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EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - Freedom Leaf Inc.freedom_10q-ex3102.htm
EX-32.2 - CERTIFICATION - Freedom Leaf Inc.freedom_10q-ex3202.htm
EX-32.1 - CERTIFICATION - Freedom Leaf Inc.freedom_10q-ex3201.htm
EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - Freedom Leaf Inc.freedom_10q-ex3101.htm
EX-10.12 - EXCHANGE AGREEMENT - Freedom Leaf Inc.freedom_10q-ex1012.htm

Table of Contents

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 March 31, 2018

 

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

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

 

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

 

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 June 27, 2018, there were 187,048,252 shares of common stock, par value $0.001 per share issued, issuable, and outstanding.

 

 

 

   
 

 

FREEDOM LEAF INC.

FORM 10-Q

MARCH 31, 2018

 

INDEX

 

  Page No.
PART I – FINANCIAL INFORMATION 3
Item 1.   Financial Statements 4
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations 29
Item 3.   Quantitative and Qualitative Disclosures About Market Risk 34
Item 4.   Controls and Procedures 34
       
PART II – OTHER INFORMATION 36
Item 1.   Legal Proceedings 36
Item 1A.   Risk Factors 36
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds 36
Item 3.   Defaults Upon Senior Securities 38
Item 4.   Mine Safety Disclosures 38
Item 5.   Other Information 38
Item 6.   Exhibits 39
       
SIGNATURES 40

 

 

 

 

 

 

 

 

 2 
 

 

PART I – FINANCIAL INFORMATION

 

TABLE OF CONTENTS

 

Index to Financial Statements   Page
     
Condensed Consolidated Balance Sheets as of March 31, 2018 (unaudited) and June 30, 2017   4
     
Condensed Consolidated Statements of Operations and Comprehensive Income for the three months and nine months ended March 31, 2018 and 2017 (unaudited)   5
     
Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2018 and 2017 (unaudited)   6
     
Notes to Condensed Consolidated Financial Statements   7

 

 

 

 

 

 

 

 3 
 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

FREEDOM LEAF INC.

and Subsidiaries

Condensed Consolidated Balance Sheets

(unaudited)

 

 

   March 31,   June 30, 
   2018   2017 
   (unaudited)     
         
ASSETS    
Current assets          
Cash  $165,544   $2,498 
Accounts receivable, net   28,881     
Inventory, net   82,485     
Prepaid expense and other current assets   119,615    1,600 
Other receivable, net of reserves   1,123    637,817 
Total current assets   397,648    641,915 
           
Fixed assets, net   196,631     
Intangible assets, net   316,955    10,820 
Goodwill   315,685     
Other assets   44,185    338,084 
           
Total assets  $1,271,104   $990,819 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
Current liabilities          
Convertible notes payable, net of discount  $   $70,678 
Notes payable   759    3,141 
Accounts payable   323,924    15,789 
Accrued expenses   97,806    31,891 
Accrued expenses to related parties   109,500     
Derivative liabilities       52,757 
Total current liabilities   531,989    174,256 
           
Non-current liabilities          
Other non-current liabilities       188,075 
Payable to related party   313,713    290,670 
Total non-current liabilities   313,713    478,745 
           
Total liabilities   845,702    653,001 
           
Commitments and contingencies       150,000 
           
Stockholders' equity          
Preferred stock, $0.001 par value, 10,000,000 shares authorized Series A preferred stock, 1,000,000 shares authorized, 948,022 shares issued and outstanding at March 31, 2018 and June 30, 2017, respectively   948    948 
Common stock, $0.001 par value, 500,000,000 shares authorized, 161,740,712 and 111,101,795 shares issued, issuable, and outstanding at March 31, 2018 and June 30, 2017, respectively   161,741    111,102 
Additional paid-in capital   8,516,596    4,996,756 
Accumulated comprehensive income   22     
Accumulated deficit   (8,247,029)   (4,920,988)
Total Freedom Leaf Inc. stockholders' equity   432,278    187,818 
Non-controlling interests   (6,876)    
Total stockholders’ equity   425,402     
Total liabilities and stockholders' equity  $1,271,104   $990,819 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

 4 
 

 

FREEDOM LEAF INC.

and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income

(unaudited)

 

 

   For the three months ended
March 31,
   For the nine months ended
March 31,
 
   2018   2017   2018   2017 
                 
Revenue, net  $56,254   $254,084   $63,913   $823,204 
                     
Operating expenses                    
Direct costs of revenue   81,045    17,428    150,871    88,792 
General and administrative   337,409    247,578    1,186,222    1,170,036 
Depreciation and amortization expense   84,935        108,251    370 
Bad debt expense   221,294        637,817    1,500 
Marketing and selling   54,237    12,600    58,554    32,319 
Total operating expenses   778,920    277,606    2,141,715    1,293,017 
                     
Operating loss   (722,666)   (23,522)   (2,077,802)   (469,813)
                     
Other income (expense)                    
Interest expense   (1,659)   (6,026)   (14,439)   (11,276)
Loss on settlement of debt   (113,936)       (419,098)    
Interest income   7        10,331     
Loss on conversion of debt into common stock   (781,523)       (781,523)    
Gain on extinguishment of liabilities   54,157        54,157     
Change in fair value of embedded conversion features   (36,575)   (2,905)   (59,127)   (2,905)
Beneficial conversion feature   34,178    5,253    (45,416)   (55,014)
Total other income (expense)   (845,351)   (3,678)   (1,255,115)   (69,195)
                     
Provision for income taxes                
                     
Net loss before non-controlling interest   (1,568,017)   (27,200)   (3,332,917)   (539,008)
Loss attributable to non-controlling interest   6,876        6,876     
                     
Net loss attributable to common stockholders  $(1,561,141)  $(27,200)  $(3,326,041)  $(539,008)
                     
Net loss attributable to common stockholders per share - basic and diluted  $(0.01)  $(0.00)  $(0.02)  $(0.01)
                     
Weighted average number of common shares outstanding - basic and diluted   158,509,748    102,022,698    137,114,271    98,283,870 
                     
Exchange differences arising on translating foreign operations  $(22)  $   $(22)  $ 
Total comprehensive loss   (1,561,039)       (3,326,019)    
Total comprehensive loss – Non-controlling interest   (6,978)       (6,898)    
Total comprehensive loss – Controlling interest  $(1,568,017)  $(27,200)  $(3,332,917)  $(539,008)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

 5 
 

 

FREEDOM LEAF INC.

and Subsidiaries

Condensed Consolidated Statements of Cash Flows

For the Nine Months Ended March 31,

(unaudited)

 

 

