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 March 31, 2018

 

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

 

For the transition period from to _______

 

 

Commission File Number: 000-55609

 

Rocky Mountain High Brands, Inc.

(Exact name of registrant as specified in its charter)

 

Nevada 90-0895673

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

 

9101 LBJ Freeway, Suite 200, Dallas, TX 75243

(Address of principal executive offices)

 

(800)-260-9062

(Registrant’s telephone number)

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

 

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

 

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

 

[ ] Large accelerated filer [ ] Accelerated filer

 

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

 

[ ] 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: 1,578,250,540 common shares as of May 15, 2018.

 

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

 

 

 

 

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	11
Item 4:	Controls and Procedures	11
	PART II – OTHER INFORMATION
Item 1:	Legal Proceedings	12
Item 1A:	Risk Factors	12
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	13
Item 3:	Defaults Upon Senior Securities	13
Item 4:	Mine Safety Disclosures	13
Item 5:	Other Information	13
Item 6:	Exhibits	13

 

 

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 March 31, 2018 and December 31, 2017 (unaudited);
F-2	Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017 (unaudited);
F-3	Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017 (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 March 31, 2018 are not necessarily indicative of the results that can be expected for the full year.

 

 

Rocky Mountain High Brands, Inc.

Consolidated Balance Sheets

(Unaudited)

 

		March 31, 2018				December 31, 2017
CURRENT ASSETS
Cash		$	580,946			$	16,983
Accounts Receivable, net of allowance of $197,261 and $195,632			7,803				2,844
Inventory			71,160				82,312
Prepaid Expenses and Other Current Assets			539,601				634,722
TOTAL CURRENT ASSETS			1,199,510				736,861
Property and Equipment, net			32,050				35,681
Other Assets			52,813				29,093
TOTAL ASSETS		$	1,284,373			$	801,635
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts Payable and Accrued Liabilities		$	431,937			$	750,807
Related Party Convertible Notes Payable, net of debt discount			179,000				174,456
Convertible Notes Payable, net of debt discount			749,208				677,698
Notes Payable			46,895				549,936
Accrued Interest			43,253				81,248
Derivative Liability			819,544				5,609,389
TOTAL CURRENT LIABILITIES			2,269,837				7,843,534
SHAREHOLDERS' DEFICIT
Preferred Stock - Series A - Par Value of $.001; 1,000,000 shares designated; 1,000,000 shares issued and outstanding as of March 31, 2018 and December 31, 2017			1,000				1,000
Preferred Stock - Series B - Par Value of $.001; 7,000,000 shares designated; No shares issued and outstanding as of March 31, 2018 and December 31, 2017			—				—
Preferred Stock - Series C - Par Value of $.001; 2,000,000 shares designated; No shares issued and outstanding as of March 31, 2018 and December 31, 2017			—				—
Preferred Stock - Series D - Par Value of $.001; 2,000,000 shares designated; No shares issued and outstanding as of March 31, 2018 and December 31, 2017			—				—
Preferred Stock - Series E - Par Value of $.001; 789,474 shares designated; No shares issued and outstanding as of March 31, 2018 and December 31, 2017			—				—
Common Stock - Par Value of $.001; 4,000,000,000 shares authorized; 1,509,279,945 shares issued and outstanding as of March 31, 2018; 1,159,706,457 shares issued and outstanding as of December 31, 2017			1,509,280				1,159,706
Additional Paid-In Capital			31,498,734				23,459,809
Accumulated Deficit			(33,994,478	)			(31,662,414)
TOTAL SHAREHOLDERS' DEFICIT			(985,464	)			(7,041,899)
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT		$	1,284,373			$	801,635

 

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

 

 

Rocky Mountain High Brands, Inc.

