Rocky Mountain High Brands, Inc. - FORM 10-Q

Attached files

file	filename
EX-32.1 - Rocky Mountain High Brands, Inc.	ex32_1.htm
EX-31.2 - Rocky Mountain High Brands, Inc.	ex31_2.htm
EX-31.1 - Rocky Mountain High Brands, Inc.	ex31_1.htm

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 December 31, 2016

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

For the transition period from to _______

Commission File Number: 000-55609

Rocky Mountain High Brands, Inc.

(Exact name of registrant as specified in its charter)

Nevada 90-0895673

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

9101 LBJ Freeway, Suite 200, Dallas, TX 75243

(Address of principal executive offices)

(800)-260-9062

(Registrant’s telephone number)

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

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

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

[ ] Large accelerated filer [ ] Accelerated filer

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

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: 747,580,314 common shares as of February 13, 2017.

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

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	17
Item 4:	Controls and Procedures	17
PART II – OTHER INFORMATION
Item 1:	Legal Proceedings	19
Item 1A:	Risk Factors	19
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 3:	Defaults Upon Senior Securities	21
Item 4:	Mine Safety Disclosures	21
Item 5:	Other Information	21
Item 6:	Exhibits	21

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 December 31, 2016 and June 30, 2016 (unaudited);

F-2 Consolidated Statements of Operations for the three months ended December 31, 2016 and 2015 (unaudited); for the six months ended December 31, 2016 and 2015 (unaudited);

F-3 Consolidated Statements of Cash Flows for the six months ended December 31, 2016 and 2015 (unaudited);

F-4 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 December 31, 2016 are not necessarily indicative of the results that can be expected for the full year.

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Rocky Mountain High Brands, Inc.

Consolidated Balance Sheets

(Unaudited)

		December 31, 2016			June 30, 2016
CURRENT ASSETS

Cash	$	155,061		$	102,255
Accounts Receivable, net of allowance of $60,163 and $60,163		262,429			20,377
Inventory		218,271			290,368
Prepaid Expenses and Other Current Assets		1,551,623			1,716,551
TOTAL CURRENT ASSETS		2,187,384			2,129,551

Property and Equipment, net		66,931			92,208
Other Assets		76,435			33,230

TOTAL ASSETS	$	2,330,750		$	2,254,989

LIABILITIES AND SHAREHOLDERS' DEFICIT

CURRENT LIABILITIES

Accounts Payable and Accrued Liabilities	$	655,859		$	337,866
Related Party Convertible Notes Payable, net of debt discount		95,483			20,730
Convertible Notes Payable, net of debt discount		731,434			597,500
Note Payable-Other		31,767			—
Accrued Interest		236,327			58,399
Deferred Revenue		—			500,000
Derivative Liability		2,639,826			2,217,744
TOTAL CURRENT LIABILITIES		4,390,696			3,732,239

SHAREHOLDERS' DEFICIT
Preferred Stock - Series A - Par Value of $.001 1,000,000 shares authorized; 1,000,000 shares issued and outstanding as of September 30, 2016 and June 30, 2016		1,000			1,000
Preferred Stock - Series B - Par Value of $.001 9,000,000 shares authorized; no shares issued and outstanding		-			-
Preferred Stock - Series C - Par Value of $.001 2,000,000 shares authorized; 1,107,607 shares issued and outstanding as of September 30, 2016 and June 30, 2016		1,107			1,107
Preferred Stock - Series D - Par Value of $.001 2,000,000 shares authorized; no shares issued and outstanding		-			-
Common Stock - Par Value of $.001 800,000,000 shares authorized; 735,080,314 shares issued and outstanding as of December 31, 2016; 537,989,764 shares issued and outstanding as of June 30, 2016		735,080			537,990
Additional Paid In Capital		17,221,942			14,861,035
Accumulated Deficit		(20,019,075	)		(16,878,382	)
TOTAL SHAREHOLDERS' DEFICIT		(2,059,946	)		(1,477,250	)

TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT	$	2,330,750		$	2,254,989

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						Six Months Ended
	December 31, 2016			December 31, 2015			December 31, 2016			December 31, 2015

Sales	$	24,751		$	313,116		$	320,338		$	589,687

Cost of Sales		8,619			171,937			98,639			317,213
Inventory Obsolescence		28,837			—			28,837			—

Gross Profit (Loss)		(12,705	)		141,179			192,862			272,474

Operating Expenses
General and Administrative		988,540			408,566			1,853,089			780,229
Advertising and Marketing		431,520			118,288			749,059			325,368
Total Operating Expenses		1,420,060			526,854			2,602,148			1,105,597

Loss from Operations		(1,432,765	)		(385,675	)		(2,409,286	)		(833,123	)

Other (Income)/Expenses:
Interest Expense		164,129			34,025			398,648			120,402
Gain on extinguishment of debt		—			(622,342	)		—			(622,342	)
(Gain) Loss on change in fair value of derivative liability		813,522			(2,133,647	)		332,759			(8,896,472	)
Total Other (Income) Expenses:		977,651			(2,721,964	)		731,407			(9,398,412	)

Income (Loss) Before Income Tax Provision		(2,410,416	)		2,336,289			(3,140,693	)		8,565,289

Income Tax Provision		—			—			—			—

Net Income (Loss)	$	(2,410,416	)	$	2,336,289		$	(3,140,693	)	$	8,565,289

Net Income (Loss) per Common Share - Basic and Diluted	$	(0.00	)	$	0.01		$	(0.00	)	$	0.02

