We have audited the accompanying balance
sheet of Freedom Leaf Inc. and subsidiaries as of June 30, 2017, and the related statement of operations, changes in stockholders’
equity, and cash flow for the year then ended. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of Freedom Leaf Inc. as of June 30,
2017, and the results of its operations and its cash flows for the year in the period ended June 30, 2017 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial
statement have been prepared assuming the Company will continue as a going concern. These matters raise substantial doubt about
the Company’s ability to continue as a going concern. Management’s plans as to these matters are also described in
Note 4. The consolidated financial statement do not include any adjustments that might result from the outcome of this uncertainty.
Notes to Consolidated Financial Statements
June 30, 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.
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:
|
·
|
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.
|
|
·
|
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’s owns our Valencia greenhouse operations.
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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.
|
Nature of Operations
Freedom Leaf Inc. is a group of diversified,
multinational, vertically-integrated hemp businesses and cannabis media companies. Freedom Leaf has strived to be a leading go-to
resource in the cannabis, medical marijuana, and industrial hemp industries since 2014, founded by professionals with Decades
of combined experience in cannabis legalization advocacy. The Company is continuously building a diverse, global portfolio of
valuable businesses and enterprises through strategic mergers, acquisitions, and acceleration projects across the hemp and cannabis
industry. Utilizing these mergers and acquisitions, Freedom Leaf is building a solid foundation for our vertically-integrated
hemp company to maximize both stockholder value and revenue growth. Our cultivation and extraction divisions allow FRLF to grow
and source our own hemp extract, which allows dramatically lower production costs for our wholly-owned hemp product lines, thereby
generating more revenue for each product sold. We also formulate and manufacture the majority of our products in our own in-house
formulation centers, also greatly reducing our costs and increasing revenue. In addition, our extensive domestic and international
media companies ensure we can continuously direct traffic to our many ecommerce sites and nationwide retail locations. For valuation
purposes, the Company’s focus is on developing and implementing multiple, mutually-reinforcing revenue streams; through
which revenue, net income and stockholder value are maximized by cross-marketing across its brands and advertising through its
media properties. The Company’s major business lines are:
·
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Legal Industrial Hemp Cultivation
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·
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Cannabidiol Extraction, Distillation, and Processing
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·
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Expert Product Formulation
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·
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Nutraceutical Brand Marketing
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·
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Ancillary Products & Niche Markets
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·
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Affiliate Marketing Programs
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·
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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 consolidated financial statements include
the accounts of Freedom Leaf and its wholly-owned subsidiaries. All significant inter-company balances and transactions have been
eliminated in 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.
Impairment of Long-Lived Assets
The Company accounts for long-lived assets
in accordance with the provisions of Statement of Financial Accounting Standards ASC 360-10, “Accounting for the Impairment
or Disposal of Long-Lived Assets.” This statement requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted
net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to sell.
Fair Value of Financial Instruments
The Company measures its financial assets
and liabilities in accordance with generally accepted accounting principles. For certain of our financial instruments, including
cash, accounts payable, accrued expenses, and short-term loans the carrying amounts approximate fair value due to their short maturities.
We follow accounting guidance for financial
and non-financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires
certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting
pronouncements that require or permit fair value measurements. This guidance does not apply to measurements related to share-based
payments. This guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach
(present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement
cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value
into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted
prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices
that are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets
and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs in which little
or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market
participant would use.
We currently measure and report at fair value derivative liabilities. The fair value of derivative liabilities is measured
using the Black-Scholes option pricing method. The following table summarizes our non-financial assets and liabilities measured
at fair value on a recurring basis as of June 30, 2018 and 2017:
The Company evaluates its convertible debt,
options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives
to be separately accounted for. The result of this accounting treatment is that under certain circumstances the fair value of the
derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded
as a liability, the change in fair value is recorded in the statement of operations as other income or expense. Upon conversion
or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value
is reclassified to equity. Equity instruments that are initially classified as equity that become subject to reclassification under
this accounting standard are reclassified to liability at the fair value of the instrument on the reclassification date.
The following table summarizes our financial
assets and liabilities measured at fair value on a recurring basis at June 30, 2018:
|
|
Balance at
June 30, 2018
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
|
|
|
|
|
(Level 1)
|
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(Level 2)
|
|
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(Level 3)
|
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Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Derivative Liabilities
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|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Total Financial Liabilities
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
The following table summarizes our financial
assets and liabilities measured at fair value on a recurring basis at June 30, 2017:
|
|
Balance at June 30, 2017
|
|
|
Quoted Prices in Active Markets for Identical Assets
|
|
|
Significant Other Observable Inputs
|
|
|
Significant Unobservable Inputs
|
|
|
|
|
|
|
|
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(Level 1)
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|
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(Level 2)
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|
|
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(Level 3)
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Derivative Liabilities
|
|
$
|
52,757
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
52,757
|
|
Total Financial Liabilities
|
|
$
|
52,757
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
52,757
|
|
Following is a summary of activity through
June 30, 2018 of the fair value of derivative liabilities valued using Level 3 inputs:
Balance at June 30, 2017
|
|
$
|
52,757
|
|
Note inception date fair value
|
|
|
6,370
|
|
Change in fair value during 2018
|
|
|
(59,127
|
)
|
Balance at June 30, 2018
|
|
$
|
–
|
|
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.
Use of Estimates
The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Significant estimates in the accompanying consolidated financial statements include
the amortization period for intangible assets, valuation and impairment valuation of intangible assets, depreciable lives of the
web site and property and equipment, valuation of warrants and beneficial conversion feature debt discounts, valuation of derivatives,
valuation of share-based payments and the valuation allowance on deferred tax assets.
Reclassifications
Certain amounts in the prior period consolidated
financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect
on reported losses, total assets, or stockholders’ equity as previously reported.
Cash and Cash Equivalents
The Company considers all highly liquid
investments with an original maturity of three months or less when purchased to be cash equivalents.
Accounts Receivable
Accounts receivable consisted of amounts
due from customers primarily for management fees. 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, 2018 of $20,261 and $0 as of June 30, 2017.
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 $36,039 and $0 for the years ended June 30, 2018 and 2017, 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, 2018 or 2017.
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 is recorded at cost.
Depreciation is computed using the straight-line method based on the estimated useful lives of the related assets of three years
for computer equipment, five years for office furniture and fixtures, 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
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 two 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. Variances between the two reporting periods are primarily due to foreign
currency translation calculations.
Accounting for Derivatives
The Company evaluates its convertible debt,
options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives
to be separately accounted for. The result of this accounting treatment is that under certain circumstances the fair value of the
derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded
as a liability, the change in fair value is recorded in the statement of operations as other income or expense. Upon conversion
or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value
is reclassified to equity. Equity instruments that are initially classified as equity that become subject to reclassification under
this accounting standard are reclassified to liability at the fair value of the instrument on the reclassification date.
Revenue Recognition
The Company recognizes revenue for our
services in accordance with ASC 605-10, "Revenue Recognition in Financial Statements." Under these guidelines, revenue
is recognized on transactions when all of the following exist: persuasive evidence of an arrangement did exist, delivery of service
has occurred, the sales price to the buyer is fixed or determinable and collectability is reasonably assured. The Company has five
primary revenue streams as follows:
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·
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Advertising Services – Revenue
from advertising is recognized over the contracted period in which advertising services are performed. Advertising services
are considered performed when an ad is displayed to users.
|
|
|
|
|
·
|
Product Sales – Revenue from the sale of the Company’s branded products is recognized in the period in which product is shipped. Sales billed or cash received in advance of actual shipment are deferred and recorded as income in the period in which shipment is made. Shipping and handling fees billed to customers is included in net sales. Shipping and handling costs are expensed as incurred and included in cost of sales. All sales are presented net of sales taxes, which are excluded from revenue.
|
|
|
|
|
·
|
Licensing Revenue – Revenue from licensing arrangements is recognized when earned, estimable and realizable. The timing of revenue recognition is dependent on the terms of each license agreement and on the timing of sales of licensed products. The Company generally recognizes royalty revenue when it is reported to the Company by its licensees, which is generally one quarter in arrears from the licensees’ sales of licensed products. For licensing fees that are not determined by the licensees’ sales, the Company generally recognizes license fee revenue on a straight-line basis over the life of the license.
|
Advertising and Marketing
Advertising and marketing is expensed as
incurred and is included in selling, general and administrative expenses on the accompanying statement of operations. For the years
ended June 30, 2018 and 2017, advertising expense was $49,656 and $41,712, 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, 2018, 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 4,518,167 shares
of common stock at June 30, 2018. 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 Green Market Europe, S.L. and 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, 2018, the exchange rate between U.S. Dollars and the Euro was USD $1.17 = €1.00, and the weighted average exchange
rate for the period (acquisition date to end of fiscal year) ended June 30, 2018 was USD $1.20 = €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, 2018 and 2017.
