Quarterly Report (10-q)

Date : 08/19/2019 @ 8:57PM
Source : Edgar (US Regulatory)
Stock : Rocky Mountain High Brands Inc (QB) (RMHB)
Quote : 0.034815  0.0 (0.00%) @ 1:06PM

Quarterly Report (10-q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

X]    Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
     
    For the quarterly period ended June 30, 2019
     
[ ]     Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934
     
    For the transition period from ______ to ______

 

Commission File Number: 000-55609

 

Rocky Mountain High Brands, Inc.

(Exact name of registrant as specified in its charter)

 

Nevada 90-0895673
(State or other jurisdiction of incorporation or organization)  (IRS Employer Identification No.)

 

9101 LBJ Freeway, Suite 200, Dallas, TX 75243

(Address of principal executive offices)

 

(800)-260-9062

(Registrant’s telephone number)

(Former name, former address and former fiscal year, if changed since last report)

 

 

Securities registered pursuant to Section 12(b) of the Act: None.

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

[ ] Large accelerated filer [ ] Accelerated filer

 

[ ] Non-accelerated filer [X] Smaller reporting company

 

[X] Emerging growth company

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No

 

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 121,366,790 common shares as of August 16, 2019.

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [ ]

 

   

 

 

 

 

 

TABLE OF CONTENTS

 

PART 1- FINANCIAL STATEMENTS

 
  Page
Item 1: Consolidated Financial Statements 3
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations 4
Item 3: Quantitative and Qualitative Disclosures About Market Risk 9
Item 4: Controls and Procedures 9
 

 

PART II – OTHER INFORMATION

 

 
Item 1: Legal Proceedings 10
Item 1A: Risk Factors 10
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 10
Item 3: Defaults Upon Senior Securities 10
Item 4: Mine Safety Disclosures 10
Item 5: Other Information 10
Item 6: Exhibits 10

 

  2  

 

PART I - FINANCIAL INFORMATION 

 

Item 1. Consolidated Financial Statements

 

Our financial statements included in this Form 10-Q are as follows:

 

F-1 Consolidated Balance Sheets as of June 30, 2019 (unaudited) and December 31, 2018;
F-2 Consolidated Statements of Operations for the three months ended June 30, 2019 and 2018 (unaudited);
F-3 Consolidated Statements of Cash Flows for the three months ended June 30, 2019 and 2018 (unaudited);
F-4 Consolidated Statements of Shareholders’ Deficit for the three months ended June 30, 2019 and 2018 (unaudited);
F-5 Notes to Consolidated Financial Statements (unaudited).

 

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the SEC instructions to Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the interim period ended March 31, 2019 are not necessarily indicative of the results that can be expected for the full year.

       

  3  

 

Rocky Mountain High Brands, Inc.

Consolidated Balance Sheets

 

    June 30, 2019   December 31, 2018
      (Unaudited)        
CURRENT ASSETS              
               
Cash   $ 68,563     $ 613,686
Accounts Receivable, net of allowance of $1,864 and $5,275, respectively     3,618       17,324
Inventory     375,627       146,722
Prepaid Expenses and Other Current Assets     520,811       388,074
TOTAL CURRENT ASSETS     968,619       1,165,806
               
Property and Equipment, net     26,255       34,280
Intangible Assets     135,152       148,647
Other Assets     29,093       26,245
               
TOTAL ASSETS   $ 1,159,119     $ 1,374,978
               
LIABILITIES AND SHAREHOLDERS' DEFICIT              
               
CURRENT LIABILITIES              
               
Accounts Payable and Accrued Liabilities   $ 573,404     $ 505,214
Convertible Notes Payable, net of debt discount     378,578       666,596
Notes Payable     31,069       37,493
Accrued Interest     50,781       25,758
Deferred Revenue     466,300       466,300
Derivative Liability     584,897       376,172
TOTAL CURRENT LIABILITIES     2,085,029       2,077,533
               
SHAREHOLDERS' DEFICIT              
Preferred Stock - Series A - Par Value of $.001;  1,000,000 shares designated;              
      No shares issued and outstanding as of June 30, 2019 and December 31, 2018     —         —  
Preferred Stock - Series B - Par Value of $.001;  7,000,000 shares designated;              
      No shares issued and outstanding as of June 30, 2019 and December 31, 2018     —         —  
Preferred Stock - Series C - Par Value of $.001;  2,000,000 shares designated;              
      No shares issued and outstanding as of June 30, 2019 and December 31, 2018     —         —  
Preferred Stock - Series D - Par Value of $.001;  2,000,000 shares designated;              
      No shares issued and outstanding as of June, 2019 and December 31, 2018     —         —  
Preferred Stock - Series E - Par Value of $.001;  789,474 shares designated; No shares  issued and outstanding as of June 30, 2019 and December 31, 2018     —         —  
Common Stock - Par Value of $.001;  200,000,000 shares authorized; 108,979,991  shares issued and outstanding as of June 30, 2019; 94,580,869 shares issued and outstanding as of December 31, 2018     108,980       94,581
Additional Paid-In Capital     35,913,891       34,221,215
Accumulated Deficit     (36,948,781 )     (35,018,351
TOTAL SHAREHOLDERS' DEFICIT     (925,910 )     (702,555)
               
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT   $ 1,159,119     $ 1,374,978

 

The Accompanying Notes are an Integral Part of the Consolidated Financial Statements

 

  F- 1  

 

Rocky Mountain High Brands, Inc.

Consolidated Statements of Operations

(Unaudited)

 

    Three Months Ended   Six Months Ended
    June 30, 2019   June 30, 2018   June 30, 2019   June 30, 2018
                 
Sales   $ 36,572     $ 72,675     $ 113,001     $ 123,584
                               
Cost of Sales     38,854       97,800       114,584       164,790
Inventory Obsolescence     —         11,424       —         11,424
                               
Gross Loss     (2,282 )     (36,549 )     (1,583 )     (52,630)
                               
Operating Expenses                              
General and Administrative     696,846       909,788       1,653,486       1,990,306
Advertising and Marketing     158,985       211,295       368,375       281,117
Total Operating Expenses     855,831       1,121,083       2,021,861       2,271,423
                               
Loss from Operations     (858,113 )     (1,157,632 )     (2,023,444 )     (2,324,053)
                               
Other (Income)/Expenses:                              
Interest Expense     339,368       365,570       632,754       3,182,698
(Gain) Loss on Extinguishment of Debt     (689,991 )     (5,362 )     (689,991 )     191,138
Gain on Lawsuit Judgment and Legal Settlement     (230,840 )     —         (230,840 )     —  
(Gain) Loss on Change in Fair Value of Derivative Liability     390,520       (140,045 )     195,063       (1,988,030)
Total Other (Income) Expenses     (190,943 )     220,163       (93,014 )     1,385,806
                               
Loss Before Income Tax Provision     (667,170 )     (1,377,795 )     (1,930,430 )     (3,709,859)
                               
Income Tax Provision     —         —         —         —  
                               
Net Loss   $ (667,170 )   $ (1,377,795 )   $ (1,930,430 )   $ (3,709,859)
                               
Net Loss per Common Share - Basic and Diluted   $ (0.01 )   $ (0.02 )   $ (0.02 )   $ (0.05)
                               
Weighted Average Shares Outstanding     106,076,970       78,526,753       102,934,506       73,474,643

 

The Accompanying Notes are an Integral Part of the Consolidated Financial Statements.

  F- 2  

Rocky Mountain High Brands, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

    Six Months Ended
    June 30, 2019   June 30, 2018
         
Operating Activities:              
Net Loss   $ (1,930,430 )   $ (3,709,859)
Adjustments to reconcile net loss to net cash used in operating activities:              
  Stock-based compensation     110,209       319,143
  Stock-based payments to vendors     —         65,250
  Warrants and options issued for services rendered     —         44,476
  Non-cash interest expense     622,367       3,057,912
  Fees and penalties on debt     —         120,251
  Noncash portion of gain on lawsuit judgment and legal settlement     (30,840 )     —  
  (Gain) Loss on change in fair value of derivative liability     195,063       (1,988,030)
  (Gain) Loss on extinguishment of debt     (689,991 )     191,138
  Bad debt expense     1,678       1,069
  Depreciation and amortization expense     14,773       12,732
  Inventory obsolescence     —         11,424
Changes in operating assets and liabilities:              
  Accounts receivable     12,029       (19,742)
  Inventory     (228,905 )     (6,502)
  Prepaid expenses and other current assets     (238,945 )     (57,210)
  Other assets     49,432       17,500
  Accounts payable and accrued liabilities     68,188       (344,694)
NET CASH USED IN OPERATING ACTIVITIES     (2,045,372 )     (2,285,142)
               
Investing Activities:              
  Investments in other assets     —         (31,220)
  Acquisition of property and equipment     —         (10,965)
NET CASH USED IN INVESTING ACTIVITIES     —         (42,185)
               
Financing Activities:              
  Proceeds from issuance of convertible notes     367,500       300,000
  Repayment of convertible notes     —         (172,932)
  Repayment of notes payable     (6,424 )     (6,128)
  Proceeds from issuance of common stock     1,139,173       2,514,562
NET CASH PROVIDED BY FINANCING ACTIVITIES     1,500,249       2,635,502
               
INCREASE (DECREASE) IN CASH     (545,123 )     308,175
               
CASH - BEGINNING OF PERIOD     613,686       16,983
               
CASH - END OF PERIOD   $ 68,563     $ 325,158
               
Supplemental cash flow information:              
  Cash paid for interest   $ 10,387     $ 10,567
  Cash paid for taxes   $ —       $ —  
Supplemental disclosure of non-cash financing and investing activities:              
  Common stock issued for conversion of debt   $ 188,870     $ 3,489,181
  Debt and accrued interest converted for common stock   $ 271,189     $ 499,053
  Derivative liability relieved upon conversion of related debt   $ —       $ 3,021,935
  Beneficial conversion feature recognized as debt discount   $ 367,500     $ 3,328,740

 

The Accompanying Notes are an Integral Part of the Consolidated Financial Statements.

