Rocky Mountain High Brands, Inc. - Annual Report: 2017 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act

of 1934 for the Fiscal Year Ended June 30, 2017

Commission File Number: 000-55609

Rocky Mountain High Brands, Inc.

(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes [ ] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes [ ] No [X]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [ X ] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [x] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ] Accelerated filer [ ]

Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [X]

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. Approximately $24,827,241 as of December 31, 2016, using the closing price of $0.044 per share.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 793,266,046 of as of October 10, 2017.

PART I

PART I

When used in this Annual Report, unless otherwise indicated, the terms “the Company,” “RMHB,” “we,” “us” and “our” refers to Rocky Mountain High Brands, Inc. and/or its subsidiaries. All references in this report to “$” or “dollars” are to United States dollars, unless specifically stated otherwise.

Forward-Looking Statements

This Annual Report contains forward-looking statements that reflect our current views about future events. We use the words “anticipate,” “assume,” “believe,” “estimate,” “expect,” “will,” “intend,” “may,” “plan,” “project,” “should,” “could,” “seek,” “designed,” “potential,” “forecast,” “target,” “objective,” “goal,” or the negatives of such terms or other similar expressions. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

Item 1. Business

Overview

Rocky Mountain High Brands, Inc. is a Nevada corporation. RMHB currently operates through its parent company, three wholly-owned subsidiaries 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)

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

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

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

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

RMHB is a consumer goods company specializing in brand development of health conscious, hemp-infused food and beverage products. The Company currently markets a lineup of five naturally flavored hemp-infused beverages (Citrus Energy, Black Tea, Mango Energy and Lemonade) and a low-calorie hemp-infused Coconut Lime Energy drink. The Company also offers hemp-infused 2oz. Mango Energy Shots and Mixed Berry Energy Shots. In August 2016 the Company launched Eagle Spirit Spring Water, a line of naturally high alkaline spring water.

After developing the beverage products, RMHB completed its first production run in February of 2015. Since then RMHB has had production runs for hemp-infused beverages totaling over 3,900,000 cans. Each beverage contains approximately 50mg (our first production run) to 100mg of hempseed extract and all-natural ingredients. The hemp-infused products are shelf stable (no refrigeration necessary) with a shelf life of two years.

During fiscal year 2017, the Company also produced energy shots and Relaxation Brownies.

In September 2016, the Company bottled its first high alkaline spring water, Eagle Spirit Spring Water and has completed several production runs since, including approximately 110,000 16.9 oz. bottles and 1,800 2.64-gallon (10-liter) “Bag in a Box.”

In March and April 2017, the Company completed additional production runs of its more popular hemp-infused beverages, Citrus Energy and Mango Energy.

In August 2017, the Company sold its remaining inventory of Smarterita wine-based beverages. There are currently no plans to resume production of this alcoholic beverage.

Corporate History

Rocky Mountain High Brands Inc. 10/23/2014 to present – Articles of Amendment filed with the State of

Nevada

f/k/a Totally Hemp Crazy Inc. 07/17/2014 to 10/23/2014 – Articles of Amendment filed with the State of

Nevada

f/k/a Republic of Texas Brands Incorporated 11/2011 to 07/17/2014 – Articles of Amendment filed with the State of

Nevada

f/k/a Legends Food Corporation 05/2011 to 11/2011 – Articles of Amendment filed with the State of Nevada

f/k/a Precious Metals Exchange Corp. – Articles of Amendment filed with the State of Nevada on December 23, 2008

f/k/a Stealth Industries, Inc. – Articles of Amendment filed with the State of Minnesota on October 25, 1999 (name change). Articles of Incorporation filed with the State of Nevada on October 30, 2000 (Change of Domicile; Merger with Stealth Industries, Inc. (Minnesota)

f/k/a Assisted Living Corporation – Articles of Amendment filed with the State of Minnesota on November 3, 1993 (name change)

f/k/a Electric Reel Corporation of America, Inc. -- Articles of Incorporation filed with the State of Minnesota on August 15, 1968

Acquisitions

Rocky Mountain High Water Company LLC

In July 2016, the Company entered into a business alliance with Poafpybitty Family, LLC to launch Eagle Spirit Spring Water, a line of purified, high-alkaline spring water sourced from Native American tribal land in Oklahoma.

The agreement calls for the Company to pay a royalty on each gallon of water collected at the spring. Production of filtered spring water filled bottles commenced in August 2016 and sales began in October 2016.

In consideration for the 20-year water and surface rights, and a related 10-year renewal option, the Company paid Poafpybitty Family, LLC cash payments of $22,500 and issued a warrant for 500,000 shares of the Company’s common stock exercisable at $.03 per share over a three-year period beginning July 27, 2016.

The agreement grants the Company an exclusive right to develop land adjacent to the spring for commercial purposes as agreed to by both parties. Additionally, the Company has agreed to grow hemp for experimental or commercial purposes on the land within three years.

On November 12, 2016, the agreement with the Poafpybitty Family was amended to give the Company a controlling voting interest of 75% of RMHW, while the Poafpybitty Family received 51% of the equity interest. The amended agreement is being accounted for as a step-acquisition, with the resulting goodwill of $49,911 included in other assets. The Company is obtaining an outside valuation of the rights to use the land and obtain the water described in the agreement. Beginning November 12, 2016, the operations of RMHW are consolidated in the financial statements of RMHB.

