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Form 10-K Rocky Mountain High Bran For: Dec 31

April 15, 2019 1:38 PM EDT

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the fiscal year ended December 31, 2018
   
[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
   
For the transition period from _________ to ________

 

 

Commission File Number: 000-55609

 

Rocky Mountain High Brands, Inc.

(Exact name of registrant as specified in its charter)

 

Nevada   90-0895673
(State or other jurisdiction of  incorporation or organization)  

(I.R.S. Employer

Identification No.)

 

9101 LBJ Freeway, Suite 200, Dallas, TX 75243

(Address of principal executive offices) (Zip code)

 

(800)-260-9062

(Registrant’s telephone number, including area code)

 
 

Securities registered under Section 12(b) of the Act:

Not Applicable

 

 

None

(Title of each class)

N/A

(Name of Exchange on which registered)

         

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock, $0.001 par value

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]

 

Indicate by checkmark 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.

Yes [X] No [ ]

 

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 (§ 232.405 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 [ ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth 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 [ ] No [X]

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. Approximately $23,047,302 as of June 30, 2018, using the closing price of $0.01135 per share.

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 2,083,392,171 of as of April 10, 2019.

 

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TABLE OF CONTENTS

 

  PART I  
    Page
     
Item 1. Business Overview 3
Item 1A. Risk Factors 10
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Mine Safety Disclosures 13
     
PART II

Item 5. Unregistered Sales of Equity Securities and Use of Proceeds Between November 17, 2018 and March 30, 2019 13
Item 6 Selected Financial Data 15
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 25
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 26
Item 9A. Controls and Procedures 26
Item 9B Other Information 27
     
PART III
     
Item 10. Directors, Executive Officers and Corporate Governance 27
Item 11. Executive Compensation 30
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 33
Item 13. Certain Relationships and Related Transactions, and Director 34
Item 14. Principal Accounting Fees and Services 35
     
PART IV
   
Item 15. Exhibits, Financial Statement Schedules  36

       

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PART I

 

When used in this Annual Report, unless otherwise indicated, the terms “the Company,” “RMHB,” “we,” “us,” and “our” refers to Rocky Mountain High Brands, Inc. and/or its subsidiaries. All references in this report to “$” or “dollars” are to United States dollars, unless specifically stated otherwise.

Forward-Looking Statements

This Annual Report contains forward-looking statements that reflect our current views about future events. We use the words “anticipate,” “assume,” “believe,” “estimate,” “expect,” “will,” “intend,” “may,” “plan,” “project,” “should,” “could,” “seek,” “designed,” “potential,” “forecast,” “target,” “objective,” “goal,” or the negatives of such terms or other similar expressions. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

 

Item 1. Business Overview

 

Rocky Mountain High Brands, Inc. is a Nevada corporation. RMHB currently operates through its parent company, three

wholly-owned subsidiaries and one minority-owned subsidiary, which the Company controls. All subsidiaries are consolidated for financial reporting purposes:

 

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

 

Wellness For Life Colorado, Inc. (“WFLC”) (f/k/a Rocky Mountain Hemp Company and Wellness For Life, Inc.), an active Colorado corporation (Subsidiary)

 

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

 

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

 

FitWhey Brands Inc. (“FitWhey”), an active Nevada corporation (Subsidiary)

 

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

 

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

 

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RMHB is a lifestyle brand management company that markets primarily CBD and hemp-infused products to health-conscious consumers. Our products span various categories including beverage, food, fitness, and skin care. RMHB also markets a naturally high alkaline spring water and a water-based protein drink with caffeine and B vitamins. All products comply with federal regulations on hemp products and contain 0.0% tetrahydrocannabinol (THC), the psychoactive constituent of cannabis.

 

In March 2018, the Company launched the HEMPd brand with gummies, water soluble drops, capsules, tinctures, lotions, and salves. The Company introduced four flavors of CBD-infused waters in 12 oz. cans in November 2018.

 

In July 2018, the Company acquired the assets of BFIT Brands, LLC and formed a new subsidiary, FitWhey Brands LLC. FitWhey markets a line-up of five water-based protein drinks that include caffeine and B vitamins.

 

During 2017 and 2018, the Company continued to market its lineup of naturally flavored hemp-infused functional beverages, as well as hemp-infused 2oz. Mango Energy Shots and Mixed Berry Energy Shots through the first half of 2018. The Company plans to introduce updated offerings of hemp seed extract-infused functional beverages in the second quarter of 2019 under the name of Rocky Mountain.

 

Corporate History

 

Rocky Mountain High Brands Inc. October 23, 2014 to present – Articles of Amendment filed with the State of Nevada

 

f/k/a Totally Hemp Crazy Inc. July 17, 2014 to October 23, 2014 – Articles of Amendment filed with the State of Nevada

 

f/k/a Republic of Texas Brands Incorporated November 2011 to July 17, 2014 – Articles of Amendment filed with the State of Nevada

 

f/k/a Legends Food Corporation May 2011 to November 2011 – Articles of Amendment filed with the State of Nevada

 

f/k/a Precious Metals Exchange Corp. – Articles of Amendment filed with the State of Nevada on December 23, 2008

 

f/k/a Stealth Industries, Inc. – Articles of Amendment filed with the State of Minnesota on October 25, 1999 (name change). Articles of Incorporation filed with the State of Nevada on October 30, 2000 (Change of Domicile; Merger with Stealth Industries, Inc. (Minnesota)

 

f/k/a Assisted Living Corporation – Articles of Amendment filed with the State of Minnesota on November 3, 1993 (name change) f/k/a Electric Reel Corporation of America, Inc. -- Articles of Incorporation filed with the State of Minnesota on August 15, 1968

 

Acquisitions

 

Rocky Mountain High Water Company LLC

 

In July 2016, the Company entered into a business alliance with Poafpybitty Family, LLC to launch Eagle Spirit Spring Water, a line of purified, high-alkaline spring water sourced from Native American tribal land in Oklahoma.

 

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The agreement calls for the Company to pay a royalty on each gallon of water collected at the spring. Production of filtered spring water filled bottles commenced in August 2016 and sales began in October 2016.

 

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

 

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

 

On November 12, 2016, the agreement with the Poafpybitty Family was amended to give the Company a controlling voting interest of 75% of WaterCo, while the Poafpybitty Family received a majority 51% of the equity interest. The amended agreement is being accounted for as a step-acquisition, with the resulting goodwill of $59,163 included in other assets. During the six months ended December 31, 2017, the Company obtained an outside valuation of the rights to use the land and obtain the water described in the agreement. As a result of that analysis and the continued operating losses by the Company’s spring water business, the Company determined that its investment, including the related goodwill, was fully impaired. The Company recorded an impairment expense of $59,163 as of November 12, 2017. As a result of the step-acquisition, beginning on November 12, 2016 the operations of WaterCo are consolidated in the financial statements of RMHB.

 

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

 

In July 2018, the Company purchased the assets of BFIT Brands, LLC, an Arizona-based company. The acquired assets include the cash, accounts receivable, inventory, FitWhey trademark, recipes and formulas of BFIT’s FitWhey branded water-based protein drinks containing caffeine and a vitamin-B pack. The Company paid $230,438 including common stock issued to the owners of BFIT of $75,000, forgiveness of a note receivable of $80,000 plus accrued interest of $438, and $75,000 to be paid to the owners of BFIT over time based on 5% of net sales of FitWhey products. The acquisition includes $98,297 of assets including cash, accounts receivable, inventory, and prepaid production costs and $132,141 of intangible assets, including the FitWhey software, trademark, formulas, and goodwill. The Company is obtaining an outside valuation of these assets.

 

Trademarks Related to Our Business

 

           Rocky Mountain High

           HEMPd

           HEMPFIT

           Smarterita

           Totally Hemp Crazy

           Blue Leaf

           Rock the Road Trip

           Eagle Spirit

           Eagle Paa

           FitWhey

 

Strategic Update and Planned Product Offerings

 

The Company recently updated and began execution of its long-term strategic plan. Management’s goal is to become the cutting-edge leader in CBD and hemp-infused food, beverage, fitness, and other health-conscious product categories. This includes the use of CBD and hemp in products under the HEMPd and Rocky Mountain brand names. In late 2017, the Company executed its first private label manufacturing agreement and in 2019 executed a second private label agreement. Production on both private label agreements is scheduled to start in the second quarter of 2019.

 

The Company’s marketing will focus on the health benefits of hemp and CBD.

 

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Current Product Offerings

 

The Company’s Wellness For Life Colorado, Inc. subsidiary currently markets the following lineup of CBD-infused products under the HEMPd brand:

 

CBD-Infused Waters – The Company’s initial production run of CBD-Infused waters consisted of 12 oz. cans each containing 5mg of CBD. The Company raised the CBD content to 20mg per can in its March 2019 production run.

 

Gummies – Each bottle contains 30 gummies containing 25mg of full plant hemp extract in assorted flavors. Gummies are made to be chewed and ingested for absorption for hemp absorption.

 

Water Soluble Concentrate – Each bottle contains 1,500mg of full plant hemp extract. Consumers place approximately 8 drops of this water-soluble concentrate in 12-16 oz. of water for a daily dose of hemp.

 

Tinctures – Each bottle contains 300mg of full plant hemp extract. Consumers place these drops under their tongue. Flavors include tangerine, lemon, and spearmint.

 

Capsules – Each bottle contains 30 capsules containing 25mg of full plant hemp extract. The capsules are swallowed for ingestion and hemp absorption.

 

Triple Relief Salve – Each jar contains 250mg of full plant hemp extract. The salve is used directly on skin for pain relief in muscles, bones and joints.

 

Serenity Hemp Lotion – Each bottle contains 250mg of full plant hemp extract. Lotion is meant to be applied to any part of the skin for absorption into your body.

 

Under its Rocky Mountain High Brands name, the Company marketed a lineup of five hemp-infused 16 oz. beverages in 2017 and 2018, including:

 

Naturally Flavored Citrus Energy Drink - A citrus energy drink that contains 100mg of hempseed extract and is complemented with ginseng and guarana extract, caffeine and other ingredients

 

Naturally Flavored Mango Energy Drink - A mango energy drink that contains 100mg of hempseed extract and is complemented with ginseng and guarana extract, caffeine and other ingredients.

 

Low Calorie Coconut Energy Lime - A low-calorie coconut lime energy drink that contains 100mg of hempseed extract and is complemented with ginseng and guarana extract, caffeine and other ingredients.

 

Naturally Flavored Lemonade - A lemonade drink that contains 100mg of hempseed extract and is complemented with ginseng extract and other ingredients.

 

Naturally Flavored Black Tea - A black tea drink that contains 100mg of hempseed extract and is complemented with black tea and ginseng extract and other ingredients.

 

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RMHB sold its remaining inventory of these products in March 2019.

 

Our Eagle Spirit Land and Water Company currently markets its naturally high alkaline spring water in two sizes: a 500ml (16.9 oz.) plastic bottle sold in cases of 24 and a 1-liter bottle sold in cases of 12. The Company also previously sold a 10-liter (2.64-gallon) Bag in a Box product.

 

Private Label

 

CBD Life

 

In December 2017, the Company executed a three-year Master Manufacturing Agreement with CBD Alimentos SA de CV (“CBD-Alimentos”), a Mexican food and beverage distributor. Under the agreement (as amended), CBD Alimentos, through its sister company, CBD Life, will be our exclusive distributor in Mexico for all of our CBD-infused energy and functional beverages. In turn, we will be CBD Alimentos’ exclusive supplier of such products. The beverages supplied to CBD Alimentos will be private label products made to order for CBD Alimentos, and we will cooperate on laboratory and taste-testing of each batch of beverages at the co-packing facility. In accordance with the Agreement, RMHB opened a separate operating bank account for all deposits made by CBD Alimentos towards the purchase of ingredients and packaging. CBD Alimentos is required to maintain a positive cash balance in the account at all times. The Company will have full unilateral authority to disburse funds from the bank account to vendors, suppliers, co-packers and the Company solely for the purposes of production and the Company’s margin on the sale. CBD Alimentos’ initial purchase order, including a deposit of $466,300 was received in December 2018. Due to ingredient and packaging sourcing delays, production did not commence in 2018 as expected. The Company’s initial production run of 2,000,000 cans is expected to be completed in June 2019.

 

Green Lotus

 

On February 21, 2019 the Company entered into a Beverage Manufacture and Supply Agreement with Texas Wellness Center, LLC, a marketer and distributor of hemp and CBD products under the Green Lotus” brand. Under the Agreement, the Company will be the exclusive supplier to Texas Wellness for hemp-infused beverages for the Green Lotus brand. The Company will produce a Green Lotus Premium Sparkling Hemp Water in Watermelon and Grapefruit flavors, each containing 25mg of naturally occurring cannabinoids. Texas Wellness will supply the hemp-derived ingredients for the beverages, and Rocky Mountain High Brands will provide all other materials necessary for the production, processing, batching, labeling, and packaging of the beverages. The Agreement runs for an initial term of three years, with subsequent automatic annual renewals.  The Agreement may be terminated upon 180 days written notice. The Company’s initial production run of 100,000 cans is expected to be completed in April 2019.