 

  F- 3  

  

 Rocky Mountain High Brands, Inc.

 Consolidated Statements of Shareholders' Deficit for the Three and Six Months Ended June 30, 2019

(Unaudited) 

 

    Common Stock   Preferred Stock A   Preferred Stock C   Preferred Stock E        
    Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   APIC   Accumulated Deficit   Equity/(Deficit)
Balance - December 31, 2018     94,580,869     $ 94,581       —       $ —         —       $ —         —       $ —       $ 34,221,215     $ (35,018,351 )   $ (702,555)
Shares issued for cash     7,813,337       7,813       —         —         —         —         —         —         1,009,233       —         1,017,046
Shares issued for compensation     25,403       25       —         —         —         —         —         —         3,976       —         4,001
Shares issued upon conversion of convertible notes     1,750,000       1,750       —         —         —         —         —         —         169,592       —         171,342
Net loss for the three months ended March 31, 2019     —         —         —         —         —         —         —         —         —         (1,263,260 )     (1,263,260)
Balance - March 31, 2019     104,169,609     $ 104,170       —       $ —         —       $ —         —       $ —       $ 35,404,015     $ (36,281,611 )   $ (773,426)
Shares issued for cash     2,490,932       2,491       —         —         —         —         —         —         119,636       —         122,127
Shares issued upon conversion of convertible notes     2,315,980       2,316       —         —         —         —         —         —         15,213       —         17,529
Stock option forfeiture     —         —         —         —         —         —         —         —         7,530       —         7,530
Beneficial conversion feature recognized on convertible notes payable     —         —         —         —         —         —         —         —         367,500       —         367,500
Fractional shares issued as a result of the reverse stock split     3,470       3       —         —         —         —         —         —         (3 )     —         —  
Net loss for the three months ended June 30, 2019     —         —         —         —         —         —         —         —         —         (667,170 )     (667,170)
Balance - June 30, 2019     108,979,991     $ 108,980       —       $ —         —       $ —         —       $ —       $ 35,913,891     $ (36,948,781 )   $ (925,910)

 

 

 

 Rocky Mountain High Brands, Inc.

 Consolidated Statements of Shareholders' Deficit for the Three and Six Months Ended June 30, 2018

(Unaudited) 

    Common Stock   Preferred Stock A   Preferred Stock C   Preferred Stock E        
    Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   APIC   Accumulated Deficit   Equity/ (Deficit)
Balance - December 31, 2017     57,985,323     $ 57,985       1,000,000     $ 1,000       —       $ —         —       $ —       $ 24,561,530     $ (31,662,414 )   $ (7,041,899)
Shares issued for cash     6,757,451       6,757       —         —         —         —         —         —         1,463,243       —         1,470,001
Shares issued for compensation     1,984,690       1,985       —         —         —         —         —         —         154,280       —         156,265
Shares issued upon conversion of convertible notes     8,440,262       8,440       —         —         —         —         —         —         3,363,554       —         3,371,994
Shares to vendors for services rendered     296,271       296       —         —         —         —         —         —         61,204       —         61,500
Beneficial conversion feature recognized on convertible notes payable     —         —         —         —         —         —         —         —         3,328,740       —         3,328,740
Net loss for the three months ended March 31, 2018     —         —         —         —         —         —         —         —         —         (2,332,064 )     (2,332,064)
Balance - March 31, 2018     75,463,997     $ 75,464       1,000,000     $ 1,000       —       $ —         —       $ —       $ 32,932,550     $ (33,994,478 )   $ (985,464)
Shares issued for cash     5,453,434       5,453       —         —         —         —         —         —         1,039,108       —         1,044,561
Shares issued for compensation     124,247       124       —         —         —         —         —         —         27,104       —         27,228
Options issued for compensation     —         —         —         —         —         —         —         —         44,476       —         44,476
Shares issued upon conversion of convertible notes     467,742       468       —         —         —         —         —         —         116,719       —         117,187
Shares to vendors for services rendered     20,547       21       —         —         —         —         —         —         3,729       —         3,750
Net loss for the three months ended June 30, 2018     —         —         —         —         —         —         —         —         —         (1,377,795 )     (1,377,795)
Balance - June 30, 2018     81,529,967     $ 81,530       1,000,000     $ 1,000       —       $ —         —       $ —       $ 34,163,686     $ (35,372,273 )   $ (1,126,057)

 

The Accompanying Notes are an Integral Part of the Consolidated Financial Statements.

 

  F- 4  

 

Rocky Mountain High Brands, Inc.

Notes to Consolidated Financial Statements

(Unaudited) 

NOTE 1 – General

 

Rocky Mountain High Brands, Inc. (“RMHB” or the “Company”) was incorporated under the laws of the State of Nevada. On July 17, 2014, the Company changed its name from Republic of Texas Brands Incorporated to Totally Hemp Crazy, Inc and on October 23, 2015, the Company changed its name to Rocky Mountain High Brands, Inc.

 

RMHB currently operates through its parent company, four wholly-owned subsidiaries, one majority-owned subsidiary, and one minority-owned subsidiary, which the Company controls. All subsidiaries are consolidated for financial reporting purposes.

 

RMHB is a consumer goods company that specializes in developing, manufacturing, marketing, and distributing high-quality, health conscious, cannabidiol (“CBD”) and hemp- infused products that span various categories including beverage, food, fitness, skin care and more. RMHB also markets a naturally high alkaline spring water and a water-based whey protein and energy drink as part of our brand portfolio.

 

In March 2018, the Company launched the HEMPd brand with tinctures, gummies, water soluble drops, capsules, lotions, salves, and E-juice liquids. In October 2018, the Company introduced CBD-infused waters in four flavors and plans to introduce additional HEMPd product offerings in the future. HEMPd products are marketed through the Company’s Rocky Mountain Hemp Company subsidiary. In November 2018, the Company discontinued sales of its vape-related products.

 

On July 25, 2018 the Company acquired the assets of BFIT Brands, LLC (“BFIT”), an Arizona limited liability company. These assets include the cash, accounts receivable, inventory, FitWhey trademark, recipes and formulas of BFIT’s FitWhey branded water-based protein drinks containing caffeine and a vitamin-B pack.

 

On June 12, 2019 the Company organized Sweet Rock, LLC (“Sweet Rock”), a 51% owned company, with Sweet Ally, Inc. Sweet Rock will manufacture and market CBD-infused chocolates, hard candies, and baked goods for distribution in the United States.

 

RMHB also bottles and distributes its naturally high alkaline spring water under the name Eagle Spirit Spring Water and plans to re-introduce its hemp-infused energy drinks later in 2019.

 

 On April 22, 2019 the reverse split of the Company’s Stock, at a ratio of one share for every 20 shares, was effective. All common stock share and per share amounts in this document reflect this reverse split.

 

NOTE 2 – Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of the Company’s management, the accompanying unaudited consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of June 30, 2019 and the results of operations and cash flows for the periods presented. The results of operations for the three and six months ended June 30, 2019 are not necessarily indicative of the operating results for the full fiscal year or any future period. These unaudited consolidated financial statements should be read in conjunction with the financial statements and related notes thereto included in the Company’s form 10-K for the year ended December 31, 2018 filed with the SEC on April 15, 2019.

 

Principles of Consolidation

 

The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States. The consolidated financial statements include the accounts of the Company, its wholly-owned and controlled subsidiaries. All intercompany balances and transactions have been eliminated.

 

Use of Estimates

 

The preparation of the financial statements in conformity with Generally Accepted Accounting Principles (“GAAP”) 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 dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. Certain of the Company’s estimates could be affected by external conditions, including those unique to its industry, and general economic conditions. It is possible that these external factors could have an effect on the Company’s estimates that could cause actual results to differ from its estimates. The Company re-evaluates all of its accounting estimates at least quarterly based on these conditions and record adjustments when necessary.

 

  F- 5  

 

Cash

 

The Company considers all short-term highly liquid investments with an original maturity at the date of purchase of three months or less to be cash equivalents.

 

Revenue Recognition

 

The Company follows the guidance of the Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers,” as amended. It records revenue when persuasive evidence of an arrangement exists, product delivery has occurred, the selling price to the customer is fixed or determinable and collectability of the revenue is reasonably assured. The Company has not experienced any significant returns from customers and accordingly, in management’s opinion, no reserve for returns has been provided. Payments received prior to shipment of goods are recorded as deferred revenue.