Investments

On July 17, 2015, the Company acquired all of the assets of Dollar Shots Club, LLC. The purpose of the acquisition was to acquire formulas developed by Dollar Shots Club, LLC for inclusion in the Company’s hemp-based energy shots, which were being developed at the time.

The Company issued 2,000,000 shares of its common stock to seven individuals who owned 100% of membership units in Dollar Shots Club, LLC.  The investment in Dollar Shots Club, LLC was recorded on the Company’s books at a price of $166,000, which was based on the closing price of the Company’s common stock on the day the stock was issued.   The assets purchased included the trademark and other intellectual property of the LLC, inventory, all websites and ecommerce sites, goodwill, formulas and all other general intangibles (the “assets”).

On September 18, 2015, the Company sold these assets to Dollar Shots Club, Inc. in exchange for 5,000,000 shares of Dollar Shots Club, Inc. common stock. The Company retained the rights to the formulas to the shots so that it could develop a similar hemp-infused energy version of them to be sold under Rocky Mountain High Brands. To the best of the Company’s knowledge, there is no relationship between the Dollar Shots Club entities. The Company fully impaired this investment during the year ended June 30, 2016.

 Trademarks Related to Our Business

•  Rocky Mountain High Energy Drink

•  Smarterita

•  Totally Hemp Crazy

•  Blue Leaf

•  Rock the Road Trip

•  Eagle Sprint

Current Product Offerings

Under its Rocky Mountain High Brands name, the Company currently markets a lineup of five hemp-infused 16 oz. beverages including:

The Company is also currently marketing a two-flavor lineup of energy shots.

The Company plans to sell its remaining inventory of these products during the first half of fiscal year 2018. In order to execute this plan, the Company will offer larger discounts to distributors and retailers and higher commissions to its broker network, likely resulting in lower gross profit margins for the first and second quarter of 2018.

Our Eagle Spirit Land and Water Company currently markets its naturally high alkaline spring water in two sizes: a 16.9 oz. plastic bottle sold in cases of 24 and a 2.64-gallon (10-liter) Bag in a Box.

Strategic Update and Planned Product Offerings

The Company has recently updated its long-term strategic plan. Management’s goal is to become the category leader in the hemp-infused beverage market, a segment of the functional beverage market. Functional beverages, or beverages that convey health benefits, are the fastest growing segment within the beverage market.

The Company is developing four newly reformulated, sugar-free, non-energy, hemp-infused beverage flavors. In addition to the new formulas, the beverages will feature 12 oz. cans, an all-new look and will replace all current hemp-infused beverage offerings. Two of the four beverage flavors will be carbonated. Flavor choices will be similar to past offerings. Management plans to begin production on the new beverages in February 2018. Marketing will focus on the health benefits of hemp, including Omega-3 and Omega-6 fatty acids, amino acids, and natural, plant-based fiber.

The Company is also reviewing its other product offerings, but there are no immediate plans to produce additional Relaxation Brownies or energy shots.

The Board of Directors is currently evaluating its plans with regard to the Eagle Spirit Water business.

The Company also plans to hire a Vice President of Sales and a Director of Marketing during fiscal year 2018.

Sales Channels

The Company depends upon a network of brokers and distributors to represent its product in the market. During its first year of operation, the Company signed twenty-four distributors across the country. For the year ended June 30, 2017, the Company’s two largest distributors accounted for 50% and 7% of sales, respectively.

The various distribution channels differ in costs, customer relationships, complexity and the resources required to operate the channel. We strategically build sales distribution channels to match and reinforce the goals and objectives of our marketing plan. To increase competitiveness and sales, we have a specific sales strategy in order to maximize revenues that includes the following:

Direct Selling

We utilize direct sales to retailers, which eliminates the delays and additional expense of a standard distribution channel. In this way we are better able to preserve more revenue, and protect capital under the control of the company. Direct selling to certain segments supports our marketing plan that has identified, researched and segmented certain final customers.

We utilize Amazon and our two proprietary websites – www.liverockymountainhigh.com and www.eaglespiritspringwater.com – to sell directly to consumers.

Wholesale Distribution

Another sales channel includes wholesale distribution. This method is designed for our potential customers who are widely dispersed. Wholesale distribution leaves the selling to wholesalers and retailers specialized in retail sales, which enables us to focus on production. Product is sold to distributors under a variety of terms from cash to credit terms.

Beverage Brokers

Beverage brokers develop local, regional, and national product campaigns with attention to long-term sustainable success. They assist in matching brands with the needs of an evolving market. Scheduling appointments, making presentations, securing product approval, and shelf resets, have added greatly to the time line from ship to shelf, making the role of the beverage broker all the more important. Beverage brokers represent a cost-efficient method of doing business for our drink brands. A commission-based beverage broker is a variable cost directly tied to the volume sold.

The Company is re-assessing its go-to-market strategy. Specifically, channels of distribution and distributor and broker agreements are being reviewed. Going forward, management plans to focus on key domestic markets.

Outsourced Production and Storage Services

In May 2016, the Company executed a one-year agreement with MBA Beverage to coordinate the manufacturing of our hemp-infused beverage products. MBA Beverage acted as our outsourced supply-chain management and coordinated every aspect of the manufacturing process. The contract expired in May 2017. We have not executed a new contract with MBA Beverage or any other outsourced production coordinator.