Consolidated Statements of Operations

(Unaudited)

 

		Three Months Ended
		March 31, 2018				March 31, 2017
Sales		$	50,909			$	117,814
Cost of Sales			66,990				56,835
Gross Profit (Loss)			(16,081	)			60,979
Operating Expenses
General and Administrative			1,080,518				1,248,202
Advertising and Marketing			69,822				684,607
Total Operating Expenses			1,150,340				1,932,809
Loss from Operations			(1,166,421	)			(1,871,830)
Other (Income)/Expenses:
Interest Expense			2,817,128				133,051
Loss on Extinguishment of Debt			196,500				—
(Gain) Loss on Change in Fair Value of Derivative Liability			(1,847,985	)			2,464,439
Total Other (Income) Expenses:			1,165,643				2,597,490
Loss Before Income Tax Provision			(2,332,064	)			(4,469,320)
Income Tax Provision			—				—
Net Loss		$	(2,332,064	)		$	(4,469,320)
Net Loss per Common Share - Basic and Diluted		$	(0.00	)		$	(0.01)
Weighted Average Shares Outstanding			1,367,327,986				756,596,375

  

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

 

 

 

 

Rocky Mountain High Brands, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

		Three Months Ended
		March 31, 2018				March 31, 2017
Operating Activities:
Net Loss		$	(2,332,064	)		$	(4,469,320)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation			224,090				606,625
Stock-based payments to vendors			61,500				521,774
Non-cash interest expense			2,762,497				133,050
Fees and penalties on debt			120,251				—
Gain on change in fair value of derivative liability			(1,847,985	)			2,464,439
Loss on extinguishment of debt			196,500				—
Loss on disposal of property and equipment			—				13,328
Bad debt expense			2,489				93,220
Depreciation expense			4,681				7,257
Changes in operating assets and liabilities:
Accounts Receivable			(7,448	)			(77,529)
Inventory			11,152				(47,807)
Prepaid expenses			27,296				(367,481)
Other assets			7,500				(364)
Accounts payable and accrued liabilities			(228,252	)			310,847
NET CASH USED IN OPERATING ACTIVITIES			(997,793	)			(811,961)
Investing Activities:
Investment in other assets			(31,220	)			—
Acquisition of property and equipment			(1,050	)			(8,809)
NET CASH USED IN INVESTING ACTIVITIES			(32,270	)			(8,809)
Financing Activities:
Proceeds from issuance of convertible notes			300,000				—
Repayment of convertible notes			(172,932	)			—
Proceeds from issuance of related party convertible notes			—				110,000
Repayment of notes payable			(3,042	)			(2,715)
Proceeds from issuance of common stock			1,470,000				558,882
NET CASH PROVIDED BY FINANCING ACTIVITIES			1,594,026				666,167
INCREASE (DECREASE) IN CASH			563,963				(154,603)
CASH - BEGINNING OF PERIOD			16,983				155,061
CASH - END OF PERIOD		$	580,946			$	458
Supplemental disclosure of non-cash financing and investing activities:
Common stock issued for conversion of debt		$	3,371,994			$	—
Debt and accrued interest converted for common stock		$	444,918			$	—
Derivative liability incurred for debt discount			—			$	3,887,618
Derivative liability relieved upon conversion of related debt		$	2,941,860			$	3,372,917
Beneficial conversion feature recognized		$	3,328,740			$	212,771

 

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

 

 

Rocky Mountain High Brands, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

. 

NOTE 1 – General

 

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

 

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

 

RMHB is a consumer goods company that specializes in developing, manufacturing, marketing, and distributing high-quality, health conscious, cannabidiol (“CBD”) and hemp- infused products that span various categories including beverage, food, fitness, skin care and more. RMHB also markets a naturally high alkaline spring water 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 and cartridges. The Company plans to introduce CBD-infused waters and additional HEMPd product offerings during the remainder of 2018. HEMPd products are marketed through the Company’s Rocky Mountain Hemp Company subsidiary. Customer shipments of HEMPd products began in late March 2018.

 

The Company continues to market its lineup of four naturally flavored hemp-infused functional beverages (Citrus Energy, Black Tea, Mango Energy and Lemonade) and a low-calorie Coconut Lime Energy drink, as well as hemp-infused 2oz. Mango Energy Shots and Mixed Berry Energy Shots. RMHB also bottles and distributes its naturally high alkaline spring water under the name Eagle Spirit Spring Water.

