rent expense for the year ended June 30,
2019 (post acquisition, cumulatively) was $867. There are no future minimum lease payments under this lease.
Compensation Accruals
On May 31, 2019, the Company entered into
Employment Agreements with the former owners of ECS Labs, LLC, Carlos Frias, Daniel Nguyen and Alex Frias. Each agreement provides
for both cash and equity incentives in consideration for the future performance of services. Compensation expense under these Employment
Agreements to be recognized is as follows:
2019
|
|
$
|
3,873,870
|
|
2020
|
|
|
24,469,574
|
|
2021
|
|
|
5,297,103
|
|
2022
|
|
|
662,138
|
|
Total
|
|
$
|
34,302,685
|
|
Unrecognized Compensation costs related to stock awards, Carlos Frias
|
$10,738,750
|
Unrecognized Compensation costs related to stock awards, Alex Frias
|
$ 7,138,750
|
Unrecognized Compensation costs related to stock awards, Daniel Nguyen
|
$ 8,938,750
|
NOTE 6 – RELATED PARTIES
Carlos Frias, CEO and Director of the Company,
has promissory notes payable to him in the amount of $123,657 for various expense reimbursements and $2,400,000 in cash incentives
as part of his employment agreement subject to his continued provision of services to the Company. Imputed interest is immaterial.
The promissory notes are reflected as liabilities on the financial statements as of June 30, 2019.
Alexandro Frias, VP of Finance of the Company,
has promissory notes payable to him in the amount of $83,657 for various expense reimbursements and $1,600,000 in cash incentives
as part of his employment agreement subject to his continued provision of services to the Company. Imputed interest is immaterial.
The promissory notes are reflected as liabilities on the financial statements as of June 30, 2019.
Ngoc “Daniel” Quong Nguyen,
CSO and Director of the Company, has promissory notes payable to him in the amount of $655,000 for various expense reimbursements
and asset purchases and $2,0400,000 in cash incentives as part of his employment agreement subject to his continued provision of
services to the Company. Imputed interest is immaterial. The promissory notes are reflected as liabilities on the financial statements
as of June 30, 2019.
Richard Cowan (“Cowan”), a
former Director and officer of the Company, has payables and accruals due to him of $15,485 as of June 30, 2018, as reflected on
the balance sheet under Accounts Payable and Accrued Expenses. 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. On May 15, 2018, the Company issued to
Cowan a License Agreement that grants him exclusive licensee distribution rights to the Freedom Leaf Inc. magazine, as well as
other “Freedom Leaf” branded merchandise and services in southern California. In consideration of such license, Cowan
cancelled $240,000 of payables owed to him by the Company. Also, in connection with this transaction, the Company issued to Cowan
a warrant, exercisable between July 1, 2018 and November 15, 2019, to acquire 1,000,000 shares at an exercise price of $0.01 per
share.
Clifford J. Perry (“Perry”),
former Chief Executive Officer and a former Director of the Company, has compensation due and other payables and accruals due to
him totaling $72,934 and $32,814 as of June 30, 2019 and 2018, respectively, as reflected on the balance sheet under Accounts Payable
and Accrued Expenses. Imputed interest is immaterial.
Raymond P. Medeiros (“Medeiros”),
a former Director of the Company, has compensation due and other payables and accruals due to him totaling $24,423 and $63,000
as of June 30, 2019 and June 30, 2018, respectively, as reflected on the balance sheet under Accounts Payable and Accrued Expenses.
Imputed interest is immaterial.
On October 31, 2017, the Company issued
850,000 shares of common stock to Paul F. Pelosi, Jr. (“Pelosi”), in regard 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 was 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 date
eighteen months after the issuance. On February 12, 2018, the Company issued 1,250,000 warrants for common stock to Paul Pelosi
in satisfaction of this obligation. The warrants have an exercise price of $0.04 and expire August 11, 2018 (see Note 8). On January
18, 2018, Pelosi purchased 1,050,000 shares of common stock for $21,000. On July 27, 2018, the Company agreed to sell to Paul T.
Pelosi Jr Two Million Two Hundred Thousand (2,200,000) shares of the Company’s 144 common stock for the price of Thirty Eight
Thousand dollars ($38,500), $0.0175 per share, in consideration for which Pelosi agreed to: (1) cancellation and return of the
previously issued to him and exercisable into 1,250,000 shares of Company common stock at $0.04 per share and (2) the cancellation
of the Company’s obligation to issue to him 850,000 shares of Company common stock.
