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
X] | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
For the quarterly period endedSeptember 30, 2019 | ||
[ ] | Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934 | |
For the transition period from ______ to ______ |
For the quarterly period endedSeptember 30, 2017
[ ] 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)
Nevada90-0895673
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
Nevada | 90-0895673 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
9101 LBJ Freeway, Suite 200, Dallas, TX 75243
(Address of principal executive offices)
(800)-260-9062
(Registrant’s telephone number)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None.
Indicated by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days [X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
[ ] Large accelerated filer [ ] Accelerated filer
[ ] Non-accelerated filer [X] Smaller reporting company
[X] Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 896,655,520133,811,183 common shares as of November 13, 2017.18, 2019.
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
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 | |
Item 4: | Controls and Procedures | |
PART II – OTHER INFORMATION
| ||
Item 1: | Legal Proceedings | |
Item 1A: | Risk Factors | |
Item 2: | Unregistered Sales of Equity Securities and Use of Proceeds | |
Item 3: | Defaults Upon Senior Securities | |
Item 4: | Mine Safety Disclosures | |
Item 5: | Other Information | |
Item 6: | Exhibits |
2 |
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Our financial statements included in this Form 10-Q are as follows:
F-1 | Consolidated Balance Sheets as of September 30, |
F-2 | Consolidated Statements of Operations for the three and nine months ended September 30, |
F-3 | Consolidated Statements of Cash Flows for the three and nine months ended September 30, |
F-4 | Consolidated Statements of Shareholders’ Deficit for the three and nine months ended September 30, 2019 and 2018 (unaudited); |
F-5 | Notes to Consolidated Financial Statements (unaudited). |
These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the SEC instructions to Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the interim period ended September 30, 20172019 are not necessarily indicative of the results that can be expected for the full year.
3 |
Rocky Mountain High Brands, Inc.
Consolidated Balance Sheets
(Unaudited)
September 30, 2017 | June 30, 2017 | |||||
CURRENT ASSETS | ||||||
Cash | $ | 19,266 | $ | 91,675 | ||
Accounts Receivable, net of allowance of $221,268 and $138,373 | 1,657 | 63,268 | ||||
Inventory | 195,363 | 224,695 | ||||
Prepaid Expenses and Other Current Assets | 682,435 | 774,338 | ||||
TOTAL CURRENT ASSETS | 898,721 | 1,153,976 | ||||
Property and Equipment, net | 43,730 | 48,133 | ||||
Other Assets | 102,256 | 77,256 | ||||
TOTAL ASSETS | $ | 1,044,707 | $ | 1,279,365 | ||
LIABILITIES AND SHAREHOLDERS' DEFICIT | ||||||
CURRENT LIABILITIES | ||||||
Accounts Payable and Accrued Liabilities | $ | 547,137 | $ | 441,190 | ||
Related Party Convertible Notes Payable, net of debt discount | 438,832 | 266,247 | ||||
Related Party Notes Payable | — | — | ||||
Convertible Notes Payable, net of debt discount | 782,099 | 733,253 | ||||
Note Payable-Other | 23,164 | 26,130 | ||||
Redemption Value of Series C Preferred Stock | 1,661,424 | 1,661,424 | ||||
Accrued Interest | 447,974 | 382,820 | ||||
Derivative Liability | 3,590,301 | 5,072,579 | ||||
TOTAL CURRENT LIABILITIES | 7,490,931 | 8,583,643 | ||||
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, 2017 and June 30, 2017 | 1,000 | 1,000 | ||||
Preferred Stock - Series B - Par Value of $.001 5,000,000 shares authorized; no shares issued and outstanding | — | — | ||||
Preferred Stock - Series C - Par Value of $.001 2,000,000 shares authorized; 1,107,607 shares outstanding (classified as a liability as of September 30, 2017 and June 30, 2017) | — | — | ||||
Preferred Stock - Series D - Par Value of $.001 2,000,000 shares authorized; no shares issued and outstanding | — | — | ||||
Preferred Stock - Series E - Par Value of $.001 789,474 shares authorized, issued, and outstanding as of September 30, 2017; No shares authorized, issued, and outstanding as of June 30, 2017 | 789 | — | ||||
Common Stock - Par Value of $.001 950,000,000 shares authorized; 793,266,046 shares issued and outstanding as of September 30, 2017; 786,525,118 shares issued and outstanding as of June 30, 2017 | 793,266 | 786,525 | ||||
Additional Paid In Capital | 18,228,082 | 18,062,830 | ||||
Accumulated Deficit | (25,469,361) | (26,154,633) | ||||
TOTAL SHAREHOLDERS' DEFICIT | (6,446,224) | (7,304,278) | ||||
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT | $ | 1,044,707 | $ | 1,279,365 |
September 30, 2019 | December 31, 2018 | ||||||
(Unaudited) | |||||||
CURRENT ASSETS | |||||||
Cash | $ | 68,811 | $ | 613,686 | |||
Accounts Receivable, net of allowance of $0 and $5,275, respectively | 326,470 | 17,324 | |||||
Inventory | 278,212 | 146,722 | |||||
Prepaid Expenses and Other Current Assets | 398,441 | 388,074 | |||||
TOTAL CURRENT ASSETS | 1,071,934 | 1,165,806 | |||||
Property and Equipment, net | 22,705 | 34,280 | |||||
Intangible Assets | 15,610 | 148,647 | |||||
Other Assets | 20,503 | 26,245 | |||||
TOTAL ASSETS | $ | 1,130,752 | $ | 1,374,978 | |||
LIABILITIES AND SHAREHOLDERS' DEFICIT | |||||||
CURRENT LIABILITIES | |||||||
Accounts Payable and Accrued Liabilities | $ | 693,022 | $ | 505,214 | |||
Convertible Notes Payable, net of debt discount | 651,775 | 666,596 | |||||
Notes Payable | 30,000 | 37,493 | |||||
Accrued Interest | 65,405 | 25,758 | |||||
Deferred Revenue | 466,300 | 466,300 | |||||
Derivative Liability | 263,530 | 376,172 | |||||
TOTAL CURRENT LIABILITIES | 2,170,032 | 2,077,533 | |||||
SHAREHOLDERS' DEFICIT | |||||||
Preferred Stock - Series A - Par Value of $.001; 1,000,000 shares designated; No shares issued and outstanding as of September 30, 2019 and December 31, 2018 | — | — | |||||
Preferred Stock - Series B - Par Value of $.001; 7,000,000 shares designated; No shares issued and outstanding as of September 30, 2019 and December 31, 2018 | — | — | |||||
Preferred Stock - Series C - Par Value of $.001; 2,000,000 shares designated; No shares issued and outstanding as of September 30, 2019 and December 31, 2018 | — | — | |||||
Preferred Stock - Series D - Par Value of $.001; 2,000,000 shares designated; No shares issued and outstanding as of September 30, 2019 and December 31, 2018 | — | — | |||||
Preferred Stock - Series E - Par Value of $.001; 789,474 shares designated; No shares issued and outstanding as of September 30, 2019 and December 31, 2018 | — | — | |||||
Common Stock - Par Value of $.001; 200,000,000 shares authorized; 126,162,146 shares issued and outstanding as of September 30, 2019; 94,580,869 shares issued and outstanding as of December 31, 2018 | 126,162 | 94,581 | |||||
Additional Paid-In Capital | 36,703,086 | 34,221,215 | |||||
Accumulated Deficit | (37,867,494 | ) | (35,018,351) | ||||
Total Rocky Mountain High Brands Shareholders' Deficit | (1,038,246 | ) | (702,555) | ||||
Noncontrolling Interests | (1,034 | ) | — | ||||
TOTAL SHAREHOLDERS' DEFICIT | (1,039,280 | ) | (702,555) | ||||
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT | $ | 1,130,752 | $ | 1,374,978 |
The Accompanying Notes are an Integral Part of the Consolidated Financial Statements
F-1 |
Rocky Mountain High Brands, Inc.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, 2019 | September 30, 2018 | September 30, 2019 | September 30, 2018 | ||||||||||||
Sales | $ | 353,863 | $ | 117,117 | $ | 466,864 | $ | 240,701 | |||||||
Cost of Sales | 352,517 | 110,940 | 467,101 | 275,730 | |||||||||||
Inventory Obsolescence | 107,594 | 13,721 | 107,594 | 25,145 | |||||||||||
Gross Loss | (106,248 | ) | (7,544 | ) | (107,831 | ) | (60,174) | ||||||||
Operating Expenses | |||||||||||||||
General and Administrative | 617,378 | 823,173 | 2,270,864 | 2,813,479 | |||||||||||
Advertising and Marketing | 101,225 | 340,666 | 469,600 | 621,783 | |||||||||||
Impairment Expense | 118,066 | — | 118,066 | — | |||||||||||
Total Operating Expenses | 836,669 | 1,163,839 | 2,858,530 | 3,435,262 | |||||||||||
Loss from Operations | (942,917 | ) | (1,171,383 | ) | (2,966,361 | ) | (3,495,436) | ||||||||
Other (Income)/Expenses: | |||||||||||||||
Interest Expense | 296,692 | 580,904 | 929,446 | 3,763,602 | |||||||||||
(Gain) Loss on Extinguishment of Debt | — | — | (689,991 | ) | 191,138 | ||||||||||
Gain on Lawsuit Judgment and Legal Settlement | — | (688,724 | ) | (230,840 | ) | (688,724) | |||||||||
Gain on Change in Fair Value of Derivative Liability | (319,367 | ) | (71,591 | ) | (124,304 | ) | (2,059,621) | ||||||||
Total Other (Income) Expenses | (22,675 | ) | (179,411 | ) | (115,689 | ) | 1,206,395 | ||||||||
Loss Before Income Tax Provision | (920,242 | ) | (991,972 | ) | (2,850,672 | ) | (4,701,831) | ||||||||
Income Tax Provision | — | — | — | — | |||||||||||
Net Loss | $ | (920,242 | ) | $ | (991,972 | ) | $ | (2,850,672 | ) | $ | (4,701,831) | ||||
Net Loss Attributable to Noncontrolling Interests | (1,529 | ) | — | (1,529 | ) | — | |||||||||
Net Loss Attributable to Rocky Mountain High Brands | $ | (918,713 | ) | $ | (991,972 | ) | $ | (2,849,143 | ) | $ | (4,701,831) | ||||
Net Loss per Common Share - Basic and Diluted | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.06) | ||||
Weighted Average Shares Outstanding | 121,033,557 | 81,798,422 | 109,033,820 | 74,150,686 |
Three Months Ended | |||||||
September 30, 2017 | September 30, 2016 | ||||||
Sales | $ | 41,002 | $ | 295,587 | |||
Cost of Sales | 43,800 | 90,020 | |||||
Gross Profit (Loss) | (2,798 | ) | 205,567 | ||||
Operating Expenses | |||||||
General and Administrative | 604,751 | 864,549 | |||||
Advertising and Marketing | 56,318 | 317,540 | |||||
Total Operating Expenses | 661,069 | 1,182,089 | |||||
Loss from Operations | (663,867 | ) | (976,522) | ||||
Other (Income)/Expenses: | |||||||
Interest Expense | 464,110 | 234,519 | |||||
Gain on Change in Fair Value of Derivative Liability | (1,813,249 | ) | (480,764) | ||||
Total Other (Income) Expenses: | (1,349,139 | ) | (246,245) | ||||
Income (Loss) Before Income Tax Provision | 685,272 | (730,277) | |||||
Income Tax Provision | — | — | |||||
Net Income (Loss) | $ | 685,272 | $ | (730,277) | |||
Net Income (Loss) per Common Share - Basic and Diluted | $ | 0.00 | $ | (0.00) | |||
Weighted Average Shares Outstanding | 788,609,275 | 594,531,676 |
The Accompanying Notes are an Integral Part of the Consolidated Financial Statements.
