10-Q 1 freedom_10q-093016.htm QUARTERLY REPORT

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2016

 

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

 

For the transition period from _________ to _________

 

Commission File Number: 000-55687

 

 

FREEDOM LEAF, INC.

(Exact name of Registrant as specified in its charter)

 

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

 

3571 E. Sunset Road, Suite 420

Las Vegas, Nevada 89120

 

877-442-0411

(Registrant’s telephone number)

 

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

 

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

 

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

 

(Check one):

Large accelerated filer o Accelerated filer o
Non-accelerated filer o Smaller reporting company x
(Do not check if a smaller reporting company)      

 

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

 

As of November 9, 2016 there were 98,405,817 shares of common stock, par value $0.001 per share issued, issuable, and outstanding.

 

 

 

   
 

 

FREEDOM LEAF, INC.

FORM 10-Q

SEPTEMBER 30, 2016

INDEX

  Page No.
PART I – FINANCIAL INFORMATION 3
Item 1.   Financial Statements 3
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
Item 3.   Quantitative and Qualitative Disclosures About Market Risk 21
Item 4.   Controls and Procedures 21
       
PART II – OTHER INFORMATION 23
Item 1.   Legal Proceedings 23
Item 1A.   Risk Factors 23
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3.   Defaults Upon Senior Securities 23
Item 4.   Mine Safety Disclosures 23
Item 5.   Other Information 23
Item 6.   Exhibits 23
       
SIGNATURES 24

 

 

 

 

 

 

 

 

 

 

 2 
 

 

PART I – FINANCIAL INFORMATION

 

TABLE OF CONTENTS

 

Index to Financial Statements   Page
Condensed Balance Sheets as of September 30, 2016 (unaudited) and June 30, 2016   4
Condensed Statements of Operations for the three months ended September 30, 2016 and 2015 (unaudited)   5
Condensed Statements of Cash Flows for the three months ended September 30, 2016 and 2015 (unaudited)   6
Notes to Condensed Financial Statements.   7

 

 

 

 

 

 

 

 

 

 

 

 

 3 
 

 

Item 1. Financial Statements.

 

FREEDOM LEAF, INC.

Condensed Balance Sheets

 

   September 30,   June 30, 
   2016   2016 
   (unaudited)     
ASSETS          
           
Current assets          
Cash  $2,999   $1,758 
Accounts receivable   500    500 
Inventory   1,390    2,465 
Other receivable       2,399 
Total current assets   4,889    7,122 
           
Intangible assets, net   8,174    7,464 
Other assets   3,584    3,584 
           
Total assets  $16,647   $18,170 
           
LIABILITIES AND STOCKHOLDERS' DEFICIT          
           
Current liabilities          
Convertible notes payable, net of discount  $73,836   $44,521 
Notes payable   5,400     
Accounts payable   61,156    46,936 
Accounts payable to related parties   10,000    10,000 
Accrued expenses   150,818    29,853 
Accrued expenses to related parties       45,000 
           
Total current liabilities   301,210    176,310 
           
Long-term liabilities          
Payable to related party   122,788    126,250 
           
Total long-term liabilities   122,788    126,250 
           
Total liabilities   423,998    302,560 
           
Commitments and contingencies          
           
Stockholders' deficit          
Preferred stock, $0.001 par value, 10,000,000 shares authorized Series A preferred stock, 1,000,000 shares authorized, 948,022 shares issued and outstanding at September 30, 2016 and June 30, 2016, respectively   948    948 
Common stock, $0.001 par value, 500,000,000 shares authorized, 95,038,650 and 94,438,650 shares issued, issuable, and outstanding at September 30, 2016 and June 30, 2015, respectively   95,039    94,439 
Additional paid-in capital   3,929,029    3,800,699 
Unearned stock compensation   (20,137)   (170,137)
Accumulated deficit   (4,412,230)   (4,010,338)
Total stockholders' deficit   (407,351)   (284,390)
           
Total liabilities and stockholders' deficit  $16,647   $18,170 

 

 

 

 

 See accompanying notes to unaudited condensed financial statements.

 

 4 
 

 

FREEDOM LEAF, INC.

(f/k/a Arkadia International, Inc.)

Statements of Operations

For the Three Months Ended September 30,

(unaudited)

               

   2016   2015 
         
Revenue, net  $120,554   $15,095 
           
Operating expenses          
Direct costs of revenue   25,265    41,309 
General and administrative (includes stock-based compensation of $256,900 and $0 for the three months ended September 30, 2016 and 2015, respectively.)   451,671    113,316 
Marketing and selling   13,794     
           
Operating loss   (370,176)   (139,530)
           
Other income (expense)          
Interest expense   (2,401)    
Beneficial conversion feature   (29,315)   (4,636)
           
Net loss  $(401,892)  $(144,166)
           
Net loss per share - basic and diluted  $(0.00)  $(0.00)
           
Weighted average number of shares outstanding - basic and diluted   95,012,563    174,181,200 

 

 

 

 

 

 

 

See accompanying notes to unaudited condensed financial statements.

 

 5 
 

 

FREEDOM LEAF, INC.

Statements of Cash Flows

For the Three Months Ended September 30,

(unaudited)

 

   2016   2015 
Cash flows from operating activities:          
Net loss  $(401,892)  $(144,166)
Adjustments to reconcile net loss to net cash used in operations:          
Amortization of intellectual properties   140    82 
Beneficial conversion feature   29,315    4,636 
Issuance of common stock for services   256,900     
Changes in operating assets and liabilities:          
Accounts receivable       1,150 
Inventory   1,075     
Other receivable   2,399     
Accounts payable   14,220    34,564 
Accounts payable to related parties       (7,466)
Accrued expenses   120,966    26,172 
Accrued expenses to related parties   (45,000)    
Deferred revenue       8,167 
Net cash used in operating activities   (21,877)   (76,861)
           
Cash flows used in investing activities          
Intangible asset acquired   (850)   (1,230)
Net cash used in investing activities   (850)   (1,230)
           
Cash flows from financing activities:          
Proceeds from capital contributed   22,030    58,500 
Payments to related party   (3,462)    
Proceeds from notes payable   5,400    22,500 
Net cash provided by financing activities   23,968    81,000 
           
Net decrease in cash   1,241    2,909 
           
Cash at beginning of period   1,758    901 
           
Cash at end of period  $2,999   $3,810 
           
Supplemental disclosure of cash flow information:          
           
Cash paid for interest  $   $ 
           
Cash paid for taxes  $   $ 

 

 

 

 

 See accompanying notes to unaudited condensed financial statements.

 

 6 
 

 

FREEDOM LEAF, INC.

(f/k/a Arkadia International, Inc.)

Notes to Condensed Financial Statements

September 30, 2016

(unaudited)

 

NOTE 1 – NATURE OF BUSINESS, PRESENTATION AND GOING CONCERN

 

Organization

 

Freedom Leaf, Inc. (the “Company,” “we,” “us,” “our,” or “Freedom Leaf”) was incorporated in the State of Nevada on February 21, 2013, under the name of Arkadia International, Inc. The Company was originally engaged in the business of the acquisition of in demand equipment, cars, and goods with the intent to resale these in the U.S. territory or export to overseas countries.

