Rocky Mountain High Brands, Inc. - Quarter Report: 2018 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

[X]       Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2018

[ ]       Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to _______

Commission File Number: 000-55609

Rocky Mountain High Brands, Inc.

(Exact name of registrant as specified in its charter)

Nevada 90-0895673

(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)

9101 LBJ Freeway, Suite 200, Dallas, TX 75243

(Address of principal executive offices)

(800)-260-9062

(Registrant’s telephone number)

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

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

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

[ ] Large accelerated filer [ ] Accelerated filer

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

[X] Emerging growth company

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

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 1,833,939,135 common shares as of November 16, 2018.

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 (§ 229.405 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 [ ]

PART I - FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

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

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the SEC instructions to Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the interim period ended September 30, 2018 are not necessarily indicative of the results that can be expected for the full year.

Rocky Mountain High Brands, Inc.

Consolidated Balance Sheets

(Unaudited)

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

Rocky Mountain High Brands, Inc.

Consolidated Statements of Operations

(Unaudited)

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

Rocky Mountain High Brands, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

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

Rocky Mountain High Brands, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1 – General

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

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

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

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

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

The Company continues to market its naturally flavored hemp-infused functional beverage, Mango Energy. RMHB also bottles and distributes its naturally high alkaline spring water under the name Eagle Spirit Spring Water.

NOTE 2 – Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q and Article 8 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of the Company’s management, the accompanying unaudited consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of September 30, 2018 and the results of operations and cash flows for the periods presented. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the operating results for the full fiscal year or any future period. These unaudited consolidated financial statements should be read in conjunction with the financial statements and related notes thereto included in the Company’s form 10-KT for the transition period ended December 31, 2017 filed with the SEC on April 2, 2018.

Principles of Consolidation

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

Use of Estimates

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

Cash

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

Revenue Recognition

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

Accounts Receivable and Allowance for Doubtful Accounts Receivable

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

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

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

Inventories

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

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

Fair Value Measurements

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

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

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

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

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

The estimated fair value of the derivative instruments was valued using the Black-Scholes option pricing model, using the following assumptions as of September 30, 2018:

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.

Capitalized Software

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

Impairment of Long-Lived Assets

The Company evaluates intangible assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. The Company assesses the recoverability of the assets based on the undiscounted future cash flow and recognizes an impairment loss when the estimated undiscounted future cash flow expected to result from the use of the asset plus the net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When the Company identifies an impairment, it reduces the carrying amount of the asset to its estimated fair value based on a discounted cash flow approach or, when available and appropriate, to comparable market values. No impairment charges were recorded during the nine months ended September 30, 2018 and 2017.

Share-based Payments

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

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

Convertible Instruments

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

Preferred Stock

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

Advertising

Advertising and marketing expenses are charged to operations as incurred.

Income Taxes

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

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

NOTE 3 – Going Concern

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has a shareholders’ deficit of $764,655, an accumulated deficit of $36,364,245, and a working capital deficit of $990,329 as of September 30, 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.

On June 27, 2018, the Company entered into a Securities Purchase Agreement (“SPA”) with GHS Investments, LLC (“GHS”), which provides for GHS to purchase up to $15,000,000 of the Company’s common stock over a 24-month period based on a contractually agreed upon market discount. The SPA replaces the Equity Financing Agreement the Company entered into with GHS on October 12, 2017. On August 8, 2018, the Company filed a registration statement with the Securities and Exchange Commission (“SEC”) to register up to 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. Management believes the SPA will provide sufficient cash flows until cash flows from operations become consistently positive.

NOTE 4 – Inventory

As of September 30, 2018 and December 31, 2017, inventory consisted of the following:

NOTE 5 – Prepaid Expenses and Other Current Assets

As of September 30, 2018 and December 31, 2017, prepaid expenses and other current assets were as follows:

NOTE 6 – Property and Equipment

As of September 30, 2018 and December 31, 2017, property and equipment were as follows:

For the three months ended September 30, 2018 and 2017, depreciation expense was $4,367 and $4,584, respectively. For the nine months ended September 30, 2018 and 2017, depreciation expense was $14,496 and $16,679, respectively.