F-2 |
Rocky Mountain High Brands, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended | ||||||||||||||
Three Months Ended | September 30, 2019 | September 30, 2018 | ||||||||||||
September 30, 2017 | September 30, 2016 | |||||||||||||
Operating Activities: | ||||||||||||||
Net Income (Loss) | $ | 685,272 | $ | (730,277) | ||||||||||
Net Loss | $ | (2,850,672 | ) | $ | (4,701,831) | |||||||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||
Stock-based compensation | 82,824 | 49,704 | 146,017 | 390,758 | ||||||||||
Stock-based payments to vendors | — | 67,750 | ||||||||||||
Warrants and options issued for services rendered | 23,074 | 191,969 | — | 91,982 | ||||||||||
Non-cash interest expense | 464,110 | 233,826 | 919,013 | 3,638,816 | ||||||||||
Gain on change in fair value of derivative liability | (1,813,249 | ) | (480,764) | |||||||||||
Loss on disposal of property and equipment | 832 | — | ||||||||||||
Fees and penalties on debt | — | 120,251 | ||||||||||||
Noncash portion of gain on lawsuit judgment and legal settlement | (30,840 | ) | (688,724) | |||||||||||
(Gain) Loss on change in fair value of derivative liability | (124,304 | ) | (2,059,621) | |||||||||||
(Gain) Loss on extinguishment of debt | (689,991 | ) | 191,138 | |||||||||||
Bad debt expense | 64,042 | — | 1,678 | 1,188 | ||||||||||
Depreciation expense | 4,584 | 11,659 | ||||||||||||
Depreciation and amortization expense | 30,436 | 19,701 | ||||||||||||
Impairment of goodwill and other intangibles | 118,066 | — | ||||||||||||
Inventory obsolescence | 107,594 | 25,145 | ||||||||||||
Changes in operating assets and liabilities: | — | — | ||||||||||||
Accounts Receivable | (2,431 | ) | (244,503) | |||||||||||
Accounts receivable | (310,824 | ) | (39,722) | |||||||||||
Inventory | 29,332 | 30,738 | (239,084 | ) | (54,458) | |||||||||
Prepaid expenses | 24,079 | 84,540 | ||||||||||||
Prepaid expenses and other current assets | (116,211 | ) | (39,878) | |||||||||||
Other assets | (25,000 | ) | (18,430) | 1,852 | (4,232) | |||||||||
Accounts payable and accrued liabilities | 65,601 | 305,482 | 189,337 | (60,428) | ||||||||||
NET CASH USED IN OPERATING ACTIVITIES | (396,930 | ) | (566,056) | (2,847,933 | ) | (3,102,165) | ||||||||
Investing Activities: | ||||||||||||||
Investment in Rocky Mountain High Water Company | — | (39,774) | ||||||||||||
Investments in other assets | (500 | ) | (31,220) | |||||||||||
Acquisition of property and equipment | (1,013 | ) | (36,635) | — | (13,008) | |||||||||
Disposal of property and equipment | — | 35,000 | ||||||||||||
NET CASH USED IN INVESTING ACTIVITIES | (1,013 | ) | (41,409) | (500 | ) | (44,228) | ||||||||
Financing Activities: | ||||||||||||||
Proceeds from issuance of convertible notes | 220,000 | 220,000 | 367,500 | 825,000 | ||||||||||
Proceeds from issuance of related party notes | 100,000 | 35,000 | ||||||||||||
Proceeds from issuance of note payable-other | — | 35,960 | ||||||||||||
Repayment of note payable-other | (2,966 | ) | — | |||||||||||
Repayment of convertible notes | — | (172,932) | ||||||||||||
Repayment of notes payable | (7,493 | ) | (10,206) | |||||||||||
Proceeds from issuance of common stock | 8,500 | 214,250 | 1,943,551 | 2,558,045 | ||||||||||
NET CASH PROVIDED BY FINANCING ACTIVITIES | 325,534 | 505,210 | 2,303,558 | 3,199,907 | ||||||||||
INCREASE (DECREASE) IN CASH | (72,409 | ) | (102,255) | (544,875 | ) | 53,514 | ||||||||
CASH - BEGINNING OF PERIOD | 91,675 | 102,255 | 613,686 | 16,983 | ||||||||||
CASH - END OF PERIOD | $ | 19,266 | $ | — | $ | 68,811 | $ | 70,497 | ||||||
Supplemental cash flow information: | ||||||||||||||
Cash paid for interest | $ | 10,433 | $ | 10,567 | ||||||||||
Cash paid for taxes | $ | — | $ | — | ||||||||||
Supplemental disclosure of non-cash financing and investing activities: | ||||||||||||||
Common stock issued for conversion of debt | $ | 126,207 | $ | 41,800 | $ | 188,870 | $ | 4,000,604 | ||||||
Common stock issued for acquisition | $ | — | $ | 75,000 | ||||||||||
Debt and accrued interest converted for common stock | $ | 85,234 | $ | — | $ | 271,189 | $ | 499,053 | ||||||
Derivative liability incurred for debt discount | $ | 443,482 | $ | — | ||||||||||
Derivative liability relieved upon conversion of related debt | $ | 52,542 | $ | — | $ | — | $ | 3,021,935 | ||||||
Beneficial conversion feature recognized | $ | — | $ | 128,500 | ||||||||||
Beneficial conversion feature recognized as debt discount | $ | 367,500 | $ | 4,000,230 |
The Accompanying Notes are an Integral Part of the Consolidated Financial Statements.
F-3 |
Rocky Mountain High Brands, Inc.
Consolidated Statements of Shareholders' Deficit for the Three and Nine Months Ended September 30, 2019
(Unaudited)
Common Stock | Preferred Stock A | Preferred Stock C | Preferred Stock E | ||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | APIC | Accumulated Deficit | Total RMHB Shareholders’ Deficit | Noncontrolling Interests | Total Equity/(Deficit) | |||||||||||||||||||||||||||||||||||||||
Balance - December 31, 2018 | 94,580,869 | $ | 94,581 | — | $ | — | — | $ | — | — | $ | — | $ | 34,221,215 | $ | (35,018,351 | ) | $ | (702,555 | ) | $ | — | $ | (702,555) | |||||||||||||||||||||||||||
Shares issued for cash | 7,813,337 | 7,813 | — | — | — | — | — | — | 1,009,233 | — | 1,017,046 | — | 1,017,046 | ||||||||||||||||||||||||||||||||||||||
Shares issued for compensation | 25,403 | 25 | — | — | — | — | — | — | 3,976 | — | 4,001 | — | 4,001 | ||||||||||||||||||||||||||||||||||||||
Shares issued upon conversion of convertible notes | 1,750,000 | 1,750 | — | — | — | — | — | — | 169,592 | — | 171,342 | — | 171,342 | ||||||||||||||||||||||||||||||||||||||
Net loss for the three months ended March 31, 2019 | — | — | — | — | — | — | — | — | — | (1,263,260 | ) | (1,263,260 | ) | — | (1,263,260) | ||||||||||||||||||||||||||||||||||||
Balance - March 31, 2019 | 104,169,609 | $ | 104,170 | — | $ | — | — | $ | — | — | $ | — | $ | 35,404,015 | $ | (36,281,611 | ) | $ | (773,426 | ) | $ | — | $ | (773,426) | |||||||||||||||||||||||||||
Shares issued for cash | 2,490,932 | 2,491 | — | — | — | — | — | — | 119,636 | — | 122,127 | — | 122,127 | ||||||||||||||||||||||||||||||||||||||
Shares issued upon conversion of convertible notes | 2,315,980 | 2,316 | — | — | — | — | — | — | 15,213 | — | 17,529 | — | 17,529 | ||||||||||||||||||||||||||||||||||||||
Stock option forfeiture | — | — | — | — | — | — | — | — | 7,530 | — | 7,530 | — | 7,530 | ||||||||||||||||||||||||||||||||||||||
Beneficial conversion feature recognized on convertible notes payable | — | — | — | — | — | — | — | — | 367,500 | — | 367,500 | — | 367,500 | ||||||||||||||||||||||||||||||||||||||
Fractional shares issued as a result of the reverse stock split | 3,470 | 3 | — | — | — | — | — | — | (3 | ) | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Net loss for the three months ended June 30, 2019 | — | — | — | — | — | — | — | — | — | (667,170 | ) | (667,170 | ) | — | (667,170) | ||||||||||||||||||||||||||||||||||||
Balance - June 30, 2019 | 108,979,991 | $ | 108,980 | — | $ | — | — | $ | — | — | $ | — | $ | 35,913,891 | $ | (36,948,781 | ) | $ | (925,910 | ) | $ | — | $ | (925,910) | |||||||||||||||||||||||||||
Sweet Ally purchase of Sweet Rock, Inc. shares | — | — | — | — | — | — | — | — | — | — | — | 495 | 495 | ||||||||||||||||||||||||||||||||||||||
Shares issued for cash | 17,182,155 | 17,182 | — | — | — | — | — | — | 787,195 | — | 804,377 | — | 804,377 | ||||||||||||||||||||||||||||||||||||||
Warrant forfeiture | — | — | — | — | — | — | — | — | 2,000 | — | 2,000 | — | 2,000 | ||||||||||||||||||||||||||||||||||||||
Net loss for the three months ended September 30, 2019 | — | — | — | — | — | — | — | — | — | (918,713 | ) | (918,713 | ) | (1,529 | ) | (920,242) | |||||||||||||||||||||||||||||||||||
Balance - September 30, 2019 | 126,162,146 | $ | 126,162 | — | $ | — | — | $ | — | — | $ | — | $ | 36,703,086 | $ | (37,867,494 | ) | $ | (1,038,246 | ) | $ | (1,034 | ) | $ | (1,039,280) |
Rocky Mountain High Brands, Inc.
Consolidated Statements of Shareholders' Deficit for the Three and Nine Months Ended September 30, 2018
(Unaudited)
Common Stock | Preferred Stock A | Preferred Stock C | Preferred Stock E | ||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | APIC | Accumulated Deficit | Total RMHB Shareholders’ Deficit | Noncontrolling Interests | Total Equity/(Deficit) | |||||||||||||||||||||||||||||||||||||||
Balance - December 31, 2017 | 57,985,323 | $ | 57,985 | 1,000,000 | $ | 1,000 | — | $ | — | — | $ | — | $ | 24,561,530 | $ | (31,662,414 | ) | $ | (7,041,899 | ) | $ | — | $ | (7,041,899) | |||||||||||||||||||||||||||
Shares issued for cash | 6,757,451 | 6,757 | — | — | — | — | — | — | 1,463,243 | — | 1,470,001 | — | 1,470,001 | ||||||||||||||||||||||||||||||||||||||
Shares issued for compensation | 1,984,690 | 1,985 | — | — | — | — | — | — | 154,280 | — | 156,265 | — | 156,265 | ||||||||||||||||||||||||||||||||||||||
Shares issued upon conversion of convertible notes | 8,440,262 | 8,440 | — | — | — | — | — | — | 3,363,554 | — | 3,371,994 | — | 3,371,994 | ||||||||||||||||||||||||||||||||||||||
Shares to vendors for services rendered | 296,271 | 296 | — | — | — | — | — | — | 61,204 | — | 61,500 | — | 61,500 | ||||||||||||||||||||||||||||||||||||||
Beneficial conversion feature recognized on convertible notes payable | — | — | — | — | — | — | — | — | 3,328,740 | — | 3,328,740 | — | 3,328,740 | ||||||||||||||||||||||||||||||||||||||
Net loss for the three months ended March 31, 2018 | — | — | — | — | — | — | — | — | — | (2,332,064 | ) | (2,332,064 | ) | — | (2,332,064) | ||||||||||||||||||||||||||||||||||||
Balance - March 31, 2018 | 75,463,997 | $ | 75,464 | 1,000,000 | $ | 1,000 | — | $ | — | — | $ | — | $ | 32,932,550 | $ | (33,994,478 | ) | $ | (985,464 | ) | $ | — | $ | (985,464) | |||||||||||||||||||||||||||
Shares issued for cash | 5,453,434 | 5,453 | — | — | — | — | — | — | 1,039,108 | — | 1,044,561 | — | 1,044,561 | ||||||||||||||||||||||||||||||||||||||
Shares issued for compensation | 124,247 | 124 | — | — | — | — | — | — | 27,104 | — | 27,228 | — | 27,228 | ||||||||||||||||||||||||||||||||||||||
Options issued for compensation | — | — | — | — | — | — | — | — | 44,476 | — | 44,476 | — | 44,476 | ||||||||||||||||||||||||||||||||||||||
Shares issued upon conversion of convertible notes | 467,742 | 468 | — | — | — | — | — | — | 116,719 | — | 117,187 | — | 117,187 | ||||||||||||||||||||||||||||||||||||||
Shares to vendors for services rendered | 20,547 | 21 | — | — | — | — | — | — | 3,729 | — | 3,750 | — | 3,750 | ||||||||||||||||||||||||||||||||||||||
Net loss for the three months ended June 30, 2018 | — | — | — | — | — | — | — | — | — | (1,377,795 | ) | (1,377,795 | ) | — | (1,377,795) | ||||||||||||||||||||||||||||||||||||
Balance - June 30, 2018 | 81,529,967 | $ | 81,530 | 1,000,000 | $ | 1,000 | — | $ | — | — | $ | — | $ | 34,163,686 | $ | (35,372,273 | ) | $ | (1,126,057 | ) | $ | — | $ | (1,126,057) | |||||||||||||||||||||||||||
Shares issued for cash | 289,116 | 289 | — | — | — | — | — | — | 43,194 | — | 43,483 | — | 43,483 | ||||||||||||||||||||||||||||||||||||||
Shares issued for compensation | 25,757 | 26 | — | — | — | — | — | — | 3,764 | — | 3,790 | — | 3,790 | ||||||||||||||||||||||||||||||||||||||
Options issued for compensation | — | — | — | — | — | — | — | — | 47,506 | — | 47,506 | — | 47,506 | ||||||||||||||||||||||||||||||||||||||
Shares issued upon conversion of convertible notes | 3,305,360 | 3,305 | — | — | — | — | — | — | 508,118 | — | 511,423 | — | 511,423 | ||||||||||||||||||||||||||||||||||||||
Shares to vendors for services rendered | 15,708 | 16 | — | — | — | — | — | — | 2,484 | — | 2,500 | — | 2,500 | ||||||||||||||||||||||||||||||||||||||
Shares issued for acquisition | 373,134 | 373 | — | — | — | — | — | — | 74,627 | 75,000 | — | 75,000 | |||||||||||||||||||||||||||||||||||||||
Shares returned as part of legal settlement | (90,909 | ) | (91 | ) | (1,727 | ) | (1,818 | ) | — | (1,818) | |||||||||||||||||||||||||||||||||||||||||
Beneficial conversion feature recognized on convertible notes payable | — | — | — | — | — | — | — | — | 671,490 | 671,490 | — | 671,490 | |||||||||||||||||||||||||||||||||||||||
Net loss for the three months ended September 30, 2018 | — | — | — | — | — | — | — | — | — | (991,972 | ) | (991,972 | ) | — | (991,972) | ||||||||||||||||||||||||||||||||||||
Balance - September 30, 2018 | 85,448,133 | $ | 85,448 | 1,000,000 | $ | 1,000 | — | $ | — | — | $ | — | $ | 35,513,142 | $ | (36,364,245 | ) | $ | (764,655 | ) | $ | — | $ | (764,655) |
The Accompanying Notes are an Integral Part of the Consolidated Financial Statements.
F-4 |
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 has developedcurrently operates through its parent company, four wholly-owned subsidiaries, one majority-owned subsidiary, and one minority-owned subsidiary, which the Company controls. All subsidiaries are consolidated for financial reporting purposes.
RMHB is currently sellinga consumer goods company that specializes in developing, manufacturing, marketing, and distributing high-quality, health conscious, cannabidiol (“CBD”) and hemp- infused products that span various categories including beverage, food, fitness, skin care and more. RMHB also markets a naturally high alkaline spring water as part of our brand portfolio.
In March 2018, the Company launched the HEMPd brand with tinctures, gummies, water soluble drops, capsules, lotions, salves, and E-juice liquids. In October 2018, the Company introduced CBD-infused waters in four flavors and plans to introduce additional HEMPd product offerings in the marketplace a lineup of five hemp-infused beverages and 2oz. energy shotsfuture. HEMPd products are marketed through its nationwide distributor network and online. Effective June 30, 2016,the Company’s Wellness For Life Colorado, Inc. subsidiary. In November 2018, the Company entered intodiscontinued sales of its vape-related products.
On July 25, 2018 the Company acquired the assets of BFIT Brands, LLC (“BFIT”), an Arizona limited liability company. These assets include the cash, accounts receivable, inventory, FitWhey trademark, recipes and formulas of BFIT’s FitWhey branded water-based protein drinks containing caffeine and a business alliancevitamin-B pack.