 

NOTE 2 – Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q and Article 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 March 31, 2018 and the results of operations and cash flows for the periods presented. The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the operating results for the full fiscal year or any future period. These unaudited consolidated financial statements should be read in conjunction with the financial statements and related notes thereto included in the Company’s form 10-KT for the transition period ended December 31, 2017 filed with the SEC on April 2, 2018.

 

Principles of Consolidation

 

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

 

Use of Estimates

 

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

 

Cash

 

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

 

 

Revenue Recognition 

In May 2014 the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes all existing revenue recognition requirements, including most industry specific guidance. This new standard requires a company to recognize revenues when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. The FASB subsequently issued the following amendments to ASU No. 2014-09 that have the same effective date and transition date: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations; ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients; and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The Company adopted these amendments with ASU 2014-09 (collectively, the new revenue standards).

The new revenue standards became effective for the Company on January 1, 2018, and were adopted using the modified retrospective method. The adoption of the new revenue standards as of January 1, 2018 did not change the Company’s revenue recognition as the majority of its revenues continue to be recognized when the customer takes control of its product. As the Company did not identify any accounting changes that impacted the amount of reported revenues with respect to its product revenues, no adjustment to retained earnings was required upon adoption.

Under the new revenue standards, the Company recognizes revenues when its customer obtains control of promised goods or services, in an amount that reflects the consideration which it expects to receive in exchange for those goods. The Company recognizes revenues following the five-step model prescribed under ASU No. 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.

Revenues from product sales are recognized when the customer obtains control of the Company’s product, which occurs at a point in time, typically upon delivery to the customer. The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that it would have recognized is one year or less or the amount is immaterial. 

Accounts Receivable and Allowance for Doubtful Accounts Receivable

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

 

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

 

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

Inventories

 

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

 

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

 

Fair Value Measurements

 

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

 

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

 

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

•

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, 2017		$	5,609,389
Issued during the three months ended March 31, 2018
Exercises/Conversions		$	(2,941,860)
Change in fair value recognized in operations		$	(1,847,985)
Balance, March 31, 2018		$	819,544

 

The estimated fair value of the derivative instruments were valued using the Black-Scholes option pricing model, using the following assumptions as of March 31, 2018:

 

Estimated Dividends			None
Expected Volatility			162.6%
Risk Free Interest Rate			1.723%
Expected term			.1 to 4.5 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.

 

Capitalized Software

 

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

 

Impairment of Long-Lived Assets

 

The Company evaluates intangible assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. The Company assesses the recoverability of the assets based on the undiscounted future cash flow and recognizes an impairment loss when the estimated undiscounted future cash flow expected to result from the use of the asset plus the net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When the Company identifies an impairment, it reduces the carrying amount of the asset to its estimated fair value based on a discounted cash flow approach or, when available and appropriate, to comparable market values. No impairment charges were recorded during the three months ended March 31, 2018 and 2017.

 

Share-based Payments

 

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

 

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

 

Convertible Instruments

 

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

 

 

Preferred Stock

 

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

 

Advertising

 

Advertising and marketing expenses are charged to operations as incurred.

 

Income Taxes

 

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

 

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

 

NOTE 3 – Going Concern

 

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has a shareholders’ deficit of $985,464 and an accumulated deficit of $33,994,478 as of March 31, 2018 and has generated operating losses since inception. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern. The Company’s continuation as a going concern is dependent upon its ability to generate revenues and its ability to continue raising capital.

 

On October 12, 2017, the Company entered into an Equity Financing Agreement (“EFA”) with GHS Investments, LLC (“GHS”), which provides for GHS to purchase up to $12,000,000 of the Company’s common stock over a 24-month period based on a contractually agreed upon market discount. In February 2018 the Company began sales of common stock to GHS under the EFA. Management believes the EFA will provide sufficient cash flows until cash flows from operations become consistently positive.

