Item 1. Business.
General Overview
Freedom Leaf, Inc. (the “Company”) was incorporated in the State of Nevada on February 21, 2013, under the name of Arkadia International, Inc. The Company was originally engaged in the business of the acquisition of in demand equipment, cars, and goods with the intent to resell these in the U.S. territories or export to overseas countries.
On October 3, 2014, the Company experienced a change in control. Richard C. Cowan acquired a majority of the issued and outstanding common stock of the Company in accordance with stock purchase agreements by and between Mr. Cowan and Vladimir and Galina Shekhtman (“Sellers”). On the closing date, October 3, 2014, pursuant to the terms of the Stock Purchase Agreement, Cowan purchased from the Sellers 6,950,100 shares of the Company’s outstanding restricted common stock for $100,000, representing 93% of the total issued and outstanding at that time.
On November 6, 2014, the Company merged with Freedom Leaf, Inc., a private Nevada corporation. The Company changed its name from Arkadia International, Inc., to Freedom Leaf, Inc. As a result of the merger, the private company was dissolved. See Note 2 for related discussion.
For financial reporting purposes, the Share Exchange represents a "reverse merger" rather than a business combination and Private Company is deemed to be the accounting acquirer in the transaction. The Share Exchange is being accounted for as a reverse-merger and recapitalization. Private Company is the acquirer for financial reporting purposes and the Public Company (Freedom Leaf, Inc., f/k/a Arkadia International, Inc.) is the acquired company. Consequently, the assets and liabilities and the operations that will be reflected in the historical financial statements prior to the Share Exchange will be those of the Private Company and will be recorded at the historical cost basis of the Private Company, and the financial statements after completion of the Share Exchange will include the assets and liabilities of the Public Company and the Private Company, and the historical operations of Private Company and operations of both companies from the closing date of the Share Exchange.
We are currently devoting substantially all of our efforts in migrating to the news, arts and entertainment niche, with both in print and online publications. The Company generates revenue through paid advertising in publications, both print and online, in the cannabis/hemp marketplace. The Company earns revenue from 1) providing consulting services to companies who are in our industry, 2) contracting with companies to brand, market, and sell their products and/or services, 3) providing seminars in this space, 4) selling branded products for the Company and others the Company represents, 5) selling licenses, both domestic and foreign, for the use of the Freedom Leaf brand that includes the Company’s products and services, and 6) pursuing mergers and/or acquisitions having instituted an incubator / accelerator that began incubating one company starting during the year ended June 30, 2016.
The Company reports its business under the following SIC Codes:
Our corporate headquarters are located at 3571 E. Sunset Road, Suite 420, Las Vegas, Nevada, 89120. The Company’s primary web site is www.freedomleaf.com. This web site is not incorporated in this Form 10-K.
Overview
Freedom Leaf, The Marijuana Legalization Company, has now published and circulated hundreds of thousands of copies of our fifteen editions in thirty-two states with the assistance of over 160 activist marketers. Freedom Leaf magazine, “The Good News in Marijuana Reform,” reports on arts, fashion, and lifestyle, all of the elements of the burgeoning cannabis movements. Freedom Leaf magazine provides activists, consumers, patients and entrepreneurs with a means to stay informed on the emerging industry's most cutting edge marijuana-related information, innovations and legislation. It is distributed nationally through chapters of the National Organization for the Reform of Marijuana Laws (NORML.org), Students for a Sensible Drug Policy (SSDP.org), and WomenGrow.com, as well as through participating medical and recreational dispensaries, smoke and vape shops, doctors and attorneys’ offices, and others in the marijuana industry. It is also available online at www.FreedomLeaf.com/ezine and on the Company’s free mobile app available on Apple iOS and the Google Play Store.
Freedom Leaf is also expanding its online presence. Freedom Leaf has an entire platform of content suited for every aspect of advertising and marketing to consumers from all businesses in the cannabis industry. These sites incorporate many aspects of the marijuana industry and movement.
The Industry
The following is a report on the industry, “Legal Marijuana Is The Fastest-Growing Industry In The U.S.: Report,” as published in HuffPost Business (The Huffington Post) on January 26, 2015 and updated on January 28, 2015.
Legal marijuana is the fastest-growing industry in the United States and if the trend toward legalization spreads to all 50 states, marijuana could become larger than the organic food industry, according to The Huffington Post.
Researchers from The ArcView Group, a cannabis industry investment and research firm based in Oakland, California, found that the U.S. market for legal cannabis grew 74 percent in 2014 to $2.7 billion, up from $1.5 billion in 2013.
The group surveyed hundreds of medical and recreational marijuana retailers in states where sales are legal, as well as ancillary business operators and independent cultivators of the plant, over the course of seven months during 2013 and 2014. ArcView also compiled data from state agencies, nonprofit organizations and private companies in the marijuana industry for a more complete look at the marketplace.
“In the last year, the rise of the cannabis industry went from an interesting cocktail conversation to being taken seriously as the fastest growing industry in America,” Troy Dayton, CEO of The ArcView Group and publisher of the third edition of the State of Legal Marijuana Markets, said in the executive summary of the report. “At this point, it’s hard to imagine that any serious businessperson who is paying attention hasn’t spent some time thinking about the possibilities in this market.”
Graph courtesy of ArcView Market Research.
The report also projects a strong year for legal marijuana in 2015 and projects 32 percent growth in the market. Dayton said that places "cannabis in the top spot" when compared with other fast-growing industries.
Over the next five years, the marijuana industry is expected to continue to grow, with ArcView predicting that 14 more states will legalize recreational marijuana and two more states will legalize medical marijuana. At least 9 states as shown below, are already considering legalizing recreational marijuana in just the next two years through ballot measures or state legislatures.
Medical Recreational Legalize Dispensaries
Arkansas Arizona Montana
Florida California
North Dakota Maine
Massachusetts
Nevada
To date, four states -- Colorado, Washington, Alaska and Oregon -- have legalized retail marijuana. Washington, D.C., voters also legalized recreational and/or medical marijuana use, but sales currently remain banned. Twenty-five states have legalized medical cannabis. Still, marijuana remains illegal at the federal level.
The report projects that, by 2019, all of the state-legal marijuana markets combined will make for a potential overall market worth almost $11 billion annually.
Graph courtesy of ArcView Market Research.
The report also breaks out some interesting marijuana trends from around the nation. California still has the largest legal cannabis market in the U.S., at $1.3 billion. Arizona was found to have the fastest-growing major marijuana market in 2014, expanding to $155 million, up more than $120 million from the previous year. Medical marijuana is already legal in Arizona and California and recreational legalization measures are likely to appear on the 2016 ballots in both states.
More than 1.5 million shoppers purchased legal marijuana from a dispensary, either medical or recreational, in 2014. Five states now boast marijuana markets that are larger than $100 million, and in Colorado and Washington -- the first states to open retail marijuana shops in the U.S. -- consumers bought $370 million in marijuana products last year.
Oregon and Alaska are expected to add a combined $275 million in retail marijuana sales in their first year of operation, the report projects. And while D.C. has also legalized recreational marijuana use, ArcView couldn't project a market size in the District because of an ongoing attempt by congressional Republicans to block the new law.
Graph courtesy of ArcView Market Research.
The huge growth potential of the industry appears to be limited only by the possibility of states rejecting the loosening of their drug laws. The report projects a marijuana industry that could be more valuable than the entire organic food industry -- that is, if the legalization trend continues to the point that all 50 states legalize recreational marijuana. The total market value of all states legalizing marijuana would top $36.8 billion -- more than $3 billion larger than the organic food industry.
Industry Statistics
According to ArcView, 2015 was another watershed year for the legal cannabis market. National legal sales grew to $5.7 billion, up from $4.6 billion in 2014. National sales were fueled by explosive growth in adult use market sales, which grew from $373.8 million in 2014, to $1.2 billion by the end of 2015; an increase of 232%. Demand is expected to remain strong in 2016.
states and the District of Columbia have legalized medical marijuana with 10 additional states having initiatives on the November 2016 ballot for either medical marijuana or recreational marijuana use. There are 4 states that have passed either initiatives or legislative bills allowing for recreational use of marijuana.
According to the England Journal of Medicine, 76% of clinicians polled worldwide believe that the medicinal benefits of marijuana outweigh the risks and potential harms. Within the next 5 years, the legal cannabis industry is expected to out earn the US film industry, the organic foods industry and more than triple the revenues of the NFL. (Source: http://www.nejm.org/doi/full/10.1056/NEJMclde1305159)
Approximately 53% of Americans support marijuana legalization according to Pew Research. (Source: http://www.pewresearch.org/fact-tank/2015/04/14/6-facts-about-marijuana/)
Customers
Some of our customers are companies in the cannabis/hemp industry. Two main services that we provide these clients include the following: (1) advertising in our magazine, website and email blasts; and (2) branding and marketing services in order to aid companies in the industry to develop their brand as well as market and sell their products.
Other customers are consumers in the cannabis marketplace seeking to purchase our products, magazine subscriptions, seminars, expos, educational classes, concerts / musical festivals, and the productions or services of our commercial clients.
We are also providing licenses to individuals or companies who wish to market and sell the Freedom Leaf magazine and website advertising, products, services, seminars as well as other products and services that we develop for those companies that we provide our branding and marketing services. The licenses are available for individuals and entities in certain states, cities and other countries.
Currently, there are companies in two European countries, Netherland and Spain, that have signed a memorandum of understanding regarding future license agreements. The Company is in negotiation with entities in other countries for them to acquire a license agreement with Freedom Leaf. The Freedom Leaf licenses allow a company to market and sell the Freedom Leaf magazine, website advertising, products, services, seminars and other products and services that we develop for those companies. We also guide them on how to provide branding and marketing services to clients who are entering or already in the cannabis industry.
Marketing Focus and Strategy
Our marketing is centered around the Freedom Leaf magazine and website. It is a two-fold strategy. First, the magazine draws businesses that are in the cannabis/hemp industry to speak to us either because they are interested in advertising in the magazine and/or for Freedom Leaf to publicize their business either through us writing an article about their company or for them to write an article about an aspect in the industry that relates to their business (content marketing). Second, Freedom Leaf will undertake cross promotion with operators of different expos, seminars and other public events that extend our reach to companies in the industry. Last of all, we also use the non-profit alliances that we have established to gain a prominent position in our Industry.
Our Products
·Ads in magazine, on Freedom Leaf owned web sites, and in our email blasts
·Events, education classes, expos and seminars
·Marketing contracts with industry businesses
·Branding contracts with industry businesses
·Freedom Leaf branded products
·Magazine subscriptions
·Branded products and/or services companies that we represent
·Concerts and musical festivals
·Licensing the Freedom Leaf brand, products and services
Sales Targets
Non-Profits within the Cannabis/Hemp Industry
Freedom Leaf currently has a branding and marketing contract with NORML (the National Organization for the Reform of Marijuana Laws). Freedom Leaf is responsible for many of their business activities, such as selling branded merchandise, donation fundraising, licensing their brand, membership campaigns, etc.
