Rocky Mountain High Brands, Inc. - Annual Report: 2018 (Form 10-K)

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

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 [ ]

 

 

 

 

TABLE OF CONTENTS

 

	PART I
		Page
Item 1.	Business Overview	3
Item 1A.	Risk Factors	10
Item 2.	Properties	10
Item 3.	Legal Proceedings	11
Item 4.	Mine Safety Disclosures	13
PART II

Item 5.	Unregistered Sales of Equity Securities and Use of Proceeds Between November 17, 2018 and March 30, 2019	13
Item 6	Selected Financial Data	15
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	25
Item 8.	Financial Statements and Supplementary Data	25
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	26
Item 9A.	Controls and Procedures	26
Item 9B	Other Information	27
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	27
Item 11.	Executive Compensation	30
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	33
Item 13.	Certain Relationships and Related Transactions, and Director	34
Item 14.	Principal Accounting Fees and Services	35
PART IV
Item 15.	Exhibits, Financial Statement Schedules	36

       

 

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:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

During 2017 and 2018, the Company continued to market its lineup of naturally flavored hemp-infused functional beverages, as well as hemp-infused 2oz. Mango Energy Shots and Mixed Berry Energy Shots through the first half of 2018. The Company plans to introduce updated offerings of hemp seed extract-infused functional beverages in the second quarter of 2019 under the name of Rocky Mountain.

 

Corporate History

 

Rocky Mountain High Brands Inc. October 23, 2014 to present – Articles of Amendment filed with the State of Nevada

 

f/k/a Totally Hemp Crazy Inc. July 17, 2014 to October 23, 2014 – Articles of Amendment filed with the State of Nevada

 

f/k/a Republic of Texas Brands Incorporated November 2011 to July 17, 2014 – Articles of Amendment filed with the State of Nevada

 

f/k/a Legends Food Corporation May 2011 to November 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 WaterCo, while the Poafpybitty Family received a majority 51% of the equity interest. The amended agreement is being accounted for as a step-acquisition, with the resulting goodwill of $59,163 included in other assets. During the six months ended December 31, 2017, the Company obtained an outside valuation of the rights to use the land and obtain the water described in the agreement. As a result of that analysis and the continued operating losses by the Company’s spring water business, the Company determined that its investment, including the related goodwill, was fully impaired. The Company recorded an impairment expense of $59,163 as of November 12, 2017. As a result of the step-acquisition, beginning on November 12, 2016 the operations of WaterCo are consolidated in the financial statements of RMHB.

 

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

 

In July 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. The acquisition includes $98,297 of assets including cash, accounts receivable, inventory, and prepaid production costs and $132,141 of intangible assets, including the FitWhey software, trademark, formulas, and goodwill. The Company is obtaining an outside valuation of these assets.

 

Trademarks Related to Our Business

 

•           Rocky Mountain High

•           HEMPd

•           HEMPFIT

•           Smarterita

•           Totally Hemp Crazy

•           Blue Leaf

•           Rock the Road Trip

•           Eagle Spirit

•           Eagle Paa

•           FitWhey

 

Strategic Update and Planned Product Offerings

 

The Company recently updated and began execution of its long-term strategic plan. Management’s goal is to become the cutting-edge leader in CBD and hemp-infused food, beverage, fitness, and other health-conscious product categories. This includes the use of CBD and hemp in products under the HEMPd and Rocky Mountain brand names. In late 2017, the Company executed its first private label manufacturing agreement and in 2019 executed a second private label agreement. Production on both private label agreements is scheduled to start in the second quarter of 2019.

 

The Company’s marketing will focus on the health benefits of hemp and CBD.

 

 

Current Product Offerings

 

The Company’s Wellness For Life Colorado, Inc. subsidiary currently markets the following lineup of CBD-infused products under the HEMPd brand:

 

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CBD-Infused Waters – The Company’s initial production run of CBD-Infused waters consisted of 12 oz. cans each containing 5mg of CBD. The Company raised the CBD content to 20mg per can in its March 2019 production run.

 

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Gummies – Each bottle contains 30 gummies containing 25mg of full plant hemp extract in assorted flavors. Gummies are made to be chewed and ingested for absorption for hemp absorption.

 

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Water Soluble Concentrate – Each bottle contains 1,500mg of full plant hemp extract. Consumers place approximately 8 drops of this water-soluble concentrate in 12-16 oz. of water for a daily dose of hemp.

 

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Tinctures – Each bottle contains 300mg of full plant hemp extract. Consumers place these drops under their tongue. Flavors include tangerine, lemon, and spearmint.

 

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Capsules – Each bottle contains 30 capsules containing 25mg of full plant hemp extract. The capsules are swallowed for ingestion and hemp absorption.

 

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Triple Relief Salve – Each jar contains 250mg of full plant hemp extract. The salve is used directly on skin for pain relief in muscles, bones and joints.

 

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Serenity Hemp Lotion – Each bottle contains 250mg of full plant hemp extract. Lotion is meant to be applied to any part of the skin for absorption into your body.

 

Under its Rocky Mountain High Brands name, the Company marketed a lineup of five hemp-infused 16 oz. beverages in 2017 and 2018, including:

 

•

Naturally Flavored Citrus Energy Drink - A citrus energy drink that contains 100mg of hempseed extract and is complemented with ginseng and guarana extract, caffeine and other ingredients

 

•

Naturally Flavored Mango Energy Drink - A mango energy drink that contains 100mg of hempseed extract and is complemented with ginseng and guarana extract, caffeine and other ingredients.

 

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Low Calorie Coconut Energy Lime - A low-calorie coconut lime energy drink that contains 100mg of hempseed extract and is complemented with ginseng and guarana extract, caffeine and other ingredients.

 

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Naturally Flavored Lemonade - A lemonade drink that contains 100mg of hempseed extract and is complemented with ginseng extract and other ingredients.

 

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Naturally Flavored Black Tea - A black tea drink that contains 100mg of hempseed extract and is complemented with black tea and ginseng extract and other ingredients.

 

 

RMHB sold its remaining inventory of these products in March 2019.

 

Our Eagle Spirit Land and Water Company currently markets its naturally high alkaline spring water in two sizes: a 500ml (16.9 oz.) plastic bottle sold in cases of 24 and a 1-liter bottle sold in cases of 12. The Company also previously sold a 10-liter (2.64-gallon) Bag in a Box product.

 

Private Label

 

CBD Life

 

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 will have 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. Due to ingredient and packaging sourcing delays, production did not commence in 2018 as expected. The Company’s initial production run of 2,000,000 cans is expected to be completed in June 2019.