         
   2018   2017 
Cash flows from operating activities:          
Net loss  $(3,332,917)  $(539,008)
Adjustments to reconcile net loss to net cash used in operations:          
Depreciation and amortization   108,251    370 
Beneficial conversion feature   187,902    55,014 
Gain on settlement of contingent liabilities   (150,000)    
Loss on common stock issued for accounts payable   189,114     
Issuance of common stock for services   571,858    616,942 
Loss on conversion of debt   710,447     
Change in fair value of embedded conversion features       2,905 
Loss on revaluation of derivative liabilities   59,217      
Bad debt expense   637,817    (1,500)
Changes in operating assets and liabilities:          
Accounts receivable   (21,451)   500 
Inventory   (55,285)   2,465 
Prepaid expense   (119,138)    
Other receivable       (399,286)
Other assets   (40,600)   (229,791)
Accounts payable and accrued expenses   607,198    165,085 
Accounts payable and accrued expenses to related parties   127,499    103,405 
Net cash used in operating activities   (520,088)   (222,899)
           
Cash flows from (used in) investing activities          
Cash acquired in acquisition of GME   3,546     
Intangible asset acquired   (27,938)   (3,897)
Net cash from (used in) investing activities   (24,392)   (3,897)
           
Cash flows from financing activities:          
Proceeds from capital contributed       28,148 
Proceeds from related party       76,940 
Proceeds from sale of common stock   646,058    80,000 
Repayments on notes payable   (97,382)    
Proceeds from notes payable   166,842    46,000 
Net cash provided by financing activities   715,518    231,088 
           
Effects of exchange rates on cash   (7,992)    
           
Net increase in cash   163,046    4,293 
           
Cash at beginning of period   2,498    1,758 
           
Cash at end of period  $165,544   $6,051 
           
Supplemental disclosure of cash flow information:          
           
Cash paid for interest  $   $ 
           
Cash paid for taxes  $   $ 
           
Non-cash investing and financing activities:          
Conversion of debt into common stock  $   $115,065 
Issuance of common stock for accounts payable and accrued expenses  $662,459   $ 
Conversion of common stock into licensing agreement  $   $25,000 
Issuance of common stock for inventory  $27,200   $ 
Financed purchases of property and equipment  $148,500   $ 
Common stock issued in business combination  $396,728   $ 
Exercise of warrants for the issuance of common stock  $215   $ 
Notes assigned between holders  $118,602   $ 
Initial debt discounts  $116,625   $ 
Common stock issued for settlement of debt  $1,346,520   $ 
Common stock issued for rights agreement  $22,000   $ 
Derivatives liability  $   $23,918 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 6 
 

 

Freedom Leaf Inc.

and Subsidiaries

Notes to Condensed Consolidated Financial Statements

March 31, 2018

(unaudited)

 

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

 

Organization

 

Freedom Leaf Inc. (the “Company,” “we,” “us,” “our,” “Freedom Leaf” or “FRLF”) was incorporated in the State of Nevada on February 21, 2013, under the name of Arkadia International, Inc. The Company originally was engaged in the business of the acquisition of in demand equipment, cars and goods with the intent to 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 (“Cowan”) acquired a majority of the issued and outstanding common stock of the Company in accordance with stock purchase agreements by and between Cowan and Vladimir and Galina Shekhtman (“Sellers”). On the closing date, October 3, 2014, Cowan purchased from the Sellers 6,950,100 shares of the Company’s outstanding restricted common stock for $100,000, representing 93% of the then-outstanding common stock of the Company.

 

On November 6, 2014, the Company merged with Freedom Leaf Inc., a private Nevada corporation. The Company changed its name from Arkadia International, Inc., to Freedom Leaf Inc. As a result of the merger, the private company was dissolved, the sole officer, director and shareholder of the private company, Clifford J. Perry, became an officer and director of the Company, and Mr. Perry received approximately 48.1% of the Company’s common stock post-merger. See Note 2 for related discussion.

 

For financial reporting purposes, the merger was accounted for as a "reverse merger" and recapitalization rather than a business combination, and the private company was deemed to be the accounting acquirer in the transaction, with the Company deemed to be the acquired company for financial reporting purposes. Consequently, the assets and liabilities and the operations that are reflected in the historical consolidated financial statements of the Company prior to the merger are those of the private company, and were recorded at the historical cost basis of the private company, and the consolidated financial statements after completion of the merger include the assets and liabilities of both the predecessor public company and private company, the historical operations of private company, and the operations of both companies from the date of the merger.

 

Cannabis Business Solutions Inc (“Cannabis Business Solutions”), a Nevada corporation, was formed on February 5, 2014, and is a subsidiary of the Company. This subsidiary had nominal activity until it purchased the LaMarihuana.com assets from Valencia Web Technology S.L., B-97183354, effective April 8, 2017 (see Note 2).

 

Leafceuticals Inc (“Leafceuticals”), formerly known as Cannabiz U, Inc., a Nevada corporation, was formed on February 13, 2014, and is a wholly-owned subsidiary of the Company. This subsidiary began active operations in January 2018.

 

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.

 

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 Company that is dedicated to health and wellness products derived from legal Hemp. It is comprised of a group of diversified, international, vertically-integrated hemp businesses and cannabis media companies. Freedom Leaf Inc. has been working since 2014 to build a diverse portfolio of related hemp businesses through strategic acquisitions across the industry.

 

 

 7 

 

 

FRLF’s portfolio of acquisitions includes our recently acquired hemp CBD product line Irie CBD; our wholly-owned hemp extraction division Leafceuticals, Inc.; our exclusive health and wellness CBD brand “Hempology;” our hemp greenhouse cultivation with recent acquisition of a facility in Valencia, Spain; our hemp-based rolling paper company Plants to Paper; two of the largest Spanish-speaking cannabis web portals in the world LaMarihuana.com and Marihuana-Medicinal.com; and, of course, our flagship publication, Freedom Leaf Magazine.

 

Through our targeted acquisitions and growth plan execution, the Company has built a solid foundation for our vertically-integrated hemp and cannabis media company to enhance both revenue growth and shareholder value. Our cultivation and extraction divisions allow FRLF to grow and source our own hemp CBD, which allows lower production costs for our wholly-owned CBD product lines, and better gross profit, for our CBD product sales. In addition, our domestic and international media companies permit us to direct organic traffic to our eCommerce sites and retail locations.

 

·Freedom Leaf does not handle, grow, sell, or dispense marijuana or related products in the United States.

 

·Freedom Leaf believes that its European activities are in compliance with relevant EU laws.

 

Basis of Presentation

 

The Company prepares its consolidated financial statements in conformity with generally accepted accounting principles in the United States of America.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Freedom Leaf and its subsidiaries, Cannabis Business Solutions, Leafceuticals, Freedom Leaf Cares, and Freedom Leaf International. All significant inter-company balances and transactions have been eliminated in consolidation.

 

Fair Value Measurements

 

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 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 

 

 

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.

 

Inventory

 

Inventory is recorded at the lower of cost or market and the cost of sales are recorded utilizing the first in first out (“FIFO”) method.