There are a few other non-profit organizations within the cannabis/hemp industry that we intend to approach to develop a contract to do the same.
Companies within the Cannabis/Hemp Industry for Advertising
We target companies in the cannabis/hemp industry to offer our advertising and related services. Some examples are: dispensaries in the 25 states (http://medicalmarijuana.procon.org/view.resource.php?resourceID=000881) that have legalized medical marijuana sales; locations that sell recreational marijuana in the 4 states that have legalized recreational marijuana use, companies that make edible food infused with marijuana and/or CBDs, vape manufacturers and wholesalers, websites that sell auxiliary products related to cannabis/hemp use, and other businesses that sell products and or services that wish to reach our market, such as clothing companies, concert organizers, and manufacturers or distributors of cell phones, headsets, soda, energy drinks, health products, etc.
Target Market
The State of Colorado completed a survey for the year 2014 which provides helpful information on the demographics related to our target markets:
Competitive Edge
Freedom Leaf’s credibility has been growing in the cannabis/hemp marketplace due to its support of non-profits in the space and for the excellent editorial and other content in our magazine.
At least 50% of our magazine distribution is through non-profit activists (to themselves and those they come in contact with) and we believe, industry activists are among the most loyal consumers any company can potentially have. All of the magazine issues are also available on our Web site in addition to other content for viewers.
Freedom Leaf has signed a very important branding and marketing agreement with NORML, who is the oldest non-profit in our space promoting the legalization of marijuana and related hemp laws, and the oldest non-profit in the industry.
Its digest size (5.5” x 8.5”) is perfect for people to carry around easily.
Competitors
We compete with companies of all sizes in a variety of geographies that offer solutions that compete with elements of our business plan, such as in print and online printing, advertising, etc. More specifically, however, the medical and recreational marijuana companies is a new, developing and nascent market, resulting in a highly fragmented and fractured marketplace. The federal state and municipal governments have varying degrees of legality that will affect business. Some of the companies we compete with are much larger than us, and such companies have significantly greater resources.
Most of our current and potential competitors have longer operating histories, larger customer or user bases, greater brand recognition and significantly greater financial, marketing and other resources than we do. Our competitors may be able to secure experienced employees, accommodate customers more efficiently and adopt more aggressive pricing policies than we can. Many of these current and potential competitors can devote substantially more resources to advertising, marketing and attracting experienced talent than we can. In addition, larger, more well-established and financed entities may acquire, invest in or form joint ventures with our competitors
Our competitors include:
Culture Magazine
www.ireadculture.com
Southern & Northern CA, Denver CO, Seattle WA, San Diego CA, Portland OR,
Started in Southern CA in 2009
High Times Magazine
www.hightimes.com
Started in 1974, monthly publication, oldest in industry but subscription base has reduced substantially, still the major national magazine.
Dope Magazine
www.dopemagazine.com
Approximately 10 months old in eastern Washington, 4 to 6 months in balance of locations (southern CA, northern CA, eastern WA, Portland, OR, Denver, CO)
Elevate Magazine
www.elavatnv.com
Local Las Vegas magazine (we have a strategic relationship with them)
Intellectual Property
Website
We assert common law copyright in the contents of our websites, www.freedomleaf.com and www.cannabizu.com, and common law trademark rights in our business name and related product labels, including “The Marijuana Legalization Company,” “Hemp Inspired,” “CannaBizU,” and “CannaBiz.” We have copyrights and trademarked some of our tradenames (see Trademarks section). We expect to copyright and/or trademark additional tradenames in the future, as we deem necessary to protect our business.
We plan to develop these other domains, which are owned by Freedom Leaf:
www.MarijuanaNews.com
www.LadyCannabis.com
www.CannabisSeminars.com
www.CannabisDebate.com
www.CannaSpa.com
www.Vegasterdam.com
Trademarks
We have registered or filed for registration with the United States Trademark and Patent Office for the following trademarks: “Freedom Leaf,” “The Marijuana Legalization Company,” “Hemp Inspired,” and with the State of Nevada “CannaBizU,” and “CannaBiz.” Internationally, we have filed for “Freedom Leaf” trademark protection in European Union, Columbia, China, Mexico, Jamaica and Uruguay.
Reports to Security Holders
We intend to furnish our shareholders annual reports containing financial statements audited by our independent registered public accounting firm and to make available quarterly reports containing unaudited financial statements for each of the first three quarters of each year. We file Quarterly Reports on Form 10-Q, Annual Reports on Form 10-K and Current Reports on Form 8-K with the Securities and Exchange Commission in order to meet our timely and continuous disclosure requirements. We may also file additional documents with the Commission if they become necessary in the course of our company's operations.
The public may read and copy any materials that we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is www.sec.gov.
Government Regulations
We believe that we are and will continue to be in compliance in all material respects with applicable statutes and the regulations passed in the United States. There are no current orders or directions relating to our company with respect to the foregoing laws and regulations.
Continued development of the marijuana industry is dependent upon continued legislative authorization of marijuana at the state level. Any number of factors could slow or halt progress in this area. Further, progress, while encouraging, is not assured. While there may be ample public support for legislative action, numerous factors impact the legislative process. Any one of these factors could slow or halt use of marijuana, which would negatively impact our proposed business.
Marijuana is a Schedule-I controlled substance and is illegal under federal law. Even in those states in which the use of marijuana has been legalized, its use remains a violation of federal laws. There are currently 25 states and the District of Columbia allowing its citizens to use Medical Marijuana. Additionally, Alaska, Colorado, Oregon, Washington State, as well as Washington D.C., have voted to legalize cannabis for adult recreational use. The state laws are in conflict with the federal Controlled Substances Act, which makes marijuana use and possession illegal on a national level. The Obama administration has effectively stated that it is not an efficient use of resources to direct law federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical marijuana. However, there is no guarantee that the administration will not change its stated policy regarding the low-priority enforcement of federal laws. Additionally, any new administration that follows could change this policy and decide to enforce the federal laws strongly. Active enforcement of the current federal regulatory position on cannabis may thus indirectly and adversely affect our revenues and profits. Any such change in the federal government’s enforcement of current federal laws could cause significant financial damage to us. While we do not intend to harvest, distribute or sell cannabis, we may be irreparably harmed by a change in enforcement by the federal government or state-level regulatory or legislative changes.
Environmental Regulations
We do not believe that we are or will become subject to any environmental laws or regulations of the United States. While our products and business activities do not currently violate any laws, any regulatory changes that impose additional restrictions or requirements on us or on our products or potential customers could adversely affect us by increasing our operating costs or decreasing demand for our products or services, which could have a material adverse effect on our results of operations.
Employees
As of June 30, 2016, we had a total of six full time employees. Our employees are not parties to any collective bargaining agreement. We believe our relationships with our employees are good.
Property
We lease approximately 2,800 square feet of office space in Las Vegas, Nevada, pursuant to a lease that will expire on April 15, 2019. This facility serves as our corporate headquarters.
Available Information
All reports of the Company filed with the SEC are available free of charge through the SEC’s website at www.sec.gov. In addition, the public may read and copy materials filed by the Company at the SEC’s Public Reference Room located at 100 F Street, N.E., Washington, D.C. 20549. The public may also obtain additional information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330.
Item 1A.
Item 1A. Risk Factors.
As a smaller reporting company, we are not required to provide the information required by this item.
Item 1B.
Item 1B. Unresolved Staff Comments.
None.
Item 2.
Item 2. Properties.
We lease approximately 2,800 square feet of office space in Las Vegas, Nevada, pursuant to a lease that will expire on April 15, 2019. This facility serves as our corporate headquarters.
Item 3.
Item 3. Legal Proceedings.
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of October 6, 2016, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of our operations.
Item 4.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market for Common Equity
Market Information
The Company’s common stock is quoted on OTC Markets Group’s OTCPink under the symbol “FRLF.” The symbol change from the predecessor company was effective February 24, 2015. As of June 30, 2016, the Company’s common stock was held by 45 shareholders of record, which does not include shareholders whose shares are held in street or nominee name.
The Company’s shares commenced trading on or about February 10, 2014 (for Arkadia International, Inc.). The following chart is indicative of the fluctuations in the stock prices:
Source: OTC Markets
The Company’s transfer agent is Globex Transfer, LLC, at 780 Deltona Blvd., Suite 202, Deltona, FL 32725.
Dividend Distributions
We have not paid any cash dividends on our common stock and have no present intention of paying any dividends on the shares of our common stock for the foreseeable future. Our current policy is to retain earnings, if any, for use in our operations and in the development of our business. Our future dividend policy may be modified from time to time by our board of directors.
Securities authorized for issuance under equity compensation plans
The Company established a stock option plan on June 27, 2016.
Penny Stock
Our common stock is considered "penny stock" under the rules the Securities and Exchange Commission (the "SEC") under the Securities Exchange Act of 1934. The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on the NASDAQ Stock Market System, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or quotation system. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock, to deliver a standardized risk disclosure document prepared by the Commission, that:
• contains a description of the nature and level of risks in the market for penny stocks in both public offerings and secondary trading;
• contains a description of the broker's or dealer's duties to the customer and of the rights and remedies available to the customer with respect to a violation to such duties or other requirements of Securities' laws; contains a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and the significance of the spread between the bid and ask price;
• contains a toll-free telephone number for inquiries on disciplinary actions;
• defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and
• contains such other information and is in such form, including language, type, size and format, as the Commission shall require by rule or regulation.
The broker-dealer also must provide, prior to effecting any transaction in a penny stock, the customer with:
• bid and offer quotations for the penny stock;
• the compensation of the broker-dealer and its salesperson in the transaction;
• the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the marker for such stock; and
• monthly account statements showing the market value of each penny stock held in the customer's account.
In addition, the penny stock rules that require that prior to a transaction in a penny stock not otherwise exempt from those rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written acknowledgement of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated copy of a written suitably statement.
These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our stock.
Related Stockholder Matters
None.
Purchase of Equity Securities
None.
Item 6.
Item 6. Selected Financial Data.
As the Company is a “smaller reporting company,” this item is inapplicable.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Rule 175 of the Securities Act of 1933, as amended, and Rule 3b-6 of the Securities Act of 1934, as amended, that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about our industry, our beliefs and our assumptions. Words such as “anticipate,” “expects,” “intends,” “plans,” “believes,” “seeks” and “estimates” and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Form 10-K. Investors should carefully consider all of such risks before making an investment decision with respect to the Company’s stock. The following discussion and analysis should be read in conjunction with our financial statements and summary of selected financial data for Freedom Leaf, Inc. Such discussion represents only the best present assessment from our Management.