Blues City Brewery, LLC (“Blues City”) in Memphis, Tennessee, a subsidiary of City Brewing Company, LLC, has completed all of beverage production and canning to-date. Blues City is an FDA registered facility that is audited annually to ensure compliance with FDA GMP (Good Manufacturing Practices) for food safety. MBA Beverage schedules beverage production with Blues City. Upon completion of the production, the Company stores finished product at Blues City, awaiting sale to our distributor network. The Company does not contract with Blues City directly.

Sovereign Flavors of Santa Ana, California collaborates with the Company for product formulation under an informal agreement. The Company owns the propriety formulas to our products.

Our naturally high alkaline spring water is cold-filtered and packaged by a third-party water processor, Water Event Pure Water Solutions (“Water Event”).

Regulatory Requirements

We are subject to numerous federal, state, local, and foreign laws and regulations, including those relating to:

Since our hemp-based products are derived from industrial hemp containing a tetrahydrocannabinol (“THC”) level of 0.3% or less, they are not subject to the Controlled Substances Act. The express language of the federal Controlled Substances Act (“CSA”) provides that hemp stalk, fiber, oil, and sterilized seed are not controlled as marijuana. Thus, products containing industrial hemp – defined as the cannabis sativa plant containing a THC level of 0.3% or less - have been sold legally in every state in the U.S. for decades. In 2004, the U.S. Court of Appeals invalidated U.S. Drug Enforcement Administration (“DEA”) regulations that would have banned the manufacture and sale of edible products made from hemp seed and oil. Hemp Industries Ass’n v. Drug Enforcement Administration, 357 F.2d 1012 (9^th Cir. 2004). For this reason, U.S. companies may import hemp stalk, fiber, seed and oil, to trade in it, and to use it in the manufacture of products. The Company purchases imported hemp seed extract and uses it in the manufacture of its products. The Company does not have plans to grow marijuana, distribute marijuana or infuse our food or beverage products with marijuana, as defined in the Controlled Substance Act.

Our beverage products are not subject to direct FDA approval as the FDA does not perform review testing or approval of food, beverages or dietary supplements. The FDA requires that we manufacture our products in commercial manufacturing facilities that are annually audited to ensure that they pass inspection based on Good Manufacturing Practices for food safety.

Possession of hemp in the United States is legal, including possession of the sterilized seed, hemp seed oil, hemp seed flour, hemp seed cake, hulled hemp seeds, hemp clothing, hemp fabrics, hemp fuel or any other product made from industrial hemp. Because the industrial hemp plant is the same species as marijuana, until recently, it has been illegal for U.S. farmers to grow the plant itself. However, in the federal Agricultural Act of 2014, Congress specifically exempted from the CSA cultivation of industrial hemp under agricultural pilot programs authorized by state law.

Employees and Independent Contractors

The Company currently has five officers and two non-officer employees. The Company uses independent contractors, when necessary, to support operational or back-office functions.

Implications of Emerging Growth Company Status

As a company with less than $1 billion in revenue in our last fiscal year, we are defined as an “emerging growth company” under the Jumpstart Our Business Startups (“JOBS”) Act.  We will retain “emerging growth company” status until the earliest of:

 Pursuant to Section 107(b) of the JOBS Act, we have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of The JOBS Act.  This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies.  As a result, our financial statements may not be comparable to companies that comply with public company effective dates.  Section 107 of the JOBS Act provides that our decision to opt into the extended transition period for complying with new or revised accounting standards is irrevocable.

Because the worldwide market value of our common stock held by non-affiliates, or public float, is below $75 million, we are also a “smaller reporting company” as defined under the Exchange Act.  Some of the foregoing reduced disclosure and other requirements are also available to us because we are a smaller reporting company and may continue to be available to us even after we are no longer an emerging growth company under the JOBS Act but remain a smaller reporting company under the Exchange Act.  As a smaller reporting company we are not required to:

Item 1A. Risk Factors.

Smaller reporting companies are not required to provide the information required by this item. Please see our Registration Statement on Form 10/A filed September 29, 2016 to review our current risk factors.

Item 2. Properties

At present, we do not own any real property.  As of June 30, 2017, we leased approximately 7,000 square feet of office space at 9101 LBJ Freeway, Suite 200, Dallas, Texas 75243. Our lease period began on September 1, 2016 and terminates on August 31, 2019. Payments under the lease are as follows:

In connection with the new lease, we also purchased used office furniture from the landlord and financed this purchase with a note payable in the amount of $40,122 with an interest rate of 0% and monthly payments of $1,114 over thirty-six monthly installments.

The Company leases the following warehouse space on a month-to-month basis:

Our monthly rents at both locations vary depending on how much inventory is stored. Inventory levels fluctuate based on production and sales.

The Company is currently evaluating its growth requirements and researching alternatives to lower its recurring expenses for warehouse space.

Item 3. Legal Proceedings

Claims Against Donna Rayburn

RMHB and Rayburn entered into a convertible promissory note dated February 2, 2015 for the original principal amount of $165,000 (with a $5,000 original issue discount). On August 29. 2015, RMHB paid to Rayburn $197,774, representing return of principal and interested earned during the life of the loan. On February 19, 2016, Rayburn issued an additional demand of interest and penalties totaling $99,488. Rayburn has charged $137,262 in interest and penalties on a $160,000 loan for one year and 17 days for an effective annual interest rate of 85.77%. As additional consideration for the note, RMHB was required to issue a warrant to Rayburn for 10,000,000 of common stock.

