Rocky Mountain High Brands, Inc. - Quarter Report: 2019 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, 2019

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

		For the transition period from ______ to ______

Commission File Number: 000-55609

Rocky Mountain High Brands, Inc.

(Exact name of registrant as specified in its charter)

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

9101 LBJ Freeway, Suite 200, Dallas, TX 75243

(Address of principal executive offices)

(800)-260-9062

(Registrant’s telephone number)

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

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

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

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

[ ] Large accelerated filer [ ] Accelerated filer

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

[X] Emerging growth company

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

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

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 133,811,183 common shares as of November 18, 2019.

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

Table of Contents

	TABLE OF CONTENTS PART 1- FINANCIAL STATEMENTS
		Page
Item 1:	Consolidated Financial Statements	3
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	10
Item 4:	Controls and Procedures	10
	PART II – OTHER INFORMATION
Item 1:	Legal Proceedings	11
Item 1A:	Risk Factors	11
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	11
Item 3:	Defaults Upon Senior Securities	11
Item 4:	Mine Safety Disclosures	11
Item 5:	Other Information	11
Item 6:	Exhibits	11

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

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

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

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the SEC instructions to Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the interim period ended September 30, 2019 are not necessarily indicative of the results that can be expected for the full year.

Table of Contents

Rocky Mountain High Brands, Inc.

Consolidated Balance Sheets

	September 30, 2019			December 31, 2018
		(Unaudited)
CURRENT ASSETS

Cash	$	68,811		$	613,686
Accounts Receivable, net of allowance of $0 and $5,275, respectively		326,470			17,324
Inventory		278,212			146,722
Prepaid Expenses and Other Current Assets		398,441			388,074
TOTAL CURRENT ASSETS		1,071,934			1,165,806

Property and Equipment, net		22,705			34,280
Intangible Assets		15,610			148,647
Other Assets		20,503			26,245

TOTAL ASSETS	$	1,130,752		$	1,374,978

LIABILITIES AND SHAREHOLDERS' DEFICIT

CURRENT LIABILITIES

Accounts Payable and Accrued Liabilities	$	693,022		$	505,214
Convertible Notes Payable, net of debt discount		651,775			666,596
Notes Payable		30,000			37,493
Accrued Interest		65,405			25,758
Deferred Revenue		466,300			466,300
Derivative Liability		263,530			376,172
TOTAL CURRENT LIABILITIES		2,170,032			2,077,533

SHAREHOLDERS' DEFICIT
Preferred Stock - Series A - Par Value of $.001; 1,000,000 shares designated; No shares issued and outstanding as of September 30, 2019 and December 31, 2018		—			—
Preferred Stock - Series B - Par Value of $.001; 7,000,000 shares designated; No shares issued and outstanding as of September 30, 2019 and December 31, 2018		—			—
Preferred Stock - Series C - Par Value of $.001; 2,000,000 shares designated; No shares issued and outstanding as of September 30, 2019 and December 31, 2018		—			—
Preferred Stock - Series D - Par Value of $.001; 2,000,000 shares designated; No shares issued and outstanding as of September 30, 2019 and December 31, 2018		—			—
Preferred Stock - Series E - Par Value of $.001; 789,474 shares designated; No shares issued and outstanding as of September 30, 2019 and December 31, 2018		—			—
Common Stock - Par Value of $.001; 200,000,000 shares authorized; 126,162,146 shares issued and outstanding as of September 30, 2019; 94,580,869 shares issued and outstanding as of December 31, 2018		126,162			94,581
Additional Paid-In Capital		36,703,086			34,221,215
Accumulated Deficit		(37,867,494	)		(35,018,351)
Total Rocky Mountain High Brands Shareholders' Deficit		(1,038,246	)		(702,555)
Noncontrolling Interests		(1,034	)		—
TOTAL SHAREHOLDERS' DEFICIT		(1,039,280	)		(702,555)

TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT	$	1,130,752		$	1,374,978

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

F-1

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Rocky Mountain High Brands, Inc.

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30, 2019			September 30, 2018			September 30, 2019			September 30, 2018

Sales	$	353,863		$	117,117		$	466,864		$	240,701

Cost of Sales		352,517			110,940			467,101			275,730
Inventory Obsolescence		107,594			13,721			107,594			25,145

Gross Loss		(106,248	)		(7,544	)		(107,831	)		(60,174)

Operating Expenses
General and Administrative		617,378			823,173			2,270,864			2,813,479
Advertising and Marketing		101,225			340,666			469,600			621,783
Impairment Expense		118,066			—			118,066			—
Total Operating Expenses		836,669			1,163,839			2,858,530			3,435,262

Loss from Operations		(942,917	)		(1,171,383	)		(2,966,361	)		(3,495,436)

Other (Income)/Expenses:
Interest Expense		296,692			580,904			929,446			3,763,602
(Gain) Loss on Extinguishment of Debt		—			—			(689,991	)		191,138
Gain on Lawsuit Judgment and Legal Settlement		—			(688,724	)		(230,840	)		(688,724)
Gain on Change in Fair Value of Derivative Liability		(319,367	)		(71,591	)		(124,304	)		(2,059,621)
Total Other (Income) Expenses		(22,675	)		(179,411	)		(115,689	)		1,206,395

Loss Before Income Tax Provision		(920,242	)		(991,972	)		(2,850,672	)		(4,701,831)

Income Tax Provision		—			—			—			—

Net Loss	$	(920,242	)	$	(991,972	)	$	(2,850,672	)	$	(4,701,831)