DESCRIPTION OF COMPANY
The Company was a startup company that was incorporated in Nevada under the name Arkadia International, Inc. on February 21, 2013.
On October 3, 2014, the Company experienced a change in control. Richard C. Cowan acquired a majority of the issued and outstanding common stock of the Company in accordance with stock purchase agreements by and between Mr. Cowan and Vladimir and Galina Shekhtman (“Sellers”). On the closing date, October 3, 2014, pursuant to the terms of the Stock Purchase Agreement, Cowan purchased from the Sellers 6,950,100 shares of the Company’s outstanding restricted common stock for $100,000, representing 93%.
On November 4, 2014, the Company's Board of Directors declared a twelve for one forward stock split of all outstanding shares of the Company’s common stock. As the stock split was approved by FINRA, the common share and per common share data in these financial statements and related notes hereto have been retroactively adjusted to account for the effect of the stock split. The total number of authorized common shares and the par value thereof was not changed by the split.
On November 6, 2014, we entered into a share exchange agreement (the “Exchange Agreement”) with Freedom Leaf, Inc., a Nevada corporation (“Private Company”), and the Company’s sole officer and director Clifford J. Perry (“Perry”), being the owners of record of all of the issued share capital of Freedom Leaf, Inc. (the “FL Stock”). Pursuant to the Exchange Agreement, the Shareholders received an aggregate of 83,401,200 shares (48.1%) our common stock (consisting of a new issuance of shares and Mr. Perry’s transfer of all of his shares) and we received the FL Stock. As a result of the exchange of the FL Stock for the Acquisition Stock (the “Share Exchange”), Freedom Leaf, Inc. became our Company whereas the operations of Arkadia International, Inc. ceased, and there was a change of control of the Company.
Prior to the Share Exchange, we were a startup company that originally intended to engage in the business of the acquisition of in demand equipment, cars, and goods with the intent to resell these in the in the U.S. territories or export to overseas countries.
We have had limited operations and have been issued a “going concern” opinion by our auditor, based upon our reliance on the sale of our common stock as the sole source of funds for our future operations.
We have been devoting substantially all of our efforts to migrate to the news, arts and entertainment niche, with both “in print” and online publications. The Company is generating revenue through paid advertising in publications, both print and online, in the cannabis/hemp marketplace. The Company will also earn revenue from providing consulting services to companies who are in our industry, contracting with companies to brand, market, and sell their products and/or services, provide seminars in this space, and sell branded products for the Company and others the Company represents. We have also started incubating other companies in the cannabis industry and have one company that we are currently incubating.
The following Management Discussion and Analysis should be read in conjunction with the financial statements and accompanying notes included in this Form 10-K.
COMPARISON OF THE YEAR ENDED JUNE 30, 2016 TO THE YEAR ENDED JUNE 30, 2015
Results of Operations
Revenue. For the year ended June 30, 2016, our revenue was $118,473, compared to $48,674 for the same period in 2015. This increase in revenue was attributable to increased sales related to increased magazine subscriptions and licensing fees.
Operating Expenses:
Direct costs of Revenue. For the year ended June 30, 2016, direct costs of revenue were $132,381 compared to $213,604 for the same period in 2015. As a percent of revenue, direct costs of revenue were 111.7% and 438.8%, respectively, for 2016 and 2015.
General and Administrative Expenses. For the year ended June 30, 2016, general and administrative expenses were $2,685,025 compared to $768,938 for the same period in 2015. The increase was due to the increase in operations and stock-based compensation ($2,258,863 compared to $12,500 for the years ended June 30, 2016 and 2015, respectively).
Net Loss. We generated net losses of $3,011,220 for the year ended June 30, 2016, compared to $999,118 for the same period in 2015.
Liquidity and Capital Resources
General. At June 30, 2016, we had cash and cash equivalents of $1,758. We have historically met our cash needs through a combination of cash flows from operating activities and proceeds from private placements of our securities and loans. Our cash requirements are generally for selling, general and administrative activities. We believe that our cash balance is not sufficient to finance our cash requirements for expected operational activities, capital improvements, and partial repayment of debt through the next 12 months.
Our operating activities used cash of $50,831 for the year ended June 30, 2016, and we used cash in operations of $944,352 during the same period in 2015. The principal elements of cash flow from operations for the year ended June 30, 2016, included a net loss of $3,011,220.
Cash used in investing activities during the year ended June 30, 2016, was $3,235 compared to $4,301 provided by investing activities during the same period in 2015.
Cash generated in our financing activities was $54,923 for the year ended June 30, 2016, compared to cash generated of $940,952 during the comparable period in 2015.
As of June 30, 2016, current liabilities exceeded current assets by 24.8 times. Current assets increased from $5,381 at June 30, 2015 to $12,122 at June 30, 2016, whereas current liabilities increased from $50,161 at June 30, 2015, to $176,310 at June 30, 2016.
Going Concern
The accompanying financial statements 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. The Company had sales of $118,473 and net losses of $3,105,991 for the year ended June 30, 2016, compared to sales of $48,674 and net losses of $999,118 for the year ended June 30, 2015. The Company had a working capital deficit, stockholders’ deficit, and accumulated deficit of $169,188, $284,390 and $4,105,109, respectively, at June 30, 2016. These factors raise substantial doubt about the ability of the Company to continue as a going concern for a reasonable period of time. The Company is highly dependent on its ability to continue to obtain investment capital from future funding opportunities to fund the current and planned operating levels. 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. The Company’s continuation as a going concern is dependent upon its ability to bring in income generating activities and its ability to continue receiving investment capital from future funding opportunities. No assurance can be given that the Company will be successful in these efforts.
Critical Accounting Policies
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates in the accompanying financial statements include the amortization period for intangible assets, valuation and impairment valuation of intangible assets, depreciable lives of the web site and property and equipment, valuation of warrant and beneficial conversion feature debt discounts, valuation of share-based payments and the valuation allowance on deferred tax assets.
Changes in Accounting Principles. No significant changes in accounting principles were adopted during fiscal 2016 and 2015.
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.
Impairment of Long-Lived Assets. The Company accounts for long-lived assets in accordance with the provisions of Statement of Financial Accounting Standards ASC 360-10, “Accounting for the Impairment or Disposal of Long-Lived Assets”. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Fair Value of Financial Instruments and Fair Value Measurements. The Company measures their financial assets and liabilities in accordance with generally accepted accounting principles. For certain of our financial instruments, including cash, accounts payable, accrued expenses escrow liability and short-term loans the carrying amounts approximate fair value due to their short maturities.
We have adopted accounting guidance for financial and non-financial assets and liabilities. The adoption did not have a material impact on our results of operations, financial position or liquidity. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. This guidance does not apply to measurements related to share-based payments. This guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.
Revenue Recognition. The Company recognizes revenue for our services in accordance with ASC 605-10, "Revenue Recognition in Financial Statements." Under these guidelines, revenue is recognized on transactions when all of the following exist: persuasive evidence of an arrangement did exist, delivery of service has occurred, the sales price to the buyer is fixed or determinable and collectability is reasonably assured. The Company has five primary revenue streams as follows:
• Consulting services.
• Advertising services.
• Branding, marketing and selling products for companies.
• Educational seminars.
• Selling branded products.
Stock-Based Compensation. The Company accounts for stock-based instruments issued to employees in accordance with ASC Topic 718. ASC Topic 718 requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity based compensation issued to employees. The Company accounts for non-employee share-based awards in accordance with ASC Topic 505-50. The value of the portion of an award that is ultimately expected to vest is recognized as an expense over the requisite service periods using the straight-line attribution method. The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model. The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model.
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 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:
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
As the Company is a “smaller reporting company,” this item is inapplicable.
Item 8.
Item 8. Financial Statements and Supplementary Data.
Freedom Leaf, Inc.
Green & Company, CPAs
A PCAOB Registered Accounting Firm
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of:
Freedom Leaf, Inc.
We have audited the accompanying balance sheets of Freedom Leaf, Inc. and subsidiaries as of June 30, 2016 and 2015, and the related statements of operations, changes in shareholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Freedom Leaf, Inc. as of June 30, 2016 and 2015, and the results of its operations and its cash flows for the years in the periods ended June 30, 2016 and 2015 in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company reported a net loss of $3,011,220 in 2016, and used cash for operating activities of $50,831. At June 30, 2016, the Company had a working capital deficit, shareholders’ deficit and accumulated deficit of $169,188, $284,390 and $4,010,338, respectively. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans as to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Green & Company CPAs, Inc.
Green & Company CPAs, Inc.
Temple Terrace, Florida
October 6, 2016
10320 N 56 th Street, Suite 330
Temple Terrace, FL 33617
813.606.4388
FREEDOM LEAF, INC.
(f/k/a Arkadia International, Inc.)
Balance Sheets
June 30,
See accompanying notes to financial statements.
FREEDOM LEAF, INC.
(f/k/a Arkadia International, Inc.)
Statements of Operations
For the Years Ended June 30,
See accompanying notes to financial statements.
FREEDOM LEAF, INC.
Statement of Shareholders' Deficit
June 30, 2016
See accompanying notes to financial statements.
FREEDOM LEAF, INC.
(f/k/a Arkadia International, Inc.)
Statements of Cash Flows
For the Years Ended June 30,
See accompanying notes to financial statements.
Freedom Leaf, Inc.
(f/k/a Arkadia International, Inc.)
Notes to Financial Statements
June 30, 2016
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Freedom Leaf, Inc. (the “Company,” “we,” “us,” “our,” or “Freedom Leaf”) was incorporated in the State of Nevada on February 21, 2013, under the name of Arkadia International, Inc. The Company was originally engaged in the business of the acquisition of in demand equipment, cars, and goods with the intent to resale these in the U.S. territory or export to overseas countries.
On October 3, 2014, the Company experienced a change in control. Richard C. Cowan acquired a majority of the issued and outstanding common stock of the Company in accordance with stock purchase agreements by and between Mr. Cowan and Vladimir and Galina Shekhtman (“Sellers”). On the closing date, October 3, 2014, pursuant to the terms of the Stock Purchase Agreement, Cowan purchased from the Sellers 6,950,100 shares of the Company’s outstanding restricted common stock for $100,000, representing 93%.
On November 6, 2014, the Company merged with Freedom Leaf, Inc., a private Nevada corporation. The Company changed its name from Arkadia International, Inc., to Freedom Leaf, Inc. As a result of the merger, the private company was dissolved. See Note 2 for related discussion.