On January 18, 2018, the Company appointed
Richard 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 issued on January 18, 2018 and valued at $81,200 and $60,900, respectively.
On May 10, 2018, the Company appointed its CFO, Richard Groberg, as a member of the Company’s Board of Directors. In consideration
of his appointment, the Company agreed to issue to Mr. Groberg’s entity (1) $50,000 in common stock to vest monthly over
a one-year period, at a value of $0.16 per share, for a total of 312,500 shares, and (2) an eighteen-month warrant to acquire 500,000
shares of common stock of the Company at an exercise price of $0.10 per share.
On April 30, 2018, the Company appointed
Nevada State Senator Richard Segerblom as a member of the Company’s Board of Directors and issued to Senator Segerblom (i)
$50,000 in common stock to vest monthly for one year, with a value of $0.159 per share, for a total of 314,465 shares of common
stock, and (ii) an eighteen-month warrant to acquire 500,000 shares of common stock at an exercise price of $0.10 per share.
On May 15, 2018, the Company issued to
Cowan a License Agreement that grants him exclusive licensee distribution rights to the Freedom Leaf Inc. magazine, as well as
other “Freedom Leaf” branded merchandise and services in Southern California. In consideration of such license, Cowan
cancelled $240,000 of payables owed to him by the Company. Also, in connection with this transaction, the Company issued to Cowan
a warrant, exercisable between July 1, 2018 and November 15, 2019, to acquire 1,000,000 shares at an exercise price of $0.01 per
share.
NOTE 7 – INVENTORY
Inventories at June 30, 2019 and 2018 consisted
of the following:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2017
|
|
Raw materials
|
|
$
|
1,017,291
|
|
|
$
|
126,047
|
|
Work in process
|
|
|
–
|
|
|
|
–
|
|
Finished goods
|
|
|
87,873
|
|
|
|
111,681
|
|
Allowance for inventory obsolescence
|
|
|
(21,077
|
)
|
|
|
(36,039
|
)
|
Total inventory
|
|
$
|
1,084,157
|
|
|
$
|
201,689
|
|
NOTE 8 – PROPERTY AND EQUIPMENT
Property and equipment June 30, 2019 and 2018 consisted of the
following:
|
|
June 30, 2019
|
|
|
June 30, 2018
|
|
Property and equipment
|
|
$
|
192,944
|
|
|
$
|
1,874,480
|
|
Furniture and office equipment
|
|
|
88,330
|
|
|
|
173,500
|
|
Land
|
|
|
–
|
|
|
|
630,805
|
|
Building
|
|
|
–
|
|
|
|
2,170,963
|
|
Total Fixed Assets
|
|
|
281,274
|
|
|
|
4,849,748
|
|
Accumulated depreciation
|
|
|
(59,552
|
)
|
|
|
(63,698
|
)
|
Total Fixed Assets, Net
|
|
$
|
221,722
|
|
|
$
|
4,786,050
|
|
Depreciation expense for the years ended June 30, 2019 and 2018
was $474,682 and $63,698, respectively.
NOTE 9 – INVESTMENTS
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 was 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. 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 that date. To date, ownership rights have not been transferred.
This agreement expired on January 18, 2017. The Company made no investment in PTP and recorded no investment in that entity.
The Company has investments of $-0- and
$995,400 at June 30, 2019 and 2018, respectively. The investment at June 30, 2018 relates to the 25% investment in Cicero Transact
Group, LLC, a company that is launching an innovative, online business-to-business deal platform. As of June 30, 2018, Cicero Transact
Group, LLC had incurred nominal expenditures and had generated no revenues. 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. Its formal development efforts commenced in July 2018. See Notes 8 and 18. As June 30, 2019 the Cicero Transact Group,
LLC investment has been disposed of.
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. As June 30, 2019 the Cicero Transact Group, LLC investment has been disposed of.