Net Loss Attributable to Noncontrolling Interests		(1,529	)		—			(1,529	)		—

Net Loss Attributable to Rocky Mountain High Brands	$	(918,713	)	$	(991,972	)	$	(2,849,143	)	$	(4,701,831)

Net Loss per Common Share - Basic and Diluted	$	(0.01	)	$	(0.01	)	$	(0.03	)	$	(0.06)

Weighted Average Shares Outstanding		121,033,557			81,798,422			109,033,820			74,150,686

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

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Rocky Mountain High Brands, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended
	September 30, 2019			September 30, 2018

Operating Activities:
Net Loss	$	(2,850,672	)	$	(4,701,831)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation		146,017			390,758
Stock-based payments to vendors		—			67,750
Warrants and options issued for services rendered		—			91,982
Non-cash interest expense		919,013			3,638,816
Fees and penalties on debt		—			120,251
Noncash portion of gain on lawsuit judgment and legal settlement		(30,840	)		(688,724)
(Gain) Loss on change in fair value of derivative liability		(124,304	)		(2,059,621)
(Gain) Loss on extinguishment of debt		(689,991	)		191,138
Bad debt expense		1,678			1,188
Depreciation and amortization expense		30,436			19,701
Impairment of goodwill and other intangibles		118,066			—
Inventory obsolescence		107,594			25,145
Changes in operating assets and liabilities:
Accounts receivable		(310,824	)		(39,722)
Inventory		(239,084	)		(54,458)
Prepaid expenses and other current assets		(116,211	)		(39,878)
Other assets		1,852			(4,232)
Accounts payable and accrued liabilities		189,337			(60,428)
NET CASH USED IN OPERATING ACTIVITIES		(2,847,933	)		(3,102,165)

Investing Activities:
Investments in other assets		(500	)		(31,220)
Acquisition of property and equipment		—			(13,008)
NET CASH USED IN INVESTING ACTIVITIES		(500	)		(44,228)

Financing Activities:
Proceeds from issuance of convertible notes		367,500			825,000
Repayment of convertible notes		—			(172,932)
Repayment of notes payable		(7,493	)		(10,206)
Proceeds from issuance of common stock		1,943,551			2,558,045
NET CASH PROVIDED BY FINANCING ACTIVITIES		2,303,558			3,199,907

INCREASE (DECREASE) IN CASH		(544,875	)		53,514

CASH - BEGINNING OF PERIOD		613,686			16,983

CASH - END OF PERIOD	$	68,811		$	70,497

Supplemental cash flow information:
Cash paid for interest	$	10,433		$	10,567
Cash paid for taxes	$	—		$	—
Supplemental disclosure of non-cash financing and investing activities:
Common stock issued for conversion of debt	$	188,870		$	4,000,604
Common stock issued for acquisition	$	—		$	75,000
Debt and accrued interest converted for common stock	$	271,189		$	499,053
Derivative liability relieved upon conversion of related debt	$	—		$	3,021,935
Beneficial conversion feature recognized as debt discount	$	367,500		$	4,000,230

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

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Rocky Mountain High Brands, Inc.

Consolidated Statements of Shareholders' Deficit for the Three and Nine Months Ended September 30, 2019

(Unaudited)

	Common Stock				Preferred Stock A				Preferred Stock C				Preferred Stock E
	Shares		Amount		Shares		Amount		Shares		Amount		Shares		Amount		APIC			Accumulated Deficit			Total RMHB Shareholders’ Deficit			Noncontrolling Interests			Total Equity/(Deficit)
Balance - December 31, 2018		94,580,869	$	94,581		—	$	—		—	$	—		—	$	—	$	34,221,215		$	(35,018,351	)	$	(702,555	)	$	—		$	(702,555)
Shares issued for cash		7,813,337		7,813		—		—		—		—		—		—		1,009,233			—			1,017,046			—			1,017,046
Shares issued for compensation		25,403		25		—		—		—		—		—		—		3,976			—			4,001			—			4,001
Shares issued upon conversion of convertible notes		1,750,000		1,750		—		—		—		—		—		—		169,592			—			171,342			—			171,342
Net loss for the three months ended March 31, 2019		—		—		—		—		—		—		—		—		—			(1,263,260	)		(1,263,260	)		—			(1,263,260)
Balance - March 31, 2019		104,169,609	$	104,170		—	$	—		—	$	—		—	$	—	$	35,404,015		$	(36,281,611	)	$	(773,426	)	$	—		$	(773,426)
Shares issued for cash		2,490,932		2,491		—		—		—		—		—		—		119,636			—			122,127			—			122,127
Shares issued upon conversion of convertible notes		2,315,980		2,316		—		—		—		—		—		—		15,213			—			17,529			—			17,529
Stock option forfeiture		—		—		—		—		—		—		—		—		7,530			—			7,530			—			7,530
Beneficial conversion feature recognized on convertible notes payable		—		—		—		—		—		—		—		—		367,500			—			367,500			—			367,500
Fractional shares issued as a result of the reverse stock split		3,470		3		—		—		—		—		—		—		(3	)		—			—			—			—
Net loss for the three months ended June 30, 2019		—		—		—		—		—		—		—		—		—			(667,170	)		(667,170	)		—			(667,170)
Balance - June 30, 2019		108,979,991	$	108,980		—	$	—		—	$	—		—	$	—	$	35,913,891		$	(36,948,781	)	$	(925,910	)	$	—		$	(925,910)
Sweet Ally purchase of Sweet Rock, Inc. shares		—		—		—		—		—		—		—		—		—			—			—			495			495
Shares issued for cash		17,182,155		17,182		—		—		—		—		—		—		787,195			—			804,377			—			804,377
Warrant forfeiture		—		—		—		—		—		—		—		—		2,000			—			2,000			—			2,000
Net loss for the three months ended September 30, 2019		—		—		—		—		—		—		—		—		—			(918,713	)		(918,713	)		(1,529	)		(920,242)
Balance - September 30, 2019		126,162,146	$	126,162		—	$	—		—	$	—		—	$	—	$	36,703,086		$	(37,867,494	)	$	(1,038,246	)	$	(1,034	)	$	(1,039,280)

Rocky Mountain High Brands, Inc.