For financial reporting purposes, the Share Exchange represents a "reverse merger" rather than a business combination and Private Company is deemed to be the accounting acquirer in the transaction. The Share Exchange is being accounted for as a reverse-merger and recapitalization. Private Company is the acquirer for financial reporting purposes and the Public Company (Freedom Leaf, Inc., f/k/a Arkadia International, Inc.) is the acquired company. Consequently, the assets and liabilities and the operations that will be reflected in the historical financial statements prior to the Share Exchange will be those of the Private Company and will be recorded at the historical cost basis of the Private Company, and the financial statements after completion of the Share Exchange will include the assets and liabilities of the Public Company and the Private Company, and the historical operations of Private Company and operations of both companies from the closing date of the Share Exchange.
Nature of Operations
The Company is focused on being the premium national and international news source for the Cannabis/Industrial Hemp industry. Through our online and print media channels, our efforts are in dissemination of current legislation and legal news, arts and entertainment. Additional websites and online partnerships are in the development stage that will give the Freedom Leaf brand greater exposure. The Company generates revenue from paid advertising on both online and print publications as well as consulting fees and incubator fees for companies that want to participate in the Cannabis/Industrial Hemp industry. Another segment of income generation by the Company is brand management for both profit and non-profit organizations. An example is the contract with NORML which was entered into on May 26, 2015. This contract authorizes the Company to undertake all of the commercial activities of NORML, earning income for both the non-profit and the Company.
Basis of Presentation
The Company prepares its financial statements in conformity with generally accepted accounting principles in the United States of America.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates in the accompanying financial statements include the amortization period for intangible assets, valuation and impairment valuation of intangible assets, allowance for accounts receivable, depreciable lives of the web site, valuation of warrants and beneficial conversion feature debt discounts, valuation of derivatives, and valuation of share-based payments.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
Property, Equipment and Depreciation
Property and equipment is recorded at cost. Depreciation is computed using the straight-line method based on the estimated useful lives of the related assets of three years for computer equipment, five years for office furniture and fixtures, and the lesser of the lease term or the useful life of the leased equipment. Leasehold improvements, if any, would be amortized over the lesser of the lease term or the useful life of the improvements. Expenditures for maintenance and repairs along with fixed assets below our capitalization threshold are expensed as incurred.
Freedom Leaf, Inc.
(f/k/a Arkadia International, Inc.)
Notes to Financial Statements
June 30, 2016
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.
Impairment of Long-Lived Assets
The Company accounts for long-lived assets in accordance with the provisions of Statement of Financial Accounting Standards ASC 360-10, “Accounting for the Impairment or Disposal of Long-Lived Assets”. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in accordance with generally accepted accounting principles. For certain of our financial instruments, including cash, accounts payable, accrued expenses, deposits received from customers for layaway sales and short term loans the carrying amounts approximate fair value due to their short maturities.
We follow accounting guidance for financial and non-financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. This guidance does not apply to measurements related to share-based payments. This guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.
We currently measure and report at fair value our intangible assets (due to our impairment analysis) and derivative liabilities. The fair value of intangible assets has been determined using the present value of estimated future cash flows method. The fair value of derivative liabilities is measured using the Black-Scholes option pricing method. The following table summarizes our non-financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2016:
Freedom Leaf, Inc.
(f/k/a Arkadia International, Inc.)
Notes to Financial Statements
June 30, 2016
Following is a summary of activity through June 30, 2016 of the fair value of intangible assets valued using Level 3 inputs:
Revenue Recognition
The Company recognizes revenue for our services in accordance with ASC 605-10, "Revenue Recognition in Financial Statements." Under these guidelines, revenue is recognized on transactions when all of the following exist: persuasive evidence of an arrangement did exist, delivery of service has occurred, the sales price to the buyer is fixed or determinable and collectability is reasonably assured. The Company has five primary revenue streams as follows:
· Consulting services.
· Advertising services.
· Branding, marketing and selling products for companies.
· Educational seminars.
· Selling branded products.
Stock-Based Compensation
The Company accounts for stock-based instruments issued to employees in accordance with ASC Topic 718. ASC Topic 718 requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity based compensation issued to employees. The value of the portion of an award that is ultimately expected to vest is recognized as an expense over the requisite service periods using the straight-line attribution method. The Company accounts for non-employee share-based awards in accordance with the measurement and recognition provisions ASC Topic 505-50. The Company estimates the fair value of stock options at the grant date by using the Black-Scholes option-pricing model.
Advertising
Advertising is expensed as incurred and is included in selling, general and administrative expenses on the accompanying statement of operations. For the years ended June 30, 2016 and 2015 advertising expense was $18,335 and $65,250, respectively.
Income Taxes
The Company adopted the provisions of ASC 740-10, “Accounting for Uncertain Income Tax Positions.” When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above should be reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company believes its tax positions are all highly certain of being upheld upon examination. As such, the Company has not recorded a liability for unrecognized tax benefits. As of June 30, 2016, all previous tax years remain open for IRS audit. The Company has received no notice of audit from the IRS for any of the open tax years.
The Company adopted ASC 740-10, “Definition of Settlement in FASB Interpretation No. 48,” (“ASC 740-10”), which was issued on May 2, 2007. ASC 740-10 amends FIN 48 to provide guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. The term “effectively settled” replaces the term “ultimately settled” when used to describe recognition, and the terms “settlement” or “settled” replace the terms “ultimate settlement” or “ultimately settled” when used to describe measurement of a tax position under ASC 740-10. ASC 740-10 clarifies that a tax position can be effectively settled upon the completion of an examination by a taxing authority without being legally extinguished. For tax positions considered effectively settled, an entity would recognize the full amount of tax benefit, even if the tax position is not considered more likely than not to be sustained based solely on the basis of its technical merits and the statute of limitations remains open. The adoption of ASC 740-10 did not have an impact on the accompanying financial statements.
Freedom Leaf, Inc.
(f/k/a Arkadia International, Inc.)
Notes to Financial Statements
June 30, 2016
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.
Segment Information
In accordance with the provisions of ASC 280-10, “Disclosures about Segments of an Enterprise and Related Information”, the Company is required to report financial and descriptive information about its reportable operating segments. The Company does not have any operating segments as of June 30, 2016 and 2015.
Effect of Recent Accounting Pronouncements
The Company reviews new accounting standards and updates as issued. No new standards or updates had any material effect on these unaudited financial statements. The accounting pronouncements and updates issued subsequent to the date of these audited financial statements that were considered significant by management were evaluated for the potential effect on these audited financial statements. Management does not believe any of the subsequent pronouncements will have a material effect on these audited financial statements as presented and does not anticipate the need for any future restatement of these audited financial statements because of the retro-active application of any accounting pronouncements issued subsequent to June 30, 2016 through the date these audited financial statements were issued.
NOTE 2 - ENTRY INTO A DEFINITIVE AGREEMENT
Freedom Leaf, Inc., (f/k/a Arkadia International, Inc., the “Public Company,” “we,” “us,” “our”) entered into a share exchange agreement (the “Exchange Agreement”) with Freedom Leaf, Inc. (the “Public Company”), a Nevada corporation. Prior to the reverse merger, Richard C. Cowan, an officer and director of the Company, post-merger, acquired 89,808,000, or 99.8% of the outstanding shares of Freedom Leaf, Inc., the public company. Clifford J. Perry, an individual, and the Private Company’s sole officer and director (“Perry”), was the owner of record of all of the outstanding common shares of the Private Company (the “Private Company Stock”). Pursuant to the Exchange Agreement, upon surrender by the Shareholders and the cancellation by the Private Company of the certificates evidencing the Private Company Stock as registered in the name of the Shareholder, and pursuant to the registration of the Public Company in the register of Shareholders maintained by Private Company as the new holder of the Public Company Stock and the issuance of the certificates evidencing the aforementioned registration of the Private Company Stock in the name of the Public Company, the Public Company will issue 83,401,200 shares (the “New Shares”) (subject to adjustment for fractionalized shares as set forth below) of the Company’s common stock to the Shareholders (or their designees), and Perry will cause 100% of the shares of the Private Company’s common stock that he owns (the “ Perry Stock ,” together with the New Shares, the “Acquisition Stock”) to be transferred to the Shareholders (or their designees), which collectively shall represent 48.1% of the issued and outstanding common stock of the Public Company immediately after the Closing, in exchange for the Private Company Stock, representing 100% of the issued share capital of the Private Company. As a result of the exchange of the Private Company Stock for the Acquisition Stock (the “Share Exchange”), the Private Company will be dissolved.
The closing of the Exchange Agreement was conditioned upon certain, limited customary representations and warranties, as well as the satisfaction or waiver of specified conditions to closing. As the parties satisfied all of the closing conditions, on November 6, 2014, we consummate the Share Exchange contemplated by the Exchange Agreement. As a result, the shareholders of Private Company own approximately 48.1% of our issued and outstanding common stock.
Prior to the execution and delivery of the Exchange Agreement, our board of directors approved the Share Exchange and the transactions contemplated thereby. Similarly, the board of directors of Private Company approved the Share Exchange. Reference is hereby made regarding the completion of the Share Exchange.
Following the Share Exchange, we have abandoned our prior business plan and we are now pursuing Private Company’s historical businesses and proposed businesses. Private Company is in the business of advertising in industry publications related to marijuana.
The foregoing description of the Exchange Agreement does not purport to be complete and is qualified in its entirety by the Share Exchange Agreement, a copy of which has been filed on Form 10-Q/A for the period ended December 31, 2014 which is incorporated herein by reference.
Freedom Leaf, Inc.
(f/k/a Arkadia International, Inc.)
Notes to Financial Statements
June 30, 2016
Accounting Treatment of the Merger
For financial reporting purposes, the Share Exchange represents a “reverse merger” rather than a business combination and Private Company is deemed to be the accounting acquirer in the transaction. The Share Exchange is being accounted for as a reverse-merger and recapitalization. Private Company is the acquirer for financial reporting purposes and the Public Company (Freedom Leaf, Inc., f/k/a Arkadia International, Inc.) is the acquired company. Consequently, the assets and liabilities and the operations that will be reflected in the historical financial statements prior to the Share Exchange will be those of the Private Company and will be recorded at the historical cost basis of the Private Company, and the financial statements after completion of the Share Exchange will include the assets and liabilities of the Public Company and the Private Company, and the historical operations of Private Company and operations of both companies from the closing date of the Share Exchange.