 

The following table represents sales by sales channel for each of the periods:

 

    Three Months Ended   Six Months Ended
   

June 30, 2019

 

June 30, 2018

  June 30, 2019   June 30, 2018
Online   $ 36,472     $ 57,657   $ 96,450   $ 96,092
Distributor     100       13,301     1,520     23,164
Retailer     –         1,717     15,031     4,328
Total   $ 36,572     $ 72,675   $ 113,001   $ 12 3,584

  

All sales for all periods presented were to domestic customers.

 

Due to the nature of the Company’s revenue from contracts with customers, the Company does not have material contract assets or liabilities that fall under the scope of ASC 606.

 

The Company’s revenues accounted for under ASC 606, generally, do not require significant estimates or judgments based on the nature of the Company’s revenue streams. The sales prices are generally fixed at the point of sale and all consideration from contracts is included in the transaction price. The Company’s contracts do not include multiple performance obligations or material variable consideration.

 

Accounts Receivable and Allowance for Doubtful Accounts Receivable

 

The Company has a policy of reserving for uncollectible accounts based on the best estimate of the amount of probable credit losses in our existing accounts receivable. We extend credit to customers based on an evaluation of their financial condition and other factors. The Company generally does not require collateral or other security to support accounts receivable and perform ongoing credit evaluations of customers and maintain an allowance for potential bad debts if required.

 

It is determined whether an allowance for doubtful accounts is required by evaluating specific accounts where information indicates the customers may have an inability to meet financial obligations. In these cases, we use assumptions and judgment, based on the best available facts and circumstances, to record a specific allowance for those customers against amounts due to reduce the receivable to the amount expected to be collected. These specific allowances are re-evaluated and adjusted as additional information is received. The amounts calculated are analyzed to determine the total amount of the allowance. The Company may also record a general allowance as necessary.

 

Direct write-offs are taken in the period when we have exhausted our efforts to collect overdue and unpaid receivables or otherwise evaluate other circumstances that indicate the collectability of receivables.

 

Inventories

 

Inventories, which consist only of the Company’s finished products held for resale, are stated at the lower of cost, determined using the first-in, first-out, and net realizable value. Net realizable value is the estimated selling price, in the ordinary course of business, less estimated costs to dispose of the product.

 

If the Company identifies excess, obsolete or unsalable items, its inventories are written down to their realizable value in the period in which the impairment is first identified. Shipping and handling costs incurred for inventory purchases and product shipments are recorded in cost of sales in the Company’s statements of operations.

 

Fair Value Measurements

 

The Company adopted the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures,” which defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements.

 

The estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments. The carrying amounts of our short- and long-term credit obligations approximate fair value because the effective yields on these obligations, which include contractual interest rates taken together with other features such as concurrent issuances of warrants and/or embedded conversion options, are comparable to rates of returns for instruments of similar credit risk.

 

ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:

Level 1 — quoted prices in active markets for identical assets or liabilities.

Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable.

Level 3 — inputs that are unobservable (for example cash flow modeling inputs based on assumptions).

 

The derivative liability, which relates to the conversion feature of convertible debt and common stock warrants and options, is classified as a Level 3 liability, and is the only financial liability measure at fair value on a recurring basis.

  F- 6  

 

The change in the Level 3 financial instrument is as follows:

 

Balance, December 31, 2018   $ 376,172
Issued during the three months ended June 30, 2019   $

 

21,192

Exercises/Conversions   $ (7,530)
Change in fair value recognized in operations   $ 195,063
Balance, June 30, 2019   $ 584,897

 

The estimated fair value of the derivative instruments was valued using the Black-Scholes option pricing model, using the following assumptions as of June 30, 2019:

 

Estimated Dividends     None
Expected Volatility     142.8%
Risk Free Interest Rate     2.136%
Expected term     .1 to 3.50 years

   

Property and Equipment

 

Property and equipment is stated at cost less accumulated depreciation. Depreciation is provided for on a straight-line basis over the useful lives of the assets. Expenditures for additions and improvements are capitalized; repairs and maintenance are expensed as incurred.

 

Leases

 

The Company accounts for leases in accordance with Financial Accounting Standards Board (“FASB”) Topic 840 Leases . In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) , which requires lessees to recognize on the balance sheet a right-of-use asset, representing their right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 was effective for calendar year-end public companies on January 1, 2019. The Company’s status as an emerging growth company allows it to defer the adoption of this standard by one year and the Company has elected to do so. The Company plans to adopt this new standard on January 1, 2020. The Company is currently evaluating the impact that ASU 2016-02 will have on its consolidated financial statements.

 

Capitalized Software

 

Direct costs related to software development, including coding, website application development, infrastructure development and graphics development, are capitalized and included in other assets. Amortization is provided for on a straight-line basis over the useful life of the software. Costs related to planning, content development, and operating and maintaining software are expensed as incurred.

 

Impairment of Long-Lived Assets

 

The Company evaluates intangible assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. The Company assesses the recoverability of the assets based on the undiscounted future cash flow and recognizes an impairment loss when the estimated undiscounted future cash flow expected to result from the use of the asset plus the net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When the Company identifies an impairment, it reduces the carrying amount of the asset to its estimated fair value based on a discounted cash flow approach or, when available and appropriate, to comparable market values. No impairment charges were recorded during the three and six months ended June 30, 2019 and 2018.

 

Share-based Payments

 

Share-based payments to employees, including grants of employee stock options, are recognized as compensation expense in the financial statements based on their fair values, in accordance with FASB ASC Topic 718. That expense is recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period). The Company had no common stock options or common stock equivalents granted or outstanding for all periods presented.

 

The Company issued restricted stock to consultants and employees for various services. Cost for these transactions are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The value of the common stock is to be measured at the earlier of (i) the date at which a firm commitment for performance by the counterparty to earn the equity instruments is reached or (ii) the date at which the counterparty's performance is complete.

 

Convertible Instruments

 

The Company evaluates and accounts for conversion options embedded in convertible instruments in accordance with ASC 815 “Derivatives and Hedging Activities.” Applicable GAAP requires companies to bifurcate conversion options from their host instruments and account for them as freestanding derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.

 

  F- 7  

 

Preferred Stock

 

We apply the guidance enumerated in ASC 480 “Distinguishing Liabilities from Equity” when determining the classification and measurement of preferred stock. Preferred shares subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value. We classify conditionally redeemable preferred shares (if any), which includes preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within our control, as temporary equity. At all other times, we classified our preferred shares in stockholders’ equity. Our preferred shares do not feature any redemption rights within the holders’ control or conditional redemption features not within our control. Accordingly, unless otherwise noted, all issuances of preferred stock are presented as a component of consolidated shareholders’ deficit.

 

Advertising

 

Advertising and marketing expenses are charged to operations as incurred.

 

Income Taxes

 

The Company uses the asset and liability method of accounting for income taxes in accordance with ASC Topic 740, “Income Taxes.” Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion or all of the deferred tax assets will not be realized.

 

ASC Topic 740.10.30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740.10.40 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company has no material uncertain tax positions.

 

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 has a shareholders’ deficit of $925,910 and an accumulated deficit of $36,948,781 as of June 30, 2019 and has generated operating losses since inception. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern. The Company’s continuation as a going concern is dependent upon its ability to generate revenues and its ability to continue raising capital.

 

On June 27, 2018, the Company entered into a Securities Purchase Agreement (“SPA”) with GHS Investments, LLC (“GHS”), which provides for GHS to purchase up to $15,000,000 of the Company’s common stock over a 24-month period based on a contractually agreed upon market discount. The SPA replaces the Equity Financing Agreement the Company entered into with GHS on October 12, 2017. On August 8, 2018, the Company filed a registration statement with the Securities and Exchange Commission (“SEC”) to register up to 16,000,000 shares of our common stock to be purchased by GHS under the SPA. The registration statement became effective on October 10, 2018 and the Company sold all the available shares under the SPA. On May 15, 2019, the Company filed a registration statement for 30,000,000 shares to be purchased by GHS. This registration statement became effective on June 18, 2019 and the Company began selling shares in June. Management believes the SPA, along with bridge financing from GHS, will provide sufficient cash flows until cash flows from operations become consistently positive.

 

NOTE 4 – Inventory

 

Inventory consists of the following:

 

    June 30, 2019   December 31, 2018
Finished inventory   $ 49,987     $ 84,730
Raw materials and packaging     325,640       61,992
Total   $ 375,627     $ 146,722

 

  F- 8  

 

NOTE 5 – Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets consist of the following:

 

    June 30, 2019   December 31, 2018
Prepaid officers’ compensation   $ 214,850     $ 291,617
Prepaid directors’ compensation     —         29,442
Prepaid production     157,400       —  
Other prepaid expenses and current assets     148,561       67,015
Total   $ 520,811     $ 388,074

 

NOTE 6 – Property and Equipment

 

Property and equipment consist of the following:

    June 30, 2019   December 31, 2018
Vehicles   $ 29,598     $ 29,598
Furniture and equipment     45,322       41,422
Personal computers     17,901       17,901
      92,821       88,921
Less: accumulated depreciation     66,566       54,641
Total   $ 26,255     $ 34,280

 

For the three months ended June 30, 2019 and 2018, depreciation expense was $3,843 and $5,448, respectively. For the six months ended June 30, 2019 and 2018, depreciation expense was $8,004 and $10,129, respectively.

