| Nature of Operations and Summary of Significant Accounting Policies | NOTE 1 – NATURE OF OPERATIONS
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization The Company
was incorporated in the State of Nevada on February 21, 2013, under the name of Arkadia International, Inc. The Company was originally
engaged in the business of the acquisition of in demand equipment, cars, and goods with the intent to resell these in the U.S.
territories or export to overseas countries. On October 3, 2014, the Company experienced a change in control. Richard C. Cowan
acquired approximately 93% of the issued and outstanding common stock of the Company at the time. On November 6, 2014, the Company
merged with Freedom Leaf Inc., a private Nevada corporation, and the Company changed its name to Freedom Leaf Inc. In connection
with the merger, the sole officer, director and stockholder of the private company, Clifford J. Perry, became an officer and director
of the Company, and Mr. Perry received approximately 48.1% of the Company’s common stock post-merger. For
financial reporting purposes, this merger was accounted for as a "reverse acquisition" rather than a business combination,
and the private company was deemed to be the accounting acquirer in the transaction, with the Company deemed to be the acquired
company for financial reporting purposes. Consequently, the assets and liabilities and the operations that were reflected in the
historical financial statements of the Company prior to the merger are those of the private company, and they were recorded at
the historical cost basis of the private company, and the financial statements after completion of the merger include the combined
assets and liabilities of the Company and the private company, the historical operations of the private company only, and the
operations of both companies from the closing date of the merger. Freedom Leaf
Inc. is a reporting public company traded under the symbol (OTCQB: FRLF) with corporate headquarters located at 3571 E. Sunset
Road, Las Vegas, Nevada, 89120. Subsidiary
Entities:
☐ Cannabis Business
Solutions Inc. (“Cannabis Business Solutions”), a Nevada corporation, was formed on February 5, 2014, and is a
wholly-owned subsidiary of the Company. This subsidiary had no activity until the agreement with Valencia Web Technology S.L.,
B-97183354 (see Note 2).
☐ Leafceuticals Inc.
(“Leafceuticals”), formerly known as Cannabiz U, Inc., a Nevada corporation, was formed on February 13, 2014,
and is a wholly-owned subsidiary of the Company.
☐ Freedom Leaf International
Inc. (“Freedom Leaf International”), a Nevada corporation, was formed on November 27, 2015, and is a wholly-owned
subsidiary of the Company. This subsidiary has had no activity to date.
☐ Leafceuticals Europe,
SL, a wholly-owned subsidiary of the Company’s owns our Valencia greenhouse operations.
☐ Freedom Leaf Cares
Inc. (“Freedom Leaf Cares”), a Nevada corporation, was formed on October 1, 2014, and is a wholly-owned subsidiary
of the Company. Freedom Leaf Cares was dissolved in 2016. Until dissolution, this subsidiary had no activity.
☐ Tierra
Science Global, LLC. (“Tierra”), a Nevada corporation, was formed on August 23, 2017, and, as of its acquisition
by Freedom Leaf on July 26, 2018 with an effective date of August 1, 2018, is a wholly-owned subsidiary of the Company. Nature of Operations Freedom Leaf
Inc. is a group of diversified, multinational, vertically-integrated hemp businesses and cannabis media companies. Freedom Leaf
has strived to be a leading go-to resource in the cannabis, medical marijuana, and industrial hemp industries since 2014, founded
by professionals with Decades of combined experience in cannabis legalization advocacy. The Company is continuously building a
diverse, global portfolio of valuable businesses and enterprises through strategic mergers, acquisitions, and acceleration projects
across the hemp and cannabis industry. Utilizing these mergers and acquisitions, Freedom Leaf is building a solid foundation for
our vertically-integrated hemp company to maximize both stockholder value and revenue growth. Our cultivation and extraction divisions
allow FRLF to grow and source our own hemp extract, which allows dramatically lower production costs for our wholly-owned hemp
product lines, thereby generating more revenue for each product sold. We also formulate and manufacture the majority of our products
in our own in-house formulation centers, also greatly reducing our costs and increasing revenue. In addition, our extensive domestic
and international media companies ensure we can continuously direct traffic to our many ecommerce sites and nationwide retail
locations. For valuation purposes, the Company’s focus is on developing and implementing multiple, mutually-reinforcing
revenue streams; through which revenue, net income and stockholder value are maximized by cross-marketing across its brands and
advertising through its media properties. The Company’s major business lines are:
☐ Legal Industrial Hemp Cultivation
☐ Cannabidiol Extraction, Distillation, and Processing
☐ Expert Product Formulation
☐ Nutraceutical Brand Marketing
☐ Ancillary Products & Niche Markets
☐ Affiliate Marketing Programs
☐ E-Commerce Solutions
☐ Global Media & Advertising Networks Basis of Presentation The Company
prepares its consolidated financial statements in conformity with generally accepted accounting principles in the United States
of America. The unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring
accruals, which are, in the opinion of management, necessary for a fair presentation of such statements. These unaudited condensed
consolidated financial statements have been prepared in accordance with GAAP pursuant to the rules and regulations of the Securities
and Exchange Commission (“SEC”). Additionally, the results of operations for the three months ended September 30,
2018 are not necessarily indicative of the results that may be expected for the entire year. These unaudited condensed consolidated
financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the
year ended June 30, 2018 included in the Company’s 2018 Annual Report on Form 10-K, filed with the SEC on October 15, 2018. Principles of Consolidation The Company
consolidates any variable interest entities of which it is the primary beneficiary. Equity investments through which the Company