NOTE 10 – INTANGIBLE ASSETS
Intangible assets at June 30, 2019 and
2018 consisted of the following:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Websites and other intangible assets
|
|
$
|
174,105
|
|
|
$
|
519,923
|
|
Trademarks and trade names
|
|
|
327,000
|
|
|
|
342,682
|
|
Customer relationships
|
|
|
712,000
|
|
|
|
712,000
|
|
Patents and intellectual
property
|
|
|
–
|
|
|
|
264,160
|
|
Total intangible assets
|
|
|
1,213,104
|
|
|
|
1,838,765
|
|
Accumulated amortization
|
|
|
(663,178
|
)
|
|
|
(316,191
|
)
|
Intangible assets, net
|
|
$
|
549,927
|
|
|
$
|
1,522,574
|
|
The amortization expense for the years ended June 30, 2019 and
2018, was $687,187 and $332,964, respectively. The Company recognized impairment expense on intangible assets for the years ended
June 30, 2019 and 2018, was $780,884 and $-0-, respectively.
The following table presents the amortization for the next five
years:
2020
|
|
$
|
304,552
|
|
2021
|
|
|
36,333
|
|
2022
|
|
|
36,333
|
|
2023
|
|
|
36,333
|
|
2024 and thereafter
|
|
|
136,376
|
|
Total
|
|
$
|
549,927
|
|
NOTE 11 – NOTES PAYABLE
Convertible notes payable, all classified
as current at June 30, 2019, consist of the following:
Convertible notes, net of discounts and notes payable
|
|
June 30,
|
|
|
June 30,
|
|
Notes payable as of June 30, 2019 and June 30, 2018 consist of the following:
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Note payable bearing interest at 12.0%, originated June 18, 2019, due on December 18, 2019
|
|
$
|
630,000
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable bearing interest at 12.0%, originated May 21, 2019, due on November 21, 2019
|
|
$
|
183,750
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable bearing interest at 18.0%, originated May 14, 2019, due on July 30, 2019
|
|
$
|
45,000
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable bearing interest at 12.0%, originated April 15, 2019, due on October 12, 2019
|
|
$
|
200,000
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable bearing interest at 40.0%, originated June 30, 2018, due on June 30, 2020
|
|
$
|
57,394
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable bearing interest at 40.0%, originated June 30, 2018, due on June 10, 2020
|
|
$
|
57,041
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable bearing interest at 0.0%, originated May 31, 2018, due on May 31, 2020
|
|
$
|
554,528
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable bearing interest at 40.0%, originated May 31, 2018, due on May 31, 2020
|
|
$
|
158,269
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable bearing interest at 1.5%, originated October 23, 2017, due on April 20, 2018
|
|
$
|
20,000
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable bearing interest at 0.0%, originated March 3, 2017, due on March 3, 2020
|
|
$
|
93,000
|
|
|
$
|
99,000
|
|
|
|
|
|
|
|
|
|
|
Note payable bearing interest at 5.0%, originated May 17, 2018, due on December 31, 2022
|
|
$
|
–
|
|
|
$
|
4,629,486
|
|
|
|
|
|
|
|
|
|
|
Note payable bearing interest at 0.0%, originated June 5, 2018, due on September 5, 2018
|
|
$
|
14,774
|
|
|
$
|
95,000
|
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
$
|
1,905,982
|
|
|
$
|
4,823,486
|
|
Less: current portion
|
|
|
(1,818,982
|
)
|
|
|
(381,575
|
)
|
|
|
|
|
|
|
|
|
|
Long-term notes payable
|
|
$
|
87,000
|
|
|
$
|
4,441,911
|
|
Notes Payable
On June 4, 2018, the Company borrowed $95,000
from Baytown Holdings, LLC, $10,000 of which was withheld as an original issue discount (“OID”) and the $85,000 of
net proceeds of which was advanced to P2P to fund working capital in connection with orders received by P2P (a cost method
investee of the Company). The loan bears no interest, other than the OID and is due in full on September 5, 2018. At June 30, 2019,
P2P has repaid the Company $95,000; and, the Company has repaid $95,000 to Baytown.