NOTE 7 – Accounts Payable and Accrued Liabilities

As of September 30, 2018 and December 31, 2017, accounts payable and accrued liabilities consisted of the following:

NOTE 8 – Convertible Notes Payable

As of September 30, 2018 and December 31, 2017, the Company’s convertible notes payable were as follows:

For the three months ended September 30, 2018 and 2017, interest expense on these notes, including amortization of the discount, was $308,239 and $124,584, respectively. For the nine months ended September 30, 2018 and 2017, interest expense on these notes, including amortization of the discount, was $1,048,765 and $219,435, respectively.

The Company has determined that the conversion feature embedded in certain of the notes referred to above that contain a potential variable conversion amount constitutes a derivative which has been bifurcated from the note and recorded as a derivative liability, with a corresponding discount recorded to the associated debt. The excess of the derivative value over the face amount of the note is recorded immediately to interest expense at inception. The Company recorded no interest expense for the three and nine months ended September 30, 2018 and 2017, respectively, related to the excess of derivative value over the face amount of convertible notes payable.

The Company recorded $268,021 and $0, interest expense for the three months ended September 30, 2018 and 2017, respectively, at the inception of certain convertible notes payable relating to the excess of the derivative over the face amount of the related convertible notes payable. The Company recorded $2,700,930 and $0 interest expense for the nine months ended September 30, 2018 and 2017, respectively, at the inception of certain convertible notes payable relating to the excess of the derivative over the face amount of the related convertible notes payable.

NOTE 9 – Notes Payable

As of September 30, 2018 and 2017, the Company’s notes payable were as follows:

On September 1, 2016, the Company purchased used office furniture and equipment from its landlord. The Company executed a note payable in the amount of $40,122 at an interest rate of 0% and with monthly payments of $1,114. The Company imputed interest on the note and recorded a discounted note balance of $36,634 on September 1, 2016. The term of the note is three years.

On November 30, 2017 the Company amended two notes payable to GHS in the aggregate principal amount of $500,000. The notes, which were originally made on October 12 and November 2, 2017 and included conversion prices at a 20% discount off market price, as defined in the agreements. The amendments removed the conversion features in the notes. Upon amendment, the Company recorded a loss on extinguishment of these notes of $15,256. As of December 31, 2017 the notes, which were previously included in Convertible Notes Payable are included in Notes Payable. On January 9, 2018 the notes were again amended to reinstate the conversion feature. These notes are included in Convertible Notes Payable as of September 30, 2018.

For the three months ended September 30, 2018 and 2017, interest expense on these notes was $559 and $416, respectively. For the nine months ended September 30, 2018 and 2017, interest expense on these notes was $1,779 and $1,461, respectively.

NOTE 10 – Related Party Convertible Notes Payable

As of September 30, 2018 and 2017, the Company’s related party convertible notes payable were as follows:

For the three months ended September 30, 2018 and 2017, interest expense on these notes, including amortization of the discount, was $0 and $121,199, respectively. For the nine months ended September 30, 2018 and 2017, interest expense on these notes, including amortization of the discount, was $8,043 and $529,678, respectively.

The Company has determined that the conversion feature embedded in certain of the notes referred to above that contain a potential variable conversion amount constitutes a derivative which has been bifurcated from the note and recorded as a derivative liability, with a corresponding discount recorded to the associated debt. The excess of the derivative value over the face amount of the note is recorded immediately to interest expense at inception. The Company recorded no interest expense for the three and nine months ended September 30, 2018 and 2017, respectively, at the inception of the notes relating to the excess of derivative value over the face of the notes.

The balance of these notes was reclassified to convertible notes payable as of April 5, 2018 upon the termination of the Company’s Executive Vice President, Lily Li, who is the Managing Member of LSW Holdings, LLC (“LSW”), the holder of these notes.

NOTE 11 – Shareholders’ Deficit

Common Stock

As of September 30, 2018, the Company has 4,000,000,000 shares of common stock authorized.

During the nine months ended September 30, 2018 the Company issued 551,074,370 shares of common stock, including 244,267,280 shares for convertible notes payable conversions, 250,000,000 shares for cash, 29,096,402 shares for option exercises, 20,248,000 shares for services rendered, and 7,462,688 for the FitWhey acquisition. In September 2018, the Company also cancelled 1,818,180 shares as part of a legal settlement.