On April 22, 2019 the reverse split of the Company’s Stock, at a ratio of one share for every 20 shares, was effective. All common stock share and per share amounts in this document reflect this reverse split.
On June 12, 2019 the Company organized Sweet Rock, LLC (“Sweet Rock”), a 51% owned company, with Poafpybitty Family, LLC to launchSweet Ally, Inc. Sweet Rock will manufacture and market CBD-infused chocolates, hard candies, and baked goods for distribution in the United States.
RMHB also bottles and distributes its naturally high alkaline spring water under the name Eagle Spirit Spring Water a line of purified, high-alkaline spring water sourced from Native American tribal landand plans to re-introduce its hemp-infused energy drinks later in Oklahoma. 2019 or early 2020.
NOTE 2 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of the Company’s management, the accompanying unaudited consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of September 30, 20172019 and the results of operations and cash flows for the periods presented. The results of operations for the three and nine months ended September 30, 20172019 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/A10-K for the year ended June 30, 2017December 31, 2018 filed with the SEC on October 12, 2017.April 15, 2019.
Principles of Consolidation
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States. The consolidated financial statements include the accounts of the Company, its wholly-owned and controlled subsidiaries. All intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of the financial statements in conformity with Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. Certain of the Company’s estimates could be affected by external conditions, including those unique to its industry, and general economic conditions. It is possible that these external factors could have an effect on the Company’s estimates that could cause actual results to differ from its estimates. The Company re-evaluates all of its accounting estimates at least quarterly based on these conditions and record adjustments when necessary.
F-5 |
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 605,606, “Revenue Recognition.from Contracts with Customers,” as amended. It records revenue when persuasive evidence of an arrangement exists, product delivery has occurred, the selling price to the customer is fixed or determinable and collectability of the revenue is reasonably assured. The Company has not experienced any significant returns from customers and accordingly, in management’s opinion, no reserve for returns has been provided. Payments received prior to shipment of goods are recorded as deferred revenue.
The following table represents sales by sales channel for each of the periods:
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, 2019 | September 30, 2018 | September 30, 2019 | September 30, 2018 | ||||||||||
Online | $ | 30,356 | $ | 96,063 | $ | 127,667 | $ | 171,322 | |||||
Private Label | 322,000 | — | 322,000 | — | |||||||||
Distributor | 66 | 6,449 | 381 | 47,237 | |||||||||
Retailer | 1,441 | 14,605 | 16,816 | 22,142 | |||||||||
Total | $ | 353,863 | $ | 117,117 | $ | 446,864 | $ | 240,701 |
All sales for all periods presented were to domestic customers.
Due to the nature of the Company’s revenue from contracts with customers, the Company does not have material contract assets or liabilities that fall under the scope of ASC 606.
The Company’s revenues accounted for under ASC 606, generally, do not require significant estimates or judgments based on the nature of the Company’s revenue streams. The sales prices are generally fixed at the point of sale and all consideration from contracts is included in the transaction price. The Company’s contracts do not include multiple performance obligations or material variable consideration.
Accounts Receivable and Allowance for Doubtful Accounts Receivable
The Company has a policy of reserving for uncollectible accounts based on the best estimate of the amount of probable credit losses in our existing accounts receivable. We extend credit to customers based on an evaluation of their financial condition and other factors. The Company generally does not require collateral or other security to support accounts receivable and perform ongoing credit evaluations of customers and maintain an allowance for potential bad debts if required.
It is determined whether an allowance for doubtful accounts is required by evaluating specific accounts where information indicates the customers may have an inability to meet financial obligations. In these cases,weuse 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.
F-6 |
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 shortshort- and long termlong-term credit obligations approximate fair value because the effective yields on these obligations, which include contractual interest rates taken together with other features such as concurrent issuances of warrants and/or embedded conversion options, are comparable to rates of returns for instruments of similar credit risk.
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
The derivative liability, which relates to the conversion feature of convertible debt and common stock warrants and options, is classified as a Level 3 liability, and is the only financial liability measure at fair value on a recurring basis.
The change in the Level 3 financial instrument is as follows:
Balance, June 30, 2017 | $ | 5,072,579 | |
Issued during the three months ended September 30, 2017 | $ | 443,482 | |
Exercises/Conversions | $ | (112,511) | |
Change in fair value recognized in operations | $ | (1,813,249) | |
Balance, September 30, 2017 | $ | 3,590,301 |
21,192Balance, December 31, 2018 $ 376,172 Issued during the nine months ended September 30, 2019 $ Exercises/Conversions $ (7,530) Change in fair value recognized in operations $ (126,304) Balance, September 30, 2019 $ 263,530
The estimated fair value of the derivative instruments werewas valued using the Black-Scholes option pricing model, using the following assumptions as of September 30, 2017:2019:
None | |||
Expected Volatility | |||
Expected |
F-7 |
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation. Depreciation is provided for on a straight-line basis over the useful lives of the assets. Expenditures for additions and improvements are capitalized; repairs and maintenance are expensed as incurred.
Leases
The Company accounts for leases in accordance with Financial Accounting Standards Board (“FASB”) (Topic 840)Leases. In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02,Leases (Topic 842), which requires lessees to recognize on the balance sheet a right-of-use asset, representing their right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 was effective for calendar year-end public companies on January 1, 2019. The Company’s status as an emerging growth company allows it to defer the adoption of this standard by one year and the Company has elected to do so. The Company plans to adopt this new standard on January 1, 2020. The Company is currently evaluating the impact that ASU 2016-02 will have on its consolidated financial statements.
Capitalized Software
Direct costs related to software development, including coding, website application development, infrastructure development and graphics development, are capitalized and included in other assets. Amortization is provided for on a straight-line basis over the useful life of the software. Costs related to planning, content development, and operating and maintaining software are expensed as incurred.
Impairment of Long-Lived Assets
The Company evaluates intangible assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. The Company assesses the recoverability of the assets based on the undiscounted future cash flow and recognizes an impairment loss when the estimated undiscounted future cash flow expected to result from the use of the asset plus the net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When the Company identifies an impairment, it reduces the carrying amount of the asset to its estimated fair value based on a discounted cash flow approach or, when available and appropriate, to comparable market values. In August 2019 the Company recorded a $118,066 impairment on the intangible assets recorded as a result of the BFIT Brands, LLC acquisition in July 2018. No other impairment charges were recorded during the three and nine months ended September 30, 20172019 and September 30, 2016.2018.
Share-based Payments
Share-based payments to employees, including grants of employee stock options, are recognized as compensation expense in the financial statements based on their fair values, in accordance with FASB ASC Topic 718. That expense is recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period). The Company had no common stock options or common stock equivalents granted or outstanding for all periods presented.
The Company issued restricted stock to consultants and employees for various services. Cost for these transactions are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The value of the common stock is to be measured at the earlier of (i) the date at which a firm commitment for performance by the counterparty to earn the equity instruments is reached or (ii) the date at which the counterparty's performance is complete.
Convertible Instruments
The Company evaluates and accounts for conversion options embedded in convertible instruments in accordance with ASC 815 “Derivatives and Hedging Activities.” Applicable GAAP requires companies to bifurcate conversion options from their host instruments and account for them as freestanding derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
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 $6,446,224$1,039,280 and an accumulated deficit of $25,469,361$37,867,494 as of September 30, 2017,2019 and has generated operating losses since inception. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern. The Company’s continuation as a going concern is dependent upon its ability to generate revenues and its ability to continue raising capital.
On October 12, 2017June 27, 2018, the Company executed an Equity Financingentered into a Securities Purchase Agreement (“EFA”SPA”) with GHS Investments, LLC (“GHS”). Under the agreement,, which provides for GHS has committed to purchase up $12 millionto $15,000,000 of the Company’s common stock over a 24-month period atbased on a 20% discount offcontractually agreed upon market discount. The SPA replaces the market price, as defined in the agreement. The agreement contains certain restrictions on the timing of the stock purchases and requiresEquity Financing Agreement the Company to fileentered into with GHS on October 12, 2017. On August 8, 2018, the Company filed a registration statement with the Securities and Exchange Commission (“SEC”) to register theup to 16,000,000 shares of our common shares issuablestock to be purchased by GHS under the agreement. In conjunction with the Equity Financing Agreement,SPA. The registration statement became effective on October 10, 2018 and the Company entered into a $250,000 secured convertible promissory note with a term of nine months and bearing interest at 10%. The note is convertible to commonsold all the available shares based on a formula with a discount to market price.under the SPA. On November 2, 2017,May 15, 2019, the Company entered into a second $250,000 secured convertible promissory note with similar terms after filingfiled a registration statement for 30,000,000 shares to be purchased by GHS. This registration statement became effective on Form S-1June 18, 2019 and the Company began selling shares in June. Management believes the SPA, along with bridge financing from GHS, will provide sufficient cash flows until cash flows from operations become consistently positive.
NOTE 4 – Inventory
Inventory consists of the SEC on November 1, 2017 to register 300,000,000 shares at $.02 per sharefollowing:
September 30, 2019 | December 31, 2018 | ||||||
Finished inventory | $ | 38,493 | $ | 84,730 | |||
Raw materials and packaging | 239,719 | 61,992 | |||||
Total | $ | 278,212 | $ | 146,722 |
For the three and nine months ended September 30, 2019 the Company recorded inventory obsolescence expense of $107,594 for each period. This expense primarily represented the write-down of expired FitWhey beverages and ingredients, obsolete FitWhey labels, and other expired ingredients.
For the three and nine months ended September 30, 2018 the Company recorded inventory obsolescence expense of $13,721 and $25,145, respectively. The expense primarily represented the write-down of expired hemp-infused beverages and shots.
F-9 |
NOTE 5 – Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
September 30, 2019 | December 31, 2018 | ||||||
Prepaid officers’ compensation | $ | 179,041 | $ | 291,617 | |||
Prepaid directors’ compensation | — | 29,442 | |||||
Prepaid production | 167,400 | — | |||||
Other prepaid expenses and current assets | 52,000 | 67,015 | |||||
Total | $ | 398,441 | $ | 388,074 |
NOTE 6 – Property and Equipment
Property and equipment consist of the following:
September 30, 2019 | December 31, 2018 | ||||||
Vehicles | $ | 29,598 | $ | 29,598 | |||
Furniture and equipment | 45,322 | 41,422 | |||||
Personal computers | 17,901 | 17,901 | |||||
92,821 | 88,921 | ||||||
Less: accumulated depreciation | 70,116 | 54,641 | |||||
Total | $ | 22,705 | $ | 34,280 |
For the three months ended September 30, 2019 and 2018, depreciation expense was $3,550 and $4,367, respectively. For the nine months ended September 30, 2019 and 2018, depreciation expense was $11,554 and $16,679, respectively.
NOTE 7 – Acquisition
FitWhey Brands Inc. (acquisition of the assets of BFIT Brands, LLC)
On July 25, 2018, the Company purchased the assets of BFIT Brands, LLC, an Arizona-based company. The acquired assets include the cash, accounts receivable, inventory, FitWhey trademark, recipes and formulas of BFIT’s FitWhey branded water-based protein drinks containing caffeine and a total offering of $6 million.vitamin-B pack. The Company expectspaid $230,438 including common stock issued to fundthe owners of BFIT of $75,000, forgiveness of a note receivable of $80,000 plus accrued interest of $438, and $75,000 to be paid to the owners of BFIT over time based on 5% of net sales of FitWhey products. No liabilities were assumed by the Company in the transaction.
The purchase price of the assets of BFIT Brands, LLC assets was preliminarily allocated as follows:
Common stock issuedPurchase Price $ 75,000 Note payable and accrued interest forgiven 80,438 Earnout liability 75,000 Total $ 230,438 Allocation Cash $ 15,612 Accounts receivable 5,763 Inventory 76,922 Software 31,000 Formulas 12,500 Trademark 2,500 Goodwill 86,141 Total $ 230,438
In August 2019 management determined the Company would suspend the production of water-based protein and caffeine-infused products until it develops a related hemp or CBD-infused product. As a result, the Company fully impaired the intangible assets related to its operationalpurchase of FitWhey. This resulted in an impairment charge of $118,066 for the three and investing needs through the EFA over the next two years.nine months ended September 30, 2019. Because all intangible assets were 100% impaired, it was determined that completion of an outside valuation was no longer necessary.
NOTE 4 – InventoryThe following represents the unaudited pro forma statement of operations of the Company for the three and nine months ended September 30, 2018 had FitWhey been acquired on January 1, 2018:
As of September 30, 2017
Three Months Ended | Nine Months Ended | ||||||
September 30, 2018 | September 30, 2018 | ||||||
Sales | $ | 121,911 | $ | 245,495 | |||
Cost of Sales | 128,590 | 293,380 | |||||
Inventory Obsolescence | 13,721 | 25,145 | |||||
Gross Profit (Loss) | (20,400 | ) | (73,030) | ||||
Operating Expenses | 1,165,093 | 3,436,516 | |||||
Loss From Operations | (1,185,493 | ) | (3,509,546) | ||||
Other (Income) Expenses | (179,411 | ) | 1,206,395 | ||||
Loss Before Income Tax Provision | (1,006,082 | ) | (4,715,941) | ||||
Income Tax Provision | — | — | |||||
Net Loss | $ | (1,006,082 | ) | $ | (4,715,941) | ||
Net Loss Per Common Share-Basic and Diluted | $ | (0.01 | ) | $ | (0.06) | ||
Weighted Average Shares Outstanding | 81,798,422 | 74,150,686 |
NOTE 8 – Accounts Payable and June 30, 2017, inventory consistedAccrued Liabilities
Accounts payable and accrued liabilities consist of the following:
September 30, 2017 | June 30, 2017 | |||||
Finished inventory | $ | 186,587 | $ | 216,711 | ||
Raw materials and packaging | 8,776 | 7,984 | ||||
Total | $ | 195,363 | $ | 224,695 |
September 30, 2019 | December 31, 2018 | ||||||
Accounts payable | $ | 517,075 | $ | 308,717 | |||
Accrued compensation | 30,000 | 25,500 | |||||
Other accrued expenses | 145,947 | 170,997 | |||||
Total | $ | 693,022 | $ | 505,214 |
NOTE 9 – Convertible Notes Payable
NOTE 5 – Prepaid Expenses and Other Current AssetsConvertible notes payable consist of the following:
Interest Rates Term September 30, 2019 December 31,2018As of September 30, 2017 and June 30, 2017, prepaid expenses and other current assets were as follows: Conversion Rates GHS Investments, LLC (fixed conversion) 10% .1 - .5 years $ 0.03 - 0.05 $ 973,750 $ 871,079 LSW Holdings, LLC (variable conversion) 6% — (a) 179,000 179,000 Discount (500,975 ) (383,483) Total $ 651,775 $ 666,596
September 30, 2017 | June 30, 2017 | |||||
Prepaid officers’ compensation | $ | 483,532 | $ | 521,916 | ||
Prepaid directors’ compensation | 176,648 | 206,090 | ||||
Prepaid marketing expenses | — | 19,250 | ||||
Other prepaid expenses and current assets | 22,255 | 27,082 | ||||
Total | $ | 682,435 | $ | 774,338 |
NOTE 6 – Property and Equipment
As of September 30, 2017 and June 30, 2017, property and equipment were as follows:
September 30, 2017 | June 30, 2017 | |||||
Vehicles | $ | 29,598 | $ | 29,598 | ||
Furniture and equipment | 42,055 | 41,042 | ||||
Personal computers | 2,379 | 3,315 | ||||
74,032 | 73,955 | |||||
Less: accumulated depreciation | 30,302 | 25,822 | ||||
Total | $ | 43,730 | $ | 48,133 |
(a) | 50% discount on the average of the 3 lowest closing bid prices during the 10 trading days prior to conversion ($0.045). |
For the three months ended September 30, 20172019 and September 30, 2016, depreciation expense was $4,584 and $11,659, respectively.