RMHB has claims against Rayburn for violation of Florida Usury Laws. RMHB will seek a cancellation of the note and additional monetary recovery in the total amount paid to Rayburn, plus additional recovery for all usurious interest charged. RMHB will also seek to void the warrant for 10,000,000 shares of common stock, which was issued under a voidable note. The amount which RMHB will seek from Rayburn is in excess of $300,000.

Arbitration Claim of Roy J. Meadows Against Rocky Mountain High Brands, Inc. (RMHB) dated February 24, 2016

Meadows claims a breach of an exchange agreement dated November 3, 2015. RMHB has denied the breach. Meadows has demanded that RMHB remove him as a Control Person under RMHB’s OTC Markets Disclosure Statement as of December 31, 2015 filed on January 29, 2016. Meadows has rejected the interest payment under the exchange agreement dated January 30, 2016. He has not given an explanation of his rejection. Meadows also demands the exchange of the Series C Preferred back to the original $1,500,000 convertible note.

Meadows has initiated arbitration claiming notice of an Arbitration Claim against RMHB. RMHB has objected to this claim, as well as to the arbitration process itself. Meadows seeks damages of $2,947,094. He has further demanded that RMHB comply with an Agreement dated November 16, 2015 which is a part of the litigation described in the disclosure above. This agreement, which was a requirement of Meadows to execute the Exchange Agreement, requires the Company to issue warrants for common stock of 110,760,000 for not redeeming the Series C Preferred Shares by March 24, 2016.

On April 4, 2016, RMHB engaged the law firm of Allred Wilcox & Hartley PLLC to act as counsel in defending these claims.

As a result of the arbitration, RMHB filed suit in Florida, Eighteenth Judicial Circuit Court of Seminole County, Florida, Rocky Mountain High Brands, Inc. v. Roy Meadows, David Meadows et al, Case No. 2016-CA-000958-15-W.

The Company filed suit for an injunction against continuation of the Meadows Arbitration. The Meadows Arbitration hearing currently has no date for commencement of the Arbitration hearing. Shortly after the suspension of the Arbitration hearing, on April 20, 2016, false, malicious, and defamatory allegations were asserted by the Shareholder Alert inappropriately released by the Law Office of A.A. McClanahan, Meadow’s attorney.

The Company has filed in the Seminole Suit a Motion for Leave To Amend its current suit to add claims against Meadows for usury, cancellation of warrants and defamation as a result of the Shareholder Alert press release.

The Company is investigating facts surrounding Meadows and others and may amend its Florida lawsuit to seek more than $20 Million in damages and disgorgement of Meadows and Rayburn profits on questionable trading activities.

The Amended Suit will deal with the following:

RMHB has asserted usury claims in connection with $1,500,000 demand convertible note referenced below in the section pertaining to the Meadows Arbitration Claim. RMHB seeks unspecified monetary damages in connection with the Meadows Note, and further seeks cancellation of warrants for 41,454,851 and 13,641,974 shares of common stock issued to Meadows in connection with the Meadows Note and cancellation of the Meadows Note.

During the six months ended December 31, 2015, the Company issued 68,220,350 shares of common stock for the conversion of $104,220 of convertible debt to Roy Meadows and Trinexus, Inc. prior to executing the exchange agreement to Series C preferred stock.

RMHB believes that as a result of Meadows’ actions in this suit, the Arbitration is effectively waived and that the Court in Seminole County, Florida will resolve this matter.

Meadows has filed a counter claim in this suit for the damages he asserted in the arbitration claim. He has also filed for relief under elderly laws of Florida.

192^nd Judicial District Court of Dallas County Texas, filed February 16, 201, DC-17-02058. Rocky Mountain High Brands, Inc. v. Dewmar International BMC, Inc. RMHB filed suit against Dewmar for breach of contract and for an accounting. RMHB is in the process of obtaining a default judgment against Dewmar for its failure to file an answer to the suit.

134^th Judicial District Court of Dallas County, Texas, filed April 28, 2017. Rocky Mountain High Brands, Inc. v Lyonpride Music, LLC. RMHB filed suit against Lyonpride for fraud and for declaratory relief with respect to a contract between the parties. RMHB seeks monetary damages against said Defendant.

134^th Judicial District Court of Dallas County, Texas. Filed June 26, 2017. Rocky Mountain High Brands, Inc. v Statewide Beverage Company, Inc. RMHB has filed suit for breach of contract, common law fraud and declaratory relief.

Los Angeles Superior Court, BC669367, filed July 24, 2017. Statewide Beverage Company, Inc. v. Rocky Mountain High Brands, Inc. Statewide filed a breach of contract claim, dealing with the same fact issues in the above case of RMHB v Statewide. RMHB still has not been served in this case.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Unregistered Sales of Equity Securities and Use of Proceeds

Market Information

Our common stock is quoted on the OTCQB tier of the OTC Markets Group quotation system (www.otcmarkets.com) under the trading ticker “RMHB.”  The following tables set forth the range of high and low prices for our common stock for the two most recent fiscal years, as reported on the OTC Market Group’s quotation system. These quotations reflect inter-dealer prices, without retail markup, markdown, or commission and may not necessarily represent actual transactions.

On October 10, 2017, the last sales price per share of our common stock was $0.0297.

Penny Stock

The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a market price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock, to deliver a standardized risk disclosure document prepared by the SEC, that: (a) contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; (b) contains a description of the broker's or dealer's duties to the customer and of the rights and remedies available to the customer with respect to a violation of such duties or other requirements of the securities laws; (c) contains a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and the significance of the spread between the bid and ask price; (d) contains a toll-free telephone number for inquiries on disciplinary actions; (e) defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and (f) contains such other information and is in such form, including language, type size and format, as the SEC shall require by rule or regulation.