Preferred Stock

The Company has 20,000,000 shares of preferred stock authorized as of September 30, 2018, of which 12,789,474 are specifically designated to a series of preferred stock and 7,210,526 remain undesignated.

Series A Preferred Stock

The Company has 1,000,000 shares of Series A Preferred Stock designated and outstanding as of September 30, 2018 and December 31, 2017. LSW is the holder of these shares. Lily Li, who was the Company’s Executive Vice President until April 5, 2018, is the Managing Member of LSW and, in that capacity, has the authority to direct voting and investment decisions with regard to its holdings in the Company. On October 26, 2018 these shares were ruled void ab initio by a District Court in Dallas County, Texas. The Company cancelled these shares effective that date.

Series B Preferred Stock

The Company has 7,000,000 shares of Series B Preferred Stock designated, of which none were outstanding as of September 30, 2018 and December 31, 2017.

Series C Preferred Stock

The Company has 2,000,000 shares of Series C Preferred Stock designated, of which none were outstanding as of September 30, 2018 and December 31, 2017. Series C Preferred Stock is 12% interest bearing, cumulative, exchangeable, non-voting, convertible preferred stock of the Company. Each Series C Preferred share is convertible to 50 shares of common stock.

Series D Preferred Stock

The Company has 2,000,000 shares of Series D Preferred Stock designated, of which none were outstanding as of September 30, 2018 and December 31, 2017. Series D Preferred Stock is a non-voting, non-interest bearing convertible preferred stock. Each Series D preferred share is convertible to 100 shares of common stock.

Series E Preferred Stock

On September 19, 2017, the Board of Directors approved a new Series E Preferred Stock. Holders of Series E Preferred Stock are entitled to cast 2,000 votes per share of Series E Preferred Stock on any proposal to increase our authorized capital stock, with no other voting rights. Series E Preferred Stock is convertible to common stock on a 1:1 basis. On the same day, the Board granted our Chairman 789,474 shares of Series E Preferred stock as payment for his deferred compensation. On October 31, 2017, Mr. Welch converted his 789,474 shares of Series E Preferred Stock to 789,474 shares of common stock. As of September 30, 2018 and December 31, 2017 there were no shares outstanding.

Warrants

During the nine months ended September 30, 2018 the Company granted no common stock warrants, none were exercised, and none were cancelled.

Options

During the nine months ended September 30, 2018 the Company granted 11,469,613 options to purchase common stock with terms ranging from two to five years and exercise prices of $.003, holders exercised 23,607,193 options, and none were cancelled.

NOTE 12– Concentrations

During the three months ended September 30, 2018 the Company’s two largest customers accounted for approximately 12% and 3% of sales, respectively. During the three months ended September 30, 2017, the Company’s two largest customers accounted for approximately 10% and 5% of sales, respectively. During the nine months ended September 30, 2018 the Company’s two largest customers accounted for approximately 6% and 6% of sales, respectively. During the nine months ended September 30, 2017, the Company’s two largest customers accounted for approximately 23% and 14% of sales, respectively.

NOTE 13 – Income Taxes

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

The tax effects of temporary differences that give rise to the Company’s net deferred tax liability as of September 30, 2018 and December 31, 2017 are as follows:

As of September 30, 2018 the Company had approximately $14,000,000 of federal and state net operating loss carryovers (“NOLs”), which begin to expire in 2028. Utilization of the NOLs may be subject to limitation under the Internal Revenue Code Section 382 should there be a greater than 50% ownership change as determined under regulations.

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the assessment, management has established a full valuation allowance against the entire deferred tax asset relating to NOLs for every period because it is more likely than not that all of the deferred tax asset will not be realized.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. We have estimated our provision for income taxes in accordance with the Tax Act and guidance available as of the date of this filing but have kept the full valuation allowance. As a result the Company has recorded no income tax expense during the three and nine months ended September 30, 2018.

The Company’s deferred tax assets and liabilities were remeasured to reflect the reduction in the U.S. corporate income tax rate from 34% to 21%, resulting in a deferred tax expense of approximately $2,000,000 in 2017 that is still fully valued against as of September 30, 2018. This expense is attributable to the Company being in a net deferred tax asset position at the time of remeasurement. As the company maintains fully valuation allowance, this amount can be seen on the rate reconciliation as an adjustment to deferred tax asset and corresponding valuation allowance.