 

Upcoming Product Offerings

 

The Company is currently updating the formulations of its hemp-infused drinks under the Rocky Mountain brand name and will reintroduce them in the second quarter of 2019. These drinks will contain 250mg of hemp seed extract and be carbonated.

 

The Company’s WFLC subsidiary plans to introduce hemp-infused flavored waters under the HEMPd brand name in the second quarter of 2019. These drinks will contain 250mg of hemp seed extract be sold exclusively to our national distributor.

 

The Company’s Eagle Spirit subsidiary plans to launch the Spirit Water brand in 2019.

 

The Company plans to continually update and improve its product offerings in accordance with consumer demand, changes in federal and local regulations, and internal research and development. Ongoing research and development costs are not expected to be material.

 

Sales Channels

 

The Company sells its products to retailers, distributors, and online directly to consumers via Amazon and the Company’s websites: www.HEMPd.com, www.EagleSpiritWater.com, and www.LiveRockyMountainHigh.com. For the year ended December 31, 2018, sales by channel were 21% distributor, 12% retailer, and 67% online. In 2018 the Company’s two largest customers represented 12% and 7% of sales.

 

For the year ended December 31, 2017, sales by channel were 24% distributor, 15% retailer, and 61% online. In 2017 the Company’s two largest customers represented 21% and 12% of sales.

 

For the six months ended December 31, 2017, sales by channel were 10% distributor, 22% retailer, and 68% online. In the same period, the Company’s two largest customers each represented 6% of sales.

 

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Outsourced Production and Storage Services

 

In May 2016, the Company executed a one-year agreement with MBA Beverage to coordinate the manufacturing of our hemp-infused beverage products. MBA Beverage acted as our outsourced supply-chain management and coordinated every aspect of the manufacturing process. The contract expired in May 2017 and was not renewed.

 

Through early 2018, Blues City Brewery, LLC (“Blues City”) in Memphis, Tennessee, a subsidiary of City Brewing Company, LLC, completed all beverage production and canning. Blues City is an FDA registered facility that is audited annually to ensure compliance with FDA GMP (Good Manufacturing Practices) for food safety. MBA Beverage schedules beverage production with Blues City. Upon completion of the production, the Company stored finished product at Blues City, awaiting sale. The Company did not contract with Blues City directly.

 

On January 9, 2019 the Company executed an agreement with Optimus Fulfill LLC in Coppell Texas to co-pack beverages. The agreement terminates on December 31, 2024. The Company will utilize other co-packers as necessary to supplement Optimus’ production capabilities.

 

The Company utilizes numerous vendors to collaborate on product formulation. All formulas developed for the Company through outside vendors are the property of the Company.

 

Our naturally high alkaline spring water is cold-filtered and packaged by a third-party water processor, Water Event Pure Water Solutions (“Water Event”).

 

On February 24, 2018 the Company executed an Amazon Brand Development and Launch Agreement with BuyDMi, Inc. (DBA GoodforYou.com) for the new HEMPd product line. Under this contract GoodforYou.com is creating an Amazon page for the initial 17 HEMPd products, converting all HEMPd products to Amazon Prime offerings, providing customer phone and email support, managing inventory forecasting, shipping, storage, and returns, and launching sponsored ad campaigns. The Company cancelled this contract in December 2018 and is currently performing these functions through other less expensive vendors.

 

On March 20, 2018 the Company executed a Fulfillment and Customer Support Services Agreement with GoodforYou.com for the new HEMPd product line. Under this contract GoodforYou.com managed inventory and providing storage, shipping, and customer support services. The Company cancelled this contract in December 2018 and is currently performing these functions through other less expensive vendors.

 

Regulatory Requirements

 

We are subject to numerous federal, state, local, and foreign laws and regulations, including those relating to:

 

The production of beverages and other related products;
The preparation and sale of beverage;
Environmental protection;
Interstate commerce and taxation laws; and
Workplace and safety conditions, minimum wage and other labor requirements

 

The Company’s hemp and CBD products are derived from industrial hemp, not marijuana. There is a clear scientific distinction between the two plants: The Company’s products contain less than 0.3% tetrahydrocannabinol (“THC”), the psychoactive compound found in marijuana. (Most marijuana contains over 10% THC). There is also a clear legal distinction between the two plants. While marijuana is illegal under U.S. federal law, the industrial hemp used in our products is 100% legal at the federal level. It is grown under a duly-licensed state agricultural pilot program conducted by the Colorado Department of Agriculture, as authorized by the 2014 U.S. Farm Bill. The Farm Bill explicitly exempts hemp products from the definition of “marijuana” and explicitly exempts hemp products from the purview and regulation of the Controlled Substances Act. Furthermore, the 2016 Omnibus Appropriations Act specifically instructs federal agencies not to interfere with the transport or sale of pilot program hemp products such as the ones sold by the Company. The 2018 Farm Bill specifically removed hemp from Schedule 1 of the Controlled Substances Act. The law also prohibits states from interfering with the transportation of hemp and hemp products from one state to another.

 

Our beverage products are not subject to direct FDA approval as the FDA does not perform review testing or approval of food, beverages or dietary supplements. The FDA requires that we manufacture our products in commercial manufacturing facilities that are annually audited to ensure that they pass inspection based on Good Manufacturing Practices for food safety.

 

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Employees and Independent Contractors

 

The Company currently has four officers and five non-officer employees. The Company uses independent contractors, when necessary, to support operational or back-office functions.

 

Implications of Emerging Growth Company Status

 

As a company with less than $1 billion in revenue in our last fiscal year, we are defined as an “emerging growth company” under the Jumpstart Our Business Startups (“JOBS”) Act. We will retain “emerging growth company” status until the earliest of:

 

The last day of the fiscal year during which our annual revenues are equal to or exceed $1 billion;

 

The last day of the fiscal year following the fifth anniversary of our first sale of common stock pursuant to a registration statement filed under the Securities Act of 1933, as amended, which we refer to in this document as the Securities Act;

 

The date on which we have issued more than $1 billion in nonconvertible debt in a previous three-year period; or

 

The date on which we qualify as a large accelerated filer under Rule 12b-2 adopted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (i.e., an issuer with a public float of $700 million that has been filing reports with the U.S. Securities and Exchange Commission (“SEC”) under the Exchange Act for at least 12 months).

 

As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to SEC reporting companies. For so long as we remain an emerging growth company we will not be required to:

 

Have an auditor report on our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Wall Street Reform and Consumer Protection Act of 2002;

 

Comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis);

 

Submit certain executive compensation matters to stockholder non-binding advisory votes;

 

Submit for stockholder approval golden parachute payments not previously approved;

 

Disclose certain executive compensation related items, as we will be subject to the scaled disclosure requirements of a smaller reporting company with respect to executive compensation disclosure; and

 

Present more than two years of audited financial statements and two years of selected financial data in a registration statement for our initial public offering of our securities.

 

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Pursuant to Section 107(b) of the JOBS Act, we have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of The JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result, our financial statements may not be comparable to companies that comply with public company effective dates. Section 107 of the JOBS Act provides that our decision to opt into the extended transition period for complying with new or revised accounting standards is irrevocable.

 

Because the worldwide market value of our common stock held by non-affiliates, or public float, is below $75 million, we are also a “smaller reporting company” as defined under the Exchange Act. Some of the foregoing reduced disclosure and other requirements are also available to us because we are a smaller reporting company and may continue to be available to us even after we are no longer an emerging growth company under the JOBS Act but remain a smaller reporting company under the Exchange Act. As a smaller reporting company we are not required to:

 

Have an auditor report on our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act; and

 

Present more than two years of audited financial statements in our registration statements and annual reports on Form 10-K and present any selected financial data in such registration statements and annual reports.

 

Item 1A. Risk Factors.

 

Smaller reporting companies are not required to provide the information required by this item. Please see our Registration Statement on Form S-1/A filed October 9, 2018 to review our current risk factors.

 

Item 2. Properties

 

At present, we do not own any real property. As of December 31, 2018, we leased approximately 7,000 square feet of office space at 9101 LBJ Freeway, Suite 200, Dallas, Texas 75243. Our lease period began on September 1, 2016 and terminates on August 31, 2019. Payments under the lease are as follows:

 

Lease Period Base Rent (monthly)
9/1/2016 to 8/31/2017 $7,715.00
9/1/2017 to 8/31/2018 $7,972.17
9/1/2018 to 8/31/2019 $8,229.33

 

In connection with the new lease, we also purchased used office furniture from the landlord and financed this purchase with a note payable in the amount of $40,122 with an interest rate of 0% and monthly payments of $1,114 over thirty-six monthly installments.

 

On January 18, 2018, the RMHC entered into a 12-month office use agreement for office space in Denver, Colorado. Monthly payments are $91. This agreement renewed on January 19, 2019 for another 12-month period.

 

The Company leases the following warehouse space on a month-to-month basis:

 

Water Event, Carrollton, Texas – We lease space for both hemp-infused beverages and spring water. The Company also stores small quantities of ice barrels and other packaging at this location. As of March 30, 2019, the Company held no inventory at this location.

 

American Fitness Wholesale, Tempe, Arizona – We lease space on a month-to-month basis for FitWhey beverages at this location.

 

Pet Healthy Brands, Dallas, Texas – We lease space on a month-to-month basis for packaging and ingredients at this location.

 

Our monthly rent varies depending on how much inventory is stored. Inventory levels fluctuate based on production and sales.

 

The Company is currently evaluating its growth requirements and researching alternatives to lower its recurring expenses for warehouse space.

 

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Item 3. Legal Proceedings

 

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

 

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

 

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

 

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

 

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

 

In June 2018 LSW Holdings, LLC (“LSW”) and Lily Li (“Li”) filed counterclaims against the Company, generally seeking an increase of voting rights of the Series A shares to 1200:1, a declaration that the Series A shares were validly issued to Grisaffi, challenging the authorized share increase of the Company, claiming securities fraud by the Company with respect to the Series A Shares purchased from Grisaffi and other common stock allegedly purchased by LSW and Li, as well as fraud, breach of contract and negligent misrepresentation by the Company. LSW seeks $10,000,000 in damages from the Company, for the $3,500,000 which was paid to Grisaffi for the Series A shares and for which LSW claims to be the responsibility of the Company to cover, and the remaining $6,500,000 for money allegedly spent by LSW in “developing a distribution system in China” and other alleged “investments” of Li and LSW in the Company. LSW and Li also sought exemplary damages.

 

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

 

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 void ab initio and unenforceable, and that all stock and promissory notes issued in connection with the Employment Agreement were also void ab initio and of no force and effect, including but not limited to:

 

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.

 

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 10,000,000 shares of common stock to Li and the 11,000,000 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.

 

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

 

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

 

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

 

Grisaffi has filed an appeal of the Default Judgment, and submitted his brief on or about February 28, 2019. The Company is preparing its brief which is currently due April 1, 2019. 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.

 

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

 

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

 

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

 

  1. The Employment Agreement with Grisaffi dated April 1, 2013 was void ab initio and unenforceable, and that all stock or other instruments issued on the basis or authority of that Employment Agreement were also void ab initio and of no force and effect;

 

  2. The Series A Preferred Shares that RMHB issued to Grisaffi and later sold by Grisaffi to LSW were void ab initio and any potential rights or remedies thereunder were terminated on July 11, 2014 pursuant to the Order Confirming Debtor’s Amended Plan of Reorganization;

 

  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 11,000,000 shares of common stock to Epic Group One, LLC, and 10,000,000 shares of common stock to Li for no consideration, and (iii) causing the issuance of 113,688,625 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 void ab initio and 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;

 

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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.

 

The amount of damages and attorneys’ fees to be awarded to RMHB and against LSW Holdings and Li will be determined in a trial currently scheduled for June 3, 2019. We are continuing to pursue our claims against the remaining defendants in the case, which will be adjudicated at trial, currently scheduled for June 3, 2019.

 

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.