 

Green Lotus

 

On February 21, 2019 the Company entered into a Beverage Manufacture and Supply Agreement with Texas Wellness Center, LLC, a marketer and distributor of hemp and CBD products under the “Green Lotus” brand. Under the Agreement, the Company will be the exclusive supplier to Texas Wellness for hemp-infused beverages for the Green Lotus brand. The Company will produce a Green Lotus Premium Sparkling Hemp Water in Watermelon and Grapefruit flavors, each containing 25mg of naturally occurring cannabinoids. Texas Wellness will supply the hemp-derived ingredients for the beverages, and Rocky Mountain High Brands will provide all other materials necessary for the production, processing, batching, labeling, and packaging of the beverages. The Agreement runs for an initial term of three years, with subsequent automatic annual renewals.  The Agreement may be terminated upon 180 days written notice. The Company’s initial production run of 100,000 cans is expected to be completed in April 2019.

 

Upcoming Product Offerings

 

The Company is currently updating the formulations of its hemp-infused drinks under the Rocky Mountain brand name and will reintroduce them in the second quarter of 2019. These drinks will contain 250mg of hemp seed extract and be carbonated.

 

The Company’s WFLC subsidiary plans to introduce hemp-infused flavored waters under the HEMPd brand name in the second quarter of 2019. These drinks will contain 250mg of hemp seed extract be sold exclusively to our national distributor.

 

The Company’s Eagle Spirit subsidiary plans to launch the Spirit Water brand in 2019.

 

The Company plans to continually update and improve its product offerings in accordance with consumer demand, changes in federal and local regulations, and internal research and development. Ongoing research and development costs are not expected to be material.

 

Sales Channels

 

The Company sells its products to retailers, distributors, and online directly to consumers via Amazon and the Company’s websites: www.HEMPd.com, www.EagleSpiritWater.com, and www.LiveRockyMountainHigh.com. For the year ended December 31, 2018, sales by channel were 21% distributor, 12% retailer, and 67% online. In 2018 the Company’s two largest customers represented 12% and 7% of sales.

 

For the year ended December 31, 2017, sales by channel were 24% distributor, 15% retailer, and 61% online. In 2017 the Company’s two largest customers represented 21% and 12% of sales.

 

For the six months ended December 31, 2017, sales by channel were 10% distributor, 22% retailer, and 68% online. In the same period, the Company’s two largest customers each represented 6% of sales.

 

 

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 and was not renewed.

 

Through early 2018, Blues City Brewery, LLC (“Blues City”) in Memphis, Tennessee, a subsidiary of City Brewing Company, LLC, completed all beverage production and canning. 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 stored finished product at Blues City, awaiting sale. The Company did not contract with Blues City directly.

 

On January 9, 2019 the Company executed an agreement with Optimus Fulfill LLC in Coppell Texas to co-pack beverages. The agreement terminates on December 31, 2024. The Company will utilize other co-packers as necessary to supplement Optimus’ production capabilities.

 

The Company utilizes numerous vendors to collaborate on product formulation. All formulas developed for the Company through outside vendors are the property of the Company.

 

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

 

On February 24, 2018 the Company executed an Amazon Brand Development and Launch Agreement with BuyDMi, Inc. (DBA GoodforYou.com) for the new HEMPd product line. Under this contract GoodforYou.com is creating an Amazon page for the initial 17 HEMPd products, converting all HEMPd products to Amazon Prime offerings, providing customer phone and email support, managing inventory forecasting, shipping, storage, and returns, and launching sponsored ad campaigns. The Company cancelled this contract in December 2018 and is currently performing these functions through other less expensive vendors.

 

On March 20, 2018 the Company executed a Fulfillment and Customer Support Services Agreement with GoodforYou.com for the new HEMPd product line. Under this contract GoodforYou.com managed inventory and providing storage, shipping, and customer support services. The Company cancelled this contract in December 2018 and is currently performing these functions through other less expensive vendors.

 

Regulatory Requirements

 

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

 

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The production of beverages and other related products;

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The preparation and sale of beverage;

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Environmental protection;

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Interstate commerce and taxation laws; and

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Workplace and safety conditions, minimum wage and other labor requirements

 

The Company’s hemp and CBD products are derived from industrial hemp, not marijuana. There is a clear scientific distinction between the two plants: The Company’s products contain less than 0.3% tetrahydrocannabinol (“THC”), the psychoactive compound found in marijuana. (Most marijuana contains over 10% THC). There is also a clear legal distinction between the two plants. While marijuana is illegal under U.S. federal law, the industrial hemp used in our products is 100% legal at the federal level. It is grown under a duly-licensed state agricultural pilot program conducted by the Colorado Department of Agriculture, as authorized by the 2014 U.S. Farm Bill. The Farm Bill explicitly exempts hemp products from the definition of “marijuana” and explicitly exempts hemp products from the purview and regulation of the Controlled Substances Act. Furthermore, the 2016 Omnibus Appropriations Act specifically instructs federal agencies not to interfere with the transport or sale of pilot program hemp products such as the ones sold by the Company. The 2018 Farm Bill specifically removed hemp from Schedule 1 of the Controlled Substances Act. The law also prohibits states from interfering with the transportation of hemp and hemp products from one state to another.

 

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.

 

 

Employees and Independent Contractors

 

The Company currently has four officers and five 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:

 

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The last day of the fiscal year during which our annual revenues are equal to or exceed $1 billion;

 

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The last day of the fiscal year following the fifth anniversary of our first sale of common stock pursuant to a registration statement filed under the Securities Act of 1933, as amended, which we refer to in this document as the Securities Act;

 

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The date on which we have issued more than $1 billion in nonconvertible debt in a previous three-year period; or

 

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The date on which we qualify as a large accelerated filer under Rule 12b-2 adopted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (i.e., an issuer with a public float of $700 million that has been filing reports with the U.S. Securities and Exchange Commission (“SEC”) under the Exchange Act for at least 12 months).

 

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As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to SEC reporting companies. For so long as we remain an emerging growth company we will not be required to:

 

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Have an auditor report on our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Wall Street Reform and Consumer Protection Act of 2002;

 

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Comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis);

 

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Submit certain executive compensation matters to stockholder non-binding advisory votes;

 

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Submit for stockholder approval golden parachute payments not previously approved;

 

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Disclose certain executive compensation related items, as we will be subject to the scaled disclosure requirements of a smaller reporting company with respect to executive compensation disclosure; and

 

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Present more than two years of audited financial statements and two years of selected financial data in a registration statement for our initial public offering of our securities.

 

 

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:

 

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Have an auditor report on our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act; and

 

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Present more than two years of audited financial statements in our registration statements and annual reports on Form 10-K and present any selected financial data in such registration statements and annual reports.

 

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 S-1/A filed October 9, 2018 to review our current risk factors.

 

Item 2. Properties

 

At present, we do not own any real property. As of December 31, 2018, 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:

 

Lease Period	Base Rent (monthly)
9/1/2016 to 8/31/2017	$7,715.00
9/1/2017 to 8/31/2018	$7,972.17
9/1/2018 to 8/31/2019	$8,229.33

 

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.

 

On January 18, 2018, the RMHC entered into a 12-month office use agreement for office space in Denver, Colorado. Monthly payments are $91. This agreement renewed on January 19, 2019 for another 12-month period.