 

On October 3, 2014, the Company experienced a change in control. Richard C. Cowan acquired a majority of the issued and outstanding common stock of the Company in accordance with stock purchase agreements by and between Mr. Cowan and Vladimir and Galina Shekhtman (“Sellers”). On the closing date, October 3, 2014, pursuant to the terms of the Stock Purchase Agreement, Cowan purchased from the Sellers 6,950,100 shares of the Company’s outstanding restricted common stock for $100,000, representing 93%.

 

On November 6, 2014, the Company merged with Freedom Leaf, Inc., a private Nevada corporation. The Company changed its name from Arkadia International, Inc., to Freedom Leaf, Inc. As a result of the merger, the private company was dissolved. See Note 2 for related discussion.

 

For financial reporting purposes, the Share Exchange represents a "reverse merger" rather than a business combination and Private Company is deemed to be the accounting acquirer in the transaction. The Share Exchange is being accounted for as a reverse-merger and recapitalization. Private Company is the acquirer for financial reporting purposes and the Public Company (Freedom Leaf, Inc., f/k/a Arkadia International, Inc.) is the acquired company. Consequently, the assets and liabilities and the operations that will be reflected in the historical financial statements prior to the Share Exchange will be those of the Private Company and will be recorded at the historical cost basis of the Private Company, and the financial statements after completion of the Share Exchange will include the assets and liabilities of the Public Company and the Private Company, and the historical operations of Private Company and operations of both companies from the closing date of the Share Exchange.

 

Nature of Operations

 

The Company is focused on being the premium national and international news source for the Cannabis/Industrial Hemp industry. Through our online and print media channels, our efforts are in dissemination of current legislation and legal news, arts and entertainment. Additional websites and online partnerships are in the development stage that will give the Freedom Leaf brand greater exposure. The Company generates revenue from paid advertising on both online and print publications as well as consulting fees and incubator fees for companies that want to participate in the Cannabis/Industrial Hemp industry. Another segment of income generation by the Company is brand management for both profit and non-profit organizations. An example is the contract with NORML which was entered into on May 26, 2015. This contract authorizes the Company to undertake all of the commercial activities of NORML, earning income for both the non-profit and the Company.

 

Basis of Presentation

 

The accompanying unaudited condensed financial statements of Freedom Leaf, Inc. have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 8 of Regulation S-X. The results of operations for the interim period ended September 30, 2016 shown in this report are not necessarily indicative of results to be expected for the full fiscal year ending June 30, 2017. In the opinion of the Company’s management, the information contained herein reflects all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the Company’s results of operations, financial position and cash flows. The unaudited interim financial statements should be read in conjunction with the audited financial statements in the Company’s Form 10-K for the year ended June 30, 2016 filed on October 7, 2016 and Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

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.

  

 

 

 7 
 

 

FREEDOM LEAF, INC.

(f/k/a Arkadia International, Inc.)

Notes to Condensed Financial Statements

September 30, 2016

(unaudited)

 

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 our intangible assets (due to our impairment analysis) and derivative liabilities. The fair value of intangible assets has been determined using the present value of estimated future cash flows method. The fair value of derivative liabilities is measured using the Black-Scholes option pricing method. The following table summarizes our non-financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2016:

  

   Balance at September   Quoted Prices in Active Markets for Identical   Significant Other Observable   Significant Unobservable 
   30, 2016   Assets   Inputs   Inputs 
       (Level 1)   (Level 2)   (Level 3) 
Assets:                    
Trademarks  $8,174   $   $   $8,174 
Total Financial Assets  $8,174   $   $   $8,174 

 

Following is a summary of activity through September 30, 2016 of the fair value of intangible assets valued using Level 3 inputs:

 

       Accumulated     
   Asset   Amortization   Net 
Intangibles - June 30, 2016  $8,148   $(684)  $7,464 
Additions   850        850 
Amortization       (140)   (140)
Intangibles - September 30, 2016  $8,998   $(824)  $8,174 

 

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.

 

 

  

 8 
 

 

FREEDOM LEAF, INC.

(f/k/a Arkadia International, Inc.)

Notes to Condensed Financial Statements

September 30, 2016

(unaudited)

 

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.

  

Going Concern

 

The Company has generated limited revenues for the three months ended September 30, 2016 of $120,554, has recurring net losses for the three months ended September 30, 2016 of $401,892, and a working capital deficiency as of September 30, 2016 of $296,322, and used cash in operations of $21,878 for the three months ended September 30, 2016. In addition, as of September 30, 2016, the Company had a stockholders’ deficit and accumulated deficit of $407,352 and $4,412,230, respectively. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

 

The accompanying condensed financial statements have been prepared in conformity with U.S. GAAP, which contemplate continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The ability of the Company to continue its operations is dependent on the execution of management’s plans, which include the raising of capital through the debt and/or equity markets, until such time that funds provided by operations are sufficient to fund working capital requirements. If the Company were not to continue as a going concern, it would likely not be able to realize its assets at values comparable to the carrying value or the fair value estimates reflected in the balances set out in the preparation of the consolidated financial statements.

 

There can be no assurances that the Company will be successful in generating additional cash from the equity/debt markets or other sources to be used for operations. The consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary. Based on the Company’s current resources, the Company will not be able to continue to operate without additional immediate funding. Should the Company not be successful in obtaining the necessary financing to fund its operations, the Company would need to curtail certain or all operational activities and/or contemplate the sale of its assets, if necessary.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates in the accompanying financial statements include the amortization period for intangible assets, valuation and impairment valuation of intangible assets, 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 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.

 

Development Stage Company

 

Since inception, the Company became a “development stage company” as defined in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 915 “Development Stage Entities.” On June 10, 2014 the FASB issued authoritative guidance which eliminates the concept of a development stage entity. The incremental reporting requirements for presenting the development stage operations and cash flows since inception will no longer apply to development stage entities. The amendments of Topic 915 are to be applied retrospectively and are effective for fiscal years beginning after December 15, 2014. The Company has elected early adoption of this guidance effective with the filing of its previous quarterly report.

 

 

 

 9 
 

 

FREEDOM LEAF, INC.

(f/k/a Arkadia International, Inc.)

Notes to Condensed Financial Statements

September 30, 2016

(unaudited)

 

On November 6, 2014, the Company merged with Freedom Leaf, Inc., a private Nevada corporation. The Company changed its name from Arkadia International, Inc., to Freedom Leaf, Inc. As a result of the merger, the private company was dissolved. See Note 2 for related discussion.

 

Net Earnings (Loss) Per Share

 

In accordance with ASC 260-10, “Earnings Per Share,” basic net earnings (loss) per common share is computed by dividing the net earnings (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share are computed using the weighted average number of common and dilutive common stock equivalent shares outstanding during the period. Dilutive common stock equivalent shares which may dilute future earnings per share consist of convertible notes convertible into 20,225,000 common shares. Equivalent shares are not utilized when the effect is anti-dilutive.

 

Segment Information

 

In accordance with the provisions of ASC 280-10, “Disclosures about Segments of an Enterprise and Related Information,” the Company is required to report financial and descriptive information about its reportable operating segments. The Company does not have any operating segments as of September 30, 2016 and 2015.