Licensing Rights
On February 8, 2016, the Company and Freedomleaf Netherlands, b.v. (“FLNL”), a company located in the Netherlands, executed a Memorandum of Understanding (“MOU”), wherein the Company granted FLNL a right of first refusal to license certain rights from the Company described below in exchange for a payment of $25,000, and the parties agreed to negotiate a definite license agreement for such rights and with proposed terms of the definitive agreement set forth in the MOU. Such rights include FLNL’s rights to use various trademarks of the Company, primarily “Freedom Leaf,” and other related rights, for use in the Netherlands by FLNL, including FLNL’s right to publish a Freedom Leaf magazine in the Netherlands, sell Freedom Leaf products and perform other activities related to the business of the Company. Except for the grant of the right of first refusal, and the required payment has not been received by the Company. FLNL is a shareholder (common stock and warrants to purchase additional common stock) of the Company.
Incubation Agreement
On January 18, 2016, the Company and Plants to Paper, LLC (“PTP”), executed an Incubation Agreement. PTP owns the patent pending application 62/245,153 with the title being “Rolling Papers and Blunt Wraps made from 100% Marijuana.” PTP transferred its ownership rights to the Company and its Medical Marijuana / Cannabis / Hemp Industry Incubator program. The Company will supply management services and to fund the early stage development of PTP. The Incubation Agreement is for a period of twelve months. PTP will provide the Company with 20% of the outstanding membership shares of PTP in exchange for its services. The costs of patent registrations in the United States and other countries will be the liability of PTP. As of June 30, 2016, PTP had no activity.
NOTE 3 - GOING CONCERN
The accompanying financial statements 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. The Company sustained net losses of $3,011,220 and used cash in operating activities of $50,831 for the year ended June 30, 2016. The Company had a working capital deficit, stockholders’ deficit and accumulated deficit of $169,188, $284,390 and $4,010,338, respectively, at June 30, 2016. These factors raise substantial doubt about the ability of the Company to continue as a going concern for a reasonable period of time. 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.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Legal Matters
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of October 5, 2016, there were no pending or threatened lawsuits.
Lease Commitment
We lease approximately 2,800 square feet of office space in Las Vegas, Nevada, pursuant to a lease that will expire on April 15, 2019. This facility serves as our corporate headquarters.
Freedom Leaf, Inc.
(f/k/a Arkadia International, Inc.)
Notes to Financial Statements
June 30, 2016
Future minimum lease payments under these leases are as follows:
Rent expense for the years ended June 30, 2016 and 2015 was $33,919 and $22,172, respectively.
NOTE 5 - RELATED PARTIES
Richard C. Cowan (“Cowan”), Director and former officer of the Company, has payables and accruals due to him of $100,000 and $194,355 as of June 30, 2016 and 2015, respectively.
Clifford J. Perry (“Perry”), chief executive officer, chief financial officer, and director of the Company, has payables and accruals due to him of $26,250 and $26,666 as of June 30, 2016 and 2015, respectively.
Raymond P. Medeiros (“Medeiros”), a director of the Company, has payables and accruals due to him of $10,500 and $0 as of June 30, 2016 and 2015, respectively.
A shareholder of the Company is owed $10,000 as of June 30, 2016.
On May 25, 2016, Perry converted 68,401,200 shares of common stock into 684,012 shares of Series A preferred stock. See Note 7.
On May 25, 2016, Cowan converted 26,401,000 shares of common stock into 264,010 shares of Series A preferred stock. See Note 7.
On June 30, 2016, Cowan converted $225,892 of payables and accruals into 2,509,914 shares of common stock. The conversion was at a 50% discount or $0.09 per share. As of June 30, 2016, these shares had not been issued and were recorded as issuable. See Note 7.
NOTE 6 - CONVERTIBLE NOTES PAYABLE, NET OF PREMIUMS AND NOTES PAYABLE
Convertible notes payable, all classified as current at June 30, 2016, consists of the following:
On July 7, 2015, the Company executed a convertible promissory note for $5,000 with Bruce Perlowin. The note is for one year, 12% interest rate, and convertible at $0.10 per share. The current price at that date was $0.085, which is less than the conversion price. The stock price for our common stock as of September 30, 2015 was $0.40. Our common stock is thinly traded therefore our price, as management has determined, is not indicative of our valuation. In October 2015, the Company issued common stock for services to unrelated parties and the common stock was values at $0.20, therefore, the $0.20 was used for valuation purposes for this note. A beneficial conversion feature of $5,000 was recorded and, as of March 31, 2016, $3,671 was amortized. The Company has recorded accrued interest of $467 as of June 30, 2016. On April 15, 2016, Mr. Perlowin converted the principal of this promissory note into 50,000 shares of common stock (see Note 7). The accrued interest was not converted.
Freedom Leaf, Inc.
(f/k/a Arkadia International, Inc.)
Notes to Financial Statements
June 30, 2016
On August 12, 2015, the Company executed a convertible promissory note for $5,000 with Bruce Perlowin. The note is for one year, 12% interest rate, and convertible at $0.10 per share. The current price at that date was $0.10, which is less than the conversion price. The stock price for our common stock as of September 30, 2015 was $0.40. Our common stock is thinly traded therefore our price, as management has determined, is not indicative of our valuation. In October 2015, the Company issued common stock for services to unrelated parties and the common stock was values at $0.20, therefore, the $0.20 was used for valuation purposes for this note. A beneficial conversion feature of $5,000 was recorded and, as of March 31, 2016, $3,178 was amortized. The Company has recorded accrued interest of $408 as of June 30, 2016. On April 15, 2016, Mr. Perlowin converted the principal of this promissory note into 50,000 shares of common stock (see Note 7). The accrued interest was not converted.
On August 20, 2015, the Company executed a convertible promissory note for $12,500 with Svetlana Ogorodnikova. The note matures on February 19, 2016, 12% interest rate, and convertible at $0.10 per share. The current price at that date was $0.085, which is less than the conversion price. The stock price for our common stock as of September 30, 2015 was $0.40. Our common stock is thinly traded therefore our price, as management has determined, is not indicative of our valuation. In October 2015, the Company issued common stock for services to unrelated parties and the common stock was values at $0.20, therefore, the $0.20 was used for valuation purposes for this note. A beneficial conversion feature of $12,500 was recorded and, as of March 31, 2016, $12,500 was amortized. The Company has recorded accrued interest of $986 as of June 30, 2016. On February 19, 2016, Ms. Ogorodnikova granted the Company an extension on the due date to June 30, 2016. On April 15, 2016, Ms. Ogorodnikova converted the principal of this promissory note into 125,000 shares of common stock (see Note 7). The accrued interest was not converted.
On December 14, 2015, the Company executed a convertible promissory note for $100,000 with Swiss Allied Trust, Inc. (“Swiss Allied”). The note has two funding dates; December 14, 2015 and January 15, 2016, each for $50,000. On January 26, 2016, the Company received $50,000 from Swiss Allied as the second tranche of the convertible promissory note. As of March 31, 2016, both tranches were received by the Company. The term on each installment is for one year from the date of receipt of each tranche. Each installment is recorded and presented separately. For the initial tranche of $50,000, the Company recorded a beneficial conversion feature of $50,000 and, as of March 31, 2016, $14,795 was amortized. A beneficial conversion feature of $50,000 was recorded and, as of March 31, 2016, $8,904 has been amortized. For the initial tranche, the Company has recorded accrued interest of $1,195 as of March 31, 2016. For the second tranche, the Company has recorded accrued interest of $1,195 as of June 30, 2016. The beneficial conversion features were calculated on the conversion price of $0.005, as further discussed below. The Company maintained the common stock to be valued at $0.20, as discussed in prior notes, as the Company’s common stock continues to be thinly traded. Additionally, the Company issued Swiss Allied four warrants as an incentive to the note, each for 20,000,000 shares of the Company’s common stock, for a total of 80,000,000 warrants (see Note 4). Each warrant has an exercise price of $0.005 per share.
The four warrants, each for 20,000,000 shares of common stock, mature on March 31, 2016, June 30, 2016, October 31, 2016, and December 31, 2016, respectively. If Swiss Allied exercises all warrants, the Company would receive an additional $400,000 for said shares of common stock. If Swiss Allied does not exercise all 80,000,000 warrants, by the maturation dates, as described herein, the exercise price shall be adjusted to $0.06, an increase of $0.055 per share as a penalty, which is payable to the Company at the time Swiss Allied requests to have the Rule 144 restriction removed. The interest rate for each loan tranche is 8% and is accrued with a payment date of December 15, 2016 for the first tranche and January 15, 2017 for the second tranche. The conversion price for the $100,000, which may happen any time prior to December 14, 2016, shall be the greater of $0.03 or 50% of the lowest closing price on the primary trading market on which the Company’s common stock is quoted for the five trading days immediately prior to, but not including, the conversion date, assuming that Swiss Allied has not exercised all 80,000,000 warrants for common stock. The conversion price for the $100,000, assuming that Swiss Allied has exercised all 80,000,000 warrants for common stock, shall be $0.005 per share. Swiss Allied has a right of first refusal on any future funding to the Company. Swiss Allied has the right to name a party to serve as a member of the Company’s board of directors if Swiss Allied owns at least 40,000,000 shares of the Company’s common stock. If Swiss Allied owns at least 80,000,000 shares of the Company’s common stock, they have the right to name two parties to the Company’s board of directors. The two directors will remain as long as Swiss Allied owns 55,000,000 shares of the Company’s common stock. As of March 31, 2016, Swiss Allied had not exercised the first warrant therefore, the warrant had expired as of said date. On April 8, 2016, Swiss Allied converted warrants for 4,800,000 shares of common stock in exchange for $24,000. The Company agreed to amend the obligations of Swiss Allied to accommodate the extension of the warrant until June 5, 2016. As of June 30, 2016, the warrant had expired.
NOTE 7 - 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.
Freedom Leaf, Inc.
(f/k/a Arkadia International, Inc.)
Notes to Financial Statements
June 30, 2016
On May 25, 2016, Perry converted 68,401,200 shares of common stock into 684,012 shares of Series A preferred stock. See Note 5.
On May 25, 2016, Cowan converted 26,401,000 shares of common stock into 264,010 shares of Series A preferred stock. See Note 5.
Common Stock
The Company was authorized to issue up to 75,000,000 shares of common stock, par value $0.001 per share. On January 21, 2015, the Company increased it’s authorized to 500,000,000 shares of common stock. Each outstanding share of common stock entitles the holder to one vote per share on all matters submitted to a stockholder vote. All shares of common stock are non-assessable and non-cumulative, with no pre-emptive rights.
On November 6, 2014, the Company merged with Freedom Leaf, Inc., a private Nevada corporation (see Note 1). After the completion of the merger, there were 173,401,200 shares of common stock issued, issuable and outstanding.
On November 10, 2014, the Company issued 780,000 shares of common stock to Vincent Moreno for consulting services from November 10, 2014 through April 10, 2015. The Company’s stock is thinly traded therefore the valuation of the issuance was based on the value of the services, which was $12,500.