 

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

 

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Water Event, Carrollton, Texas – We lease space for both hemp-infused beverages and spring water. The Company also stores small quantities of ice barrels and other packaging at this location. As of March 30, 2019, the Company held no inventory at this location.

 

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American Fitness Wholesale, Tempe, Arizona – We lease space on a month-to-month basis for FitWhey beverages at this location.

 

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Pet Healthy Brands, Dallas, Texas – We lease space on a month-to-month basis for packaging and ingredients at this location.

 

Our monthly rent varies 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

 

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.

 

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 1200:1, 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 10,000,000 shares of common stock to Li and the 11,000,000 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 preparing its brief which is currently due April 1, 2019. Grisaffi did not appeal the Order Dismissing Derivative Claims. Grisaffi only seeks in his appeal to reverse in part the Default Judgment by striking the paragraph awarding monetary damages, leaving the remainder of the Default Judgment intact.

 

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

 

This is 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 11,000,000 shares of common stock to Epic Group One, LLC, and 10,000,000 shares of common stock to Li for no consideration, and (iii) causing the issuance of 113,688,625 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.

 

The amount of damages and attorneys’ fees to be awarded to RMHB and against LSW Holdings and Li will be determined in a trial currently scheduled for June 3, 2019. We are continuing to pursue our claims against the remaining defendants in the case, which will be adjudicated at trial, currently scheduled for June 3, 2019.

 

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

 

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

 

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

 

The Plaintiff sued the Company, seeking $21,000.00 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.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

PART II

 

Item 5. Unregistered Sales of Equity Securities and Use of Proceeds Between November 17, 2018 and March 30, 2019:

Date	Name	Shares Issued		Issue Price	Description	Exemption
11/29/2018	GHS Investments	10,000,000	$	0.005	Note Payable Conversion	Rule 506
12/4/2018	GHS Investments	14,561,852		0.005	Note Payable Conversion	Rule 506
12/13/2018	GHS Investments	33,116,385		0.007	Shares Sold	Rule 506
1/2/2019	John Kuhlke	508,062		0.008	Services Rendered	Section 4(2)
1/2/2019	GHS Investments	10,000,000		0.005	Note Payable Conversion	Rule 506
1/7/2019	GHS Investments	46,276,982		0.007	Shares Sold	Rule 506
1/25/2019	GHS Investments	10,000,000		0.005	Note Payable Conversion	Rule 506
2/4/2019	GHS Investments	15,000,000		0.005	Note Payable Conversion	Rule 506
2/5/2019	GHS Investments	25,247,856		0.007	Shares Sold	Rule 506
2/22/2019	GHS Investments	23,358,593		0.007	Shares Sold	Rule 506
3/7/2019	GHS Investments	30,606,307		0.006	Shares Sold	Rule 506
3/20/2019	GHS Investments	30,776,999		0.006	Shares Sold	Rule 506

 

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 years ended December 31, 2018, 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.

 

Quarter Ended:			High Sale Price				Low Sale Price
March 31, 2017			$	0.15			$	0.04
June 30, 2017			$	0.10			$	0.07
September 30, 2017			$	0.07			$	0.02
December 31, 2017			$	0.03			$	0.01
March 31, 2018			$	0.01			$	0.03
June 30, 2018			$	0.01			$	0.02
September 30, 2018			$	0.01			$	0.01
December 31, 2018			$	0.01			$	0.01

 

On April 10, 2019, the last sales price per share of our common stock was $0.0057.

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.

 

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.

 

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

 

On December 19, 2017 the Board of Directors increased the authorized shares in the 2017 Incentive Plan to 100,000,000 and issued 33,100,000 options to members of the Board, management and employees.

 

During the year ended December 31, 2017 the Board granted 31,000,000 to two new members of the Board of Directors (Mr. Gerry David and Mr. Kevin Harrington), 1,690,000 options to consultants, and 35,100,000 options to other members of the Board of Directors, officers and employees. Messrs. David and Harrington resigned from the Board of Directors in July 2017 and joined the newly formed Advisory Board to the Board of Directors at that time.

 

During the year ended December 31, 2018 the Board granted 13,312,458 options to members of the Advisory Board and 254,310 options to consultants.

 

On January 31, 2019, 43,715,482 options were forfeited by former members of the Board of Directors. On February 28, 2019, 851,286 options were forfeited by former consultants.

 

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:

 

•

Statements regarding our anticipated financial and operating results, including increases in and anticipated sources of revenues;

•

Predictions regarding the outcome of pending legal proceedings and the impact on us of pending legal proceedings;

•

Statements regarding anticipated changes in expenses;

•

Statements regarding our goals, intensions, plans and expectations, including selling and marketing plans generally, the introduction of new products, and markets and locations we intend to target in the future

•

Statements regarding expanded business opportunities in 2019;

•

Our expectation that we will sell securities on our balance sheet;

•

Our expectation regarding repayment of loans;

•

Expected uses of cash in 2019 and beyond; and

•

Statements with respect to having adequate liquidity

 

 

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:

 

•

Negative changes in public sentiment towards acceptance of the use of hemp- and CBD-infused drinks and other products;

•

Other regulatory developments that could limit the market for our products;

•

Our ability to successfully integrate acquired entities;

•

Competitive developments, including the possibility of new entrants into our primary markets;

•

The loss of key personnel; and

•

Other risks discussed in this document

 

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 certain 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 December 31, 2018 Compared to the Year Ended December 31, 2017

 

Financial Summary

 

The Company’s sales for the year ended December 31, 2018 were $379,238 compared to $141,289 for the year ended December 31, 2017.

 

The Company’s net loss for the year ended December 31, 2018 was $3,355,937 compared to a net loss of $11,643,339 for the year ended December 31, 2017.

 

Sales

 

For the year ended December 31, 2018, sales were $379,238 compared to $141,289 for the year ended December 31, 2017, an increase of $237,949 or 168%. The sales increase was driven by the introduction of our new line of HEMPd products in March 2018, sales of FitWhey products, and increased sales of our high alkaline natural spring water. These sales increases were partially offset by the decrease in sales of our Rocky Mountain High branded hemp-infused energy drinks as the Company sold off remaining inventory in anticipation of the 2019 rebranding of these drinks. For the year ended December 31, 2018, sales by channel were 21% distributor, 12% retailer, and 67% online compared to the year ended December 31, 2017 during which sales by channel were 24% distributor, 15% retailer, and 61% online.

 

Cost of Sales

 

For the year ended December 31, 2018, cost of sales was $410,818 or 108% of sales, versus $297,487 or 211% of sales for the year ended December 31, 2017, an increase of $113,331 or 38%. In 2018 the Company recorded inventory obsolescence expense of $25,145 compared to $165,271 in 2017. In 2018 the obsolescence expense related primarily to E-Juice and vape products that the Company no longer carries. In 2017 the obsolescence expense was comprised of the write-down of the remaining hemp-infused beverage and shots inventory to reflect selling price reductions.