On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The deferred tax expense recorded in connection with the remeasurement of deferred tax assets is a provisional amount and a reasonable estimate at December 31, 2017 based upon the best information currently available. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Act. Any subsequent adjustment to these amounts will be recorded to current tax expense in the quarter of 2018 when the analysis is complete. The accounting is expected to be complete when the 2017 U.S. corporate income tax return is filed in 2018.

NOTE 14 – Commitments

Office Leases

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

On January 18, 2018, the RMHC entered into a 12-month office use agreement for office space in Denver, Colorado. Monthly payments are $91.

Other Leases

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

NOTE 15 – Legal Proceedings

Please refer to our Transition Report on Form 10-KT filed April 2, 2018 for information regarding our pending legal proceedings. The following represents an update to the items disclosed in that filing:

Rocky Mountain High Brands, Inc. v Lyonpride Music, LLC, United States District Court Northern District of Texas, 3:18-cv-00045-C

The Company filed suit against Lyonpride Music, LLC (“Lyonpride”) for fraud and for declaratory relief with respect to a contract between the parties. The Company is seeking monetary damages against Lyonpride. The case has been referred to binding arbitration.

Los Angeles Superior Court, BC669367, filed July 24, 2017. Statewide Beverage Company, Inc. v. Rocky Mountain High Brands, Inc.

Statewide Beverage Company, Inc. (“Statewide”) filed a breach of contract claim, and the Company has filed counterclaims for breach of contract, common law fraud and declaratory relief. The parties have settled this matter.  Under the settlement, the Company was not required to pay damages to Statewide and canceled 1,818,180 shares of common stock previously issued to affiliates of Statewide.

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 is seeking the return of 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 alleges, 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 is also seeking 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 have 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 has also filed a derivative suit within the main lawsuit. The Company has filed a motion to dismiss the derivative suit and is awaiting a ruling on that motion.

In June 2018 LSW and 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 said Series A shares and for which LSW claims to somehow 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 seek exemplary damages. The Company intends to vigorously defend these counterclaims.

On August 30, 2018, the Trial Court entered a final judgment and order in our 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:

Finally, the Court ruled that our continuing claims against the other defendants in the case are to be severed and docketed under a separate cause of action and case number. 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. We will continue to pursue our claims against the other defendants in the below referenced case.

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 Holdings, LLC, holding that all Series A Preferred Shares in Rocky Mountain High Brands, Inc, including the shares issued to Jerry Grisaffi and later sold by him to LSW Holdings, LLC evidenced by Stock Certificate N0. 604 issued by Rocky Mountain High Brands, Inc., 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. The Company is pursuing its claims against LSW Holdings, LLC and Lily Li, and is defending against the remaining counterclaims.

NOTE 16 – Gain on Lawsuit Judgment and Legal Settlement

In August 2018, the Company recorded a $654,289 gain related to the lawsuit judgment the Company received against Jerry Grisaffi, our former Chairman of the Board. The Company de-recognized two notes payable to Mr. Grisaffi, plus accrued interest, in the amount of $418,865, and de-recognized the related derivative liability of $235,424. The 1,000,000 Series A Preferred Shares that were ruled void ab initio will be de-recognized upon legal cancellation, which is expected to occur later in 2018.

In September 2018, the Company executed a settlement with Statewide Beverage and recorded a gain on legal settlement of $34,435. As part of the settlement, the Company received 1,818,180 of its common shares that had previously been issued to the owners of Statewide Beverage and cancelled them. The Company also recorded the extinguishment of liabilities that had been recorded at the time of the sale of product to Statewide Beverage in 2016.

NOTE 17 – Acquisition

On July 25, 2018 the Company completed the acquisition of the assets of BFIT Brands, LLC (“BFIT”), which was accounted for as a business combination. 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 Company recorded the preliminary fair value of the assets which includes $98,297 of assets including cash, accounts receivable, inventory, and prepaid production costs and $132,141 of intangible assets, including the FitWhey trademark, recipes, formulas, and goodwill. The Company plans to obtain an outside valuation of these assets.