 

NOTE 7 – Acquisition

 

FitWhey Brands Inc. (acquisition of the assets of BFIT Brands, LLC)

 

On July 25, 2018, the Company purchased the assets of BFIT Brands, LLC, an Arizona-based company. The acquired assets include the cash, accounts receivable, inventory, FitWhey trademark, recipes and formulas of BFIT’s FitWhey branded water-based protein drinks containing caffeine and a vitamin-B pack. The Company paid $230,438 including common stock issued to the owners of BFIT of $75,000, forgiveness of a note receivable of $80,000 plus accrued interest of $438, and $75,000 to be paid to the owners of BFIT over time based on 5% of net sales of FitWhey products. No liabilities were assumed by the Company in the transaction.

 

The purchase price of the assets of BFIT Brands, LLC assets was preliminarily allocated as follows:

 

Purchase Price      

Common stock issued

  $ 75,000
Note payable and accrued interest forgiven     80,438
Earnout liability     75,000
Total   $ 230,438
       
Allocation      
Cash   $ 15,612
Accounts receivable     5,763
Inventory     76,922
Software     31,000
Formulas     12,500
Trademark     2,500
Goodwill     86,141
Total   $ 230,438

 

 

The Company is obtaining an outside valuation of these assets.

 

  F- 9  

 

 

 

The following represents the unaudited pro forma statement of operations of the Company for the three and six months ended June 30, 2018 had FitWhey been acquired on January 1, 2018:

    Three Months Ended   Six Months Ended
    June 30, 2018   June 30, 2018
Sales   $ 98,555   $ 187,572
Cost of Sales     94,074     223,245
Inventory Obsolescence     11,424     11,424
Gross Loss     (6,943)     (47,097)
Operating Expenses     1,138,096     2,318,995
Loss From Operations     (1,145,039)     (2,366,092)
Other Expenses     220,163     1,385,806
Loss Before Income Tax Provision     (1,365,202)     (3,751,898)
Income Tax Provision     —       —  
Net Loss   $ (1,365,202)   $ (3,751,898)
Net Loss Per Common Share-Basic and Diluted   $ (0.02)   $ (0.05)
Weighted Average Shares Outstanding     78,526,753     68,366,399

 

 

 

NOTE 8 – Accounts Payable and Accrued Liabilities

 

Accounts payable and accrued liabilities consist of the following:

 

    June 30, 2019   December 31, 2018
Accounts payable   $ 397,255     $ 308,717
Accrued compensation     28,500       25,500
Other accrued expenses     147,649       170,997
Total   $ 573,404     $ 505,214

 

NOTE 9 – Convertible Notes Payable

 

Convertible notes payable consist of the following:

 

   

Interest Rates

 

 

Term

  Conversion Rates  

June 30, 2019  

 

December 31, 2018

GHS Investments, LLC (fixed conversion)     10%     .1 - .75 years     $ 0.03 - 0.05   $ 973,750     $ 871,079
LSW Holdings, LLC (variable conversion)     6%       —        (a)     179,000       179,000
Discount                           (774,172 )     (383,483)
Total                         $ 378,578     $ 666,596

 

(a) 50% discount on the average of the 3 lowest closing bid prices during the 10 trading days prior to conversion ($0.029).

 

For the three months ended June 30, 2019 and 2018, interest expense on these notes, including amortization of the discount, was $339,286 and $365,011, respectively. For the six months ended June 30, 2019 and 2018, interest expense on these notes, including amortization of the discount, was $632,557 and $740,526, respectively.

 

All tangible and intangible assets of the Company are pledged as security.

   

NOTE 10 – Notes Payable

 

Notes payable consist of the following:

 

   

Interest Rate

 

 

Term

 

June 30, 2019

 

December 31, 2018

Notes payable  

0 %

   

.3 years

    $ 31,069     $ 37,493

  F- 10  

 

As of June 30, 2019 and December 31, 2018, notes payable includes three notes: two non-interest bearing notes totaling $30,000 that originated prior to the Company’s 2014 bankruptcy proceedings and a three-year note executed on September 1, 2016 relating to the purchase of used office furniture and equipment from our landlord. The Company executed the note payable in the amount of $40,122 at an interest rate of 0% and with monthly payments of $1,115. The Company imputed interest on the note and recorded a discounted note balance of $36,634.

 

For the three months ended June 30, 2019 and 2018, interest expense on the furniture and equipment note was $82 and $559, respectively. For the six months ended June 30, 2019 and 2018, interest expense on the furniture and equipment note was $197 and $1,220, respectively.

 

NOTE 11 – Deferred Revenue

 

In December 2017, the Company executed a three-year Master Manufacturing Agreement with CBD Alimentos SA de CV (“CBD-Alimentos”), a Mexican food and beverage distributor. Under the agreement (as amended), CBD Alimentos, through its sister company, CBD Life, will be our exclusive distributor in Mexico for all of our CBD-infused energy and functional beverages. In turn, we will be CBD Alimentos’ exclusive supplier of such products. The beverages supplied to CBD Alimentos will be private label products made to order for CBD Alimentos, and we will cooperate on laboratory and taste-testing of each batch of beverages at the co-packing facility. In accordance with the Agreement, RMHB opened a separate operating bank account for all deposits made by CBD Alimentos towards the purchase of ingredients and packaging. CBD Alimentos is required to maintain a positive cash balance in the account at all times. The Company has full unilateral authority to disburse funds from the bank account to vendors, suppliers, co-packers and the Company solely for the purposes of production and the Company’s margin on the sale. CBD Alimentos’ initial purchase order, including a deposit of $466,300 was received in December 2018. The $466,300 is accounted for as Deferred Revenue as of June 30, 2019 and December 31, 2018 as production and delivery of finished product had not yet been completed.

 

NOTE 12 – Shareholders’ Deficit

 

Common Stock

 

As of June 30, 2019, the Company has 200,000,000 shares of common stock authorized and 108,979,991 shares issued and outstanding. On April 22, 2019 the Company effected a 1-for-20 reverse stock split. All common share amounts in this report reflect this stock split. During the six months ended June 30, 2019 the Company issued 14,399,122 shares of common stock, including 4,065,980 shares for convertible notes payable conversions, 10,304,269 shares for cash, and 25,403 shares for compensation. The remaining 3,470 shares were issued as a result of the Company’s reverse stock split, which was effective on April 22, 2019.

 

Preferred Stock

 

The Company has 20,000,000 shares of preferred stock authorized as of June 30, 2019, of which 12,789,474 are specifically designated to a series of preferred stock and 7,210,526 remain undesignated.

 

Series A Preferred Stock

 

The Company has 1,000,000 shares of Series A Preferred Stock designated, of which none were outstanding as of June 30, 2019 and December 31, 2018. LSW Holdings LLC was the holder of these shares. Lily Li, who was the Company’s Executive Vice President until April 5, 2018, is the Managing Member of LSW and, in that capacity, had the authority to direct voting and investment decisions with regard to its holdings in the Company. On October 26, 2018 these shares were ruled void ab initio by a District Court in Dallas County, Texas. The Company cancelled these shares effective that date.

 

Series B Preferred Stock

 

The Company has 7,000,000 shares of Series B Preferred Stock designated, of which none were outstanding as of June 30, 2019 and December 31, 2018.

 

Series C Preferred Stock

 

The Company has 2,000,000 shares of Series C Preferred Stock designated, of which none were outstanding as of June 30, 2019 and December 31, 2018. Series C Preferred Stock is 12% interest bearing, cumulative, exchangeable, non-voting, convertible preferred stock of the Company. Each Series C Preferred share is convertible to 2.5 shares of common stock.

 

  F- 11  

 

Series D Preferred Stock

 

The Company has 2,000,000 shares of Series D Preferred Stock designated, of which none were outstanding as of June 30, 2019 and December 31, 2018. Series D Preferred Stock is a non-voting, non-interest bearing convertible preferred stock. Each Series D preferred share is convertible to 5 shares of common stock.

 

Series E Preferred Stock

 

On September 19, 2017, the Board of Directors approved a new Series E Preferred Stock. Holders of Series E Preferred Stock are entitled to cast 100 votes per share of Series E Preferred Stock on any proposal to increase our authorized capital stock, with no other voting rights. Series E Preferred Stock is convertible to common stock on a 20:1 basis. On the same day, the Board granted our Chairman 789,474 shares of Series E Preferred stock as payment for his deferred compensation. On October 31, 2017, Mr. Welch converted his 789,474 shares of Series E Preferred Stock to 39,474 shares of common stock. As of June 30, 2019 and December 31, 2018 there were no shares outstanding.

 

Warrants

 

During the six months ended June 30, 2019 the Company granted no common stock warrants, none were exercised, and none were cancelled.

 

Options

 

In February 2019 the Company granted 500,000 options to an employee to purchase common stock with a term of three years and an exercise price of $.06. The options never vested and were forfeited in May 2019 due to the employee’s termination. No other options were granted and none were exercised or cancelled during the six months ended June 30, 2019.