 

 

Operating Expenses

 

For the year ended December 31, 2018, operating expenses were $4,523,108, compared to $7,407,789 for the year ended December 31, 2017, a decrease of $2,884,681 or 38%. Areas in which the Company experienced significant changes in operating expenses are discussed below.

 

General and Administrative

 

For the year ended December 31, 2018, general and administrative expenses were $3,689,175 or 973% of sales, compared to $6,465,861 or 4576% of sales for the year ended December 31, 2017, a decrease of $2,776,686 or 42%. The decrease in general and administrative expenses in 2018 was driven by decreases in compensation expense to former members of the Board of Directors and bad debt expense, partially offset by increases in legal expenses.

 

Advertising and Marketing

 

For the year ended December 31, 2018, advertising and marketing expenses were $833,933 or 220% of sales, compared to $882,765 or 625% of sales for the year ended December 31, 2017, a decrease of $48,832 or 6%. The decrease in advertising and marketing expenses in 2018 was a result of management’s decision to decrease advertising and marketing expenditures on the Company’s hemp-infused beverages and energy shots, partially offset by an increase in costs related to the launch of the new HEMPd products and advertising for the newly-acquired FitWhey brand. Additionally, in 2017 the Company executed a large marketing contract with a third-party promoter and issued stock to a distributor in exchange for promotional activity.

 

Impairment Expense

 

During the year ended December 31, 2017, the Company recorded an impairment expense of $59,163 related to its investment in Rocky Mountain High Water Company. This represented a 100% impairment on this investment. There was no impairment recorded in 2018.

 

Other (Income) Expense

 

Interest Expense

 

For the year ended December 31, 2018, interest expense was $1,275,693, compared to $2,700,221 for the year ended December 31, 2017, a decrease of $1,424,528 or 53%. The decrease in interest expense, which includes the amortization of the discount on convertible debt, beneficial conversion features on convertible debt, interest on Series C Preferred Stock, and interest on newly issued convertible debt was due to decreased debt activity in 2018.

 

Gain (Loss) on Extinguishment of Debt

 

For the year ended December 31, 2018, the Company recorded a net loss on extinguishment of debt of $191,138 related to the settlement of convertible debt. During the year ended December 31, 2017, the Company recorded a net gain on extinguishment of debt of $1,200,092 related to the settlement of convertible debt.

 

Gain on Change in Redemption Value of Series C Preferred Stock

 

For the year ended December 31, 2017, the Company recorded a gain of $834,242 on the change in redemption value of Series C Preferred Stock related to the valuation of these shares. There was no change in redemption value in 2018 as the Series C Preferred Stock was cancelled in October 2017 as part of a legal settlement with the holder.

 

Gain on Lawsuit Judgment and Legal Settlement

 

For the year ended December 31, 2018, the Company recorded a $654,289 gain on a lawsuit judgment against the Company’s former Chairman of the Board, a $34,435 gain related to the settlement of a lawsuit with Statewide Beverage, and a gain on a judgment against the holder of our Series A Preferred Stock of $1,000, which represented the par value of the 1,000,000 shares. There were no such gains in 2017.

 

 

Gain (Loss) on Change in Fair Value of Derivative Liability

 

For the year ended December 31, 2018, the Company recorded a gain on the change in fair value of derivative liability of $1,975,858 compared to a loss of $3,413,465 for the year ended December 31, 2017. In 2018 the gain resulted from the decrease in the price of the Company’s underlying stock, which is used to calculate the fair value of the related derivative liability, from the beginning of the nine-month period to the end of the period and a decrease in the balance of variable rate convertible notes payable. In 2017 the gain resulted from an increase in the risk-free interest rate and the Company’s stock volatility factors that are inputs in the derivative liability calculation.

 

Income Taxes

 

For the years ended December 31, 2018 and December 31, 2017, the Company recorded no income tax provision due to a full valuation allowance provided on deferred tax assets resulting from net operating losses.

 

Six Months Ended December 31, 2017 Compared to Six Months Ended December 31, 2016

 

Financial Summary

 

The Company’s sales for the six months ended December 31, 2017 were $59,653 compared to $320,338 for the six months ended December 31, 2016.

 

The Company’s net loss for the six months ended December 31, 2017 was $5,507,781 compared to a net loss of $3,140,693 for the six months ended December 31, 2016.

 

Sales

 

For the six months ended December 31, 2017, sales were $59,653 compared to $320,338 for the six months ended December 31, 2016, a decrease of $260,685 or 81%. The sales decrease was driven primarily by the lack of funding for inventory production, direct sales support, and advertising and promotion of the Company’s products. Also, in 2017 the Company has reduced prices on its existing drinks and shots inventory in order to clear out existing inventory and prepare for the launch of its new HEMPd product line. The prior year sales amount included a large sale to a distributor. In the six months ended December 31, 2017 sales consisted of approximately 68% online sales, 22% retailer sales, and 10% distributor sales, compared to 97% distributor sales and 3% online sales for the six months ended December 31, 2016.

 

Cost of Sales

 

For the six months ended December 31, 2017, cost of sales was $173,043 or 290% of sales, versus $127,476 or 40% of sales for the six months ended December 31, 2016, an increase of $45,567 or 36%. In 2017 the Company recorded inventory obsolescence expense of $93,110 compared to $28,837 in 2016, resulting in a high cost of sales percentage. In 2017 the obsolescence expense was comprised of the write-down of the remaining hemp-infused beverage and shots inventory to reflect selling price reductions. In 2016, the obsolescence expense was due to the write-off of the Company’s expired brownie inventory.

 

Operating Expenses

 

For the six months ended December 31, 2017, operating expenses were $2,744,840 or 4,214% of sales, compared to $2,602,148 or 812% of sales for the six months ended December 31, 2016, an increase of $142,692 or 6%. Areas in which the Company experienced significant changes in operating expenses are discussed below.

 

General and Administrative

 

For the six months ended December 31, 2017, general and administrative expenses were $2,567,486 or 4,304% of sales, compared to $1,853,089 or 579% of sales for the six months ended December 31, 2016, an increase of $714,396 or 39%. The increase in general and administrative expenses in 2017 was driven by fees and penalties paid on convertible debt.

 

 

Advertising and Marketing

 

For the six months ended December 31, 2017, advertising and marketing expenses were $118,191 or 198% of sales, compared to $749,059 or 234% of sales for the six months ended December 31, 2016, a decrease of $630,868 or 84%. The decrease in advertising and marketing expenses in 2017 was driven by the lack of funding for advertising and promotional expenditures and the decreased need to advertise and promote the Company’s existing products in anticipation of the launch of the new product line.

 

Impairment Expense

 

During the six months ended December 31, 2017, the Company recorded an impairment expense of $59,163 related to its investment in Rocky Mountain High Water Company. This represented a 100% impairment on this investment. There was no impairment recorded during the six months ended December 31, 2016.