NOTE 7 – Convertible Notes Payable
As of September 30, 2017 and June 30, 2017, the Company’s convertible notes payable were as follows:
Interest Rates | Term | September 30, 2017 | June 30, 2017 | ||||||||||||
Convertible notes payable | 6% - 12% | 0 -2 year | $ | 1,310,000 | $ | 1,115,000 | |||||||||
Discount | (527,901 | ) | (381,747) | ||||||||||||
Total | $ | 782,099 | $ | 733,253 |
For the three months ended September 30, 2017 and September 30, 2016,2018, interest expense on these notes, including amortization of the discount, was $124,584$295,585 and $29,089,$308,239, respectively. For the nine months ended September 30, 2019 and 2018, interest expense on these notes, including amortization of the discount, was $928,142 and $1,048,765, respectively.
All tangible and intangible assets of the Company are pledged as security.
NOTE 10 – Notes Payable
Notes payable consist of the following:
Interest Rate Term September 30, 2019 December 31, 2018 0 % Due Notes payable $ 30,000 $ 37,493
The Company has determinedAs of September 30, 2019, notes payable includes two non-interest bearing notes totaling $30,000 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 recordedoriginated prior to the associated debt. The excessCompany’s 2014 bankruptcy proceedings. As of the derivative value over the face amount of theDecember 31, 2018, notes payable also includes a three-year note is recorded immediately to interest expense at inception. The Company recorded $101,587 and $0 of interest expense for the three months endedexecuted on September 30, 2017 and1, 2016 respectively, at the inception of the notes relating to the excesspurchase of derivative value over the face of the notes.
NOTE 8 – Note Payable-Other
On September 1, 2016, the Company purchased used office furniture and equipment from itsour landlord. The Company executed athe 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.$36,634. The term of the note is three years. The balance on theoffice furniture note was $23,164 and $26,130 on September 30, 2017 and June 30, 2017, respectively. For the three months ended September 30, 2017 and September 30, 2016, interest expense on this note was $377 and $183, respectively.repaid in August 2019.
NOTE 9 – Related Party Convertible Notes Payable
As of September 30, 2017 and June 30, 2017, the Company’s related party convertible notes payable were as follows:
Interest Rate | Term | September 30, 2017 | June 30, 2017 | ||||||||||
Related party convertible notes payable | 6% | 6 mos. - 1 year | $ | 563,450 | $ | 493,450 | |||||||
Discount | (124,618 | ) | (227,203) | ||||||||||
Total | $ | 438,832 | $ | 266,247 |
For the three months ended September 30, 20172019 and 2016,2018, interest expense on these notes, including amortization of the discount,furniture and equipment note was $191,826$0 and $82,934,$559, respectively.
The Company has determined that For 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 threenine months ended September 30, 2019 and 2018, interest expense on the furniture and equipment note was $197 and $1,779, respectively.
NOTE 11 – Deferred Revenue
In December 2017, the Company executed a three-year Master Manufacturing Agreement with CBD Alimentos SA de CV (“CBD-Alimentos”), a Mexican food and 2016, respectively,beverage distributor. Under the agreement (as amended), CBD Alimentos, through its sister company, CBD Life, will be our exclusive distributor in Mexico for all of our CBD-infused energy and functional beverages. In turn,wewill be CBD Alimentos’ exclusive supplier of such products. The beverages supplied to CBD Alimentos will be private label products made to order for CBD Alimentos, andwewill cooperate on laboratory and taste-testing of each batch of beverages at the inceptionco-packing facility. In accordance with the Agreement, RMHB opened a separate operating bank account for all deposits made by CBD Alimentos towards the purchase of ingredients and packaging. CBD Alimentos is required to maintain a positive cash balance in the notes relatingaccount at all times. The Company has full unilateral authority to disburse funds from the excessbank account to vendors, suppliers, co-packers and the Company solely for the purposes of derivative value overproduction and the faceCompany’s margin on the sale. CBD Alimentos’ initial purchase order, including a deposit of the notes.$466,300 was received in December 2018. The $466,300 is accounted for as Deferred Revenue as of September 30, 2019 and December 31, 2018 as production and delivery of finished product had not yet been completed.
NOTE 1012 – Shareholders’ Deficit
Common Stock
As of September 30, 2017 and June 30, 20172019, the Company has 950,000,000200,000,000 shares of common stock authorized.authorized and 126,162,146 shares issued and outstanding. On October 31, 2017April 22, 2019 the authorization was increased to 4,000,000,000.Company effected a 1-for-20 reverse stock split. All common share amounts in this report reflect this stock split.
During the three months ended September 30, 20172019 the Company issued 6,740,92817,182,155 shares of common stock, all of which were issued for cash.
During the nine months ended September 30, 2019 the Company issued 31,581,277 shares of common stock, including 6,240,9284,065,980 shares for convertible notes payable conversions, 27,486,424 shares for cash, and 500,00025,403 shares for cash.compensation. The remaining 3,470 shares were issued as a result of the Company’s reverse stock split, which was effective on April 22, 2019.
On July 14, 2017 the Board of Directors increased the authorized shares in the Rocky Mountain High Brands, Inc. 2017 Incentive Plan to 65,000,000.
Preferred Stock
The Company has 20,000,000 shares of preferred stock authorized as of September 30, 2017,2019, of which 10,000,00012,789,474 are specifically designated to a series of preferred stock and 10,000,0007,210,526 remain undesignated.
Series A Preferred Stock
The Company has 1,000,000 shares of Series A Preferred Stock authorized anddesignated, of which none were outstanding as of September 30, 20172019 and June 30, 2017.December 31, 2018. LSW Holdings LLC (“LSW”),was the holder of these shares is our controlling shareholder.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, hashad the authority to direct voting and investment decisions with regard to its holdings in the company. See Note 16 – Subsequent Events.Company. On October 26, 2018 these shares were ruled voidab initioby a District Court in Dallas County, Texas. The Company cancelled these shares effective that date.
On July 5, 2017, the Company amended the Certificate of Designation for our Series A Preferred stock. The amendment changed the conversion ratio of our Series A Preferred stock from 1,200 shares of common stock for every share of Series A Preferred stock to 100 shares of common stock for every share of Series A Preferred stock. The amendment was approved by the Company’s Board of Directors and LSW, the holder of our Series A Preferred Stock.
On July 24, 2017, the Company’s Board of Directors approved an amendment to the Certificate of Designation for the Series A Preferred Stock that changed the voting rights back to 400 votes from 1,200 for every share of Series A Preferred Stock.
Series B Preferred Stock
The Company has 5,000,0007,000,000 shares of Series B Preferred Stock authorized,designated, of which none arewere outstanding as of September 30, 20172019 and June 30, 2017.December 31, 2018.
F-12 |
Series C Preferred Stock
The Company has 2,000,000 shares of Series C Preferred Stock authorized,designated, of which 1,107,607 arenone were outstanding as of September 30, 20172019 and June 30, 2017. The shares areDecember 31, 2018. Series C Preferred Stock is 12% interest bearing, cumulative, exchangeable, non-voting, convertible preferred stock of the Company. Each Series C Preferred share is convertible to 502.5 shares of common stock.
The redemption value of the Series C Preferred stock has been reclassified to current liabilities in accordance with the agreement executed between the Company and the holder of the shares.
Series D Preferred Stock
The Company has 2,000,000 shares of Series D Preferred Stock authorized,designated, of which none arewere outstanding as of September 30, 20172019 and June 30, 2017.December 31, 2018. Series D Preferred Stock is a non-voting, non-interest bearing convertible preferred stock. Each Series D preferred share is convertible to 1005 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 2,000100 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 1:20:1 basis. On the same day, the Board granted our Chairman 789,474 shares of Series E Preferred stock as payment for his deferred compensation. On October 31, 2017, Mr. Welch converted his 789,474 shares of Series E Preferred Stock to 789,47439,474 shares of common stock. As of September 30, 2019 and December 31, 2018 there were no shares outstanding.
Warrants
During the threenine months ended September 30, 20172019 the Company granted no common stock warrants and none were exercised, and 1,187,500exercised. During that period, 25,000 warrants were cancelled.forfeited.
Options
Options
During the threenine months ended September 30, 20172019 the Company granted 650,000500,000 options to purchase common stock.stock with a term of three years and an exercise price of $.06. The options never vested and were forfeited in May 2019. No options were exercised or cancelled.and no others were cancelled during the nine months ended September 30, 2019.
NOTE 11–13– Noncontrolling Interests
In July 2019, the Company invested $500 in Sweet Rock, LLC, a Michigan limited liability company. The Company owns 51% and Sweet Ally, Inc. (“Sweet Ally”) invested $495 and owns 49%. The Company consolidates the financial statements of Sweet Rock and accounts for Sweet Ally’s ownership as a noncontrolling interest. During the three and nine months ended September 30, 2019 Sweet Rock incurred marketing expenses of $3,120. This activity is included in the consolidated financial statements of the Company with corresponding noncontrolling interests.
NOTE 14– Concentrations
During the three months ended September 30, 2017,2019 the Company’s two largest customers accounted for approximately 18%91% and 7%less than 1% of sales, respectively. During the three months ended September 30, 2016,2018, the Company’s two largest customers accounted for approximately 81%12% and 3% of sales, respectively.
During the nine months ended September 30, 2019 the Company’s two largest customers accounted for approximately 69% and 3% of sales, respectively. During the nine months ended September 30, 2018, the Company’s two largest customers accounted for approximately 6% and 6% of sales, respectively.
NOTE 1215 – Income Taxes
The reconciliation of income tax benefit at the U.S. statutory rate of 34%21% to the Company’s effective rate for the periods presented is as follows:
Three Months Ended | Nine Months Ended | |||||||||
September 30, 2017 | September 30, 2016 | September 30, 2019 | September 30, 2018 | |||||||
U.S federal statutory rate | (34%) | (34%) | ||||||||
U.S. federal statutory rate | (21 | %) | (21%) | |||||||
State income tax, net of federal benefit | (0.0%) | (0.0%) | (0.0 | %) | (0.0%) | |||||
Increase in valuation allowance | 34% | 34% | 21 | % | 21% | |||||
Income tax provision (benefit) | 0.0% | 0.0% | 0.0 | % | 0.0% |
F-13 |
The tax effects of temporary differences that give rise to the Company’s net deferred tax liability as of September 30, 20172019 and June 30, 2017 are as follows:December 31, 2018 are:
September 30, 2019 | December 31, 2018 | ||||||||||||
Deferred Tax Assets | September 30, 2017 | June 30, 2017 | |||||||||||
Net Operating Losses | $ | 4,700,000 | $ | 4,482,000 | $ | 4,400,000 | $ | 3,960,000 | |||||
Less: Valuation Allowance | $ | (4,700,000) | $ | (4,482,000) | $ | (4,400,000 | ) | $ | (3,960,000) | ||||
Deferred Tax Assets - Net | — | — | |||||||||||
Deferred Tax Assets – Net | — | — |
As of September 30, 2017,2019 the Company had approximately $13,900,000$21,000,000 of federal and state net operating loss carryovers (“NOLs”), which begin to expire in 2027.2028. 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.
NOTE 13 – CommitmentsOn December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. We have estimated our provision for income taxes in accordance with the Tax Act and guidance available as of the date of this filing but have kept the full valuation allowance. As a result, the Company has recorded no income tax expense during the three and nine months ended September 30, 2019.
The Company’s deferred tax assets and liabilities were remeasured to reflect the reduction in the U.S. corporate income tax rate from 34% to 21%, resulting in a deferred tax expense of approximately $2,000,000 in 2017 that is still fully valued against as of June 30, 2019. This expense is attributable to the Company being in a net deferred tax asset position at the time of remeasurement. As the company maintains fully valuation allowance, this amount can be seen on the rate reconciliation as an adjustment to deferred tax asset and corresponding valuation allowance.
NOTE 16 – Commitments
Office LeaseLeases
TheOn September 5, 2019 the Company has a three-year lease foramended its corporate office space.lease. The amendment extended the lease, which had expired August 31, 2019, through February 29, 2020. Monthly payments are $8,065 plus certain maintenance fees.
On January 18, 2018, the RMHC entered into a 12-month office use agreement for office space in Denver, Colorado. Monthly payments are $91. The lease commenced on September 1, 2016 with monthlywas renewed for another 12 months in January 2019. 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.remained $91.
Other Leases
The Company rents storage space from various third parties on a month-to-month basis.
NOTE 14 – Legal Proceedings
Please refer to our Annual Report on Form 10-K/A filed October 12, 2017 for information regarding our pending legal proceedings. The following represents an update to the items disclosed in that filing:
Claims Against Donna Rayburn
On October 6, 2017 the Company executed a Release and Settlement Agreement with Donna Rayburn regarding the litigation between the Company and Ms. Rayburn. Ms. Rayburn released the Company from all claims and returned 10 million stock warrants.