 

NOTE 13– Concentrations

 

During the three months ended June 30, 2019 no customers accounted for more than 10% of sales. During the three months ended June 30, 2018, the Company’s two largest customers accounted for approximately 16% and 3% of sales, respectively.

 

During the six months ended June 30, 2019 the Company’s two largest customers accounted for approximately 12% and 1% of sales, respectively. During the six months ended June 30, 2018, the Company’s two largest customers accounted for approximately 12% and 9% of sales, respectively.

 

NOTE 14 – Income Taxes

 

The reconciliation of income tax benefit at the U.S. statutory rate of 21% to the Company’s effective rate for the periods presented is as follows:

 

    June 30, 2019   June 30, 2018
U.S. federal statutory rate     (21 %)     (21%)
State income tax, net of federal benefit     (0.0 %)     (0.0%)
Increase in valuation allowance     21 %     21%
Income tax provision (benefit)     0.0 %     0.0%

 

 

The tax effects of temporary differences that give rise to the Company’s net deferred tax liability as of June 30, 2019 and December 31, 2018 are:

 

    June 30, 2019   December 31, 2018
Deferred Tax Assets              
Net Operating Losses   $ 4,400,000     $ 3,990,000
Less: Valuation Allowance   $ (4,400,000 )   $ (3,990,000)
Deferred Tax Assets – Net     —         —  

 

As of June 30, 2019 the Company had approximately $21,000,000 of federal and state net operating loss carryovers (“NOLs”), which begin to expire in 2028. Utilization of the NOLs may be subject to limitation under the Internal Revenue Code Section 382 should there be a greater than 50% ownership change as determined under regulations.

 

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will 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. Based on the assessment, management has established a full valuation allowance against the entire deferred tax asset relating to NOLs for every period because it is more likely than not that all of the deferred tax asset will not be realized.

 

  F- 12  

 

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. We have estimated our provision for income taxes in accordance with the Tax Act and guidance available as of the date of this filing but have kept the full valuation allowance. As a result, the Company has recorded no income tax expense during the three and six months ended June 30, 2019.

 

The Company’s deferred tax assets and liabilities were remeasured to reflect the reduction in the U.S. corporate income tax rate from 34% to 21%, resulting in a deferred tax expense of approximately $2,000,000 in 2017 that is still fully valued against as of June 30, 2019. This expense is attributable to the Company being in a net deferred tax asset position at the time of remeasurement. As the company maintains fully valuation allowance, this amount can be seen on the rate reconciliation as an adjustment to deferred tax asset and corresponding valuation allowance.

 

NOTE 15 – Commitments

 

Office Leases

 

The Company has a three-year lease for corporate office space. The lease commenced on September 1, 2016 with monthly payments of $7,715 in year one, $7,972 in year two and $8,229 in year three. The lease is being accounted for on a straight-line basis over its term.

 

On January 18, 2018, the RMHC entered into a 12-month office use agreement for office space in Denver, Colorado. Monthly payments are $91. The lease was renewed for another 12 months in January 2019. Monthly payments remained $91.

 

Other Leases

 

The Company rents storage space from various third parties on a month-to-month basis.

 

NOTE 16 – Legal Proceedings

 

Rocky Mountain High Brands, Inc. v Lyonpride Music, LLC, United States District Court Northern District of Texas, 3:18-cv-00045-C, now Lyonpride Music LLC v Rocky Mountain High Brands, Inc., Before the American Arbitration Association, 01-18-0003-1428.

 

The Company filed a suit against Lyonpride Music, LLC (“Lyonpride”) for fraud and for declaratory relief with respect to a contract between the parties. Lyonpride is seeking monetary damages from the Company for breach of contract and the Company is seeking monetary damages against Lyonpride. The case has been referred to binding arbitration as referenced above. The parties are conducting discovery. The arbitration hearing is currently set for November 5, 2019.

 

Dallas County Texas, Case Number DC-17-15441 filed November 8, 2017. Rocky Mountain High Brands, Inc. f/k/a Republic of Texas Brands, Inc. Plaintiff, vs. Jerry Grisaffi, Joe Radcliffe, LSW Holdings, LLC, Lily Li, Epic Group One, LLC, Kenneth Radcliffe, Dennis Radcliffe, Phil Uhrik, Michael Radcliffe, Frank Izzo, Morgan Albright, John Garrison, BB Winks, LLC, Crackerjack Classic, LLC, and Universal Consulting, LLC.

 

The Company sought the return of our Series A Preferred Stock (“Series A”) issued to Jerry Grisaffi (“Grisaffi”), RMHB’s former Chairman of the Board, and common stock issued to certain other defendants or later obtained by certain other defendants for little or no consideration paid to the Company. The Company alleged, among other things, that Grisaffi breached his fiduciary duty to the Company by issuing these Series A shares to himself and common stock to himself and others. RMHB also sought to void the Indemnification and Release Agreement (“Indemnification”) between the Company and Grisaffi that was executed in June 2017.

 

Grisaffi filed a counterclaim against the Company seeking payment for two promissory notes allegedly owed to him, as well as relief under the Indemnification. Those notes have been accounted for in the Company’s consolidated financial statements. Those counterclaim matters had been proactively addressed in the Company’s original suit, seeking to void the Indemnification and the two notes based on, among other things, fraud of Grisaffi. Grisaffi had also filed a derivative suit within the main lawsuit. The Company filed a motion to dismiss the derivative suit and on August 3, 2018 the Trial Court entered an Order Dismissing Derivative Claims, dismissing the derivative suit with prejudice. That Order is final.

 

In June 2018 LSW Holdings, LLC (“LSW”) and Lily Li (“Li”) filed counterclaims against the Company, generally seeking an increase of voting rights of the Series A shares to 60:1, a declaration that the Series A shares were validly issued to Grisaffi, challenging the authorized share increase of the Company, claiming securities fraud by the Company with respect to the Series A Shares purchased from Grisaffi and other common stock allegedly purchased by LSW and Li, as well as fraud, breach of contract and negligent misrepresentation by the Company. LSW seeks $10,000,000 in damages from the Company, for the $3,500,000 which was paid to Grisaffi for the Series A shares and for which LSW claims to be the responsibility of the Company to cover, and the remaining $6,500,000 for money allegedly spent by LSW in “developing a distribution system in China” and other alleged “investments” of Li and LSW in the Company. LSW and Li also sought exemplary damages.

 

  F- 13  

 

On August 30, 2018, the Trial Court entered a final judgment and order in the Company’s favor and against Grisaffi. On August 29, 2018, after a show cause hearing, the Trial Court entered an order sanctioning Grisaffi for his repeated and unexcused refusals to make discovery in the case. As a sanction, the Trial Court struck Grisaffi’s pleadings in the case and, on August 30, 2018, entered a Default Judgment against him. Under the Trial Court’s Default Judgment:

 

1. The Court entered a monetary judgment against Grisaffi and in favor of the Company in the amount of $3,500,000 for fraud, breach of fiduciary duty, and conversion with respect to the Series A preferred stock.

 

2. The Court declared that the Employment Agreement with Grisaffi dated April 1, 2013 was void ab initio and unenforceable, and that all stock and promissory notes issued in connection with the Employment Agreement were also void ab initio and of no force and effect, including but not limited to:

 

a. The 1,000,000 shares of Series A Preferred Stock issued to Grisaffi;
b. The Convertible Promissory Note issued to Grisaffi in the principal amount of $184,300 dated April 1, 2016; and
c. The Convertible Promissory Note issued to Grisaffi in the principal amount of $200,150 dated June 19, 2017.

 

3. The Court declared that Grisaffi’s sale of the Series A Preferred Stock to LSW was made with actual intent to hinder, delay, or defraud creditors and was thus a fraudulent transfer under Texas law.

 

4. The Court declared that the issuance of 500,000 shares of common stock to Li and the 550,000 shares of common stock issued to Epic One Group, LLC were made without lawful consideration, and constituted breaches of fiduciary duty by Grisaffi.

5. The Court declared that an Indemnification was procured through fraud and breach of fiduciary duty and is therefore void and unenforceable.

 

6. The Court ruled that Grisaffi shall take nothing by his counterclaims in the case.

 

Furthermore, the Court ruled that our continuing claims against the other defendants in the case were to be severed and docketed under a separate cause of action and case number. We have continued to pursue our claims against the other defendants in the below referenced case.

 

The judgment and order entered August 30, 2018 concludes our litigation in district court as against Grisaffi. On September 4, 2018, Mr. Grisaffi filed a Notice of Appeal in the case against him.

 

In The Court Of Appeals For The Fifth District Of Texas Dallas, Texas, Jerry Grisaffi, Appellant v. Rocky Mountain High Brands, Inc, f/k/a Republic of Texas Brands, Inc., Appellee, No. 05-18-01020-CV.

 

Grisaffi has filed an appeal of the Default Judgment, and submitted his brief on or about February 28, 2019. The Company prepared and filed its brief. Grisaffi did not appeal the Order Dismissing Derivative Claims. Grisaffi only seeks in his appeal to reverse in part the Default Judgment by striking the paragraph awarding monetary damages, leaving the remainder of the Default Judgment intact.