 

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 $21,000.00 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.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

PART II

 

Item 5. Unregistered Sales of Equity Securities and Use of Proceeds Between November 17, 2018 and March 30, 2019:

Date Name Shares Issued   Issue Price Description Exemption
11/29/2018 GHS Investments 10,000,000 $ 0.005 Note Payable Conversion Rule 506
12/4/2018 GHS Investments 14,561,852    0.005 Note Payable Conversion Rule 506
12/13/2018 GHS Investments 33,116,385    0.007 Shares Sold Rule 506
1/2/2019 John Kuhlke 508,062    0.008 Services Rendered Section 4(2)
1/2/2019 GHS Investments 10,000,000    0.005 Note Payable Conversion Rule 506
1/7/2019 GHS Investments 46,276,982    0.007 Shares Sold Rule 506
1/25/2019 GHS Investments 10,000,000    0.005 Note Payable Conversion Rule 506
2/4/2019 GHS Investments 15,000,000    0.005 Note Payable Conversion Rule 506
2/5/2019 GHS Investments 25,247,856    0.007 Shares Sold Rule 506
2/22/2019 GHS Investments 23,358,593    0.007 Shares Sold Rule 506
3/7/2019 GHS Investments 30,606,307    0.006 Shares Sold Rule 506
3/20/2019 GHS Investments 30,776,999   0.006 Shares Sold Rule 506

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Market Information

 

Our common stock is quoted on the OTCQB tier of the OTC Markets Group quotation system (www.otcmarkets.com) under the trading ticker “RMHB.” The following tables set forth the range of high and low prices for our common stock for the two years ended December 31, 2018, as reported on the OTC Market Group’s quotation system. These quotations reflect inter-dealer prices, without retail markup, markdown, or commission and may not necessarily represent actual transactions.

 

Quarter Ended:  High Sale Price  Low Sale Price
March 31, 2017   $0.15   $0.04
June 30, 2017   $0.10   $0.07
September 30, 2017   $0.07   $0.02
December 31, 2017   $0.03   $0.01
March 31, 2018   $0.01   $0.03
June 30, 2018   $0.01   $0.02
September 30, 2018   $0.01   $0.01
December 31, 2018   $0.01   $0.01

 

On April 10, 2019, the last sales price per share of our common stock was $0.0057.

Penny Stock

 

The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a market price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock, to deliver a standardized risk disclosure document prepared by the SEC, that: (a) contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; (b) contains a description of the broker's or dealer's duties to the customer and of the rights and remedies available to the customer with respect to a violation of such duties or other requirements of the securities laws; (c) contains a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and the significance of the spread between the bid and ask price; (d) contains a toll-free telephone number for inquiries on disciplinary actions; (e) defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and (f) contains such other information and is in such form, including language, type size and format, as the SEC shall require by rule or regulation.

 

The broker-dealer also must provide, prior to effecting any transaction in a penny stock, the customer with (a) bid and offer quotations for the penny stock; (b) the compensation of the broker-dealer and its salesperson in the transaction; (c) the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and (d) a monthly account statement showing the market value of each penny stock held in the customer's account.

 

In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written acknowledgment of the receipt of a risk disclosure statement, a written agreement as to transactions involving penny stocks, and a signed and dated copy of a written suitability statement.

 

These disclosure requirements may have the effect of reducing the trading activity for our common stock. Therefore, stockholders may have difficulty selling our securities.

 

Dividends

 

There are no restrictions in our articles of incorporation or bylaws that prevent us from declaring dividends. The Nevada Revised Statutes, however, do prohibit us from declaring dividends where after giving effect to the distribution of the dividend:

 

1.  we would not be able to pay our debts as they become due in the usual course of business, or;

 

2.  our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of shareholders who have preferential rights superior to those receiving the distribution.

 

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We have not declared any dividends and we do not plan to declare any dividends in the foreseeable future.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

On March 17, 2017, our Board of Directors approved the Rocky Mountain High Brands, Inc. 2017 Incentive Plan (the “2017 Incentive Plan”). The purpose of the Incentive Plan is to provide a means for the Company to continue to attract, motivate and retain management, key employees, consultants and other independent contractors, and to provide these individuals with greater incentive for their service to the Company by linking their interests in the Company’s success with those of the Company and its shareholders. The Plan provides that up to a maximum of 35,000,000 shares of the Company’s common stock (subject to adjustment) are available for issuance under the Plan. The Board of Directors awards these shares at its sole discretion.

 

Also on March 31, 2017, certain of our officers and directors returned a total of 25,041,732 shares of common stock to treasury for cancellation. On that same date, we granted to each of these officers and directors an equivalent number of restricted shares of common stock under our 2017 Incentive Plan. The restricted shares so granted may not be transferred, sold, or encumbered until six (6) months from the date of issue.

 

On July 14, 2017 the Board of Directors increased the authorized shares in the 2017 Incentive Plan to 65,000,000.

 

On December 19, 2017 the Board of Directors increased the authorized shares in the 2017 Incentive Plan to 100,000,000 and issued 33,100,000 options to members of the Board, management and employees.

 

During the year ended December 31, 2017 the Board granted 31,000,000 to two new members of the Board of Directors (Mr. Gerry David and Mr. Kevin Harrington), 1,690,000 options to consultants, and 35,100,000 options to other members of the Board of Directors, officers and employees. Messrs. David and Harrington resigned from the Board of Directors in July 2017 and joined the newly formed Advisory Board to the Board of Directors at that time.

 

During the year ended December 31, 2018 the Board granted 13,312,458 options to members of the Advisory Board and 254,310 options to consultants.

 

On January 31, 2019, 43,715,482 options were forfeited by former members of the Board of Directors. On February 28, 2019, 851,286 options were forfeited by former consultants.

 

Item 6. Selected Financial Data

 

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

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

This document contains certain forward-looking statements as defined by federal securities laws. For this purpose, forward- looking statements are any statements contained herein that are not statements of historical fact and include, but are not limited to, those preceded by or that include the words, “estimate,” “could,” “should,” “would,” “likely,” “may,” “will,” “plan,” “intend,” “believes,” “expects,” “anticipates,” “projected,” or similar expressions. Those statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those contemplated by such statements. The forward-looking information is based on various factors and was derived using numerous assumptions. For these statements, we claim the protection of the “bespeaks caution” doctrine. Such forward-looking statements include, but are not limited to:

 

Statements regarding our anticipated financial and operating results, including increases in and anticipated sources of revenues;
Predictions regarding the outcome of pending legal proceedings and the impact on us of pending legal proceedings;
Statements regarding anticipated changes in expenses;
Statements regarding our goals, intensions, plans and expectations, including selling and marketing plans generally, the introduction of new products, and markets and locations we intend to target in the future
Statements regarding expanded business opportunities in 2019;
Our expectation that we will sell securities on our balance sheet;
Our expectation regarding repayment of loans;
Expected uses of cash in 2019 and beyond; and
Statements with respect to having adequate liquidity

 

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The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

Negative changes in public sentiment towards acceptance of the use of hemp- and CBD-infused drinks and other products;
Other regulatory developments that could limit the market for our products;
Our ability to successfully integrate acquired entities;
Competitive developments, including the possibility of new entrants into our primary markets;
The loss of key personnel; and
Other risks discussed in this document

 

Overview

 

The Company generates revenue from finished product sales to distributors (resellers), retailers and consumers. The wholesale market for the Company’s products includes all retailers in the convenience and grocery store channels as well as certain specialty retail niche markets including health food, “smoke shop,” and novelty stores. Additionally, the Company has an online retail presence on Amazon.com and via our Company websites.

 

Results of Operations

 

Year Ended December 31, 2018 Compared to the Year Ended December 31, 2017

 

Financial Summary

 

The Company’s sales for the year ended December 31, 2018 were $379,238 compared to $141,289 for the year ended December 31, 2017.

 

The Company’s net loss for the year ended December 31, 2018 was $3,355,937 compared to a net loss of $11,643,339 for the year ended December 31, 2017.

 

Sales

 

For the year ended December 31, 2018, sales were $379,238 compared to $141,289 for the year ended December 31, 2017, an increase of $237,949 or 168%. The sales increase was driven by the introduction of our new line of HEMPd products in March 2018, sales of FitWhey products, and increased sales of our high alkaline natural spring water. These sales increases were partially offset by the decrease in sales of our Rocky Mountain High branded hemp-infused energy drinks as the Company sold off remaining inventory in anticipation of the 2019 rebranding of these drinks. For the year ended December 31, 2018, sales by channel were 21% distributor, 12% retailer, and 67% online compared to the year ended December 31, 2017 during which sales by channel were 24% distributor, 15% retailer, and 61% online.

 

Cost of Sales

 

For the year ended December 31, 2018, cost of sales was $410,818 or 108% of sales, versus $297,487 or 211% of sales for the year ended December 31, 2017, an increase of $113,331 or 38%. In 2018 the Company recorded inventory obsolescence expense of $25,145 compared to $165,271 in 2017. In 2018 the obsolescence expense related primarily to E-Juice and vape products that the Company no longer carries. In 2017 the obsolescence expense was comprised of the write-down of the remaining hemp-infused beverage and shots inventory to reflect selling price reductions.

 

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Operating Expenses

 

For the year ended December 31, 2018, operating expenses were $4,523,108, compared to $7,407,789 for the year ended December 31, 2017, a decrease of $2,884,681 or 38%. Areas in which the Company experienced significant changes in operating expenses are discussed below.

 

General and Administrative

 

For the year ended December 31, 2018, general and administrative expenses were $3,689,175 or 973% of sales, compared to $6,465,861 or 4576% of sales for the year ended December 31, 2017, a decrease of $2,776,686 or 42%. The decrease in general and administrative expenses in 2018 was driven by decreases in compensation expense to former members of the Board of Directors and bad debt expense, partially offset by increases in legal expenses.

 

Advertising and Marketing

 

For the year ended December 31, 2018, advertising and marketing expenses were $833,933 or 220% of sales, compared to $882,765 or 625% of sales for the year ended December 31, 2017, a decrease of $48,832 or 6%. The decrease in advertising and marketing expenses in 2018 was a result of management’s decision to decrease advertising and marketing expenditures on the Company’s hemp-infused beverages and energy shots, partially offset by an increase in costs related to the launch of the new HEMPd products and advertising for the newly-acquired FitWhey brand. Additionally, in 2017 the Company executed a large marketing contract with a third-party promoter and issued stock to a distributor in exchange for promotional activity.

 

Impairment Expense

 

During the year ended December 31, 2017, the Company recorded an impairment expense of $59,163 related to its investment in Rocky Mountain High Water Company. This represented a 100% impairment on this investment. There was no impairment recorded in 2018.

 

Other (Income) Expense

 

Interest Expense

 

For the year ended December 31, 2018, interest expense was $1,275,693, compared to $2,700,221 for the year ended December 31, 2017, a decrease of $1,424,528 or 53%. The decrease in interest expense, which includes the amortization of the discount on convertible debt, beneficial conversion features on convertible debt, interest on Series C Preferred Stock, and interest on newly issued convertible debt was due to decreased debt activity in 2018.

 

Gain (Loss) on Extinguishment of Debt

 

For the year ended December 31, 2018, the Company recorded a net loss on extinguishment of debt of $191,138 related to the settlement of convertible debt. During the year ended December 31, 2017, the Company recorded a net gain on extinguishment of debt of $1,200,092 related to the settlement of convertible debt.

 

Gain on Change in Redemption Value of Series C Preferred Stock

 

For the year ended December 31, 2017, the Company recorded a gain of $834,242 on the change in redemption value of Series C Preferred Stock related to the valuation of these shares. There was no change in redemption value in 2018 as the Series C Preferred Stock was cancelled in October 2017 as part of a legal settlement with the holder.

 

Gain on Lawsuit Judgment and Legal Settlement

 

For the year ended December 31, 2018, the Company recorded a $654,289 gain on a lawsuit judgment against the Company’s former Chairman of the Board, a $34,435 gain related to the settlement of a lawsuit with Statewide Beverage, and a gain on a judgment against the holder of our Series A Preferred Stock of $1,000, which represented the par value of the 1,000,000 shares. There were no such gains in 2017.

 

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

 

For the year ended December 31, 2018, the Company recorded a gain on the change in fair value of derivative liability of $1,975,858 compared to a loss of $3,413,465 for the year ended December 31, 2017. In 2018 the gain resulted from the decrease in the price of the Company’s underlying stock, which is used to calculate the fair value of the related derivative liability, from the beginning of the nine-month period to the end of the period and a decrease in the balance of variable rate convertible notes payable. In 2017 the gain resulted from an increase in the risk-free interest rate and the Company’s stock volatility factors that are inputs in the derivative liability calculation.

 

Income Taxes

 

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

 

Six Months Ended December 31, 2017 Compared to Six Months Ended December 31, 2016

 

Financial Summary

 

The Company’s sales for the six months ended December 31, 2017 were $59,653 compared to $320,338 for the six months ended December 31, 2016.

 

The Company’s net loss for the six months ended December 31, 2017 was $5,507,781 compared to a net loss of $3,140,693 for the six months ended December 31, 2016.

 

Sales

 

For the six months ended December 31, 2017, sales were $59,653 compared to $320,338 for the six months ended December 31, 2016, a decrease of $260,685 or 81%. The sales decrease was driven primarily by the lack of funding for inventory production, direct sales support, and advertising and promotion of the Company’s products. Also, in 2017 the Company has reduced prices on its existing drinks and shots inventory in order to clear out existing inventory and prepare for the launch of its new HEMPd product line. The prior year sales amount included a large sale to a distributor. In the six months ended December 31, 2017 sales consisted of approximately 68% online sales, 22% retailer sales, and 10% distributor sales, compared to 97% distributor sales and 3% online sales for the six months ended December 31, 2016.