  

Effect of Recent Accounting Pronouncements

 

The Company reviews new accounting pronouncements as issued. No new pronouncements had any material effect on these unaudited financial statements. The accounting pronouncements issued subsequent to the date of these unaudited financial statements that were considered significant by management were evaluated for the potential effect on these unaudited financial statements. Management does not believe any of the subsequent pronouncements will have a material effect on these unaudited financial statements as presented and does not anticipate the need for any future restatement of these unaudited financial statements because of the retro-active application of any accounting pronouncements issued subsequent to September 30, 2016 through the date these unaudited financial statements were issued.

 

NOTE 2 – ENTRY INTO A DEFINITIVE AGREEMENT

 

Freedom Leaf, Inc., (f/k/a Arkadia International, Inc., the “Public Company,” “we,” “us,” “our”) entered into a share exchange agreement (the “Exchange Agreement”) with Freedom Leaf, Inc. (the “Private Company”), a Nevada corporation. Prior to the reverse merger, Richard C. Cowan, an officer and director of the Company, post-merger, acquired 89,808,000, or 99.8% of the outstanding shares of Freedom Leaf, Inc., the public company. Clifford J. Perry, an individual, and the Private Company’s sole officer and director (“Perry”), was the owner of record of all of the outstanding common shares of the Private Company (the “Private Company Stock”). Pursuant to the Exchange Agreement, upon surrender by the shareholders of the Public Company (the “Shareholders”) and the cancellation by the Private Company of the certificates evidencing the Private Company Stock as registered in the name of the Shareholder, and pursuant to the registration of the Public Company in the register of Shareholders maintained by Private Company as the new holder of the Public Company Stock and the issuance of the certificates evidencing the aforementioned registration of the Private Company Stock in the name of the Public Company, the Public Company will issue 83,401,200 shares (the “New Shares”) (subject to adjustment for fractionalized shares as set forth below) of the Company’s common stock to the Shareholders (or their designees), and Perry will cause 100% of the shares of the Private Company’s common stock that he owns (the “Perry Stock,” together with the New Shares, the “Acquisition Stock”) to be transferred to the Shareholders (or their designees), which collectively shall represent 48.1% of the issued and outstanding common stock of the Public Company immediately after the Closing, in exchange for the Private Company Stock, representing 100% of the issued share capital of the Private Company. As a result of the exchange of the Private Company Stock for the Acquisition Stock (the “Share Exchange”), the Private Company will be dissolved.

 

The closing of the Exchange Agreement was conditioned upon certain, limited customary representations and warranties, as well as the satisfaction or waiver of specified conditions to closing. As the parties satisfied all of the closing conditions, on November 6, 2014, we consummated the Share Exchange contemplated by the Exchange Agreement. As a result, the shareholders of Private Company own approximately 48.1% of our issued and outstanding common stock.

 

Prior to the execution and delivery of the Exchange Agreement, our board of directors approved the Share Exchange and the transactions contemplated thereby. Similarly, the board of directors of Private Company approved the Share Exchange. Reference is hereby made regarding the completion of the Share Exchange.

 

 

 

 10 
 

 

FREEDOM LEAF, INC.

(f/k/a Arkadia International, Inc.)

Notes to Condensed Financial Statements

September 30, 2016

(unaudited)

 

Following the Share Exchange, we have abandoned our prior business plan and we are now pursuing Private Company’s historical businesses.

 

The foregoing description of the Exchange Agreement does not purport to be complete and is qualified in its entirety by the Share Exchange Agreement, a copy of which has been filed on Form 10-Q/A for the period ended December 31, 2014 which is incorporated herein by reference.

 

Accounting Treatment of the Merger

 

For financial reporting purposes, the Share Exchange represents a “reverse merger” rather than a business combination and Private Company is deemed to be the accounting acquirer in the transaction. The Share Exchange is being accounted for as a reverse-merger and recapitalization. Private Company is the acquirer for financial reporting purposes and the Public Company (Freedom Leaf, Inc., f/k/a Arkadia International, Inc.) is the acquired company. Consequently, the assets and liabilities and the operations that will be reflected in the historical financial statements prior to the Share Exchange will be those of the Private Company and will be recorded at the historical cost basis of the Private Company, and the financial statements after completion of the Share Exchange will include the assets and liabilities of the Public Company and the Private Company, and the historical operations of Private Company and operations of both companies from the closing date of the Share Exchange.

 

Licensing Rights

 

On February 8, 2016, the Company and Freedomleaf Netherlands, b.v. (“FLNL”), a company located in the Netherlands, executed a Memorandum of Understanding (“MOU”), wherein the Company granted FLNL a right of first refusal to license certain rights from the Company described below in exchange for a payment of $25,000, and the parties agreed to negotiate a definite license agreement for such rights and with proposed terms of the definitive agreement set forth in the MOU. Such rights include FLNL’s rights to use various trademarks of the Company, primarily “Freedom Leaf,” and other related rights, for use in the Netherlands by FLNL, including FLNL’s right to publish a Freedom Leaf magazine in the Netherlands, sell Freedom Leaf products and perform other activities related to the business of the Company. Except for the grant of the right of first refusal, and the required payment has not been received by the Company. FLNL is a shareholder (common stock and warrants to purchase additional common stock) of the Company.

 

Incubation Agreement

 

On January 18, 2016, the Company and Plants to Paper, LLC (“PTP”), executed an Incubation Agreement. PTP owns the patent pending application 62/245,153 with the title being “Rolling Papers and Blunt Wraps made from 100% Marijuana.” PTP transferred its ownership rights to the Company and its Medical Marijuana / Cannabis / Hemp Industry Incubator program. The Company will supply management services and to fund the early stage development of PTP. The Incubation Agreement is for a period of twelve months. PTP will provide the Company with 20% of the outstanding membership shares of PTP in exchange for its services. The costs of patent registrations in the United States and other countries will be the liability of PTP. As of June 30, 2016, PTP had no activity.

  

NOTE 3 – COMMITMENTS AND CONTINGENCIES

 

Legal Matters

 

From time to time, the Company may become subject to legal proceedings, claims and litigation arising in the ordinary course of its business. The Company is not currently a party to any material legal proceedings, nor is the Company aware of any other pending or threatened litigation that would have a material adverse effect on the Company’s business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.

  

Lease Commitment

 

We lease approximately 2,800 square feet of office space in Las Vegas, Nevada, pursuant to a lease that will expire on September 30, 2019. This facility serves as our corporate headquarters. After September 30, 2017, the Company has the option to opt out of the lease.

 

 

 

 11 
 

 

FREEDOM LEAF, INC.

(f/k/a Arkadia International, Inc.)

Notes to Condensed Financial Statements

September 30, 2016

(unaudited)

 

Future minimum lease payments under these leases are as follows:

 

2017  $17,946 
2018   23,928 
2019   18,943 
      
Total  $60,817 

 

Rent expense for the three months ended September 30, 2016 and 2015 was $10,511 and $15,396, respectively.

 

NOTE 4 – RELATED PARTIES

 

Richard C. Cowan (“Cowan”), Director and former officer of the Company, has payables and accruals due to him of $100,000 and $100,000 as of September 30, 2016 and June 30, 2016, respectively. There are no set terms for repayment.