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. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and
related disclosures. The Company has not yet selected a transition method, nor has it determined the effect of the standard on
its ongoing financial reporting.
In August 2014, the FASB issued ASU No.
2014-15,
Presentation of Financial Statements (Topic 205) Disclosure of Uncertainties about an Entity’s Ability to
Continue as a Going Concern.
The guidance requires management to perform an evaluation each annual and interim reporting period
of whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability
to continue as a going concern within the one-year period after the date that the financial statements are issued. If such conditions
are identified, the guidance requires an entity to provide certain disclosures about the principal conditions or events that gave
rise to the substantial doubt about the entity’s ability to continue as a going concern, management’s evaluation of
the significance of those conditions or events in relation to the entity’s ability to meet its obligations and management’s
plans to alleviate or mitigate substantial doubt about the entity’s ability to continue as a going concern. The guidance
is effective for the first annual period ending after December 15, 2016 and interim periods thereafter. 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 February 2016, the Financial Accounting
Standards Board (“FASB”) issued an ASU on lease accounting. The ASU requires the lease rights and obligations arising
from lease contracts, including existing and new arrangements, to be recognized as assets and liabilities on the balance sheet.
The ASU is effective for reporting periods beginning after December 15, 2018 with early adoption permitted. While the Company is
still evaluating the ASU, the Company expects the adoption of the ASU to have a material effect on the Company’s financial
condition due to the recognition of the lease rights and obligations as assets and liabilities. The Company does not expect the
ASU to have a material effect on the Company’s results of operations, and the ASU will have no effect on cash flows.
The Company has evaluated all other recent
accounting pronouncements and believes that none of them will have a significant effect on the Company’s financial statement.
NOTE 2 – ENTRY INTO A DEFINITIVE
AGREEMENT
Freedom Leaf Inc. f/k/a Arkadia International,
Inc., a Nevada corporation and the public company (the “Company,” “Public Company,” “we,” “us,”
“our”) entered into a merger agreement with a private Nevada corporation, Freedom Leaf Inc. (the “Private Company”).
Prior to the reverse merger, Richard C. Cowan, the officer and Director of the Public Company, had acquired the majority of its
outstanding common stock. Clifford J. Perry, the Private Company’s sole officer and Director pre-merger (“Perry”),
was the owner of record of all of the outstanding common shares of the Private Company (the “Private Company Stock”)
prior to the merger. Pursuant to the merger, the Private Company was merged into the Public Company, and Perry, the Private Company’s
stockholder, received 83,401.2 shares of Public Company common stock for each share of Private Company stock pre-merger, or 83,401,200
total shares of the Company’s common stock. The closing of the merger was conditioned upon certain, limited customary representations
and warranties, as well as the satisfaction or waiver of specified conditions to closing. As the parties satisfied all of the closing
conditions, we filed Articles of Merger in Nevada consummating the merger, and stockholders of the Private Company pre-merger (Perry)
owned approximately 48.1% of our issued and outstanding common stock post-merger. Following the merger, the Company focused on
pursuing Private Company’s historical businesses. The foregoing description of the merger agreement and transaction does
not purport to be complete and is qualified in its entirety by the merger agreement, a copy of which has been filed as Exhibit
10.1 to our Quarterly Report on Form 10-Q/A for the period ended December 31, 2014, which is incorporated herein by reference.
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 a $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, 2018, 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, 2018, 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
$0.01 per share. This has been reflected as other income (“Licensing income – related party”) in the consolidated
statement of operations and comprehensive loss.
Incubation Agreement
On January 18, 2016, the Company and Plants
to Paper, LLC (“PTP”), a New Jersey limited liability company, executed an Incubation Agreement. PTP owned the patent
pending application 62/245,153 (the “Patent”) with the title being “Rolling Papers and Blunt Wraps made from
100% Marijuana.” PTP agreed to transfer its ownership rights in the patent application to the Company, as well as PTP’s
Medical Marijuana / Cannabis/Hemp Industry Incubator program. The Company agreed to supply management services and to fund the
early stage development of PTP. The Incubation Agreement 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.
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, 2018, there have been no sales or commissions earned.
Equipment Sales Representative Contract
On December 22, 2016, the Company and
NuAxon executed an Equipment Sales Representative Contract. NuAxon is a manufacturer and distributor for extraction equipment.
The contract appoints the Company as NuAxon’s equipment sales representative worldwide. The contract is for a period of
one year and shall automatically renew for successive terms of the same duration. The contract provides a commission for sales
by the Company at various rates ranging from 3% to 10%, dependent on the cumulative annual sales. On March 15, 2017, the Company
entered into an Exclusive Distribution Agreement with NuAxon to sell NuAxon’s CO2 extraction equipment pursuant to which
the Company would be paid increasing commissions depending on gross sales of the equipment. On March 16, 2017, the Company issued
a purchase order (the “Purchase Order”) to NuAxon to purchase extraction equipment for one of the Company’s
customers. As of June 30, 2018, there have been no sales.
NOTE 3 –BUSINESS COMBINATION 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.
Assets acquired, and liabilities assumed, at fair value:
The fair value of the purchase consideration
issued to the sellers of IRIE was allocated to the net tangible assets acquired. We accounted for the acquisition of IRIE 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 $1,455,000. The excess of the aggregate fair value of the net
tangible and intangible assets has been treated as goodwill.
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
|
|
The following presents the pro-forma combined
results of operations of the Company with IRIE as if the entities were combined on July 1, 2017.
|
|
For the
|
|
|
|
Year Ended
|
|
|
|
June 30,
|
|
|
|
2018
|
|
Revenues, net
|
|
$
|
1,629,730
|
|
Net loss allocable to common stockholders
|
|
|
(305,757
|
)
|
Net loss per common share
|
|
$
|
(0.00
|
)
|
Weighted-average number of share outstanding
|
|
|
149,199,226
|
|
Revenue recognized by IRIE from acquisition
through June 30, 2018 was $393,480. The pro-forma results of operations are presented for information purposes only. The pro-forma
results of operations are not intended to present actual results that would have been attained had the acquisitions been completed
as of January 1, 2016 or to project potential operating results as of any future date or for any future periods.
Greenhouse Purchase
The Company, on May 17, 2018, consummated
the acquisition of an existing, approximately 430,000 square foot facility, that has 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 Company intends to retain the predecessor operation’s key employees to maintain the growing facilities.
Management’s goal is for this facility to become a leading greenhouse producer of cannabinoids in Europe. The Company’s
goal is to grow up to two million grams of EU-certified Industrial Hemp in its first year of operations and then to expand significantly
in subsequent years. The Company also expects to utilize this facility to increase its Hemp research, tissue culture and extraction
capabilities in the following years.
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 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 Company intends to retain the predecessor operation’s key employees to maintain the growing facilities.
Management’s goal is for this facility to become a leading greenhouse producer of cannabinoids in Europe. The Company’s
goal is to grow up to two million grams of EU-certified Industrial Hemp in its first year of operations and then to expand significantly
in subsequent years. The Company also expects to utilize this facility to increase its Hemp research, tissue culture and extraction
capabilities in the following years. For accounting purposes, the Company is treating the transaction as an asset purchase
vs. a business combination. The transaction does not meet the standard necessary, per ASC 805-10, for the transaction to
be characterized as a business combination as, among other reasons: the prior business, a poinsettia farm, had been out of
business for a number years; the Company, post-acquisition, converted the assets acquired into a totally different business, and
the Company employed none of the employees of the former business.
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.
The Company is in the process of meeting
international requirements for the complete use of the web sites by the Company. This process is expected to be completed before
the end of fiscal year 2019.
NOTE 4 – GOING CONCERN
The Company has a net loss attributable
to common stockholders for the year ended June 30, 2018 of $4,628,673 and working capital as of June 30, 2018 of $86,285 and has
used cash in operations of $1,100,802 for the year ended June 30, 2018. In addition, as of June 30, 2018, the Company had a stockholders’
equity and accumulated deficit of $3,018,398 and $9,540,976, 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.
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. As of October 15, 2018, there
were no pending or threatened lawsuits.
Lease Commitment
We lease approximately 2,800 square feet
of office space in Las Vegas, Nevada, pursuant to a lease that will expire on April 15, 2019. This facility serves as our corporate
headquarters. After December 31, 2018, the Company has the option to opt out of the lease.