 

Cost of Sales

 

For the six months ended December 31, 2017, cost of sales was $173,043 or 290% of sales, versus $127,476 or 40% of sales for the six months ended December 31, 2016, an increase of $45,567 or 36%. In 2017 the Company recorded inventory obsolescence expense of $93,110 compared to $28,837 in 2016, resulting in a high cost of sales percentage. In 2017 the obsolescence expense was comprised of the write-down of the remaining hemp-infused beverage and shots inventory to reflect selling price reductions. In 2016, the obsolescence expense was due to the write-off of the Company’s expired brownie inventory.

 

Operating Expenses

 

For the six months ended December 31, 2017, operating expenses were $2,744,840 or 4,214% of sales, compared to $2,602,148 or 812% of sales for the six months ended December 31, 2016, an increase of $142,692 or 6%. Areas in which the Company experienced significant changes in operating expenses are discussed below.

 

General and Administrative

 

For the six months ended December 31, 2017, general and administrative expenses were $2,567,486 or 4,304% of sales, compared to $1,853,089 or 579% of sales for the six months ended December 31, 2016, an increase of $714,396 or 39%. The increase in general and administrative expenses in 2017 was driven by fees and penalties paid on convertible debt.

 

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Advertising and Marketing

 

For the six months ended December 31, 2017, advertising and marketing expenses were $118,191 or 198% of sales, compared to $749,059 or 234% of sales for the six months ended December 31, 2016, a decrease of $630,868 or 84%. The decrease in advertising and marketing expenses in 2017 was driven by the lack of funding for advertising and promotional expenditures and the decreased need to advertise and promote the Company’s existing products in anticipation of the launch of the new product line.

 

Impairment Expense

 

During the six months ended December 31, 2017, the Company recorded an impairment expense of $59,163 related to its investment in Rocky Mountain High Water Company. This represented a 100% impairment on this investment. There was no impairment recorded during the six months ended December 31, 2016.

 

Other (Income) Expense

 

Interest Expense

 

For the six months ended December 31, 2017, interest expense was $2,054,438, compared to $398,648 for the six months ended December 31, 2016, an increase of $1,655,790 or 415%. The increase in interest expense, which includes the amortization of the discount on convertible debt, beneficial conversion features on convertible debt, interest on Series C Preferred Stock, and interest on newly issued convertible debt was due to increased debt activity in 2017.

 

Gain on Extinguishment of Debt

 

For the six months ended December 31, 2017, the Company recorded a gain of $1,200,092 on the extinguishment of debt. The gain was a result of the amendment of two convertible notes into non-convertible notes. There was no change gain or loss on the extinguishment of debt during the six months ended December 31, 2016.

 

Loss on Change in Fair Value of Derivative Liability

 

For the six months ended December 31, 2017, the Company recorded a loss on the change in fair value of derivative liability of $1,795,205 compared to a loss of $332,759 during the six months ended December 31, 2016. In 2017 the loss resulted from the increase in convertible debt and the related increase in the value of the conversion features, partially offset by the decrease in the price of the Company’s underlying stock, which is used to calculate the fair value of the related derivative liability, over the period from July 1, 2017 to December 31, 2017. The smaller loss in 2016 resulted from the relative stability of the price of the Company’s common stock between July 1, 2016 and December 31, 2017.

 

Income Taxes

 

For the six months ended December 31, 2017 and 2016, the Company recorded no income tax benefit due to a full valuation allowance provided on deferred tax assets resulting from net operating losses.

 

Liquidity and Capital Resources

 

As of December 31, 2018, we had current assets of $1,165,806, consisting of cash of $613,686, accounts receivable (net) of $17,324, inventory of $146,722, and prepaid expenses and other current assets of $388,074. As of December 31, 2018, we had current liabilities of $2,077,533, consisting of accounts payable and accrued liabilities of $505,214, convertible notes payable (net) of $666,596, other notes payable of $37,493, accrued interest of $25,758, deferred revenue of $466,300, and derivative liability of $376,172.

 

Cash flows from operating activities

 

Net cash used in operating activities during the year ended December 31, 2018 was $3,728,782 compared to $1,949,322 during the year ended December 31, 2017. In both years, the Company used funds for advertising, promotions, storage, and administrative expenses.

 

 19 

 

Cash flows from investing activities

 

Net cash used in investing activities during the year ended December 31, 2018 was $33,915 compared to $14,125 during the year ended December 31, 2017. In 2018 the increase consisted of software expenditures for the Company’s new HEMPd.com website. Property and equipment purchases in both years consisted of office and computer equipment.

 

Cash flows from financing activities

 

Net cash provided by financing activities during the year ended December 31, 2018 was $4,359,400 compared to $1,825,369 during the year ended December 31, 2017. In 2018, proceeds of $877,500 were from the issuance of convertible notes payable compared to $590,000 in 2017. In 2018 the Company repaid $172,932 of convertible notes. In 2017 the Company received proceeds of $289,000 and $440,000 from the issuance of related party convertible notes and notes payable, respectively. In 2018, the Company repaid notes payable of $14,672. In 2017, the Company repaid related party convertible notes of $25,000 and notes payable of $11,831. In the years ended December 31, 2018 and 2017, the Company received proceeds from sales of common stock of $3,669,504 and $543,200, respectively.

 

Material Indebtedness

 

As of December 31, 2018 and 2017, the Company’s outstanding debt, net of discounts, totaled $704,089 and $1,402,090, respectively. The decrease in debt during the year ended December 31, 2018 resulted from the conversion of notes payable to common stock, the repayment of debt, and the extinguishment of debt based on a court ruling in a lawsuit against our former Chairman of the Board.

 

During 2017 our operations were funded primarily through the issuance of convertible promissory notes, which were convertible to common stock at fixed prices or at a specified percentage discount off market prices. On October 12, 2017, the Company executed an Equity Financing Agreement (“EFA”) with GHS Investments, LLC (“GHS”). Under the agreement, GHS 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 contained certain restrictions on the timing of the stock purchases and required the Company to file a registration statement with the Securities and Exchange Commission (“SEC”) to register the common shares issuable under the agreement. The Company filed the registration statement on Form S-1 with the SEC on November 1, 2017. Between November 1, 2017 and the date of the effectiveness of the Form S-1, the Company entered into convertible promissory notes payable with GHS totaling $1,087,490. As of December 31, 2018, the majority of these notes had been repaid or converted for common stock and the remaining principal balance was $212,329.

 

On June 27, 2018, the Company entered into a Securities Purchase Agreement (“SPA”) with GHS, which provides for GHS to purchase up to $15,000,000 of the Company’s common stock over a 24-month period based on a contractually agreed upon market discount. The SPA replaces the EFA the Company entered into with GHS on October 12, 2017. On August 8, 2018, the Company filed a registration statement on Form S-1 with the Securities and Exchange Commission (“SEC”) to register up to 320,000,000 shares of our common stock to be purchased by GHS under the SPA. The registration statement became effective on October 10, 2018. Between August 8, 2018 and the effectiveness of the Form S-1 on October 10, 2018 the Company entered into convertible promissory notes payable totaling $658,750. As of December 31, 2018, the principal balance of these notes was $658,750.

 

As of December 31, 2018, convertible promissory notes payable were convertible for common stock at fixed prices ranging from $.005 to $.008 or at a discount to market price, as defined, of 50%.

 

The Company has determined that the conversion feature embedded in the notes referred to above, that contain a potential variable conversion amount, constitutes a derivative which has been bifurcated from the note and recorded as a derivative liability, with a corresponding discount recorded to the associated debt. The excess of the derivative value over the face amount of the note is recorded immediately to interest expense at inception.

 

Future Liquidity Requirements

 

During the year ending December 31, 2019, the Company expects to have an operational cash shortfall of approximately $1,000,000 to $1,500,000 depending on the timing, development, and advertising and marketing needs related to our future product rollouts. Our cash needs will be higher in the first half of 2019. In the second half of 2019, we expect our outside cash needs to lessen with a net operational positive cash flow in the fourth quarter of 2019. We expect our operational cash needs will be met by our current funding arrangements with GHS.

 

 20 

Off-Balance Sheet Arrangements

 

As of December 31, 2018, there were no off-balance sheet arrangements

 

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 $702,555, an accumulated deficit of $35,018,351 as of December 31, 2018, and has generated operating losses since inception. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern. The Company’s continuation as a going concern is dependent upon its ability to generate revenues and its ability to continue raising capital from third parties.

 

On June 27, 2018, the Company entered into a Securities Purchase Agreement (“SPA”) with GHS Investments, LLC (“GHS”), which provides for GHS to purchase up to $15,000,000 of the Company’s common stock over a 24-month period based on a contractually agreed upon market discount. In October 2018 the Company began sales of common stock to GHS under the SPA. Management believes the SPA will provide sufficient cash flows until cash flows from operations become consistently positive.

 

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 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.

 

Revenue Recognition

 

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

 

Accounts Receivable and Allowance for Doubtful Accounts Receivable

 

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

 

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

 

 21 

 

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

 

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

 

Fair Value Measurements

 

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

 

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

 

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

 

Level 1 — quoted prices in active markets for identical assets or liabilities.
Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable.
Level 3 — inputs that are unobservable (for example cash flow modeling inputs based on assumptions).

 

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

 

 22 

 

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

 

Balance, June 30, 2017  $5,072,579
Issued   4,017,623
Exercises/Conversions  $(5,276,018)
Change in fair value recognized in operations  $1,795,205
Balance, December 31, 2017  $5,609,389
Issued  $—  
Exercises/Conversions  $(3,257,359)
Change in fair value recognized in operations  $(1,975,858)
Balance, December 31, 2018  $376,172

 

The estimated fair value of the derivative instruments was valued using the Black-Scholes option pricing model, using the following assumptions as of December 31, 2018 and December 31, 2017:

 

   December 31, 2018  December 31, 2017
Estimated dividends   None   None
Expected volatility   106%   114%
Risk free interest rate   2.41%   .84%
Expected term   .1 to 4.0 years   1 to 2.0 years

 

 

Property and Equipment

 

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

 

Impairment of Long-Lived Assets

 

The Company evaluates intangible assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. The Company assesses the recoverability of the assets based on the undiscounted future cash flow and recognizes an impairment loss when the estimated undiscounted future cash flow expected to result from the use of the asset plus the net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When the Company identifies an impairment, it reduces the carrying amount of the asset to its estimated fair value based on a discounted cash flow approach or, when available and appropriate, to comparable market values. During the six months and year ended December 31, 2017 the Company recorded an impairment charge on the goodwill related to the acquisition of Rocky Mountain High Water Company in the amount of $59,163. As of December 31, 2018 and 2017, the goodwill related to this acquisition is fully impaired. No impairment charges were recorded during the year ended December 31, 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 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.

 

 23 

 

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 classify our preferred shares in shareholders’ 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’ equity (deficit).

 

Recently Issued Accounting Pronouncements

 

Unless otherwise noted, we have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1) of the JOBS Act. This allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of our election, our financial statements may not be comparable with other public companies.

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 840), 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 is effective for the Company beginning January 1, 2020. The Company is currently evaluating the impact that ASU 2016-02 will have on its consolidated financial statements.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires the immediate recognition of management’s estimates of current and expected credit losses. ASU 2016-13 is effective for the Company beginning January 1, 2021. The Company is currently evaluating the potential impact of adopting this guidance on our financial statements.

 

In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business (Topic 805), which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is required to be applied prospectively and will be effective for the Company beginning January 1, 2019. The impact on our consolidated financial statements will depend on the facts and circumstances of any specific future transactions.

 

In May 2018, the FASB issued ASU 2018-09, Compensation-Stock Compensation: Scope of Modification Accounting. This ASU amends the scope of modification accounting for share-based payment arrangements, provides guidance on the types of changes to the terms or conditions of share-based payment awards an entity is required to apply modification accounting under ASC 718. This update is effective for the Company beginning January 1, 2021. The Company is currently evaluating the impact that ASU 2018-09 will have on its consolidated financial statements.

 

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The guidance is intended to reduce the complexity associated with issuers’ accounting for share-based payment transactions for acquiring goods and services. The ASU is effective for the Company beginning January 1, 2022. The Company is currently evaluating the impact that ASU 2018-07 will have on its consolidated financial statements.