On October 12, 2015, the Company issued 1,700,000 shares of common stock to various employees as part of compensation. The current price at that date was $0.20. Our common stock is thinly traded therefore our price, as management has determined, may not be indicative of our valuation. Previously, the Company issued common stock for services to unrelated parties and the common stock was valued at $0.20, therefore, the stock was valued at $0.20 or $340,000 was recorded.
On October 12, 2015, the Company issued 2,000,000 shares of common stock to Raymond Medeiros, a director of the Company, for his past services. The current price at that date was $0.20. Our common stock is thinly traded therefore our price, as management has determined, may not be indicative of our valuation. Previously, the Company issued common stock for services to unrelated parties and the common stock was valued at $0.20, therefore, the stock was valued at $0.20 or $400,000 was recorded.
On October 12, 2015, the Company issued 3,000,000 shares of common stock to Raymond Medeiros, a director of the Company, for his future services. The issuance will vest over a period of twelve months. The current price at that date was $0.20. Our common stock is thinly traded therefore our price, as management has determined, may not be indicative of our valuation. Previously, the Company issued common stock for services to unrelated parties and the common stock was valued at $0.20, therefore, the stock was valued at $0.20 or $600,000 was recorded.
On October 12, 2015, the Company issued 2,010,000 shares of common stock to various subcontractors for their services. The current price at that date was $0.20. Our common stock is thinly traded therefore our price, as management has determined, may not be indicative of our valuation. Previously, the Company issued common stock for services to unrelated parties and the common stock was valued at $0.20, therefore, the stock was valued at $0.20 or $402,000, was recorded.
In October 2015, the Company issued 50,000 shares of common stock for services to unrelated parties and the common stock was valued at $0.20, therefore, the stock was valued at $0.20 or $10,000, was recorded.
On November 2, 2015, the Company issued 125,000 shares of common stock to various subcontractors for their services. The current price at that date was $0.45. Our common stock is thinly traded therefore our price, as management has determined, may not be indicative of our valuation.
On February 2, 2016, Dobrucki exercised a warrant for 500,000 shares of common stock for $10,000, the exercise price of the warrants at $0.02 per share.
On February 15, 2016, the Company issued 750,000 shares of common stock to various subcontractors for their services. The current price at that date was $0.227. Our common stock is thinly traded therefore our price, as management has determined, may not be indicative of our valuation. Previously, the Company issued common stock for services to unrelated parties and the common stock was valued at $0.20, therefore, the stock was valued at $0.20, therefore, the issuance on was valued at $150,000, was recorded.
On February 15, 2016, the Company issued 50,000 shares of common stock to an employee for their services. The current price at that date was $0.227. Our common stock is thinly traded therefore our price, as management has determined, may not be indicative of our valuation. Previously, the Company issued common stock for services to unrelated parties and the common stock was valued at $0.20, therefore, the stock was valued at $0.20 or $10,000, was recorded.
On February 24, 2016, the Company issued 100,000 shares of common stock to various subcontractors for their services. The current price at that date was $0.227. Our common stock is thinly traded therefore our price, as management has determined, may not be indicative of our valuation. Previously, the Company issued common stock for services to unrelated parties and the common stock was valued at $0.20, therefore, the stock was valued at $0.20 or $20,000, was recorded.
Freedom Leaf, Inc.
(f/k/a Arkadia International, Inc.)
Notes to Financial Statements
June 30, 2016
On March 17, 2016, the Company issued 50,000 shares of common stock to various subcontractors for their services. The current price at that date was $0.20. Our common stock is thinly traded therefore our price, as management has determined, may not be indicative of our valuation.
On March 18, 2016, the Company issued 10,000 shares of common stock to an employee for their services. The current price at that date was $0.20. Our common stock is thinly traded therefore our price, as management has determined, may not be indicative of our valuation. In October 2015, the Company issued common stock for services to unrelated parties and the common stock was valued at $0.20, therefore, the stock was valued at $0.20 or $2,000, was recorded. As of June 30, 2016, the stock was not issued therefore recorded as issuable.
On April 8, 2016, Swiss Allied exercised a portion of a warrant for common stock into 400,000 shares of common stock of the Company in exchange for $24,000. As of June 30, 2016, the stock was not issued therefore recorded as issuable.
On April 15, 2016, Bruce Perlowin converted the principal ($5,000) of his promissory note into 50,000 shares of common stock (see Note 6).
On April 15, 2016, Bruce Perlowin converted the principal ($5,000) of his promissory note into 50,000 shares of common stock (see Note 6).
On April 15, 2016, Svetlana Ogorodnikova converted the principal ($12,500) of her promissory note into 125,000 shares of common stock (see Note 6).
On May 2, 2016, Freedom Leaf Iberia exercised a cashless conversion of its 1,000,000 warrants for common stock of the Company into 889,868 shares of common stock of the Company. As of June 30, 2016, the stock was not issued therefore recorded as issuable.
On May 2, 2016, Freedomleaf Netherlands, b.v. exercised a cashless conversion of its 1,000,000 warrants for common stock of the Company into 889,868 shares of common stock of the Company. As of June 30, 2016, the stock was not issued therefore recorded as issuable.
On May 25, 2016, Perry converted 68,401,200 shares of common stock into 684,012 shares of Series A preferred stock. See Note 5.
On May 25, 2016, Cowan converted 26,401,000 shares of common stock into 264,010 shares of Series A preferred stock. See Note 5.
On June 30, 2016, Cowan converted $225,892 of payables and accruals into 2,509,914 shares of common stock. The conversion was at a 50% discount or $0.09 per share. As of June 30, 2016, these shares had not been issued and were recorded as issuable. See Note 5.
On June 30, 2016, the Company determined that on February 15, 2016, there was a duplicate issuance to an entity, as they were already issued on October 12, 2015. The Company cancelled 200,000 shares on June 30, 2016, thereby reducing the stock-based compensation previously recorded by $40,000.
Warrants
On November 2, 2015, the Company issued 1,000,000 warrants for common stock to Freedom Leaf Iberia, in regards to a contemplated future transaction between the Company and Freedom Leaf Iberia. The warrants mature on May 2, 2016. The exercise price is $0.02 and the warrant has a cashless exercise option. The warrants were valued at $0.20 per share, as defined in the section. The Company recorded an expense of $200,000. On May 2, 2016, Freedom Leaf Iberia exercised a cashless conversion of its 1,000,000 warrants for common stock of the Company into 889,868 shares of common stock of the Company.
On November 2, 2015, the Company issued 1,000,000 warrants for common stock to Freedomleaf Netherlands, b.v., in regards to a contemplated future transaction between the Company and Freedomleaf Netherlands, b.v. The warrants mature on May 2, 2016. The exercise price is $0.02 and the warrant has a cashless exercise option. The warrants were valued at $0.20 per share, as defined in the section. The Company recorded an expense of $200,000. On May 2, 2016, Freedomleaf Netherlands, b.v. exercised a cashless conversion of its 1,000,000 warrants for common stock of the Company into 889,868 shares of common stock of the Company.
On November 2, 2015, the Company issued 500,000 warrants for common stock to a subcontractor as an incentive to their services. The warrants mature on May 2, 2016. The exercise price is $0.02 and the warrant has a cashless exercise option. The warrants were valued at $0.20 per share, as defined in the section. The Company recorded an expense of $100,000. On February 2, 2016, Dobrucki exercised a warrant for 500,000 shares of common stock for $10,000, the exercise price of the warrants at $0.02 per share. As of March 31, 2016, the shares were not issued therefore they are recorded as issuable.
Freedom Leaf, Inc.
(f/k/a Arkadia International, Inc.)
Notes to Financial Statements
June 30, 2016
On December 14, 2015, the Company executed a convertible promissory note for $100,000 with Swiss Allied (see Note 3). The Company issued Swiss Allied four warrants as an incentive to the note, each for 20,000,000 shares of the Company’s common stock, for a total of 80,000,000 warrants. Each warrant has an exercise price of $0.005 per share. The four warrants, each for 20,000,000 shares of common stock, mature on March 31, 2016, June 30, 2016, October 31, 2016, and December 31, 2016, respectively. The warrants, as an incentive to the note, should have a beneficial conversion feature. As the note’s beneficial conversion feature is at the maximum, there is no beneficial conversion feature to record. If Swiss Allied exercises all warrants, the Company would receive an additional $400,000 for said shares of common stock. If Swiss Allied does not exercise all 80,000,000 warrants, by the maturation dates, as described herein, the exercise price shall be adjusted to $0.06, an increase of $0.055 per share as a penalty, which is payable to the Company at the time Swiss Allied requests to have the Rule 144 restriction removed. The interest rate for each loan tranche is 8% and is accrued with a payment date of December 15, 2016 for the first tranche and January 15, 2017 for the second tranche. The conversion price for the $100,000, which may happen any time prior to December 14, 2016, shall be the greater of $0.03 or 50% of the lowest closing price on the primary trading market on which the Company’s common stock is quoted for the five trading days immediately prior to, but not including, the conversion date, assuming that Swiss Allied has not exercised all 80,000,000 warrants for common stock. The conversion price for the $100,000, assuming that Swiss Allied has exercised all 80,000,000 warrants for common stock, shall be $0.005 per share. Swiss Allied has a right of first refusal on any future funding to the Company. Swiss Allied has the right to name a party to serve as a member of the Company’s board of directors if Swiss Allied owns at least 40,000,000 shares of the Company’s common stock. If Swiss Allied owns at least 80,000,000 shares of the Company’s common stock, they have the right to name two parties to the Company’s board of directors. The two directors will remain as long as Swiss Allied owns 55,000,000 shares of the Company’s common stock. See Note 7 for amendment on the warrant that matured on March 31, 2016.
Stock Option Plan
On June 27, 2016, the Board of Directors approved the 2016 Stock Option Plan which has reserved 10,000,000 shares of common stock.
NOTE 8 - INCOME TAX
For the fiscal year 2015 and 2014, there was no provision for income taxes and deferred tax assets have been entirely offset by valuation allowances.
As of June 30, 2016 and 2015, the Company has net operating loss carry forwards of $3,195,067 and $986,649, respectively. The carry forwards expire through the year 2034. The Company’s net operating loss carry forwards may be subject to annual limitations, which could reduce or defer the utilization of the losses as a result of an ownership change as defined in Section 382 of the Internal Revenue Code.
The Company’s tax expense differs from the “expected” tax expense for Federal income tax purposes (computed by applying the United States Federal tax rate of 34% to loss before taxes), as follows:
The tax effects of the temporary differences between reportable financial statement income and taxable income are recognized as deferred tax assets and liabilities.
The tax years 2014 through 2016 remain to examination by federal agencies and other jurisdictions in which it operates.