 

Dallas County Texas, Case Number DC-18-13491. Rocky Mountain High Brands, Inc. f/k/a Republic of Texas Brands, Inc. Plaintiff, vs. Joe Radcliffe, LSW Holdings, LLC, Lily Li, Epic Group One, LLC, Kenneth Radcliffe, Dennis Radcliffe, Phil Uhrik, Michael Radcliffe, Frank Izzo, Morgan Albright, John Garrison, BB Winks, LLC, Crackerjack Classic, LLC, and Universal Consulting, LLC.

 

This was the surviving case of the above case, having been severed on September 12, 2018. In this case, on October 26, 2018 the Court granted our Motion For Summary Judgment, per a Summary Judgment Order, against LSW, holding that all Series A Preferred Shares in RMHB, including the shares issued to Grisaffi and later sold by him to LSW evidenced by Stock Certificate N0. 604 issued by RMHB, to LSW Holdings LLC in the amount of 1,000,000 shares, were void ab initio , and any potential rights thereunder were terminated as of July 11, 2014, when the bankruptcy court signed the Order Confirming Debtor’s Amended Plan of Reorganization. The Series A Preferred Shares have no legal force or effect. The Court also granted a take nothing judgment against LSW on counterclaim Counts 1, 2 and 3. The Company’s transfer agent has cancelled the Series A Preferred Shares. Later, on November 26, 2018, the Court entered an Order of Sanctions against Li and LSW. In the Order of Sanctions, and in response to Li and LSW’s repeated refusals to make proper discovery in the case, the Court struck the pleadings of these parties and ruled that RMHB was entitled to take a default judgment against them.

 

  F- 14  

 

On February 4, 2019, the Court entered its Default Judgment against Li and LSW. In the Default Judgment, the Court ruled as follows:

 

1. The Employment Agreement with Grisaffi dated April 1, 2013 was void ab initio and unenforceable, and that all stock or other instruments issued on the basis or authority of that Employment Agreement were also void ab initio and of no force and effect;

 

2. The Series A Preferred Shares that RMHB issued to Grisaffi and later sold by Grisaffi to LSW were void ab initio and any potential rights or remedies thereunder were terminated on July 11, 2014 pursuant to the Order Confirming Debtor’s Amended Plan of Reorganization;

 

3. Grisaffi’s issuance and transfer to himself of the 1,000,000 Series A Preferred Shares, and his subsequent transfer of those shares to LSW Holdings, were fraudulent transfers and are voided and set aside;

 

4. Grisaffi breached his fiduciary duties to RMHB by, among other things: (i), purporting to sell the Series A Preferred Shares to LSW, (ii) causing the issuance of 550,000 (on a post reverse-split basis) shares of common stock to Epic Group One, LLC, and 500,000 (on a post reverse-split basis) shares of common stock to Li for no consideration, and (iii) causing the issuance of 5,684,432 shares to the Radcliffe Group at deeply discounted prices;

 

5. LSW and Li knowingly participated in Grisaffi’s breaches of fiduciary duty and are therefore jointly and severally liable for all damages and equitable relief arising from such breaches;

 

6. The issuance of 500,000 shares of common stock to Li was not authorized by the Board of Directors and was both void ab initio and a fraudulent conveyance;

 

7. RMHB is entitled to recover all damages proximately resulting from the improper issuance of the 500,000 shares of common stock to Li;

 

8. Li did not perform and materially breached her agreement to raise money for RMHB;

 

9. The 500,000 shares of purported common stock issued to Li belongs to RMHB and Li has no further rights or remedies arising out of or related to the 500,000 shares;

 

10. By virtue of their actions described above, Li and LSW have taken advantage of RMHB and have unjustly enriched themselves at Rocky Mountain High Brands’ expense, and RMHB is entitled to full restitution of all its losses and damages;

 

11. LSW Holdings and Li engaged in a civil conspiracy with Grisaffi to commit the wrongs against RMHB described above, and RMHB is entitled to recover from them actual, consequential, and special damages resulting from such wrongs, including their knowing participation in Grisaffi’s breaches of fiduciary duty, breaches of contract, receipt of fraudulent conveyances, and unjust enrichments.

 

12. The torts against RMHB committed by LSW Holdings and Li were aggravated by fraud and malice, and RMHB is therefore entitled to exemplary damages.

 

13. LSW Holdings and Li shall take nothing by their counterclaims; and

 

14. RMHB is entitled to court costs and reasonable attorneys’ fees from LSW Holdings and Li.

 

On August 12, 2019, the Court entered its Final Judgment in the Case. Prior to that, on June 25, 2019, the Court had entered an Agreed Order of Dismissal With Prejudice Of Certain Claims and Parties, after the Court was advised that claims dismissed by the order had been settled and released between RMHB and Joe Radcliffe, Kenneth Radcliffe, Dennis Radcliffe, Crackerjack Classic, LLC and Universal Consulting, LLC and joined by Epic One Group, LLC.

 

The Final Judgment was entered against Lily Li and LSW Holdings, LLC. The Court incorporated the rulings of the February 4, 2019 Default Judgment into this Final Judgment, together with an award that RMHB have and recover, of and from, Lily Li and LSW Holdings, jointly and severally with Jerry Grisaffi, actual damages of $3.5 million for their knowing participation of Grisaffi's breaches of fiduciary duties, breach of contract, fraudulent conveyances and unjust enrichment. The Court also awarded RMHB $88,000 in attorney fees, an the additional $10,000 in accordance with the previous Sanctions Order.

 

Rocky Mountain High Brands, Inc. v La Dolce Vita Trust and Christine Guthrie, In Her Capacity As Trustee, In The 382nd District Court of Rockwall County, Texas, Cause No. 1-18-1608.

 

This is a case whereby the Company is attempting to collect on the Default Judgment obtained against Grisaffi. More specifically the Company is requesting the Court to order the La Dolce Vita Trust to turnover fraudulently transferred assets and for additional relief necessary to enforce the Company’s judgment against Grisaffi.

 

Chet – 5 Broadcasting, Inc. v Rocky Mountain High Brands, Inc., Supreme Court of the State of New Your, County of Ulster, Case No. 18-4416.

 

The Plaintiff sued the Company, seeking $21,000 in damages for breach of contract. The Company is contesting that claim in its entirety and has filed a counterclaim against the Plaintiff for an unspecified amount of damages. This case is new and the parties have not yet conducted any discovery.

 

  F- 15  

 

NOTE 17 – Other (Income)/Expenses

 

Gain/Loss on Extinguishment of Debt

 

The Company recorded a gain on the extinguishment of debt of $689,991 related to the amendment of convertible debt. The conversion ratio on all of the Company’s fixed convertible notes payable outstanding as of May 6, 2019 (principal amount of $909,000) was changed from $.005 to $.05 and the due dates were extended.

 

Gain on Lawsuit Judgment and Legal Settlement

 

On May 30, 2019 the Company recorded a gain on l awsuit judgment and legal settlement of $230,840 related to the settlement of a lawsuit the Company filed in 2017 against several defendants. The settlement was reached on May 30, 2019 and included a $200,000 cash payment by the defendants to the Company, the forgiveness of debt of $30,840 owed by the Company to one of the defendants, and the return of 6,750,000 shares of common stock.

 

NOTE 18 – Subsequent Events

 

Between July 1, 2019 and August 16, 2019 the Company issued 12,386,799 shares of common stock, all of which were for cash.

 

In June 2019 the Company received a $350,000 purchase order from B&B Aesthetics Labs LLC (d/b/a "Green Lotus") to produce two flavors of sparkling hemp water. In July and August 2019 the Company made two deposits totaling $56,632 to a co-packer in anticipation of a 200,000 can production run for Green Lotus. The Company anticipates the production run will occur in late August or early September 2019. The Company will recognize $350,000 in revenue upon the successful completion and delivery of the production run.

 

In December 2018 the Company received a purchase order and $466,300 deposit from CBD Life to produce two million cans of CBD-infused energy drink. In August 2019 the Company was notified by CBD Life that they have cleared the regulatory challenges with COFEPRIS (a regulatory agency) in Mexico for importing and distributing CBD-infused beverages. As a result, the Company anticipates that CBD Life will fulfill their initial purchase order with the Company for a two million can production by September 30, 2019. The Company will recognize revenue upon the completion and delivery of the production run. 