Consolidated Statements of Shareholders' Deficit for the Three and Nine Months Ended September 30, 2018

(Unaudited)

	Common Stock						Preferred Stock A				Preferred Stock C				Preferred Stock E
	Shares			Amount			Shares		Amount		Shares		Amount		Shares		Amount		APIC			Accumulated Deficit			Total RMHB Shareholders’ Deficit			Noncontrolling Interests		Total Equity/(Deficit)
Balance - December 31, 2017		57,985,323		$	57,985			1,000,000	$	1,000		—	$	—		—	$	—	$	24,561,530		$	(31,662,414	)	$	(7,041,899	)	$	—	$	(7,041,899)
Shares issued for cash		6,757,451			6,757			—		—		—		—		—		—		1,463,243			—			1,470,001			—		1,470,001
Shares issued for compensation		1,984,690			1,985			—		—		—		—		—		—		154,280			—			156,265			—		156,265
Shares issued upon conversion of convertible notes		8,440,262			8,440			—		—		—		—		—		—		3,363,554			—			3,371,994			—		3,371,994
Shares to vendors for services rendered		296,271			296			—		—		—		—		—		—		61,204			—			61,500			—		61,500
Beneficial conversion feature recognized on convertible notes payable		—			—			—		—		—		—		—		—		3,328,740			—			3,328,740			—		3,328,740
Net loss for the three months ended March 31, 2018		—			—			—		—		—		—		—		—		—			(2,332,064	)		(2,332,064	)		—		(2,332,064)
Balance - March 31, 2018		75,463,997		$	75,464			1,000,000	$	1,000		—	$	—		—	$	—	$	32,932,550		$	(33,994,478	)	$	(985,464	)	$	—	$	(985,464)
Shares issued for cash		5,453,434			5,453			—		—		—		—		—		—		1,039,108			—			1,044,561			—		1,044,561
Shares issued for compensation		124,247			124			—		—		—		—		—		—		27,104			—			27,228			—		27,228
Options issued for compensation		—			—			—		—		—		—		—		—		44,476			—			44,476			—		44,476
Shares issued upon conversion of convertible notes		467,742			468			—		—		—		—		—		—		116,719			—			117,187			—		117,187
Shares to vendors for services rendered		20,547			21			—		—		—		—		—		—		3,729			—			3,750			—		3,750
Net loss for the three months ended June 30, 2018		—			—			—		—		—		—		—		—		—			(1,377,795	)		(1,377,795	)		—		(1,377,795)
Balance - June 30, 2018		81,529,967		$	81,530			1,000,000	$	1,000		—	$	—		—	$	—	$	34,163,686		$	(35,372,273	)	$	(1,126,057	)	$	—	$	(1,126,057)
Shares issued for cash		289,116			289			—		—		—		—		—		—		43,194			—			43,483			—		43,483
Shares issued for compensation		25,757			26			—		—		—		—		—		—		3,764			—			3,790			—		3,790
Options issued for compensation		—			—			—		—		—		—		—		—		47,506			—			47,506			—		47,506
Shares issued upon conversion of convertible notes		3,305,360			3,305			—		—		—		—		—		—		508,118			—			511,423			—		511,423
Shares to vendors for services rendered		15,708			16			—		—		—		—		—		—		2,484			—			2,500			—		2,500
Shares issued for acquisition		373,134			373			—		—		—		—		—		—		74,627						75,000			—		75,000
Shares returned as part of legal settlement		(90,909	)		(91	)														(1,727	)					(1,818	)		—		(1,818)
Beneficial conversion feature recognized on convertible notes payable		—			—			—		—		—		—		—		—		671,490						671,490			—		671,490
Net loss for the three months ended September 30, 2018		—			—			—		—		—		—		—		—		—			(991,972	)		(991,972	)		—		(991,972)
Balance - September 30, 2018		85,448,133		$	85,448			1,000,000	$	1,000		—	$	—		—	$	—	$	35,513,142		$	(36,364,245	)	$	(764,655	)	$	—	$	(764,655)

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

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Rocky Mountain High Brands, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1 – General

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

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

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

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

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

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

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

RMHB also bottles and distributes its naturally high alkaline spring water under the name Eagle Spirit Spring Water and plans to re-introduce its hemp-infused energy drinks later in 2019 or early 2020.

NOTE 2 – Summary of Significant Accounting Policies

Basis of Presentation

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

Principles of Consolidation

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

Use of Estimates

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

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Cash

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

Revenue Recognition

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

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

	Three Months Ended				Nine Months Ended
	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Online	$	30,356	$	96,063	$	127,667	$	171,322
Private Label		322,000		—		322,000		—
Distributor		66		6,449		381		47,237
Retailer		1,441		14,605		16,816		22,142
Total	$	353,863	$	117,117	$	446,864	$	240,701

All sales for all periods presented were to domestic customers.