 

 

NOTE 4 – Inventory

 

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

 

		March 31, 2018				December 31, 2017
Finished inventory		$	66,362			$	77,517
Raw materials and packaging			4,798				4,795
Total		$	71,160			$	82,312

 

 

 

NOTE 5 – Prepaid Expenses and Other Current Assets

 

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

 

		March 31, 2018				December 31, 2017
Prepaid officers’ compensation		$	406,766			$	445,149
Prepaid directors’ compensation			117,766				147,207
Prepaid marketing expenses			—				13,750
Other prepaid expenses and current assets			15,069				28,616
Total		$	539,601			$	634,722

 

NOTE 6 – Property and Equipment

 

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

 

		March 31, 2018				December 31, 2017
Vehicles		$	29,598			$	29,598
Furniture and equipment			43,588				42,538
Personal computers			2,379				2,379
			75,565				74,515
Less:  accumulated depreciation			43,515				38,834
Total		$	32,050			$	35,681

 

For the three months ended March 31, 2018 and 2017, depreciation expense was $4,681 and $7,257, respectively.

 

NOTE 7 – Accounts Payable and Accrued Liabilities

 

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

 

			March 31, 2018				December 31, 2017
Accounts payable			$	253,596			$	373,882
Accrued compensation				21,000				215,026
Other accrued expenses				157,341				161,899
Total			$	431,937			$	750,807

 

NOTE 8 – Convertible Notes Payable

 

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

 

		Interest Rates			Term				March 31, 2018				December 31, 2017
Convertible Notes Payable			6% - 10%			0 - 5 months			$	1,338,296			$	1,026,995
Discount										(589,088	)			(349,297)
Total									$	749,208			$	677,698

 

For the three months ended March 31, 2018 and 2017, interest expense on these notes, including amortization of the discount, was $375,545 and $36,744, respectively.

The Company has determined that the conversion feature embedded in certain of the notes referred to above that contain a potential variable conversion amount constitutes a derivative which has been bifurcated from the note and recorded as a derivative liability, with a corresponding discount recorded to the associated debt. The excess of the derivative value over the face amount of the note is recorded immediately to interest expense at inception. The Company recorded no interest expense for the three months ended March 31, 2018 and 2017, respectively, relating to the excess of derivative value over the face amount of convertible notes payable.

The Company recorded $2,432,909 and $0 of interest expense for the three months ended March 31, 2018 and 2017, respectively, at the inception of certain convertible notes payable relating to the excess of the beneficial conversion feature over the face amount of the related convertible notes payable.

 

 

NOTE 9 – Notes Payable

 

As of March 31, 2018 and 2017, the Company’s notes payable were as follows:

 

		Interest Rate		Term				March 31, 2018				December 31, 2017
Notes payable		0 - 6%			1 - 2 years			$	46,895			$	549,936

 

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

 

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

 

For the three months ended March 31, 2018 and 2017, interest expense on these notes was $631 and $629, respectively.

 

NOTE 10 – Related Party Convertible Notes Payable

 

As of March 31, 2018 and 2017, the Company’s related party convertible notes payable were as follows:

 

		Interest Rate			Term				March 31, 2018				December 31, 2017
Related party convertible notes payable			6%			0 years			$	179,000			$	179,000
Discount														(4,544)
Total									$	179,000			$	174,456

 

For the three months ended March 31, 2018 and 2017, interest expense on these notes, including amortization of the discount, was

$8,043 and $216,653, respectively.

 

The Company has determined that the conversion feature embedded in certain of the notes referred to above that contain a potential variable conversion amount constitutes a derivative which has been bifurcated from the note and recorded as a derivative liability, with a corresponding discount recorded to the associated debt. The excess of the derivative value over the face amount of the note is recorded immediately to interest expense at inception. The Company recorded no interest expense for the three months ended March 31, 2018 and 2017, respectively, at the inception of the notes relating to the excess of derivative value over the face of the notes.

 

NOTE 11 – Shareholders’ Deficit

 

Common Stock

 

As of March 31, 2018 the Company has 4,000,000,000 shares of common stock authorized.

 

During the three months ended March 31, 2018 the Company issued 349,573,488 shares of common stock, including 168,805,244 shares for convertible notes payable conversions of $498,784, 135,149,014 shares for cash of $1,293,600, 29,096,402 shares for option exercises and 16,522,828 shares for services rendered with a value of $202,833.