Future minimum lease payments under these
leases are as follows:
2019
|
|
$
|
29,646
|
|
|
|
|
|
|
Total
|
|
$
|
29,646
|
|
Rent expense for the years ended
June 30, 2018 and 2017 was $32,046 and $39,600, respectively.
We also lease approximately 1,777
square feet of office and production space, used by Irie in Oakland, California, pursuant to a lease that will expire June 30,
2019.
Future minimum lease payments under these
leases are as follows:
2019
|
|
$
|
40,700
|
|
|
|
|
|
|
Total
|
|
$
|
40,700
|
|
Rent expense for the years ended June
30, 2018 was $16,564.
NOTE 6 – RELATED PARTIES
Richard Cowan (“Cowan”), a
former Director and officer of the Company, has payables and accruals due to him of $15,485 and $269,225 as of June 30, 2018 and
2017, respectively, 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”),
Chief Executive officer, Chief Financial Officer, and a Director of the Company, has compensation due and other payables and accruals
due to him totaling $32,813 and $133,944 as of June 30, 2018 and 2017, respectively, as reflected on the balance sheet under Accounts
Payable and Accrued Expenses. Imputed interest is immaterial. On July 31, 2017, the Company issued 5,784,061 shares of common stock
to Cliff Perry for accrued compensation of $112,500 owed to him as of June 30, 2017 and recorded a loss on settlement of liabilities
of $130,431.
Raymond P. Medeiros (“Medeiros”),
a Director of the Company, has compensation due and other payables and accruals due to him totaling $63,000 and $52,500 as of
June 30, 2018 and June 30, 2017, respectively, as reflected on the balance sheet under Accounts Payable and Accrued Expenses.
Imputed interest is immaterial. On July 31, 2017, the Company issued 2,699,228 shares of common stock to Raymond Medeiros for
accrued compensation of $52,500 owed to him as of June 30, 2017 and recorded a loss on settlement of liabilities of $60,368.
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 November
10, 2017, the Company sold 967,000 shares of common stock to Pelosi for $14,500, based on a per share price of $0.01499. On 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 – CONVERTIBLE NOTES PAYABLE,
NET OF PREMIUMS AND NOTES PAYABLE
Convertible notes payable, all classified
as current at June 30, 2018, consist of the following:
Convertible notes, net of discounts and notes payable
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
|
|
Principal,
|
|
|
|
|
|
|
Debt
|
|
|
net of
|
|
|
|
|
|
Debt
|
|
|
net of
|
|
|
|
Principal
|
|
|
Discounts
|
|
|
Discounts
|
|
|
Principal
|
|
|
Discounts
|
|
|
Discounts
|
|
Baytown Holdings (b)
|
|
$
|
95,000
|
|
|
$
|
–
|
|
|
|
95,000
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Valencia (c)
|
|
|
4,629,486
|
|
|
|
–
|
|
|
|
4,629,486
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Irie (c)
|
|
|
99,000
|
|
|
|
–
|
|
|
|
99,000
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Pure Energy (a)(b)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
15,475
|
|
|
|
(7,489
|
)
|
|
|
7,986
|
|
Pure Energy (a)(b)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
13,480
|
|
|
|
(5,565
|
)
|
|
|
7,915
|
|
Power Up (a)(b)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
75,000
|
|
|
|
(39,330
|
)
|
|
|
35,670
|
|
Power Up (a)(b)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
38,000
|
|
|
|
(18,893
|
)
|
|
|
19,107
|
|
Total
|
|
$
|
4,832,486
|
|
|
$
|
–
|
|
|
$
|
4,832,486
|
|
|
$
|
141,955
|
|
|
$
|
(71,277
|
)
|
|
$
|
70,678
|
|
Short-term notes payable
|
|
|
(95,000
|
)
|
|
|
–
|
|
|
|
(95,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Current portion of long-term notes payable
|
|
|
(286,575
|
)
|
|
|
–
|
|
|
|
(286,575
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Long-term portion
|
|
$
|
4,441,911
|
|
|
$
|
–
|
|
|
$
|
4,441,911
|
|
|
$
|
141,955
|
|
|
$
|
(71,277
|
)
|
|
$
|
70,678
|
|
Convertible Notes
On July 7, 2015, the Company executed a
convertible promissory note for $5,000 with Bruce Perlowin. The note is for one year, 12% interest rate, and convertible at $0.10
per share. The current price at that date was $0.085, which is less than the conversion price. The stock price for our common stock
as of September 30, 2015 was $0.40. Our common stock is thinly traded therefore our price, as management has determined, is not
indicative of our valuation. In October 2015, the Company issued common stock for services to unrelated parties and the common
stock was values at $0.20, therefore, the $0.20 was used for valuation purposes for this note. A beneficial conversion feature
of $5,000 was recorded and subsequently amortized. The Company has recorded accrued interest of $467 as of June 30, 2018. On April
15, 2016, Mr. Perlowin converted the principal of this promissory note into 50,000 shares of common stock. The accrued interest
was not converted.
On August 12, 2015, the Company executed
a convertible promissory note for $5,000 with Bruce Perlowin. The note is for one year, 12% interest rate, and convertible at $0.10
per share. The current price at that date was $0.10, which is less than the conversion price. The stock price for our common stock
as of September 30, 2015 was $0.40. Our common stock is thinly traded therefore our price, as management has determined, is not
indicative of our valuation. In October 2015, the Company issued common stock for services to unrelated parties and the common
stock was values at $0.20, therefore, the $0.20 was used for valuation purposes for this note. A beneficial conversion feature
of $5,000 was recorded and subsequently amortized. The Company has recorded accrued interest of $408 as of June 30, 2018. On April
15, 2016, Mr. Perlowin converted the principal of this promissory note into 50,000 shares of common stock. The accrued interest
was not converted.
On August 20, 2015, the Company executed
a convertible promissory note for $12,500 with Svetlana Ogorodnikova. The note matures on February 19, 2016, 12% interest rate,
and convertible at $0.10 per share. The current price at that date was $0.085, which is less than the conversion price. The stock
price for our common stock as of December 31, 2015 was $0.40. Our common stock is thinly traded therefore our price, as management
has determined, is not indicative of our valuation. In October 2015, the Company issued common stock for services to unrelated
parties and the common stock was values at $0.20, therefore, the $0.20 was used for valuation purposes for this note. A beneficial
conversion feature of $12,500 was recorded and subsequently amortized. The Company has recorded accrued interest of $986 as of
June 30, 2018. On February 19, 2016, Ms. Ogorodnikova granted the Company an extension on the due date to June 30, 2016. On April
15, 2016, Ms. Ogorodnikova converted the principal of this promissory note into 125,000 shares of common stock. The accrued interest
was not converted.
On November 1, 2016, the Company executed
a collateralized secured promissory note with Eagle Equities, LLC (“Eagle”) for $25,000. The Company netted $23,000
due to legal fees of $2,000. The note has a conversion discount of 45% based on the lowest closing price of the 20 days prior to
conversion. The Company recorded a debt discount of $25,000 and as of December 31, 2017, had recorded $25,000 of amortization.
The note matures on November 1, 2017 and bears interest at 8%. On April 26, 2017, Eagle sold its convertible note to PureEnergy
714 LLC (“PureEnergy”) with no change in terms. As of June 30, 2018, there is $0 of accrued interest. On June 29, 2017,
the Company issued 791,140 shares of common stock to PureEnergy for the conversion of $12,501. On July 19, 2017, the Company issued
748,934 shares of common stock to PureEnergy related to the conversion of $13,481.
On May 23, 2017, the Company executed a
convertible promissory note with PureEnergy for $15,475. The note has a conversion discount of 45% based on the lowest closing
price of the 20 days prior to conversion. The Company recorded a debt discount of $8,481. The note matures on February 23, 2018
and bears interest at 8%. On October 30, 2017, the balance of the note and the accrued interest was converted into 1,006,768 shares
of common stock. See Note 8.
On May 10, 2017, the Company executed a
convertible promissory note with Power Up for $75,000. The note has a conversion discount of 35% based on the lowest closing price
of the 20 days prior to conversion. The note matures on February 23, 2018 and bears interest at 8%. On September 28, 2017, Pure
Energy purchased the May 10, 2017 convertible promissory note between the Company and Power Up. The Power Up convertible promissory
note was for $78,427. The Company and Pure Energy entered into a revised convertible promissory note to replace the Power Up convertible
promissory note as stated below. On November 9, 2017, Pure Energy converted the entire note and accrued interest into 5,764,490
shares of common stock. See Note 8. On January 26, 2018, the Company issued to Pure Energy 1,933,848 shares of common stock in
consideration of its conversion of a second convertible promissory note for $33,842 that the Company issued to Pure Energy
on September 27, 2017 in conjunction with Pure Energy’s payoff of the May 10, 2017 Power Up convertible note.