Weighted Average Shares Outstanding		664,048,113			460,736,356			629,289,895			434,749,516

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)

	Six Months Ended
	December 31, 2016			December 31, 2015
Operating Activites:
Net Income (Loss)	$	(3,140,693	)	$	8,565,289
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation		409,062			206,869
Stock-based payments to vendors		465,267			—
Warrants issued for services rendered		407,447			—
Non-cash interest expense		398,649			111,976
(Gain) Loss on change in fair value of derivative liability		332,759			(8,896,472	)
Gain on extinguishment of debt		—			(622,342	)
Depreciation expense		18,691			—
Disposal of property and equipment		43,221			—
Inventory write-off		28,837			—
Changes in operating assets and liabilities:		—			—
Accounts Receivable		(242,052	)		(239,356	)
Inventory		43,260			(199,210	)
Prepaid expenses		164,928			(9,607	)
Other assets		(3,431	)		—
Accounts payable and accrued liabilities		284,253			131,236
Deferred revenue		—			470,048
Accrued interest		—			(30,433	)
NET CASH USED IN OPERATING ACTIVITIES		(789,802	)		(512,002	)

Investing Activites:
Investment in Rocky Mountain High Water Company		(39,774	)		—
Acquisition of property and equipment		(36,635	)		(40,512	)
NET CASH USED IN INVESTING ACTIVITIES		(76,409	)		(40,512	)

Financing Activities:
Proceeds from issuance of convertible notes		330,000			500,000
Repayment of convertible notes		—			(165,000	)
Proceeds from issuance of related party convertible notes		100,600			—
Repayment of related party convertible notes		—			(11,000	)
Proceeds from issuance of note payable-other		35,960			—
Repayment of note payable-other		(4,193	)		—
Proceeds from issuance of common stock		456,650			233,500
NET CASH PROVIDED BY FINANCING ACTIVITIES		919,017			557,500

INCREASE IN CASH		52,806			4,986

CASH - BEGINNING OF PERIOD		102,255			95,726

CASH - END OF PERIOD	$	155,061		$	100,712

Supplemental disclosure of non-cash financing and investing activities:
Common stock issued for conversion of debt	$	188,023		$	79,220
Debt and accrued interest converted for common stock	$	442,633		$	—
Common stock issued as part of legal settlement	$	500,000		$	—
Derivative liability relieved upon conversion of related debt	$	318,125		$	2,048,519
Benefical conversion feature recognized	$	212,771		$	—
Series C preferred stock issued for conversion of debt	$	—		$	1,107,606
Debt and accrued interest converted for Series C preferred stock	$	—		$	2,495,666

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.

On June 30, 2016 the Company entered into a business alliance with Poafpybitty Family, LLC and formed Rocky Mountain High Water Company LLC (“RMHW”). The Company has a non-controlling interest in RMHW and accounts for its investment in RMHW on the equity method. In connection with this business alliance, the Company formed Eagle Spirit Land & Water Company (“ESLW”) effective June 30, 2016. ESLW is a wholly-owned consolidated subsidiary of the Company. On November 12, 2016, the agreement with the Poafpybitty Family was amended to give the Company a controlling voting interest of 75% of RMHW, while the Poafpybitty Family received 51% of the equity interest. Beginning November 12, 2016, the operations of RMHW are consolidated in the financial statements of RMHB.

RMHB has developed and is currently selling in the marketplace a lineup of five hemp-infused beverages, hemp-infused 2oz. energy shots, and plans to re-introduce hemp-infused relaxation brownies through its nationwide distributor network and online. Effective June 30, 2016, the Company entered into a business alliance with Poafpybitty Family, LLC to launch Eagle Spirit Spring Water, a line of purified, high-alkaline spring water sourced from Native American tribal land in Oklahoma.

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 December 31, 2016 and the results of operations and cash flows for the periods presented. The results of operations for the three and six months ended December 31, 2016 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 June 30, 2016 filed with the SEC on October 4, 2016.

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.

Investments in non-consolidated subsidiaries

Investments in non-consolidated entities are accounted for using the equity method or cost basis depending upon the level of ownership and/or the Company's ability to exercise significant influence over the operating and financial policies of the investee. When the equity method is used, investments are recorded at original cost and adjusted periodically to recognize the Company's proportionate share of the investees' net income or losses after the date of investment. When net losses from an investment accounted for under the equity method exceed its carrying amount, the investment balance is reduced to zero and additional losses are not provided for. The Company resumes accounting for the investment under the equity method if the entity subsequently reports net income and the Company's share of that net income exceeds the share of net losses not recognized during the period the equity method was suspended. Investments are written down only when there is clear evidence that a decline in value that is other than temporary has occurred.

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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 605, “Revenue Recognition.” It records revenue when persuasive evidence of an arrangement exists, product delivery has occurred, the selling price to the customer is fixed or determinable and collectability of the revenue is reasonably assured. The Company has not experienced any significant returns from customers and accordingly, in management’s opinion, no reserve for returns has been provided. Payments received prior to shipment of goods are recorded as deferred revenue.

Accounts Receivable and Allowance for Doubtful Accounts Receivable

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

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

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

As of December 31, 2016 and June 30, 2016, the Company recorded an allowance for doubtful accounts of $60,163 and $60,163, respectively.