 

Preferred Stock

 

The Company has 20,000,000 shares of preferred stock authorized as of March 31, 2018, of which 12,789,474 are specifically designated to a series of preferred stock and 7,210,526 remain undesignated.

 

Series A Preferred Stock

 

The Company had 1,000,000 shares of Series A Preferred Stock designated and outstanding as of March 31, 2018 and December 31, 2017. LSW Holdings, LLC (“LSW”) is the holder of these shares. Lily Li, who was the Company’s Executive Vice President until April 5, 2018, is the Managing Member of LSW and, in that capacity, has the authority to direct voting and investment decisions with regard to its holdings in the company.

 

 

Series B Preferred Stock

 

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

 

Series C Preferred Stock

 

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

 

Series D Preferred Stock

 

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

 

Series E Preferred Stock

 

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

 

Warrants

 

During the three months ended March 31, 2018 the Company granted no common stock warrants, none were exercised, and none were cancelled.

 

Options

 

During the three months ended March 31, 2018 the Company granted no options to purchase common stock, 23,607,193 were exercised, and none were cancelled.

 

NOTE 12– Concentrations

 

During the three months ended March 31, 2018 the Company’s two largest customers accounted for approximately 28% and 12% of sales, respectively. During the three months ended March 31, 2017, the Company’s two largest customers accounted for approximately 25% and 14% of sales, respectively.

 

NOTE 13 – Income Taxes

 

The reconciliation of income tax benefit at the U.S. statutory rate (21% for the three months ended March 31, 2018 and 34% for the three months ended March 31, 2017) to the Company’s effective rate for the periods presented is as follows:

 

		Three Months Ended
		March 31, 2018				March 31, 2017
U.S federal statutory rate			(21	%)			(34%)
State income tax, net of federal benefit			(0.0	%)			(0.0%)
Increase in valuation allowance			21	%			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 March 31, 2018 and December 31, 2017 are as follows:

			March 31, 2018				December 31, 2017
Deferred Tax Assets
Net Operating Losses		$	3,360,000			$	3,360,000
Less:  Valuation Allowance		$	(3,360,000)			$	(3,360,000)
Deferred Tax Assets – Net			—				—

 

 

As of March 31, 2018 the Company had approximately $17,000,000 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 months ended March 31, 2018.

 

The Company’s deferred tax assets and liabilities were remeasured to reflect the reduction in the U.S. corporate income tax rate from 34% to 21%, resulting in a deferred tax expense of approximately $2,000,000 in 2017 that is still fully valued against as of March 31, 2018. This expense is attributable to the Company being in a net deferred tax asset position at the time of remeasurement. The company maintains a full valuation allowance.

 

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

 

NOTE 14 – Commitments

 

Office Leases

 

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

 

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

 

Other Leases

 

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

 

NOTE 15 – Legal Proceedings

 

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

 

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

 

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

 

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

 

Statewide Beverage Company, Inc. filed a breach of contract claim, and the Company has filed counterclaims for breach of contract, common law fraud and declaratory relief. The case is currently in the discovery phase.

 

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

 

The Company is seeking the return of Series A Preferred Stock and common stock issued to certain defendants or later obtained by certain other defendants for little or no consideration paid to the Company. The Company alleges among other things that RMHB’s former Chairman of the Board breached his fiduciary duty to the Company by issuing these shares to himself and others. RMHB is also seeking to void the Indemnification and Release Agreement between the parties that was executed in June 2017. The Company is awaiting response from discovery requests at the current time. A trial date has been set for December 2018.

 

NOTE 16 – Subsequent Events

 

Between April 1, 2018 and May 14, 2018, the Company issued 68,970,595 shares of common stock, of which 62,848,940 were for cash, 4,000,000 were for debt conversions, and 2,121,655 were for services rendered.

 

On April 5, 2018 the Company terminated its Executive Vice President, Lily Li.