 

Other (Income) Expense

 

Interest Expense

 

For the six months ended December 31, 2017, interest expense was $2,054,438, compared to $398,648 for the six months ended December 31, 2016, an increase of $1,655,790 or 415%. The increase in interest expense, which includes the amortization of the discount on convertible debt, beneficial conversion features on convertible debt, interest on Series C Preferred Stock, and interest on newly issued convertible debt was due to increased debt activity in 2017.

 

Gain on Extinguishment of Debt

 

For the six months ended December 31, 2017, the Company recorded a gain of $1,200,092 on the extinguishment of debt. The gain was a result of the amendment of two convertible notes into non-convertible notes. There was no change gain or loss on the extinguishment of debt during the six months ended December 31, 2016.

 

Loss on Change in Fair Value of Derivative Liability

 

For the six months ended December 31, 2017, the Company recorded a loss on the change in fair value of derivative liability of $1,795,205 compared to a loss of $332,759 during the six months ended December 31, 2016. In 2017 the loss resulted from the increase in convertible debt and the related increase in the value of the conversion features, partially offset by the decrease 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, 2017 to December 31, 2017. The smaller loss in 2016 resulted from the relative stability of the price of the Company’s common stock between July 1, 2016 and December 31, 2017.

 

Income Taxes

 

For the six months ended December 31, 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 December 31, 2018, we had current assets of $1,165,806, consisting of cash of $613,686, accounts receivable (net) of $17,324, inventory of $146,722, and prepaid expenses and other current assets of $388,074. As of December 31, 2018, we had current liabilities of $2,077,533, consisting of accounts payable and accrued liabilities of $505,214, convertible notes payable (net) of $666,596, other notes payable of $37,493, accrued interest of $25,758, deferred revenue of $466,300, and derivative liability of $376,172.

 

Cash flows from operating activities

 

Net cash used in operating activities during the year ended December 31, 2018 was $3,728,782 compared to $1,949,322 during the year ended December 31, 2017. In both years, the Company used funds for advertising, promotions, storage, and administrative expenses.

 

 

Cash flows from investing activities

 

Net cash used in investing activities during the year ended December 31, 2018 was $33,915 compared to $14,125 during the year ended December 31, 2017. In 2018 the increase consisted of software expenditures for the Company’s new HEMPd.com website. Property and equipment purchases in both years consisted of office and computer equipment.

 

Cash flows from financing activities

 

Net cash provided by financing activities during the year ended December 31, 2018 was $4,359,400 compared to $1,825,369 during the year ended December 31, 2017. In 2018, proceeds of $877,500 were from the issuance of convertible notes payable compared to $590,000 in 2017. In 2018 the Company repaid $172,932 of convertible notes. In 2017 the Company received proceeds of $289,000 and $440,000 from the issuance of related party convertible notes and notes payable, respectively. In 2018, the Company repaid notes payable of $14,672. In 2017, the Company repaid related party convertible notes of $25,000 and notes payable of $11,831. In the years ended December 31, 2018 and 2017, the Company received proceeds from sales of common stock of $3,669,504 and $543,200, respectively.

 

Material Indebtedness

 

As of December 31, 2018 and 2017, the Company’s outstanding debt, net of discounts, totaled $704,089 and $1,402,090, respectively. The decrease in debt during the year ended December 31, 2018 resulted from the conversion of notes payable to common stock, the repayment of debt, and the extinguishment of debt based on a court ruling in a lawsuit against our former Chairman of the Board.

 

During 2017 our operations were funded primarily through the issuance of convertible promissory notes, which were convertible to common stock at fixed prices or at a specified percentage discount off market prices. On October 12, 2017, the Company executed an Equity Financing Agreement (“EFA”) with GHS Investments, LLC (“GHS”). Under the agreement, GHS committed to purchase up $12 million of the Company’s common stock over a 24-month period at a 20% discount off the market price, as defined in the agreement. The agreement contained certain restrictions on the timing of the stock purchases and required the Company to file a registration statement with the Securities and Exchange Commission (“SEC”) to register the common shares issuable under the agreement. The Company filed the registration statement on Form S-1 with the SEC on November 1, 2017. Between November 1, 2017 and the date of the effectiveness of the Form S-1, the Company entered into convertible promissory notes payable with GHS totaling $1,087,490. As of December 31, 2018, the majority of these notes had been repaid or converted for common stock and the remaining principal balance was $212,329.

 

On June 27, 2018, the Company entered into a Securities Purchase Agreement (“SPA”) with 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 EFA the Company entered into with GHS on October 12, 2017. On August 8, 2018, the Company filed a registration statement on Form S-1 with the Securities and Exchange Commission (“SEC”) to register up to 320,000,000 shares of our common stock to be purchased by GHS under the SPA. The registration statement became effective on October 10, 2018. Between August 8, 2018 and the effectiveness of the Form S-1 on October 10, 2018 the Company entered into convertible promissory notes payable totaling $658,750. As of December 31, 2018, the principal balance of these notes was $658,750.

 

As of December 31, 2018, convertible promissory notes payable were convertible for common stock at fixed prices ranging from $.005 to $.008 or at a discount to market price, as defined, of 50%.

 

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.

 

Future Liquidity Requirements

 

During the year ending December 31, 2019, the Company expects to have an operational cash shortfall of approximately $1,000,000 to $1,500,000 depending on the timing, development, and advertising and marketing needs related to our future product rollouts. Our cash needs will be higher in the first half of 2019. In the second half of 2019, we expect our outside cash needs to lessen with a net operational positive cash flow in the fourth quarter of 2019. We expect our operational cash needs will be met by our current funding arrangements with GHS.

 

Off-Balance Sheet Arrangements

 

As of December 31, 2018, there were no off-balance sheet arrangements

 

Going Concern

 

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has a shareholders’ deficit of $702,555, an accumulated deficit of $35,018,351 as of December 31, 2018, 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 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. In October 2018 the Company began sales of common stock to GHS under the SPA. Management believes the SPA will provide sufficient cash flows until cash flows from operations become consistently positive.

 

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.

 

Revenue Recognition

 

The Company follows the guidance of the Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers,” as amended. We record 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:

 

Balance, June 30, 2017		$	5,072,579
Issued			4,017,623
Exercises/Conversions		$	(5,276,018)
Change in fair value recognized in operations		$	1,795,205
Balance, December 31, 2017		$	5,609,389
Issued		$	—
Exercises/Conversions		$	(3,257,359)
Change in fair value recognized in operations		$	(1,975,858)
Balance, December 31, 2018		$	376,172

 

The estimated fair value of the derivative instruments was valued using the Black-Scholes option pricing model, using the following assumptions as of December 31, 2018 and December 31, 2017:

 

		December 31, 2018			December 31, 2017
Estimated dividends			None			None
Expected volatility			106%			114%
Risk free interest rate			2.41%			.84%
Expected term			.1 to 4.0 years			1 to 2.0 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.