 

Accounting for Derivatives

 

The Company evaluates its convertible debt, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for. The result of this accounting treatment is that under certain circumstances the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Equity instruments that are initially classified as equity that become subject to reclassification under this accounting standard are reclassified to liability at the fair value of the instrument on the reclassification date.

 

Revenue Recognition

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This update provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. We have early adopted this update. We do not believe this guidance will impact the recognition of our primary source of revenue. The adoption of this guidance did not have a material impact on our 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, which may dilute future earnings per share, consist of warrants to purchase 4,618,167 shares of common stock at March 31, 2018. Equivalent shares are not utilized when the effect is anti-dilutive.

 

Effect of Recent Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (“ASU No. 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for annual reporting periods beginning after December 15, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has adopted this update. We do not believe this guidance will impact the recognition of our primary source of revenue. The adoption of this guidance did not have a material impact on our consolidated financial statements.

 

 

 

 9 

 

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This update provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. We have adopted this update. We do not believe this guidance will impact the recognition of our primary source of revenue. The adoption of this guidance did not have a material impact on our consolidated financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements (Topic 205) Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The guidance requires management to perform an evaluation each annual and interim reporting period of whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within the one-year period after the date that the financial statements are issued. If such conditions are identified, the guidance requires an entity to provide certain disclosures about the principal conditions or events that gave rise to the substantial doubt about the entity’s ability to continue as a going concern, management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations and management’s plans to alleviate or mitigate substantial doubt about the entity’s ability to continue as a going concern. The guidance is effective for the first annual period ending after December 15, 2016 and interim periods thereafter.

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued an ASU on lease accounting. The ASU requires the lease rights and obligations arising from lease contracts, including existing and new arrangements, to be recognized as assets and liabilities on the balance sheet. The ASU is effective for reporting periods beginning after December 15, 2018 with early adoption permitted. While the Company is still evaluating the ASU, the Company expects the adoption of the ASU to have a material effect on the Company’s financial condition due to the recognition of the lease rights and obligations as assets and liabilities. The Company does not expect the ASU to have a material effect on the Company’s results of operations, and the ASU will have no effect on cash flows.

 

The Company has evaluated all other recent accounting pronouncements and believes that none of them will have a significant effect on the Company’s financial statement.

 

NOTE 2 –DEFINITIVE AGREEMENTS

 

On November 6, 2014, Freedom Leaf 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, Cowan, the officer and director of the Public Company, had acquired the majority of its outstanding common stock. Clifford J. Perry, the Private Company’s sole officer and director pre-merger (“Perry”), was the owner of record of all of the outstanding common shares of the Private Company (the “Private Company Stock”) prior to the merger. Pursuant to the merger, the Private Company was merged into the Public Company, and Perry, the Private Company’s shareholder, received 83,401.2 shares of Public Company common stock for each share of Private Company stock pre-merger, or 83,401,200 total shares of the Company’s common stock.

 

The closing of the merger was conditioned upon certain, limited customary representations and warranties, as well as the satisfaction or waiver of specified conditions to closing. As the parties satisfied all of the closing conditions, we filed Articles of Merger in Nevada consummating the merger, and shareholders of the Private Company pre-merger (Perry) owned approximately 48.1% of our issued and outstanding common stock post-merger. Following the merger, the Company focused on pursuing Private Company’s historical businesses.

 

The foregoing description of the merger agreement and transaction does not purport to be complete and is qualified in its entirety by the merger agreement, a copy of which has been filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q/A for the period ended December 31, 2014, which is incorporated herein by reference.

 

Accounting Treatment of the Merger

 

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

 

 

 

 10 

 

 

Licensing Rights

 

On February 8, 2016, the Company and Freedom Leaf Netherlands, B.V. (“FLNL”), a company located in the Netherlands, executed a Memorandum of Understanding (“MOU”), wherein the Company granted FLNL a right of first refusal to license certain rights from the Company described below in exchange for a payment of $25,000, and the parties agreed to negotiate a definite license agreement for such rights with the terms of the definitive agreement incorporating the material terms set forth in the MOU. Such rights include FLNL’s rights to use various trademarks of the Company, primarily “Freedom Leaf,” and other related rights, for use in the Netherlands by FLNL, including FLNL’s right to publish a Freedom Leaf magazine in the Netherlands, sell Freedom Leaf products and perform other activities related to the business of the Company. FLNL is a shareholder (common stock and warrants to purchase additional common stock) of the Company. On December 15, 2016, the Company and FLNL executed the license agreement. The agreement provided for a licensing fee of $250,000 with a payment schedule as follows: $70,869 which has been paid from the date of the MOU until the date of the agreement; $25,000 payment every two months, commencing on April 10, 2017 with the last payment on April 10, 2018, and a final payment of $4,131 on June 10, 2018. As of March 31, 2018, the Company has written the receivable 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 can be exercised as follows:

 

·250,000 warrants between June 2017 and August 2017; 250,000 warrants between September 2017 and November 2017; 250,000 warrants between December 2017 and February 2018; and 250,000 warrants between March 2018 and May 2018. See Notes 7 and 12.

 

On December 15, 2016, the Company and Freedom Leaf Iberia, B.V. (“FLI”), a company incorporated under the laws of the Netherlands, executed a license agreement. The licensing agreement provides FLI the distribution rights to the Company’s magazine and other “Freedom Leaf” branded merchandise. The territory of the agreement is Spain and Portugal. The agreement provided for a license fee of $250,000 payable to the Company. The payment schedule provides for a $25,000 payment every two months, beginning on April 20, 2017, concluding on April 20, 2018, with a final payment of $75,000 on June 20, 2018. As the Company is allowing for progress payments, the balance is shown net of imputed interest on the balance sheet. The Company also provided FLI with warrants to purchase up to 1,000,000 shares of common stock. The warrants have an exercise price of $0.05. The warrants can be exercised as follows: 250,000 warrants between June 2017 and August 2017; 250,000 warrants between September 2017 and November 2017; 250,000 warrants between December 2017 and February 2018; and 250,000 warrants between March 2018 and May 2018. See Notes 8 and 12. As of March 31, 2018, the Company has written the receivable 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. As the Company is allowing for progress payments, the balance is shown net of imputed interest on the balance sheet. The Company also provided BBDHS with warrants to purchase 1,200,000 shares of Company common stock at an exercise price of $0.05, exercisable as follows: 240,000 shares between September 1, 2017 and October 31, 2017, 240,000 shares between November 1, 2017 and December 31, 2017, 240,000 shares between January 1, 2018 and February 28, 2018, 240,000 shares between March 1, 2018 and May 30, 2018, and 240,000 shares between June 1, 2018 and July 30, 2018. See Notes 8 and 12. As of March 31, 2018, the Company has written the receivable off to bad debt.