exercises significant influence over but does not control the investee and is not the primary beneficiary of the investee’s
activities are accounted for using the equity method. Investments through which the Company is not able to exercise significant
influence over the investee and which do not have readily determinable fair values are accounted for under the cost method. All
material inter-company accounts have been eliminated in the consolidation. Use
of Estimates The preparation
of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates in the accompanying
consolidated financial statements include the amortization period for intangible assets, valuation and impairment valuation of
intangible assets, depreciable lives of the web site and property and equipment, valuation of warrants and beneficial conversion
feature debt discounts, valuation of derivatives, valuation of share-based payments and the valuation allowance on deferred tax
assets. Fair
Value of Financial Instruments The Company
measures its financial assets and liabilities in accordance with generally accepted accounting principles. For certain of our
financial instruments, including cash, accounts payable, accrued expenses, and short-term loans the carrying amounts approximate
fair value due to their short maturities. We follow
accounting guidance for financial and non-financial assets and liabilities. This standard defines fair value, provides guidance
for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements, but
rather applies to all other accounting pronouncements that require or permit fair value measurements. This guidance does not apply
to measurements related to share-based payments. This guidance discusses valuation techniques, such as the market approach (comparable
market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the
service capacity of an asset or replacement cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels: Level 1:
Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2:
Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets
or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. Level 3:
Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by
us, which reflect those that a market participant would use. 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:
· Advertising
Services – Revenue from advertising is recognized over the contracted period in which advertising services are performed.
Advertising services are considered performed when an ad is displayed to users.
· Product
Sales – Revenue from the sale of the Company’s branded products is recognized in the period in which product is
shipped. Sales billed or cash received in advance of actual shipment are deferred and recorded as income in the period in
which shipment is made. Shipping and handling fees billed to customers is included in net sales. Shipping and handling costs
are expensed as incurred and included in cost of sales. All sales are presented net of sales taxes, which are excluded from
revenue.
· Licensing
Revenue – Revenue from licensing arrangements is recognized when earned, estimable and realizable. The timing of revenue
recognition is dependent on the terms of each license agreement and on the timing of sales of licensed products. The Company
generally recognizes royalty revenue when it is reported to the Company by its licensees, which is generally one quarter in
arrears from the licensees’ sales of licensed products. For licensing fees that are not determined by the licensees’
sales, the Company generally recognizes license fee revenue on a straight-line basis over the life of the license. Net Earnings (Loss) Per
Share In accordance
with ASC 260-10, “Earnings Per Share,” basic net earnings (loss) per common share is computed by dividing the net
earnings (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted earnings
(loss) per share are computed using the weighted average number of common and dilutive common stock equivalent shares outstanding
during the period. Dilutive common stock equivalent shares that may dilute future earnings per share consist of Series A convertible
preferred stock and warrants to purchase common stock. As of September 30, 2018, there were 94,830,801 such common stock equivalents.
Equivalent shares are not utilized when the effect is anti-dilutive. Going
Concern The Company
has a net loss attributable to common stockholders for the nine months ended September 30, 2018 of $1,111,766 and working capital
deficit as of September 30, 2018 of $66,935 and has used cash in operations of $525,800 for the three months ended September 30,
2018. In addition, as of September 30, 2018, the Company had an accumulated deficit of $10,643,599. These conditions raise substantial
doubt about the Company’s ability to continue as a going concern for a period of one year from the date of the issuance
of these financial statements. The accompanying
consolidated financial statements have been prepared in conformity with U.S. GAAP, which contemplate continuation of the Company
as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The ability
of the Company to continue its operations is dependent on the execution of management’s plans, which include the raising
of capital through the debt and/or equity markets, until such time that funds provided by operations are sufficient to fund working
capital requirements. If the Company were not to continue as a going concern, it would likely not be able to realize its assets
at values comparable to the carrying value or the fair value estimates reflected in the balances set out in the preparation of
the consolidated financial statements. There can
be no assurances that the Company will be successful in generating additional cash from the equity/debt markets or other sources
to be used for operations. The consolidated financial statements do not include any adjustments relating to the recoverability
of assets and classification of assets and liabilities that might be necessary. Based on the Company’s current resources,
the Company will not be able to continue to operate without additional immediate funding. Should the Company not be successful
in obtaining the necessary financing to fund its operations, the Company would need to curtail certain or all operational activities
and/or contemplate the sale of its assets, if necessary. |