 

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. During the six months and year ended December 31, 2017 the Company recorded an impairment charge on the goodwill related to the acquisition of Rocky Mountain High Water Company in the amount of $59,163. As of December 31, 2018 and 2017, the goodwill related to this acquisition is fully impaired. No impairment charges were recorded during the year ended December 31, 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 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 classify our preferred shares in shareholders’ 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’ equity (deficit).

 

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 February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 840), 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 January 1, 2020. The Company is currently evaluating the impact that ASU 2016-02 will have on its consolidated financial statements.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires the immediate recognition of management’s estimates of current and expected credit losses. ASU 2016-13 is effective for the Company beginning January 1, 2021. The Company is currently evaluating the potential impact of adopting this guidance on our financial statements.

 

In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business (Topic 805), 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 January 1, 2019. The impact on our consolidated financial statements will depend on the facts and circumstances of any specific future transactions.

 

In May 2018, the FASB issued ASU 2018-09, Compensation-Stock Compensation: Scope of Modification Accounting. This ASU amends the scope of modification accounting for share-based payment arrangements, provides guidance on the types of changes to the terms or conditions of share-based payment awards an entity is required to apply modification accounting under ASC 718. This update is effective for the Company beginning January 1, 2021. The Company is currently evaluating the impact that ASU 2018-09 will have on its consolidated financial statements.

 

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The guidance is intended to reduce the complexity associated with issuers’ accounting for share-based payment transactions for acquiring goods and services. The ASU is effective for the Company beginning January 1, 2022. The Company is currently evaluating the impact that ASU 2018-07 will have on its consolidated financial statements.

 

In July 2018, the FASB issued ASU 2018-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480): Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. The guidance is intended to reduce the complexity associated with issuers’ accounting for certain financial instruments with characteristics of liabilities and equity. Specifically, a down round feature (as defined) would no longer cause a freestanding equity-linked financial instrument (or an embedded conversion option) to be accounted for as a derivative liability at fair value with changes in fair value recognized in current earnings. The amendments in this ASU are effective for the Company beginning January 1, 2020. The Company is currently evaluating the impact that ASU 2018-11 will have on its consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurements: Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement. This update modifies the disclosure requirements on fair value measurements in Topic 820. The ASU is effective for the Company beginning January 1, 2021. The Company is currently evaluating the impact that ASU 2018-13 will have on its consolidated financial statements.

 

 

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:

 

F-1		Report of Prager Metis, CPAs, LLC, Independent Registered Public Accounting Firm
F-2		Report of Paritz & Company, P.A., Independent Registered Public Accounting Firm
F-3		Consolidated Balance Sheets as of December 31, 2018 and December 31, 2017
F-4		Consolidated Statements of Operations for the years ended December 31, 2018 and December 31, 2017, and the six months ended December 31, 2017 and December 31, 2016
F-5		Consolidated Statements of Cash Flows for the years ended December 31, 2018 and December 31, 2017, and the six months ended December 31, 2017 and December 31, 2016
F-6		Consolidated Statements of Shareholder’s Deficit for the years ended December 31, 2018 and December 31, 2017
F-7		Consolidated Statements of Shareholder’s Deficit for the six months ended December 31, 2017 and December 31, 2016
F-8		Notes to Consolidated Financial Statements.

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Stockholders of

Rocky Mountain High Brands, Inc.

 

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheet of Rocky Mountain Brands, Inc. (the Company) as of December 31, 2018, and the related consolidated statement of operations, stockholders’ deficit, and cash flows for the year ended December 31, 2018, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for the year ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 3 to the consolidated financial statements, the Company has a shareholders’ deficit of $702,555, an accumulated deficit of $35,018,351 as of December 31, 2017, and has generated operating losses since inception. These factors, among others, raise substantial doubt regarding the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3 to the accompanying financial statements. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, 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.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Prager Metis CPA’s LLC
We have served as the Company’s auditor since 2018.
Hackensack, New Jersey
April 12, 2019

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Stockholders of

Rocky Mountain High Brands, Inc.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheet of Rocky Mountain Brands, Inc. (the Company) as of December 31, 2017, and the related consolidated statement of operations, stockholders’ deficit, and cash flows for the six months ended December 31, 2017, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and the results of its operations and its cash flows for the six months ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, 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.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 3 to the consolidated financial statements, the Company has a shareholders’ deficit, an accumulated deficit, and a working capital deficit as of December 31, 2017, and has generated operating losses since inception. These factors, among others, raise substantial doubt regarding the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3 to the accompanying financial statements. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ Paritz & Company, P.A.
We have served as the Company’s auditor since 2015.
Hackensack, New Jersey
April 2, 2018

 

 

Rocky Mountain High Brands, Inc.

Consolidated Balance Sheets

 

		December 31, 2018				December 31, 2017
CURRENT ASSETS
Cash		$	613,686			$	16,983
Accounts Receivable, net of allowance of $5,275 and $195,632, respectively			17,324				2,844
Inventory			146,722				82,312
Prepaid Expenses and Other Current Assets			388,074				634,722
TOTAL CURRENT ASSETS			1,165,806				736,861
Property and Equipment, net			34,280				35,681
Intangible Assets			148,647				—
Other Assets			26,245				29,093
TOTAL ASSETS		$	1,374,978			$	801,635
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts Payable and Accrued Liabilities		$	505,214			$	750,807
Related Party Convertible Notes Payable, net of debt discount			—				174,456
Convertible Notes Payable, net of debt discount			666,596				677,698
Notes Payable			37,493				549,936
Redemption Value of Series C Preferred Stock			—				—
Accrued Interest			25,758				81,248
Deferred Revenue			466,300				—
Derivative Liability			376,172				5,609,389
TOTAL CURRENT LIABILITIES			2,077,533				7,843,534
SHAREHOLDERS' DEFICIT
Preferred Stock - Series A - Par Value of $.001;  1,000,000 shares designated; No shares issued and outstanding as of December 31, 2018 and 1,000,000 shares issued and outstanding as of December 31, 2017			—				1,000
Preferred Stock - Series B - Par Value of $.001;  7,000,000 shares designated; No shares issued and outstanding as of December 31, 2018 and December 31, 2017			—				—
Preferred Stock - Series C - Par Value of $.001;  2,000,000 shares designated; No shares issued and outstanding as of December 31, 2018 and December 31, 2017			—				—
Preferred Stock - Series D - Par Value of $.001;  2,000,000 shares designated; No shares issued and outstanding as of December 31, 2018 and December 31, 2017			—				—
Preferred Stock - Series E - Par Value of $.001;  789,474 shares designated; No shares issued and outstanding as of December 31, 2018 and December 31, 2017			—				—
Common Stock - Par Value of $.001;  4,000,000,000 shares authorized as of December 31, 2018 and December 31, 2017; 1,891,617,372 shares issued and outstanding as of December 31, 2018; 1,159,706,457 shares issued and outstanding as of December 31, 2017			1,891,617				1,159,706
Additional Paid-In Capital			32,424,179				23,459,809
Accumulated Deficit			(35,018,351	)			(31,662,414)
TOTAL SHAREHOLDERS' DEFICIT			(702,555	)			(7,041,899)
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT		$	1,374,978			$	801,635

   

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

 

 

Rocky Mountain High Brands, Inc.