 

In July 2018, the FASB issued ASU 2018-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480): Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. The guidance is intended to reduce the complexity associated with issuers’ accounting for certain financial instruments with characteristics of liabilities and equity. Specifically, a down round feature (as defined) would no longer cause a freestanding equity-linked financial instrument (or an embedded conversion option) to be accounted for as a derivative liability at fair value with changes in fair value recognized in current earnings. The amendments in this ASU are effective for the Company beginning January 1, 2020. The Company is currently evaluating the impact that ASU 2018-11 will have on its consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurements: Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement. This update modifies the disclosure requirements on fair value measurements in Topic 820. The ASU is effective for the Company beginning January 1, 2021. The Company is currently evaluating the impact that ASU 2018-13 will have on its consolidated financial statements.

 

 24 

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

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

 

Item 8. Financial Statements and Supplementary Data

 

Index to Financial Statements Required by Article 8 of Regulation S-X:

 

Audited Financial Statements:

 

F-1   Report of Prager Metis, CPAs, LLC, Independent Registered Public Accounting Firm
F-2   Report of Paritz & Company, P.A., Independent Registered Public Accounting Firm
F-3   Consolidated Balance Sheets as of December 31, 2018 and December 31, 2017
F-4   Consolidated Statements of Operations for the years ended December 31, 2018 and December 31, 2017, and the six months ended December 31, 2017 and December 31, 2016
F-5   Consolidated Statements of Cash Flows for the years ended December 31, 2018 and December 31, 2017, and the six months ended December 31, 2017 and December 31, 2016
F-6   Consolidated Statements of Shareholder’s Deficit for the years ended December 31, 2018 and December 31, 2017
F-7   Consolidated Statements of Shareholder’s Deficit for the six months ended December 31, 2017 and December 31, 2016
F-8   Notes to Consolidated Financial Statements.

 

 25 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Stockholders of

Rocky Mountain High Brands, Inc.

 

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheet of Rocky Mountain Brands, Inc. (the Company) as of December 31, 2018, and the related consolidated statement of operations, stockholders’ deficit, and cash flows for the year ended December 31, 2018, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for the year ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 3 to the consolidated financial statements, the Company has a shareholders’ deficit of $702,555, an accumulated deficit of $35,018,351 as of December 31, 2017, and has generated operating losses since inception. These factors, among others, raise substantial doubt regarding the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3 to the accompanying financial statements. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Prager Metis CPA’s LLC
   
We have served as the Company’s auditor since 2018.
   
Hackensack, New Jersey
April 12, 2019  

 

 F-1 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Stockholders of

Rocky Mountain High Brands, Inc.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheet of Rocky Mountain Brands, Inc. (the Company) as of December 31, 2017, and the related consolidated statement of operations, stockholders’ deficit, and cash flows for the six months ended December 31, 2017, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and the results of its operations and its cash flows for the six months ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 3 to the consolidated financial statements, the Company has a shareholders’ deficit, an accumulated deficit, and a working capital deficit as of December 31, 2017, and has generated operating losses since inception. These factors, among others, raise substantial doubt regarding the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3 to the accompanying financial statements. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ Paritz & Company, P.A.
   
We have served as the Company’s auditor since 2015.
   
Hackensack, New Jersey
April 2, 2018  

 

 F-2 

 

Rocky Mountain High Brands, Inc.

Consolidated Balance Sheets

 

   December 31, 2018  December 31, 2017
CURRENT ASSETS         
          
Cash  $613,686   $16,983
Accounts Receivable, net of allowance of $5,275 and $195,632, respectively   17,324    2,844
Inventory   146,722    82,312
Prepaid Expenses and Other Current Assets   388,074    634,722
TOTAL CURRENT ASSETS   1,165,806    736,861
          
Property and Equipment, net   34,280    35,681
Intangible Assets    148,647    —  
Other Assets   26,245    29,093
          
TOTAL ASSETS  $1,374,978   $801,635
          
LIABILITIES AND SHAREHOLDERS' DEFICIT         
          
CURRENT LIABILITIES         
          
Accounts Payable and Accrued Liabilities  $505,214   $750,807
Related Party Convertible Notes Payable, net of debt discount   —      174,456
Convertible Notes Payable, net of debt discount   666,596    677,698
Notes Payable   37,493    549,936
Redemption Value of Series C Preferred Stock   —      —  
Accrued Interest   25,758    81,248
Deferred Revenue   466,300    —  
Derivative Liability   376,172    5,609,389
TOTAL CURRENT LIABILITIES   2,077,533    7,843,534
          
SHAREHOLDERS' DEFICIT         
Preferred Stock - Series A - Par Value of $.001;  1,000,000 shares designated; No shares issued and outstanding as of December 31, 2018 and 1,000,000 shares issued and outstanding as of December 31, 2017   —      1,000
Preferred Stock - Series B - Par Value of $.001;  7,000,000 shares designated; No shares issued and outstanding as of December 31, 2018 and December 31, 2017   —      —  
Preferred Stock - Series C - Par Value of $.001;  2,000,000 shares designated; No shares issued and outstanding as of December 31, 2018 and December 31, 2017   —      —  
Preferred Stock - Series D - Par Value of $.001;  2,000,000 shares designated; No shares issued and outstanding as of December 31, 2018 and December 31, 2017   —      —  
Preferred Stock - Series E - Par Value of $.001;  789,474 shares designated; No shares issued and outstanding as of December 31, 2018 and December 31, 2017   —      —  
Common Stock - Par Value of $.001;  4,000,000,000 shares authorized as of December 31, 2018 and December 31, 2017; 1,891,617,372 shares issued and outstanding as of December 31, 2018; 1,159,706,457 shares issued and outstanding as of December 31, 2017   1,891,617    1,159,706
Additional Paid-In Capital   32,424,179    23,459,809
Accumulated Deficit   (35,018,351)   (31,662,414)
TOTAL SHAREHOLDERS' DEFICIT   (702,555)   (7,041,899)
          
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT  $1,374,978   $801,635

   

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

 

 F-3 

 

Rocky Mountain High Brands, Inc.

Consolidated Statements of Operations

 

   Year Ended  Six Months Ended
   December 31, 2018  December 31, 2017  December 31, 2017  December 31, 2016
      (Unaudited)     (Unaudited)
             
Sales  $379,238   $141,289   $59,653   $320,338
                    
Cost of Sales   385,673    132,216    79,933    98,639
Inventory Obsolescence   25,145    165,271    93,110    28,837
                    
Gross Profit (Loss)   (31,580)   (156,198)   (113,390)   192,862
                    
Operating Expenses                   
General and Administrative   3,689,175    6,465,861    2,567,486    1,853,089
Advertising and Marketing   833,933    882,765    118,191    749,059
Impairment Expense   —      59,163    59,163    —  
Total Operating Expenses   4,523,108    7,407,789    2,744,840    2,602,148
                    
Loss from Operations   (4,554,688)   (7,563,987)   (2,858,230)   (2,409,286)
                    
Other (Income)/Expenses:                   
Interest Expense   1,275,693    2,700,221    2,054,438    398,648
(Gain) Loss on Extinguishment of Debt   191,138    (1,200,092)   (1,200,092)   —  
(Gain) Loss on Change in Redemption Value of Series C Preferred Stock   —      (834,242)   —      —  
(Gain) Loss on Lawsuit Judgment and Legal Settlement   (689,724)   —      —      —  
(Gain) Loss on Change in Fair Value of Derivative Liability   (1,975,858)   3,413,465    1,795,205    332,759
Total Other (Income) Expenses   (1,198,751)    4,079,352    2,649,551    731,407
                    
Loss Before Income Tax Provision   (3,355,937)   (11,643,339)   (5,507,781)   (3,140,693)
                    
Income Tax Provision   —      —      —      —  
                    
Net Loss  $(3,355,937)  $(11,643,339)  $(5,507,781)  $(3,140,693)
                    
Net Loss per Common Share - Basic and Diluted  $(0.00)  $(0.01)  $(0.01)  $(0.00)
                    
Weighted Average Shares Outstanding   1,605,719,345    813,528,472    855,469,994    629,289,895

 

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

 

 F-4 

  

Rocky Mountain High Brands, Inc.

Consolidated Statements of Cash Flows

 

   Year Ended  Six Months Ended
   December 31, 2018  December 31, 2017  December 31, 2017  December 31, 2016
      (Unaudited)     (Unaudited)
Operating Activities:                   
Net Loss  $(3,355,937)  $(11,643,339)  $(5,507,781)  $(3,140,693)
Adjustments to reconcile net loss to net cash used in operating activities:                   
  Stock-based compensation   456,007    1,976,388    468,291    409,062
  Stock-based payments to vendors   80,445    548,084    —      465,267
  Warrants and options issued for services rendered   108,205    1,846,944    180,163    407,447
  Non-cash interest expense   1,160,857    2,700,220    2,054,438    398,649
  Fees and penalties on debt   120,251    729,929    729,929    —  
  Gain on change in redemption value of Series C Preferred Stock   —      (834,242)   —      —  
  Gain on lawsuit judgment and legal settlement   (689,724)   —      —      —  
  (Gain) Loss on change in fair value of derivative liability   (1,975,858)   3,413,465    1,795,205    332,759
  (Gain) Loss on extinguishment of debt   191,138    (1,200,092)   (1,200,092)   —  
  Bad debt expense   1,536    246,520    61,554    —  
  Loss on disposal of equipment   —      15,912    —      43,221
  Depreciation and amortization expense   34,423    25,211    13,116    18,691
  Impairment expense   —      59,163    59,163    —  
  Inventory obsolescence   25,145    165,271    93,110    28,837
Changes in operating assets and liabilities:                   
  Accounts receivable   (16,017)   13,064    (1,131)   (242,052)
  Inventory   (89,556)   (29,312)   49,273    43,260
  Prepaid expenses   (22,076)   (169,470)   3,966    164,928
  Other assets   (12,765)    (7,569)   (11,000)   (3,431)
  Accounts payable and accrued liabilities   (211,156)   194,531    375,462    284,253
  Deferred revenue   466,300    —      —      —  
NET CASH USED IN OPERATING ACTIVITIES   (3,728,782)   (1,949,322)   (836,334)   (789,802)
                    
Investing Activities:                   
  Investments in other assets   (31,220)   (4,252)   —      (39,774)
Cash acquired in business acquisition   15,612               
  Acquisition of property and equipment   (18,307)   (10,705)   (1,496)   (36,635)
  Disposal of property and equipment   —      832    832    —  
NET CASH USED IN INVESTING ACTIVITIES   (33,915)   (14,125)   (664)   (76,409)
                    
Financing Activities:                   
  Proceeds from issuance of convertible notes   877,500    590,000    220,000    330,000
  Repayment of convertible notes   (172,932)   —      —      —  
  Proceeds from issuance of related party convertible notes   —      289,000    100,000    100,600
  Repayment of related party convertible notes   —      (25,000)   —      —  
  Proceeds from issuance of notes payable   —      440,000    440,000    35,960
  Repayment of notes payable   (14,672)   (11,831)   (6,194)   (4,193)
  Proceeds from issuance of common stock   3,669,504    543,200    8,500    456,650
NET CASH PROVIDED BY FINANCING ACTIVITIES   4,359,400    1,825,369    762,306    919,017
                    
INCREASE (DECREASE) IN CASH   596,703    (138,078)   (74,692)   52,806
                    
CASH - BEGINNING OF PERIOD   16,983    155,061    91,675    102,255
                    
CASH - END OF PERIOD  $613,686   $16,983   $16,983   $155,061
                    
Supplemental cash flow information:                   
Cash paid for interest  $56,742   $1,654   $740   $705
Cash paid for taxes  $—     $—     $—     $—  
Supplemental disclosure of non-cash financing and investing activities:                   
  Common stock issued for conversion of debt  $4,000,604   $3,056,572   $3,055,140   $188,023
  Common stock issued for acquisition  $75,000   $—     $—     $—  
  Common stock issued as part of legal settlement  $—     $1,439,975   $1,439,975   $500,000
  Debt and accrued interest converted for common stock  $499,053   $3,951,186   $3,889,083   $442,633
  Derivative liability relieved upon conversion of related debt  $3,021,935   $5,310,518   $5,276,018   $318,125
  Derivative liability incurred for debt discount  $—     $4,676,772   $4,017,622   $—  
  Beneficial conversion feature recognized as debt discount  $1,351,790   $—     $—     $212,771
  Series C Preferred Stock redeemed for common stock  $—     $1,661,424   $1,661,424   $—  

 

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

 

 F-5 

 

Rocky Mountain High Brands, Inc.