 

Clifford J. Perry (“Perry”), chief executive officer, chief financial officer, and director of the Company, has payables and accruals due to him of $22,310 and $26,250 as of September 30, 2016 and June 30, 2016, respectively.

 

Raymond P. Medeiros (“Medeiros”), a director of the Company, has payables and accruals due to him of $478 and $10,500 as of September 30, 2016 and June 30, 2016, respectively.

 

A shareholder of the Company is owed $10,000 and $10,000 as of September 30, 2016 and June 30, 2016, respectively.

 

On May 25, 2016, Perry converted 68,401,200 shares of common stock into 684,012 shares of Series A preferred stock. See Note 6.

 

On May 25, 2016, Cowan converted 26,401,000 shares of common stock into 264,010 shares of Series A preferred stock. See Note 6.

 

On June 30, 2016, Cowan converted $225,892 of payables and accruals into 2,509,914 shares of common stock. The conversion was at a 50% discount or $0.09 per share. As of June 30, 2016, these shares had not been issued and were recorded as issuable. See Note 6.

 

NOTE 5 – CONVERTIBLE NOTES PAYABLE, NET OF PREMIUMS AND NOTES PAYABLE

 

Convertible notes payable, all classified as current at September 30, 2016, consists of the following:

 

Convertible notes, net of discounts and notes payable                        
   September 30, 2016   June 30, 2016 
           Principal,           Principal, 
       Debt   net of       Debt   net of 
   Principal   Discounts   Discounts   Principal   Discounts   Discounts 
Swiss Allied Trust, Inc. (a)  $50,000   $(10,137)  $39,863   $50,000   $(24,794)  $25,206 
Swiss Allied Trust, Inc. (a)   50,000    (16,027)   33,973    50,000    (30,685)   19,315 
                               
Total  $100,000   $(26,164)  $73,836   $100,000   $(55,479)  $44,521 

 

(a) Convertible

 

On July 7, 2015, the Company executed a convertible promissory note for $5,000 with Bruce Perlowin. The note is for one year, 12% interest rate, and convertible at $0.10 per share. The current price at that date was $0.085, which is less than the conversion price. The stock price for our common stock as of September 30, 2015 was $0.40. Our common stock is thinly traded therefore our price, as management has determined, is not indicative of our valuation. In October 2015, the Company issued common stock for services to unrelated parties and the common stock was values at $0.20, therefore, the $0.20 was used for valuation purposes for this note. A beneficial conversion feature of $5,000 was recorded and, as of March 31, 2016, $3,671 was amortized. The Company has recorded accrued interest of $467 as of September 30, 2016. On April 15, 2016, Mr. Perlowin converted the principal of this promissory note into 50,000 shares of common stock (see Note 6). The accrued interest was not converted.

 

 

 

 12 
 

 

FREEDOM LEAF, INC.

(f/k/a Arkadia International, Inc.)

Notes to Condensed Financial Statements

September 30, 2016

(unaudited)

  

On August 12, 2015, the Company executed a convertible promissory note for $5,000 with Bruce Perlowin. The note is for one year, 12% interest rate, and convertible at $0.10 per share. The current price at that date was $0.10, which is less than the conversion price. The stock price for our common stock as of September 30, 2015 was $0.40. Our common stock is thinly traded therefore our price, as management has determined, is not indicative of our valuation. In October 2015, the Company issued common stock for services to unrelated parties and the common stock was values at $0.20, therefore, the $0.20 was used for valuation purposes for this note. A beneficial conversion feature of $5,000 was recorded and, as of March 31, 2016, $3,178 was amortized. The Company has recorded accrued interest of $408 as of September 30, 2016. On April 15, 2016, Mr. Perlowin converted the principal of this promissory note into 50,000 shares of common stock (see Note 6). The accrued interest was not converted.

 

On August 20, 2015, the Company executed a convertible promissory note for $12,500 with Svetlana Ogorodnikova. The note matures on February 19, 2016, 12% interest rate, and convertible at $0.10 per share. The current price at that date was $0.085, which is less than the conversion price. The stock price for our common stock as of September 30, 2015 was $0.40. Our common stock is thinly traded therefore our price, as management has determined, is not indicative of our valuation. In October 2015, the Company issued common stock for services to unrelated parties and the common stock was values at $0.20, therefore, the $0.20 was used for valuation purposes for this note. A beneficial conversion feature of $12,500 was recorded and, as of March 31, 2016, $12,500 was amortized. The Company has recorded accrued interest of $986 as of September 30, 2016. On February 19, 2016, Ms. Ogorodnikova granted the Company an extension on the due date to June 30, 2016. On April 15, 2016, Ms. Ogorodnikova converted the principal of this promissory note into 125,000 shares of common stock (see Note 6). The accrued interest was not converted.

 

On December 14, 2015, the Company executed a convertible promissory note for $100,000 with Swiss Allied Trust, Inc. (“Swiss Allied”). The note has two funding dates; December 14, 2015 and January 15, 2016, each for $50,000. On January 26, 2016, the Company received $50,000 from Swiss Allied as the second tranche of the convertible promissory note. As of March 31, 2016, both tranches were received by the Company. The term on each installment is for one year from the date of receipt of each tranche. Each installment is recorded and presented separately. For the initial tranche of $50,000, the Company recorded a beneficial conversion feature of $50,000 and, as of March 31, 2016, $14,795 was amortized. A beneficial conversion feature of $50,000 was recorded and, as of March 31, 2016, $8,904 has been amortized. For the initial tranche, the Company has recorded accrued interest of $2,181 as of September 30, 2016. For the second tranche, the Company has recorded accrued interest of $1,709 as of September 30, 2016. The beneficial conversion features were calculated on the conversion price of $0.005, as further discussed below. The Company maintained the common stock to be valued at $0.20, as discussed in prior notes, as the Company’s common stock continues to be thinly traded. Additionally, the Company issued Swiss Allied four warrants as an incentive to the note, each for 20,000,000 shares of the Company’s common stock, for a total of 80,000,000 warrants. Each warrant has an exercise price of $0.005 per share.

 

The four warrants, each for 20,000,000 shares of common stock, mature on March 31, 2016, June 30, 2016, October 31, 2016, and December 31, 2016, respectively. If Swiss Allied exercises all warrants, the Company would receive an additional $400,000 for said shares of common stock. If Swiss Allied does not exercise all 80,000,000 warrants, by the maturation dates, as described herein, the exercise price shall be adjusted to $0.06, an increase of $0.055 per share as a penalty, which is payable to the Company at the time Swiss Allied requests to have the Rule 144 restriction removed. The interest rate for each loan tranche is 8% and is accrued with a payment date of December 15, 2016 for the first tranche and January 15, 2017 for the second tranche. The conversion price for the $100,000, which may happen any time prior to December 14, 2016, shall be the greater of $0.03 or 50% of the lowest closing price on the primary trading market on which the Company’s common stock is quoted for the five trading days immediately prior to, but not including, the conversion date, assuming that Swiss Allied has not exercised all 80,000,000 warrants for common stock. The conversion price for the $100,000, assuming that Swiss Allied has exercised all 80,000,000 warrants for common stock, shall be $0.005 per share. Swiss Allied has a right of first refusal on any future funding to the Company. Swiss Allied has the right to name a party to serve as a member of the Company’s board of directors if Swiss Allied owns at least 40,000,000 shares of the Company’s common stock. If Swiss Allied owns at least 80,000,000 shares of the Company’s common stock, they have the right to name two parties to the Company’s board of directors. The two directors will remain as long as Swiss Allied owns 55,000,000 shares of the Company’s common stock. As of March 31, 2016, Swiss Allied had not exercised the first warrant therefore, the warrant had expired as of said date. On April 8, 2016, Swiss Allied converted warrants for 4,800,000 shares of common stock in exchange for $24,000. The Company agreed to amend the obligations of Swiss Allied to accommodate the extension of the warrant until June 5, 2016. As of June 30, 2016, the warrant had expired.