Effective with the Company’s purchase
of the Valencia, Spain greenhouse on June 30, 2018, for which the Company committed to pay €4,000,000 (approximately US$4.7
million and paid €20,000 down, it committed to pay: (ii) €20,000 a month for 25 months, and (iii) €100,000 per month
thereafter until paid in full. There is 0% interest on the first 25 monthly payments and the interest rate on the remaining balance
is 5%. The principal balance as of June 30, 2018, was $4,348,911. The agreement was in the form of a lease/purchase and included
a clause allowing for the cancellation of the agreement with notice and payment of 2 months lease payments. On May 16, 2019, Leafceuticals
S.L.U. informed the owner of the facility through a notarial deed of its intent to withdraw from the agreement. The required €40,000
(approximately US$48,000) was paid. Freedom Leaf Inc. and Leafceuticals S.L.U have no obligation relating to the agreed price for
the purchase of the greenhouse, as both companies have withdrawn from the contract and the other party has accepted it. Accordingly,
the remaining lease obligation no longer appears on the books of the Company.
In connection with the IRIE acquisition,
the Company assumed a $100,000 Note, which bears no interest and is payable at the rate of $500 per month with the balance due
on March 3, 2020. The principal balance was $93,000.
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. This
note was repaid in full June 23, 2019.
In connection with the ECS Labs, LLC acquisition,
on May 31,2019 the Company assumed a $40,000 promissory note payable to Carlos Frias for biomass reimbursement, and promissory
notes payable to Carlos Frias of $75,000 and $8,657 for contributions. The $40,000 note bears interest at 40% and is due June 10,
2020. Each of the notes for contributions were documented in writing.
In connection with the ECS Labs, LLC acquisition,
on May 31,2019 the Company assumed promissory notes payable to Alexandro Frias of $75,000 and $8,657 for contributions. The notes
for contributions were not documented in writing.
In connection with the ECS Labs, LLC acquisition,
on May 31,2019 the Company assumed a $110,000 promissory note payable to Ngoc “Daniel” Quong Nguyen for biomass reimbursement,
and promissory notes payable to Ngoc “Daniel” Quong Nguyen of $45,000 for contributions. The $110,000 note bears interest
at 40% and is due June 10, 2020. The $45,000 note payable requires 18% interest payments each month.
In connection with the ECS Labs, LLC acquisition,
on May 31,2019 the Company assumed a $360,000 promissory note payable to Rachel and Elgin Allen for biomass reimbursement. The
note includes payment to Rachel and Elgin Allen of 12 monthly principal payments in the amount of $30,000 starting at the end of
the 13th month and will continue for the next 11 months. Additionally, the note includes payment of an additional balloon
payment equal to the principal loan amount.
In connection with the ECS Labs, LLC acquisition,
on May 31,2019 the Company assumed a $200,000 promissory note payable to Merida Capital for working capital. The note bears interest
at 12% and is due October 15, 2019.
On May 21, 2019, the Company executed a
promissory note for $183,750 with Merida Capital Partners 2, for working capital. The note bears interest at 12% and is due May
21, 2019.
On June 18, 2019, the Company executed
a promissory note for $630,000 with Merida Capital Partners 3, for working capital. The note bears interest at 12% and is due June
18, 2019.
NOTE 12– STOCKHOLDERS’ EQUITY
Series A Preferred Stock
On May 24, 2016, the Board of Directors
of the Company authorized amending the Company’s Articles of Incorporation to authorize 10,000,000 shares of “blank
check” preferred stock and designate 1,000,000 of the shares as Series A preferred stock. Each share of the Series A preferred
stock is entitled to 500 votes and is convertible into 100 shares of common stock.
On May 25, 2016, Perry converted 68,401,200
shares of common stock into 684,012 shares of Series A preferred stock.
On May 25, 2016, Cowan converted 26,401,000
shares of common stock into 264,010 shares of Series A preferred stock.
Common Stock
The Company is authorized to issue up to
100,000,000 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 June 30, 2019 and 2018 there were 310,600,203 and 185,369,365 shares of common stock were outstanding,
respectively.