Inventory

Inventory, which consists of the Company’s raw materials, packaging, and 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 inventory is written down to the net realizable value in the period in which the impairment is first identified. Shipping and handling costs incurred for inventory purchases and product shipments are recorded in cost of sales in the Company’s statements of operations.

Fair Value Measurements

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

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

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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 in connection with the conversion feature of the convertible debt, classified as a Level 3 liability, 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, June 30, 2016	$	2,217,744
Issued during the six months ended December 31, 2016	$	378,007
Exercises	$	(288,684	)
Change in fair value recognized in operations	$	332,759
Balance, December 31, 2016	$	2,639,826

The estimated fair value of the derivative instruments were valued using the Black-Scholes option pricing model, using the following assumptions as of December 31, 2016:

Estimate Dividends	None
Expected Volatility	1.1	%
Risk Free Interest Rate	.53	%
Expected Term	.1-.86 years

Property and Equipment

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

Impairment of Long-Lived Assets

The Company evaluates intangible assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. The Company assesses the recoverability of the assets based on the undiscounted future cash flow and recognizes an impairment loss when the estimated undiscounted future cash flow expected to result from the use of the asset plus the net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When the Company identifies an impairment, it reduces the carrying amount of the asset to its estimated fair value based on a discounted cash flow approach or, when available and appropriate, to comparable market values. No impairment charges were recorded during the six months ended December 31, 2016 and 2015.

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Share-based Payments

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

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

Convertible Instruments

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

Preferred Stock

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

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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 $2,059,946 and an accumulated deficit of $20,019,075 as of December 31, 2016, and has generated operating losses since inception. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern. The Company’s continuation as a going concern is dependent upon its ability to generate revenues and its ability to continue raising capital from third parties.

On September 9, 2016, the Company, its controlling shareholder, and an outside investor group executed a letter of intent granting the investor group the option to purchase 100% of the Company’s Series A Preferred Stock, which represents a controlling interest in the Company. The agreement between the parties requires that the investors provide the Company sufficient capital to move forward with its expansion plans. The acquisition is expected to close on or before February 28, 2017.

NOTE 4 – Inventory

As of December 31, 2016 and June 30, 2016, inventory consisted of the following:

	December 31, 2016	June 30, 2016
Finished inventory	$165,226	$290,368
Raw materials and packaging	53,045	-
Total	$218,271	$290,368

NOTE 5 – Prepaid Expenses and Other Current Assets

As of December 31, 2016 and June 30, 2016, prepaid expenses and other current assets were as follows:

	December 31, 2016	June 30, 2016
Prepaid officers compensation	$1,238,394	$1,334,261
Prepaid directors compensation	264,972	323,855
Prepaid marketing expenses	27,500	33,000
Other prepaid expenses and current assets	20,757	25,435
Total	$1,551,623	$1,716,551

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NOTE 6 – Property and Equipment

As of December 31, 2016 and June 30, 2016, property and equipment were as follows:

	December 31, 2016	June 30, 2016
Vehicles	$60,847	$112,817
Furniture and equipment	36,977	343
Personal computers	1,170	1,170
Less: accumulated depreciation	32,063	22,122
Total	$66,931	$92,208

NOTE 7 – Investments

Dollar Shots Club

On September 18, 2015, the Company, through a series of transactions acquired 5,000,000 shares of Dollar Shots Club, Inc. (“DSC”) in exchange for 2,000,000 shares of common stock. The shares of DSC are being carried on the accompanying balance sheet based on the shares of stock given in exchange for the investment. The Company is accounting for the investment on the cost basis of accounting being that the shares represent approximately 5% of the total outstanding shares of DSC and the Company does not have any significant influence in DSC. The investment in DSC was fully impaired as of June 30, 2016.

Rocky Mountain High Water Company LLC

In July 2016, the Company entered into a business alliance with Poafpybitty Family, LLC to launch Eagle Spirit Spring Water, a line of purified, high-alkaline spring water sourced from Native American tribal land in Oklahoma. The agreement calls for the Company to pay a royalty on each gallon of water collected at the spring. Production of filtered spring water filled bottles commenced in August 2016 and sales began in October 2016.

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

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

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

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NOTE 8 – Convertible Notes Payable

As of December 31, 2016 and June 30, 2016, the Company’s convertible notes payable were as follows:

	Interest Rates	Term	December 31, 2016	June 30, 2016
Convertible notes	6% -
payable	12%	0 - 1 year	$ 785,000	$ 597,500
Discount			(53,566)	—
Total			$ 731,434	$ 597,500

For the three months ended December 31, 2016 and 2015, interest expense on these notes, including amortization of the discount, was $47,460 and $34,025, respectively. For the six months ended December 31, 2016 and 2015, interest expense on these notes, including amortization of the discount, was $77,743 and $120,402, respectively.

NOTE 9 – Related Party Convertible Notes Payable

As of December 31, 2016 and June 30, 2016, the Company’s related party convertible notes payable were as follows:

	Interest Rates	Term	December 31, 2016	June 30, 2016
Related party convertible notes	6% -
payable	12%	0 - 1 year	$ 219,300	$ 298,332
Discount			(123,817)	(277,602)
Total			$ 95,483	$ 20,730

For the three months ended December 31, 2016 and 2015, interest expense on these notes, including amortization of the discount, was $77,155 and $0, respectively. For the six months ended December 31, 2016 and 2015, interest expense on these notes, including amortization of the discount, was $160,089 and $0, respectively.