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

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

Accounts Receivable and Allowance for Doubtful Accounts Receivable

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

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

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

Inventories

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

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

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Fair Value Measurements

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

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

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

•

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

•

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

•

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

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

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

Balance, December 31, 2018	$	376,172
Issued during the nine months ended September 30, 2019	$	21,192
Exercises/Conversions	$	(7,530)
Change in fair value recognized in operations	$	(126,304)
Balance, September 30, 2019	$	263,530

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

Estimated Dividends			None
Expected Volatility			125.2%
Risk Free Interest Rate			1.88%
Expected term			.1 to 3.25 years

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Property and Equipment

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

Leases

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

Capitalized Software

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

Impairment of Long-Lived Assets

The Company evaluates intangible assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. The Company assesses the recoverability of the assets based on the undiscounted future cash flow and recognizes an impairment loss when the estimated undiscounted future cash flow expected to result from the use of the asset plus the net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When the Company identifies an impairment, it reduces the carrying amount of the asset to its estimated fair value based on a discounted cash flow approach or, when available and appropriate, to comparable market values. In August 2019 the Company recorded a $118,066 impairment on the intangible assets recorded as a result of the BFIT Brands, LLC acquisition in July 2018. No other impairment charges were recorded during the three and nine months ended September 30, 2019 and 2018.

Share-based Payments

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

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

Convertible Instruments

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

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Preferred Stock

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

Advertising

Advertising and marketing expenses are charged to operations as incurred.

Income Taxes

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

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

NOTE 3 – Going Concern

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has a shareholders’ deficit of $1,039,280 and an accumulated deficit of $37,867,494 as of September 30, 2019 and has generated operating losses since inception. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern. The Company’s continuation as a going concern is dependent upon its ability to generate revenues and its ability to continue raising capital.

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

NOTE 4 – Inventory

Inventory consists of the following:

	September 30, 2019		December 31, 2018
Finished inventory	$	38,493	$	84,730
Raw materials and packaging		239,719		61,992
Total	$	278,212	$	146,722

For the three and nine months ended September 30, 2019 the Company recorded inventory obsolescence expense of $107,594 for each period. This expense primarily represented the write-down of expired FitWhey beverages and ingredients, obsolete FitWhey labels, and other expired ingredients.

For the three and nine months ended September 30, 2018 the Company recorded inventory obsolescence expense of $13,721 and $25,145, respectively. The expense primarily represented the write-down of expired hemp-infused beverages and shots.

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NOTE 5 – Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:

	September 30, 2019		December 31, 2018
Prepaid officers’ compensation	$	179,041	$	291,617
Prepaid directors’ compensation		—		29,442
Prepaid production		167,400		—
Other prepaid expenses and current assets		52,000		67,015
Total	$	398,441	$	388,074

NOTE 6 – Property and Equipment

Property and equipment consist of the following:

	September 30, 2019		December 31, 2018
Vehicles	$	29,598	$	29,598
Furniture and equipment		45,322		41,422
Personal computers		17,901		17,901
		92,821		88,921
Less: accumulated depreciation		70,116		54,641
Total	$	22,705	$	34,280

For the three months ended September 30, 2019 and 2018, depreciation expense was $3,550 and $4,367, respectively. For the nine months ended September 30, 2019 and 2018, depreciation expense was $11,554 and $16,679, respectively.

NOTE 7 – Acquisition

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

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

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

Purchase Price
Common stock issued	$	75,000
Note payable and accrued interest forgiven		80,438
Earnout liability		75,000
Total	$	230,438

Allocation
Cash	$	15,612
Accounts receivable		5,763
Inventory		76,922
Software		31,000
Formulas		12,500
Trademark		2,500
Goodwill		86,141
Total	$	230,438

In August 2019 management determined the Company would suspend the production of water-based protein and caffeine-infused products until it develops a related hemp or CBD-infused product. As a result, the Company fully impaired the intangible assets related to its purchase of FitWhey. This resulted in an impairment charge of $118,066 for the three and nine months ended September 30, 2019. Because all intangible assets were 100% impaired, it was determined that completion of an outside valuation was no longer necessary.

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

	Three Months Ended			Nine Months Ended
	September 30, 2018			September 30, 2018
Sales	$	121,911		$	245,495
Cost of Sales		128,590			293,380
Inventory Obsolescence		13,721			25,145
Gross Profit (Loss)		(20,400	)		(73,030)
Operating Expenses		1,165,093			3,436,516
Loss From Operations		(1,185,493	)		(3,509,546)
Other (Income) Expenses		(179,411	)		1,206,395
Loss Before Income Tax Provision		(1,006,082	)		(4,715,941)
Income Tax Provision		—			—
Net Loss	$	(1,006,082	)	$	(4,715,941)
Net Loss Per Common Share-Basic and Diluted	$	(0.01	)	$	(0.06)
Weighted Average Shares Outstanding		81,798,422			74,150,686

NOTE 8 – Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consist of the following:

	September 30, 2019		December 31, 2018
Accounts payable	$	517,075	$	308,717
Accrued compensation		30,000		25,500
Other accrued expenses		145,947		170,997
Total	$	693,022	$	505,214

NOTE 9 – Convertible Notes Payable

Convertible notes payable consist of the following:

	Interest Rates		Term		Conversion Rates		September 30, 2019			December 31, 2018
GHS Investments, LLC (fixed conversion)		10%		.1 - .5 years	$	0.03 - 0.05	$	973,750		$	871,079
LSW Holdings, LLC (variable conversion)		6%		—		(a)		179,000			179,000
Discount								(500,975	)		(383,483)
Total							$	651,775		$	666,596

(a)

50% discount on the average of the 3 lowest closing bid prices during the 10 trading days prior to conversion ($0.045).