 

Incubation Agreement

 

On January 18, 2016, the Company and Plants to Paper, LLC (“PTP”), a New Jersey limited liability company, executed an Incubation Agreement. PTP owned the patent pending application 62/245,153 (the “Patent”) with the title being “Rolling Papers and Blunt Wraps made from 100% Marijuana.” PTP agreed to transfer its ownership rights in the patent application to the Company, as well as PTP’s Medical Marijuana / Cannabis/Hemp Industry Incubator program. The Company agreed to supply management services and to fund the early stage development of PTP. The Incubation Agreement is for a period of twelve months. PTP will provide the Company with 20% of the outstanding membership shares of PTP in exchange for its services. The costs of patent registrations in the United States and other countries will be the liability of PTP. As of March 31, 2018, PTP had no activity. On February 1, 2017, the Agreement was modified for the following items: a) to provide 25% of the outstanding membership shares of PTP; b) require that the Patent be assigned to PTP; and c) acknowledge that the ownership rights have not been transferred to the Company as of that date. To-date, ownership rights have not been transferred.

 

 

 

 11 

 

 

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 March 31, 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 March 31, 2018, there were no sales.

 

LaMarihuana Purchase

 

On May 30, 2017, with an effective date of April 8, 2017 as per the Bill of Sale, Cannabis Business Solutions Inc. (the “Buyer”), a wholly-owned Nevada subsidiary of the registrant, Freedom Leaf Inc., entered into an Asset Purchase Agreement with Valencia Web Technology S.L., B-97183354, a Spanish limited liability company (Sociedad de Responsabilidad Limitada) (the “Seller,” or “Valencia”) to purchase the Seller’s assets, including its cash and cash equivalents, equipment, inventory, receivables, and two of its websites www.lamarihuana.com and www.marihuana-medicinal.com (but not including the Seller’s website cannabislandia.com), for a purchase price consisting of a 10% interest in the Buyer, and 3,000,000 shares of common stock of the registrant, valued at $300,000 (the “Initial FRLF Shares”), with additional shares of the registrant’s common stock due six months (October 8, 2017) following closing if, at such time, the average closing price of the registrant’s common stock during the previous five trading days is less than $0.10/share. Such additional shares shall be calculated as follows: $300,000 minus the product of (a) the Initial FRLF Shares multiplied by (b) the average closing price of the registrant’s common stock during the five trading days immediately preceding the True-Up Date (the “True-Up Price”), with such difference divided by the True-Up Price. On October 8, 2017, the Company removed the previously recorded contingent liability and recorded 4,142,857 shares of common stock as issuable, with a value of $126,000. On February 7, 2018, the Company and the Buyer agreed that 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. See Note 17.

 

The Company is in the process of meeting international requirements for the complete use of the web sites by the Company. This process is expected to be completed before the end of this fiscal year.

 

NOTE 3 –BUSINESS COMBINATION

 

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.

 

 

 

 12 

 

 

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 shareholders   (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 will write off the approximately $33,000 it had invested cumulatively in GME in addition to the stock issuance.

 

NOTE 4– GOING CONCERN

 

The Company has a net loss attributable to common stockholders for the nine months ended March 31, 2018 of $3,326,041 and working capital deficit as of March 31, 2018 of $134,341 and has used cash in operations of $520,088 for the nine months ended March 31, 2018. In addition, as of March 31, 2018, the Company had a stockholders’ equity and accumulated deficit of $425,402 and $8,247,029, respectively. These conditions raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year from the date of the issuance of these financial statements.

 

 

 

 13 

 

 

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

 

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

 

NOTE 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 the date of this report, 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 December 31, 2019. This facility serves as our corporate headquarters. After December 31, 2017, the Company has the option to opt out of the lease.

 

Future minimum lease payments under these leases are as follows:

 

2018  $5,982 
2019   18,943 
      
Total  $24,925 

 

Rent expense for the nine months ended March 31, 2018 and 2017 was $23,334 and $28,021, respectively.

 

NOTE 6 – RELATED PARTIES

 

Cowan, a former director and officer of the Company, has payables and accruals due to him of $313,713 and $269,226 as of March 31, 2018 and June 30, 2017, respectively. The payable, as agreed upon verbally, has a maturity date greater than one year, without any other set terms for repayment. Imputed interest is immaterial.

 

Clifford J. Perry (“Perry”), Chief Executive officer, Chief Financial Officer, and a director of the Company, has payables and accruals due to him of $0 and $21,444 as of March 31, 2018 and June 30, 2017, respectively. Imputed interest is immaterial. On July 31, 2017, the Company issued 5,784,061 shares of common stock to Cliff Perry for accrued compensation of $112,500. See Note 12

 

Raymond P. Medeiros (“Medeiros”), a director of the Company, has payables and accruals due to him of $0 and $0 as of March 31, 2018 and June 30, 2017, respectively. Imputed interest is immaterial. On July 31, 2017, the Company issued 2,699,228 shares of common stock to Raymond Medeiros for accrued compensation of $52,500. See Note 12.

 

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 12).

 

 

 

 14 

 

 

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, 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. See Note 17. 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 January 18, 2018, Pelosi purchased 1,050,000 shares of common stock for $21,000.

 

NOTE 7 – OTHER RECEIVABLES

 

The Company has three licensing agreements with the following: FLNL, FLI and BBDHS (see Note 2). The receivable, per entity, as recorded in Other Receivables as of March 31, 2018, is as follows:

 

   March 31,
2018
   June 30,
2017
 
FLNL  $176,779   $173,551 
FLI   246,178    240,555 
BBDHS   225,186    223,711 
Subtotal   648,143    637,817 
Less: Allowance   (648,143)     
Net Balance  $   $637,817 

 

As of March 31, 2018, FLNL, FLI and BBDHS are behind on payments of $100,000, $100,000, and $75,000, respectively. The Company and FLI agreed to a legal right of offset in regards to a balance of $60,000 owed by the Company to FLI. The revenue streams as stated herein have been delayed due to unforeseen circumstances. Thus, the Company granted deferment on the payments with each entity. Both FLNL and FLI expected to begin making payment sometime in 2018. As of the date of this report, the Company has not received payment, therefore, the Company has recorded an allowance of $648,143.

 

NOTE 8– FIXED ASSETS

 

The Company has fixed assets related to equipment and capital improvements. The depreciation of the equipment and capital improvements is over a five-year and two-year period, respectively. As of March 31, 2018, and June 30, 2017, the Company had fixed assets, net of accumulated depreciation, of $196,631 and $0, respectively. The fixed assets are as follows:

 

   March 31,   June 30, 
   2018   2017 
Equipment  $221,200   $ 
Total fixed assets   221,200     
Less: Accumulated depreciation   (24,569)    
Fixed assets, net  $196,631   $ 

 

The depreciation expense for the nine months ended March 31, 2018 and 2017, was $24,569 and $0, respectively.