The broker-dealer also must provide, prior to effecting any transaction in a penny stock, the customer with (a) bid and offer quotations for the penny stock; (b) the compensation of the broker-dealer and its salesperson in the transaction; (c) the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and (d) a monthly account statement showing the market value of each penny stock held in the customer's account.

In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written acknowledgment of the receipt of a risk disclosure statement, a written agreement as to transactions involving penny stocks, and a signed and dated copy of a written suitability statement.

These disclosure requirements may have the effect of reducing the trading activity for our common stock. Therefore, stockholders may have difficulty selling our securities.

Holders of Our Common Stock

As of October,9 2017, there were approximately 17,700 holders of record of our common stock .

Dividends  

There are no restrictions in our articles of incorporation or bylaws that prevent us from declaring dividends. The Nevada Revised Statutes, however, do prohibit us from declaring dividends where after giving effect to the distribution of the dividend:

1. we would not be able to pay our debts as they become due in the usual course of business, or;

2. our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of shareholders who have preferential rights superior to those receiving the distribution.

We have not declared any dividends and we do not plan to declare any dividends in the foreseeable future.

Securities Authorized for Issuance under Equity Compensation Plans

On March 17, 2017, our Board of Directors approved the Rocky Mountain High Brands, Inc. 2017 Incentive Plan (the “2017 Incentive Plan”). The purpose of the Incentive Plan is to provide a means for the Company to continue to attract, motivate and retain management, key employees, consultants and other independent contractors, and to provide these individuals with greater incentive for their service to the Company by linking their interests in the Company’s success with those of the Company and its shareholders. The Plan provides that up to a maximum of 35,000,000 shares of the Company’s common stock (subject to adjustment) are available for issuance under the Plan. The Board of Directors awards these shares at its sole discretion. 

Also on March 31, 2017, certain of our officers and directors returned a total of 25,041,732 shares of common stock to treasury for cancellation. On that same date, we granted to each of these officers and directors an equivalent number of restricted shares of common stock under our 2017 Incentive Plan. The restricted shares so granted may not be transferred, sold, or encumbered until six (6) months from the date of issue.

In April and June 2017, a Board member was granted 7,000,000 and 13,000,000 options to purchase common stock, respectively. In May 2017 another Board member was granted 7,000,000 options. An additional 350,000 options were granted to a consultant to the Company in April 2017. All options were granted through the 2017 Incentive Plan.

On July 14, 2017 the Board of Directors increased the authorized shares in the 2017 Incentive Plan to 65,000,000.

Item 6. Selected Financial Data

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

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This document contains certain forward-looking statements as defined by federal securities laws.  For this purpose, forward- looking statements are any statements contained herein that are not statements of historical fact and include, but are not limited to, those preceded by or that include the words, “estimate,” “could,” “should,” “would,” “likely,” “may,” “will,” “plan,” “intend,” “believes,” “expects,” “anticipates,” “projected,” or similar expressions.  Those statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those contemplated by such statements.  The forward-looking information is based on various factors and was derived using numerous assumptions.  For these statements, we claim the protection of the “bespeaks caution” doctrine. Such forward-looking statements include, but are not limited to:

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

Overview

The Company generates revenue from finished product sales to distributors (resellers), retailers and consumers. The wholesale market for the Company’s products includes all retailers in the convenience and grocery store channels as well as a number of specialty retail niche markets including health food, “smoke shop,” and novelty stores. Additionally, the Company has an online retail presence on Amazon.com and via our Company websites.

Results of Operations

Year Ended June 30, 2017 Compared to Year Ended June 30, 2016

Financial Summary

The Company’s sales for the year ended June 30, 2017 were $401,974 compared to $1,075,476 for the year ended June 30, 2016.

The Company’s net loss for the year ended June 30, 2017 was $9,276,251 compared to net income of $2,325,726 for the year ended June 30, 2016.

Sales

For the year ended June 30, 2017, sales were $401,974 compared to $1,075,476 for the year ended June 30, 2016, a decrease of $673,502 or 63%. The sales decrease was driven by the lack of funding for inventory production, direct sales support, and advertising and promotion of the Company’s products, as well as a restructuring of our outside broker agreements, and product returns. In the year ended June 30, 2017 sales consisted of approximately 80% distributor sales and 20% online sales, compared to 93% distributor sales and 7% online sales for the year ended June 30, 2016.

Cost of Sales

For the year ended June 30, 2017, cost of sales was $251,920 or 63% of sales, versus $1,134,636 or 105% of sales for the year ended June 30, 2016, a decrease of $882,716 or 78 %. In 2017 the Company recorded inventory obsolescence expense of $100,998 compared to $725,718 in 2016, resulting in a lower cost of sales percentage. In 2017 the obsolescence expense was comprised of a $72,161 write-off of the remaining “mountain can” packaging and a $28,837 write-off of the Company’s expired brownie inventory. In 2016 the obsolescence expense related primarily to expiring hemp-infused beverage product.

Operating Expenses

For the year ended June 30, 2017, operating expenses were $7,265,097 or 1,807% of sales, compared to $3,649,412 or 339% of sales for the year ended June 30, 2016, an increase of $3,615,685 or 99%. Areas in which the Company experienced material changes in operating expenses are discussed below.