The following table provides unaudited pro forma results of operations for the nine months ended September 30, 2018 and 2017 as if the acquisitions had been consummated as of the beginning of each period presented. Pro forma results do not include any anticipated cost savings or other effects of the planned integration of the companies. Accordingly, such amounts are not necessarily indicative of the results if the acquisition has occurred on the dates indicated, or which may occur in the future.

NOTE 18 – Subsequent Events

Between October 1, 2018 and November 16, 2018, the Company issued 124,976,488 shares of common stock, of which 102,935,062 were for cash, 1,500,000 were for services, and 20,541,426 were for debt conversions.

On October 12, 2018 the Company executed a $55,000 convertible note payable with GHS Investments. The note has a nine-month term, accrues interest at 10%, and includes a fixed conversion rate of $.008 and can be prepaid at any time.

On October 26, 2018 a District Court in Dallas County, Texas voided the 1,000,000 Series A Preferred Shares held by LSW Holdings, LLC ab initio. The Company cancelled these shares effective as of this date.

On October 31, 2018, the Company eliminated the Advisory Board to the Board of Directors and terminated its contracts with the Advisory Board members.

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

Forward-Looking Statements

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

Company Overview

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

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

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

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

The Company continues to market its naturally flavored hemp-infused functional beverage, Mango Energy. RMHB also bottles and distributes its naturally high alkaline spring water under the name Eagle Spirit Spring Water.

Results of Operations

Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017

Financial Summary

The Company’s sales for the three months ended September 30, 2018 were $117,117 compared to net sales of $41,002 for the three months ended September 30, 2017.

The Company’s net loss for the three months ended September 30, 2018 was $991,972 compared to net income of $685,272 for the three months ended September 30, 2017.

Sales

For the three months ended September 30, 2018 sales were $117,117 compared to net sales of $41,002 for the three months ended September 30, 2017, an increase of $76,115 or 186%. The sales increase was driven by the incremental sales of our newly launched HEMPd product line-up, sales of our newly-acquired FitWhey branded protein beverages, partially offset by a decrease in sales of our hemp-infused functional beverages and the discontinuation of our energy shots in 2018. In the three months ended September 30, 2018 sales consisted of approximately 82% online sales, 6% distributor sales, and 12% direct to retailer sales, compared to approximately 67% online sales, 12% distributor sales, and 21% direct to retailer sales for the three months ended September 30, 2017.

Cost of Sales

For the three months ended September 30, 2018, cost of sales was $124,661 or 106% of sales, compared to $43,800 or 106% of sales for the three months ended September 30, 2017, an increase of $80,861 or 184%. For the three months ended September 30, 2018, cost of sales increased as a result of increased sales as well as a $13,721 write-down related to obsolete inventory. Excluding the write-down, cost of sales was 95% in the three months ended September 30, 2018. There was no write-down in the three months ended September 30, 2017.

Operating Expenses

For the three months ended September 30, 2018, operating expenses were $1,163,839 or 994% of sales, compared to $661,069 or 1,612% of sales for the three months ended September 30, 2017. Areas in which the Company experienced material changes in operating expenses are discussed below.

General and Administrative

For the three months ended September 30, 2018, general and administrative expenses were $823,173 or 703% of sales, compared to $604,751 or 1,475% of sales for the three months ended September 30, 2017, an increase of $218,422 or 36%. The increase in general and administrative expenses in 2018 was primarily driven by increases related to legal expenses, management of new product introductions, and research and development costs.

Advertising and Marketing

For the three months ended September 30, 2018, advertising and marketing expenses were $340,666 or 291% of sales, compared to $56,318 or 139% of sales for the three months ended September 30, 2017, an increase of $283,848 or 500%. The increase in advertising and marketing expenses in 2018 was a result of the launch of the Company’s new HEMPd product line-up.

Other (Income) Expense

Interest Expense

For the three months ended September 30, 2018, interest expense was $580,904, compared to $464,110 for the three months ended September 30, 2017, an increase of $116,794. The increase in interest expense, which includes the amortization of the discount on convertible debt, excess of the beneficial conversion feature on certain convertible notes payable, and, in 2017, interest on Series C Preferred Stock, was due to increased debt issuances in 2018 while the Company was awaiting the effectiveness of its Registration Statements on Form S-1.