The Company made the following issuances during the year ended
June 30, 2018:
|
|
Shares
|
|
|
Fair Value
|
|
|
Average Price per Share
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for warrants and cash
|
|
|
21,243,829
|
|
|
$
|
1,388,558
|
|
|
$
|
0.07
|
|
Common stock issued for accounts payable
|
|
|
13,220,275
|
|
|
|
661,443
|
|
|
|
0.05
|
|
Common stock issued in business combinations
|
|
|
8,118,886
|
|
|
|
1,294,023
|
|
|
|
0.16
|
|
Common stock issued for services
|
|
|
11,494,062
|
|
|
|
1,202,215
|
|
|
|
0.10
|
|
Common stock issued for debt
|
|
|
12,263,698
|
|
|
|
1,346,519
|
|
|
|
0.11
|
|
Common stock issued for inventory and intangibles
|
|
|
3,100,000
|
|
|
|
313,360
|
|
|
|
0.10
|
|
Common stock issued for cost method investments
|
|
|
6,000,000
|
|
|
|
995,400
|
|
|
|
0.17
|
|
Common stock issued for exercise of warrants
|
|
|
215,378
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
74,267,570
|
|
|
$
|
7,201,518
|
|
|
|
|
|
The Company made the following issuances during the year ended
June 30, 2019:
|
|
Shares
|
|
|
Fair Value
|
|
|
Average Price per Share
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for warrants cash
|
|
|
29,702,424
|
|
|
$
|
3,328,500
|
|
|
$
|
0.11
|
|
Common stock issued for services
|
|
|
3,272,747
|
|
|
|
380,367
|
|
|
|
0.12
|
|
Common stock issued in exercise of warrants
|
|
|
1,000,000
|
|
|
|
50,000
|
|
|
|
0.05
|
|
Common stock issued for business combinations
|
|
|
88,916,419
|
|
|
|
14,455,838
|
|
|
|
0.16
|
|
Common stock issued for cost method investments
|
|
|
3,000,000
|
|
|
|
375,000
|
|
|
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
125,230,838
|
|
|
$
|
7,201,518
|
|
|
|
|
|
Options and Warrants
As of June 30, 2019, the Company had options and warrants to
acquire 48,444,444 shares of common stock were outstanding.
A summary of the status of the options and warrants granted
as of June 30, 2019 and 2018, and the changes during the years then ended is presented below:
|
|
Number of Options and Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Life
|
|
Outstanding as of June 30, 2017
|
|
|
4,618,167
|
|
|
$
|
–
|
|
|
|
|
|
Granted
|
|
|
7,694,444
|
|
|
|
0.13
|
|
|
|
|
|
Exercised
|
|
|
(268,167
|
)
|
|
|
0.06
|
|
|
|
|
|
Cancelled or Expired
|
|
|
(3,250,000
|
)
|
|
|
0.05
|
|
|
|
|
|
Outstanding as of June 30, 2018
|
|
|
8,794,444
|
|
|
$
|
0.12
|
|
|
|
1.53
|
|
Granted
|
|
|
42,000,000
|
|
|
|
0.21
|
|
|
|
|
|
Exercised
|
|
|
(1,000,000
|
)
|
|
|
0.06
|
|
|
|
|
|
Cancelled or Expired
|
|
|
(1,350,000
|
)
|
|
|
0.06
|
|
|
|
|
|
Outstanding as of June 30, 2019
|
|
|
48,444,444
|
|
|
$
|
0.20
|
|
|
|
2.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of June 30, 2018
|
|
|
7,794,444
|
|
|
$
|
0.10
|
|
|
|
1.73
|
|
Exercisable as of June 30, 2019
|
|
|
48,444,444
|
|
|
$
|
0.20
|
|
|
|
2.07
|
|
A summary of the status of options and warrants outstanding
as of June 30, 2019 is presented below:
Range of Exercise Prices
|
|
Number Outstanding
|
|
|
Weighted Average Remaining Contractual Life
|
|
|
Number Exercisable
|
|
|
Weighted Average Exercise Price
|
|
$0.10 - $0.19
|
|
|
30,444,444
|
|
|
|
1.98
|
|
|
|
30,444,444
|
|
|
$
|
0.17
|
|
$0.20 - $0.29
|
|
|
18,000,000
|
|
|
|
2.21
|
|
|
|
18,000,000
|
|
|
$
|
0.25
|
|
TOTAL
|
|
|
48,444,444
|
|
|
|
2.07
|
|
|
|
48,444,444
|
|
|
$
|
0.20
|
|
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. The Board of Directors has no plans to
reserve additional shares for this purpose.