 

 

 

 13 
 

 

FREEDOM LEAF, INC.

(f/k/a Arkadia International, Inc.)

Notes to Condensed Financial Statements

September 30, 2016

(unaudited)

 

NOTE 6 – STOCKHOLDERS’ DEFICIT

 

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. See Note 5.

 

On May 25, 2016, Cowan converted 26,401,000 shares of common stock into 264,010 shares of Series A preferred stock. See Note 5.

 

Common Stock

 

The Company was authorized to issue up to 75,000,000 shares of common stock, par value $0.001 per share. On January 21, 2015, the Company increased it’s authorized to 500,000,000 shares of common stock. Each outstanding share of common stock entitles the holder to one vote per share on all matters submitted to a stockholder vote. All shares of common stock are non-assessable and non-cumulative, with no pre-emptive rights.

 

On November 6, 2014, the Company merged with Freedom Leaf, Inc., a private Nevada corporation (see Note 1). After the completion of the merger, there were 173,401,200 shares of common stock issued, issuable and outstanding.

 

On November 10, 2014, the Company issued 780,000 shares of common stock to Vincent Moreno for consulting services from November 10, 2014 through April 10, 2015. The Company’s stock is thinly traded therefore the valuation of the issuance was based on the value of the services, which was $12,500.

 

On October 12, 2015, the Company issued 1,700,000 shares of common stock to various employees as part of compensation. The current price at that date was $0.20. Our common stock is thinly traded therefore our price, as management has determined, may not be indicative of our valuation. Previously, the Company issued common stock for services to unrelated parties and the common stock was valued at $0.20, therefore, the stock was valued at $0.20 or $340,000 was recorded.

 

On October 12, 2015, the Company issued 2,000,000 shares of common stock to Raymond Medeiros, a director of the Company, for his past services. The current price at that date was $0.20. Our common stock is thinly traded therefore our price, as management has determined, may not be indicative of our valuation. Previously, the Company issued common stock for services to unrelated parties and the common stock was valued at $0.20, therefore, the stock was valued at $0.20 or $400,000 was recorded.

 

On October 12, 2015, the Company issued 3,000,000 shares of common stock to Raymond Medeiros, a director of the Company, for his future services. The issuance will vest over a period of twelve months. The current price at that date was $0.20. Our common stock is thinly traded therefore our price, as management has determined, may not be indicative of our valuation. Previously, the Company issued common stock for services to unrelated parties and the common stock was valued at $0.20, therefore, the stock was valued at $0.20 or $600,000 was recorded.

 

On October 12, 2015, the Company issued 2,010,000 shares of common stock to various subcontractors for their services. The current price at that date was $0.20. Our common stock is thinly traded therefore our price, as management has determined, may not be indicative of our valuation. Previously, the Company issued common stock for services to unrelated parties and the common stock was valued at $0.20, therefore, the stock was valued at $0.20 or $402,000, was recorded.

 

In October 2015, the Company issued 50,000 shares of common stock for services to unrelated parties and the common stock was valued at $0.20, therefore, the stock was valued at $0.20 or $10,000, was recorded.

 

On November 2, 2015, the Company issued 125,000 shares of common stock to various subcontractors for their services. The current price at that date was $0.45. Our common stock is thinly traded therefore our price, as management has determined, may not be indicative of our valuation.

 

On February 2, 2016, Dobrucki exercised a warrant for 500,000 shares of common stock for $10,000, the exercise price of the warrants at $0.02 per share.

 

 14 
 

 

FREEDOM LEAF, INC.

(f/k/a Arkadia International, Inc.)

Notes to Condensed Financial Statements

September 30, 2016

(unaudited)

 

On February 15, 2016, the Company issued 750,000 shares of common stock to various subcontractors for their services. The current price at that date was $0.227. Our common stock is thinly traded therefore our price, as management has determined, may not be indicative of our valuation. Previously, the Company issued common stock for services to unrelated parties and the common stock was valued at $0.20, therefore, the stock was valued at $0.20, therefore, the issuance on was valued at $150,000, was recorded.

 

On February 15, 2016, the Company issued 50,000 shares of common stock to an employee for their services. The current price at that date was $0.227. Our common stock is thinly traded therefore our price, as management has determined, may not be indicative of our valuation. Previously, the Company issued common stock for services to unrelated parties and the common stock was valued at $0.20, therefore, the stock was valued at $0.20 or $10,000, was recorded.

 

On February 24, 2016, the Company issued 100,000 shares of common stock to various subcontractors for their services. The current price at that date was $0.227. Our common stock is thinly traded therefore our price, as management has determined, may not be indicative of our valuation. Previously, the Company issued common stock for services to unrelated parties and the common stock was valued at $0.20, therefore, the stock was valued at $0.20 or $20,000, was recorded.

 

On March 17, 2016, the Company issued 50,000 shares of common stock to various subcontractors for their services. The current price at that date was $0.20. Our common stock is thinly traded therefore our price, as management has determined, may not be indicative of our valuation.

 

On March 18, 2016, the Company issued 10,000 shares of common stock to an employee for their services. The current price at that date was $0.20. Our common stock is thinly traded therefore our price, as management has determined, may not be indicative of our valuation. In October 2015, the Company issued common stock for services to unrelated parties and the common stock was valued at $0.20, therefore, the stock was valued at $0.20 or $2,000, was recorded. As of June 30, 2016, the stock was not issued therefore recorded as issuable.

 

On April 8, 2016, Swiss Allied exercised a portion of a warrant for common stock into 400,000 shares of common stock of the Company in exchange for $24,000. As of June 30, 2016, the stock was not issued therefore recorded as issuable.

 

On April 15, 2016, Bruce Perlowin converted the principal ($5,000) of his promissory note into 50,000 shares of common stock (see Note 5).

 

On April 15, 2016, Bruce Perlowin converted the principal ($5,000) of his promissory note into 50,000 shares of common stock (see Note 5).

 

On April 15, 2016, Svetlana Ogorodnikova converted the principal ($12,500) of her promissory note into 125,000 shares of common stock (see Note 5).

 

On May 2, 2016, Freedom Leaf Iberia exercised a cashless conversion of its 1,000,000 warrants for common stock of the Company into 889,868 shares of common stock of the Company. As of June 30, 2016, the stock was not issued therefore recorded as issuable.