NOTE 10 – Note Payable-Other

On September 1, 2016, the Company purchased used office furniture and equipment from its landlord. The Company executed a note payable in the amount of $40,122 at an interest rate of 0% and with monthly payments of $1,115. The Company imputed interest on the note and recorded a discounted note balance of $36,634 on September 1, 2016. The term of the note is three years. The balance on the note was $31,767 on December 31, 2016. For the three and six months ended December 31, 2016, interest expense on this note was $521 and $710, respectively.

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NOTE 11 – Shareholders’ Deficit

Common Stock

During the six months ended December 31, 2016 the Company issued 197,090,550 shares of common stock, including 75,761,502 for convertible notes payable conversions, 45,408,834 for warrant exercises, 15,701,363 for services rendered, 11,933,557 for compensation, 6,800,000 as part of a legal settlement, and 41,485,294 for cash. During the six months ended December 31, 2015 the Company issued 78,020,350 shares of common stock for convertible notes payable conversions, the acquisition of Dollar Shots Club, cash purchases, and services rendered.

On December 29, 2016 the Company executed a securities purchase agreement for the sale of 1,000,000 shares of its common stock. The agreement includes a “true-up” provision whereby the Company must provide the purchaser additional shares of common stock if the stock price is below a predetermined level six months from the date of the agreement. In accordance with this provision, the Company was also required to reserve 10,000,000 shares of common stock in the event that the true-up provision is triggered. The shares will be released if the provision is not triggered six months from the date of the agreement.

Series C Preferred Stock

The Company amended its Articles of Incorporation as of November 13, 2015 to create a Series C Preferred shares, which are 12% interest bearing, cumulative, exchangeable, non-voting, convertible preferred stock of the Company. Each Series C Preferred share can be converted to 50 shares of common stock.

On November 16, 2015, the holder of a convertible note aggregating $1,107,607 of principal and accrued interest, agreed to a dollar for dollar exchange for same number of Preferred C shares. As of December 31, 2016, there were 1,107,607 shares of Series C Preferred shares outstanding.

Series D Preferred Stock

The Company amended its Articles of Incorporation as of March 21, 2016 to create the Series D Preferred stock class, a non-voting, non-interest bearing convertible preferred stock. Each Series C preferred share is convertible to 100 shares of common stock. As of December 31, 2016, there are no Series D preferred shares outstanding.

Warrants

During the six months ended December 31, 2016 the Company granted 9,037,500 common stock warrants and 36,526,204 were exercised. During the six months ended December 31, 2015 there were no common stock warrants granted or exercised.

NOTE 12– Concentrations

During the three months ended December 31, 2016, the Company’s two largest customers accounted for approximately 17% and 7% of sales, respectively. During the six months ended December 31, 2016, the Company’s two largest customers accounted for approximately 75% and 1% of sales, respectively. During the three months ended December 31, 2015, the Company’s two largest customers accounted for approximately 51% and 16% of sales, respectively. During the six months ended December 31, 2015, the Company’s two largest customers accounted for approximately 45% and 8% of sales, respectively.

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NOTE 13 – Income Taxes

The reconciliation of income tax benefit at the U.S. statutory rate of 34% to the Company’s effective rate for the periods presented is as follows:

	Three Months Ended December 31, 2016	Three Months Ended December 31, 2015
U.S federal statutory rate	(34%)	(34%)
State income tax, net of federal benefit	(0.0%)	(0.0%)
Increase in valuation allowance	34%	34%
Income tax provision (benefit)	0.0%	0.0%

	Six Months Ended December 31, 2016	Six Months Ended December 31, 2015
U.S federal statutory rate	(34%)	(34%)
State income tax, net of federal benefit	(0.0%)	(0.0%)
Increase in valuation allowance	34%	34%
Income tax provision (benefit)	0.0%	0.0%

The tax effects of temporary differences that give rise to the Company’s net deferred tax liability as of December 31 and June 30, 2016 are as follows:

Deferred Tax Assets	December 31, 2016	June 30, 2016
Net Operating Losses	$ 3,700,000	$ 3,200,000
Less: Valuation Allowance	$(3,700,000)	$(3,200,000)
Deferred Tax Assets - Net	-	-

As of December 31, 2016, the Company had approximately $9,500,000 of federal and state net operating loss carryovers ("NOLs"), which begin to expire in 2027. 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

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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.

NOTE 14 – Commitments

Office Lease

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

Other Leases

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

NOTE 15 – Legal Proceedings

Please refer to our Annual Report on Form 10-K filed October 4, 2016 for information regarding our pending legal proceedings. The following represents an update to the items disclosed in that filing:

193rd Judicial District Court of Dallas County Texas. Rocky Mountain High Brands, Inc. (RMHB) FKA Totally Hemp Crazy, Inc. V Rodney Peterson (Peterson) and Rocky Mountain High Canada, Inc. (RMHC), Case #DC-16-01416; Date Filed: February 4, 2016.

This case has been settled as to all claims and counterclaims with the issuance of 6,800,000 shares of RMHB stock.

44th Judicial District Court of Dallas County Texas. Rocky Mountain High Brands, Inc. (RMHB) FKA Totally Hemp Crazy, Inc. V Donna Rayburn (Rayburn), Case #DC-16-02131; Date Filed: February 23, 2016.