 

NOTE 9 – INTANGIBLE ASSETS

 

The Company has intangible assets related to website development. The amortization of the intangible assets is over a five-year period. As of March 31, 2018, and June 30, 2017, the Company had intangible assets, net of accumulated amortization, of $316,955 and $10,820, respectively. The intangible assets are as follows:

 

   March 31,   June 30, 
   2018   2017 
Website development  $401,980   $12,245 
Total intangible assets   401,980    12,245 
Less: Accumulated amortization   (85,025)   (1,425)
Intangible assets, net  $316,955   $10,820 

 

 

 15 

 

 

The amortization expense for the nine months ended March 31, 2018 and 2017, was $83,722 and $370, respectively.

 

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

 

2018  $5,136 
2019   15,127 
2020   1,044 
2021   1,044 
2022 and thereafter   2,422 
Total  $24,773 

 

NOTE 10 – DERIVATIVES

 

Embedded Conversion Option Derivatives

 

Due to the conversion terms of certain promissory notes, the embedded conversion options met the criteria to be bifurcated and presented as derivative liabilities. The Company calculated the estimated fair values of the liabilities for embedded conversion option derivative instruments at the original note inception date and settlement dates and at June 30, 2017, using the Black-Scholes option pricing model using the share prices of the Company’s stock on the dates of valuation and using the following ranges for volatility, expected term and the risk-free interest rate at each respective valuation date, no dividend has been assumed for any of the periods:

 

   

March 31,

2018

   

June 30,

2017

   

Note

Inception

Date

 
Volatility     N/A       141%       170% - 232%  
Expected Term     N/A       0.33 - 0.96 years       0.75 - 1.0 years  
Risk-Free Interest Rate     N/A       0.84%       1.07% - 1.33%  

 

The following reflects the initial fair value on the note inception date and changes in fair value through March 31, 2018, which reflects that all promissory notes were converted and/or paid leaving no outstanding promissory notes as of March 31, 2018:

 

Embedded conversion option derivative liability fair value on June 30, 2017  $52,757 
Note modifications adjustment   43,866 
Adjustment for extinguishment of notes and conversion of notes   (91,653)
Change in fair value in fiscal year 2018   (4,970)
Embedded conversion option derivative liability fair value on March 31, 2018  $ 

 

NOTE 11 – CONVERTIBLE NOTES PAYABLE, NET OF PREMIUMS AND NOTES PAYABLE

 

Convertible notes, net of discounts and notes payable                        
   March 31, 2018   June 30, 2017 
           Principal,           Principal, 
       Debt   net of       Debt   net of 
   Principal   Discounts   Discounts   Principal   Discounts   Discounts 
PureEnergy  $   $   $   $15,475   $(7,489)  $7,986 
PureEnergy               13,480    (5,565)   7,915 
PowerUp               75,000    (39,330)   35,670 
PowerUp               38,000    (18,893)   19,107 
Total  $   $   $   $141,955   $(71,277)  $70,678 

 

 

 

 16 

 

 

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 March 31, 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 March 31, 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 March 31, 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 March 31, 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 12.

 

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 12. 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.

 

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.

 

 

 

 17 

 

 

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).

 

NOTE 12 – STOCKHOLDERS’ EQUITY

 

Series A Preferred Stock

 

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

  

Common Stock

 

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

 

In the first quarter of fiscal year 2018, the Company issued 1,793,195 shares of common stock which were recorded as issuable as of June 30, 2017.

 

On July 19, 2017, the Company issued 748,934 shares of common stock to PureEnergy related to the conversion of $13,481 of a convertible promissory note.

 

On July 31, 2017, the Company issued 5,784,061 shares of common stock to Cliff Perry for accrued compensation of $112,500. See Note 6.

 

 

 

 18 

 

 

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 May 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 500,303 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.

 

 

 

 19 

 

 

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.

 

 

 

 20 

 

 

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.

 

During the quarter ended March 31, 2018, the Company issued 503,535 shares of common stock to NuAxon BioScience, Inc. on behalf of Jason Edwards for services in November 2017 through March 2018 valued at $48,117.

 

 

 

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Warrants

 

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

 

On November 2, 2015, the Company issued 500,000 warrants for common stock to a subcontractor as an incentive to their services. The warrants mature on May 2, 2016. The exercise price is $0.02, and the warrant has a cashless exercise option. The warrants were valued at $0.20 per share, as defined in the section. The Company recorded an expense of $100,000. On February 2, 2016, Dobrucki exercised a warrant for 500,000 shares of common stock for $10,000, the exercise price of the warrants at $0.02 per share.

 

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

 

On October 17, 2016, the Company issued 268,167 shares of common stock and 268,167 warrants for common stock to Weintraub Law Group, LLC for the settlement of payables of $15,065.

 

On December 15, 2016, the Company and FLNL executed a license agreement (see Note 2). As part of the agreement, the Company provided FLNL with warrants to purchase up to 1,000,000 shares of common stock. The warrants have an exercise price of $0.05. The warrants can be exercised as follows: 250,000 warrants between June 2017 and August 2017; 250,000 warrants between September 2017 and November 2017; 250,000 warrants between December 2017 and February 2018, and; 250,000 warrants between March 2018 and May 2018. The warrants will be expensed according to their respective vesting schedule.

 

On December 15, 2016, the Company and FLI executed a license agreement (see Note 2). The Company provided FLI with warrants to purchase up to 1,000,000 shares of common stock. The warrants have an exercise price of $0.05. The warrants can be exercised as follows: 250,000 warrants between June 2017 and August 2017; 250,000 warrants between September 2017 and November 2017; 250,000 warrants between December 2017 and February 2018, and; 250,000 warrants between March 2018 and May 2018. The warrants will be expensed according to their respective vesting schedule.

 

 

 

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On January 16, 2017, the Company issued 1,000,000 warrants for common stock to Vincent Moreno for future consulting services. The warrants have an exercise price of $0.05 and expire in five years.

 

On January 30, 2017, the Company entered into an agreement with CorporateAds.com, LLC for services. The compensation provides a minimal $500 payment, 150,000 shares of common stock, and 150,000 warrants for common stock. The warrants have an exercise price of $0.10 per share with an expiration date eighteen months after issuance. The agreement is for 15 days and has an auto renewal feature for an additional 75 days. During the 75-day period, the Company will pay $500 for each additional 15 days. On February 1, 2017, both parties agreed to an addendum to the agreement to change the exercise price of $0.10 for the warrants to the following: 50,000 of the warrants have an exercise price of $0.10 per share; 50,000 of the warrants have an exercise price of $0.125 per share; and 50,000 of the warrants have an exercise price of $0.15 per share.

 

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.

 

   March 31, 2018   March 31, 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% 

 

Stock Option Plan

 

On June 27, 2016, the Board of Directors approved the 2016 Stock Option Plan which has reserved 10,000,000 shares of common stock. There are no stock options outstanding as of March 31, 2018.

 

NOTE 13 – CONCENTRATIONS

 

Concentration of Credit Risk

 

Financial instruments, which potentially subject the Company to a concentration of credit risk, consist principally of temporary cash investments.