NOTE 13– REVENUE CLASSES
Selected financial information for the
Company’s operating revenue classes as of June 30, 2018 and 2017, are as follows:
Revenues:
|
|
June
30,
|
|
|
|
2019
|
|
|
2018
|
|
Magazine related
|
|
$
|
1,616
|
|
|
$
|
9,484
|
|
Product sales
|
|
|
2,317,133
|
|
|
|
401,788
|
|
Total
|
|
$
|
2,318,749
|
|
|
$
|
411,272
|
|
|
|
For the years ended
|
|
Direct costs of revenue:
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Magazine related
|
|
$
|
–
|
|
|
$
|
89,518
|
|
Product sales
|
|
|
2,315,070
|
|
|
|
221,695
|
|
Total
|
|
$
|
2,315,070
|
|
|
$
|
311,213
|
|
The Company’s four revenue classes
are magazine related and product sales.
NOTE 14 – INCOME TAX
As of June 30, 2019, and 2018, the Company
has net operating loss carry forwards of $11,789,383 and $4,594,669, respectively. The carry forwards expire through the year 2039.
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 year 2019 and 21% to loss before taxes for fiscal year 2018), as follows:
|
|
For the Years Ended
|
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Tax expense (benefit) at the statutory rate
|
|
$
|
4,665,860
|
|
|
$
|
972,021
|
|
State income taxes, net of federal income tax benefit
|
|
|
–
|
|
|
|
–
|
|
Change in valuation allowance
|
|
|
(4,665,860
|
)
|
|
|
(972,021
|
)
|
|
|
|
|
|
|
|
|
|
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 2015 through 2019 remain
subject to examination by federal agencies and other jurisdictions in which it operates.
The tax effect of significant components
of the Company’s deferred tax assets and liabilities at June 30, 2019 and 2018, respectively, are as follows:
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
4,468,147
|
|
|
$
|
1,398,216
|
|
Timing differences
|
|
|
2,203,142
|
|
|
|
906,968
|
|
Total gross deferred tax assets
|
|
|
6,671,288
|
|
|
|
2,305,184
|
|
Less: Deferred tax asset valuation allowance
|
|
|
(6,671,288
|
)
|
|
|
(2,305,184
|
)
|
|
|
|
|
|
|
|
|
|
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 2019 were fully offset by a 100% valuation allowance. The valuation allowance for
the remaining net deferred tax assets was $6,671,288 and $2,305,184 as of June 30, 2019 and 2018, respectively.
NOTE 15 – CONCENTRATIONS
Concentration of Credit Risk
Financial instruments, which potentially
subject the Company to a concentration of credit risk, consist principally of temporary cash investments.
The Company places its temporary cash investments
with financial institutions insured by the FDIC. No amounts exceeded federally insured limits as of June 30, 2019. There have been
no losses in these accounts through June 30, 2019.
Concentration of Revenue
In 2019, the Company had 11 customers that
together made up 16% of its revenue. None of the customers in 2019 individual comprised more than 2.25% of revenue. In 2018, the
Company had six customers that made up 64.9% or more of its revenue
Concentration of Supplier
The Company relies on several suppliers,
including:
|
·
|
Mile High Labs - provision of isolate, distillate and mother liquor
|
|
·
|
Cosmetic Innovations - contract manufacturing of various product lines
|
|
·
|
Hammer Enterprises – biomass and crude vendor
|
Other vendors are available to replace
each of the suppliers above, should a replacement or additional capacity beyond what is currently offered be required.
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. The Company
also owns
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 October 15, 2019 the Company executed
a Promissory Note with Merida Capital Partners III LP. The note is in the principal sum of $900,000 plus accrued interest thereon,
bears interest at the rate of twelve per cent (12.0%) per annum and matures April 15, 2020.
On September 24, 2019, the Board of Directors
(the “Board”) of Freedom Leaf Inc. appointed Brian Moon to serve as the Chief Financial Officer of the Company. In
connection with Mr. Moon’s appointment as Chief Financial Officer, on September 24, 2019, the Board approved entering into
an at-will employment agreement (the “Employment Agreement”) with Mr. Moon, dated August 5, 2019, and effective the
first day of Mr. Moon’s employment on September 23, 2019. Under the terms of the Employment Agreement, the Company agreed
to equity incentives consisting of (i) an award of 1,000,000 shares of the Company’s restricted common stock on October 1,
2019, to vest 12 months thereafter on October 1, 2020 (the “first Equity Award”), and (ii) an award of an additional
1.000,000 shares on April 1, 2020 to vest 12 months thereafter on April 1, 2021 (the “Second Equity Award”). On September
24, 2019, the Company also entered into a Restricted Stock Agreement with Mr. Moon pursuant to which the vesting of the First Equity
Award and Second Equity Award was formalized. Pursuant to the Restricted Stock Agreement, (i) the First Equity Award will vest
on October 1, 2020, and the Second Equity Award will vest on April 1, 2021, so long as Mr. Moon is continuously employed by the
Company on such dates.