For the three months ended September 30, 2019 and 2018, interest expense on these notes, including amortization of the discount, was $295,585 and $308,239, respectively. For the nine months ended September 30, 2019 and 2018, interest expense on these notes, including amortization of the discount, was $928,142 and $1,048,765, respectively.

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

NOTE 10 – Notes Payable

Notes payable consist of the following:

Interest Rate

Term

September 30, 2019

December 31, 2018

Notes payable

0 %

Due

30,000

37,493

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

For the three months ended September 30, 2019 and 2018, interest expense on the furniture and equipment note was $0 and $559, respectively. For the nine months ended September 30, 2019 and 2018, interest expense on the furniture and equipment note was $197 and $1,779, respectively.

NOTE 11 – Deferred Revenue

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

NOTE 12 – Shareholders’ Deficit

Common Stock

As of September 30, 2019, the Company has 200,000,000 shares of common stock authorized and 126,162,146 shares issued and outstanding. On April 22, 2019 the Company effected a 1-for-20 reverse stock split. All common share amounts in this report reflect this stock split.

During the three months ended September 30, 2019 the Company issued 17,182,155 shares of common stock, all of which were issued for cash.

During the nine months ended September 30, 2019 the Company issued 31,581,277 shares of common stock, including 4,065,980 shares for convertible notes payable conversions, 27,486,424 shares for cash, and 25,403 shares for compensation. The remaining 3,470 shares were issued as a result of the Company’s reverse stock split, which was effective on April 22, 2019.

Preferred Stock

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

Series A Preferred Stock

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

Series B Preferred Stock

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

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Series C Preferred Stock

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

Series D Preferred Stock

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

Series E Preferred Stock

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

Warrants

During the nine months ended September 30, 2019 the Company granted no common stock warrants and none were exercised. During that period, 25,000 warrants were forfeited.

Options

During the nine months ended September 30, 2019 the Company granted 500,000 options to purchase common stock with a term of three years and an exercise price of $.06. The options never vested and were forfeited in May 2019. No options were exercised and no others were cancelled during the nine months ended September 30, 2019.

NOTE 13– Noncontrolling Interests

In July 2019, the Company invested $500 in Sweet Rock, LLC, a Michigan limited liability company. The Company owns 51% and Sweet Ally, Inc. (“Sweet Ally”) invested $495 and owns 49%. The Company consolidates the financial statements of Sweet Rock and accounts for Sweet Ally’s ownership as a noncontrolling interest. During the three and nine months ended September 30, 2019 Sweet Rock incurred marketing expenses of $3,120. This activity is included in the consolidated financial statements of the Company with corresponding noncontrolling interests.

NOTE 14– Concentrations

During the three months ended September 30, 2019 the Company’s two largest customers accounted for approximately 91% and less than 1% of sales, respectively. During the three months ended September 30, 2018, the Company’s two largest customers accounted for approximately 12% and 3% of sales, respectively.

During the nine months ended September 30, 2019 the Company’s two largest customers accounted for approximately 69% and 3% of sales, respectively. During the nine months ended September 30, 2018, the Company’s two largest customers accounted for approximately 6% and 6% of sales, respectively.

NOTE 15 – Income Taxes

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

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

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

	September 30, 2019			December 31, 2018
Deferred Tax Assets
Net Operating Losses	$	4,400,000		$	3,960,000
Less: Valuation Allowance	$	(4,400,000	)	$	(3,960,000)
Deferred Tax Assets – Net		—			—

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

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

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

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

NOTE 16 – Commitments

Office Leases

On September 5, 2019 the Company amended its corporate office lease. The amendment extended the lease, which had expired August 31, 2019, through February 29, 2020. Monthly payments are $8,065 plus certain maintenance fees.

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

Other Leases

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

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NOTE 17 – Legal Proceedings

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

The Company filed a suit against Lyonpride Music, LLC (“Lyonpride”) for fraud and for declaratory relief with respect to a contract between the parties. Lyonpride is seeking monetary damages from the Company for breach of contract and the Company is seeking monetary damages against Lyonpride. The case has been referred to binding arbitration as referenced above. The parties are conducting discovery. The arbitration hearing has been rescheduled from November 5, 2019 to January 14, 2020.

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

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

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

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

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

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.

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:

The 1,000,000 shares of Series A Preferred Stock issued to Grisaffi;

The Convertible Promissory Note issued to Grisaffi in the principal amount of $184,300 dated April 1, 2016; and

The Convertible Promissory Note issued to Grisaffi in the principal amount of $200,150 dated June 19, 2017.

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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.

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

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

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

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

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

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

Grisaffi has filed an appeal of the Default Judgment, and submitted his brief on or about February 28, 2019. The Company is prepared and filed its brief. Grisaffi did not appeal the Order Dismissing Derivative Claims. Grisaffi only seeks in his appeal to reverse in part the Default Judgment by striking the paragraph awarding monetary damages, leaving the remainder of the Default Judgment intact. Appellate briefs were filed, and the appeal was submitted to oral argument by the parties, with such arguments being heard by the Court of Appeals on November 6, 2019. The parties are awaiting the decision of the Court of Appeals.

RMHB is actively engaged in collection efforts on the Grisaffi Default Judgment.

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

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

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

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;

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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;

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;

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

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;

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;

RMHB is entitled to recover all damages proximately resulting from the improper issuance of the 10,000,000 shares of common stock to Li;

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

The 10,000,000 shares of purported common stock issued to Li belongs to RMHB and Li has no further rights or remedies arising out of or related to the 10,000,000 shares;

10.