Consolidated Statement of Shareholders' Deficit for the Year Ended December 31, 2018

 

    Common Stock    Preferred Stock A    Preferred Stock C    Preferred Stock E               
    Shares    Amount    Shares    Amount    Shares    Amount    Shares    Amount    APIC    Accumulated Deficit    Equity/(Deficit)
Balance - December 31, 2017   1,159,706,457   $1,159,706    1,000,000   $1,000    —     $—      —     $—     $23,459,809   $(31,662,414)  $(7,041,899)
                                                       
Shares issued for cash   386,051,448    386,051                                  3,283,452         3,669,503
                                                       
Shares issued for compensation   13,597,469    13,598                                  144,589         158,187
                                                       

Shares issued for stock option exercises

   29,096,402     29,096                                            29,096
                                                       
Options issued for compensation   —      —                                    108,205         108,205
                                                       
Shares issued upon conversion of convertible notes   289,370,558    289,370                                  3,731,895         4,021,265
                                                       
Shares to vendors for services rendered   8,150,531    8,151                                  74,112         82,263
                                                       
Shares issued for acquisition   7,462,688    7,463                                  67,537         75,000
                                                       
Shares returned as part of lawsuit judgment and legal settlement   (1,818,181)   (1,818)   (1,000,000)   (1,000)                               (2,818)
                                                       
Beneficial conversion feature recognized on convertible notes payable   —      —                                    1,554,580         1,554,580
                                                       
Net loss for the year ended December 31, 2018   —      —      —      —      —      —      —      —      —      (3,355,937)   (3,355,937)
                                                       
Balance - December 31, 2018   1,891,617,372   $1,891,617    —     $—      —     $—      —     $—     $32,424,179   $(35,018,351)  $(702,555)

 

 

 

Rocky Mountain High Brands, Inc.

Consolidated Statement of Shareholders' Deficit for the Year Ended December 31, 2017

(Unaudited)

 

   Common Stock  Preferred Stock A  Preferred Stock C  Preferred Stock E      
   Shares  Amount  Shares  Amount  Shares  Amount  Shares  Amount  APIC  Accumulated Deficit  Equity/(Deficit)
Balance - December 31, 2016   735,080,314   $735,081    1,000,000   $1,000    —     $—      —     $—     $14,727,383   $(20,019,075)  $(4,555,611)
                                                       
Shares issued for cash   24,682,293    24,682         —           —           —      518,518         543,200
                                                       
Shares issued for compensation   700,550    701         —           —      789,474    789    29,570         31,060
                                                       
Warrant exercise   1,500,000    1,500         —           —           —      33,000         34,500
                                                       
Preferred shares converted to common shares   789,474    789                        (789,474)   (789)   14,211         14,211
                                                       
Shares issued upon conversion of convertible notes   323,331,050    323,330         —           —           —      3,872,003         4,195,333
                                                       
Stock options issued to Board members and employees   —      —           —           —           —      1,642,127         1,642,127
                                                       
Shares to vendors for services rendered   28,622,776    28,623         —           —           —      1,266,023         1,294,646
                                                       
Shares issued as part of a legal settlement   45,000,000    45,000    —      —           —           —      1,356,975         1,401,975
                                                       
Beneficial conversion feature recognized on convertible notes payable   —      —           —           —           —      —           —  
                                                       
Net loss for the year ended December 31, 2017   —      —      —      —      —      —      —      —      —      (11,643,339)   (11,643,339)
                                                       
Balance - December 31, 2017   1,159,706,457   $1,159,706    1,000,000   $1,000    —     $—      —     $—     $23,459,809   $(31,662,414)  $(7,041,899)

 

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

 

 F-6 

 

Rocky Mountain High Brands, Inc.

Consolidated Statement of Shareholders' Deficit for the Six Months Ended December 31, 2017

 

   Common Stock  Preferred Stock A  Preferred Stock C  Preferred Stock E      
   Shares  Amount  Shares  Amount  Shares  Amount  Shares  Amount  APIC  Accumulated Deficit  Equity/(Deficit)
                                  
Balance - June 30, 2017   786,525,118   $786,525    1,000,000   $1,000    —     $—      —     $—     $18,062,830   $(26,154,633)  $(7,304,278)
                                                       
Shares issued for cash   500,000    500                                  8,000         8,500
                                                       
Shares issued for compensation                                 789,474    789    14,211         15,000
                                                       
Preferred shares converted to common shares   789,474    789                        (789,474)   (789)             —  
                                                       
Stock options issued to Board members and employees                                           179,116         179,116
                                                       
Shares issued upon conversion of convertible notes   321,291,865    321,292                                  3,626,114         3,947,406
                                                       
Stock options issued for services rendered   5,600,000    5,600                                  174,563         180,163
                                                       
Shares issued as part of a legal settlement   45,000,000    45,000                                  1,394,975         1,439,975
                                                       
Net loss for the six months ended December 31, 2017   —      —      —      —      —      —      —      —      —      (5,507,781)   (5,507,781)
                                                       
Balance - December 31, 2017   1,159,706,457   $1,159,706    1,000,000   $1,000    —     $—      —     $—     $23,459,809   $(31,662,414)  $(7,041,899)

 

 

 

Rocky Mountain High Brands, Inc.

Consolidated Statement of Shareholders' Deficit for the Six Months Ended December 31, 2016

 

   Common Stock  Preferred Stock A  Preferred Stock C  Preferred Stock E      
   Shares  Amount  Shares  Amount  Shares  Amount  Shares  Amount  APIC  Accumulated Deficit  Equity/(Deficit)
                                  
Balance - June 30, 2016   537,989,764   $537,990    1,000,000   $1,000    —     $—      —     $—     $12,366,476   $(16,878,382)  $(3,972,916)
                                                       
Shares issued for cash   41,485,294    41,485                                  415,165         456,650
                                                       
Shares issued for compensation   11,933,557    11,934                                  399,330         411,264
                                                       
Shares issued for services rendered   15,701,363    15,701                                  449,567         465,268
                                                       
Shares issued upon conversion of convertible notes   75,761,502    75,762                                  112,261         188,023
                                                       
Cashless warrant exercise   45,408,834    45,409                                  278,614         324,023
                                                       
Shares issued as part of a legal settlement   6,800,000    6,800                                  493,199         499,999
                                                       
Beneficial conversion feature on convertible related party notes payable                                           212,771         212,771
                                                       
Net loss for the six months ended December 31, 2016   —      —      —      —      —      —      —      —      —      (3,140,693)   (3,140,693)
                                                       
Balance - December 31, 2016   735,080,314   $735,081    1,000,000   $1,000    —     $—      —     $—     $14,727,383   $(20,019,075)  $(4,555,611)

 

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

 

 F-7 

 

Rocky Mountain High Brands, Inc. 

Notes to Consolidated Financial Statements

NOTE 1 – General

 

Rocky Mountain High Brands, Inc. (“RMHB” or the “Company”) is 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, 2014, the Company changed its name to Rocky Mountain High Brands, Inc.

 

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

 

RMHB is a lifestyle brand management company that markets primarily CBD and hemp-infused products to health-conscious consumers. Our products span various categories including beverage, food, fitness, and skin care. RMHB also markets a naturally high alkaline spring water and a water-based protein drink with caffeine and B vitamins. All products comply with federal regulations on hemp products and contain 0.0% tetrahydrocannabinol (THC), the psychoactive constituent of cannabis.

 

In March 2018, the Company launched the HEMPd brand with gummies, water soluble drops, capsules, tinctures, lotions, and salves. The Company introduced four flavors of CBD-infused waters in 12 oz. cans in November 2018.

 

In July 2018, the Company acquired the assets of BFIT Brands, LLC and formed a new subsidiary, FitWhey Brands Inc. FitWhey markets a line-up of five water-based protein drinks that include caffeine and B vitamins.

 

During 2017 and 2018, the Company continued to market its lineup of naturally flavored hemp-infused functional beverages, as well as hemp-infused 2oz. Mango Energy Shots and Mixed Berry Energy Shots through the first half of 2018. The Company plans to introduce updated offerings of hemp seed extract-infused functional beverages in the second quarter of 2019 under the name of Rocky Mountain.

 

NOTE 2 – Summary of Significant Accounting Policies

 

Principles of Consolidation

 

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

 

Use of Estimates

 

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

 

Cash

 

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

 

 F-8 

 

Accounts Receivable and Allowance for Doubtful Accounts Receivable

 

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

 

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

 

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

 

Inventories

 

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

 

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

 

Fair Value Measurements

 

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

 

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

 

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

 

Level 1 — quoted prices in active markets for identical assets or liabilities.
Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable.
Level 3 — inputs that are unobservable (for example cash flow modeling inputs based on assumptions).

 

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

 

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

 

Balance, June 30, 2017  $5,072,579
Issued   4,017,623
Exercises/Conversions  $(5,276,018)
Change in fair value recognized in operations  $1,795,205
Balance, December 31, 2017  $5,609,389
Issued  $—  
Exercises/Conversions  $(3,257,359)
Change in fair value recognized in operations  $(1,975,858)
Balance, December 31, 2018  $376,172

 

 

 F-9 

 

The estimated fair value of the derivative instruments was valued using the Black-Scholes option pricing model, using the following assumptions as of December 31, 2018 and December 31, 2017:

 

   December 31, 2018  December 31, 2017
Estimated dividends   None   None
Expected volatility   106%   165%
Risk free interest rate   2.41%   1.39%
Expected term   .1 to 4.0 years

   1 to 4.8 years

 

 

Property and Equipment 

 

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

 

Impairment of Long-Lived Assets

 

The Company evaluates intangible assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. The Company assesses the recoverability of the assets based on the undiscounted future cash flow and recognizes an impairment loss when the estimated undiscounted future cash flow expected to result from the use of the asset plus the net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When the Company identifies an impairment, it reduces the carrying amount of the asset to its estimated fair value based on a discounted cash flow approach or, when available and appropriate, to comparable market values. During the six months and year ended December 31, 2017 the Company recorded an impairment charge on the goodwill related to the acquisition of Rocky Mountain High Water Company in the amount of $59,163. As of December 31, 2018 and 2017, the goodwill related to this acquisition is fully impaired. No impairment charges were recorded during the year ended December 31, 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 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 stockholders’ equity (deficit).

 

 F-10 

 

Revenue From Contracts with Customers

 

During the year ended December 31, 2017 the Company recognized revenue in accordance with ASC 605, “Revenue Recognition.” Revenue was considered realized or realizable and earned when all of the following criteria were met: (1) persuasive evidence of an arrangement exists, (2) product delivery has occurred, (3) the selling price to the customer is fixed or determinable, and (4) collectability of the revenue is reasonably assured.

 

On January 1, 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers” and all the related amendments, which are also codified into ASC 606. The adoption of this guidance did not have a material effect on the Company’s financial position, results of operations or cash flows.

 

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

 

   Year Ended  Year Ended  Six Months Ended  Six Months Ended
   December 31, 2018  December 31, 2017  December 31, 2017  December 31, 2016
Online   $254,316   $84,404   $40,646   $9,610
Distributor    78,853    32,551    5,753    310,728
Retailer    46,069    24,334    13,254    —  
Total   $379,238   $141,289   $59,653   $320,338

 

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.

 

Advertising and Marketing

 

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.

 

Segments

 

The Company has determined that it operates one reportable operating segment. This determination was made based on the management approach, as described in FASB ASC 280, “Reportable Segments.” The management approach is based on an entity’s internal organization and the information that the chief operating decision maker uses to make decisions about operating matters. It also takes into consideration the nature of products, production processes, types and classes of customers, distribution methods, the Company’s regulatory environment, and whether discrete financial information is available for reportable segments.

 

Recently Issued Accounting Pronouncements

 

Unless otherwise noted, we have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1) of the JOBS Act. This allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of our election, our financial statements may not be comparable with other public companies.

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 840), 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 is effective for the Company beginning January 1, 2020. The Company is currently evaluating the impact that ASU 2016-02 will have on its consolidated financial statements.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires the immediate recognition of management’s estimates of current and expected credit losses. ASU 2016-13 is effective for the Company beginning January 1, 2021. The Company is currently evaluating the potential impact of adopting this guidance on our financial statements.

 

In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business (Topic 805), which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is required to be applied prospectively and will be effective for the Company beginning January 1, 2019. The impact on our consolidated financial statements will depend on the facts and circumstances of any specific future transactions.

 

In May 2018, the FASB issued ASU 2018-09, Compensation-Stock Compensation: Scope of Modification Accounting. This ASU amends the scope of modification accounting for share-based payment arrangements, provides guidance on the types of changes to the terms or conditions of share-based payment awards an entity is required to apply modification accounting under ASC 718. This update is effective for the Company beginning January 1, 2021. The Company is currently evaluating the impact that ASU 2018-09 will have on its consolidated financial statements.

 

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The guidance is intended to reduce the complexity associated with issuers’ accounting for share-based payment transactions for acquiring goods and services. The ASU is effective for the Company beginning January 1, 2022. The Company is currently evaluating the impact that ASU 2018-07 will have on its consolidated financial statements.

