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 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 Wellness For Life Colorado, Inc.
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
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.
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 or early 2020.
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 September 30, 2019 and the results of operations and cash flows for the periods presented. The results of operations
for the three and nine months ended September 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.
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
|
|
Nine Months Ended
|
|
|
|
September
30, 2019
|
|
September
30, 2018
|
|
September
30, 2019
|
|
September
30, 2018
|
|
Online
|
|
$
|
30,356
|
|
|
$
|
96,063
|
|
$
|
127,667
|
|
$
|
171,322
|
|
Private Label
|
|
|
322,000
|
|
|
|
—
|
|
|
322,000
|
|
|
—
|
|
Distributor
|
|
|
66
|
|
|
|
6,449
|
|
|
381
|
|
|
47,237
|
|
Retailer
|
|
|
1,441
|
|
|
|
14,605
|
|
|
16,816
|
|
|
22,142
|
|
Total
|
|
$
|
353,863
|
|
|
$
|
117,117
|
|
$
|
446,864
|
|
$
|
240,701
|
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.
The
change in the Level 3 financial instrument is as follows:
|
Balance, December 31, 2018
|
|
$
|
376,172
|
|
Issued during the nine months ended September 30, 2019
|
|
$
|
21,192
|
|
Exercises/Conversions
|
|
$
|
(7,530)
|
|
Change in fair value recognized in operations
|
|
$
|
(126,304)
|
|
Balance, September 30, 2019
|
|
$
|
263,530
|
The
estimated fair value of the derivative instruments was valued using the Black-Scholes option pricing model, using the following
assumptions as of September 30, 2019:
|
Estimated Dividends
|
|
|
None
|
|
Expected Volatility
|
|
|
125.2%
|
|
Risk Free Interest Rate
|
|
|
1.88%
|
|
Expected term
|
|
|
.1 to 3.25 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. In August 2019 the Company recorded a $118,066
impairment on the intangible assets recorded as a result of the BFIT Brands, LLC acquisition in July 2018. No other impairment
charges were recorded during the three and nine months ended September 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.
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 $1,039,280
and an accumulated deficit of $37,867,494 as of September 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:
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Finished inventory
|
|
$
|
38,493
|
|
|
$
|
84,730
|
|
Raw materials and packaging
|
|
|
239,719
|
|
|
|
61,992
|
|
Total
|
|
$
|
278,212
|
|
|
$
|
146,722
|
For the three and nine months ended September 30, 2019 the Company recorded inventory obsolescence expense of $107,594 for
each period. This expense primarily represented the write-down of expired FitWhey beverages and ingredients, obsolete FitWhey
labels, and other expired ingredients.
For the three and nine months ended
September 30, 2018 the Company recorded inventory obsolescence expense of $13,721 and $25,145, respectively. The expense primarily
represented the write-down of expired hemp-infused beverages and shots.
NOTE
5 – Prepaid Expenses and Other Current Assets
Prepaid
expenses and other current assets consist of the following:
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Prepaid officers’ compensation
|
|
$
|
179,041
|
|
|
$
|
291,617
|
|
Prepaid directors’ compensation
|
|
|
—
|
|
|
|
29,442
|
|
Prepaid production
|
|
|
167,400
|
|
|
|
—
|
|
Other prepaid expenses and current assets
|
|
|
52,000
|
|
|
|
67,015
|
|
Total
|
|
$
|
398,441
|
|
|
$
|
388,074
|
NOTE
6 – Property and Equipment
Property
and equipment consist of the following:
|
|
|
September 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
|
|
|
70,116
|
|
|
|
54,641
|
|
Total
|
|
$
|
22,705
|
|
|
$
|
34,280
|
For
the three months ended September 30, 2019 and 2018, depreciation expense was $3,550 and $4,367, respectively. For the nine months
ended September 30, 2019 and 2018, depreciation expense was $11,554 and $16,679, 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
|
In
August 2019 management determined the Company would suspend the production of water-based protein and caffeine-infused products
until it develops a related hemp or CBD-infused product. As a result, the Company fully impaired the intangible assets related
to its purchase of FitWhey. This resulted in an impairment charge of $118,066 for the three and nine months ended September 30,
2019. Because all intangible assets were 100% impaired, it was determined that completion of an outside valuation was no longer
necessary.