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

11.

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

12.

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

13.

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

14.

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

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

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

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LSW Holdings and Lily Li filed a Motion for New Trial, which was overruled by operation of law, and failed to timely file a Notice of Appeal. RMHB will begin its collection efforts against LSW Holdings and Lily Li on the Final Judgment.

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

This is a case whereby the Company is attempting to collect on the Default Judgment obtained against Grisaffi. More specifically the Company is requesting the Court to order the La Dolce Vita Trust to turnover fraudulently transferred assets and for additional relief necessary to enforce the Company’s judgment against Grisaffi. This case is currently set for trial for December 16, 2019.

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

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

NOTE 18 – Other (Income)/Expenses

Gain/Loss on Extinguishment of Debt

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

Gain on Lawsuit Judgment and Legal Settlement

On May 30, 2019 the Company recorded a gain on lawsuit judgment and legal settlement of $230,840 related to the settlement of a lawsuit the Company filed in 2017 against several defendants. The settlement was reached on May 30, 2019 and included a $200,000 cash payment by the defendants to the Company, the forgiveness of debt of $30,840 owed by the Company to one of the defendants, and the return of 6,750,000 shares of common stock. During the three and nine months ended September 30, 2018 the Company recorded gains totaling $688,724 in two separate legal proceedings, including a judgment against its former chairman that resulted in a $654,289 gain and a settlement with a former customer that resulted in a gain of $34,435.

NOTE 19 – Subsequent Events

Between October 1, 2019 and November 13, 2019 the Company issued 7,649,037 shares of common stock, all of which were for cash.

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

Forward-Looking Statements

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

Company Overview

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

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

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Results of Operations

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

Financial Summary

The Company’s sales for the three months ended September 30, 2019 were $353,863 compared to net sales of $117,117 for the three months ended September 30, 2018.

The Company’s net loss for the three months ended September 30, 2019 was $920,242 compared to a net loss of $991,972 for the three months ended September 30, 2018.

Sales

For the three months ended September 30, 2019 sales were $353,863 compared to net sales of $117,117 for the three months ended September 30, 2018, an increase of $236,746 or 202%. The sales increase was driven by the sale of private label beverages to a new customer. This increase was partially offset by a reduction in website sales due to the loss of the Company’s merchant services provider and lower Eagle Spirit Water sales in 2019. Website sales were negatively impacted by the loss of merchant services in the May 2019. A new merchant services provider that began processing in July 2019 proved to be unreliable so the Company made another change in October 2019. The Company completed a production run of its previously out-of-stock Eagle Spirit Water in late August 2019 that provided sales in September 2019. For the three months ended September 30, 2019 sales consisted of approximately 8% online sales, 91% private label sales, 0% distributor sales, and 1% direct to retailer sales, compared to approximately 79% online sales, 18% distributor sales, and 3% direct to retailer sales for the three months ended September 30, 2018.

Cost of Sales

For the three months ended September 30, 2019 cost of sales was $460,111 or 130% of sales, compared to $124,661 or 106% of sales for the three months ended September 30, 2018, an increase of $335,450 or 269%. The increase in 2019 was primarily due to the increase in sales for the same period. In 2019, $107,594 of cost of sales was due to inventory obsolescence compared to $13,721 in 2018. For the three months ended September 30, 2019 inventory obsolescence related to expired or unusable finished goods, ingredients, and packaging, primarily related to the FitWhey brand. In August 2019 management determined the Company would suspend the production of water-based protein and caffeine-infused products, which had been produced under the FitWhey brand, until it develops a related hemp or CBD-infused product and/or brand.

Operating Expenses

For the three months ended September 30, 2019, operating expenses were $836,669 or 236% of sales, compared to $1,163,839 or 994% of sales for the three months ended September 30, 2018. Areas in which the Company experienced significant changes in operating expenses are discussed below.

General and Administrative

For the three months ended September 30, 2019, general and administrative expenses were $617,378 or 174% of sales, compared to $823,173 or 703% of sales for the three months ended September 30, 2018, a decrease of $205,795 or 25%. The decrease in general and administrative expenses in 2019 was primarily driven by decreases in compensation, partially offset by increases in legal expenses and research and development costs.

Advertising and Marketing

For the three months ended September 30, 2019, advertising and marketing expenses were $101,225 or 29% of sales, compared to $340,666 or 291% of sales for the three months ended September 30, 2018, a decrease of $239,441 or 70%. The decrease in advertising and marketing expenses in 2019 was due to the Company’s reduction in online advertising and marketing. This was primarily the result of the loss of Company’s ability to sell product on its HEMPd website after the loss of its merchant services provider. Also, private label customers are responsible for their own advertising so the Company does not bear those costs.

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Impairment Expense

For the three months ended September 30, 2019, impairment expense was $118,066 or 33% of sales. There was no impairment expense for the three months ended September 30, 2018. The 2019 impairment expense was a result of management’s decision to suspend the production of water-based protein and caffeine-infused products, which had been produced under the FitWhey brand, until it develops a related hemp or CBD-infused product and/or brand. The Company impaired all software, formula, trademark, and goodwill assets related to FitWhey.

Other (Income) Expense

Interest Expense

For the three months ended September 30, 2019, interest expense was $296,692, compared to $580,904 for the three months ended September 30, 2018, a decrease of $284,212. The decrease in interest expense, which includes the amortization of the discount on convertible debt, and the excess of the beneficial conversion feature on certain convertible notes payable, was due to decreased debt levels and activity in 2019.