 

  F- 16  

 

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

 

Forward-Looking Statements

 

Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements.” These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

 

Company Overview

 

Rocky Mountain High Brands, Inc. is a Nevada corporation. RMHB currently operates through its parent company, three wholly-owned subsidiaries, one majority-owned subsidiary, and one minority-owned subsidiary, which the Company controls. All subsidiaries are consolidated for financial reporting purposes:

 

Rocky Mountain High Brands, Inc., an active Nevada corporation (Parent)

 

Wellness For Life Colorado, Inc. (“WFLC”) (f/k/a Rocky Mountain Hemp Company and Wellness For Life, Inc.), an active Colorado corporation (Subsidiary)

 

Eagle Spirit Land & Water Company (“Eagle Spirit”), an active Oklahoma corporation (Subsidiary)

 

Rocky Mountain High Water Company, LLC (“WaterCo”), an active Delaware limited liability company (Subsidiary-consolidated beginning November 12, 2016)

 

FitWhey Brands Inc. (“FitWhey”), an active Nevada corporation (Subsidiary)

 

Sweet Rock, LLC (“Sweet Rock”), an active Michigan limited liability company (Subsidiary)

 

Rocky Mountain High Clothing Company, Inc., an inactive Texas Corporation (Subsidiary)

 

Smarterita, LLC, an inactive Texas limited liability company (Subsidiary)

 

RMHB is a lifestyle brand management company that markets primarily CBD and hemp-infused products to health-conscious consumers. Our products span various categories including beverage, food, fitness, and skin care. RMHB also markets a naturally high alkaline spring water and a water-based protein drink with caffeine and B vitamins. All products comply with federal regulations on hemp products and contain 0.0% tetrahydrocannabinol (THC), the psychoactive constituent of cannabis.

 

In March 2018, the Company launched the HEMPd brand with gummies, water soluble drops, capsules, tinctures, lotions, and salves. The Company introduced four flavors of CBD-infused waters in 12 oz. cans in November 2018.

 

In July 2018, the Company acquired the assets of BFIT Brands, LLC and formed a new subsidiary, FitWhey Brands LLC. FitWhey markets a line-up of five water-based protein drinks that include caffeine and B vitamins.

 

In June 2019, the Company organized Sweet Rock, LLC (“Sweet Rock”), a 51% owned company, with Sweet Ally, Inc. Sweet Rock will manufacture and market CBD-infused chocolates, hard candies, and baked goods for distribution in the United States.

 

RMHB also bottles and distributes its naturally high alkaline spring water under the name Eagle Spirit Spring Water and plans to re-introduce its hemp-infused energy drinks later in 2019.

 

  4  

 

Results of Operations

 

Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018

 

Financial Summary

 

The Company’s sales for the three months ended June 30, 2019 were $36,572 compared to net sales of $72,675 for the three months ended June 30, 2018.

 

The Company’s net loss for the three months ended June 30, 2019 was $667,170 compared to a net loss of $1,377,795 for the three months ended June 30, 2018.

 

Sales

 

For the three months ended June 30, 2019 sales were $36,572 compared to net sales of $72,675 for the three months ended June 30, 2018, a decrease of $36,103 or 50%. The sales decrease in 2019 was driven by the loss of website sales of HEMPd branded products, the lack of Eagle Spirit Water inventory, and the lack of Rocky Mountain branded products inventory. On May 31, 2019 our credit card merchant services provider ceased operations in the cannabis industry. The Company was unable to replace merchant services with another provider until July 2019 which resulted in lost online sales. Due to production-related issues, the Company was out-of-stock of Eagle Spirit Water for the entire three months ended June 30, 2019. The Company resumed production and sales of Eagle Spirit Water in August 2019. For the three months ended June 30, 2019 sales consisted of approximately 99% online sales, 1% distributor sales, and 0% direct to retailer sales, compared to approximately 79% online sales, 18% distributor sales, and 3% direct to retailer sales for the three months ended June 30, 2018.

 

Cost of Sales

 

For the three months ended June 30, 2019 cost of sales was $38,854 or 106% of sales, compared to $109,224 or 150% of sales for the three months ended June 30, 2018, a decrease of $70,370 or 64%. The decrease in 2019 was primarily due to the decrease in sales for the same period. In 2018, the Company recorded an inventory obsolescence charge for $11,424 related to expiring product.

 

Operating Expenses

 

For the three months ended June 30, 2019, operating expenses were $855,831 or 2340% of sales, compared to $1,121,083 or 1543% of sales for the three months ended June 30, 2018. Areas in which the Company experienced significant changes in operating expenses are discussed below.

 

General and Administrative

 

For the three months ended June 30, 2019, general and administrative expenses were $696,846 or 1905% of sales, compared to $909,788 or 1252% of sales for the three months ended June 30, 2018, a decrease of $212,942 or 24%. The decrease in general and administrative expenses in 2019 was primarily driven by decreases in compensation, partially offset by increases in legal expenses and research and development costs.

 

Advertising and Marketing

 

For the three months ended June 30, 2019, advertising and marketing expenses were $158,985 or 435% of sales, compared to

$211,295 or 291% of sales for the three months ended June 30, 2018, an increase of $52,310 or 25%. The decrease in advertising and marketing expenses in 2019 was due to the Company’s reduction in online advertising and marketing. This was a result of the loss of Company’s ability to sell product on its HEMPd website after the loss of its merchant services provider.

 

Other (Income) Expense

 

Interest Expense

 

For the three months ended June 30, 2019, interest expense was $339,368, compared to $365,570 for the three months ended June 30, 2018, a decrease of $26,202. The decrease in interest expense, which includes the amortization of the discount on convertible debt, and the excess of the beneficial conversion feature on certain convertible notes payable, was due to decreased debt levels and activity in 2019.

 

  5  

 

(Gain) Loss on Extinguishment of Debt

 

For the three months ended June 30, 2019, the Company recorded a gain on the extinguishment of debt of $689,991 related to the amendment of convertible debt. The conversion ratio on all of the Company’s fixed convertible notes payable outstanding as of May 6, 2019 was changed from $.005 to $.05 and the due dates were extended. The Company recorded a $5,362 gain on extinguishment of debt for the three months ended June 30, 2018 as a result of the conversion of variable rate convertible notes payable into common stock.

 

Gain on Lawsuit Judgment and Legal Settlement

 

For the three months ended June 30, 2019, the Company recorded a gain on l awsuit judgment and legal settlement of $230,840 related to the settlement of a lawsuit the Company filed in 2017 against several defendants. The settlement was reached on May 30, 2019 and included a $200,000 cash payment by the defendants to the Company and the forgiveness of debt of $30,840 owed by the Company to one of the defendants. There was no gain or loss on l awsuit judgment and legal settlement during the three months ended June 30, 2018.

 

Gain on Change in Fair Value of Derivative Liability

 

For the three months ended June 30, 2019, the Company recorded a loss on the change in fair value of derivative liability of $390,520 compared to a gain of $140,045 for the three months ended June 30, 2018. In 2019 the gain resulted from the decrease in the price of the Company’s underlying stock toward the end of the period, which is used to calculate the fair value of the related derivative liability.

 

Income Taxes

 

For the three months ended June 30, 2019 and June 30, 2018, the Company recorded no income tax provision due to a full valuation allowance provided on deferred tax assets resulting from net operating losses.

 

Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018

 

Sales

 

For the six months ended June 30, 2019 sales were $113,001 compared to net sales of $123,584 for the six months ended June 30, 2018, a decrease of $10,583 or 9%. The sales decrease in 2019 was driven by the loss of online sales of HEMPd branded products, the lack of Eagle Spirit Water inventory, and the lack of Rocky Mountain branded products inventory. On May 31, 2019 our credit card merchant services provider ceased operations in the cannabis industry. The Company was unable to replace merchant services with another provider until July 2019 which resulted in lost online sales. The Company launched the HEMPd brand in March 2018. Due to production-related issues, the Company was out-of-stock of Eagle Spirit Water for most of 2019. The Company resumed production and sales of Eagle Spirit Water in August 2019. For the six months ended June 30, 2019 sales consisted of approximately 85% online sales, 1% distributor sales, and 14% direct to retailer sales, compared to approximately 78% online sales, 19% distributor sales, and 3% direct to retailer sales for the six months ended June 30, 2018.

 

Cost of Sales

 

For the six months ended June 30, 2019 cost of sales was $114,584 or 101% of sales, compared to $176,214 or 143% of sales for the six months ended June 30, 2018, a decrease of $61,630 or 35%. The decrease in 2019 was primarily due to the decrease in sales for the same period. In 2018, the Company recorded an inventory obsolescence charge for $11,424 related to expiring product.

 

Operating Expenses

 

For the six months ended June 30, 2019, operating expenses were $2,021,861 or 1789% of sales, compared to $2,271,423 or 1838% of sales for the six months ended June 30, 2018. Areas in which the Company experienced significant changes in operating expenses are discussed below.

 

General and Administrative

 

For the six months ended June 30, 2019, general and administrative expenses were $1,653,486 or 1463% of sales, compared to $1,990,306 or 1610% of sales for the six months ended June 30, 2018, a decrease of $336,820 or 17%. The decrease in general and administrative expenses in 2019 was primarily driven by decreases in compensation, partially offset by increases in legal expenses and research and development costs.

 

  6  

 

Advertising and Marketing

 

For the six months ended June 30, 2019, advertising and marketing expenses were $368,375 or 326% of sales, compared to $281,117 or 227% of sales for the six months ended June 30, 2018, an increase of $87,258 or 31%. The increase in advertising and marketing expenses in 2019 was the result of expenditures for our HEMPd product line. In 2018 the Company incurred advertising and marketing costs related to the March 2018 launch of the product line. In 2019, the Company increased spending on the HEMPd brand and also incurred advertising and marketing related to the FitWhey brand, which was acquired in July 2018.