Freedom Leaf, Inc.
(f/k/a Arkadia International, Inc.)
Notes to Financial Statements
June 30, 2016
The tax effect of significant components of the Company’s deferred tax assets and liabilities at June 30, 2016 and 2015, respectively, are as follows:
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.
Because of the historical earnings history of the Company, the net deferred tax assets for 2016 were fully offset by a 100% valuation allowance. The valuation allowance for the remaining net deferred tax assets was $1,980,163 and $375,515 as of June 30, 2016 and 2015, respectively.
NOTE 9 - CONCENTRATIONS
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to a concentration of credit risk, consist principally of temporary cash investments.
The Company places its temporary cash investments with financial institutions insured by the FDIC. No amounts exceeded federally insured limits as of June 30, 2016. There have been no losses in these accounts through June 30, 2016.
Concentration of Revenue
In 2016, the Company had one customer that made up 12% or more of its revenue. In 2015, the Company had one customer that made up 12% or more of its revenue.
Concentration of Supplier
The Company does not rely on any particular suppliers for its services.
Concentration of Intellectual Property
The Company owns or has filed for the trademarks “Freedom Leaf,” “Hemp Inspired,” “Cannabizu,” and “Cannabiz” as filed with the United States Patent and Trademark Office. The Company has filed for “Freedom Leaf” in Jamaica and Uruguay.
NOTE 10 - SUBSEQUENT EVENTS
On July 1, 2016, the Company hired an employee and, as a condition of the employment contract, the Company is obligated to issue 500,000 shares of common stock to the employee. The shares will be expensed accordingly.
On July 19, 2016, the Company issued 100,000 shares of common stock to its transfer agent, Globex Transfer, LLC.
On July 21, 2016, the Company issued 1,385,000 shares of previously issuable common stock.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
On August 8, 2014, Thomas Ralston Certified Public Accountant (“Ralston”) declined to stand for appointment as the Company’s independent accountant. Ralston’s report on the financial statements for the years ended June 30, 2014, and 2013, contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to audit scope or accounting, except that the report contained an explanatory paragraph stating that there was substantial doubt about the Company’s ability to continue as a going concern. Our Board of Directors participated in and approved the decision to change independent accountants. Through the period covered by the financial review of financial statements of the quarterly period June 30, 2014, there have been no disagreements with Ralston on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Ralston, would have caused them to make reference thereto in their report on the financial statements. Through the interim period August 8, 2014 (the date of resignation of the former accountant), there have been no disagreements with Ralston on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Ralston would have caused them to make reference thereto in their report on the financial statements.
On January 15, 2015 the Company engaged Weinberg & Baer Certified Public Accountants (“Weinberg”) as our independent accountants for the period ending September 30, 2014. The Board made the decision to engage Weinberg acting under authority delegated to it and the Board of Directors approved the same on January 14, 2015. During the years ended June 30, 2014 and 2013, and prior to January 15, 2015 (the date of the new engagement), we did not consult with Weinberg regarding (i) the application of accounting principles to a specified transaction, (ii) the type of audit opinion that might be rendered on the Company’s financial statements by Weinberg, in either case where written or oral advice provided by Weinberg would be an important factor considered by us in reaching a decision as to any accounting, auditing or financial reporting issues or (iii) any other matter that was the subject of a disagreement between us and our former auditor or was a reportable event (as described in Items 304(a)(1)(iv) or Item 304(a)(1)(v) of Regulation S-K, respectively. On May 4, 2015, Weinberg was dismissed as the Company’s independent accountant. Weinberg has no issued a report on the financial statements for the years ended June 30, 2014 and 2013. These year ends were audited by Ralston and contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to audit scope or accounting, except that the report contained an explanatory paragraph stating that there was substantial doubt about the Company’s ability to continue as a going concern. Our Board of Directors participated in and approved the decision to change independent accountants. Through the period covered by the financial review of financial statements of the quarterly period December 31, 2014, there have been no disagreements with Weinberg on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Weinberg, would have caused them to make reference thereto in their report on the financial statements. Through the interim period May 4, 2015 (the date of dismissal of the former accountant), there have been no disagreements with Weinberg on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Weinberg would have caused them to make reference thereto in their report on the financial statements.
On May 4, 2015 the Company engaged Green & Company, CPAs (“Green”) of Tampa, Florida, as its new registered independent public accountant. During the years ended June 30, 2014 and 2013, and prior to May 4, 2015 (the date of the new engagement), we did not consult with Green regarding (i) the application of accounting principles to a specified transaction, (ii) the type of audit opinion that might be rendered on the Company’s financial statements by Green, in either case where written or oral advice provided by Green would be an important factor considered by us in reaching a decision as to any accounting, auditing or financial reporting issues or (iii) any other matter that was the subject of a disagreement between us and our former auditor or was a reportable event (as described in Items 304(a)(1)(iv) or Item 304(a)(1)(v) of Regulation S-K, respectively).
Item 9A.
Item 9A. Controls and Procedures.
Management’s Annual Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in rule 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of the CEO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal controls over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records which in reasonable detail accurately and fairly reflect the transactions and disposition of the Company’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made in accordance with authorizations of management and directors of the issuer; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency or a combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
In evaluating the effectiveness of the Company’s internal control over financial reporting as of June 30, 2016, management used the criteria established in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on the criteria established by COSO, management (with the participation of the CEO) identified the following material weaknesses in the Company’s internal control over financial reporting as of June 30, 2016, which arose from the limited number of number of staff at the Company and the inability to achieve proper segregation of duties:
The Company lacked effective controls for ensuring the accuracy of reporting over significant account balances, including the review, approval, and documentation of related transactions and account reconciliations and other complex accounting procedures.
The Company lacked effective controls because their directors are not independent.
As a result of these material weaknesses, management concluded that the Company did not maintain effective internal control over financial reporting as of June 30, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Security and Exchange Commission that permit us to provide only management’s report in this Annual Report.
Changes in Internal Control over Financial Reporting
Except as set forth above, there were no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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.
Item 9B.
Item 9B. Other Information.
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
The following table sets forth information with respect to persons who are serving as directors and officers of the Company. Each director holds office until the next annual meeting of shareholders or until his successor has been elected and qualified.
(1) Appointed as Director on November 6, 2014. Appointed as CEO and CFO on March 1, 2015.
(2) Appointed as CEO, CFO and Director on November 6, 2014. Resigned as CEO and CFO on February 28, 2015.
(3) Appointed on January 22, 2015.
Biographies of Directors and Officers
The following is a brief account of the education and business experience during at least the past five years of each director, executive officer and key employee of our company, indicating the person’s principal occupation during that period, and the name and principal business of the organization in which such occupation and employment were carried out.
Clifford J. Perry - Chief Executive Officer, Chief Financial Officer, Treasurer and Director
Mr. Perry, co-founder, chief executive officer, chief financial officer, and director, has an extensive entrepreneurial background owning a number of Master Franchise operations with major franchisors, such as The Crab House and Cinnabon. He also took a real estate seminar company from $0 in revenue to over $3 million in gross revenues within one year. In 2009, for that year only, he was Executive Vice President of Business Development for the first U.S. public company in the Marijuana Industry, Medical Marijuana, Inc. (MJNA). He created the first revenue source for Medical Marijuana, Inc., utilizing his expertise in educational training seminars, branding, licensing and event planning to develop and produce the “National Medical Marijuana Educational Expo.” Mr. Perry has been consulting to companies in this space since 2009. Mr. Perry has, over his business career, been either a consultant or a principle, involved in Franchising, Licensing, Network Marketing, Trademark, Copyright & Patents, Print, Indoor/Outdoor/Digital Advertising, Telephony, Hotel, Resort, Restaurant, Hospitality, Nightclub, Event Production, Concert Promotion, Video & Film Production, Business Aviation, Luxury and High Performance Auto Restoration, Oil & Gas, Mining, Shipping, Counter Trade, Traditional, Alternative & Complimentary Healthcare, Non-Profit Fundraising.
Richard C. Cowan - Director
Mr. Cowan is a renowned activist, published writer and former National Director of the National Organization for the Reform of Marijuana Laws (NORML); is a current Board Member of The Marijuana News; and Co-Founder of Freedom Leaf, Inc. He worked with Cannabis Science, Inc. (CBIS) from 2009 until he retired in 2014. In 2015, Mr. Cowan was recently reappointed to the Board of NORML and is internationally active in the cannabis legalization movement. Mr. Cowan holds a B.A. in Economics from Yale University.
Raymond P. Mederios - Director
Raymond P. Mederios, 66, director, is an experienced entrepreneur and marketing executive, has focused on successfully investing in the turnaround of financially troubled companies and has founded several start-up companies. Mr. Medeiros has managed many facets of operating a successful business including: operations, finance, human relations, sales and marketing in retail, import, manufacturing, hospitality, financial services and computer technology. Mr. Mederios was involved with Runco International (www.runco.com), a high technology consumer manufacturer, as a Senior Executive for nearly eight years. Mr. Medeiros reported to, and worked with, the CEO, to develop company strategy and manage IT. Additionally, he advised the Vice President of Marketing, and had oversight over the finance and legal operations. The company was sold to a public company, Planar Systems, Inc. In 1992, Medeiros founded NewGate Internet, a pioneer Internet company, which was one of the first companies to market on the Internet and effectively assisted companies, such as the Gap and LEGO, to use the Internet to brand themselves. NewGate was recognized as an industry leader in paid search for online retailers. In 2006, it was sold to iCrossing (www.icrossing.com), a Hearst Corporation. Over the past 40 years, Mr. Medeiros has worked with a number of non-profit organizations as a volunteer and/or board member. In 2012, he founded a new non-profit called Business Cares to match non-profits with businesses developing creative projects that benefit both organizations: raising funds for the non-profit and goodwill for the business. He holds a BS in Business Administration with an emphasis in Marketing from Kent State University.
There are no family relationships among any of our directors and executive officers.
Our directors are elected at the annual meeting of the shareholders, with vacancies filled by the Board of Directors, and serve until their successors are elected and qualified, or their earlier resignation or removal. Officers are appointed by the board of directors and serve at the discretion of the board of directors or until their earlier resignation or removal. Any action required can be taken at any annual or special meeting of stockholders of the corporation which may be taken without a meeting, without prior notice and without a vote, if consent of consents in writing setting forth the action so taken, shall be signed by the holders of the outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the corporation by delivery to its registered office, its principle place of business, or an officer or agent of the corporation having custody of the book in which the proceedings of meetings are recorded.