Gain on Lawsuit Judgment and Legal Settlement

For the three months ended September 30, 2018, the Company recorded a gain on lawsuit judgment and legal settlement of $688,724 related to two separate legal proceedings, including a judgment against its former chairman that resulted in a $654,289 gain and a settlement with a former customer that resulted in a gain of $34,435. There were no such gains for the three months ended September 30, 2019.

Gain on Change in Fair Value of Derivative Liability

For the three months ended September 30, 2019, the Company recorded a gain on the change in fair value of derivative liability of $319,367 compared to a gain of $71,591 for the three months ended September 30, 2018. In 2019 the gain resulted from the decrease in the price of the Company’s underlying stock at the end of the period, which is used to calculate the fair value of the related derivative liability, thereby reducing the derivative liability resulting in a gain.

Income Taxes

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

Net Loss Attributable to Noncontrolling Interests

For the three months ended September 30, 2019 the Company incurred expenses of $3,120 in its 51%-owned subsidiary, Sweet Rock. The 49% allocated to noncontrolling interests was $1,529. There were no noncontrolling interests in 2018.

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

Financial Summary

The Company’s sales for the nine months ended September 30, 2019 were $466,864 compared to net sales of $240,701 for the nine months ended September 30, 2018.

The Company’s net loss for the nine months ended September 30, 2019 was $2,850,672 compared to a net loss of $4,701,831 for the nine months ended September 30, 2018.

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Sales

For the nine months ended September 30, 2019 sales were $466,864 compared to net sales of $240,701 for the nine months ended September 30, 2018, an increase of $226,163 or 94%. The sales increase in 2019 was driven by the sale of private label beverages to a new customer. This increase was partially offset by a reduction in website sales due to the loss of the Company’s merchant services provider and lower Eagle Spirit Water sales in 2019. Website sales were negatively impacted by the loss of merchant services in the May 2019. A new merchant services provider that began processing in July 2019 proved to be unreliable so the Company made another change in October 2019. The Company completed a production run of its previously out-of-stock Eagle Spirit Water in late August 2019 that provided sales in September 2019. Due to production-related issues, the Company was out-of-stock of Eagle Spirit Water for most of 2019. For the nine months ended September 30, 2019 sales consisted of approximately 27% online sales, 69% private label sales, 0% distributor sales, and 4% direct to retailer sales, compared to approximately 71% online sales, 20% distributor sales, and 9% direct to retailer sales for the nine months ended September 30, 2018.

Cost of Sales

For the nine months ended September 30, 2019 cost of sales was $574,695 or 123% of sales, compared to $300,875 or 125% of sales for the nine months ended September 30, 2018, an increase of $273,820 or 91%. The increase in 2019 was primarily due to the increase in sales for the same period. In 2019, $107,594 of cost of sales was due to inventory obsolescence compared to $25,145 in 2018. For the nine months ended September 30, 2019 inventory obsolescence related to expired or unusable finished goods, ingredients, and packaging, primarily related to the FitWhey brand. In August 2019 management determined the Company would suspend the production of water-based protein and caffeine-infused products, which had been produced under the FitWhey brand, until it develops a related hemp or CBD-infused product and/or brand.

Operating Expenses

For the nine months ended September 30, 2019, operating expenses were $2,858,530 or 612% of sales, compared to $3,435,262 or 1427% of sales for the nine months ended September 30, 2018. Areas in which the Company experienced significant changes in operating expenses are discussed below.

General and Administrative

For the nine months ended September 30, 2019, general and administrative expenses were $2,270,864 or 486% of sales, compared to $2,813,479 or 1169% of sales for the nine months ended September 30, 2018, a decrease of $542,615 or 19%. The decrease in general and administrative expenses in 2019 was primarily driven by decreases in compensation, partially offset by increases in legal expenses and research and development costs.

Advertising and Marketing

For the nine months ended September 30, 2019, advertising and marketing expenses were $469,600 or 101% of sales, compared to $621,783 or 258% of sales for the nine months ended September 30, 2018, a decrease of $152,183 or 24%. The decrease in advertising and marketing expenses in 2019 was due to the Company’s reduction in online advertising and marketing. This was primarily the result of the loss of Company’s ability to sell product on its HEMPd website after the loss of its merchant services provider. Also, private label customers are responsible for their own advertising so the Company does not bear those costs.

Impairment Expense

For the nine months ended September 30, 2019, impairment expense was $118,066 or 33% of sales. There was no impairment expense for the nine months ended September 30, 2018. The 2019 impairment expense was a result of management’s decision to suspend the production of water-based protein and caffeine-infused products, which had been produced under the FitWhey brand, until it develops a related hemp or CBD-infused product and/or brand. The Company impaired all software, formula, trademark, and goodwill assets related to FitWhey.

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Other (Income) Expense

Interest Expense

For the nine months ended September 30, 2019, interest expense was $929,446, compared to $3,763,602 for the nine months ended September 30, 2018, a decrease of $2,834,156. The decrease in interest expense, which includes the amortization of the discount on convertible debt, and the excess of the beneficial conversion feature on certain convertible notes payable, was due to decreased debt levels and activity in 2019.