 

On May 11, 2018 Jerry Grisaffi, the Company’s former Chairman of the Board, filed a countersuit in the Company’s lawsuit against Mr. Grisaffi and others, which is described in Note 15 – Legal Proceedings. In the counter suit, Mr. Grisaffi seeks repayment, in cash or stock, of two convertible notes payable plus accrued interest. Those are the same two notes the Company is seeking to void in its lawsuit against Mr Grisaffi. Mr. Grisaffi is also attempting to enforce his indemnification agreement with the Company, which the Company is also seeking to void in its suit. The Company has not yet responded to the countersuit.

 

 

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

 

Forward-Looking Statements

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

 

Company Overview

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

 

•

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

 

•

Rocky Mountain Hemp Company (“HempCo”), an active Colorado corporation (Subsidiary)

 

•

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

 

•

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

 

•

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

 

•

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

 

RMHB is a consumer goods company 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 16 products including tinctures, gummies, water soluble drops, capsules, lotions, salves, and E-juice liquids and cartridges. The Company plans to introduce CBD-infused waters and additional HEMPd product offerings during the remainder of 2018. HEMPd products are marketed through the Company’s Rocky Mountain Hemp Company subsidiary. Customer shipments of HEMPd products began in late March 2018.

 

The Company continues to market its lineup of four naturally flavored hemp-infused functional beverages (Citrus Energy, Black Tea, Mango Energy and Lemonade) and a low-calorie Coconut Lime Energy drink, as well as hemp-infused 2oz. Mango Energy Shots and Mixed Berry Energy Shots. RMHB also bottles and distributes its naturally high alkaline spring water under the name Eagle Spirit Spring Water.

 

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

 

 

Results of Operations

 

Three Months Ended March 31, 2018 Compared to Three Months Ended March 31, 2017

 

Financial Summary

 

The Company’s sales for the three months ended March 31, 2018 were $50,909 compared to $117,814 for the three months ended March 31, 2017.

 

The Company’s net loss for the three months ended March 31, 2018 was $2,332,064 compared to $4,469,320 for the three months ended March 31, 2017.

 

Sales

 

For the three months ended March 31, 2018 sales were $50,909 compared to $117,814 for the three months ended March 31, 2017, a decrease of $66,905 or 57%. The sales decrease was driven by the sell-off of the Company’s current hemp-infused beverage and energy shots inventories in anticipation of the launch of our new HEMPd brand products. Selling prices per case were lower in 2018 than in 2017. In the three months ended March 31, 2018 sales consisted of approximately 53% online sales, 37% distributor sales, and 10% direct to retailer sales, compared to 74% distributor sales and 26% online sales for the three months ended March 31, 2017.

 

Cost of Sales

 

For the three months ended March 31, 2018, cost of sales was $66,990 or 132% of sales, compared to $56,835 or 48% of sales for the three months ended March 31, 2017, an increase of $10,155 or 18%. Cost of sales as a percentage of sales increased in 2018 as a result of the decreased selling prices of our hemp-infused beverages and shots, which in turn reduced margins.

 

Operating Expenses

 

For the three months ended March 31, 2018, operating expenses were $1,150,340 or 2,260% of sales, compared to $1,932,809 or 1,641% of sales for the three months ended March 31, 2017. Areas in which the Company experienced material changes in operating expenses are discussed below.

 

General and Administrative

 

For the three months ended March 31, 2018, general and administrative expenses were $1,080,518 or 2,123% of sales, compared to

$1,248,202 or 1,059% of sales for the three months ended March 31, 2017, a decrease of $167,684 or 13%. The decrease in general and administrative expenses in 2018 was primarily driven by decreases in legal fees and bad debt expense, partially offset by an increase in corporate salaries as the Company prepared for the introduction of its HEMPd brand.

 

Advertising and Marketing

 

For the three months ended March 31, 2018, advertising and marketing expenses were $69,822 or 137% of sales, compared to

$684,607 or 581% of sales for the three months ended March 31, 2017, a decrease of $614,785 or 90%. The decrease in advertising and marketing expenses in 2018 was a result of management’s decision to decrease advertising and marketing expenditures on the Company’s hemp-infused beverages and energy shots in preparation for the launch of the new HEMPd brand. In 2017 the Company executed a large marketing contract with a third party promoter and issued stock to a distributor in exchange for promotional activity.