Arbitration Claim of Roy J. Meadows Against Rocky Mountain High Brands, Inc. (RMHB) dated February 24, 2016
NOTE 17 – Legal Proceedings
On October 6, 2017 the Company executed a Release and Settlement Agreement with Roy Meadows (“Meadows Settlement”) regarding the litigation between the parties. As part of the Meadows Settlement, the Company agreed to issue 45 million shares of the Company’s common stock, including 20 million shares issued immediately and 25 million shares to be issued upon the effectiveness of the Company’s increased common share authorization. Mr. Meadows is subject to a “leak-out” formula whereby he is limited in the number of shares he can re-sell if the stock price is below $.06 per share. In connection with this settlement, the Company agreed to an exchange of the Preferred C Stock back to the originating note payable in accordance with the terms of the Exchange Agreement. Mr. Meadows assigned the note to GHS Investments, LLC, (“GHS”) an outside investment group, in exchange for consideration paid to him by GHS. Mr. Meadows released the Company from all claims and returned 55,096,825 stock warrants.
192ndJudicial District Court of Dallas County Texas, filed February 16, 2017, DC-17-02058. Rocky Mountain High Brands, Inc. v. Dewmar International BMC, Inc.
RMHB filed suit against Dewmar for breach of contract and for an accounting. RMHB is in the process of obtaining a default judgment against Dewmar for its failure to file an answer to the suit.
134thJudicial District Court of Dallas County, Texas, filed April 28, 2017. Rocky Mountain High Brands, Inc. v Lyonpride Music, LLC, United States District Court Northern District of Texas, 3:18-cv-00045-C, now Lyonpride Music LLC v Rocky Mountain High Brands, Inc., Before the American Arbitration Association, 01-18-0003-1428.
RMHBThe Company filed a suit against Lyonpride Music, LLC (“Lyonpride”) for fraud and for declaratory relief with respect to a contract between the parties. RMHB seeksLyonpride is seeking monetary damages against said Defendant.
134thJudicial District Court of Dallas County, Texas. Filed June 26, 2017. Rocky Mountain High Brands, Inc. v Statewide Beveragefrom the Company Inc.
RMHB has filed suit for breach of contract common law fraud and declaratory relief.the Company is seeking monetary damages against Lyonpride. The case has been referred to binding arbitration as referenced above. The parties are conducting discovery. The arbitration hearing has been rescheduled from November 5, 2019 to January 14, 2020.
Los Angeles Superior Court, BC669367, filed July 24, 2017. Statewide Beverage Company, Inc. v. Rocky Mountain High Brands, Inc.
Statewide filed a breach of contract claim, dealing with the same fact issues in the above case of RMHB v Statewide. RMHB still has not been served in this case.
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.
RMHB is seekingThe Company sought the return of our Series A Preferred stockStock (“Series A”) issued to Jerry Grisaffi (“Grisaffi”), RMHB’s former Chairman of the Board, and common stock issued to certain other defendants or later obtained by certain other defendants for little or no consideration paid to the Company. RMHB alleges the Company’s former Chairman of the BoardThe Company alleged, among other things, that Grisaffi breached his fiduciary duty to the Company by issuing these Series A shares to himself and common stock to himself and others.
RMHB also sought to void the Indemnification and Release Agreement (“Indemnification”) between the Company and Grisaffi that was executed in June 2017.
NOTE 15 – AcquisitionsGrisaffi filed a counterclaim against the Company seeking payment for two promissory notes allegedly owed to him, as well as relief under the Indemnification. Those notes have been accounted for in the Company’s consolidated financial statements. Those counterclaim matters had been proactively addressed in the Company’s original suit, seeking to void the Indemnification and the two notes based on, among other things, fraud of Grisaffi. Grisaffi had also filed a derivative suit within the main lawsuit. The Company filed a motion to dismiss the derivative suit and on August 3, 2018 the Trial Court entered an Order Dismissing Derivative Claims, dismissing the derivative suit with prejudice. That Order is final.
Rocky Mountain High Water CompanyIn June 2018 LSW Holdings, LLC
In July 2016, (“LSW”) and Lily Li (“Li”) filed counterclaims against the Company, entered intogenerally seeking an increase of voting rights of the Series A shares to 60:1, a business alliancedeclaration that the Series A shares were validly issued to Grisaffi, challenging the authorized share increase of the Company, claiming securities fraud by the Company with Poafpybitty Family, LLCrespect to launch Eagle Spirit Spring Water, a linethe Series A Shares purchased from Grisaffi and other common stock allegedly purchased by LSW and Li, as well as fraud, breach of purified, high-alkaline spring water sourcedcontract and negligent misrepresentation by the Company. LSW seeks $10,000,000 in damages from Native American tribal land in Oklahoma. The agreement callsthe Company, for the $3,500,000 which was paid to Grisaffi for the Series A shares and for which LSW claims to be the responsibility of the Company to paycover, and the remaining $6,500,000 for money allegedly spent by LSW in “developing a royalty on each gallondistribution system in China” and other alleged “investments” of water collected atLi and LSW in the spring. Production of filtered spring water filled bottles commenced in August 2016Company. LSW 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.Li also sought exemplary damages.
On November 12, 2016,August 30, 2018, the agreement with the Poafpybitty Family was amended to give the CompanyTrial Court entered 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 is obtaining an outside valuation of the rights to use the landfinal judgment and obtain the water describedorder in the agreement. Beginning November 12, 2016,Company’s favor and against Grisaffi. On August 29, 2018, after a show cause hearing, the operations of RMHW are consolidatedTrial Court entered an order sanctioning Grisaffi for his repeated and unexcused refusals to make discovery in the financial statements of RMHB.case. As a sanction, the Trial Court struck Grisaffi’s pleadings in the case and, on August 30, 2018, entered a Default Judgment against him. Under the Trial Court’s Default Judgment:
1. | The Court entered a monetary judgment against Grisaffi and in favor of the Company in the amount of $3,500,000 for fraud, breach of fiduciary duty, and conversion with respect to the Series A preferred stock. |
2. | The Court declared that the Employment Agreement with Grisaffi dated April 1, 2013 was voidab initioand unenforceable, and that all stock and promissory notes issued in connection with the Employment Agreement were also voidab initioand of no force and effect, including but not limited to: |
a. | The 1,000,000 shares of Series A Preferred Stock issued to Grisaffi; |
b. | The Convertible Promissory Note issued to Grisaffi in the principal amount of $184,300 dated April 1, 2016; and |
c. | The Convertible Promissory Note issued to Grisaffi in the principal amount of $200,150 dated June 19, 2017. |
NOTE 16 – Subsequent Events
3. | The Court declared that Grisaffi’s sale of the Series A Preferred Stock to LSW was made with actual intent to hinder, delay, or defraud creditors and was thus a fraudulent transfer under Texas law. |
4. | The Court declared that the issuance of 500,000 shares of common stock to Li and the 550,000 shares of common stock issued to Epic One Group, LLC were made without lawful consideration, and constituted breaches of fiduciary duty by Grisaffi. |
5. | The Court declared that an Indemnification was procured through fraud and breach of fiduciary duty and is therefore void and unenforceable. |
6. | The Court ruled that Grisaffi shall take nothing by his counterclaims in the case. |
BetweenFurthermore, the Court ruled that our continuing claims against the other defendants in the case were to be severed and docketed under a separate cause of action and case number. We have continued to pursue our claims against the other defendants in the below referenced case.
The judgment and order entered August 30, 2018 concludes our litigation in district court as against Grisaffi. On September 4, 2018, Mr. Grisaffi filed a Notice of Appeal in the case against him.
In The Court Of Appeals For The Fifth District Of Texas Dallas, Texas, Jerry Grisaffi, Appellant v. Rocky Mountain High Brands, Inc, f/k/a Republic of Texas Brands, Inc., Appellee, No. 05-18-01020-CV.
Grisaffi has filed an appeal of the Default Judgment, and submitted his brief on or about February 28, 2019. The Company is prepared and filed its brief. Grisaffi did not appeal the Order Dismissing Derivative Claims. Grisaffi only seeks in his appeal to reverse in part the Default Judgment by striking the paragraph awarding monetary damages, leaving the remainder of the Default Judgment intact. Appellate briefs were filed, and the appeal was submitted to oral argument by the parties, with such arguments being heard by the Court of Appeals on November 6, 2019. The parties are awaiting the decision of the Court of Appeals.
RMHB is actively engaged in collection efforts on the Grisaffi Default Judgment.
Dallas County Texas, Case Number DC-18-13491. Rocky Mountain High Brands, Inc. f/k/a Republic of Texas Brands, Inc. Plaintiff, vs. Joe Radcliffe, LSW Holdings, LLC, Lily Li, Epic Group One, LLC, Kenneth Radcliffe, Dennis Radcliffe, Phil Uhrik, Michael Radcliffe, Frank Izzo, Morgan Albright, John Garrison, BB Winks, LLC, Crackerjack Classic, LLC, and Universal Consulting, LLC.
This was the surviving case of the above case, having been severed on September 12, 2018. In this case, on October 26, 2018 the Court granted our Motion For Summary Judgment, per a Summary Judgment Order, against LSW, holding that all Series A Preferred Shares in RMHB, including the shares issued to Grisaffi and later sold by him to LSW evidenced by Stock Certificate N0. 604 issued by RMHB, to LSW Holdings LLC in the amount of 1,000,000 shares, werevoid ab initio, and any potential rights thereunder were terminated as of July 11, 2014, when the bankruptcy court signed the Order Confirming Debtor’s Amended Plan of Reorganization. The Series A Preferred Shares have no legal force or effect. The Court also granted a take nothing judgment against LSW on counterclaim Counts 1, 20172 and 3. The Company’s transfer agent has cancelled the Series A Preferred Shares. Later, on November 13, 201726, 2018, the Company issued 103,389,474 sharesCourt entered an Order of common stock,Sanctions against Li and LSW. In the Order of which 52,000,000 were for debt conversions, 45,000,000 were forSanctions, and in response to Li and LSW’s repeated refusals to make proper discovery in the case, the Court struck the pleadings of these parties and ruled that RMHB was entitled to take a legal settlement, and 6,389,474 were for services rendered.default judgment against them.
On October 6, 2017February 4, 2019, the Company executed a ReleaseCourt entered its Default Judgment against Li and Settlement Agreement with Roy Meadows (“Meadows Settlement”) regardingLSW. In the litigation betweenDefault Judgment, the parties. As part of the Meadows Settlement, the Company agreed to issue 45 million shares of the Company’s common stock, including 20 million shares issued immediately and 25 million shares to be issued upon the effectiveness of the Company’s increased common share authorization. Mr. Meadows is subject to a “leak-out” formula whereby he is limited in the number of shares he can re-sell if the stock price is below $.06 per share. In connection with this settlement, the Company agreed to an exchange of the Preferred C Stock back to the originating note payable in accordance with the terms of the Exchange Agreement. Mr. Meadows assigned the note to GHS Investments, LLC, (“GHS”) an outside investment group, in exchange for consideration paid to him by GHS. Also on October 6, 2017 the Company exchanged that note for a new secured convertible promissory note to GHS with a principal of $1,107,607, a term of nine months, and interest of 10% annually. The new note is convertible to common shares based on a formula with a discount to market price. Mr. Meadows released the Company from all claims and returned 55,096,825 stock warrants.
The Company also executed a Release and Settlement Agreement with Donna Rayburn (“Rayburn Settlement”) regarding the litigation between the Company and Ms. Rayburn. Ms. Rayburn released the Company from all claims and returned 10 million stock warrants.Court ruled as follows:
On October 12, 2017 the Company executed an Equity Financing Agreement (“EFA”) with 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 requires the Company to file a registration statement with the Securities and Exchange Commission (“SEC”) to register the common shares issuable under the agreement. In conjunction with the EFA, the Company entered into a $250,000 secured convertible promissory note with a term of nine months and bearing interest at 10%. The note is convertible to common shares based on a formula with a discount to market price. On November 2, 2017, the Company entered into a second $250,000 secured convertible promissory note with similar terms after filing a registration statement on Form S-1 with the SEC on November 1, 2017. The Company expects to fund its operational and investing needs through the EFA over the next two years.
In October 2017, the Company hired a Chief Commercialization Officer and a Director of Marketing.
On October 31, 2017, the Company increased its common stock share authorization to 4,000,000,000.
1. | The Employment Agreement with Grisaffi dated April 1, 2013 was voidab initio and unenforceable, and that all stock or other instruments issued on the basis or authority of that Employment Agreement were also voidab initio and of no force and effect; |
2. | The Series A Preferred Shares that RMHB issued to Grisaffi and later sold by Grisaffi to LSW were voidab initioand any potential rights or remedies thereunder were terminated on July 11, 2014 pursuant to the Order Confirming Debtor’s Amended Plan of Reorganization; |
3. | Grisaffi’s issuance and transfer to himself of the 1,000,000 Series A Preferred Shares, and his subsequent transfer of those shares to LSW Holdings, were fraudulent transfers and are voided and set aside; |
4. | Grisaffi breached his fiduciary duties to RMHB by, among other things: (i), purporting to sell the Series A Preferred Shares to LSW, (ii) causing the issuance of 550,000 shares of common stock to Epic Group One, LLC, and 500,000 shares of common stock to Li for no consideration, and (iii) causing the issuance of 5,684,432 shares to the Radcliffe Group at deeply discounted prices; |
5. | LSW and Li knowingly participated in Grisaffi’s breaches of fiduciary duty and are therefore jointly and severally liable for all damages and equitable relief arising from such breaches; |
6. | The issuance of 10,000,000 shares of common stock to Li was not authorized by the Board of Directors and was both voidab initioand a fraudulent conveyance; |
7. | RMHB is entitled to recover all damages proximately resulting from the improper issuance of the 10,000,000 shares of common stock to Li; |
8. | Li did not perform and materially breached her agreement to raise money for RMHB; |
9. | The 10,000,000 shares of purported common stock issued to Li belongs to RMHB and Li has no further rights or remedies arising out of or related to the 10,000,000 shares; |
10. | By virtue of their actions described above, Li and LSW have taken advantage of RMHB and have unjustly enriched themselves at Rocky Mountain High Brands’ expense, and RMHB is entitled to full restitution of all its losses and damages; |
11. | LSW Holdings and Li engaged in a civil conspiracy with Grisaffi to commit the wrongs against RMHB described above, and RMHB is entitled to recover from them actual, consequential, and special damages resulting from such wrongs, including their knowing participation in Grisaffi’s breaches of fiduciary duty, breaches of contract, receipt of fraudulent conveyances, and unjust enrichments. |
12. | The torts against RMHB committed by LSW Holdings and Li were aggravated by fraud and malice, and RMHB is therefore entitled to exemplary damages. |
13. | LSW Holdings and Li shall take nothing by their counterclaims; and |
14. | RMHB is entitled to court costs and reasonable attorneys’ fees from LSW Holdings and Li. |
On August 12, 2019, the Court entered its Final Judgment in the Case. Prior to that, on June 25, 2019, the Court had entered an Agreed Order of Dismissal With Prejudice Of Certain Claims And Parties, after the Court was advised that claims dismissed by the order had been settled and released between RMHB and Joe Radcliffe, Kenneth Radcliffe, Dennis Radcliffe, Crackerjack Classic, LLC and Universal Consulting, LLC and joined by Epic One Group, LLC.