RMHB and Rayburn entered into a convertible promissory note dated February 2, 2015 for the original principal amount of $165,000 (with a $5,000 original issue discount). On August 29, 2015, RMHB paid to Rayburn $197,773.95, representing return of principal and interest earned during the life of the loan. On February 19, 2016, Rayburn issued an additional demand of interest and penalties totaling $99,487.92. Rayburn has charged $137,261.87 in interest and penalties on a $160,000 loan for one year and 17 days for an effective annual interest rate of 85.77%. As additional consideration for the note, RMHB was required to issue a warrant to Rayburn for 10,000,000 of common stock. RMHB seeks a cancellation of the note and additional monetary recovery in the total amount paid to Rayburn, plus additional recovery for all usurious interest charged. RMHB also seeks to void the warrant for 10,000,000 shares of common stock, which was issued under a voidable note. The amount which RMHB seeks from Rayburn is in excess of $300,000. This case was non suited and will be refiled in the Courts of Orlando, Florida.

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

Meadows claimed a breach of an exchange agreement dated November 3, 2015. RMHB has denied the breach. Meadows invoked arbitration.

Eighteenth Judicial Circuit Court of Seminole County, Florida, Rocky Mountain High Brands, Inc. v. Roy Meadows, David Meadows et al, Case No. 2016-CA-000958-15-W.

The Company filed suit for an injunction against continuation of the Meadows Arbitration. The arbitration is no longer applicable and is a moot issue. On April 20, 2016, false, malicious, and defamatory allegations were asserted by the Shareholder Alert inappropriately released by the Law Office of A.A. McClanahan, Meadow’s attorney.

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

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

Douglas County District Court, Colorado, Case No. 2015CV030672, Totally Hemp Crazy, Inc. et al v. Cannalife USA, Ltd et al.

This case was settled by all parties without any payments by any of the parties to any other party.

101st Judicial District Court of Dallas County, Texas, Case No DC-16-01220. Fanco Global Acquisitions, LLC v Rocky Mountain High Brands, Inc.

The Court dismissed this lawsuit for the failure of the Plaintiff to prosecute its case.

NOTE 16 – Subsequent Events

In February 13, 2017 the Company entered into an agreement in principle with L & H Resort Systems to acquire a former Catskill Mountain resort facility located on a natural spring. The Company plans to repurpose the resort into a bottling and canning plant. The purchase price will be based on an independent valuation of the underlying real estate and will be paid through the issuance of a newly created class of preferred stock.

Between January 1, 2017 and February 14, 2017 the Company issued 12,500,000 shares of common stock to fund a new production run and operations of the Company.

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Item 2. Management’s Discussion and Analysis or Plan of Operation 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 affect 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 and Plan of Operation Overview

Rocky Mountain High Brands, Inc. is a Nevada corporation. RMHB currently operates through its parent company, three wholly-owned subsidiaries and an unconsolidated subsidiary:

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

• Eagle Spirit Land & Water Company (Subsidiary)

• Rocky Mountain High Water Company, LLC (Subsidiary-consolidated beginning November 12, 2016)

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

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

RMHB is a consumer goods brand development company specializing in developing, manufacturing, marketing, and distributing high quality, health conscious, hemp-infused food and beverage products and spring water. The Company currently markets a lineup of five hemp-infused beverages. RMHB is also researching the development of a lineup of products containing Cannabidiol (CBD). The Company’s intention is to be on the cutting edge of the use of CBD in consumer products while complying with all state and federal laws and regulations. See New Product Pipeline below.

After developing the beverage products, RMHB completed its first production run in February of 2015. Since then RMHB has had production runs for hemp-infused beverages totaling over 3,700,000 cans. Each beverage contains approximately 100mg of hempseed extract, and all of the non-alcoholic beverages will consist of all-natural ingredients. The non-alcoholic products are shelf stable (no refrigeration necessary) with a shelf life of two (2) years. The Wine Based Ready-to-Drink Cocktails contain 12.5% alcohol and are packaged in 375ml, 750ml and 1.5 liter PET bottles. These alcoholic beverages are also shelf stable (no refrigeration necessary) and have a shelf life of 18 months. Packaging for our line-up of products containing cannabinoids (CBD) will be determined at a later date.

The Company has also produced its first production runs of Energy Shots and Relaxation Brownies. In addition, in August 2016, the Company bottled its first high alkaline spring water, Eagle Spirit Spring Water.

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Existing Products

The Company has developed a lineup of five hemp-infused beverages that include three energy drinks and a black tea and lemonade:

• Naturally Flavored Citrus Energy Drink

• A citrus energy drink that contains 100mg hempseed extract and is complemented with ginseng and guarana extract, caffeine and other ingredients.

• Naturally Flavored Mango Energy Drink

• A mango energy drink that contains 100mg hempseed extract and is complemented with ginseng and guarana extract, caffeine and other ingredients.

• Low Calorie Coconut Energy Lime

• A low calorie coconut lime energy drink that contains 100mg hempseed extract and is complemented with ginseng and guarana extract, caffeine and other ingredients.

• Naturally Flavored Lemonade

• A lemonade drink that contains 100mg hempseed extract and is complemented with ginseng extract and other ingredients.

• Naturally Flavored Black Tea

• A black tea drink that contains 100mg hempseed extract and is complemented with black tea and ginseng extract and other ingredients.

In 2016, the Company executed a one-year agreement with MBA Beverage to coordinate the manufacturing of our products. MBA Beverage acts as our outsourced supply-chain management and coordinates every aspect of the manufacturing process. MBA Beverage also purchases all ingredients that are used in the manufacturing process since it has established relationships with all suppliers. MBA Beverage purchases hemp from Global Essence, Global Essence provides MBA Beverage independent third party testing documentation that all hemp used in our manufacturing process is THC free.