Gain on Lawsuit Judgment and Legal Settlement

For the three months ended September 30, 2018, the Company recorded a $654,289 gain on a lawsuit judgment against the Company’s former Chairman of the Board and a $34,435 gain related to the settlement of a lawsuit with Statewide Beverage. There were no such gains in 2017.

Gain on Change in Fair Value of Derivative Liability

For the three months ended September 30, 2018, the Company recorded a gain on the change in fair value of derivative liability of $71,591 compared to a gain of $1,813,249 for the three months ended September 30, 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 three-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 three months ended September 30, 2018 and September 30, 2017, the Company recorded no income tax provision due to a full valuation allowance provided on deferred tax assets resulting from net operating losses.

Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017

Financial Summary

The Company’s sales for the nine months ended September 30, 2018 were $240,701 compared to $122,638 for the nine months ended September 30, 2017.

The Company’s net loss for the nine months ended September 30, 2018 was $4,701,831 compared to a net loss of $5,450,286 for the nine months ended September 30, 2017.

Sales

For the nine months ended September 30, 2018 sales were $240,701 compared to $122,638 for the nine months ended September 30, 2017, an increase of $118,063 or 96%. The sales increase was driven by the incremental sales of our newly launched HEMPd product line-up, increased sales of our high alkaline spring water, partially offset by a decrease in sales of our hemp-infused functional beverages and energy shots as inventory was being sold off. Additionally, in the nine months ended September 30, 2017 the Company recorded a return of product from a distributor. In the nine months ended September 30, 2018 sales consisted of approximately 71% online sales, 20% distributor sales, and 9% direct to retailer sales, compared to 38% online sales, 44% distributor sales, and 18% direct to retailer sales for the nine months ended September 30, 2017.

Cost of Sales

For the nine months ended September 30, 2018, cost of sales was $300,875 or 125% of sales, compared to $168,244 or 137% of sales for the nine months ended September 30, 2017, an increase of $132,631 or 79%. Cost of sales as a percentage of sales was lower in 2018 due to the return of product from a distributor in 2017, which was partially offset by 2018 price reductions on our hemp-infused functional beverages and energy shots, costs related to the launch and start-up of our HEMPd product line-up, and the write-downs of hemp-infused beverage and energy shot inventory approaching its “best by” date. During the nine months ended September 30, 2018 the Company wrote down $25,145 of obsolete inventory compared to a write down of $72,161 in 2017.

Operating Expenses

For the nine months ended September 30, 2018, operating expenses were $3,435,262 or 1,427% of sales, compared to $5,324,018 or 4,341% of sales for the nine months ended September 30, 2017. Areas in which the Company experienced material changes in operating expenses are discussed below.

General and Administrative

For the nine months ended September 30, 2018, general and administrative expenses were $2,813,479 or 1,169% of sales, compared to $4,503,126 or 3,672% of sales for the nine months ended September 30, 2017, a decrease of $1,689,647 or 38%. The decrease in general and administrative expenses in 2018 was primarily driven by decreases in compensation expense to former members of the Board of Directors, and bad debt expense, partially offset by increased legal fees and corporate salaries related to the launch of the Company’s new HEMPd product line.

Advertising and Marketing

For the nine months ended September 30, 2018, advertising and marketing expenses were $621,783 or 258% of sales, compared to $820,892 or 669% of sales for the nine months ended September 30, 2017, a decrease of $199,109 or 24%. 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. 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.

Other (Income) Expense

Interest Expense

For the nine months ended September 30, 2018, interest expense was $3,763,602, compared to $1,109,893 for the nine months ended September 30, 2017, an increase of $2,653,709. The increase in interest expense, which includes the amortization of the discount on convertible debt, excess of the beneficial conversion feature on certain convertible notes payable, and, in 2017, interest on Series C Preferred Stock, was due to increased debt activity in 2018 as the Company while the Company was awaiting the effectiveness of its Registration Statements on Form S-1.

Loss on Extinguishment of Debt

For the nine months ended September 30, 2018, the Company recorded a net loss on extinguishment of debt of $191,138 related to the settlement of convertible debt. There was no gain or loss on extinguishment of debt for the nine months ended September 30, 2017.