The
following represents the unaudited pro forma statement of operations of the Company for the three and nine months ended September
30, 2018 had FitWhey been acquired on January 1, 2018:
|
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30, 2018
|
|
September
30, 2018
|
|
Sales
|
|
$
|
121,911
|
|
|
$
|
245,495
|
|
Cost of Sales
|
|
|
128,590
|
|
|
|
293,380
|
|
Inventory
Obsolescence
|
|
|
13,721
|
|
|
|
25,145
|
|
Gross
Profit (Loss)
|
|
|
(20,400
|
)
|
|
|
(73,030)
|
|
Operating
Expenses
|
|
|
1,165,093
|
|
|
|
3,436,516
|
|
Loss
From Operations
|
|
|
(1,185,493
|
)
|
|
|
(3,509,546)
|
|
Other
(Income) Expenses
|
|
|
(179,411
|
)
|
|
|
1,206,395
|
|
Loss
Before Income Tax Provision
|
|
|
(1,006,082
|
)
|
|
|
(4,715,941)
|
|
Income
Tax Provision
|
|
|
—
|
|
|
|
—
|
|
Net
Loss
|
|
$
|
(1,006,082
|
)
|
|
$
|
(4,715,941)
|
|
Net
Loss Per Common Share-Basic and Diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.06)
|
|
Weighted
Average Shares Outstanding
|
|
|
81,798,422
|
|
|
|
74,150,686
|
NOTE
8 – Accounts Payable and Accrued Liabilities
Accounts
payable and accrued liabilities consist of the following:
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Accounts payable
|
|
$
|
517,075
|
|
|
$
|
308,717
|
|
Accrued compensation
|
|
|
30,000
|
|
|
|
25,500
|
|
Other accrued expenses
|
|
|
145,947
|
|
|
|
170,997
|
|
Total
|
|
$
|
693,022
|
|
|
$
|
505,214
|
NOTE
9 – Convertible Notes Payable
Convertible
notes payable consist of the following:
|
|
|
Interest
Rates
|
|
Term
|
|
Conversion Rates
|
|
September
30, 2019
|
|
December
31, 2018
|
|
GHS Investments,
LLC (fixed conversion)
|
|
|
10%
|
|
|
|
.1 - .5
years
|
|
|
$
|
0.03 - 0.05
|
|
$
|
973,750
|
|
|
$
|
871,079
|
|
LSW Holdings, LLC
(variable conversion)
|
|
|
6%
|
|
|
|
—
|
|
|
|
(a)
|
|
|
179,000
|
|
|
|
179,000
|
|
Discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(500,975
|
)
|
|
|
(383,483)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
651,775
|
|
|
$
|
666,596
|
|
|
(a)
|
50%
discount on the average of the 3 lowest closing bid prices during the 10 trading days
prior to conversion ($0.045).
|
For
the three months ended September 30, 2019 and 2018, interest expense on these notes, including amortization of the discount, was
$295,585 and $308,239, respectively. For the nine months ended September 30, 2019 and 2018, interest expense on these notes, including
amortization of the discount, was $928,142 and $1,048,765, 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
|
|
September 30,
2019
|
|
December
31, 2018
|
|
Notes payable
|
|
0
%
|
|
|
Due
|
|
|
$
|
30,000
|
|
|
$
|
37,493
|
As
of September 30, 2019, notes payable includes two non-interest bearing notes totaling $30,000 that originated prior to the Company’s
2014 bankruptcy proceedings. As of December 31, 2018, notes payable also includes 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. The office furniture note was repaid in August 2019.
For
the three months ended September 30, 2019 and 2018, interest expense on the furniture and equipment note was $0 and $559, respectively.
For the nine months ended September 30, 2019 and 2018, interest expense on the furniture and equipment note was $197 and $1,779,
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 September 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 September 30, 2019, the Company has 200,000,000 shares of common stock authorized and 126,162,146 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 three months ended September 30, 2019 the Company issued 17,182,155 shares of common stock, all of which were issued for cash.