On September 13, 2019 the Company executed
a Promissory Note with Merida Capital Partners III LP. The note is in the principal sum of $500,000 plus accrued interest thereon,
bears interest at the rate of twelve per cent (12.0%) per annum and matures March 13, 2020.
On August 28, 2019, the Company also entered
into a Restricted Stock Agreement with Carlos Frias, the Company’s Chief Executive Officer and a member of the Company’s
Board, providing for the issuance of 72,314,814 shares of common stock to Mr. Frias (the “Carlos Frias Common Shares”).
Pursuant to the Restricted Stock Agreement, (i) 29.63% of the Carlos Frias Common Shares will vest on the 12 month anniversary
of the Effective Date (May 31, 2019) if Mr. Frias is continuously employed by the Company on such date, (ii) 29.63% of the Carlos
Frias Common Shares will vest on the 24 month anniversary of the Effective Date if Mr. Frias is continuously employed by the Company
on such date, and (iii) 40.74% of the Carlos Frias Common Shares will vest on upon the occurrence of the milestone. The milestone
means the occurrence of an extension of the Master Manufacturing Agreement, dated as of November 13, 2017,
by and between ECS Labs LLC and CBD LIFE SA DE CV through December 31, 2020.
On August 28, 2019, the Company also entered
into a Restricted Stock Agreement with Alex Frias, the Company’s Vice President of Finance, providing for the issuance of
48,072,390 shares of common stock to Mr. Frias (the “Alex Frias Common Shares”). Pursuant to the Restricted Stock Agreement,
(i) 29.63% of the Alex Frias Common Shares will vest on the 12 month anniversary of the Effective Date (May 31, 2019) if Mr. Frias
is continuously employed by the Company on such date, (Ii) 29.63% of the Alex Frias Common Shares will vest on the 24 month anniversary
of the Effective Date if Mr. Frias is continuously employed by the Company on such date, and (iii) 40.74% of the Alex Frias Common
Shares will vest on upon the occurrence of the milestone. The milestone means the occurrence of an extension of the Master Manufacturing
Agreement, dated as of November 13, 2017, by and between ECS Labs LLC and CBD LIFE SA DE CV through December
31, 2020.
On August 28, 2019, the Company also entered
into a Restricted Stock Agreement with Ngoc Quang (Daniel) Nguyen, the Company’s Chief Science Officer and a member
of the Company’s Board, providing for the issuance of 60,193,602 shares of common stock to Mr. Nguyen (the “Daniel Nguyen
Common Shares”). Pursuant to the Restricted Stock Agreement, (i) 29.63% of the Daniel Nguyen Common Shares will vest
on the 12 month anniversary of the Effective Date (May 31, 2019) if Mr. Nguyen is continuously employed by the Company on such
date, (ii) 29.63% of the Daniel Nguyen Common Shares will vest on the 24 month anniversary of the Effective Date if Mr. Nguyen
is continuously employed by the Company on such date, and (iii) 40.74% of the Daniel Nguyen Common Shares will vest on upon
the occurrence of the milestone. The milestone means the occurrence of an extension of the Master Manufacturing Agreement, dated as of November 13, 2017,
by and between ECS Labs LLC and CBD LIFE SA DE CV through December 31, 2020.
On August 20, 2019 the Company executed
a Promissory Note with Merida Capital Partners III LP. The note is in the principal sum of $400,000 plus accrued interest thereon,
bears interest at the rate of twelve per cent (12.0%) per annum and matures February 20, 2020.
On August 19, 2019,
the Company filed a Certificate of Amendment to its Articles
of Incorporation to increase the Company’s authorized common stock from
500,000,000 shares to 1,000,000,000 shares.
On July 24, 2019 the Company executed a
Promissory Note with Merida Capital Partners III LP. The note is in the principal sum of $200,000 plus accrued interest thereon,
bears interest at the rate of twelve per cent (12.0%) per annum and matures on December 24, 2019.