On June 20, 2017, the Company executed
a convertible promissory note with Power Up for $38,000. The note has a conversion discount of 35% based on the lowest closing
price of the 20 days prior to conversion. The Company recorded a debt discount of $19,611 and as of the date of pay off, had recorded
$6,609 of amortization. The note matures on February 23, 2018 and bears interest at 8%. On December 15, 2017, the principal and
accrued interest was paid in full.
On July 20, 2017, the Company executed
a convertible promissory note with Power Up for $38,000. The note has a conversion discount of 35% based on the lowest closing
price of the 20 days prior to conversion. The Company recorded a debt discount of $14,829 and as of March 31, 2018, had recorded
$7,455 of amortization. The note matures on August 11, 2018 and bears interest at 8%. As of March 31, 2018, there is $0 of accrued
interest. On January 19, 2018, Pure Energy converted into 2,008,740 shares of Company common stock: (i) the principal balance of
the $38,000 convertible promissory note it previously acquired from Power Up and (ii) $2,175 of accrued interest in connection
with that note ($40,175 in total). That note, executed by the Company on July 20, 2017, had a conversion discount of 35% based
on the lowest closing price of the 20 days prior to conversion. In conjunction with its conversion of that note, on January 19,
2018, Pure Energy also received 800,918 shares of common stock – (i) $19,826.19 in conjunction with the settlement amount
owed by the Company to Power Up at the time Pure Energy acquired that note from Power Up in connection with that note, and (ii)
$3,000 as a transaction fee ($22,826.19 in total).
On August 11, 2017, the Company executed
a convertible promissory note with LG Capital (“LG”) for $42,000. The note has a conversion discount of 35% based on
the lowest closing price of the 12 days prior to conversion. On February 1, 2018, the Company paid LG Capital $58,813 to retire
the convertible promissory note it issued to LG Capital on August 11, 2017 for $42,000. The repayment amount included $1,565 of
accrued interest and a payment premium of $15,248.
On September 26, 2017, the Company executed
a convertible promissory note with Power Up for $53,000. The note has a conversion discount of 35% based on the lowest closing
price of the 10 days prior to conversion. On February 8, 2018, the Company paid Power Up $71,913 to retire in full this convertible
note.
On September 27, 2017, the Company executed
a convertible promissory note with Pure Energy for $78,427 to replace the May 10, 2017 convertible note with Power Up, as reflected
above. The note has a conversion discount of 35% based on the lowest closing price of the 12 days prior to conversion. On November
9, 2018, the principal and accrued interest was converted into 5,765,490 shares of common stock. (See Note 12.) In conjunction
with the payoff of the May 10, 2017 Power Up convertible note, the Company incurred a prepayment penalty of $28,496, which Pure
Energy paid to Power Up. The Company issued a second convertible promissory note to Pure Energy, in consideration of its payment
to Power Up, for $33,842, which included the prepayment penalty and legal fees of $5,346. On January 26, 2018, the Company issued
to Pure Energy 1,933,848 shares of common stock in consideration of its conversion of a second convertible promissory note for
$33,842 (see Note 12).
On January 17, 2018, Pure Energy acquired
from Power Up the $38,000 note executed by the Company on July 20, 2017. On January 19, 2018, Pure Energy converted into 2,008,740
shares of Company common stock: (i) the principal balance of the $38,000 convertible promissory note it acquired from Power Up
on January 17, 2018 and (ii) $2,175 of accrued interest in connection with that note ($40,175 in total) (see Note 12).
Non-convertible Notes
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. Subsequent
to year end, 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 note is due on June 30, 2023. The principal balance as of June 30, 2018, was $4,348,911.
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.
NOTE 8 – 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
75,000,000 shares of common stock, par value $0.001 per share. On January 21, 2015, the Company increased its authorized capital
to 500,000,000 shares of common stock. Each outstanding share of common stock entitles the holder to one vote per share on all
matters submitted to a stockholder vote. All shares of common stock are non-assessable and non-cumulative, with no pre-emptive
rights.
The Company made the following issuances during the year ended
June 30, 2018 of shares recorded as issuable as of June 30, 2017, as disclosed in the June 30, 2017 subsequent events:
177,032 shares of common stock
to Rene Velez
200,000 shares of common stock
to Jason Edwards
596,163 shares of common stock
to Michael Ostrander
400,000 shares of common stock
to Jason Edwards
120,000 shares of common stock
to a consultant of the Company
300,000 shares of common stock
to Michael Ostrander
On June 30, 2017, 109,308,600 shares were
outstanding. The following shares were issued from July 1, 2017 through June 30, 2018:
On July 19, 2017, the Company issued 748,934
shares of common stock to PureEnergy related to the conversion of $13,481 of a convertible promissory note.
On July 31, 2017, the Company issued 5,784,061
shares of common stock to Cliff Perry for accrued compensation of $112,500. See Note 6.
On July 31, 2017, the Company issued 2,699,228
shares of common stock to Raymond Medeiros for accrued compensation of $52,500. See Note 6.
On August 23, 2017, the Company issued
500,000 shares of common stock to Frank Dobrucki for services valued at $40,750.
On August 14, 2017, the Company issued
500,000 shares of common stock to Nuaxon Bioscience as part of the agreement for exclusive rights to market and sell their equipment.
The shares were valued at $22,000.
On August 17, 2017, the Company issued
345,451 shares of common stock to Lakeport Business Services, Inc. for accounts payable $9,450. The shares were valued at $24,182.
On August 25, 2017, the Company issued
600,000 shares of common stock to Christopher Thompson as a bonus in August 2017. The shares were valued at $48,900.
On August 25, 2017, the Company issued
550,000 shares of common stock to Joshua Halford for services in August 2017. The shares were valued at $44,825.
On August 28, 2017, the Company issued
1,061,500 shares of common stock to Christopher Sloan for services in August 2017 (661,500 shares) and for accrued expenses of
$23,075 (400,000 shares of common stock). The shares were valued at $137,535.
On August 28, 2017, the Company issued
530,303 shares of common stock to Neil Dutson for services valued at $37,203.
On August 29, 2017, the Company issued
100,000 shares of common stock to Marc Hatch for services valued at $7,430.
On August 29, 2017, the Company issued
100,000 shares of common stock to Marc Hatch for services valued at $7,430.
On October 6, 2017, the Company issued
400,000 shares of common stock to Jason Edwards for services in October 2017 valued at $16,280.
On October 6, 2017, the Company issued
600,000 shares of common stock to Michael Ostrander for services in October 2017 valued at $24,420.
On October 7, 2017, due to the agreement
with Valencia (see Note 2), the Company owed Valencia an additional 4,142,857 shares of common stock, which were recorded as issuable.
The Company recorded a contingent liability of $174,000 associated with this obligation. On January 29, 2018, because of the increase
of the Company’s common stock, Valencia agreed to the accept the initially issued 3,000,000 shares of common stock as satisfaction
of the obligation to pay to Valencia in connection with the Company’s May 30, 2017 Asset Purchase Agreement with Valencia
to acquire certain of its assets without the need to issue additional true-up shares of the Company’s common stock. The January
29, 2018 agreement relieved the Company of the contingent liability of issuing additional shares. See Note 17.
On October 23, 2017, the Company issued
1,001,250 shares of common stock to Timothy Puetz for services in October 2017 valued at $30,038.
On October 23, 2017, the Company issued
1,000,000 shares of common stock to Breadfruit Tree, Inc. for inventory received in October 2017 valued at $27,200.
On October 26, 2017, the Company issued
255,000 shares of common stock to Ronald Voight for services in October 2017 valued at $7,650.
On October 28, 2017, the Company issued
273,333 shares of common stock to Lakeport Business Services, Inc. for services in October 2017 valued at $8,200.
On October 28, 2017, the Company issued
30,000 shares to Neil Dutson for leasehold improvement performed in October 2017 valued at $900.
On October 30, 2017, the Company issued
122,500 shares of common stock to legal counsel for services in October 2017 valued at $8,575.
On October 31, 2017, the Company issued
850,000 shares of common stock to Paul F. Pelosi, Jr. (“Pelosi”) valued at $26,285, 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 issuance. On February 12, 2018, the Company issued 1,250,000 warrants for common stock
to Paul Pelosi in satisfaction of this obligation (see Note 13). The warrants have an exercise price of $0.04 and expire August
11, 2018.
On October 25, 2017, the Company issued
250,000 shares of common stock to Frank Dobrucki for services in October 2017 valued at $7,725.
On November 2, 2017, the Company issued
250,000 shares of common stock to Victor Park, a vendor, for services in October 2017 valued at $6,800.