 

On May 2, 2016, Freedomleaf Netherlands, b.v. exercised a cashless conversion of its 1,000,000 warrants for common stock of the Company into 889,868 shares of common stock of the Company. As of June 30, 2016, the stock was not issued therefore recorded as issuable.

 

On May 25, 2016, Perry converted 68,401,200 shares of common stock into 684,012 shares of Series A preferred stock. See Note 4.

 

On May 25, 2016, Cowan converted 26,401,000 shares of common stock into 264,010 shares of Series A preferred stock. See Note 4.

 

On June 30, 2016, Cowan converted $225,892 of payables and accruals into 2,509,914 shares of common stock. The conversion was at a 50% discount or $0.09 per share. As of June 30, 2016, these shares had not been issued and were recorded as issuable. See Note 4.

 

On June 30, 2016, the Company determined that on February 15, 2016, there was a duplicate issuance to an entity, as they were already issued on October 12, 2015. The Company cancelled 200,000 shares on June 30, 2016, thereby reducing the stock-based compensation previously recorded by $40,000.

 

 

 

 15 
 

 

FREEDOM LEAF, INC.

(f/k/a Arkadia International, Inc.)

Notes to Condensed Financial Statements

September 30, 2016

(unaudited)

 

On July 1, 2016, the Company hired an employee and, as a condition of the employment contract, the Company is obligated to issue 500,000 shares of common stock to the employee. The shares were valued at $0.175 per share. The Company recorded an expense of $87,500.

 

On July 19, 2016, the Company issued 100,000 shares of common stock to its transfer agent, Globex Transfer, LLC. The shares were valued at $0.194 per share. The Company recorded an expense of $19,400.

 

On July 21, 2016, the Company issued 1,385,000 shares of previously issuable common stock. 

 

Warrants

 

On November 2, 2015, the Company issued 1,000,000 warrants for common stock to Freedom Leaf Iberia, in regards to a contemplated future transaction between the Company and Freedom Leaf Iberia. The warrants mature on May 2, 2016. The exercise price is $0.02 and the warrant has a cashless exercise option. The warrants were valued at $0.20 per share, as defined in the section. The Company recorded an expense of $200,000. On May 2, 2016, Freedom Leaf Iberia exercised a cashless conversion of its 1,000,000 warrants for common stock of the Company into 889,868 shares of common stock of the Company.

 

On November 2, 2015, the Company issued 1,000,000 warrants for common stock to Freedomleaf Netherlands, b.v., in regards to a contemplated future transaction between the Company and Freedomleaf Netherlands, b.v. The warrants mature on May 2, 2016. The exercise price is $0.02 and the warrant has a cashless exercise option. The warrants were valued at $0.20 per share, as defined in the section. The Company recorded an expense of $200,000. On May 2, 2016, Freedomleaf Netherlands, b.v. exercised a cashless conversion of its 1,000,000 warrants for common stock of the Company into 889,868 shares of common stock of the Company.

 

On November 2, 2015, the Company issued 500,000 warrants for common stock to a subcontractor as an incentive to their services. The warrants mature on May 2, 2016. The exercise price is $0.02 and the warrant has a cashless exercise option. The warrants were valued at $0.20 per share, as defined in the section. The Company recorded an expense of $100,000. On February 2, 2016, Dobrucki exercised a warrant for 500,000 shares of common stock for $10,000, the exercise price of the warrants at $0.02 per share. As of March 31, 2016, the shares were not issued therefore they are recorded as issuable.

  

On December 14, 2015, the Company executed a convertible promissory note for $100,000 with Swiss Allied (see Note 5). The Company issued Swiss Allied four warrants as an incentive to the note, each for 20,000,000 shares of the Company’s common stock, for a total of 80,000,000 warrants. Each warrant has an exercise price of $0.005 per share. The four warrants, each for 20,000,000 shares of common stock, mature on March 31, 2016, June 30, 2016, October 31, 2016, and December 31, 2016, respectively. The warrants, as an incentive to the note, should have a beneficial conversion feature. As the note’s beneficial conversion feature is at the maximum, there is no beneficial conversion feature to record. If Swiss Allied exercises all warrants, the Company would receive an additional $400,000 for said shares of common stock. If Swiss Allied does not exercise all 80,000,000 warrants, by the maturation dates, as described herein, the exercise price shall be adjusted to $0.06, an increase of $0.055 per share as a penalty, which is payable to the Company at the time Swiss Allied requests to have the Rule 144 restriction removed. The interest rate for each loan tranche is 8% and is accrued with a payment date of December 15, 2016 for the first tranche and January 15, 2017 for the second tranche. The conversion price for the $100,000, which may happen any time prior to December 14, 2016, shall be the greater of $0.03 or 50% of the lowest closing price on the primary trading market on which the Company’s common stock is quoted for the five trading days immediately prior to, but not including, the conversion date, assuming that Swiss Allied has not exercised all 80,000,000 warrants for common stock. The conversion price for the $100,000, assuming that Swiss Allied has exercised all 80,000,000 warrants for common stock, shall be $0.005 per share. Swiss Allied has a right of first refusal on any future funding to the Company. Swiss Allied has the right to name a party to serve as a member of the Company’s board of directors if Swiss Allied owns at least 40,000,000 shares of the Company’s common stock. If Swiss Allied owns at least 80,000,000 shares of the Company’s common stock, they have the right to name two parties to the Company’s board of directors. The two directors will remain as long as Swiss Allied owns 55,000,000 shares of the Company’s common stock. See Note 5 for amendment on the warrant that matured on March 31, 2016.

 

Stock Option Plan

 

On June 27, 2016, the Board of Directors approved the 2016 Stock Option Plan which has reserved 10,000,000 shares of common stock.

 

 

 

 16 
 

 

FREEDOM LEAF, INC.

(f/k/a Arkadia International, Inc.)

Notes to Condensed Financial Statements

September 30, 2016

(unaudited)

 

NOTE 7 – SUBSEQUENT EVENTS

 

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

 

On October 17, 2016, the Company issued 24,000 shares of common stock to a consultant in exchange for services. The Company will record an expense accordingly.

 

On October 17, 2016, the Company issued 24,000 shares of common stock to a consultant in exchange for services. The Company will record an expense accordingly.

 

On October 17, 2016, the Company issued 268,167 shares of common stock and a warrant for 268,167 shares of common stock with an exercise price of $0.06 per share, with a cashless option, to a consultant in settlement of a payable of $16,090. The Company will record the applicable expense accordingly.

 

On October 17, 2016, the Company issued 2,501,000 shares of common stock to Trend Investments, Inc., a consultant, in exchange for services. The Company will record an expense accordingly.

 

On November 1, 2016, the Company executed a convertible promissory note to Eagle Equities, LLC for $25,000. The note has a discount of 45% to the lowest closing price of the last 20 trading days prior to conversion. The note has an 8% interest rate and matures on November 1, 2017.

 

On November 3, 2016, the Company issued 50,000 shares of common stock to a consultant in exchange for services. The Company will record an expense accordingly.

 

On November 3, 2016, the Company received $25,000 in exchange for 500,000 shares of common stock. The shares were valued at $0.05 per share whereas the closing price for the previous day was $0.24 per share. The Company will record the discount accordingly.