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• Blues City Brewery, LLC (“Blues City”) in Memphis, Tennessee, a subsidiary of City Brewing Company, LLC, manufactures and bottles our products. Blues City is an FDA registered facility that is audited annually to ensure compliance with FDA GMP (Good Manufacturing Practices) for food safety. MBA Beverage schedules beverage production with Blues City. The Company does not contract with Blues City directly. A copy of the MBA Beverage contract is included as an exhibit to this filing.

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

• Upstart Foods Marketing of St. Louis, Missouri and Advertising Arts of Brookfield, Wisconsin provide the packaging design. Once any packing design (label) is approved, Ball Metal Beverage Container Corporation or Rexam Beverage Can Company manufactures the cans. Upon completion, the cans are shipped to Blues City. Payments are made in advance to MBA Beverage. MBA Beverage, in turn, makes payments in advance at both manufacturing plants. There are no written contracts, other than with MBA Beverage and Upstart Food Marketing.

• Upon completion of the production, the Company stores finished product at Blues City, awaiting sale to our distributor network.

• Product is sold to distributors under a variety of terms from cash upfront to credit terms. Additionally, the Company sells through various online outlets.

New Product Pipeline

• Cannabinoid “CBD” infused beverages (subject to compliance with state and federal laws and regulations)

• Hemp Infused Beverages - expand flavor offers and beverage line

• Hemp-Infused Natural Spring Water

Cannabinoid “CBD”- infused Beverages

The CBD beverage line is in pre-development stage. Any CBD beverages will be THC-free. Therefore, these products will be 100% legal in all 50 states. Products containing Cannabidiol (CBD) can be a source of essential fatty acids, vitamin E, and trace minerals in addition to containing high amounts of protein. CBD is extracted and separated from specific varieties of cannabis, often known as hemp. Chemically, CBD is one of 85 chemical substances known as cannabinoids, which are all found in the cannabis plant. CBD is the second most abundant compound in hemp, typically representing up to 40% of its extracts. CBD is actually unrelated to the chemical chain that results in tetrahydrocannabinol (THC). They share some characteristics but are created via different paths. The chemical properties of CBD and THC vary widely enough to classify THC as a psychotropic drug strictly controlled by federal authorities, while CBD is considered a legal dietary supplement.

The Company will seek an independent legal opinion to ensure that it remains in compliance with the Controlled Substances Act prior to marketing any products containing CBDs. Both plans are contingent upon appropriate legal vetting.

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Hemp-infused Natural Spring Water

Adding hemp-infused natural spring water to our beverage line is in pre-development stage. The Company plans to bottle the water, market and sell it later in fiscal year 2017. Revenue generation should commence in the same quarter.

Expected Changes in Number of Employees, Plant, and Equipment

We do not currently plan to purchase specific additional physical plant and significant equipment within the immediate future. We do not currently have specific plans to change the number of our employees during the next twelve months.

Results of Operations

Three Months Ended December 31, 2016 Compared to Three Months Ended December 31, 2015

Financial Summary

The Company’s sales for the three months ended December 31, 2016 were $24,751 compared to $313,116 for the three months ended December 31, 2015. The sales decrease was driven by a decrease in distributor sales in 2016.

The Company’s net loss for the three months ended December 31, 2016 was $2,410,416 compared to net income of $2,336,289 for the three months ended December 31, 2015.

Sales

For the three months ended December 31, 2016 sales were $24,751 compared to $313,116 for the three months ended December 31, 2015, a decrease of $288,365 or 92%. The sales decrease was driven by management’s focus on closing the LSW Holdings purchase of the control block of the Preferred Series A shares, the lack of inventory of our more popular flavors to sell, and a restructuring of our brokerage agreements with our outside brokers. In the three months ended December 31, 2016 sales consisted of approximately 71% online sales and 29% distributor sales compared to 97% distributor sales and 3% online sales for the three months ended December 31, 2015.

Cost of Sales

For the three months ended December 31, 2016, cost of sales was $37,456 or 151% of sales, compared to $171,937 or 55% of sales, for the three months ended December 31, 2015, a decrease of $134,481 or 78%. Cost of sales increased as a percentage of sales in 2016 as a result of the $28,837 write-off of the Company’s expired brownie inventory.

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Operating Expenses

For the three months ended December 31, 2016, operating expenses were $1,420,060 or 5,737% of sales, compared to $526,854 or 168% of sales for the three months ended December 31, 2015. Areas in which the Company experienced material changes in operating expenses are discussed below.

General and Administrative

For the three months ended December 31, 2016, general and administrative expenses were $988,540 or 3994% of sales, compared to $408,566 or 131% of sales for the three months ended December 31, 2015. The increase in general and administrative expenses in 2016 was driven by an increase in officer and employee compensation, rent and storage expenses, and expenses related to the startup of the Eagle Spirit Water brand.

Advertising and Marketing

For the three months ended December 31, 2016, advertising and marketing expenses were $431,520 or 1,743% of sales, compared to $118,288 or 38% of sales for the three months ended December 31, 2015. The increase in advertising and marketing expenses in 2016 was due to increased promotional spending, broker commissions, promotions contractors, and advertising and promotional expenses related to the startup of the Eagle Spirit water brand.

Other (Income) Expense

Interest Expense

For the three months ended December 31, 2016, interest expense was $164,129, compared to $34,025 for the three months ended December 31, 2015. The increase in interest expense, which includes the amortization of the discount on convertible debt and interest on Series C Preferred Stock, was due to increased debt in 2016.