The Final Judgment was entered against Lily Li and LSW Holdings, LLC. The Court incorporated the rulings of the February 4, 2019 Default Judgment into this Final Judgment, together with an award that RMHB have and recover, of and from, Lily Li and LSW Holdings, jointly and severally with Jerry Grisaffi, actual damages of $3.5 million for their knowing participation of Grisaffi’s breaches of fiduciary duties, breach of contract, fraudulent conveyances and unjust enrichment. The Court also awarded RMHB $88,000 in attorney fees, and the additional $10,000 in accordance with the previous Sanctions Order.
F-17 |
LSW Holdings and Lily Li filed a Motion for New Trial, which was overruled by operation of law, and failed to timely file a Notice of Appeal. RMHB will begin its collection efforts against LSW Holdings and Lily Li on the Final Judgment.
Rocky Mountain High Brands, Inc. v La Dolce Vita Trust and Christine Guthrie, In Her Capacity As Trustee, In The 382nd District Court of Rockwall County, Texas, Cause No. 1-18-1608.
This is a case whereby the Company is attempting to collect on the Default Judgment obtained against Grisaffi. More specifically the Company is requesting the Court to order the La Dolce Vita Trust to turnover fraudulently transferred assets and for additional relief necessary to enforce the Company’s judgment against Grisaffi. This case is currently set for trial for December 16, 2019.
Chet – 5 Broadcasting, Inc. v Rocky Mountain High Brands, Inc., Supreme Court of the State of New Your, County of Ulster, Case No. 18-4416.
The Plaintiff sued the Company, seeking $21,000 in damages for breach of contract. The Company is contesting that claim in its entirety and has filed a counterclaim against the Plaintiff for an unspecified amount of damages. This case is new and the parties have not yet conducted any discovery.
NOTE 18 – Other (Income)/Expenses
Gain/Loss on Extinguishment of Debt
On May 6, 2019 the Company recorded a gain on the extinguishment of debt of $689,991 related to the amendment of convertible debt. The conversion ratio on all of the Company’s fixed convertible notes payable outstanding as of that date (principal amount of $909,000) was changed from $.005 to $.05 and the due dates were extended.
Gain on Lawsuit Judgment and Legal Settlement
On May 30, 2019 the Company recorded a gain onlawsuit judgment and legal settlement of $230,840 related to the settlement of a lawsuit the Company filed in 2017 against several defendants. The settlement was reached on May 30, 2019 and included a $200,000 cash payment by the defendants to the Company, the forgiveness of debt of $30,840 owed by the Company to one of the defendants, and the return of 6,750,000 shares of common stock. During the three and nine months ended September 30, 2018 the Company recorded gains totaling $688,724 in two separate legal proceedings, including a judgment against its former chairman that resulted in a $654,289 gain and a settlement with a former customer that resulted in a gain of $34,435.
NOTE 19 – Subsequent Events
Between October 1, 2019 and November 13, 2019 the Company issued 7,649,037 shares of common stock, all of which were for cash.
F-18 |
Item 2. Management’s Discussion and Analysis ofFinancial Condition and Results ofOperations
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,”“willbe,”“willcontinue,”“willlikely 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, threewholly-owned subsidiaries, one majority-owned subsidiary, and one minority-owned subsidiary, which the Company controls. All subsidiaries are consolidated for financial reporting purposes:
RMHB is a consumer goodslifestyle brand management company specializing in brand development of health conscious,that markets primarily CBD and hemp-infused products to health-conscious consumers. Our products span various categories including beverage, food, fitness, and beverage products. The Company currentlyskin care. RMHB also markets a lineup of five naturally flavored hemp-infused beverages (Citrus Energy, Black Tea, Mango Energy and Lemonade) and a low-calorie hemp-infused Coconut Lime Energy drink. The Company also offers hemp-infused 2oz. Mango Energy Shots and Mixed Berry Energy Shots. In August 2016 the Company launched Eagle Spirit Spring Water, a line of naturally high alkaline spring water.
After developingwater and a water-based protein drink with caffeine and B vitamins. All products comply with federal regulations on hemp products and contain 0.0% tetrahydrocannabinol (THC), the beverage products, RMHB completed its first production run in Februarypsychoactive constituent of 2015. Since then RMHB has had production runs for hemp-infused beverages totaling over 3,900,000 cans. Each beverage contains approximately 50mg (our first production run) to 100mg of hempseed extract and all-natural ingredients. The hemp-infused products are shelf stable (no refrigeration necessary) with a shelf life oftwo years.
During fiscal year 2017, the Company also produced energy shots and Relaxation Brownies.
In September 2016, the Company 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.”cannabis.
In March and April 2017,2018, the Company completed additional production runslaunched the HEMPd brand with gummies, water soluble drops, capsules, tinctures, lotions, and salves. The Company introduced four flavors of its more popular hemp-infused beverages, Citrus Energy and Mango Energy.CBD-infused waters in 12 oz. cans in November 2018.
In August 2017,July 2018, the Company sold its remaining inventoryacquired the assets of Smarterita wine-based beverages. There are currently no plans to resume productionBFIT Brands, LLC and formed a new subsidiary, FitWhey Brands LLC. FitWhey markets a line-up of this alcoholic beverage.five water-based protein drinks that include caffeine and B vitamins.
On June 12, 2019 the Company organized Sweet Rock, LLC (“Sweet Rock”), a 51% owned company, with Sweet Ally, Inc. Sweet Rock will manufacture and market CBD-infused chocolates, hard candies, and baked goods for distribution in the United States.
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Current Product Offerings
Under its Rocky Mountain High Brands name, the Company currently markets a lineup of five hemp-infused 16 oz. beverages including:
The Company is also currently marketing a two-flavor lineup of energy shots.
The Company plans to sell its remaining inventory of these products during the first half of fiscal year 2018. In order to execute this plan, the Company will offer larger discounts to distributors and retailers and higher commissions to its broker network, likely resulting in lower gross profit margins for the first and second quarter of 2018.
Our Eagle Spirit Land and Water Company currently marketsdistributes its naturally high alkaline spring water under the name Eagle Spirit Spring Water and plans to re-introduce its hemp-infused energy drinks later in two sizes: a 16.9 oz. plastic bottle sold in cases of 24 and a 2.64-gallon (10-liter) Bag in a Box.2019 or early 2020.
Strategic Update and Planned Product OfferingsResults of Operations
The Company has recently updated its long-term strategic plan. Management’s goal is to become the category leader in the hemp-infused beverage market, a segment of the functional beverage market. Functional beverages, or beverages that convey health benefits, are the fastest growing segment within the beverage market.
The Company is developing four newly reformulated, sugar-free, non-energy, hemp-infused beverage flavors. In addition to the new formulas, the beverages will feature 12 oz. cans, an all-new look and will replace all current hemp-infused beverage offerings. Two of the four beverage flavors will be carbonated. Flavor choices will be similar to past offerings. Management plans to begin production on the new beverages in February 2018. Marketing will focus on the health benefits of hemp, including Omega-3 and Omega-6 fatty acids, amino acids, and natural, plant-based fiber.
The Company is also reviewing its other product offerings, but there are no immediate plans to produce additional Relaxation Brownies or energy shots.
In October 2017 the Company hired a Chief Commercialization Officer and a Director of Marketing.
Results of Operations
Three Months Ended September 30, 20172019 Compared to Three Months Ended September 30, 20162018
Financial Summary
The Company’s sales for the three months ended September 30, 20172019 were $41,002$353,863 compared to $295,587net sales of $117,117 for the three months ended September 30, 2016.2018.
The Company’s net loss for the three months ended September 30, 2019 was $920,242 compared to a net loss of $991,972 for the three months ended September 30, 2018.
Sales
For the three months ended September 30, 2019 sales were $353,863 compared to net sales of $117,117 for the three months ended September 30, 2018, an increase of $236,746 or 202%. The sales increase was driven by the sale of private label beverages to a new customer. This increase was partially offset by a reduction in website sales due to the loss of the Company’s merchant services provider and lower Eagle Spirit Water sales in 2019. Website sales were negatively impacted by the loss of merchant services in the May 2019. A new merchant services provider that began processing in July 2019 proved to be unreliable so the Company made another change in October 2019. The Company completed a production run of its previously out-of-stock Eagle Spirit Water in late August 2019 that provided sales in September 2019. For the three months ended September 30, 2019 sales consisted of approximately 8% online sales, 91% private label sales, 0% distributor sales, and 1% direct to retailer sales, compared to approximately 79% online sales, 18% distributor sales, and 3% direct to retailer sales for the three months ended September 30, 2018.
Cost of Sales
For the three months ended September 30, 2019 cost of sales was $460,111 or 130% of sales, compared to $124,661 or 106% of sales for the three months ended September 30, 2018, an increase of $335,450 or 269%. The increase in 2019 was primarily due to the increase in sales for the same period. In 2019, $107,594 of cost of sales was due to inventory obsolescence compared to $13,721 in 2018. For the three months ended September 30, 2019 inventory obsolescence related to expired or unusable finished goods, ingredients, and packaging, primarily related to the FitWhey brand. In August 2019 management determined the Company would suspend the production of water-based protein and caffeine-infused products, which had been produced under the FitWhey brand, until it develops a related hemp or CBD-infused product and/or brand.
Operating Expenses
For the three months ended September 30, 2019, operating expenses were $836,669 or 236% of sales, compared to $1,163,839 or 994% of sales for the three months ended September 30, 2018. Areas in which the Company experienced significant changes in operating expenses are discussed below.
General and Administrative
For the three months ended September 30, 2019, general and administrative expenses were $617,378 or 174% of sales, compared to $823,173 or 703% of sales for the three months ended September 30, 2018, a decrease of $205,795 or 25%. The decrease in general and administrative expenses in 2019 was primarily driven by decreasesin compensation, partially offset by increases inlegal expenses and research and development costs.
Advertising and Marketing
For the three months ended September 30, 2019, advertising and marketing expenses were $101,225 or 29% of sales, compared to $340,666 or 291% of sales for the three months ended September 30, 2018, a decrease of $239,441 or 70%. The decrease in advertising and marketing expenses in 2019 was due to the Company’s reduction in online advertising and marketing. This was primarily the result of the loss of Company’s ability to sell product on its HEMPd website after the loss of its merchant services provider. Also, private label customers are responsible for their own advertising so the Company does not bear those costs.
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The Company’s net income for the three months ended September 30, 2017 was $685,272 compared to a net loss of $730,277 for the three months ended September 30, 2016.
Sales
For the three months ended September 30, 2017 sales were $41,002 compared to $295,587 for the three months ended September 30, 2016, a decrease of $254,585 or 86%. The sales decrease was driven by the lack of funding for inventory production, direct sales support, and advertising and promotion of the Company’s products. In the three months ended September 30, 2017 sales consisted of approximately 57% distributor sales, 33% direct to retailer sales, and 10% online sales compared to 95% distributor sales and 5% online sales for the three months ended September 30, 2016.
Cost of Sales
For the three months ended September 30, 2017, cost of sales was $43,800 or 107% of sales, compared to $90,020 or 31% of sales for the three months ended September 30, 2016, a decrease of $46,220 or 51%. Cost of sales decreased in 2017 due to the decrease in sales, but increased as a percentage of sales in 2017 as a result of lower net selling prices as the Company sells its remaining hemp-infused beverage and shots inventories.
Operating Expenses
For the three months ended September 30, 2017, operating expenses were $661,069 or 1,612% of sales, compared to $1,182,089 or 400% of sales for the three months ended September 30, 2016. Areas in which the Company experienced material changes in operating expenses are discussed below.
General and AdministrativeImpairment Expense
For the three months ended September 30, 2017, general and administrative expenses were $604,7512019, impairment expense was $118,066 or 1,475%33% of sales, compared to $864,549 or 293% of salessales. There was no impairment expense for the three months ended September 30, 2016.2018. The decrease in general and administrative expenses in 20172019 impairment expense was primarily driven by management’s efforts to reduce expenses as a result of management’s decision to suspend the Company’s lackproduction of funding.water-based protein and caffeine-infused products, which had been produced under the FitWhey brand, until it develops a related hemp or CBD-infused product and/or brand. The increase in generalCompany impaired all software, formula, trademark, and administrative expenses as a percentage of sales is duegoodwill assets related to lower sales in 2017.FitWhey.
Advertising and MarketingOther (Income) Expense
Interest Expense
For the three months ended September 30, 2017, advertising and marketing expenses were $56,318 or 137% of sales,2019, interest expense was $296,692, compared to $317,540 or 107% of sales$580,904 for the three months ended September 30, 2016.2018, a decrease of $284,212. The decrease in advertising and marketing expenses in 2017 was primarily driven by management’s efforts to reduce expenses as a result of the Company’s lack of funding. Also, in 2016 the Company incurred significant promotional expenses related to a large sale to a distributor. There was no comparable sale in 2017. The increase in advertising and marketing expenses as a percentage of sales is due to lower sales in 2017.
Other (Income) Expense
Interest Expense
For the three months ended September 30, 2017, interest expense was $464,110, compared to $234,519 for the three months ended September 30, 2016. The increase in interest expense, which includes the amortization of the discount on convertible debt, and interestthe excess of the beneficial conversion feature on Series C Preferred Stock,certain convertible notes payable, was due to increaseddecreased debt levels and activity in 2017.2019.