Consolidated Statements of Operations

 

		Year Ended								Six Months Ended
		December 31, 2018				December 31, 2017				December 31, 2017				December 31, 2016
						(Unaudited)								(Unaudited)
Sales		$	379,238			$	141,289			$	59,653			$	320,338
Cost of Sales			385,673				132,216				79,933				98,639
Inventory Obsolescence			25,145				165,271				93,110				28,837
Gross Profit (Loss)			(31,580	)			(156,198	)			(113,390	)			192,862
Operating Expenses
General and Administrative			3,689,175				6,465,861				2,567,486				1,853,089
Advertising and Marketing			833,933				882,765				118,191				749,059
Impairment Expense			—				59,163				59,163				—
Total Operating Expenses			4,523,108				7,407,789				2,744,840				2,602,148
Loss from Operations			(4,554,688	)			(7,563,987	)			(2,858,230	)			(2,409,286)
Other (Income)/Expenses:
Interest Expense			1,275,693				2,700,221				2,054,438				398,648
(Gain) Loss on Extinguishment of Debt			191,138				(1,200,092	)			(1,200,092	)			—
(Gain) Loss on Change in Redemption Value of Series C Preferred Stock			—				(834,242	)			—				—
(Gain) Loss on Lawsuit Judgment and Legal Settlement			(689,724	)			—				—				—
(Gain) Loss on Change in Fair Value of Derivative Liability			(1,975,858	)			3,413,465				1,795,205				332,759
Total Other (Income) Expenses			(1,198,751	)			4,079,352				2,649,551				731,407
Loss Before Income Tax Provision			(3,355,937	)			(11,643,339	)			(5,507,781	)			(3,140,693)
Income Tax Provision			—				—				—				—
Net Loss		$	(3,355,937	)		$	(11,643,339	)		$	(5,507,781	)		$	(3,140,693)
Net Loss per Common Share - Basic and Diluted		$	(0.00	)		$	(0.01	)		$	(0.01	)		$	(0.00)
Weighted Average Shares Outstanding			1,605,719,345				813,528,472				855,469,994				629,289,895

 

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

 

  

Rocky Mountain High Brands, Inc.

Consolidated Statements of Cash Flows

 

		Year Ended								Six Months Ended
		December 31, 2018				December 31, 2017				December 31, 2017				December 31, 2016
						(Unaudited)								(Unaudited)
Operating Activities:
Net Loss		$	(3,355,937	)		$	(11,643,339	)		$	(5,507,781	)		$	(3,140,693)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation			456,007				1,976,388				468,291				409,062
Stock-based payments to vendors			80,445				548,084				—				465,267
Warrants and options issued for services rendered			108,205				1,846,944				180,163				407,447
Non-cash interest expense			1,160,857				2,700,220				2,054,438				398,649
Fees and penalties on debt			120,251				729,929				729,929				—
Gain on change in redemption value of Series C Preferred Stock			—				(834,242	)			—				—
Gain on lawsuit judgment and legal settlement			(689,724	)			—				—				—
(Gain) Loss on change in fair value of derivative liability			(1,975,858	)			3,413,465				1,795,205				332,759
(Gain) Loss on extinguishment of debt			191,138				(1,200,092	)			(1,200,092	)			—
Bad debt expense			1,536				246,520				61,554				—
Loss on disposal of equipment			—				15,912				—				43,221
Depreciation and amortization expense			34,423				25,211				13,116				18,691
Impairment expense			—				59,163				59,163				—
Inventory obsolescence			25,145				165,271				93,110				28,837
Changes in operating assets and liabilities:
Accounts receivable			(16,017	)			13,064				(1,131	)			(242,052)
Inventory			(89,556	)			(29,312	)			49,273				43,260
Prepaid expenses			(22,076	)			(169,470	)			3,966				164,928
Other assets			(12,765	)			(7,569	)			(11,000	)			(3,431)
Accounts payable and accrued liabilities			(211,156	)			194,531				375,462				284,253
Deferred revenue			466,300				—				—				—
NET CASH USED IN OPERATING ACTIVITIES			(3,728,782	)			(1,949,322	)			(836,334	)			(789,802)
Investing Activities:
Investments in other assets			(31,220	)			(4,252	)			—				(39,774)
Cash acquired in business acquisition			15,612
Acquisition of property and equipment			(18,307	)			(10,705	)			(1,496	)			(36,635)
Disposal of property and equipment			—				832				832				—
NET CASH USED IN INVESTING ACTIVITIES			(33,915	)			(14,125	)			(664	)			(76,409)
Financing Activities:
Proceeds from issuance of convertible notes			877,500				590,000				220,000				330,000
Repayment of convertible notes			(172,932	)			—				—				—
Proceeds from issuance of related party convertible notes			—				289,000				100,000				100,600
Repayment of related party convertible notes			—				(25,000	)			—				—
Proceeds from issuance of notes payable			—				440,000				440,000				35,960
Repayment of notes payable			(14,672	)			(11,831	)			(6,194	)			(4,193)
Proceeds from issuance of common stock			3,669,504				543,200				8,500				456,650
NET CASH PROVIDED BY FINANCING ACTIVITIES			4,359,400				1,825,369				762,306				919,017
INCREASE (DECREASE) IN CASH			596,703				(138,078	)			(74,692	)			52,806
CASH - BEGINNING OF PERIOD			16,983				155,061				91,675				102,255
CASH - END OF PERIOD		$	613,686			$	16,983			$	16,983			$	155,061
Supplemental cash flow information:
Cash paid for interest		$	56,742			$	1,654			$	740			$	705
Cash paid for taxes		$	—			$	—			$	—			$	—
Supplemental disclosure of non-cash financing and investing activities:
Common stock issued for conversion of debt		$	4,000,604			$	3,056,572			$	3,055,140			$	188,023
Common stock issued for acquisition		$	75,000			$	—			$	—			$	—
Common stock issued as part of legal settlement		$	—			$	1,439,975			$	1,439,975			$	500,000
Debt and accrued interest converted for common stock		$	499,053			$	3,951,186			$	3,889,083			$	442,633
Derivative liability relieved upon conversion of related debt		$	3,021,935			$	5,310,518			$	5,276,018			$	318,125
Derivative liability incurred for debt discount		$	—			$	4,676,772			$	4,017,622			$	—
Beneficial conversion feature recognized as debt discount		$	1,351,790			$	—			$	—			$	212,771
Series C Preferred Stock redeemed for common stock		$	—			$	1,661,424			$	1,661,424			$	—

 

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

 

 

Rocky Mountain High Brands, Inc.