 

On November 7, 2016, the Company entered into an employment agreement which provided for the issuance of 250,000 shares of common stock. The Company will record an expense accordingly.

 

 

 

 

 

 

 

 

 

 

 17 
 

 

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

 

SPECIAL NOTE CONCERNING FORWARD-LOOKING STATEMENTS

 

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

 

Important factors that might cause our actual results to differ materially from the results contemplated by the forward-looking statements are contained in the “Risk Factors” section of and elsewhere in our Annual Report on Form 10-K for the fiscal year ended June 30, 2015 and in our subsequent filings with the Securities and Exchange Commission. The following discussion of our results of operations should be read together with our financial statements and related notes included elsewhere in this report.

 

Company Overview

 

The Company was a startup company that was incorporated in Nevada under the name Arkadia International, Inc. on February 21, 2013.

 

On October 3, 2014, the Company experienced a change in control. Richard C. Cowan acquired a majority of the issued and outstanding common stock of the Company in accordance with stock purchase agreements by and between Mr. Cowan and Vladimir and Galina Shekhtman (“Sellers”). On the closing date, October 3, 2014, pursuant to the terms of the Stock Purchase Agreement, Cowan purchased from the Sellers 6,950,100 shares of the Company’s outstanding restricted common stock for $100,000, representing 93%.

  

On November 4, 2014, the Company's Board of Directors declared a twelve for one forward stock split of all outstanding shares of the Company’s common stock. As the stock split was approved by FINRA, the common share and per common share data in these financial statements and related notes hereto have been retroactively adjusted to account for the effect of the stock split. The total number of authorized common shares and the par value thereof was not changed by the split.

 

On November 6, 2014, we entered into a share exchange agreement (the “Exchange Agreement”) with Freedom Leaf, Inc., a Nevada corporation (“Private Company”), and the Company’s sole officer and director Clifford J. Perry (“Perry”), being the owners of record of all of the issued share capital of Freedom Leaf, Inc. (the “FL Stock”). Pursuant to the Exchange Agreement, the Shareholders received an aggregate of 83,401,200 shares (48.1%) our common stock (consisting of a new issuance of shares and Mr. Perry’s transfer of all of his shares) and we received the FL Stock. As a result of the exchange of the FL Stock for the Acquisition Stock (the “Share Exchange”), Freedom Leaf, Inc. became our Company whereas the operations of Arkadia International, Inc. ceased, and there was a change of control of the Company.

 

Prior to the Share Exchange, we were a startup company that originally intended to engage in the business of the acquisition of in demand equipment, cars, and goods with the intent to resell these in the in the U.S. territories or export to overseas countries.

 

We have had limited operations and have been issued a “going concern” opinion by our auditor, based upon our reliance on the sale of our common stock as the sole source of funds for our future operations.

 

We have been devoting substantially all of our efforts to migrate to the news, arts and entertainment niche, with both “in print” and online publications. The Company is generating revenue through paid advertising in publications, both print and online, in the cannabis/hemp marketplace. The Company will also earn revenue from providing consulting services to companies who are in our industry, contracting with companies to brand, market, and sell their products and/or services, provide seminars in this space, and sell branded products for the Company and others the Company represents. We have also started incubating other companies in the cannabis industry and have one company that we are currently incubating.

 

Plan of Operation

 

We are currently devoting substantially all of our efforts in the news, multi-media arts and entertainment industry, with both in print and online publications.  

 

 

 

 18 
 

 

  

Results of Operations

 

For the Three Months Ended September 30, 2016 and 2015

 

Revenues

 

Our revenue was $120,554 for the three months ended September 30, 2016, compared to $15,095 for the three months ended September 30, 2015. The increase was primarily due to licensing fee revenue of $104,760 for 2016.

 

Operating Expenses

 

Direct costs of revenues were $25,265 and $41,309 for the three months ended September 30, 2016 and 2015, respectively. The decrease in direct costs of revenues, as a percent of revenue, was primarily due to licensing fee revenue.

 

For the three months ended September 30, 2016 our general and administrative expenses and marketing and selling expenses were $451,671 compared to $113,316 for the three months ended September 30, 2015 resulting in an increase of $338,355, contributable primarily to stock-based compensation of $256,900. As a result, net loss was $401,892 for the three months ended September 30, 2016 compared to net loss of $144,166 for the three months ended September 30, 2015.

  

Liquidity and Capital Resources

 

Overview

 

As of September 30, 2016, the Company had $2,999 in cash. We do not have sufficient resources to effectuate our business. We expect to incur a minimum of $50,000 in expenses during the next twelve months of operations. We estimate that these expenses will be comprised primarily of general expenses including overhead, legal and accounting fees.

 

Liquidity and Capital Resources during the three months ended September 30, 2016 compared to the three months ended September 30, 2015

 

We used cash in operations of $21,878 for the three months ended September 30, 2016 compared to cash used in operations of $76,861 for the three months ended September 30, 2015. The negative cash flow from operating activities for the three months ended September 30, 2016 is attributable to the Company's net loss from operations of $401,892 primarily due to the issuance of common stock for services. Cash provided by operations for the three months ended September 30, 2015 is attributable to the Company's net loss of $144,166 offset primarily by increase in prepaid expenses offset by increase in accounts payable to related parties.

 

We used cash in investing or financing activities of $850 and $1,230 for the three months ended September 30, 2016 and 2015.

 

We had cash provided by financing activities of $23,968 for the three months ended September 30, 2016 compared to $81,000 for the same period in 2015.

 

We will have to raise funds to pay for our expenses. We may have to borrow money from shareholders or issue debt or equity or enter into a strategic arrangement with a third party. There can be no assurance that additional capital will be available to us. We currently have no arrangements or understandings with any person to obtain funds through bank loans, lines of credit or any other sources. Since we have no such arrangements or plans currently in effect, our inability to raise funds for our operations will have a severe negative impact on our ability to remain a viable company.

  

Going Concern

 

The Company has generated limited revenues for the three months ended September 30, 2016 of $120,554, has recurring net losses for the three months ended September 30, 2016 of $401,892, and a working capital deficiency as of September 30, 2016 of $296,322, and used cash in operations of $21,878 for the three months ended September 30, 2016. In addition, as of September 30, 2016, the Company had a stockholders’ deficit and accumulated deficit of $407,352 and $4,412,230, respectively. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

 

The accompanying consolidated financial statements have been prepared in conformity with U.S. GAAP, which contemplate continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The ability of the Company to continue its operations is dependent on the execution of management’s plans, which include the raising of capital through the debt and/or equity markets, until such time that funds provided by operations are sufficient to fund working capital requirements. If the Company were not to continue as a going concern, it would likely not be able to realize its assets at values comparable to the carrying value or the fair value estimates reflected in the balances set out in the preparation of the consolidated financial statements.

 

 

 

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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.

 

Off Balance Sheet Arrangements

 

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

 

Critical Accounting Policies

 

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

 

See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 1, “Summary of Significant Accounting Policies” in our audited financial statements for the year ended June 30, 2015, included in our Annual Report on Form 10-K as filed on October 7, 2016, for a discussion of our critical accounting policies and estimates.