Gain on Lawsuit Judgment and Legal Settlement
For the three months ended September 30, 2018, the Company recorded a gain onlawsuit judgment and legal settlement of $688,724 related to two separate legal proceedings, including a judgment against its former chairman that resulted in a $654,289 gain and a settlement with a former customer that resulted in a gain of $34,435. There were no such gains for the three months ended September 30, 2019.
Gain on Change in Fair Value of Derivative Liability
For the three months ended September 30, 2017,2019, the Company recorded a gain on the change in fair value of derivative liability of $1,813,249$319,367 compared to a gain of $480,764$71,591 for the three months ended September 30, 2016.2018. In both periods,2019 the gain resulted from the decrease in the price of the Company’s underlying stock at the end of the period, which is used to calculate the fair value of the related derivative liability, fromthereby reducing the beginning of the period to the end of the period.derivative liability resulting in a gain.
Income Taxes
For the three months ended September 30, 20172019 and September 30, 2016,2018, the Company recorded no income tax provision due to a full valuation allowance provided on deferred tax assets resulting from net operating losses.
Net Loss Attributable to Noncontrolling Interests
For the three months ended September 30, 2019 the Company incurred expenses of $3,120 in its 51%-owned subsidiary, Sweet Rock. The 49% allocated to noncontrolling interests was $1,529. There were no noncontrolling interests in 2018.
Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018
Financial Summary
The Company’s sales for the nine months ended September 30, 2019 were $466,864 compared to net sales of $240,701 for the nine months ended September 30, 2018.
The Company’s net loss for the nine months ended September 30, 2019 was $2,850,672 compared to a net loss of $4,701,831 for the nine months ended September 30, 2018.
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Sales
For the nine months ended September 30, 2019 sales were $466,864 compared to net sales of $240,701 for the nine months ended September 30, 2018, an increase of $226,163 or 94%. The sales increase in 2019 was driven by the sale of private label beverages to a new customer. This increase was partially offset by a reduction in website sales due to the loss of the Company’s merchant services provider and lower Eagle Spirit Water sales in 2019. Website sales were negatively impacted by the loss of merchant services in the May 2019. A new merchant services provider that began processing in July 2019 proved to be unreliable so the Company made another change in October 2019. The Company completed a production run of its previously out-of-stock Eagle Spirit Water in late August 2019 that provided sales in September 2019. Due to production-related issues, the Company was out-of-stock of Eagle Spirit Water for most of 2019. For the nine months ended September 30, 2019 sales consisted of approximately 27% online sales, 69% private label sales, 0% distributor sales, and 4% direct to retailer sales, compared to approximately 71% online sales, 20% distributor sales, and 9% direct to retailer sales for the nine months ended September 30, 2018.
Cost of Sales
For the nine months ended September 30, 2019 cost of sales was $574,695 or 123% of sales, compared to $300,875 or 125% of sales for the nine months ended September 30, 2018, an increase of $273,820 or 91%. The increase in 2019 was primarily due to the increase in sales for the same period. In 2019, $107,594 of cost of sales was due to inventory obsolescence compared to $25,145 in 2018. For the nine months ended September 30, 2019 inventory obsolescence related to expired or unusable finished goods, ingredients, and packaging, primarily related to the FitWhey brand. In August 2019 management determined the Company would suspend the production of water-based protein and caffeine-infused products, which had been produced under the FitWhey brand, until it develops a related hemp or CBD-infused product and/or brand.
Operating Expenses
For the nine months ended September 30, 2019, operating expenses were $2,858,530 or 612% of sales, compared to $3,435,262 or 1427% of sales for the nine months ended September 30, 2018. Areas in which the Company experienced significant changes in operating expenses are discussed below.
General and Administrative
For the nine months ended September 30, 2019, general and administrative expenses were $2,270,864 or 486% of sales, compared to $2,813,479 or 1169% of sales for the nine months ended September 30, 2018, a decrease of $542,615 or 19%. The decrease in general and administrative expenses in 2019 was primarily driven by decreasesin compensation, partially offset by increases inlegal expenses and research and development costs.
Advertising and Marketing
For the nine months ended September 30, 2019, advertising and marketing expenses were $469,600 or 101% of sales, compared to $621,783 or 258% of sales for the nine months ended September 30, 2018, a decrease of $152,183 or 24%. The decrease in advertising and marketing expenses in 2019 was due to the Company’s reduction in online advertising and marketing. This was primarily the result of the loss of Company’s ability to sell product on its HEMPd website after the loss of its merchant services provider. Also, private label customers are responsible for their own advertising so the Company does not bear those costs.
Impairment Expense
For the nine months ended September 30, 2019, impairment expense was $118,066 or 33% of sales. There was no impairment expense for the nine months ended September 30, 2018. The 2019 impairment expense was a result of management’s decision to suspend the production of water-based protein and caffeine-infused products, which had been produced under the FitWhey brand, until it develops a related hemp or CBD-infused product and/or brand. The Company impaired all software, formula, trademark, and goodwill assets related to FitWhey.
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Other (Income) Expense
Interest Expense
For the nine months ended September 30, 2019, interest expense was $929,446, compared to $3,763,602 for the nine months ended September 30, 2018, a decrease of $2,834,156. The decrease in interest expense, which includes the amortization of the discount on convertible debt, and the excess of the beneficial conversion feature on certain convertible notes payable, was due to decreased debt levels and activity in 2019.
(Gain) Loss on Extinguishment of Debt
For the nine months ended September 30, 2019, the Company recorded a gain on the extinguishment of debt of $689,991 related to the amendment of convertible debt. The conversion ratio on all of the Company’s fixed convertible notes payable outstanding as of May 6, 2019 was changed from $.005 to $.05 and the due dates were extended. The Company recorded a $191,138 loss on extinguishment of debt for the nine months ended September 30, 2018 as a result of the conversion of variable rate convertible notes payable into common stock.
Gain on Lawsuit Judgment and Legal Settlement
For the nine months ended September 30, 2019, the Company recorded a gain onlawsuit judgment and legal settlement of $230,840 related to the settlement of a lawsuit the Company filed in 2017 against several defendants. The settlement was reached on May 30, 2019 and included a $200,000 cash payment by the defendants to the Company,the forgiveness of debt of $30,840 owed by the Company to one of the defendants, and the return of 6,750,000 shares of common stock. For the nine months ended September 30, 2018, the Company recorded a gain onlawsuit judgment and legal settlement of $688,724 related to two separate legal proceedings, including a judgment against its former chairman that resulted in a $654,289 gain and a settlement with a former customer that resulted in a gain of $34,435.
Gain on Change in Fair Value of Derivative Liability
For the nine months ended September 30, 2019, the Company recorded a gain on the change in fair value of derivative liability of $124,304 compared to a gain of $2,059,621 for the nine months ended September 30, 2018. In both periods the gain resulted from the decrease in the price of the Company’s underlying stock at the end of the period, which is used to calculate the fair value of the related derivative liability, thereby reducing the derivative liability resulting in a gain.
Income Taxes
For the nine months ended September 30, 2019 and September 30, 2018, the Company recorded no income tax provision due to a full valuation allowance provided on deferred tax assets resulting from net operating losses.
Net Loss Attributable to Noncontrolling Interests
For the nine months ended September 30, 2019 the Company incurred expenses of $3,120 in its 51%-owned subsidiary, Sweet Rock. The 49% allocated to noncontrolling interests was $1,529. There were no noncontrolling interests in 2018.
Liquidity and Capital Resources
As of September 30, 2017,2019, the Company had current assets of $898,721,$1,071,934, consisting of cash of $19,266,$68,811, accounts receivable (net) of $1,657,$326,470, inventory of $195,363,$278,212, and prepaid expenses and other current assets of $682,435.$398,441. As of September 30, 2017, we 2019,theCompanyhad current liabilities of $7,490,931,$2,170,032, consisting of accounts payable and accrued liabilities of $547,137, related party$693,022, convertible notes payable (net) of $438,832, convertible notes payable (net) of $782,099, other$651,775, notes payable of $23,164, redemption value of Series C Preferred Stock of $1,661,424,$30,000, accrued interest of $447,974,$65,405, deferred revenue of $466,300, and derivative liability of $3,590,301. During the three months ended September 30, 2017, the Company received proceeds of $8,500 related to private offering stock sales of 500,000 shares of common stock.$263,530.
Cash flows from operating activities
Net cash used in operating activities during the threenine months ended September 30, 20172019 was $396,930$2,847,933 compared to $566,056$(3,102,165) used during the nine months ended September 30, 2018. The change was principally driven by the 2019 increase in accounts receivable and the buildup of inventory and prepaid expenses and other current assets in anticipation of production runs.
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Cash flows from investing activities
Net cash used in investing activities was $500 during the three months ended September 30, 2016. The change was principally driven by management’s efforts to conserve cash during 2017.
Cash flows from investing activities
Net2019. This represents the Company’s investment in Sweet Rock, LLC. During the nine months ended September 30, 2018 net cash used in investing activities during the three months ended September 30, 2017 was $1,013 compared to $41,409 during the three months ended September 30, 2016.$44,228. In 20172018, the Company made equipment acquisitions of $1,013 compared to 2016 wheninvested $31,220 in new software for the Company made investments in Rocky Mountain High Water Company of $39,774HEMPd brand and net equipment acquisitions of $1,635.acquired new computer equipment.
Cash flows from financing activities
Net cash provided by financing activities during the threenine months ended September 30, 20172019 was $325,534$2,303,558 compared to $505,210$3,199,907 during the threenine months ended September 30, 2016.2018. In 2017,2019, proceeds of $220,000$1,943,551 were from the issuance of common stock compared to $2,558,045 in 2018. Also in 2019, the Company repaid $7,498 on notes payable compared to $10,206 in 2018. In 2019, the Company received proceeds of $367,500 related to the issuance of convertible notes payable compared to $220,000$825,000 in 2016. The Company also issued $100,000 in related party notes payable in the three months ended September 30, 2017 compared to $35,000 in 2016.2018. In 20162018 the Company issued a note payable for $35,960 related to the purchaserepaid $172,932 of office furniture and equipment. Repayments on that note were $2,966 during the three months ended September 30, 2017. In 2017 there were proceeds of $8,500 from the issuance of stock compared to $214,250 in 2016.convertible notes payable.
Outstanding Material Indebtedness
Recently, the Company’s operations have been funded primarily through the private sales of common stock or the issuance of convertible promissory notes, which are convertible to common stock at a fixed prices ranging from $0.01$0.03 to $0.024,$0.05 or at discountsa discount to market price ranging from 20% to(as defined in the agreements) of 50%, or combinations thereof.. As of September 30, 20172019, the Company had total notes payable outstanding of $1,244,095$681,775 (net of discount).
On July 28, 2017,Known Trends and Uncertainties Expected to Have a Material Impact on Revenues
We expect our revenues to increase materially during the remainder of 2019andin 2020, primarily due to anticipated sales under our private label manufacturing contracts with CBD Alimentos SA de CV (“CBD Alimentos”) and Texas Wellness Center, Inc. (“Green Lotus”). Although the initial order from CBD Alimentos was expected during the second quarter of 2018,we received the initialexecuted an agreement with Eagle Equities, LLC (“Eagle Equities”)order and a $466,300 deposit in December 2018. Due to sell upproduction-related issues, we delayed the initial production run of 2,000,000 cans and now expect to $500,000begin production of the initial order in convertible notes to Eagle Equities. On that same date,weissued a 12-month, convertible note bearing interest at 8% to Eagle Equitiesthe fourth quarter of 2019. We completed the first production run of 200,000 cans of Green Lotus in exchange for funding $220,000, net of fees. The note is convertible to common stock at a 45% discount to market based on a look-back formula. The Company has the ability to obtainSeptember 2019 and expect additional funding of $220,000 by issuing another convertible note to Eagle Equities eight monthspurchase orders. Wealsoexpect revenue growth from our HEMPd branded CBD-infused flavored waters and other HEMPd branded products. Revenue from the dateHEMPd products is inherently difficult to project and will depend on the level of the original note.market acceptance and market penetration that can be achieved for these products.
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 requires the Company to file a registration statement with the Securities and Exchange Commission to register the common shares issuable under the agreement. In conjunction with the Equity Financing Agreement, the Company entered into a $250,000 secured convertible promissory note with a term of nine months and bearing interest at 10%. The note is convertible to common shares based on a formula with a discount to market price. On November 2, 2017, the Company entered into a second $250,000 secured convertible promissory note with similar terms after filing a registration statement on Form S-1 on November 11, 2017. The Company expects to fund its operational and investing needs through the EFA over the next two years.
Future Liquidity Requirements
The Company’s anticipated operational shortfall for the next twelve months is $1,200,000. For thenext two years,we anticipate cash needs$1,500,000 to be between $2,000,000 and $5,000,000.$2,000,000. We plan to utilize the EFASPA executed with GHS in October 2017June 2018, as well as bridge financing, to raise the required capital.
Off Balance Sheet Arrangements
As of September 30, 2017,2019, there are no off balanceoff-balance sheet arrangements.
Going Concern
WeThe accompanying financial statements have experienced recurring losses from operations and to date, we have not been able to produce sufficient sales to become cash flow positive and profitableprepared on a consistent basis.going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The successCompany has a shareholders’ deficit of our business plan during the next 12 months$1,039,280 and beyond will be contingent upon generating sufficient revenue to cover our costsan accumulated deficit of operations and/or upon obtaining additional financing. For these reasons, our auditor$37,867,494 as of September 30, 2019 and has raisedgenerated operating losses since inception. These factors, among others, raise substantial doubt about ourthe 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, 2017June 27, 2018, the Company executed an Equity Financingentered into a Securities Purchase Agreement (“EFA”SPA”) with GHS Investments, LLC (“GHS”). Under the agreement,, which provides for GHS has committed to purchase up $12 millionto $15,000,000 of the Company’s common stock over a 24-month period atbased on a 20% discount offcontractually agreed upon market discount. The SPA replaces the market price, as defined in the agreement. The agreement contains certain restrictions on the timing of the stock purchases and requiresEquity Financing Agreement the Company to fileentered into with GHS on October 12, 2017. On August 8, 2018, the Company filed a registration statement with the Securities and Exchange Commission (“SEC”) to register theup to 16,000,000 shares of our common shares issuablestock to be purchased by GHS under the agreement. In conjunction with the Equity Financing Agreement,SPA. The registration statement became effective on October 10, 2018 and the Company entered into a $250,000 secured convertible promissory note with a term of nine months and bearing interest at 10%. The note is convertible to commonsold all the available shares based on a formula with a discount to market price.under the SPA. On November 2, 2017,May 15, 2019, the Company entered into a second $250,000 secured convertible promissory note with similar terms after filingfiled a registration statement for 30,000,000 shares to be purchased by GHS. This registration statement became effective on Form S-1 with the SEC on November 1, 2017. The Company expects to fund its operational and investing needs through the EFA over the next two years.