General and Administrative

For the year ended June 30, 2017, general and administrative expenses were $5,751,464 or 1,431% of sales, compared to $2,142,984 or 199% of sales for the year ended June 30, 2016, an increase of $3,608,480 or 168%. The increase in general and administrative expenses in 2017 was driven by an increase in officer and employee compensation, including approximately $1,439,096 in stock option-related compensation to two new outside Board Directors in the fourth quarter of fiscal year 2017, rent and storage expenses, and expenses related to the startup of the Eagle Spirit Water brand.

Advertising and Marketing

For the year ended June 30, 2017, advertising and marketing expenses were $1,513,633 or 377% of sales, compared to $1,340,428 or 125% of sales for the year ended June 30, 2016, an increase of $173,205 or 13%. The increase in advertising and marketing expenses in 2017 was due to increased promotional spending, broker commissions, promotions contractors, and advertising and promotional expenses related to the startup of the Eagle Spirit water brand.

Impairment

For the year ended June 30, 2016, the Company recorded an impairment expense of $166,000 related to its investment in Dollar Shots Club. This represented a 100% impairment on this investment. There was no impairment recorded during the year ended June 30, 2017.

Other (Income) Expense

Interest Expense

For the year ended June 30, 2017, interest expense was $1,044,431, compared to $203,496 for the year ended June 30, 2016, an increase of $573,907 or 282%. The increase in interest expense, which includes the amortization of the discount on convertible debt and interest on Series C Preferred Stock, was due to increased debt in 2017.

Debt Inducement Expense

During the year ended June 30, 2016, the Company recorded debt inducement expense of $3,887,618. In order to induce the holder of certain convertible debt to convert his note, he was issued warrants to purchase 41,454,851 shares of common stock at a reduced price. There was no debt inducement expense in 2017.

Loss on Extinguishment of Debt

During the year ended June 30, 2016, the Company recorded a loss of $945,838 on the extinguishment of debt related to the settlement of convertible debt. There was no extinguishment of debt in 2017.

Gain on Change in Redemption Value of Series C Preferred Stock

For the year ended June 30, 2017, the Company recorded a gain of $834,242 on the change in the redemption value of the Series C Preferred stock. The redemption value of the Series C Preferred stock is determined based on a formula in the Company’s amended Articles of Incorporation. There was no change in the redemption value during the year ended June 30, 2016.

Gain on Change in Fair Value of Derivative Liability

For the year ended June 30, 2017, the Company recorded a loss on the change in fair value of derivative liability of $1,951,019 compared to a gain of $11,071,250 for the year ended June 30, 2016. In 2017 the loss resulted from the increase in the price of the Company’s underlying stock, which is used to calculate the fair value of the related derivative liability, over the period from July 1, 2016 to June 30, 2017. The gain in 2016 resulted from a decrease in the price of the Company’s stock during the year ended June 30, 2016 and the related decrease in the derivative liability.

Income Taxes

For the years ended June 30, 2017 and 2016, the Company recorded no income tax benefit due to a full valuation allowance provided on deferred tax assets resulting from net operating losses.

Liquidity and Capital Resources

As of June 30, 2017, we had current assets of $1,153,976, consisting of cash of $91,675, accounts receivable (net) of $63,268, inventory of $224,695, and prepaid expenses and other current assets of $774,338. As of June 30, 2017, we had current liabilities of $8,583,643, consisting of accounts payable and accrued liabilities of $441,188, related party convertible notes payable (net) of $266,247, convertible notes payable (net) of $733,253, other notes payable of $26,130, redemption value of Series C Preferred stock of $1,661,424, accrued interest of $382,820, and derivative liability of $5,072,579. During the year ended June 30, 2017, the Company received proceeds of $991,350 related to private offering stock sales of 65,667,587 shares of common stock. Sales prices ranged from $.001 to $.05 per share.

Cash flows from operating activities

Net cash used in operating activities during the years ended June 30, 2017 and 2016 was $1,902,790 and $1,779,167, respectively. In both years the Company used funds for inventory production, sales and promotions, and administrative expenses. The increase in cash used in operating activities during the year ended June 30, 2017 was a result of increased officer and employee compensation, rent and storage expenses, and expenses related to the startup of the Eagle Spirit Water brand.

Cash flows from investing activities

Net cash used in investing activities during the years ended June 30, 2017 and 2016 was $89,870 and $119,042, respectively. In 2017 the Company invested in the startup of the Eagle Spirit Water brands as well as delivery vehicles and computer equipment. During 2016 the Company’s investment primarily related to the acquisition of several delivery vehicles.

Cash flows from financing activities

Net cash provided by financing activities during the years ended June 30, 2017 and 2016 was $1,982,080 and $1,904,738, respectively. In both years, over 50% of the net cash provided by financing activities was from the proceeds of sales of common stock with the remainder coming from net proceeds of notes payable. In 2017 the Company received proceeds of $991,350 from the issuance of common stock, compared to $1,282,406 in 2016.

Material Indebtedness

As of June 30, 2017 and 2016 the Company’s outstanding debt totaled $1,634,580 and $895,832, respectively. The increase in debt during 2017 was to fund the Company’s operations, including inventory production and the startup of the Eagle Spirit Water brand.