During
the nine months ended September 30, 2019 the Company issued 31,581,277 shares of common stock, including 4,065,980 shares for
convertible notes payable conversions, 27,486,424 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 September 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 September 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 September 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 September 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.
Series
D Preferred Stock
The
Company has 2,000,000 shares of Series D Preferred Stock designated, of which none were outstanding as of September 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 September 30, 2019 and December 31, 2018
there were no shares outstanding.
Warrants
During
the nine months ended September 30, 2019 the Company granted no common stock warrants and none were exercised. During that period,
25,000 warrants were forfeited.
Options
During
the nine months ended September 30, 2019 the Company granted 500,000 options 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. No options were exercised and no others
were cancelled during the nine months ended September 30, 2019.
NOTE
13– Noncontrolling Interests
In
July 2019, the Company invested $500 in Sweet Rock, LLC, a Michigan limited liability company. The Company owns 51% and Sweet
Ally, Inc. (“Sweet Ally”) invested $495 and owns 49%. The Company consolidates the financial statements of Sweet Rock
and accounts for Sweet Ally’s ownership as a noncontrolling interest. During the three and nine months ended September 30,
2019 Sweet Rock incurred marketing expenses of $3,120. This activity is included in the consolidated financial statements of the
Company with corresponding noncontrolling interests.
NOTE
14– Concentrations
During
the three months ended September 30, 2019 the Company’s two largest customers accounted for approximately 91% and less than
1% of sales, respectively. During the three months ended September 30, 2018, the Company’s two largest customers accounted
for approximately 12% and 3% of sales, respectively.
During
the nine months ended September 30, 2019 the Company’s two largest customers accounted for approximately 69% and 3% of sales,
respectively. During the nine months ended September 30, 2018, the Company’s two largest customers accounted for approximately
6% and 6% of sales, respectively.
NOTE
15 – 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
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2019
|
|
September 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 September 30, 2019
and December 31, 2018 are:
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Deferred Tax Assets
|
|
|
|
|
|
|
|
|
Net Operating Losses
|
|
$
|
4,400,000
|
|
|
$
|
3,960,000
|
|
Less: Valuation Allowance
|
|
$
|
(4,400,000
|
)
|
|
$
|
(3,960,000)
|
|
Deferred Tax Assets – Net
|
|
|
—
|
|
|
|
—
|
As
of September 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.
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 nine months ended September 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
16 – Commitments
Office
Leases
On
September 5, 2019 the Company amended its corporate office lease. The amendment extended the lease, which had expired August 31,
2019, through February 29, 2020. Monthly payments are $8,065 plus certain maintenance fees.
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
17 – 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 has been rescheduled from November 5, 2019 to January
14, 2020.
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.
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 is 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. Appellate briefs were filed, and the appeal was submitted to oral argument by the parties, with such arguments being heard
by the Court of Appeals on November 6, 2019. The parties are awaiting the decision of the Court of Appeals.
RMHB
is actively engaged in collection efforts on the Grisaffi Default Judgment.
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.
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 shares of
common stock to Epic Group One, LLC, and 500,000 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 10,000,000 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 10,000,000 shares of common stock to Li;
|
|
|
8.
|
Li
did not perform and materially breached her agreement to raise money for RMHB;
|
|
|
9.
|
The
10,000,000 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 10,000,000 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, and the additional $10,000 in accordance with the previous Sanctions Order.
LSW
Holdings and Lily Li filed a Motion for New Trial, which was overruled by operation of law, and failed to timely file a Notice
of Appeal. RMHB will begin its collection efforts against LSW Holdings and Lily Li on the Final Judgment.
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. This case is currently set for trial for December 16,
2019.
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.
NOTE
18 – Other (Income)/Expenses
Gain/Loss
on Extinguishment of Debt
On
May 6, 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 that date (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 lawsuit 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. During the three and nine months
ended September 30, 2018 the Company recorded gains totaling $688,724 in two separate legal proceedings, including a judgment
against its former chairman that resulted in a $654,289 gain and a settlement with a former customer that resulted in a gain of
$34,435.
NOTE
19 – Subsequent Events
Between
October 1, 2019 and November 13, 2019 the Company issued 7,649,037 shares of common stock, all of which were for cash.