 

The Company places its temporary cash investments with financial institutions insured by the FDIC. No amounts exceeded federally insured limits as of March 31, 2018. There have been no losses in these accounts through, March 31, 2018.

 

Concentration of Revenue

 

For the nine months ended March 31, 2018, the Company had no material customer.

 

Concentration of Supplier

 

The Company does not rely on any particular suppliers for its services.

 

Concentration of Intellectual Property

 

The Company owns or has filed for the trademarks “Freedom Leaf,” “Hemp Inspired,” “Cannabizu,” and “Cannabiz” as filed with the United States Patent and Trademark Office. The Company has filed for “Freedom Leaf” in Jamaica and Uruguay.

 

 

 

 

 23 
 

 

NOTE 14 – 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 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 $0.075 per share, for total proceeds of $75,000.

 

On April 16, 2018, Leafceuticals consummated the acquisition, with an effective date of April 1, 2018, 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 boasts an inventory of more than 25 different products and recorded approximately $1.5 million of revenue in 2017. IRIE also 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 $2,200,000 (subject to adjustment), as follows: $356,080 in cash and $1,843,920 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.

 

On April 2, 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 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 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 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.

 

 

 

 24 

 

 

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 (“Cesar”) and Joseph W and Patricia G Abrams Family Trust dtd 3/95 (“Abrams”) for $200,000 in total, based on a per share price of $0.08.

 

In a related transaction, the Company is issuing to Caesar and Abrams 6,000,000 shares of the Company’s common stock (based on a value of $0.25 per share, or $1,500,000) 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. Additionally, Michael Woloshin (“Woloshin”), a principal of Caesar, and Abrams, intend to work with the Company in an advisory capacity.

 

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 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.

 

During March through May 2018, in connection with the Company’s audit of GME, 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 on June 4, 2018, consummated a termination agreement with GME’s sellers. In connection with that agreement, GME’s sellers committed to return to the Company the 4,220,000 shares it previously issued to the sellers. The Company will write off approximately $33,000 it had invested cumulatively in GME in addition to the stock issuance. 

 

The Company, on May 17, 2018, entered into a binding letter of intent to acquire an existing, approximately 430,000 square foot facility, that it intends to convert from a Poinsettia production facility into a light deprivation hemp production greenhouse. The total purchase price, including approximately €350,000 of rare, botanical plants and other greenhouse supplies that the Company acquired for €100,000 and intends to sell, is: €4,100,000 (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. The Company intends to consummate this acquisition on or about July 2, 2018. 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.

 

On June 7, 2018, the Company retained Joseph Abrams, an individual acting as an independent contractor, to serve as a member of the Company’s Advisory Board and, in connection with that appointment, issued to Abrams: 312,500 of the Company’s common stock per year. The first year’s stock will be issued immediately and shall vest monthly over one year and will be valued at $0.16 per share, valuing the grant at $50,000. For the second year, the stock will be issued on June 9, 2019, and will be based on the closing price of the Company’s common stock on OTC Markets on June 8, 2019.

 

 

 

 

 25 

 

 

On June 21, 2018, the Company consummated the acquisition of intellectual property relating 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. The patent-pending application is for a formula for a dietary supplement, which should not require a United States Food and Drug Administration (“FDA”) approval. The Company acquired the intellectual property regarding the formula and patent-pending application for 1,600,000 shares of common stock at a value of $0.25 per share, 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.

 

NOTE 15 – RESTATEMENT OF PRIOR PERIOD FINANCIAL STATEMENTS

 

Balance Sheet and Statement of Operations

 

The Company restated its previously issued consolidated financial statements included in the original Quarterly Report on Form 10-Q for the six months ended December 31, 2017 and the three months ended September 30, 2017 to reflect the effects of accounting and reporting errors resulting from a deficiency in its accounting and financial statement preparation process. This error and the related adjustments resulted in an understatement of net loss of $314,903 for the six months ended December 31, 2017 and the overstatement of $29,707 in derivative liabilities, the understatement of $344,610 in additional paid-in capital and the overstatement of $314,903 in accumulated deficits as of December 31, 2017.  This error and the related adjustments resulted in an understatement of net loss of $143,789 for the three months ended September 30, 2017 and the overstatement of $115,975 in derivative liabilities, the understatement of $31 in common stock, the overstatement of $259,764 in additional paid-in capital and the overstatement of $143,789 in accumulated deficits as of September 30, 2017. 

 

The following tables present the impact of the financial statement error for the consolidated financials of Freedom Leaf Inc.:

 

Balance Sheet                        
   December 31, 2017   September 30, 2017 
   As previously           As previously         
   reported   Adjustments   As restated   reported   Adjustments   As restated 
Liabilities and Stockholders'                              
Equity (Deficit)                              
                               
Derivative liabilities  $47,289   $(29,707)  $17,582   $157,743   $(115,975)  $41,768 
                               
Common stock                 $124,591   $31   $124,622 
Additional paid-in capital  $6,110,832   $344,610   $6,455,442   $5,444,594   $259,764   $5,704,327 
Accumulated deficit  $(6,370,985)  $(314,903)  $(6,685,888)  $(5,628,572)  $(143,789)  $(5,772,361)

 

Statement of Operations                    
    For the Six Months Ended December 31, 2017   For the Three Months Ended September 30, 2017
Net loss attributable to common shareholders   $(1,449,997)  $(314,903)  $(1,764,900)  $(707,584)  $(143,789)  $(851,373)

 

 

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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, 2017 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 originally 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 agreements with the sellers, Cowan purchased from the Sellers 6,950,100 shares of the Company’s outstanding restricted common stock for $100,000, representing 93% of the then-outstanding common stock of the Company.

  

On November 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, the Company merged with Freedom Leaf Inc., a private Nevada corporation. The Company changed its name from Arkadia International, Inc., to Freedom Leaf Inc. As a result of the merger, the private company was dissolved, the sole officer, director and shareholder of the private company, Clifford J. Perry, became an officer and director of the Company, and Mr. Perry received approximately 48.1% of the Company’s common stock post-merger.

 

Prior to the merger, 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.

 

Until the recently-consummated IRIE acquisition, we have been devoting most of our efforts to the news, arts and entertainment niche, with both “in print” and online publications, as well as offering products and services to the cannabis industry. In connection with the IRIE acquisition and recent launch of various CBD products through our Leafceuticals subsidiary, we are increasing our focus on utilizing our web sites and other means to sell CBD products.

 

Plan of Operation

 

Freedom Leaf Inc. is a company that is dedicated to health and wellness products derived from legal Hemp. It is comprised of a group of diversified, international, vertically-integrated hemp businesses and cannabis media companies. Freedom Leaf Inc. has been working since 2014 to build a diverse portfolio of related hemp businesses and cannabis media through strategic acquisitions across the industry.