Recently, our operations have been funded primarily through the issuance of convertible promissory notes, which are convertible to common stock at fixed prices ranging from $0.001 to $0.024, or at a specified percentage discount off market prices. Discounts are generally 50% and based on a contracted look-back period. Interest rates on our notes payable range from 6% to 8%. Our ability to successfully execute our business plan is contingent upon us obtaining additional financing and/or upon realizing sales revenue sufficient to fund our ongoing expenses. Until we are able to sustain our ongoing operations through sales revenue, we intend to fund operations through debt and/or equity financing arrangements, which may be insufficient to fund our capital expenditures, working capital, or other cash requirements.

The Company has the following formal funding arrangement:

During 2011 and 2012, the Company entered into a series of convertible notes with six lenders aggregating $110,000. These were one-year terms notes at 12% interest and convertible to Common Stock at a conversion price of $.05 per share. As a part of the Bankruptcy Reorganization Plan confirmed in July 2014, the accrued interest on these notes was forgiven and the notes became zero interest bearing notes. As of December 31, 2016, the principal balance on these notes was $30,000.

In 2012, the Company entered into a $40,000 Convertible Note Payable with an individual. The notes matured one-year from the date of issuance, bear interest at 12% per annum, and is convertible into shares of Common Stock at $.001. In 2015, the lender sold and re-assigned $17,500 of this note. The new note holders converted the $17,500 of principal into 17,500,000 shares of Common Stock. During the six months ended December 31, 2016, the holder converted the remaining principal balance of $22,500 to 25,000,000 shares of common stock.

On March 25, 2015, the Company entered into an amended and restated convertible promissory note with Roy Meadows, which amended two previously issued notes dated February 5, 2013 and July 17, 2014. According to the terms of the note, the Company may borrow up to an aggregate of $1,500,000. The note bears interest at 12% per annum, and the holder may demand repayment of any portion of the note after one year from the effective date of the note. The note is convertible in whole or in part at a conversion price per share equal to the lesser of $.001 per share, or at an 80% discount to the average of the five lowest bid prices during the thirty trading days prior to the date of the conversion notice. Mr. Meadows is limited in his conversions whereby he may not at any time own more than 9.99% of the Company’s outstanding common stock. Mr. Meadows may, at his option, file a UCC-1 financing statement against all assets of the Company and have a guarantee and security agreement with the principal controlling for majority shareholders of the Company. On November 16, 2015, the debt holder converted $1,107,606 of principal and accrued interest into 1,107,607 shares of Preferred C Shares of the Company. Each Series C Preferred Share can be converted to 50 Shares of Common Stock.

In connection with the conversion, and as an inducement for the debt holder to convert, the Company issued him two warrants to purchase a total of 55,096,825 shares of the Company’s common stock at an exercise price per share of the lesser of $.005 or an eighty percent discount to the average of the five lowest bid prices during the 30 trading days prior to the date of exercise. The warrant may be exercised, in whole or in part, beginning on the date which is the earlier of six months from the Company becoming a Reporting Company (as defined in the warrant) or one year from the date of issuance. The warrant is for a period of 3 years, and contains customary anti-dilution provisions.

In October 2015, the Company entered into a $500,000 note payable at 12% simple interest for a one-year period with Roy Meadows. The note is convertible upon maturity if not paid by the company prior thereto at $0.02 per share and a 25,000,000 share maximum. There is an option to renew with a fee of 10% principle and accrued interest.

Our prior disclosures indicating that Mr. Meadows was an affiliate of the Company were made in error. We affirm that Mr. Meadows is not, and never has been, an “affiliate” of the Company within the meaning of Rule 144(a)(1) or otherwise.

The Company has determined that the conversion feature embedded in the notes referred to above, that contain a potential variable conversion amount, constitutes a derivative which has been bifurcated from the note and recorded as a derivative liability, with a corresponding discount recorded to the associated debt. The excess of the derivative value over the face amount of the note is recorded immediately to interest expense at inception. The discounts related to the above notes were completely amortized as of June 30 and December 31, 2016 on the accompanying balance sheet.

Future Liquidity Requirements

The anticipated operational shortfall for the next twelve months is approximately $2,000,000. The Company plans to utilize the Eagle Equities agreement to partially fund our operating needs and anticipates securing an equity financing arrangement or line of credit to meet its additional needs over the next 12 to 24 months. This would finance inventory production, advertising and marketing, and other working capital needs.

We anticipate that initial funds raised will be through debt financing with additional capital raised through the sale of restricted securities through an offering memorandum, the structure of which has yet to be determined.

Plans for Meeting Debt Obligations and Reaching Profitability

Going forward, the Company intends to fund its operations and meet its debt obligations through:

We project increased sales revenue in fiscal year 2018 as we execute our updated strategy, which includes updating our can design and formulas.

We intend to retain our future earnings in order to reinvest in the development and growth of our business and, therefore, do not intend to pay dividends on our common stock for the foreseeable future.

Going forward, the Company intends to achieve profitability by:

The Company has recently updated its long-term strategic plan. Management’s goal is to become the category leader in the hemp-infused beverage market, a segment of the functional beverage market. Functional beverages, or beverages that convey health benefits, are the fastest growing segment within the beverage market.

The Company is developing four newly reformulated, sugar-free, non-energy, hemp-infused beverage flavors. In addition to the new formulas, the beverages will feature 12 oz. cans, an all-new look and will replace all current hemp-infused beverage offerings. Two of the four beverage flavors will be carbonated. Flavor choices will be similar to past offerings. Management plans to begin production on the new beverages in January 2018. Marketing will focus on the health benefits of hemp, including Omega-3 and Omega-6 fatty acids, amino acids, and natural, plant-based fiber.