Gain on the Extinguishment of Debt

During the three months ended December 31, 2015, the Company recorded a gain on the extinguishment of debt related to the settlement of convertible debt. There was no extinguishment of debt in 2016.

Gain on the Change in Fair Value of Derivative Liability

For the three months ended December 31, 2016, the Company recorded a loss on the change in fair value of derivative liability of $813,522 compared to a gain of $2,133,647 for the three months ended December 31, 2015. In 2016 the loss resulted from the increase in the price of the Company’s underlying stock, which is used to calculate the fair value of the related derivative liability, during the three months ended December 31, 2016. The gain in 2015 resulted from a decrease in the price of the Company’s stock.

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Income Taxes

For the three months ended December 31, 2016 and 2015, the Company recorded no income tax provision due to a full valuation allowance provided on deferred tax assets resulting from net operating losses.

Six Months Ended December 31, 2016 Compared to Six Months Ended December 31, 2015

Financial Summary

The Company’s sales for the six months ended December 31, 2016 were $320,338 compared to $589,687 for the six months ended December 31, 2015. The sales decrease was driven by a decrease in distributor sales in 2016.

The Company’s net loss for the six months ended December 31, 2016 was $3,140,693 compared to net income of $8,565,289 for the six months ended December 31, 2015.

Sales

For the six months ended December 31, 2016 sales were $320,338 compared to $589,687 for the six months ended December 31, 2015, a decrease of $269,349 or 46%. The sales decrease was driven by management’s focus on closing the LSW Holdings purchase of the control block of the Preferred Series A shares, the lack of inventory of our more popular flavors to sell, and a restructuring of our brokerage agreements with our outside brokers. During the six months ended December 31, 2016 sales consisted of approximately 91% distributor sales and 9% online sales compared to 96% distributor sales and 4% online sales for the six months ended December 31, 2015.

Cost of Sales

For the six months ended December 31, 2016, cost of sales was $127,476 or 40% of sales, compared to $317,213 or 54% of sales, for the six months ended December 31, 2015, a decrease of $189,737 or 60%. Cost of sales increased as a percentage of sales in 2016 as a result of the $28,837 write-off of the Company’s expired brownie inventory. The overall decrease in 2016 compared to 2015 was a decrease in sales.

Operating Expenses

For the six months ended December 31, 2016, operating expenses were $2,602,148 or 812% of sales, compared to $1,105,597 or 188% of sales for the six months ended December 31, 2015. Areas in which the Company experienced material changes in operating expenses are discussed below.

General and Administrative

For the six months ended December 31, 2016, general and administrative expenses were $1,853,089 or 579% of sales, compared to $780,229 or 132% of sales for the six months ended December 31, 2015. The increase in general and administrative expenses in 2016 was driven by an increase in officer and employee compensation, rent and storage expenses, and expenses related to the startup of the Eagle Spirit Water brand.

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Advertising and Marketing

For the six months ended December 31, 2016, advertising and marketing expenses were $749,059 or 234% of sales, compared to $325,368 or 55% of sales for the six months ended December 31, 2015. The increase in advertising and marketing expenses in 2016 was due to increased promotional spending, broker commissions, promotions contractors, and advertising and promotional expenses related to the startup of the Eagle Spirit water brand.

Other (Income) Expense

Interest Expense

For the six months ended December 31, 2016, interest expense was $398,648, compared to $120,402 for the six months ended December 31, 2015. The increase in interest expense, which includes the amortization of the discount on convertible debt and interest on Series C Preferred Stock, was due to increased debt in 2016.

Gain on the Extinguishment of Debt

During the six months ended December 31, 2015, the Company recorded a gain on the extinguishment of debt related to the settlement of convertible debt. There was no extinguishment of debt in 2016.

Gain on the Change in Fair Value of Derivative Liability

For the six months ended December 31, 2016, the Company recorded a loss on the change in fair value of derivative liability of $332,759 compared to a gain of $8,896,472 for the six months ended December 31, 2015. In 2016 the loss resulted from the increase in the price of the Company’s underlying stock, which is used to calculate the fair value of the related derivative liability, during the six months ended December 31, 2016. The gain in 2015 resulted from a decrease in the price of the Company’s stock.

Income Taxes

For the six months ended December 31, 2016 and 2015, the Company recorded no income tax provision due to a full valuation allowance provided on deferred tax assets resulting from net operating losses.

Liquidity and Capital Resources

As of December 31, 2016, we had current assets of $2,187,384, consisting of cash of $155,061, accounts receivable of $262,429, inventory of $218,271, and prepaid expenses and other current assets of $1,551,623. As of December 31, 2016, we had current liabilities of $4,390,696. These consisted of accounts payable and accrued liabilities of $655,859, related party convertible notes of $95,483, convertible notes of $731,434, other notes payable of $31,767, accrued interest of $236,327, and derivative liability of $2,639,826. During the six months ended December 31, 2016, the Company received proceeds of $456,650 related to private offering stock sales of 41,485,294 shares of common stock. Sales prices ranged from $.001 to $.05 per share.