 

 

 

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FRLF’s portfolio of acquisitions includes our recently acquired hemp CBD product line Irie CBD; our wholly-owned hemp extraction division Leafceuticals, Inc.; our exclusive health and wellness CBD brand Hempology; our hemp-based rolling paper company Plants to Paper; two of the largest Spanish-speaking cannabis web portals in the world LaMarihuana.com and Marihuana-Medicinal.com; and, of course, our flagship publication, Freedom Leaf Magazine.

 

Through our targeted acquisitions and growth plan execution, the Company has built a solid foundation for our vertically-integrated hemp company to enhance both revenue growth and shareholder value. Our cultivation and extraction divisions allow FRLF to grow and source our own hemp CBD, which allows lower production costs for our wholly-owned CBD product lines, and better gross profit, for our CBD product sales. In addition, our domestic and international media companies permit us to direct organic traffic to our eCommerce sites and retail locations.

 

·         Freedom Leaf does not handle, grow, sell, or dispense marijuana or related products in the United States.

 

·         Freedom Leaf believes that its European activities are in compliance with relevant EU laws.

 

Results of Operations

 

For the Three Months Ended March 31, 2018 and March 31, 2017

 

Revenues

 

Our revenue was $56,254 for the three months ended March 31, 2018, compared to $254,084 for the three months ended March 31, 2017. Revenue, by class, is as follows:

 

   For the three months ended 
Revenues:  March 31, 
   2018   2017 
Magazine related  $   $9,157 
Licensing fees       226,685 
Equipment sales commissions       18,242 
CBD oil   30,000     
Sale of products   26,254     
Total  $56,254   $254,084 

 

Note that, the Company has been shifting its focus away from licensing revenues, its primary source of revenue in fiscal 2017, and toward the sale of products. Since the merger until the recently-consummated IRIE acquisition, we have been devoting most of our efforts to the news, arts and entertainment niche, with both “in print” and online publications, as well as offering products and services to the cannabis industry. In connection with the IRIE acquisition and recent launch of various CBD products through our Leafceuticals subsidiary, we are increasing our focus on utilizing our web sites and other means to sell CBD products.

 

Operating Expenses

 

Direct costs of revenues were $81,045 and $17,428 for the three months ended March 31, 2018 and 2017, respectively. Direct costs of revenues, by class, is as follows:

 

   For the three months ended 
Direct costs of revenue:  March 31, 
   2018   2017 
Magazine related  $25,102   $17,428 
Extraction costs   55,943     
Total  $81,045   $17,428 

 

 

 

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For the three months ended March 31, 2018 our general and administrative expenses and marketing and selling expenses were $697,875 compared to $260,178 for the three months ended March 31, 2017, resulting in an increase of $437,697, attributable primarily to stock-based compensation of $155,781 for the three months ended March 31, 2018, compared to $83,750 for the three months ended March 31, 2017, and bad debt expense of $221,294 for the three months ended March 31, 2018, compared to $0 for the three months ended March 31, 2017.

 

Other income (expenses)

 

Other income (expense) was an expense of $845,351 for the three months ended March 31, 2018, compared to an expense of $3,678 for the three months ended March 31, 2017. The expense for 2018 is primarily comprised of loss on settlement of debt ($113,936) and loss on conversion of debt into common stock ($781,523).

 

Net loss attributable to common shareholders was $1,561,141 for the three months ended March 31, 2018, compared to net loss of $27,200 for the three months ended March 31, 2017. The higher net loss for the three months ended March 31, 2018 as compared to the same period in 2017 is largely attributable to: (1) one-time expenses relate to the launch of CBD sales, such as pre-production research and development costs; (2) increasing general and administrative expenses and marketing and selling expenses in anticipation of expanding product sales, and (3) lower revenues – as the Company has shifted its focus from licensing revenues to product sales.

  

For the Nine Months Ended March 31, 2018 and March 31, 2017

 

Revenues

 

Our revenue was $63,913 for the nine months ended March 31, 2018, compared to $823,204 for the nine months ended March 31, 2017. Comparative Revenues decreased as the Company has shifted away from generating revenues for License Fees and toward product sales. Revenue, by class, is as follows:

 

   For the nine months ended 
Revenues:  March 31, 
   2018   2017 
Magazine related  $5,826   $29,101 
Referral fees       11,474 
Licensing fees       763,549 
Equipment sales commissions       18,242 
Seminar and training       838 
CBD oil   30,000     
Sale of products   28,087     
Total  $63,913   $823,204 

 

Operating Expenses

 

Direct costs of revenues were $150,871 and $88,792 for the nine months ended March 31, 2018 and 2017, respectively. The higher operating expenses for the three months ended March 31, 2018 as compared to the same period in 2017 is largely attributable to both: (1) one-time expenses relate to the launch of CBD sales, such as pre-production research and development costs, and (2) increasing general and administrative expenses and marketing and selling expenses in anticipation of expanding product sales.

  

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

 

   For the nine months ended 
Direct costs of revenue:  March 31, 
   2018   2017 
Magazine related  $77,218   $88,792 
Extraction costs   55,943     
Sale of products   7,710     
Total  $150,871   $88,792 

 

 

 

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For the nine months ended March 31, 2018, our general and administrative expenses and marketing and selling expenses were $1,990,844 compared to $1,204,225 for the nine months ended March 31, 2017, resulting in an increase of $786,619, attributable primarily to stock-based compensation of $571,858 for the nine months ended March 31, 2018, compared to $616,942 for the nine months ended March 31, 2017, and bad debt expense of $648,142 for the nine months ended March 31, 2018, compared to $500 for the nine months ended March 31, 2017. As a result, net loss attributable to common shareholders was $3,326,041 for the nine months ended March 31, 2018, compared to net loss of $539,008 for the nine months ended March 31, 2017.

 

Other income (expenses)

 

Other income (expense) was an expense of $1,255,115 for the nine months ended March 31, 2018, compared to an expense of $69,195 for the nine months ended March 31, 2017. The expense for 2018 is primarily comprised of loss on settlement of debt ($419,098) and loss on conversion of debt into common stock ($781,523).

 

Net loss attributable to common shareholders was $3,326,041 for the nine months ended March 31, 2018, compared to net loss of $539,008 for the nine months ended March 31, 2017.

 

Liquidity and Capital Resources

 

Overview

 

As of March 31, 2018, the Company had $165,544 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 nine months ended March 31, 2018 compared to the nine months ended March 31, 2017

 

We used cash in operations of $520,088 for the nine months ended March 31, 2018, compared to cash used in operations of $222,899 for the nine months ended March 31, 2017. The negative cash flow from operating activities for the nine months ended March 31, 2018 is attributable to the Company's net loss attributable to common shareholders of $3,326,041 primarily due to the issuance of common stock for services ($571,858) and bad debt expense ($648,142). Cash used in operations of $222,899 for the nine months ended March 31, 2017 is attributable to the Company's net loss of $539,008 offset primarily by increase in stock-based compensation of $616,942.