Gain on Change in Redemption Value of Series C Preferred Stock

For the nine months ended September 30, 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 nine months ended September 30, 2018, the Company recorded a $654,289 gain on a lawsuit judgment against the Company’s former Chairman of the Board and a $34,435 gain related to the settlement of a lawsuit with Statewide Beverage. There were no such gains in 2017.

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

For the nine months ended September 30, 2018, the Company recorded a gain on the change in fair value of derivative liability of $2,059,621 compared to a gain of $194,989 for the nine months ended September 30, 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 nine months ended September 30, 2018 and September 30, 2017, the Company recorded no income tax provision due to a full valuation allowance provided on deferred tax assets resulting from net operating losses.

Liquidity and Capital Resources

As of September 30, 2018, the Company had current assets of $678,261, consisting of cash of $70,497, accounts receivable (net) of $47,141, inventory of $139,022, and prepaid expenses and other current assets of $421,601. As of September 30, 2018, the Company had current liabilities of $1,668,590, consisting of accounts payable and accrued liabilities of $621,278, convertible notes payable (net) of $689,362, notes payable of $40,674, accrued interest of $24,866, and derivative liability of $292,410. During the nine months ended September 30, 2018, the Company received proceeds of $2,558,045 related to the sale of 250,000,000 shares of common stock under its Equity Financing Agreement with GHS Investments, LLC.

Cash flows from operating activities

Net cash used in operating activities during the nine months ended September 30, 2018 was $3,102,165 compared to $1,509,918 during the nine months ended September 30, 2017. The change was principally driven by management’s greater use of stock-based payments to vendors and employees in 2017 compared to 2018 as well as payments on accounts payable and accrued liabilities.

Cash flows from investing activities

Net cash used in investing activities during the nine months ended September 30, 2018 was $44,228 compared to $14,474 during the nine months ended September 30, 2017. The primary reason for the increase is the Company’s investment in software development for its new HEMPd.com website.

Cash flows from financing activities

Net cash provided by financing activities during the nine months ended September 30, 2018 was $3,199,907 compared to $1,388,597 during the nine months ended September 30, 2017. In 2018, proceeds of $825,000 were from the issuance of convertible notes payable compared to $590,000 in 2017. In 2017 the Company also received proceeds of $289,000 from the issuance of related party convertible notes payable. There were no proceeds from the issuance of related party convertible notes payable in 2018. In 2018 the Company repaid $172,932 on convertible and related party convertible notes payable. There were no repayments in 2017. In 2017 the Company repaid $25,000 on its related party convertible notes payable. In 2018 there were proceeds of $2,558,045 from the issuance of common stock compared to $543,200 in 2017.

Outstanding Material Indebtedness

Recently, the Company’s operations have been funded primarily through the private sales of common stock or the issuance of convertible promissory notes, which are convertible to common stock at fixed prices ranging from $0.005 to $0.01 or at discounts to market price of 50%. As of September 30, 2018, the Company had total notes payable outstanding of $730,036 (net of discount).

On October 12, 2017 the Company executed an Equity Financing Agreement (“EFA”) with GHS Investments LLC (“GHS”). Under the agreement, GHS has 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 contains 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. On November 1, 2017, the Company filed a Registration Statement on Form S-1 to register 300,000,000 common shares to be resold by GHS. On February 9, 2018 the Company received a Notice of Effectiveness from the SEC on an amended Form S-1 registering 250,000,000 common shares. The Company began stock sales to GHS on February 13, 2018 and has since sold all 250,000,000 shares to GHS.

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 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. Management believes the SPA will provide sufficient cash flows until cash flows from operations become consistently positive.

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

We expect our revenues to increase materially during the remainder of 2018 and in 2019, primarily due to anticipated sales under our private label manufacturing contract with CBD Alimentos SA de CV (“CBD Alimentos”). Although the initial order from CBD Alimentos was expected during the second quarter of 2018, we now expect to receive the initial order and ship the initial product in the fourth quarter of 2018, with additional orders to follow. In addition, we expect to generate additional revenue from our newly-acquired FitWhey business unit, which will continue to sell the FitWhey protein drink. Finally, we expect revenue growth from our new HEMPd branded CBD-infused flavored and unflavored waters and other HEMPd branded products. Revenue from the new FitWhey and HEMPd products is inherently difficult to project and will depend on the level of market acceptance and market penetration that can be achieved for these new products.