On November 3, 2017, the Company issued
1,006,768 shares of common stock to PureEnergy for the conversion of $15,475 of a convertible promissory note (see Note 11).
On November 9, 2017, the Company issued
5,764,490 shares of common stock to Pure Energy for the conversion of $80,077 of principal and accrued interest of a convertible
promissory note (see Note 11).
On November 9, 2017, the Company sold 4,785,459
shares of common Stock to Pure Energy for $83,745.53, based on a per share price of $0.0175.
On November 10, 2017, the Company sold
967,000 shares of common stock to Pelosi for $14,500, based on a per share price of $0.01499.
On November 28, 2017, the Company issued
730,769 shares of common Stock to Michael Ostrander for services in October 2017 and November 2017. The shares for October 2017,
which were effective October 1, 2017, were 500,000, whereas the shares for November 2017, which were effective November 1, 2017,
were 230,769. The shares were valued at $40,119.
On November 30, 2017, the Company recorded
600,000 shares of common stock as issuable to Alan Stone & Co. (“Stone”) in connection with various consulting
services provided in 2017. The shares were valued at $29,400.
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. In partial consideration for
the acquisition, the Company paid to GME’s seller 4,220,000 shares of the Company’s common stock valued at $295,400.
On January 15, 2018, the Company issued
to Stone 600,000 shares of common stock which were recorded as issuable as of December 31, 2017.
On January 17, 2018, Pure Energy acquired
526,315 shares of the Company’s common stock for $25,000.
On January 18, 2018, in connection with
the Company’s appointment of Richard Groberg (“Groberg”) as its Chief Financial Officer to serve for an initial,
two-year term, the Company (i) issued Groberg’s company, RSGroberg Consulting, LLC, 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 common stock received was valued at $81,200 and $60,900, respectively.
On January 19, 2018, Pure Energy converted
into 2,008,740 shares of Company common stock: (i) the principal balance of the $38,000 convertible promissory note it acquired
from Power Up on January 17, 2018 and (ii) $2,175 of accrued interest in connection with that note ($40,175 in total). The Power
Up note, executed by the Company on July 20, 2017, had a conversion discount of 35% based on the lowest closing price of the 20
days prior to conversion. The common stock received was valued at $190,027 and resulted in the Company recording a loss of $157,340.
On January 19, 2018, in conjunction with
its conversion of that note, Pure Energy received 800,918 shares of common stock – (i) $19,826.19 in conjunction with the
settlement amount owed by the Company to Power Up at the time Pure Energy acquired that note from Power Up in connection with that
note, and (ii) $3,000 as a transaction fee ($22,826 in total). The common stock received was valued at $89,703 and resulted in
the Company recording a loss of $66,877.
On January 22, 2018, the Company issued
60,616 shares of common stock to Joseph Gurreri, an employee, in consideration of $8,550 of accrued wages. The common stock received
had a value of $8,850
On January 22, 2018, Pelosi purchased 1,050,000
shares of common stock for $21,000.
On January 22, 2018, the Company issued
82,192 shares of common stock to Steven Bloom in connection with consulting services provided in 2017 totaling $12,000.
On January 22, 2018, the Company issued
16,952 shares of common stock to the Company’s legal counsel, in connection with services rendered totaling $2,475.
On January 26, 2018, the Company issued
to Pure Energy 1,933,848 shares of common stock in consideration of its conversion of a second convertible promissory note for
$33,842 (see Note 11) that the Company issued to Pure Energy on September 27, 2017 in conjunction with Pure Energy’s payoff
of the May 10, 2017 Power Up convertible note. The common stock received was valued at $580,154 and resulted in the Company recording
a loss of $558,722.
On January 22, 2018, the Company issued
Reliable Steel 229,671 shares of common stock for a portion of its debt of $33,532.
On January 22, 2018, the Company issued
226,497 shares of common stock to Christopher Thompson, an employee, in connection with services provided in 2017 valued at $33,069.
On January 5, 2018 and February, respectively
the Company issued to Michael Ostrander: (i) 150,000 shares of common stock for services performed in December 2017 valued at $10,500,
and (ii) 56,930 shares of common stock for services performed in January 2018 valued at $16,794.
On January 31, 2018, the Company issued
to Stone 600,000 shares of common stock which were recorded as issuable as of December 31, 2017.
On January 31, 2018, the Company issued
122,466 shares of common stock to Christopher Sloan, a former employee of the Company, in connection with services rendered by
him to the Company in 2017 totaling $39,740.
On January 31, 2018, the Company issued
47,945 shares of common Stock to Lakeport Business Services, Inc. in connection with services rendered to the Company in 2018 valued
at $7,000. The stock was valued at $15,558 based on the current stock price.
On January 31, 2018, Pure Energy purchased
838,126 shares of common stock for $83,813.
On February 7, 2018, Neil Dutson acquired 624,000 shares of
common stock for $78,000.
On February 7, 2018, Weintraub Law Group,
LLC (“Weintraub”) surrendered 52,779 warrants at a value of $0.3048 per share, $16,090 in total, to effect the cashless
exercise of warrants to acquire 215,378 shares of common stock at $0.06 per share. The Company had issued to Weintraub 268,167
warrants to acquire common stock and 268,167 shares of common stock on October 17, 2016 for the settlement of payables of $15,065.
On February 9, 2018, Douglas Montgomery,
Greg Montgomery and Lesley Montgomery acquired from the Company 160,000, 80,000 and 160,000, respectively, shares of the Company’s
common stock, in each case for a purchase price of $0.125 per share, for total proceeds of $50,000.
On February 21, 2018, the Company issued
83,760 shares of common Stock to Lakeport Business Services, Inc. in connection with services rendered to the Company in 2018 valued
at 18,000 based on the current stock price.
On March 6, 2018 Vincent Moreno acquired
500,000 shares of common stock for $50,000.
On March 7, 2018, Neil Dutson acquired 909,090 shares of common
stock for $100,000.
On March 7, 2018, Esteemed Consultants
acquired 909,091 shares of common stock for $100,000.
On March 14, 2018, Rex Anthony Carrol acquired
272,727 shares of common stock for $30,000.
On March 15, 2018, Vision Concepts acquired
74,074 shares for $10,000.
In connection
with its April 16, 2018 of Irie, effective April 1, 2018, the Company issued 8,118,886 shares of the Company’s common stock,
valued at $998,62320, to Irie’s former owners. 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 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. In October 2018, the shares were released.
On June 11, 2018, JRKH Investments, LLC
purchased 54,745 shares of common stock of the Company for a purchase price of $0.091 per share, for total proceeds of $5,000.
On April 2, 2018, the Company retained
KSW Group, LLC as an independent contractor to render various services related to launching and managing various eCommerce initiatives
for the Company. In connection with that appointment, the Company: (i) agreed to pay KSW monthly sales commissions based on net
revenues generated by KSW, and (ii) issued to KSW 450,000 shares of the Company’s Rule 144 Common stock. The closing price
of the Company’s common stock on the issuance date of April 2, 2018 was $0.135 per share.
On April 3, 2018, Esteemed Consultants,
Inc. acquired from the Company 1,000,000 shares of the Company’s common stock for a purchase price of $0.1775 per share,
for total cash proceeds of $75,000.
On April 11, 2018, Kahn Family Partnership
purchased 4,444,444 shares of common stock of the Company for a purchase price of $0.09 per share, for total proceeds of $400,000.
On that date, the Company also issued to Kahn Family Partnership a warrant to acquire 4,444,444 shares of common stock at an exercise
price of $0.13 per share. The warrant expires on April 11, 2020.
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 April 30, 2018, with an effective date
of April 1, 2018, the Company entered into separate consulting agreements with Karen Lane and Ricky Potts, each of whom were owners
of and senior executives for Irie. Pursuant to these two agreements, each agreed to continue to provide senior management services
relating to the operation of Irie under the ownership of the Company for at least nine months. In connection with these two agreements,
the Company granted to each 500,000 shares of common stock of the Company, vesting monthly over a period of nine months, with the
vesting beginning on the effective date. The shares were valued at $61,500 for each based on the closing price of the stock on
the most recent trading day prior to April 1, 2018. The Company also agreed to a total monthly compensation to each of $4,000 per
month, payable using the Company’s common stock. The determination of the number of shares of stock will be calculated monthly
based on the average of the OTC closing price based on the last five trading days of each month, as applicable. On June 30, 2018,
the Company issued to each of Karen Lane and Ricky Potts 67,545 shares of common stock, 135,090 shares in total, in connection
with each’s engagement to manage Irie in consideration for which each agreed to monthly compensation to each of $4,000 payable
at the end of each calendar quarter in the Company’s common stock with the determination of the number of shares of stock
calculated monthly based on the average of the OTC closing price based on the last five day of each month shares are earned.