 

We used cash in investing or financing activities of $24,392 and $3,897 for the nine months ended March 31, 2018 and 2017.

 

We had cash provided by financing activities of $715,518 for the nine months ended March 31, 2018, compared to $231,088 for the same period in 2017.

 

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 accompanying financial statements and the factors within it, have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business and the ability of the Company to continue as a going concern for a reasonable period of time. The Company sustained net losses attributable to common shareholders of $3,326,041 and cash used in operating activities of $520,088 for the nine months ended March 31, 2018. The Company had working capital deficit, stockholders’ equity and accumulated deficit of $134,341, $425,402 and $8,247,029, respectively, at March 31, 2018. The Company’s continuation as a going concern is dependent upon its ability to generate revenues and its ability to continue receiving investment capital and loans from third parties to sustain its current level of operations. The Company is in the process of securing working capital from investors for common stock, convertible notes payable, and/or strategic partnerships. No assurance can be given that the Company will be successful in these efforts. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern for a period of one year from the date of issuance of these financial statements.

 

 

 

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Off Balance Sheet Arrangements

 

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

  

Critical Accounting Policies

 

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

 

See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 1, “Summary of Significant Accounting Policies” in our audited financial statements for the year ended June 30, 2017, included in our Annual Report on Form 10-K as filed on October 19, 2017, 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 Nine Months Ended 
   March 31, 
   2018   2017 
         
Net loss attributable to common shareholders  $(3,326,041)  $(539,008)
Loss on settlement of debt   (419,098)    
Gain on conversion of debt into common stock   (781,523)    
Gain on extinguishment of liabilities   54,157    
Change in fair value of embedded conversion features   (59,127)   (2,905)
Beneficial conversion feature expense   (45,416)   (55,014)
           
Adjusted net loss  $(2,075,034)  $(481,089)
           
Weighted average shares outstanding - basic and diluted   137,114,271    98,283,870 
           
Adjusted basic and diluted net loss per share  $(0.02)  $(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 Nine Months Ended 
   March 31, 
   2018   2017 
         
Net loss attributable to common shareholders  $(3,326,041)  $(539,008)
Interest expense   (14,439)   (11,276)
Interest income   10,331     
Depreciation and amortization   108,247    370 
Stock-based compensation   (645,618)   (616,942)
Bad debt expense   (648,142)   (500)
Loss on settlement of debt   (419,098)    
Loss on conversion of debt into common stock   (781,523)    
Gain on extinguishment of liabilities   54,157     
Change in fair value of embedded conversion features   (59,127)   (2,905)
Beneficial conversion feature expense   (45,416)   (55,014)
           
Adjusted EBITDA  $(885,413)  $147,259 
           
Weighted average shares outstanding - basic and diluted   137,114,271    98,283,870 
           
Adjusted basic and diluted net loss per share  $(0.01)  $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.

 

 

 

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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:

 

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

 

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

  

Limitations on the Effectiveness of Controls

 

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

 

 

 

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

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

 

Item 1A. Risk Factors

 

Not required.

 

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

 

During the quarter ending March 31, 2018, the Company issued the following unregistered securities. These securities were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, Regulation D promulgated thereunder as there was no general solicitation, and the transactions did not involve a public offering.

 

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 appointed of Richard Groberg (“Groberg”), via his company, RSGroberg Consulting, LLC, as its Chief Financial Officer to serve for an initial, two-year term, 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 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 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. 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.

 

 

 

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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 $32,842.

 

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 $12,350, and (ii) 56,930 shares of common stock for services performed in January 2018 valued at $16,737.

 

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 1, 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.

 

On March 31, 2018, the Company issued 503,535 shares of common stock to NuAxon BioScience, Inc. on behalf of Jason Edwards for services in November 2017 through March 2018 valued at $48,117.

 

 

 

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Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

On April 30, 2018, Richard S. “Tick” Segerblom was appointed as a member of the Board of Directors of the Company.

 

Mr. Segerblom, age 70, an attorney and politician, has been a Nevada State Senator representing District 3, which encompasses a portion of Clark County and portion of the City of Las Vegas, since 2012. Senator Segerblom was Chairman of the Nevada Democratic Party from 1990-1994, and he was first elected to the Nevada Assembly to represent Assembly District 9 in 2006. Senator Segerblom has not been a director of any other public companies during the prior 5 years.

 

In consideration of Senator Segerblom’s first year of service as a member of the Board of Directors of the Company, Senator Segerblom will be paid 314,465 restricted shares of the Company’s common stock, and he will receive a warrant to purchase 500,000 shares of the Company’s common stock at $0.10 per share, exercisable for a period of 18 months.

 

On May 10, 2018, Richard Groberg, the Company’s Chief Financial Officer, was appointed as a member of the Company’s Board of Directors.

 

From July 2015 through the present date, Mr. Groberg, age 60, has served in various management roles at Ever Well Health Systems, Care and Residence, which owns operates and manages healthcare facilities for patients with mental health issues. From January 2014 to July 2015, Mr. Groberg was the CFO and Vice President of Dixie Foods International, Inc., which develops, owns and operates quick service and fast casual restaurants in multiple regions; and from March 2012 to June 2015, Mr. Groberg was the President of Harrison James, LLC, a boutique iBank and management company. Also, from March 2012 through the present date, Mr. Groberg has been the managing member of RSGroberg Consulting, LLC, a consulting company providing CFO-related services to private equity firms, angel groups, and other private enterprises. Mr. Groberg has a B.A. in English from Emory University and an M.B.A. in Finance from Fordham University.

 

In consideration of Mr. Groberg’s first year of service as a member of the Board of Directors of the Company, Mr. Groberg’s entity, RSGroberg Consulting, LLC, be paid 312,500 restricted shares of the Company’s common stock, and he will receive a warrant to purchase 500,000 shares of the Company’s common stock at $0.10/share, exercisable for 18 months.

 

On May 11, 2018, the Company entered into an equity exchange agreement with Ceasar Capital Group, LLC (“Ceasar”) and the Joseph W and Patricia G Abrams Family Trust dtd 3/95 (“Abrams” and Ceasar and Abrams collectively the “Sellers”) pursuant to which the Company agreed to issue to Caesar and Abrams 6,000,000 shares of the Company’s common stock in exchange for the Sellers transferring a 25% ownership interest in Cicero Transact Group, Inc., a Delaware corporation (“Cicero”) launching an innovative, online business-to-business deal platform.

 

On June 21, 2018, the Company consummated the acquisition of intellectual property relating 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. The patent-pending application is for a formula for a dietary supplement, which should not require a United States Food and Drug Administration (“FDA”) approval. The Company acquired the intellectual property regarding the formula and patent-pending application for 1,600,000 shares of common stock at a value of $0.25 per share, 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.

 

 

 

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Item 6. Exhibits

 

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

 

 

 

 

 

 

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