Future Liquidity Requirements

The Company’s anticipated operational shortfall for the next twelve months is $1,500,000. For the next two years, we anticipate cash needs to be between $2,000,000 and $5,000,000. We plan to utilize the SPA executed with GHS in June 2018 to raise the required capital.

Off Balance Sheet Arrangements

As of September 30, 2018, there are no off-balance sheet arrangements.

Going Concern

The Company has a shareholders’ deficit of $764,655 and an accumulated deficit of $36,364,245 as of September 30, 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.

On June 27, 2018, the Company entered into a Securities Purchase Agreement (“SPA”) with GHS Investments, LLC (“GHS”), which provides for GHS to purchase up to $15,000,000 of the Company’s common stock over a 24-month period based on a contractually agreed upon market discount. The SPA replaces the Equity Financing Agreement the Company entered into with GHS on October 12, 2017. On August 8, 2018, the Company filed a registration statement with the Securities and Exchange Commission (“SEC”) to register up to 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. Management believes the SPA will provide sufficient cash flows until cash flows from operations become consistently positive.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Item 4. Controls and Procedures

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2018. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer, Michael Welch, and our Chief Financial Officer, Jens Mielke. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2018 our disclosure controls and procedures are not effective. There have been no changes in our internal controls over financial reporting during the nine months ended September 30, 2018.

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

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

Limitations on the Effectiveness of Internal Controls

Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the internal control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

Please refer to our Transition Report on Form 10-KT filed April 2, 2018 for information regarding our pending legal proceedings. The following represents an update to the items disclosed in that filing:

Rocky Mountain High Brands, Inc. v Lyonpride Music, LLC, United States District Court Northern District of Texas, 3:18-cv-00045-C

The Company filed suit against Lyonpride Music, LLC (“Lyonpride”) for fraud and for declaratory relief with respect to a contract between the parties. The Company is seeking monetary damages against Lyonpride. The case has been referred to binding arbitration.

Los Angeles Superior Court, BC669367, filed July 24, 2017. Statewide Beverage Company, Inc. v. Rocky Mountain High Brands, Inc.

Statewide Beverage Company, Inc. (“Statewide”) filed a breach of contract claim, and the Company has filed counterclaims for breach of contract, common law fraud and declaratory relief. The parties have settled this matter.  Under the settlement, the Company was not required to pay damages to Statewide and canceled 1,818,180 shares of common stock previously issued to affiliates of Statewide.

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 is seeking the return of 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 alleges, 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 is also seeking 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 have 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 has also filed a derivative suit within the main lawsuit. The Company has filed a motion to dismiss the derivative suit and is awaiting a ruling on that motion.

In June 2018 LSW and 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 said Series A shares and for which LSW claims to somehow 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 seek exemplary damages. The Company intends to vigorously defend these counterclaims.

On August 30, 2018, the Trial Court entered a final judgment and order in our 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:

Finally, the Court ruled that our continuing claims against the other defendants in the case are to be severed and docketed under a separate cause of action and case number. 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. We will continue to pursue our claims against the other defendants in the below referenced case.

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 Holdings, LLC, holding that all Series A Preferred Shares in Rocky Mountain High Brands, Inc, including the shares issued to Jerry Grisaffi and later sold by him to LSW Holdings, LLC evidenced by Stock Certificate N0. 604 issued by Rocky Mountain High Brands, Inc., 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. The Company is pursuing its claims against LSW Holdings, LLC and Lily Li, and is defending against the remaining counterclaims.

Item 1A. Risk Factors

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

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

The following equity securities were issued between July 25, 2018 and November 16, 2018:

Item 3. Defaults upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

SIGNATURES

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

Rocky Mountain High Brands, Inc.

Date: November 19, 2018

By: /s/ Michael Welch

Michael Welch

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

Date: November 19, 2018

By: /s/ Jens Mielke

Jens Mielke

Title: Chief Financial Officer