Indemnification of Directors and Officers
Nevada Corporation Law allows for the indemnification of officers, directors, and any corporate agents in terms sufficiently broad to indemnify such persons under certain circumstances for liabilities, including reimbursement for expenses, incurred arising under the 1933 Act. The Bylaws of the Company provide that the Company will indemnify its directors and officers to the fullest extent authorized or permitted by law and such right to indemnification will continue as to a person who has ceased to be a director or officer of the Company and will inure to the benefit of his or her heirs, executors and Consultants; provided, however, that, except for proceedings to enforce rights to indemnification, the Company will not be obligated to indemnify any director or officer in connection with a proceeding (or part thereof) initiated by such person unless such proceeding (or part thereof) was authorized by the Board of Directors. The right to indemnification conferred will include the right to be paid by the Company the expenses (including attorney’s fees) incurred in defending any such proceeding in advance of its final disposition.
The Company may, to the extent authorized from time to time by the Board of Directors, provide rights to indemnification and to the advancement of expenses to employees and agents of the Company similar to those conferred to directors and officers of the Company. The rights to indemnification and to the advancement of expenses are subject to the requirements of the 1940 Act to the extent applicable.
Furthermore, the Company may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Company or another company against any expense, liability or loss, whether or not the Company would have the power to indemnify such person against such expense, liability or loss under the Nevada General Corporation Law.
Director Compensation
During the fiscal year ended June 30, 2016 and 2015, we did not have an independent director. Directors that were employees were not paid any fees for their role as director.
Involvement on Certain Material Legal Proceedings During the Last Five Years
No director, officer, significant employee or consultant has been convicted in a criminal proceeding, exclusive of traffic violations.
No bankruptcy petitions have been filed by or against any business or property of any director, officer, significant employee or consultant of the Company nor has any bankruptcy petition been filed against a partnership or business association where these persons were general partners or executive officers.
No director, officer, significant employee or consultant has been permanently or temporarily enjoined, barred, suspended or otherwise limited from involvement in any type of business, securities or banking activities.
No director, officer or significant employee has been convicted of violating a federal or state securities or commodities law.
Directors’ and Officers’ Liability Insurance
Freedom Leaf does not have directors’ and officers’ liability insurance insuring our directors and officers against liability for acts or omissions in their capacities as directors or officers.
Code of Ethics
We intend to adopt a code of ethics that applies to our officers, directors and employees, including our principal executive officer and principal accounting officer, but have not done so to date due to our relatively small size. We intend to adopt a written code of ethics in the near future.
Corporate Governance & Board Independence
Our Board of Directors consists of three directors and has not established a Nominating or Governance Committees as standing committees. The Board does not have an executive committee or any committees performing a similar function. We are not currently listed on a national securities exchange or in an inter-dealer quotation system that has requirements that a majority of the board of directors be independent.
Due to our lack of operations and size, and since we are not currently listed on a national securities exchange, we are not subject to any listing requirements mandating the establishment of any particular committees; all functions of a nominating/governance committee were performed by our whole board of directors. Our board of directors intends to appoint such persons and form such committees as are required to meet the corporate governance requirements imposed by the national securities exchanges as necessary. Our board of directors does not believe that it is necessary to have such committees at the early stage of the company’s development, and our board of directors believes that the functions of such committees can be adequately performed by the members of our board of directors.
We believe that members of our board of directors are capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. We believe that retaining an independent director who would qualify as an "audit committee financial expert" would be overly costly and burdensome and is not warranted in our circumstances given the early stages of our development and the fact that we have not generated any material revenues to date.
Board Leadership Structure and the Board’s Role in Risk Oversight.
The Board of Directors is led by the Chairman who is also the Chief Executive Officer. Although our sole officer is also one of our directors, the Board believes that the most effective leadership structure at this time is not to separate the roles of Chairman and Chief Executive Officer. A combined structure provides the Company with a single leader who represents the company to our stockholders, regulators, business partners and other stakeholders, among other reasons set forth below.
● This structure creates efficiency in the preparation of the meeting agendas and related Board materials as the Company’s Chief Executive Officer works directly with those individuals preparing the necessary Board materials and is more connected to the overall daily operations of the Company. Agendas are also prepared with the permitted input of the full Board of Directors allowing for any concerns or risks of any individual director to be discussed as deemed appropriate. The Board believes that the Company has benefited from this structure, and Mr. Perry's continuation in the combined role of the Chairman and Chief Executive Officer is in the best interest of the stockholders.
● The Company believes that the combined structure is necessary and allows for efficient and effective oversight, given the Company’s relatively small size, its corporate strategy and focus.
The Board of Directors does not have a specific role in risk oversight of the Company. The Chairman, President and Chief Executive Officer and other executive officers and employees of the Company provide the Board of Directors with information regarding the Company’s risks.
Item 11.
Item 11. Executive Compensation.
The table below sets forth, for our last two fiscal years, the compensation earned by Clifford J. Perry, our director (from November 6, 2014 through June 30, 2016) and as our chief executive officer and chief financial officer (from March 1, 2015 through June 30, 2016), Richard C. Cowan, our director (from November 6, 2014 through June 30, 2016) and as our former chief executive officer and chief financial officer (from November 6, 2014 through February 28, 2015), and Raymond P. Medeiros, our director (from January 22, 2015 through June 30, 2016). The Company has not executed any employment agreements with any executive.
(1) Mr. Cowan was appointed as CEO, CFO and Director on November 6, 2014. On February 28, 2015, Mr. Cowan resigned as CEO and CFO.
(2) Mr. Perry was appointed as Director on November 6, 2014. On March 1, 2105, he was appointed as CEO and CFO.
(3) Mr. Medeiros was appointed as Director on January 22, 2015.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth information regarding the beneficial ownership of the Company’s common stock (and preferred stock) as of June 30, 2016, for (i) each person or entity who, to our knowledge, beneficially owns more than 5% of our common stock; (ii) each executive officer and named officer; (iii) each director; and (iv) all of our officers and directors as a group. Unless otherwise indicated in the footnotes to the following table, each of the stockholders named in the table has sole voting and investment power with respect to the shares of our common stock beneficially owned. Except as otherwise indicated, the address of each of the stockholders listed below is: c/o 3571 E. Sunset Road, Suite 420, Las Vegas, Nevada 89120.
(1) Beneficial Ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Each of the beneficial owners listed above has direct ownership of and sole voting power and investment power to the shares of the Company's common stock.
(2) As of June 30, 2016, a total of 94,538,650 shares of the Company's common stock are considered to be outstanding (includes issuable) pursuant to SEC Rule 13d-3(d)(1). For each Beneficial Owner listed, any options exercisable within 60 days have been also included for purposes of calculating their percent of class.
(3) Director and former officer.
(4) Director and officer.
(5) Director.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Transactions with Related Persons
Richard C. Cowan (“Cowan”), Director and former officer of the Company, has payables and accruals due to him of $100,000 and $194,355 as of June 30, 2016 and 2015, respectively.
Clifford J. Perry (“Perry”), chief executive officer, chief financial officer, and director of the Company, has payables and accruals due to him of $26,250 and $26,666 as of June 30, 2016 and 2015, respectively.
Raymond P. Medeiros (“Medeiros”), a director of the Company, has payables and accruals due to him of $10,500 and $0 as of June 30, 2016 and 2015, respectively.
A shareholder of the Company is owed $10,000 as of June 30, 2016.
On May 25, 2016, Perry converted 68,401,200 shares of common stock into 684,012 shares of Series A preferred stock.
On May 25, 2016, Cowan converted 26,401,000 shares of common stock into 264,010 shares of Series A preferred stock.
On June 30, 2016, Cowan converted $225,892 of payables and accruals into 2,509,914 shares of common stock. The conversion was at a 50% discount or $0.09 per share. As of June 30, 2016, these shares had not been issued and were recorded as issuable.
Director Independence
We currently do not have any independent directors, as the term “independent” is defined in Section 803A of the NYSE Amex LLC Company Guide. Since the Over the Counter Pink (“OTCPK”) does not have rules regarding director independence, the Board makes its determination as to director independence based on the definition of “independence” as defined under the rules of the New York Stock Exchange (“NYSE”) and American Stock Exchange (“Amex”).
Item 14.
Item 14. Principal Accounting Fees and Services.
The following table sets forth the fees billed by our principal independent accountants, Green & Company CPA’s for 2015, for the categories of services indicated.
On August 8, 2014, Thomas Ralston Certified Public Accountant (“Ralston”) declined to stand for appointment as the Company’s independent accountant. Ralston’s report on the financial statements for the years ended June 30, 2014 and 2013, contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to audit scope or accounting, except that the report contained an explanatory paragraph stating that there was substantial doubt about the Company’s ability to continue as a going concern.
On January 15, 2015 the Company engaged Weinberg & Baer Certified Public Accountants (“Weinberg”) as our independent accountants for the period ending September 30, 2014. On May 4, 2015, Weinberg was dismissed as the Company’s independent accountant. Weinberg has not issued a report on the financial statements. These year ends were audited by Ralston and contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to audit scope or accounting, except that the report contained an explanatory paragraph stating that there was substantial doubt about the Company’s ability to continue as a going concern.
On May 4, 2015 the Company engaged Green & Company, CPAs (“Green”) of Tampa, Florida, as its new registered independent public accountant. During the year ended June 30, 2015, and prior to May 4, 2015 (the date of the new engagement), we did not consult with Green regarding (i) the application of accounting principles to a specified transaction, (ii) the type of audit opinion that might be rendered on the Company’s financial statements by Green, in either case where written or oral advice provided by Green would be an important factor considered by us in reaching a decision as to any accounting, auditing or financial reporting issues or (iii) any other matter that was the subject of a disagreement between us and our former auditor or was a reportable event (as described in Items 304(a)(1)(iv) or Item 304(a)(1)(v) of Regulation S-K, respectively).
Audit fees. Consists of fees billed for the audit of our annual financial statements and review of our interim financial information and services that are normally provided by the accountant in connection with year-end and quarter-end statutory and regulatory filings or engagements.
Audit-related fees. Consists of fees billed for services relating to review of other regulatory filings including registration statements, periodic reports and audit related consulting.
Tax fees. Consists of professional services rendered by our principal accountant for tax compliance, tax advice and tax planning.
Other fees. Other services provided by our accountants.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules.
Exhibits
See the Exhibit Index following the signature page of this Registration Statement, which Exhibit Index is incorporated herein by reference.
__________
(1) Filed herewith
Financial Statement Schedules
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/ Clifford J. Perry
October 7,
Clifford J. Perry, Principal Executive Officer and Principal Accounting Officer
Date
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Richard C. Cowan
October 7,
Richard C. Cowan, Director
Date
/s/ Clifford J. Perry
October 7,
Clifford J. Perry, Director
Date
/s/ Raymond P. Medeiros
October 7,
Raymond P. Medeiros, Director
Date