The Company is also reviewing its other product offerings, but there are no immediate plans to produce additional Relaxation Brownies or energy shots.

The Board of Directors is currently evaluating its plans with regard to the Eagle Spirit Water business.

The Company is re-assessing its go-to-market strategy. Specifically, channels of distribution and distributor and broker agreements are being reviewed.

Management plans to focus on key domestic markets.

The Company plans to hire a Vice President of Sales and a Director of Marketing during fiscal year 2018. These executives will be key to the successful roll-out of the Company’s newly reformulated products and key market strategy.

Off-Balance Sheet Arrangements

As of June 30, 2017, there were no off-balance sheet arrangements

Going Concern

The Company has a shareholders’ deficit of $7,304,278, an accumulated deficit of $26,154,633 as of June 30, 2017, 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 from third parties.

On February 28, 2017, LSW Holdings, LLC (“LSW”) purchased all outstanding shares of Series A Preferred Stock from our former controlling shareholder. Our Vice President of International Sales is the Managing Member of LSW. Both parties to the agreement assured management that the purchase agreement requires LSW to provide the Company sufficient capital to move forward with its expansion plans. Management has recently obtained the executed agreement and determined that agreement contains no such requirement. As a result, management is actively pursuing other funding arrangements with outside investors and creditors.

Critical Accounting Policies

In December 2001, the SEC requested that all registrants list their most “critical accounting polices” in the Management Discussion and Analysis. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We do not believe that the following accounting policies currently fit this definition:

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 605, “Revenue Recognition.” 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.

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 of the Company’s product 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 complete and 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 instruments is as follows:

The estimated fair value of the derivative instruments were valued using the Black-Scholes option pricing model, using the following assumptions as of June 30, 2017 and June 30, 2016:

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.

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. The Company recorded an impairment charge of $166,000 during the year ended June 30, 2016. No impairment charge was recorded during the year ended June 30, 2017.

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 stockholders’ equity (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.

Recently Issued Accounting Pronouncements

Unless otherwise noted, we have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1) of the JOBS Act.  This allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies.  As a result of our election, our financial statements may not be comparable with other public companies.

In August 2014, the FASB issued Accounting Standard Update No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40), (ASU No. 2014-15), which requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, ASU 2014-15 provides a definition of the term substantial doubt and requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). It also requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans and requires an express statement and other disclosures when substantial doubt is not alleviated. ASU No. 2014-15 is effective for the Company beginning July 1, 2017.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which will replace most existing revenue recognition guidance in U.S. GAAP and is intended to improve and converge with international standards the financial reporting requirements for revenue from contracts with customers. The core principle of ASU 2014-09 is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. ASU 2014-09 also requires additional disclosures about the nature, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. ASU 2014-09 allows for adoption either on a full retrospective basis to each prior reporting period presented or on a modified retrospective basis with the cumulative effect of initially applying the new guidance recognized at the date of initial application, which will be effective for the Company beginning July 1, 2019. The Company is currently evaluating the impact of ASU 2014-09, including the transition method, on its consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The amendments in this update simplify the presentation of deferred income taxes and require that deferred tax liabilities and assets be classified as noncurrent in a consolidated statement of financial position. These amendments may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The amendments will be effective for the Company beginning July 1, 2018. If the Company chooses retrospective application, the impact of ASU 2015-17 would not be material to the consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases, 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 is effective for the Company beginning July 1, 2020. The Company is currently evaluating the impact that ASU 2016-02 will have on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting. The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for the Company beginning July 1, 2018 and will require us to prospectively recognize excess tax benefits and tax deficiencies in the consolidated statement of income when the awards vest or are settled. Additionally, the guidance requires excess tax benefits to be presented as an operating activity in the statement of cash flows rather than as a financing activity. The Company is currently evaluating the impact of ASU 2016-09 on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Measurement of Credit Losses on Financial Instruments, which requires measurement and recognition of expected credit losses for financial assets held. ASU 2016-13 is effective for the Company beginning July 1, 2021 and the Company is currently evaluating the impact that ASU 2016-13 will have on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is required to be applied prospectively and will be effective for the Company beginning July 1, 2019. The impact on our consolidated financial statements will depend on the facts and circumstances of any specific future transactions.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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

Item 8. Financial Statements and Supplementary Data

Index to Financial Statements Required by Article 8 of Regulation S-X:

Audited Financial Statements:  

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Rocky Mountain High Brands, Inc.

We have audited the accompanying consolidated balance sheets of Rocky Mountain High Brands, Inc as of June 30, 2017 and 2016 and the related consolidated statements of operations, shareholders’ deficit and cash flows for the years ended June 30, 2017 and 2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Rocky Mountain High Brands, Inc.as of June 30, 2017 and 2016, and the consolidated results of its operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated 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. As discussed in Note 3 to the financial statements the Company has a shareholders’ deficit of $7,304,278, an accumulated deficit of $26,154,633 at June 30, 2017, 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. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/S/Paritz & Company, P.A.

Hackensack, New Jersey

October 11, 2017

Rocky Mountain High Brands, Inc.

Consolidated Balance Sheets

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

 Rocky Mountain High Brands, Inc.

Consolidated Statements of Operations

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

Rocky Mountain High Brands, Inc.

Consolidated Statements of Cash Flows

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

Rocky Mountain High Brands, Inc.

Consolidated Statements of Shareholders’ Deficit