(Gain) Loss on Extinguishment of Debt

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

Gain on Lawsuit Judgment and Legal Settlement

For the nine months ended September 30, 2019, the Company recorded a gain on lawsuit judgment and legal settlement of $230,840 related to the settlement of a lawsuit the Company filed in 2017 against several defendants. The settlement was reached on May 30, 2019 and included a $200,000 cash payment by the defendants to the Company, the forgiveness of debt of $30,840 owed by the Company to one of the defendants, and the return of 6,750,000 shares of common stock. For the nine months ended September 30, 2018, the Company recorded a gain on lawsuit judgment and legal settlement of $688,724 related to two separate legal proceedings, including a judgment against its former chairman that resulted in a $654,289 gain and a settlement with a former customer that resulted in a gain of $34,435.

Gain on Change in Fair Value of Derivative Liability

For the nine months ended September 30, 2019, the Company recorded a gain on the change in fair value of derivative liability of $124,304 compared to a gain of $2,059,621 for the nine months ended September 30, 2018. In both periods the gain resulted from the decrease in the price of the Company’s underlying stock at the end of the period, which is used to calculate the fair value of the related derivative liability, thereby reducing the derivative liability resulting in a gain.

Income Taxes

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

Net Loss Attributable to Noncontrolling Interests

For the nine months ended September 30, 2019 the Company incurred expenses of $3,120 in its 51%-owned subsidiary, Sweet Rock. The 49% allocated to noncontrolling interests was $1,529. There were no noncontrolling interests in 2018.

Liquidity and Capital Resources

As of September 30, 2019, the Company had current assets of $1,071,934, consisting of cash of $68,811, accounts receivable (net) of $326,470, inventory of $278,212, and prepaid expenses and other current assets of $398,441. As of September 30, 2019, the Company had current liabilities of $2,170,032, consisting of accounts payable and accrued liabilities of $693,022, convertible notes payable (net) of $651,775, notes payable of $30,000, accrued interest of $65,405, deferred revenue of $466,300, and derivative liability of $263,530.

Cash flows from operating activities

Net cash used in operating activities during the nine months ended September 30, 2019 was $2,847,933 compared to $(3,102,165) used during the nine months ended September 30, 2018. The change was principally driven by the 2019 increase in accounts receivable and the buildup of inventory and prepaid expenses and other current assets in anticipation of production runs.

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Cash flows from investing activities

Net cash used in investing activities was $500 during the three months ended September 30, 2019. This represents the Company’s investment in Sweet Rock, LLC. During the nine months ended September 30, 2018 net cash used in investing activities was $44,228. In 2018, the Company invested $31,220 in new software for the HEMPd brand and acquired new computer equipment.

Cash flows from financing activities

Net cash provided by financing activities during the nine months ended September 30, 2019 was $2,303,558 compared to $3,199,907 during the nine months ended September 30, 2018. In 2019, proceeds of $1,943,551 were from the issuance of common stock compared to $2,558,045 in 2018. Also in 2019, the Company repaid $7,498 on notes payable compared to $10,206 in 2018. In 2019, the Company received proceeds of $367,500 related to the issuance of convertible notes payable compared to $825,000 in 2018. In 2018 the Company repaid $172,932 of convertible notes payable.

Outstanding Material Indebtedness

Recently, the Company’s operations have been funded primarily through the private sales of common stock or the issuance of convertible promissory notes, which are convertible to common stock at a fixed prices ranging from $0.03 to $0.05 or at a discount to market price (as defined in the agreements) of 50%. As of September 30, 2019, the Company had total notes payable outstanding of $681,775 (net of discount).

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

We expect our revenues to increase materially during the remainder of 2019 and in 2020, primarily due to anticipated sales under our private label manufacturing contracts with CBD Alimentos SA de CV (“CBD Alimentos”) and Texas Wellness Center, Inc. (“Green Lotus”). Although the initial order from CBD Alimentos was expected during the second quarter of 2018, we received the initial order and a $466,300 deposit in December 2018. Due to production-related issues, we delayed the initial production run of 2,000,000 cans and now expect to begin production of the initial order in the fourth quarter of 2019. We completed the first production run of 200,000 cans of Green Lotus in September 2019 and expect additional purchase orders. We also expect revenue growth from our HEMPd branded CBD-infused flavored waters and other HEMPd branded products. Revenue from the 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 products.

Future Liquidity Requirements

The Company’s anticipated operational shortfall for the next twelve months is $1,500,000 to $2,000,000. We plan to utilize the SPA executed with GHS in June 2018, as well as bridge financing, to raise the required capital.

Off Balance Sheet Arrangements

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

Going Concern

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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, 2019. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer, Michael Welch, and our Chief Financial Officer, Jens Mielke. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2019 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, 2019.

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

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

Limitations on the Effectiveness of Internal Controls

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

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

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

The following equity securities were issued between August 13, 2019 and November 18, 2019:

Date	Name	Shares Issued	Issue Price	Description	Exemption
8/23/2019	GHS Investments	1,466,625	$ 0.050	Shares Sold	Rule 506
9/6/2019	GHS Investments	1,735,793	0.050	Shares Sold	Rule 506
9/20/2019	GHS Investments	1,592,938	0.039	Shares Sold	Rule 506
10/4/2019	GHS Investments	1,609,177	0.033	Shares Sold	Rule 506
10/17/2019	GHS Investments	1,947,826	0.029	Shares Sold	Rule 506
10/30/2019	GHS Investments	1,982,323	0.026	Shares Sold	Rule 506
11/12/2019	GHS Investments	2,109,711	0.026	Shares Sold	Rule 506

Item 3. Defaults upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

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

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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, 2019

By: /s/ Michael Welch

Michael Welch

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

Date: November 19, 2019

By: /s/ Jens Mielke

Jens Mielke

Title: Chief Financial Officer