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 May 14, 2018, the Company sold 1,250,000
shares to each Caesar Capital Group (“Caesar”) and Joseph W. and Patricia G Abrams Family Trust dtd 3/95 (“Abrams”),
2,500,000 shares in total, for $200,000 in total consideration, based on a per share price of $0.08.
On May 14, 2018, the Company issued to
Caesar and Abrams 6,000,000 shares of the Company’s common stock (based on a value of $0.17 per share, or $995,400) in exchange
for a 25% ownership interest in
Cicero Transact Group, LLC (“Cicero”)
,
a company that is launching an innovative, online business-to-business deal platform. The Company intends to work with Cicero in
regard to opportunities in the cannabis industry.
Effective on June 1, 2018, the Company
consummated a termination agreement with GME’s sellers in connection with GME’s sellers committed to return to the
Company the 4,220,000 shares it previously issued to the sellers. Such shares have been cancelled.
On June 21, 2018, the Company issued 312,500
of the Company’s common stock to Joseph Abrams, an individual acting as an independent contractor, to serve as a member of
the Company’s Advisory. Such shares, valued at $0.16 per share or $54,844 in total, shall vest monthly over one year.
On June 21, 2018, the Company issued 1,600,000
shares of common stock, at a value of $0.17 per share, or $264,160 subject to a leak-out agreement and a price adjustment if the
average trading price of the Company’s common stock for the five days subsequent to the six-month anniversary of the consummation
of this transaction does not exceed $0.25 per share, in connection with its acquisition of intellectual property relating (including
an underlying patent pending application) to a proprietary formula for the compounding of a nutraceutical non-liquid to inhibit
the accumulation of LDL cholesterol (and an underlying patent-pending application regarding the formula) developed by Healthy Discovery
Associates Corp., a Florida corporation.
On June 30, 2018, the Company issued to
Kahn Family Trust 160,000 shares of common stock in connection with services rendered in June 2018 valued at $27,008.
On June 30, 2018 the Company issued to
each of Harvey Katz, Warm Family Revocable Trust and The Allan S. Kaplan Revocable Trust 50,000 shares of the Company's common
stock, 150,000 shares in total, in connection with the appointment of each to the Company's advisory Board. Recipient Warm Family
Revocable Trust directed the issuance of its 50,000 shares to Harvey Katz. Each issuance was valued at $8,440 based on the $0.17
closing price of the stock on June 29, 2018.
On June 30, 2017, the Company issued 15,125
shares of common stock at $0.10 per share in consideration of $2,042 in compensation earned through March 31, 2018 to Marianne
Luzzo, a consultant to the Company.
On June 30, 2017, the Company issued 38,050
shares of common stock at $0.10 per share in consideration of $5,137 in compensation earned through March 31, 2018 to Silkia Ostrander,
a consultant to the Company.
On June 30, 2017 the Company issued 70,446
shares of common stock to Enrique Sempere, a consultant assisting the Company with its greenhouse operations in Valencia, for which
he agreed to quarterly compensation of $12,500 payable at the end of each calendar quarter in the Company’s common stock
and with the determination of the number of shares of stock calculated monthly based on the average of the OTC closing price based
on the last five day of each month shares are earned.
On June 30, 2018, the Company issued 500,000
shares of Common stock to Rodrigo Chavez, in connection with his April 1, 2018 engagement with the Company as a consultant. The
shares vest 1/12 per month with the first vesting of April 30, 2018. The shares were valued at $67,500 based the closing price
of $0.135 on the most recent trading day prior to April 1, 2018. On the same day the Company also issued 70,446 shares of common
stock to Chavez valued at $12,505 in connection with April, May and June services rendered pursuant to his consulting engagement,
for which he also agreed to monthly compensation of $4,167 in common stock with the determination of the number of shares of stock
calculated monthly based on the average of the OTC closing price based on the last five day of each month shares are earned.
On June 30, 2018, the Company issued 300,000
shares of common stock at $0.1688 to Ozzie Guzman in connection with his engagement by the Company in a consulting role valued
at $50,640.
On June 30, 2018, the Company issued 16,907
shares of common stock at $0.1688 to Trevor Hill, a consultant and former owner of Irie, in consideration of his services to the
Company in those months valued at $1,000 per month, or $3,000 in total.
On June 30, 2018, the Company issued 20,834
shares at $0.135 of common stock to Chris Thompson in consideration of consulting services he performed during the Company’s
third fiscal quarter; (ii) 64,300 shares of common stock to Marianne Luzzo in consideration of consulting services she performed
during the Company’s fourth fiscal quarter, and (iii) 53,684 shares of common stock to Silkia Ostrander in consideration
of consulting services she performed during the Company’s fourth fiscal quarter valued at $9,907.
As of June 30, 2018, 185,369,365 shares
of common stock were outstanding.
Warrants
The following warrants were exercised during
the fiscal year:
On February 7, 2018, Weintraub Law Group,
LLC (“Weintraub”) surrendered 52,779 warrants at a value of $0.3048 per share, $16,090 in total, to effect the cashless
exercise of warrants to acquire 215,378 shares of common stock at $0.06 per share. The Company had issued to Weintraub 268,167
warrants to acquire common stock and 268,167 shares of common stock on October 17, 2016 for the settlement of payables of $15,065.
The following warrants were cancelled during the fiscal year:
On July 27, 2018, the Company agreed to
sell to Paul T. Pelosi, Jr. 2,200,000 shares of the Company’s 144 common stock for the price of $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.
The following warrants expired during the fiscal year:
A warrant to acquire 1,000,000 shares of common stock at $0.05
per share, issued in 2016 to Freedom Leaf Iberia, expired unexercised.
A warrant to acquire 1,000,00 shares of common stock at $0.05
per share, issued in 2016 to Freedom Leaf Iberia, expired unexercised.
For the year ended June 30, 2018,
the Company issued the following warrants to acquire common stock:
On February 12, 2018, the Company issued
1,250,000 warrants for common stock to Paul Pelosi in lieu of a prior agreement for the Company to issue to Pelosi 1,250,000 options
(see Note 12). The warrants have an exercise price of $0.04 and expire August 11, 2018.
On April 11, 2018, the Company also issued
to Kahn Family Partnership a warrant to acquire 4,444,444 shares of common stock at an exercise price of $0.13 per share. The warrant
expires on April 11, 2020.
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 an
eighteen-month warrant to acquire 500,000 shares of common stock at an exercise price of $0.10 per share.
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 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 May 15, 2018, the Company issued to
Richard Cowan, a former director and related party, a warrant, exercisable between July 1, 2018 and November 15, 2019 at an exercise
price of $0.01 per share, into 1,000,000 shares of Company common stock in connection with: (i) the Company’s issuance 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 consideration of such license and (ii) Cowan’s cancellation
of $240,000 of payables owed to him by the Company.
As of June 30, 2018, warrants to acquire 7,494,444 shares of
common stock were outstanding.
|
|
June 30, 2018
|
|
|
June 30 2017
|
|
|
Warrants Inception Date
|
|
Expected volatility
|
|
|
260%
|
|
|
|
231%
|
|
|
|
193% - 261%
|
|
Expected dividends
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Expected term
|
|
|
2 - 9 months
|
|
|
|
21 months
|
|
|
|
0.25 - 1.76
|
|
Risk-free interest rate
|
|
|
1.93%
|
|
|
|
1.15%
|
|
|
|
0.98% - 1.82%
|
|
A summary of the status of the options
and warrants granted as at June 30, 2017 and 2016, and changes during the years then ended is presented below:
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
|
|
Number of
|
|
|
Price per
|
|
|
Life
|
|
|
|
|
Warrants
|
|
|
Share
|
|
|
(Years)
|
|
|
Outstanding at June 30, 2017
|
|
|
|
4,618,167
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
7,694,444
|
|
|
$
|
0.13
|
|
|
|
|
|
|
Exercised
|
|
|
|
(268,167
|
)
|
|
$
|
0.06
|
|
|
|
|
|
|
Cancelled
|
|
|
|
(3,250,000
|
)
|
|
$
|
0.05
|
|
|
|
|
|
|
Outstanding at June 30, 2018
|
|
|
|
8,794,444
|
|
|
$
|
0.12
|
|
|
|
1.53
|
|
|
Exercisable at June 30, 2018
|
|
|
|
7,794,444
|
|
|
$
|
0.10
|
|
|
|
1.73
|
|
A summary of the status of the warrants outstanding at
June 30, 2018 is presented below:
Range of Exercise Prices
|
|
Number Outstanding
|
|
Weighted-Average Remaining Contractual Life
|
|
Number Exercisable
|
|
Weighted-Average Exercise Price
|
|
|
|
|
|
|
|
|
|
$0.01 – $0.09
|
|
2,200,000
|
|
1.89 years
|
|
2,200,000
|
|
$ 0.05
|
$0.01 – $0.09
|
|
5,594,444
|
|
1.66 years
|
|
5,594,444
|
|
$ 0.12
|
$0.01 – $0.09
|
|
1,000,000
|
|
–
|
|
–
|
|
–
|
|
|
|
|
|
|
|
|
|
$0.01 – $0.29
|
|
8,794,444
|
|
1.53 years
|
|
7,794,444
|
|
$ 0.10
|
Stock Option Plan
On June 27, 2016, the Board of Directors
approved the 2016 Stock Option Plan which has reserved 10,000,000 shares of common stock.