Consolidated Statement of Shareholders' Deficit for the Year Ended December 31, 2018

 

			Common Stock								Preferred Stock A								Preferred Stock C								Preferred Stock E
			Shares				Amount				Shares				Amount				Shares				Amount				Shares				Amount				APIC				Accumulated Deficit				Equity/(Deficit)
Balance - December 31, 2017			1,159,706,457			$	1,159,706				1,000,000			$	1,000				—			$	—				—			$	—			$	23,459,809			$	(31,662,414	)		$	(7,041,899)
Shares issued for cash			386,051,448				386,051																												3,283,452								3,669,503
Shares issued for compensation			13,597,469				13,598																												144,589								158,187
Shares issued for stock option exercises			29,096,402				29,096																																				29,096
Options issued for compensation			—				—																												108,205								108,205
Shares issued upon conversion of convertible notes			289,370,558				289,370																												3,731,895								4,021,265
Shares to vendors for services rendered			8,150,531				8,151																												74,112								82,263
Shares issued for acquisition			7,462,688				7,463																												67,537								75,000
Shares returned as part of lawsuit judgment and legal settlement			(1,818,181	)			(1,818	)			(1,000,000	)			(1,000	)																											(2,818)
Beneficial conversion feature recognized on convertible notes payable			—				—																												1,554,580								1,554,580
Net loss for the year ended December 31, 2018			—				—				—				—				—				—				—				—				—				(3,355,937	)			(3,355,937)
Balance - December 31, 2018			1,891,617,372			$	1,891,617				—			$	—				—			$	—				—			$	—			$	32,424,179			$	(35,018,351	)		$	(702,555)

 

 

 

Rocky Mountain High Brands, Inc.

Consolidated Statement of Shareholders' Deficit for the Year Ended December 31, 2017

(Unaudited)

 

		Common Stock								Preferred Stock A								Preferred Stock C								Preferred Stock E
		Shares				Amount				Shares				Amount				Shares				Amount				Shares				Amount				APIC				Accumulated Deficit				Equity/(Deficit)
Balance - December 31, 2016			735,080,314			$	735,081				1,000,000			$	1,000				—			$	—				—			$	—			$	14,727,383			$	(20,019,075	)		$	(4,555,611)
Shares issued for cash			24,682,293				24,682								—								—								—				518,518								543,200
Shares issued for compensation			700,550				701								—								—				789,474				789				29,570								31,060
Warrant exercise			1,500,000				1,500								—								—								—				33,000								34,500
Preferred shares converted to common shares			789,474				789																				(789,474	)			(789	)			14,211								14,211
Shares issued upon conversion of convertible notes			323,331,050				323,330								—								—								—				3,872,003								4,195,333
Stock options issued to Board members and employees			—				—								—								—								—				1,642,127								1,642,127
Shares to vendors for services rendered			28,622,776				28,623								—								—								—				1,266,023								1,294,646
Shares issued as part of a legal settlement			45,000,000				45,000				—				—								—								—				1,356,975								1,401,975
Beneficial conversion feature recognized on convertible notes payable			—				—								—								—								—				—								—
Net loss for the year ended December 31, 2017			—				—				—				—				—				—				—				—				—				(11,643,339	)			(11,643,339)
Balance - December 31, 2017			1,159,706,457			$	1,159,706				1,000,000			$	1,000				—			$	—				—			$	—			$	23,459,809			$	(31,662,414	)		$	(7,041,899)

 

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

 

 

Rocky Mountain High Brands, Inc.

Consolidated Statement of Shareholders' Deficit for the Six Months Ended December 31, 2017

 

		Common Stock								Preferred Stock A								Preferred Stock C								Preferred Stock E
		Shares				Amount				Shares				Amount				Shares				Amount				Shares				Amount				APIC				Accumulated Deficit				Equity/(Deficit)
Balance - June 30, 2017			786,525,118			$	786,525				1,000,000			$	1,000				—			$	—				—			$	—			$	18,062,830			$	(26,154,633	)		$	(7,304,278)
Shares issued for cash			500,000				500																												8,000								8,500
Shares issued for compensation																											789,474				789				14,211								15,000
Preferred shares converted to common shares			789,474				789																				(789,474	)			(789	)											—
Stock options issued to Board members and employees																																			179,116								179,116
Shares issued upon conversion of convertible notes			321,291,865				321,292																												3,626,114								3,947,406
Stock options issued for services rendered			5,600,000				5,600																												174,563								180,163
Shares issued as part of a legal settlement			45,000,000				45,000																												1,394,975								1,439,975
Net loss for the six months ended December 31, 2017			—				—				—				—				—				—				—				—				—				(5,507,781	)			(5,507,781)
Balance - December 31, 2017			1,159,706,457			$	1,159,706				1,000,000			$	1,000				—			$	—				—			$	—			$	23,459,809			$	(31,662,414	)		$	(7,041,899)

 

 

 

Rocky Mountain High Brands, Inc.

Consolidated Statement of Shareholders' Deficit for the Six Months Ended December 31, 2016

 

		Common Stock								Preferred Stock A								Preferred Stock C								Preferred Stock E
		Shares				Amount				Shares				Amount				Shares				Amount				Shares				Amount				APIC				Accumulated Deficit				Equity/(Deficit)
Balance - June 30, 2016			537,989,764			$	537,990				1,000,000			$	1,000				—			$	—				—			$	—			$	12,366,476			$	(16,878,382	)		$	(3,972,916)
Shares issued for cash			41,485,294				41,485																												415,165								456,650
Shares issued for compensation			11,933,557				11,934																												399,330								411,264
Shares issued for services rendered			15,701,363				15,701																												449,567								465,268
Shares issued upon conversion of convertible notes			75,761,502				75,762																												112,261								188,023
Cashless warrant exercise			45,408,834				45,409																												278,614								324,023
Shares issued as part of a legal settlement			6,800,000				6,800																												493,199								499,999
Beneficial conversion feature on convertible related party notes payable																																			212,771								212,771
Net loss for the six months ended December 31, 2016			—				—				—				—				—				—				—				—				—				(3,140,693	)			(3,140,693)
Balance - December 31, 2016			735,080,314			$	735,081				1,000,000			$	1,000				—			$	—				—			$	—			$	14,727,383			$	(20,019,075	)		$	(4,555,611)

 

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

 

 

Rocky Mountain High Brands, Inc. 

Notes to Consolidated Financial Statements

NOTE 1 – General

 

Rocky Mountain High Brands, Inc. (“RMHB” or the “Company”) is 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, 2014, the Company changed its name to Rocky Mountain High Brands, Inc.

 

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.

 

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

 

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

 

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

 

During 2017 and 2018, the Company continued to market its lineup of naturally flavored hemp-infused functional beverages, as well as hemp-infused 2oz. Mango Energy Shots and Mixed Berry Energy Shots through the first half of 2018. The Company plans to introduce updated offerings of hemp seed extract-infused functional beverages in the second quarter of 2019 under the name of Rocky Mountain.

 

NOTE 2 – Summary of Significant Accounting Policies

 

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.