 

NON-GAAP FINANCIAL MEASURES

 

Adjusted Net Earnings

 

In addition to reporting net loss from operations as defined under generally accepted accounting principles (“GAAP”), the Company presents adjusted net earnings from operations (adjusted net earnings), which is a non-GAAP performance measure. Adjusted net earnings consist of net loss from operations after adjustment for those items shown in the table below. Adjusted net earnings does not represent, and should not be considered an alternative to, GAAP measurements such as net loss from operations (its most comparable GAAP financial measure), and the Company’s calculations thereof may not be comparable to similarly titled measures reported by other companies. By eliminating the items shown below, the Company believes that the measure is useful to investors because similar measures are frequently used by securities analysts, investors, and other interested parties in their evaluation of companies. The Company’s management does not view adjusted net earnings in isolation and also uses other measurements, such as net loss from operation and revenues to measure operating performance. The following table provides a reconciliation of net loss from operations, the most directly comparable GAAP measure, to adjusted net earnings for the periods presented:

 

Adjusted Net Loss  For the Three Months Ended 
   September 30, 
   2016   2015 
         
Net loss  $(401,892)  $(144,166)
Beneficial conversion feature expense   (29,315)   (4,636)
           
Adjusted net loss  $(372,577)  $(139,530)
           
Weighted average shares outstanding  -  basic and diluted   95,012,563    174,181,200 
           
Adjusted basic and diluted net loss per share  $(0.00)  $(0.00)

 

 

 

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Adjusted EBITDA

 

In addition to reporting net loss from operations as defined under GAAP, the Company also presents adjusted net earnings before interest, income taxes, depreciation, depletion, and amortization from operations (adjusted EBITDA), which is a non-GAAP performance measure. Adjusted EBITDA consists of net loss from operations after adjustment for those items shown in the table below. Adjusted EBITDA does not represent, and should not be considered an alternative to, GAAP measurements such as net loss from operations (its most comparable GAAP financial measure), and the Company’s calculations thereof may not be comparable to similarly titled measures reported by other companies.

 

By eliminating the items shown below, the Company believes the measure is useful in evaluating its fundamental core operating performance. The Company also believes that adjusted EBITDA is useful to investors because similar measures are frequently used by securities analysts, investors, and other interested parties in their evaluation of companies. The Company’s management uses adjusted EBITDA to manage its business, including in preparing its annual operating budget and financial projections. The Company’s management does not view adjusted EBITDA in isolation and also uses other measurements, such as net loss from operations and revenues to measure operating performance. The following table provides a reconciliation of net loss from operations, the most directly comparable GAAP measure, to adjusted EBITDA for the periods presented:

 

Adjusted EBITDA  For the Three Months Ended 
   September 30, 
   2016   2015 
         
Net loss from operations  $(401,892)  $(144,166)
Interest expense   (2,401)    
Amortization   (140)   (82)
Stock-based compensation   (256,900)    
Beneficial conversion feature expense   (29,315)   (4,636)
           
Adjusted EBITDA  $(113,136)  $(139,448)
           
Weighted average shares outstanding  -  basic and diluted   95,012,563    174,181,200 
           
Adjusted basic and diluted net loss per share  $(0.00)  $(0.00)

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

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

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

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

 

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are not effective as of such date. The Chief Executive Officer and Chief Financial Officer have determined that the Company continues to have the following deficiencies which represent a material weakness:

 

 

 

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1. The Company intends to appoint additional independent directors;
2. Lack of in-house personnel with the technical knowledge to identify and address some of the reporting issues surrounding certain complex or non-routine transactions. With material, complex and non-routine transactions, management has and will continue to seek guidance from third-party experts and/or consultants to gain a thorough understanding of these transactions;
3. Insufficient personnel resources within the accounting function to segregate the duties over financial transaction processing and reporting;
4. Insufficient written policies and procedures over accounting transaction processing and period end financial disclosure and reporting processes.

  

To remediate our internal control weaknesses, management intends to implement the following measures:

 

  · The Company will add sufficient number of independent directors to the board and appoint additional member(s) to the Audit Committee.
  · The Company will add sufficient accounting personnel to properly segregate duties and to effect a timely, accurate preparation of the financial statements.
  · The Company will hire staff technically proficient at applying U.S. GAAP to financial transactions and reporting.
  · Upon the hiring of additional accounting personnel, the Company will develop and maintain adequate written accounting policies and procedures.

 

The additional hiring is contingent upon The Company’s efforts to obtain additional funding through equity or debt and the results of its operations. Management expects to secure funds in the coming fiscal year but provides no assurances that it will be able to do so.

 

Changes in Internal Control Over Financial Reporting

 

Except as set forth above, due to the new business plan, we are in the process of finalizing our controls over the new business process.

 

Limitations on the Effectiveness of Controls

 

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

 

 

 

 

 

 

 

 

 

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

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

 

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

 

Subsequent to September 30, 2016, the following issuances of unregistered securities were made. These securities were not registered under the Securities Act of 1933, as amended (the “Securities Act”), but were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act as a transaction by an issuer not involving a public offering.

 

On October 17, 2016, the Company issued 24,000 shares of common stock to a consultant in exchange for services.

 

On October 17, 2016, the Company issued 24,000 shares of common stock to a consultant in exchange for services. The Company will record an expense accordingly.

 

On October 17, 2016, the Company issued 268,167 shares of common stock and a warrant for 268,167 shares of common stock to a consultant in settlement of a payable of $16,090.

 

On October 17, 2016, the Company issued 2,501,000 shares of common stock to Trend Investments, Inc., a consultant, in exchange for services.

 

On November 3, 2016, the Company issued 50,000 shares of common stock to a consultant in exchange for services.

 

On November 3, 2016, the Company received $25,000 in exchange for 500,000 shares of common stock.

 

On November 7, 2016, the Company entered into an employment agreement which provided for the issuance of 250,000 shares of common stock.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

  

Item 6. Exhibits

 

Exhibit No.   Description
3.1   Articles of Incorporation (incorporated by reference to our Registration Statement on Form S-1, filed on July 22, 2013)

3.2

  Bylaws (incorporated by reference to our Registration Statement on Form S-1, filed on July 22, 2013)
3.3   Articles of Merger (incorporated by reference to our Current Report on Form 8-K, filed on February 25, 2015)
3.4   Certificate of Amendment (incorporated by reference to our Current Report on Form 8-K, filed on June 9, 2016)
10.1   Share Exchange Agreement dated November 6, 2014 (incorporated by reference to our Form 10-Q/A for the period ended December 31, 2014, filed on September 10, 2015)
10.2   Audit for the Period Ended November 6, 2014 of Freedom Leaf, Inc., the private company (incorporated by reference to our Form 10-Q/A for the period ended December 31, 2014, filed on September 10, 2015)
31.1 (1)   Certification by the Principal Executive Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).
31.2 (1)   Certification by the Principal Financial Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).
32.1 (1)   Certification by the Principal Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 (1)   Certification by the Principal Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

__________

(1) Filed herewith

 

 

 

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SIGNATURES

 

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

 

  Freedom Leaf, Inc.
   
Dated: November 15, 2016 By: /s/ Clifford J. Perry
  Clifford J. Perry
  Chief Executive Officer and Chief Financial Officer
   

 

 

 

 

 

 

 

 

 

 

 

 

 

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