NOTE 9 – REVENUE
CLASSES
Selected financial information for the
Company’s operating revenue classes as of June 30, 2018 and 2017, are as follows:
|
|
For the years ended
|
|
Revenues:
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Magazine related
|
|
$
|
9,484
|
|
|
$
|
39,161
|
|
Referral fees
|
|
|
–
|
|
|
|
10,054
|
|
Licensing fees
|
|
|
–
|
|
|
|
750,000
|
|
Product sales
|
|
|
401,788
|
|
|
|
–
|
|
Equipment sales commissions
|
|
|
–
|
|
|
|
18,242
|
|
Total
|
|
$
|
411,272
|
|
|
$
|
817,457
|
|
|
|
For the years ended
|
|
Direct costs of revenue:
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Magazine related
|
|
$
|
89,518
|
|
|
$
|
124,290
|
|
Referral fees
|
|
|
–
|
|
|
|
–
|
|
Licensing fees
|
|
|
–
|
|
|
|
–
|
|
Product sales
|
|
|
211,695
|
|
|
|
–
|
|
Equipment sales commissions
|
|
|
–
|
|
|
|
–
|
|
Total
|
|
$
|
311,213
|
|
|
$
|
124,290
|
|
The Company’s four revenue classes
are magazine related, referral fees, licensing fees (see Note 2), product sales and equipment sales commissions (see Note 2).
NOTE 10 – INCOME TAX
As of June 30, 2018, and 2017, the Company
has net operating loss carry forwards of $4,594,669 and $3,196,453, respectively. The carry forwards expire through the year 2038.
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 2018 and 34% to loss before taxes for fiscal year 2017), as follows:
|
|
For the Years Ended
|
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Tax expense (benefit) at the statutory rate
|
|
$
|
972,021
|
|
|
$
|
(309,621
|
)
|
State income taxes, net of federal income tax benefit
|
|
|
–
|
|
|
|
(134
|
)
|
Change in valuation allowance
|
|
|
(972,021
|
)
|
|
|
309,755
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
–
|
|
|
$
|
–
|
|
The tax effects of the temporary differences
between reportable financial statement income and taxable income are recognized as deferred tax assets and liabilities.
The tax years 2014 through 2018 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, 2018 and 2017, respectively, are as follows:
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
1,398,216
|
|
|
$
|
1,073,183
|
|
Timing differences
|
|
|
906,968
|
|
|
|
908,366
|
|
Total gross deferred tax assets
|
|
|
2,305,184
|
|
|
|
1,981,549
|
|
Less: Deferred tax asset valuation allowance
|
|
|
(2,305,184
|
)
|
|
|
(1,981,549
|
)
|
|
|
|
|
|
|
|
|
|
Total net deferred taxes
|
|
$
|
–
|
|
|
$
|
–
|
|
In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not
be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in making this assessment.
Because of the historical earnings
history of the Company, the net deferred tax assets for 2018 were fully offset by a 100% valuation allowance. The valuation allowance
for the remaining net deferred tax assets was $2,305,184 and $1,981,549 as of June 30, 2018 and 2017, respectively.
NOTE 11 – 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, 2018. There have been
no losses in these accounts through June 30, 2018.
Concentration of Revenue
In 2018, the Company had six customers
that made up 64.9% or more of its revenue. In 2017, the Company had three customers that made up 90.3% of its revenue.
Concentration of Supplier
The Company does not rely on any particular
suppliers for its services.
Concentration of Intellectual Property
The Company owns or has filed for the trademarks
“Freedom Leaf,” “Hemp Inspired,” “Cannabizu,” and “Cannabiz” as filed with the
United States Patent and Trademark Office. The Company has filed for “Freedom Leaf” in Jamaica and Uruguay.
NOTE 12 – OTHER RECEIVABLES
The Company has three licensing agreements
with the following: FLNL, FLI and BBDHS (see Note 2). The net present value, per entity, as would be recorded in Other Receivables,
was written off in fiscal year 2018.
NOTE 13 – INTANGIBLE ASSETS
Intangible assets at June 30, 2018 and
2017 consisted of the following:
|
|
June 30,
2018
|
|
|
June 30,
2017
|
|
Websites and other intangible assets
|
|
$
|
519,923
|
|
|
$
|
12,245
|
|
Trademarks and trade names
|
|
|
342,682
|
|
|
|
–
|
|
Customer relationships
|
|
|
712,000
|
|
|
|
–
|
|
Patents and intellectual property
|
|
|
264,160
|
|
|
|
–
|
|
Total intangible assets
|
|
|
1,838,765
|
|
|
|
12,245
|
|
Accumulated amortization
|
|
|
(316,191
|
)
|
|
|
(1,425
|
)
|
Intangible assets, net
|
|
$
|
1,522,574
|
|
|
$
|
10,820
|
|
The amortization expense for the years ended August 31,
2018 and 2017, was $332,964 and $741, respectively.
The following table presents the amortization for the next five
years:
2018
|
|
$
|
691,788
|
|
2019
|
|
|
477,884
|
|
2020
|
|
|
148,603
|
|
2021
|
|
|
89,165
|
|
2022 and thereafter
|
|
|
115,134
|
|
Total
|
|
$
|
1,522,574
|
|
NOTE 14 – DERIVATIVES
Embedded Conversion Option Derivatives
Due to the conversion terms of certain
promissory notes (see Note 7), the embedded conversion options met the criteria to be bifurcated and presented as derivative liabilities.
The Company calculated the estimated fair values of the liabilities for embedded conversion option derivative instruments at the
original note inception date and as of June 30, 2018 using the Black-Scholes option pricing model using the share prices of the
Company’s stock on the dates of valuation and using the following ranges for volatility, expected term and the risk-free
interest rate at each respective valuation date, no dividend has been assumed for any of the periods:
|
|
Note Inception
Date
|
|
|
June 30,
2018
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
170% - 232%
|
|
|
|
0
%
|
|
Expected Term
|
|
0.75 - 0.83 years
|
|
|
0 years
|
|
Risk Free Interest Rate
|
|
|
1.07% - 1.18%
|
|
|
|
0.00%
|
|
The following reflects the initial fair
value on the note inception date and changes in fair value through June 30, 2018:
Note inception date fair value allocated to debt discount
|
|
$
|
122,500
|
|
Change in fair value in 2016
|
|
|
(122,500
|
)
|
Embedded conversion option derivative liability fair value on June 30, 2016
|
|
|
–
|
|
Note inception date fair value allocated to debt discount
|
|
|
163,000
|
|
Note modifications adjustment
|
|
|
(54,927
|
)
|
Change in fair value in 2017
|
|
|
(55,316
|
)
|
Embedded conversion option derivative liability fair value on June 30, 2017
|
|
|
52,757
|
|
Note inception date fair value allocated to debt discount
|
|
|
118,228
|
|
Change in fair value in 2018
|
|
|
(170,985
|
)
|
Embedded conversion option derivative liability fair value on June 30, 2018
|
|
$
|
–
|
|
NOTE 15 – INVENTORY
Inventories at June 30, 2018 and 2017 consisted
of the following:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Work in process
|
|
$
|
126,047
|
|
|
$
|
–
|
|
Finished goods
|
|
|
111,681
|
|
|
|
–
|
|
Allowance for inventory obsolescence
|
|
|
(36,039
|
)
|
|
|
–
|
|
Total inventory
|
|
$
|
201,689
|
|
|
$
|
–
|
|
NOTE 16 – PROPERTY AND EQUIPMENT
Property and equipment June 30, 2018 and 2017 consisted of
the following:
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Property and equipment
|
|
$
|
1,874,480
|
|
|
$
|
–
|
|
Furniture and office equipment
|
|
|
173,500
|
|
|
|
–
|
|
Land
|
|
|
630,805
|
|
|
|
–
|
|
Building
|
|
|
2,170,963
|
|
|
|
–
|
|
Total fixed assets
|
|
|
4,849,748
|
|
|
|
–
|
|
Accumulated depreciation
|
|
|
(63,698
|
)
|
|
|
–
|
|
Total fixed assets, net
|
|
$
|
4,786,050
|
|
|
$
|
–
|
|
Depreciation expense for the years ended June 30, 2018 and 2017
was $63,698 and $-0-, respectively.