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Cash flows from operating activities

Net cash used in operating activities during the six months ended December 31, 2016 was $789,802 compared to $512,002 during the six months ended December 31, 2015. The change was principally driven by the net loss in 2016 as compared to income in 2015 and the increase in accounts receivable during 2016. This was partially offset by the expenditures related to a hemp drink production run in 2015 with no corresponding production run in 2016. Other significant changes in cash from operating activities in the six months ended December 31, 2016 were an increase in accounts payable in 2016 of $284,253 compared to an increase of $131.236 in 2015, and the increase of deferred revenue in 2015 with no corresponding change in 2016. Non-cash gain on change in fair value of derivative liability decreased from $8,896,472 in 2015 to a loss of $332,759 in 2016.

Cash flows from investing activities

Net cash used in investing activities during the six months ended December 31, 2016 was $76,409 compared to $40,512 during the six months ended December 31, 2015. The change was primarily due to the Company’s investment in Rocky Mountain High Water Company (prior to consolidation) and furniture and equipment.

Cash flows from financing activities

Net cash provided by financing activities during the six months ended December 31, 2016 was $919,017 compared to $557,500 during the six months ended December 31, 2015. In 2016, proceeds of $330,000 were from the issuance of convertible notes payable compared to $500,000 in 2015. The Company also issued $100,600 in related party convertible notes payable and a $35,960 note payable for the acquisition of furniture and equipment in the six months ended December 31, 2016 compared to $0 in 2015. Repayments on debt were $4,193 during the six months ended December 31, 2016 and $176,000 during the six months ended December 31, 2015. In 2016 there were proceeds of $456,650 from the issuance of stock compared to $233,500 in 2015.

Outstanding Material Indebtedness

Recently, our operations have been funded primarily through the issuance of convertible promissory notes, which are convertible to common stock at fixed prices ranging from $0.001 to $0.05, at discounts to market price ranging from 50% to 99%, or combinations thereof. Our ability to successfully execute our business plan is contingent upon us obtaining additional financing and/or upon realizing sales revenue sufficient to fund our ongoing expenses. Until we are able to sustain our ongoing operations through sales revenue, we intend to fund operations through debt and/or equity financing arrangements, which may be insufficient to fund our capital expenditures, working capital, or other cash requirements. We do not have any formal commitments or arrangements for the sales of stock or the advancement or loan of funds at this time. There can be no assurance that such additional financing will be available to us on acceptable terms, or at all.

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

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

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

In connection with the conversion, and as an inducement for the debtholder to convert, the Company issued him warrants to purchase 41,454,851 shares of the Company’s common stock at an exercise price per share of the lesser of $.005 or an eighty percent discount to the average of the five lowest bid prices during the 30 trading days prior to the date of exercise. The warrant may be exercised, in whole or in part, beginning on the date which is the earlier of six months from the Company becoming a Reporting Company (as defined in the warrant) or one year from the date of issuance. The warrant is for a period of 3 years, and contains customary anti-dilution provisions.

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

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

Future Liquidity Requirements

The anticipated operational shortfall for the next twelve months is $1,200,000. For the next two years, we anticipate cash needs to be between $2,000,000 and $5,000,000. We anticipate raising the required capital through a blank check preferred stock, as authorized by the Company’s Articles of Incorporation. We plan to establish a new class of preferred stock and raise up to $5,000,000 under a Rule 506 subscription agreement.

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Off Balance Sheet Arrangements

As of December 31, 2016, there were no off balance sheet arrangements.

Going Concern

We have experienced recurring losses from operations and to date, we have not been able to produce sufficient sales to become cash flow positive and profitable on a consistent basis. The success of our business plan during the next 12 months and beyond will be contingent upon generating sufficient revenue to cover our costs of operations and/or upon obtaining additional financing. For these reasons, our auditor has raised substantial doubt about our ability to continue as a going concern.

Critical Accounting Policies

In December 2001, the SEC requested that all registrants list their most “critical accounting polices” in the Management Discussion and Analysis. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We believe that the following accounting policies currently fit this definition:

Use of Estimates

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

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Accounts Receivable and Allowance for Doubtful Accounts Receivable

Inventories

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

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

Fair Value Measurements

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

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

Balance, June 30, 2016	$	2,217,744
Issued during the six months ended December 31, 2016	$	378,007
Exercises	$	(288,684	)
Change in fair value recognized in operations	$	332,759
Balance, December 31, 2016	$	2,639,826

The estimated fair value of the derivative instruments were valued using the Black-Scholes option pricing model, using the following assumptions as of December 31, 2016:

Estimate Dividends	None
Expected Volatility	1.1	%
Risk Free Interest Rate	.53	%
Expected Term	.1-.86 years

Property and Equipment

Impairment of Long-Lived Assets

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Share-Based Payments

Convertible Instruments

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

Preferred Stock

Advertising

Advertising and marketing expenses are charged to operations as incurred.

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Income Taxes

Recently Issued Accounting Pronouncements

In August 2014, the FASB issued Accounting Standard Update No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40), (ASU No. 2014-15), which requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, ASU 2014-15 provides a definition of the term substantial doubt and requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). It also requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans and requires an express statement and other disclosures when substantial doubt is not alleviated. ASU No. 2014-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early application is permitted.

In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, Revenue from Contracts with Customers. This guidance requires companies to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance is effective for public company fiscal years beginning after December 15, 2017. The standard allows for either a full retrospective or a modified retrospective transition method. The Company is currently evaluating the impact of this standard, including the transition method, on its consolidated results of operations, financial position and cash flows.

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 December 31, 2016. 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 December 31, 2016, our disclosure controls and procedures are not effective. There have been no changes in our internal controls over financial reporting during the quarter ended December 31, 2016.

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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