 

Other (Income) Expense

 

Interest Expense

 

For the three months ended March 31, 2018, interest expense was $2,817,128, compared to $133,051 for the three months ended March 31, 2017, an increase of $2,684,077. The increase in interest expense, which includes the amortization of the discount on convertible debt, excess of the derivative liability resulting from the excess conversion feature on certain convertible notes payable, and, in 2017, interest on Series C Preferred Stock, was due to increased debt activity in 2018.

 

Loss on Extinguishment of Debt

 

For the three months ended March 31, 2018, the Company recorded a net loss on extinguishment of debt of $196,500 related to the settlement of convertible debt. There was no gain or loss on extinguishment of debt for the three months ended March 31, 2017.

 

 

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

 

For the three months ended March 31, 2018, the Company recorded a gain on the change in fair value of derivative liability of

$1,847,985 compared to a loss of $2,464,439 for the three months ended March 31, 2017. In 2018 the gain resulted from the decrease in the price of the Company’s underlying stock, which is used to calculate the fair value of the related derivative liability, from the beginning of the period to the end of the period. In 2017 the loss resulted from the increase in the price of the Company’s underlying stock from the beginning of the period to the end of the period.

 

Income Taxes

 

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

 

Liquidity and Capital Resources

 

As of March 31, 2018, the Company had current assets of $1,199,510, consisting of cash of $580,946, accounts receivable (net) of $7,803, inventory of $71,160, and prepaid expenses and other current assets of $539,601. As of March 31, 2018, the Company had current liabilities of $2,269,837, consisting of accounts payable and accrued liabilities of $431,937, related party convertible notes payable (net) of $179,000, convertible notes payable (net) of $749,208, notes payable of $46,895, accrued interest of $43,253, and derivative liability of $819,544. During the three months ended March 31, 2018, the Company received proceeds of $1,470,000 related to the sale of 135,149,014 shares of common stock under its Equity Financing Agreement with GHS Investments, LLC.

 

Cash flows from operating activities

 

Net cash used in operating activities during the three months ended March 31, 2018 was $997,793 compared to $811,961 during the three months ended March 31, 2017. The change was principally driven by management’s greater use of stock-based payments to vendors and employees in 2017 compared to 2018.

 

Cash flows from investing activities

 

Net cash used in investing activities during the three months ended March 31, 2018 was $32,270 compared to $8,809 during the three months ended March 31, 2017. In 2018 the Company invested in software development for its new HEMPd.com website and acquired $1,050 in equipment compared to $8,809 in equipment acquisitions in 2017.

 

Cash flows from financing activities

 

Net cash provided by financing activities during the three months ended March 31, 2018 was $1,594,026 compared to $666,167 during the three months ended March 31, 2017. In 2018, proceeds of $300,000 were from the issuance of convertible notes payable compared to $0 in 2017. In 2017 the Company also received proceeds of $110,000 from the issuance of related party convertible notes payable. There were no proceeds from the issuance of related party convertible notes payable in 2018. In 2018 the Company repaid $175,974 on convertible and related party convertible notes payable. There were no repayments in 2017. In 2018 there were proceeds of $1,470,000 from the issuance of common stock compared to $558,882 in 2017.

 

Outstanding Material Indebtedness

 

Recently, the Company’s operations have been funded primarily through the private sales of common stock or the issuance of convertible promissory notes, which are convertible to common stock at fixed prices ranging from $0.01 to $0.024, at discounts to market price ranging from 20% to 50%, or combinations thereof. As of March 31, 2018 the Company had total notes payable outstanding of $975,103 (net of discount).