Critical Accounting Policies
In December 2001, the SEC requested that all registrants list their most “critical accounting polices” in the Management Discussion and Analysis. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We do not believe that the following accounting policies currently fit this definition:
Use of Estimates
The preparation of the financial statements in conformity with Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statementsJune 18, 2019 and the reported amounts of revenue and expenses duringCompany began selling shares in June. Management believes the reporting periods. Actual results could differSPA, along with bridge financing 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 differGHS, will provide sufficient cash flows until cash flows from its estimates. The Company re-evaluates all of its accounting estimates at least quarterly based on these conditions and record adjustments when necessary.operations become consistently positive.
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,weuse 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.
Fair Value Measurements
The Company adopted the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures”, which defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements.
The estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments. The carrying amounts of our short and long term credit obligations approximate fair value because the effective yields on these obligations, which include contractual interest rates taken together with other features such as concurrent issuances of warrants and/or embedded conversion options, are comparable to rates of returns for instruments of similar credit risk.
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
The derivative liability, which relates to the conversion feature of convertible debt and common stock warrants and options, is classified as a Level 3 liability, and is the only financial liability measure at fair value on a recurring basis.
The change in the Level 3 financial instrument is as follows:
Balance, June 30, 2017 | $ | 5,072,579 | |
Issued during the three months ended September 30, 2017 | $ | 443,482 | |
Exercises/Conversions | $ | (112,511) | |
Change in fair value recognized in operations | $ | (1,813,249) | |
Balance, September 30, 2017 | $ | 3,590,301 |
9 |
The estimated fair value of the derivative instruments were valued using the Black-Scholes option pricing model, using the following assumptions as of September 30, 2017:
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 three months ended September 30, 2017 and September 30, 2016.
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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
A smaller reporting company is not required to provide the information required by this Item.
Item 4. Controls and Procedures
We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2017.2019. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer, Michael Welch, and our Chief Financial Officer, Jens Mielke. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2017,2019 our disclosure controls and procedures are not effective. There have been no changes in our internal controls over financial reporting during the yearnine months ended JuneSeptember 30, 2017.2019.
Our management identified the following material weaknesses in our internal control over financial reporting, which are indicative of many small companies with small staff: (i) inadequate segregation of duties and effective risk assessment; and (ii) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of both US GAAP and SEC guidelines.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Limitations on the Effectiveness of Internal Controls
Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion oftwoor 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
Please refer to our Annual Report on Form 10-K/A10-K filed October 12, 2017April 15, 2019 for information regarding our pending legal proceedings. The following represents an updateThere are no updates to the itemsinformation disclosed in that filing:filing.
Claims Against Donna Rayburn
On October 6, 2017 the Company executed a Release and Settlement Agreement with Donna Rayburn regarding the litigation between the Company and Ms. Rayburn. Ms. Rayburn released the Company from all claims and returned 10 million stock warrants.
Arbitration Claim of Roy J. Meadows Against Rocky Mountain High Brands, Inc. (RMHB) dated February 24, 2016
On October 6, 2017 the Company executed a Release and Settlement Agreement with Roy Meadows (“Meadows Settlement”) regarding the litigation between the parties. As part of the Meadows Settlement, the Company agreed to issue 45 million shares of the Company’s common stock, including 20 million shares issued immediately and 25 million shares to be issued upon the effectiveness of the Company’s increased common share authorization. Mr. Meadows is subject to a “leak-out” formula whereby he is limited in the number of shares he can re-sell if the stock price is below $.06 per share. In connection with this settlement, the Company agreed to an exchange of the Preferred C Stock back to the originating note payable in accordance with the terms of the Exchange Agreement. Mr. Meadows assigned the note to GHS Investments, LLC, (“GHS”) an outside investment group, in exchange for consideration paid to him by GHS. Mr. Meadows released the Company from all claims and returned 55,096,825 stock warrants.
192nd Judicial District Court of Dallas County Texas, filed February 16, 201, DC-17-02058
Rocky Mountain High Brands, Inc. v. Dewmar International BMC, Inc. RMHB filed suit against Dewmar for breach of contract and for an accounting. RMHB is in the process of obtaining a default judgment against Dewmar for its failure to file an answer to the suit.
134thJudicial District Court of Dallas County, Texas, filed April 28, 2017. Rocky Mountain High Brands, Inc. v Lyonpride Music, LLC
RMHB filed suit against Lyonpride for fraud and for declaratory relief with respect to a contract between the parties. RMHB seeks monetary damages against said Defendant.
134thJudicial District Court of Dallas County, Texas. Filed June 26, 2017 Rocky Mountain High Brands, Inc. v Statewide Beverage Company, Inc.
RMHB has filed suit for breach of contract, common law fraud and declaratory relief.
Los Angeles Superior Court, BC669367, filed July 24, 2017. Statewide Beverage Company, Inc. v. Rocky Mountain High Brands, Inc.
Statewide filed a breach of contract claim, dealing with the same fact issues in the above case of RMHB v Statewide. RMHB still has not been served in this case.
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.
RMHB 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. RMHB alleges the Company’s former Chairman of the Board breached his fiduciary duty to the Company by issuing these shares to himself and others.
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 January 1, 2017August 13, 2019 and November 13, 2017:18, 2019:
Date | Name | Shares Issued | Issue Price | Description | Exemption |
8/23/2019 | GHS Investments | 1,466,625 | $ 0.050 | Shares Sold | Rule 506 |
9/6/2019 | GHS Investments | 1,735,793 | 0.050 | Shares Sold | Rule 506 |
9/20/2019 | GHS Investments | 1,592,938 | 0.039 | Shares Sold | Rule 506 |
10/4/2019 | GHS Investments | 1,609,177 | 0.033 | Shares Sold | Rule 506 |
10/17/2019 | GHS Investments | 1,947,826 | 0.029 | Shares Sold | Rule 506 |
10/30/2019 | GHS Investments | 1,982,323 | 0.026 | Shares Sold | Rule 506 |
11/12/2019 | GHS Investments | 2,109,711 | 0.026 | Shares Sold | Rule 506 |
Date | Name | Shares Issued | Issue Price | Description | Exemption | ||||||||||
1/3/2017 | Louis G. Walz | 588,236 | 0.0170 | Shares Sold | Rule 506 | ||||||||||
1/3/2017 | Ruth Kerico | 500,000 | 0.0200 | Shares Sold | Rule 506 | ||||||||||
1/3/2017 | Bruce Wunsch | 100,000 | 0.0170 | Services Rendered | Section 4(2) | ||||||||||
1/3/2017 | Eagle Manufacturing Solutions | 491,176 | 0.0170 | Services Rendered | Section 4(2) | ||||||||||
1/3/2017 | Patricia Ann Wright | 150,000 | 0.0170 | Services Rendered | Section 4(2) | ||||||||||
1/3/2017 | Eason Wright | 500,000 | 0.0170 | Services Rendered | Section 4(2) | ||||||||||
1/3/2017 | John Jay Saldi | 100,000 | 0.0170 | Services Rendered | Section 4(2) | ||||||||||
1/3/2017 | Earl Pontillo | 250,000 | 0.0200 | Shares Sold | Rule 506 | ||||||||||
1/3/2017 | Ann M. Wieringa | 900,000 | 0.0170 | Shares Sold | Rule 506 | ||||||||||
1/4/2017 | Ann M. Wieringa | 900,000 | 0.0170 | Shares Sold | Rule 506 | ||||||||||
1/4/2017 | Vista Capital Investments | 10,000,000 | 0.0200 | Shares Sold | Rule 506 | ||||||||||
1/6/2017 | Eagle Manufacturing Solutions | 1,588,236 | 0.0170 | Shares Sold | Rule 506 | ||||||||||
1/6/2017 | Leroy Wheeler | 185,185 | 0.0270 | Shares Sold | Rule 506 | ||||||||||
1/6/2017 | David Economon | 200,000 | 0.0170 | Shares Sold | Rule 506 | ||||||||||
1/6/2017 | Robert & Kimberly Payne | 200,000 | 0.0250 | Shares Sold | Rule 506 | ||||||||||
1/6/2017 | Tammie L. Borders | 200,000 | 0.0250 | Shares Sold | Rule 506 | ||||||||||
1/6/2017 | Fred and Linda Borders | 600,000 | 0.0250 | Shares Sold | Rule 506 | ||||||||||
1/12/2017 | ValueCorp Trading Company | 1,000,000 | 0.0200 | Shares Sold | Rule 506 | ||||||||||
1/17/2017 | John R Anderson | 166,667 | 0.0300 | Shares Sold | Rule 506 | ||||||||||
1/17/2017 | Muleshoe Ranch | 166,667 | 0.0300 | Shares Sold | Rule 506 | ||||||||||
1/17/2017 | Steve Gill (Shelving Exchange) | 166,667 | 0.0300 | Shares Sold | Rule 506 | ||||||||||
1/18/2017 | David Economon | 350,000 | 0.0200 | Shares Sold | Rule 506 | ||||||||||
1/20/2017 | Howard Bruckner | 200,000 | 0.0500 | Shares Sold | Rule 506 | ||||||||||
1/20/2017 | Brooks Goodson | 300,000 | 0.0500 | Shares Sold | Rule 506 | ||||||||||
1/20/2017 | Robert & Kimberly Payne | 100,000 | 0.0500 | Shares Sold | Rule 506 | ||||||||||
1/23/2017 | Ronnie Neu | 555,556 | 0.0270 | Shares Sold | Rule 506 | ||||||||||
1/23/2017 | Patricia Ann Wright | 285,714 | 0.0350 | Shares Sold | Rule 506 | ||||||||||
1/23/2017 | Crackerjack Classic LLC | 1,500,000 | 0.0010 | Exercise of Warrants | Rule 506 | ||||||||||
1/24/2017 | Arthur Rezac | 100,000 | 0.0500 | Shares Sold | Rule 506 | ||||||||||
1/27/2017 | Patrick Dennehy | 100,000 | 0.0500 | Shares Sold | Rule 506 | ||||||||||
2/1/2017 | William Penz | 200,000 | 0.0500 | Shares Sold | Rule 506 | ||||||||||
2/15/2017 | Yael Moyal | 2,571,429 | 0.0350 | Shares Sold | Rule 506 | ||||||||||
2/17/2017 | Richard B Main | 222,222 | 0.0450 | Shares Sold | Rule 506 | ||||||||||
2/22/2017 | Lily Li | 10,000,000 | 0.1150 | Services Rendered | Section 4(2) | ||||||||||
2/24/2017 | Thomas O. Layman | 200,000 | 0.0500 | Shares Sold | Rule 506 | ||||||||||
2/27/2017 | Allred, Wilcox, & Hartley PLLC | 181,600 | 0.0840 | Services Rendered | Section 4(2) | ||||||||||
2/27/2017 | Yeal Moyal | 1,285,714 | 0.0350 | Shares Sold | Rule 506 | ||||||||||
2/27/2017 | Kathy Fernandez | 100,000 | 0.0200 | Shares Sold | Rule 506 | ||||||||||
2/27/2017 | Mark Ussery | 100,000 | 0.1100 | Services Rendered | Section 4(2) | ||||||||||
2/27/2017 | Terry Niedecken | 100,000 | 0.1100 | Services Rendered | Section 4(2) | ||||||||||
3/1/2017 | Kathy Fernandez | 505,096 | 0.0100 | Note Payable Conversion | Rule 506 | ||||||||||
3/27/2017 | EPIC Group One | 11,000,000 | 0.0850 | Services Rendered | Section 4(2) | ||||||||||
3/31/2017 | Jens Mielke | 357,143 | 0.0420 | Services Rendered | Section 4(2) | ||||||||||
3/31/2017 | Michael Welch | 206,044 | 0.0420 | Services Rendered | Section 4(2) | ||||||||||
3/31/2017 | David Seeberger | 137,363 | 0.0420 | Services Rendered | Section 4(2) | ||||||||||
4/7/2017 | Small Cap Voice | 300,000 | 0.0877 | Services Rendered | Section 4(2) | ||||||||||
6/29/2017 | Morris Rafi | 1,534,089 | 0.0349 | Note Payable Conversion | Rule 506 | ||||||||||
8/23/2017 | Universal Consulting LLC | 3,147,288 | 0.0100 | Note Payable Conversion | Rule 506 | ||||||||||
9/15/2017 | Homie Doroodian | 3,093,640 | 0.0177 | Note Payable Conversion | Rule 506 | ||||||||||
10/13/2017 | GHS Investments LLC | 24,000,000 | 0.0108 | Note Payable Conversion | Rule 506 | ||||||||||
10/18/2017 | Roy Meadows | 20,000,000 | 0.0216 | Note Payable Conversion | Rule 506 | ||||||||||
10/31/2017 | Michael Welch | 789,474 | 0.0196 | Services Rendered | Section 4(2) | ||||||||||
11/1/2017 | Roy Meadows | 25,000,000 | 0.0201 | Note Payable Conversion | Rule 506 | ||||||||||
11/3/2017 | Metexas Georgatos | 750,000 | 0.0186 | Services Rendered | Section 4(2) | ||||||||||
11/3/2017 | Eduardo Cabrera | 2,250,000 | 0.0186 | Services Rendered | Section 4(2) | ||||||||||
11/3/2017 | Wellington Shields Holdings LLC | 2,000,000 | 0.0186 | Services Rendered | Section 4(2) | ||||||||||
11/6/2017 | Small Cap Voice | 600,000 | 0.0168 | Services Rendered | Section 4(2) | ||||||||||
11/9/2017 | GHS Investments LLC | 28,000,000 | 0.0162 | Note Payable Conversion | Rule 506 |
Item 3. Defaults upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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, |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Rocky Mountain High Brands, Inc.
Date: November 14, 201719, 2019
By:/s/ Michael Welch
Michael Welch
Title: Chairman of the Board of Directors, President, and Chief Executive Officer
Date: November 14, 201719, 2019
By:/s/ Jens Mielke
Jens Mielke
Title: Chief Financial Officer