 

Other (Income) Expense

 

Interest Expense

 

For the six months ended June 30, 2019, interest expense was $632,754, compared to $3,182,698 for the six months ended June 30, 2018, a decrease of $2,549,944. The decrease in interest expense, which includes the amortization of the discount on convertible debt, and the excess of the beneficial conversion feature on certain convertible notes payable, was due to decreased debt levels and activity in 2019.

 

(Gain) Loss on Extinguishment of Debt

 

For the six months ended June 30, 2019, the Company recorded a gain on the extinguishment of debt of $689,991 related to the amendment of convertible debt. The conversion ratio on all of the Company’s fixed convertible notes payable outstanding as of May 6, 2019 was changed from $.005 to $.05 and the due dates were extended. The Company recorded a $191,138 loss on extinguishment of debt for the six months ended June 30, 2018 as a result of the conversion of variable rate convertible notes payable into common stock.

 

Gain on Lawsuit Judgment and Legal Settlement

 

For the six months ended June 30, 2019, the Company recorded a gain on l awsuit judgment and legal settlement of $230,840 related to the settlement of a lawsuit the Company filed in 2017 against several defendants. The settlement was reached on May 30, 2019 and included a $200,000 cash payment by the defendants to the Company , the forgiveness of debt of $30,840 owed by the Company to one of the defendants, and the return of 6,750,000 shares of common stock. There was no gain or loss on l awsuit judgment and legal settlement during the six months ended June 30, 2018.

 

Gain on Change in Fair Value of Derivative Liability

 

For the six months ended June 30, 2019, the Company recorded a loss on the change in fair value of derivative liability of $195,063 compared to a gain of $1,988,030 for the six months ended June 30, 2018. In 2019 the gain resulted from the decrease in the price of the Company’s underlying stock toward the end of the period, which is used to calculate the fair value of the related derivative liability.

 

Income Taxes

 

For the six months ended June 30, 2019 and June 30, 2018, the Company recorded no income tax provision due to a full valuation allowance provided on deferred tax assets resulting from net operating losses.

 

Liquidity and Capital Resources

 

As of June 30, 2019, the Company had current assets of $968,619, consisting of cash of $68,563, accounts receivable (net) of $3,618, inventory of $375,627, and prepaid expenses and other current assets of $520,811. As of June 30, 2019, the Company had current liabilities of $2,085,029, consisting of accounts payable and accrued liabilities of $573,404, convertible notes payable (net) of $378,578, notes payable of $31,069, accrued interest of $50,781, deferred revenue of $466,300, and derivative liability of $584,897.

 

Cash flows from operating activities

 

Net cash used in operating activities during the six months ended June 30, 2019 was $2,045,372 compared to $2,285,142 used during the six months ended June 30, 2018. The change was principally driven by the 2019 buildup of inventory and prepaid expenses and other current assets in anticipation of production runs.

 

  7  

 

Cash flows from investing activities

 

There were no investing activities during the six months ended June 30, 2019 compared to $42,185 during the six months ended June 30, 2018. In 2018, the Company invested $31,220 in new software for the HEMPd brand and acquired new computer equipment.

 

Cash flows from financing activities

 

Net cash provided by financing activities during the six months ended June 30, 2019 was $1,500,249 compared to $2,635,502 during the six months ended June 30, 2018. In 2019, proceeds of $1,139,173 were from the issuance of common stock compared to $2,514,562 in 2018. In 2019, the Company received proceeds of $367,500 related to the issuance of convertible notes payable compared to $300,000 in 2018. In 2019 the Company also repaid $6,424 on notes payable. In 2018 the Company repaid $172,932 of convertible notes payable and repaid $6,128 on notes payable.

 

Outstanding Material Indebtedness

 

Recently, the Company’s operations have been funded primarily through the private sales of common stock or the issuance of convertible promissory notes, which are convertible to common stock at a fixed prices ranging from $0.03 to $0.05 or at a discount to market price (as defined in the agreements) of 50%. As of June 30, 2019, the Company had total notes payable outstanding of $409,647 (net of discount).

 

Known Trends and Uncertainties Expected to Have a Material Impact on Revenues

 

We expect our revenues to increase materially during the remainder of 2019 and in 2020, primarily due to anticipated sales under our private label manufacturing contracts with CBD Alimentos SA de CV (“CBD Alimentos”) and B&B Aesthetics Labs LLC (“Green Lotus”). Although the initial order from CBD Alimentos was expected during the second quarter of 2018, we received the initial order and $466,300 deposit in December 2018. Due to regulatory obstacles in Mexico, we delayed the initial production run of 2,000,000 cans and now expect to produce and ship the initial order in September 2019. The Company will recognize approximately $1.1 million in revenue upon the completion and delivery of the production run. We have also experienced delays with our Green Lotus production runs, but expect to begin production and sales in the third quarter of 2019. The Company will recognize $350,000 in revenue upon the completion and delivery of the first production run. W e also expect revenue growth from our HEMPd branded CBD-infused flavored waters and other HEMPd branded products. Revenue from the HEMPd and FitWhey products is inherently difficult to project and will depend on the level of market acceptance and market penetration that can be achieved for these products. The Company plans to introduce a new Rocky Mountain hemp-infused beverage and re-introduce the Rocky Mountain High hemp-infused energy drinks later in 2019.

 

Future Liquidity Requirements

 

The Company’s anticipated operational shortfall for the next twelve months is $1,000,000 to $1,500,000. We plan to utilize the SPA executed with GHS in June 2018, as well as bridge financing, to raise the required capital.

 

Off Balance Sheet Arrangements

 

As of June 30, 2019, there are no off-balance sheet arrangements.

 

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 has a shareholders’ deficit of $925,910 and an accumulated deficit of $36,948,781 as of June 30, 2019 and has generated operating losses since inception. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern. The Company’s continuation as a going concern is dependent upon its ability to generate revenues and its ability to continue raising capital.

 

On June 27, 2018, the Company entered into a Securities Purchase Agreement (“SPA”) with GHS Investments, LLC (“GHS”), which provides for GHS to purchase up to $15,000,000 of the Company’s common stock over a 24-month period based on a contractually agreed upon market discount. The SPA replaces the Equity Financing Agreement the Company entered into with GHS on October 12, 2017. On August 8, 2018, the Company filed a registration statement with the Securities and Exchange Commission (“SEC”) to register up to 16,000,000 shares of our common stock to be purchased by GHS under the SPA. The registration statement became effective on October 10, 2018 and the Company sold all the available shares under the SPA. On May 15, 2019, the Company filed a registration statement for 30,000,000 shares to be purchased by GHS. This registration statement became effective on June 18, 2019 and the Company began selling shares in June. Management believes the SPA, along with bridge financing from GHS, will provide sufficient cash flows until cash flows from operations become consistently positive.

 

  8  

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

A smaller reporting company is not required to provide the information required by this Item.

 

Item 4. Controls and Procedures

 

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2019. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer, Michael Welch, and our Chief Financial Officer, Jens Mielke. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2019 our disclosure controls and procedures are not effective. There have been no changes in our internal controls over financial reporting during the six months ended June 30, 2019.

 

Our management identified the following material weaknesses in our internal control over financial reporting, which are indicative of many small companies with small staff: (i) inadequate segregation of duties and effective risk assessment; and (ii) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of both US GAAP and SEC guidelines.

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

Limitations on the Effectiveness of Internal Controls

 

Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls 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. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the internal control. The design of any system of controls also is based in part upon 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. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

 

  9  

 

PART II – OTHER INFORMATION  

Item 1. Legal Proceedings

 

Please refer to our Annual Report on Form 10-K filed April 15, 2019 for information regarding our pending legal proceedings. There are no updates to the information disclosed in that filing.

 

Item 1A. Risk Factors

 

A smaller reporting company is not required to provide the information required by this Item.

 

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

 

The following equity securities were issued between May 15, 2019 and August 14, 2019:

 

Date Name Shares Issued Issue Price Description Exemption
5/21/2019 GHS Investments 1,000,000  $      0.050 Note Payable Conversion Rule 506
6/11/2019 GHS Investments 194,637          0.050 Note Payable Conversion Rule 506
6/17/2019 GHS Investments 1,121,343          0.050 Note Payable Conversion Rule 506
6/19/2019 GHS Investments 1,065,361          0.036 Shares Sold Rule 506
7/2/2019 GHS Investments 7,384,020          0.038 Shares Sold Rule 506
7/16/2019 GHS Investments 1,636,689          0.070 Shares Sold Rule 506
7/29/2019 GHS Investments 1,752,656          0.050 Shares Sold Rule 506
8/12/2019 GHS Investments 1,613,434          0.050 Shares Sold Rule 506

 

Item 3. Defaults upon Senior Securities

 

None

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

Exhibit Number Description of Exhibit
31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101 Materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019 formatted in Extensible Business Reporting Language (XBRL)

 

  10  

 

SIGNATURES

 

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

 

Rocky Mountain High Brands, Inc.

 

Date: August 19, 2019

 

By: /s/ Michael Welch

Michael Welch

Title: Chairman of the Board of Directors, President, and Chief Executive Officer

 

Date: August 19, 2019

 

By: /s/ Jens Mielke

Jens Mielke

Title: Chief Financial Officer

  11  

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