NOTE 17 – 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 $995,400
and $0 at June 30, 2018 and 2017, 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. Its formal development efforts commenced in July 2018.
See Notes 8 and 18.
NOTE 18 – 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 July 12, 2018, the Company sold 560,000 shares of common
stock to Vista Capital Investment, LLC at a per share price of $0.125, or total proceeds of $70,000.
On July 16, 2018, the Company issued 33,085 shares of common
stock (vesting 1/12 per month with first vesting on July 31, 2018), at an aggregate value of $5,000 to Laurence Ruhe in partial
consideration of his employment with the Company.
On July 18, 2018, the Company issued 40,178
shares of S-8 common stock valued at that day’s closing price of $0.129425 to Lakeport Business Services in consideration
for accounting services.
On July 2, 2018 the Company issued 240,00 shares of common stock
valued at $36,000 based on the closing price on that day of $0.15 and vesting 1/12 per month with first vesting on July 31, 2018,
to Richard Bolandz in connection with his consulting engagement with the Company.
The Company, on July 15, 2108 sold 1,500,000 shares of the Company’s
common stock to Neil Dutson at $0.1166 per share for which he: (i) paid the Company $50,000 in cash and (ii) granted to the Company
of an option on the 5-acre property in North Vegas valued at $125,000. If exercised, the option, exercisable for four months, will
apply toward a down payment total of $625,000 toward the total purchase price of $1,625,000 to acquire a parcel of land in North
Las Vegas that the Company seeks to acquire and build out for various operating and corporate uses. In connection with the exercise
of the option and purchase of the land, Dutson has agreed to hold a mortgage of $1,000,000 million payable in eight quarterly installments
of principal plus interest at 8.0%, in either (at the Company’s option): (i) cash or (ii) Company common stock (at the lower
of: (a) VWAP for prior 5 days or (b) $0.25).
On July 27, 2018, the Company sold 2,200,000 shares of common
stock for the price of $38,500, $0.0175 per share to Paul T. Pelosi Jr in partial consideration for which Pelosi: (i) cancelled
and returned to the Company a Warrant previously issued to him and exercisable into 1,250,000 shares of Company common stock at
$0.04 per share and (ii) permitted the cancellation of the Company’s obligation to issue to him 850,000 shares of Company
common stock originally granted to him in connection with his appointment as the Company’s Board Chairman on October 31,
2017.
On July 17, 2018, the Company sold 100,000 shares, 200,000 shares
in total, for the total price of $25,000, $0.125 per share, to each of Messers. Michael Woloshin & Joseph Abrams.
On July 26, 2018, the Company issued 3,000,000
Shares of the common stock valued at $750,000, or $0.25 cents per share with a true-up in six months, to Messers. Michael Woloshin
& 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 @ $375,00. In addition to its ownership interest
in Cicero Platform Group LLC, the Company will receive a minimum of 1,000,000 tokens or 50% of the tokens awarded to the Cicero
Platform Group LLC, the expectation is FL will receive from 1.0 to 3.0 million tokens. FL will also receive 50% of any
transaction fees of the purchase of tokens. Other products and services may be added to the company. The Company intends
to use the tokens to create contests, incentives for selling different products. As with the purchase of 25% of Cicero Transact
Group LLC, the Company is not obligated to invest any cash for operating or development costs.
On July 26, 2018, the Company acquired
100% of the membership interests of Tierra Science Global, LLC (“Tierra Science Global”), 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. Tierra formed in August of 2017has generated sales during calendar 2018 to-date of approximately $400,000.
The Company intends to expand Tierra’s product offering to include various cannabidiol products branded as “powered
by Freedom Leaf.
On August 2, 2018, the Company issued 35,550
shares of common stock at an agreed price per share of $0.10 per share, to Jonathan Rathmann in consideration of $3,550 of services
provided.
On August 3, 2018 the Company sold 121,212
shares of common stock to Robbie Rosenfeld at $0 .0825 per share, or $10,000 in total.
On August 3, 2018 the Company sold 121,212
shares of common stock to Karen Lane at $0 .0825 per share, or $10,000 in total.
On July 31, 2018, the Company issued 41,855
shares of common stock at a price per share of $0.119, based on the average closing price the last five trading days of July, in
consideration of consulting services provided by Richard Bolandz valued at $5,000.
On July 31, 2018, the company issued 406,393
shares of common stock, at a price per share of $0.119, based on the average closing price the last five trading days of July,
to Reliable Steel in consideration of open invoices from services provided through calendar 2018 to date totaling $48,360.79.
On July 30, 2018, the Company issued 8,403
shares of common stock at prices ranging from $0.163 to $0.179, based on the average closing price the last five days of July 2018
to Trevor Hill, a consultant and former owner of Irie, in consideration of his services to the Company in July valued at $1,000
per month.
On August 14, 2018, the Company issued
34,630 shares of common stock, at an agreed price per share of $0.135 per share, to Lance Brunson in consideration of $4,675 of
legal services provided.
On August 20, 2018, the Company issued
17,361 shares of common stock, at an agreed price of $0.12 per share, to Enrique Sempere in consideration of $2,083.33 of services
provided.
On September 3, 2017 the Company issued
62,972 and 61,207 shares of common stock, respectively, (124,179 shares in total) to NuAxon BioScience, Inc. in consideration
of $10,000 per month of April and May 2018 consulting services. Both issuances were based on the average closing price of the
stock the last five trading days of the respective month.
On September 5, 2018, the Company, and
a cannabis-focused Private Equity Fund, Merida Capital Partners II, LP, (the “
Merida
”) agreed that Merida would
send the Company $250,000 (the “
Deposit Amount
”) as a deposit towards a potential purchase of Company common
stock under a non-binding Term Sheet (the “
Term Sheet
”), and if the full purchase contemplated under the Term
Sheet was not consummated on or prior to September 17, 2018 (the “
Reference Date
”), the Company would issue
to the Investor: (i) a number of shares of Company common stock (the “
Purchased Shares
”) equal to the Deposit
Amount divided by a 20% discount to the Company’s volume-weighted average price (“
VWAP
”) for the 30-day
period ending on the day prior to the Reference Date; (ii) a three-year warrant to purchase the same number of shares of Company
common stock at an exercise price of 120% of the VWAP on the Reference Date, and (iii) a three-year warrant to purchase the same
number of shares of Company common stock at an exercise price of 165% of the VWAP on the Reference Date On September 5, 2018 Merida
sent the Deposit Amount to the Company. On September 28, 2018, the Company entered into a Securities Purchase Agreement (the “
Securities
Purchase Agreement
”) with Merida and seven other investors (Merida and the seven other investors collectively the “
Investors
”),
which superseded the September 5
th
Agreement. Pursuant to the Securities Purchase Agreement, the Investors agreed to
purchase, for an aggregate purchase price of $3,000,000 (the “
Purchase Price
”): (i) 25,000,000 shares of the
Company’s common stock (the “
Common Shares
”), and (ii) three-year, non-cashless warrants to acquire 25,000,000
shares of the Company’s common stock at $0.18/share (the “
Warrants
”). Additionally, for leading the syndicate
and providing 68% of the funds in the offering, Merida received a three-year, non-cashless warrants to acquire 17,000,000 shares
of the Company’s common stock at $0.25/share (the “
Bonus Warrants
”). The Securities Purchase Agreement
contains various affirmative covenants that require the Company to, among other things, timely file all reports with the United
States Securities and Exchange Commission (the “
Commission
”); provide the Investors with copies of the Company’s
Commission reports and press releases; reimburse Merida $17,500 for legal fees and expenses associated with the transaction; reserve
shares of common stock for issuance upon exercise of the Warrants and Bonus Warrants; provide Merida a right of first refusal
for future offerings; enter into a consulting agreement with Merida prior to 30 days following closing on terms amenable to the
Company and Merida; maintain the Company’s DTC eligibility, and take all necessary action to appoint two nominees of Merida
as members of the Company’s Board of Directors. On October 2, 2018, the Company received $2,75 million of cash related to
this transaction and converted the Deposit Amount in consideration of the 25,000,000 shares.
On September 24, 2018, the Company issues
37,392 shares of common stock, at a price per share of $0.15, based on the closing price on that day, to Mark Newbauer in consideration
of open invoices from various public relations services provided through in July and August of 2018 totaling $6,050.