 

In July 2018, the FASB issued ASU 2018-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480): Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. The guidance is intended to reduce the complexity associated with issuers’ accounting for certain financial instruments with characteristics of liabilities and equity. Specifically, a down round feature (as defined) would no longer cause a freestanding equity-linked financial instrument (or an embedded conversion option) to be accounted for as a derivative liability at fair value with changes in fair value recognized in current earnings. The amendments in this ASU are effective for the Company beginning January 1, 2020. The Company is currently evaluating the impact that ASU 2018-11 will have on its consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurements: Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement. This update modifies the disclosure requirements on fair value measurements in Topic 820. The ASU is effective for the Company beginning January 1, 2021. The Company is currently evaluating the impact that ASU 2018-13 will have on its consolidated financial statements.

 

 F-11 

 

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 $702,555, an accumulated deficit of $35,018,351 as of December 31, 2018, and has generated operating losses since inception. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern. The Company’s continuation as a going concern is dependent upon its ability to generate revenues and its ability to continue raising capital from third parties.

 

On June 27, 2018, the Company entered into a Securities Purchase Agreement (“SPA”) with GHS Investments, LLC (“GHS”), which provides for GHS to purchase up to $15,000,000 of the Company’s common stock over a 24-month period based on a contractually agreed upon market discount. In October 2018 the Company began sales of common stock to GHS under the SPA. Management believes the SPA will provide sufficient cash flows until cash flows from operations become consistently positive.

 

NOTE 4 – Inventory

 

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

 

  

December 31, 2018

 

December 31, 2017

Finished inventory  $84,730   $77,517 
Raw materials and packaging   61,992    4,795 
Total  $146,722   $82,312 

 

NOTE 5 – Prepaid Expenses and Other Current Assets

 

As of December 31, 2018 and December 31, 2017, prepaid expenses and other current assets consists of the following:

 

   December 31, 2018  December 31, 2017
Prepaid officers’ compensation  $291,617   $445,149
Prepaid directors’ compensation   29,442    147,207
Prepaid marketing expenses   2,750    13,750
Other prepaid expenses and current assets   64,265    28,616
Total  $388,074   $634,722

 

NOTE 6 – Property and Equipment

 

As of December 31, 2018 and December 31, 2017, property and equipment consists of the following:

 

    December 31, 2018    December 31, 2017
Vehicles  $29,598   $29,598
Furniture and equipment   41,422    42,538
Personal computers   17,901    2,379
    88,921    74,515
Less:  accumulated depreciation   54,641    38,834
Total  $34,280   $35,681

 

 

 F-12 

 

NOTE 7 – Acquisitions

 

Rocky Mountain High Water Company LLC

 

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

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

 

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

 

On November 12, 2016, the agreement with the Poafpybitty Family was amended to give the Company a controlling voting interest of 75% of WaterCo, 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 $59,163 included in other assets. During the six months ended December 31, 2017, the Company obtained an outside valuation of the rights to use the land and obtain the water described in the agreement. As a result of that analysis and the continued operating losses by the Company’s spring water business, the Company determined that its investment, including the related goodwill, was fully impaired. The Company recorded an impairment expense of $59,163 as of November 12, 2017. As a result of the step-acquisition, beginning on November 12, 2016 the operations of WaterCo are consolidated in the financial statements of RMHB.

 

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

 

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

 

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

 

Purchase Price   
Common stock issued  $75,000
Note payable and accrued interest forgiven   80,438
Earnout liability   75,000
Total  $230,438
     
Allocation    
Cash  $15,612
Accounts receivable   5,763
Inventory   76,922
Software  31,000
Formulas   12,500
Trademark   2,500
Goodwill   86,141
Total  $230,438

 

The Company is obtaining an outside valuation of these assets.

 

The following represents the unaudited pro forma statement of operations of the Company for the year ended December 31, 2018 had FitWhey been acquired on January 1, 2018:

 

   Year Ended December 31, 2018
Sales  $448,685
Cost of Sales   465,400
Inventory Obsolescence   25,145
Gross Loss   (41,860)
Operating Expenses   4,577,323
Loss From Operations   (4,619,183)
Other Expenses   535,142
Loss Before Income Tax Provision   (5,154,325)
Income Tax Provision   —  
Net Loss  $(5,154,325)
Net Loss Per Common Share-Basic and Diluted  $(0.00)
Weighted Average Shares Outstanding   1,605,719,345

 

 F-13 

 

NOTE 8 – Accounts Payable and Accrued Liabilities

 

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

 

  

December 31, 2018

 

December 31, 2017

Accounts payable  $308,717   $373,882
Accrued compensation   25,500    215,026
Other accrued expenses   170,997    161,899
Total  $505,214   $750,807

 

NOTE 9 – Related Party Convertible Notes Payable

 

As of December 31, 2018 and December 31, 2017, the Company’s related party convertible notes payable consists of the following:

   Interest Rate 

 

Term

 

December 31, 2018

 

December 31, 2017

Related party convertible
notes payable
   6%   —    $—    $179,000
Discount           —     (4,544)
Total          $—    $174,456

 

As of December 31, 2017, the related party convertible notes include two notes payable to LSW Holdings, LLC (“LSW”) in the amounts of $79,000 and $100,000. They are convertible to shares of the Company’s common stock at 50% of market price, as defined in the notes payable agreements. These notes were reclassified to Convertible Notes Payable during 2018 upon the termination of Lily Li, Executive Vice President, who is also the managing partner of LSW.

 

The Company has determined that the conversion feature embedded in the notes referred to above that contain a potential variable conversion amount constitutes a derivative which has been bifurcated from the note and recorded as a derivative liability, with a corresponding discount recorded to the associated debt. The excess of the derivative value over the face amount of the note is recorded immediately to interest expense at inception. For the years ended December 31, 2018 and 2017 and the six months ended December 31, 2018 and 2017, the Company recorded interest expense of $0, $0, $44,901 and $0, respectively, at the inception of the notes relating to the excess of derivative value over the face of the notes.

 

For the years ended December 31, 2018 and 2017 and the six months ended December 31, 2018 and 2017, the Company recorded interest expense on these notes, including amortization of the discount, of $3,499, $345,239, $262,613 and $160,089, respectively.

 

 F-14 

 

NOTE 10 – Convertible Notes Payable

 

As of December 31, 2018 and December 31, 2017, the Company’s convertible notes payable consists of the following:

 

   Interest Rates  Terms  Conversion Rates  December 31, 2018  December 31, 2017
GHS Investments, LLC (fixed conversion)   10%   .3-.6 years   $0.005   $871,079   $—  
GHS Investments, LLC (variable conversion)   8%   —      (a)    —      182,545
LSW Holdings, LLC (variable conversion)   6%   —      (b)    179,000    —  
Other convertible notes (fixed conversion)   6%-8%    —      0.02-0.024          
Other convertible notes (variable conversion)   8%   —      (c)    —      844,450
Discount                  (383,483)   (349,297)
Total                 $666,596   $677,698

 

(a) 50% discount off the lowest trading price for the common stock during the 10 trading days prior to conversion ($0.003).

(b) 50% discount on the average of the 3 lowest closing bid prices during the 10 trading days prior to conversion ($0.008).

(c) 45% discount off the lowest trading price for the common stock during the 20 trading days prior to conversion ($0.003). 

 

The Company has determined that the conversion feature embedded in the notes referred to above that contain a potential variable conversion amount constitutes a derivative which has been bifurcated from the note and recorded as a derivative liability, with a corresponding discount recorded to the associated debt. The excess of the derivative value over the face amount of the note is recorded immediately to interest expense at inception. For the years ended December 31, 2018 and 2017 and the six months ended December 31, 2018 and 2017, $0, $1,446,168, $1,179,140 and $0, respectively, was recorded at the inception of the notes relating to the excess of derivative value over the face of the notes.

 

As of June 30, 2017, our former Chairman of the Board held two notes payable with principal amounts of $200,150 and $184,300. The $200,150 note, which was due on December 19, 2017, converts at 50% of the average of the 3 lowest bid prices of the common stock during the 10 days prior to the conversion. The $184,300 note, which was renewed through December 30, 2017, is convertible at $.01 with an anti-dilutive clause that becomes effective with any dilution of the Company’s common stock greater than 1% of the shares outstanding at the time of split. Both notes accrue interest at 6%. During the six months ended December 31, 2017, $384,450 of related party convertible notes payable were reclassified as convertible notes payable due to Mr. Grisaffi’s resignation. Both of Mr. Grisaffi’s convertible notes payable were voided by a District Court in Dallas, County Texas in 2018 and were derecognized in the financial statements.

 

For the years ended December 31, 2018 and 2017 and the six months ended December 31, 2018 and 2017, interest expense on these notes, including amortization of the discount, was $1,255,081, $1,140,238, $543,164, and $77,743, respectively.

 

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

 

NOTE 11 – Notes Payable

 

As of December 31, 2018 and December 31, 2017, the Company’s notes payable consists of the following:

   Interest Rates 

 

Term

 

December 31, 2018

 

December 31, 2017

Notes
payable
 

 

0% - 6%

   

 

.7 –.8 years

   $37,493   $549,936

 

 

As of December 31, 2018, notes payable includes three notes: two non-interest bearing notes totaling $30,000 that originated prior to the Company’s 2014 bankruptcy proceedings and a three-year note executed on September 1, 2016 relating to the purchase of used office furniture and equipment from our landlord. The Company executed the note payable in the amount of $40,122 at an interest rate of 0% and with monthly payments of $1,115. The Company imputed interest on the note and recorded a discounted note balance of $36,634 on September 1, 2016. The term of the note is three years. As of December 31, 2018 and 2017 and June 30, 2017 the balance on this note was $7,493, $19,936 and $26,130, respectively.

 

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

 

For the years ended December 31, 2018 and 2017 and the six months ended December 31, 2018 and 2017, the Company recorded interest expense on these notes of $931, $1,407, $493 and $710, respectively.

 

 F-15 

 

NOTE 12 – Deferred Revenue

 

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

 

NOTE 13 – Shareholders’ Deficit

 

Common Stock

 

As of December 31, 2018, the Company has 4,000,000,000 shares of common stock authorized and 1,891,617,372 shares issued and outstanding.

 

On March 14, 2017 the Board of Directors and the holders of a majority of the voting capital stock of the Company increased the Company’s common stock authorization from 800,000,000 to 950,000,000 and on September 19, 2017 the authorization was increased to 4,000,000,000 shares.

 

During the year ended December 31, 2018 the Company issued 733,729,095 shares of common stock, including 289,370,558 for convertible notes payable conversions, 13,597,469 for director and employee compensation, 29,096,402 for option exercises, 8,150,531 for vendor services rendered, 7,462,688 for the FitWhey acquisition, and 386,051,447 for cash. In September 2018, the Company also cancelled 1,818,180 shares of common stock as part of a legal settlement.

  

During the year ended December 31, 2017 the Company issued 424,626,143 shares of common stock, including 323,331,050 for convertible notes payable conversions, 1,500,000 for warrant exercises, 30,112,800 for services rendered, 45,000,000 as part of a legal settlement, and 24,682,293 for cash.

 

During the six months ended December 31, 2017 the Company issued 373,181,339 shares of common stock, including 321,291,865 for convertible notes payable conversions, 45,000,000 as part of a legal settlement, 789,474 for the conversion from Series E Preferred Shares, 5,600,000 for services rendered, and 500,000 for cash.

 

During the six months ended December 31, 2016 the Company issued 197,090,550 shares of common stock for convertible notes payable conversions, warrant exercises, compensation, cash purchases, services rendered, and a legal settlement.

 

On March 17, 2017, our Board of Directors approved the Rocky Mountain High Brands, Inc. 2017 Incentive Plan (the “2017 Incentive Plan”). The purpose of the Incentive Plan is to provide a means for the Company to continue to attract, motivate and retain management, key employees, consultants and other independent contractors, and to provide these individuals with greater incentive for their service to the Company by linking their interests in the Company’s success with those of the Company and its shareholders. Initially, the Board authorized 35,000,000 shares of the Company’s common stock to be included in the Plan. The Board of Directors awards these shares at its sole discretion.

 

On July 14, 2017 the Board of Directors increased the authorized shares in the 2017 Incentive Plan to 65,000,000.

 

On December 19, 2017 the Board of Directors increased the authorized shares in the 2017 Incentive Plan to 100,000,000.

 

Preferred Stock

 

As of December 31, 2018 the Company has 20,000,000 shares of Preferred Stock authorized and 12,789,474 designated through the various Series described below. The remaining 7,210,526 remain undesignated.

 

 F-16 

 

Series A Preferred Stock

 

The Company has 1,000,000 shares of Series A Preferred Stock designated.

 

From July 11, 2014 to February 28, 2017, our former Chairman of the Board held all of the1,000,000 shares of the Company’s Series A Preferred Stock. He transferred these shares to LSW Holdings, LLC (“LSW”) on February 28, 2017. As of December 31, 2017, LSW held all of these shares.