 

On October 12, 2017 the Company executed an Equity Financing Agreement (“EFA”) with GHS Investments LLC (“GHS”). Under the agreement, GHS has committed to purchase up $12 million of the Company’s common stock over a 24-month period at a 20% discount off the market price, as defined in the agreement. The agreement contains certain restrictions on the timing of the stock purchases and required the Company to file a registration statement with the Securities and Exchange Commission (“SEC”) to register the common shares issuable under the agreement. On November 1, 2017, the Company filed a Registration Statement on Form S-1 to register 300,000,000 common shares to be resold by GHS. On February 9, 2018 the Company received a Notice of Effectiveness from the SEC on an amended Form S-1 registering 250,000,000 common shares. The Company began stock sales to GHS on February 13, 2018. Since February 13, 2018 the Company has sold 197,997,954 common shares to GHS under this EFA. The Company plans to file another Form S-1 in May 2018 to register additional shares. The Company expects to fund its operational and investing needs through the EFA over the next two years.

 

Future Liquidity Requirements

 

During the next twelve months we expect our operational cash shortfall to be approximately $850,000 to $1,500,000, depending on the timing, development, advertising, and marketing needs related to our future product rollouts. Our cash needs will be higher in the second quarter of 2018, we expect our outside cash needs to lessen with a net operational positive cash flow in the fourth quarter of 2018. We expect our operational cash needs will be met by our current funding arrangements with GHS.

 

 

Off Balance Sheet Arrangements

 

As of March 31, 2018, there are no off-balance sheet arrangements.

 

Going Concern

 

The Company has a shareholders’ deficit of $985,464 and an accumulated deficit of $33,994,478 as of March 31, 2018 and has generated operating losses since inception. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern. The Company’s continuation as a going concern is dependent upon its ability to generate revenues and its ability to continue raising capital.

 

On October 12, 2017, the Company entered into an Equity Financing Agreement (“EFA”) with GHS Investments, LLC (“GHS”), which provides for GHS to purchase up to $12,000,000 of the Company’s common stock over a 24-month period based on a contractually agreed upon market discount. In February 2018 the Company began sales of common stock to GHS under the EFA. Management believes the EFA will provide sufficient cash flows until cash flows from operations become consistently positive.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

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

 

Item 4. Controls and Procedures

 

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of March 31, 2018. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer, Michael Welch, and our Chief Financial Officer, Jens Mielke. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2018 our disclosure controls and procedures are not effective. There have been no changes in our internal controls over financial reporting during the three months ended March 31, 2018.

 

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

 

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

 

Limitations on the Effectiveness of Internal Controls

 

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

 

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

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

 

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

 

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

 

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

 

Statewide Beverage Company, Inc. filed a breach of contract claim, and the Company has filed counterclaims for breach of contract, common law fraud and declaratory relief. The case is currently in the discovery phase.

 

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

 

The Company is seeking the return of Series A Preferred Stock and common stock issued to certain defendants or later obtained by certain other defendants for little or no consideration paid to the Company. The Company alleges among other things that RMHB’s former Chairman of the Board breached his fiduciary duty to the Company by issuing these shares to himself and others. RMHB is also seeking to void the Indemnification and Release Agreement between the parties that was executed in June 2017. The Company is awaiting response from discovery requests at the current time. A trial date has been set for December 2018.

 

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 March 30, 2018 and May 15, 2018:

 

Date	Name	Shares Issued	Issue Price	Description		Exemption
3/30/2018	GHS Investments	40,322,581	0.0099	Shares Sold	Rule 506
3/31/2018	Tom Blackington	104,167	0.0120	Services Rendered	Section 4(2)
4/2/2018	Dean Blythe	2,000,000	0.0116	Services Rendered	Section 4(2)
4/12/2018	GHS Investments	4,000,000	0.0068	Note Payable Conversion	Rule 506
4/18/2018	GHS Investments	38,759,690	0.0103	Shares Sold	Rule 506
4/30/2018	Tom Blackington	121,655	0.0103	Services Rendered	Section 4(2)
5/3/2018	GHS Investments	24,089,250	0.0104	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, 2016 formatted in Extensible Business Reporting Language (XBRL)

 

 

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: May 17, 2018

 

 

By: /s/ Michael Welch

Michael Welch

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

 

Date: May 17, 2018

 

 

By: /s/ Jens Mielke

Jens Mielke

Title: Chief Financial Officer