 

On March 13, 2017, the Board of Directors approved a Certificate of Designation for our Series A Preferred Stock. This document revises and restates the rights, preferences and features of our Series A Preferred Stock, which consists of 1,000,000 shares, all of which are issued and outstanding. Holders of our Series A Preferred Stock were formerly entitled to cast 400 votes for every share held, and shares of Series A Preferred Stock were convertible to common stock at a rate of 100 shares of common stock for every share of Series A Preferred Stock. Following the filing of the Certificate of Designation, holders of Series A Preferred Stock were entitled to cast 1,200 votes for every share held, and shares of Series A Convertible Preferred Stock are convertible to common stock at a rate of 1,200 shares of common stock for every share of Series A Preferred Stock.

 

On July 5, 2017, the Company again 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.

 

On August 30, 2018 in the case entitled Rocky Mountain High Brands, Inc. f/k/a Republic of Texas Brands, Inc. Plaintiff, vs. Jerry Grisaffi, et al, a judgment by the District Court in Dallas County, Texas voided the Series A Preferred Stock ab initio. The shares were cancelled on October 26, 2018 and as of December 31, 2018 are no longer issued and outstanding.

 

Series B Preferred Stock

 

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

 

Series C Preferred Stock

 

The Company amended its Articles of Incorporation as of November 13, 2015 to designate 2,000,000 shares of Series C Preferred Stock, which are 12% interest bearing, cumulative, exchangeable, non-voting, convertible preferred stock of the Company. Each Series C Preferred share is convertible 50 shares of common stock.

 

On November 16, 2015, the holder of a convertible note aggregating $1,107,607 of principal and accrued interest, agreed to a dollar for dollar exchange for same number of Series C Preferred Stock shares. As of June 30, 2017, there were 1,107,607 shares of Series C Preferred shares outstanding and the related redemption value of these shares was classified as a current liability. On October 6, 2017, the Company and the holder reached a legal settlement whereby 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. The holder then assigned the note to GHS in exchange for $1,000,000 consideration paid to him by GHS. As of December 31, 2018 and December 31, 2017, there are no Series C Preferred Stock shares outstanding. Interest expense recognized on these shares for the year ended December 31, 2017 and the six months ended December 31, 2017 and 2016 was $121,598, $43,506, $158,836, respectively.

 

Series D Preferred Stock

 

The Company amended its Articles of Incorporation as of March 21, 2016 to designate 2,000,000 shares of Series D Preferred Stock, a non-voting, non-interest bearing convertible preferred stock. Each Series C preferred share is convertible to 100 shares of common stock. As of December 31, 2018, December 31, 2017 and June 30, 2017, there are no Series D preferred shares outstanding.

 

Series E Preferred Stock

 

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

 

 F-17 

 

Warrants

 

During the year ended December 31, 2018, the Company granted no common stock warrants and none were exercised or forfeited. As of December 31, 2018, there were 12,650,000 warrants outstanding. Exercise prices range from $.001 to $.02 per share.

 

During the year ended December 31, 2017, the Company granted 12,150,000 common stock warrants and none were exercised. As part of a legal settlement, 55,096,825 warrants were returned to the Company and cancelled on October 6, 2017. As of December 31, 2017 there were 650,000 warrants outstanding.

 

During the six months ended December 31, 2017, the Company granted 12,000,000 common stock warrants and none were exercised. As part of a legal settlement, 55,096,825 warrants were returned to the Company and cancelled on October 6, 2017.

 

During the six months ended December 31, 2016, the Company granted 9,037,500 common stock warrants and 38,026,204 were exercised.

 

Options

 

During the year ended December 31, 2018, the Company issued 13,566,768 options to purchase common stock. The options have an exercise price of $.003 and vested immediately. During the year ended December 31, 2018, 35,100,000 options were exercised and none were forfeited. As of December 31, 2018, there were 46,256,768 options outstanding. Exercise prices range from $.003 to $.045 per share.

 

During the year ended December 31, 2017, the Company issued 67,790,000 options to purchase common stock. The options have an exercise price ranging from $.003 to $.045 and vested immediately. During the year ended December 31, 2017, no options were exercised and none were forfeited. As of December 31, 2017, there were 67,790,000 options outstanding. Exercise prices range from $.001 to $.045 per share.

 

During the six months ended December 31, 2017, the Company issued 39,440,000 options to purchase common stock. The options have an exercise price ranging from $.001 and $.003 and vested immediately.

 

There were no options granted or outstanding during the six months ended December 31, 2016.

 

NOTE 14 - Concentrations

 

For the year ended December 31, 2018, the Company’s two largest customers represented 12% and 7% of sales. For the year ended December 31, 2017, the Company’s two largest customers represented 21% and 12% of sales. For the six months ended December 31, 2017, the Company’s two largest customers each represented 6% of sales. For the six months ended December 31, 2016, the Company’s two largest customers represented 75% and 1% of sales.

 

 F-18 

 

NOTE 15 – Income Taxes

 

The reconciliation of income tax benefit at the U.S. statutory rate of 21% to the Company’s effective rate for the year ended December 31, 2018, the year ended December 31, 2017, and the six months ended December 31, 2017 and 2016 is as follows:

 

  

Year Ended

December 31, 2018

 

Year Ended

December 31, 2017

 

Six Months Ended

December 31, 2017

  Six Months Ended December 31, 2016
U.S federal statutory rate   (21%)   (34%)   (34%)   (34%)
State income tax, net of federal benefit   (0.0%)   (0.0%)   (0.0%)   (0.0%)
Increase in valuation allowance   21%   34%   34%   34%
Income tax provision (benefit)   0.0%   0.0%   0.0%   0.0%

 

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

Deferred Tax Assets  December 31, 2018  December 31, 2017
Net Operating Losses  $3,990,000   $5,440,000
Less:  Valuation Allowance  $(3,990,000)  $(5,440,000)
Deferred Tax Assets – Net   —      —  

 

As of December 31, 2018, the Company has approximately $19,000,000 of federal and state net operating loss carryovers (“NOLs”), which begin to expire in 2028. Utilization of the NOLs may be subject to limitation under the Internal Revenue Code Section 382 should there be a greater than 50% ownership change as determined under regulations.

 

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

 

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 for the year and six months ended December 31, 2017 that is still fully valued against as of December 31, 2018. This expense is attributable to the Company being in a net deferred tax asset position at the time of remeasurement. As the company maintains fully valuation allowance, this amount can be seen on the rate reconciliation as an adjustment to deferred tax asset and corresponding valuation allowance.

 

On December 22, 2017, 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 have recorded no income tax expense during the six months ended December 31, 2017, the period in which the legislation was enacted.

 

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

 

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.

 

 F-19 

 

NOTE 16 – Commitments

 

Office Leases

 

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

 

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

 

Other Leases

 

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

 

Employee Agreements

 

The Company has entered into employment agreements with the following Board members and officers:

 

In 2014, the Company entered into a five-year employment agreement with David M. Seeberger, Vice President and General Counsel. Under the agreement, we agreed to compensate Mr. Seeberger at a rate of $120,000 per year and to bonus obligations based on the profitability of the Company. We also agreed to grant Mr. Seeberger an option to purchase 2,000,000 shares of common stock for par value at any time after January 1, 2015. On February 1, 2018, the Company entered into a new three-year employment agreement with Mr. Seeberger. The new agreement includes base compensation of $120,000 per year and discretionary bonuses as approved by the Board of Directors.

 

In January 2016, the Company entered into a five-year employment agreement with Michael Welch, Chief Financial Officer. Under the agreement, we agreed to compensate Mr. Welch at a rate of $120,000 per year and to pay a bonus based on the profitability of the Company. Mr. Welch also became Chief Executive Officer on March 1, 2016. His salary was increased to $150,000 per year. In addition, Mr. Welch received 10,000,000 warrants for common stock at a price of $.001 on January 4, 2016 that were exercisable on July 25, 2016. On February 1, 2018, the Company entered into a new three-year employment agreement with Mr. Welch. The new agreement includes base compensation of $150,000 per year and discretionary bonuses as approved by the Board of Directors.

 

On December 18, 2017, the Company entered into a five-year employment agreement with John Blackington, Chief Commercialization Officer. The agreement includes base compensation of $140,000 per year, 7,000,000 common stock options, an annual bonus of up to 30%, and discretionary bonuses as approved by the Board of Directors. The contract was terminated effective February 6, 2019.

 

On February 1, 2018, the Company entered into a three-year employment agreement with Jens Mielke, Chief Financial Officer. The agreement includes base compensation of $140,000 per year and discretionary bonuses as approved by the Board of Directors.

 

On February 1, 2018, the Company entered into a three-year employment agreement with Charles Smith, Chief Operating Officer. The agreement includes base compensation of $120,000 per year and discretionary bonuses as approved by the Board of Directors.

 

Other Commitments

 

Under the terms of the agreement with the Poafpybitty Family, the Company is required to pay them the lesser of 3% of the sales of Rocky Mountain High Water Company or $30,000 per year.

 

 F-20 

 

NOTE 17 – Legal Proceedings

 

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

 

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

 

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

 

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

 

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

 

In June 2018 LSW Holdings, LLC (“LSW”) and Lily Li (“Li”) filed counterclaims against the Company, generally seeking an increase of voting rights of the Series A shares to 1200:1, a declaration that the Series A shares were validly issued to Grisaffi, challenging the authorized share increase of the Company, claiming securities fraud by the Company with respect to the Series A Shares purchased from Grisaffi and other common stock allegedly purchased by LSW and Li, as well as fraud, breach of contract and negligent misrepresentation by the Company. LSW seeks $10,000,000 in damages from the Company, for the $3,500,000 which was paid to Grisaffi for the Series A shares and for which LSW claims to be the responsibility of the Company to cover, and the remaining $6,500,000 for money allegedly spent by LSW in “developing a distribution system in China” and other alleged “investments” of Li and LSW in the Company. LSW and Li also sought exemplary damages.

 

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

 

  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 void ab initio and unenforceable, and that all stock and promissory notes issued in connection with the Employment Agreement were also void ab initio and of no force and effect, including but not limited to:

 

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.

     
  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 10,000,000 shares of common stock to Li and the 11,000,000 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.

     

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

 

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

 

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

 

Grisaffi has filed an appeal of the Default Judgment, and submitted his brief on or about February 28, 2019. The Company is preparing its brief which is currently due April 1, 2019. 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.

 

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.

 

 F-21 

 

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

 

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

 

  1. The Employment Agreement with Grisaffi dated April 1, 2013 was void ab initio and unenforceable, and that all stock or other instruments issued on the basis or authority of that Employment Agreement were also void ab initio and of no force and effect;

 

  2. The Series A Preferred Shares that RMHB issued to Grisaffi and later sold by Grisaffi to LSW were void ab initio and any potential rights or remedies thereunder were terminated on July 11, 2014 pursuant to the Order Confirming Debtor’s Amended Plan of Reorganization;

 

  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 11,000,000 shares of common stock to Epic Group One, LLC, and 10,000,000 shares of common stock to Li for no consideration, and (iii) causing the issuance of 113,688,625 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 void ab initio and 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.

      

The amount of damages and attorneys’ fees to be awarded to RMHB and against LSW Holdings and Li will be determined in a trial currently scheduled for June 3, 2019. We are continuing to pursue our claims against the remaining defendants in the case, which will be adjudicated at trial, currently scheduled for June 3, 2019.

 

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.

 

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 $21,000.00 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.

 

 F-22 

 

NOTE 18 – Other Income/Expenses

 

Gain/Loss on Extinguishment of Debt

 

For the year ended December 31, 2018, the Company recorded a net loss on extinguishment of debt of $191,138 related to the settlement of convertible notes payable. During the year ended and six months ended December 31, 2017, the Company recorded a net gain on extinguishment of debt of $1,200,092 related to the settlement of convertible notes payable. There was no gain or loss on the extinguishment of debt during the six months ended December 31, 2016.

 

Gain on Change in Redemption Value of Series C Preferred Stock

 

During the year ended December 31, 2017, the Company recorded a gain of $834,242 on the change in redemption value of Series C Preferred Stock related to the valuation of these shares. There was no change in redemption value for the year ended December 31, 2018 as the Series C Preferred Stock was cancelled in October 2017 as part of a legal settlement with the holder. There was no change in redemption value for six months ended December 31, 2016.

 

Gain on Lawsuit Judgment and Legal Settlement

 

In August 2018, the Company recorded a $654,289 gain related to the lawsuit judgment the Company received against Jerry Grisaffi, our former Chairman of the Board. The Company de-recognized two notes payable to Mr. Grisaffi, plus accrued interest, in the amount of $418,865, and de-recognized the related derivative liability of $235,424.

 

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

 

In November 2018, the Company recorded a gain related to the lawsuit judgment the Company received against LSW in the amount of $1,000 related to a court order to void the Series A Preferred Stock initially issued to the Company’s former Chairman of the Board and later purchased by LSW. The $1,000 gain represents the par value of the 1,000,000 shares cancelled.

 

NOTE 19 – Subsequent Events

 

Between January 1 and April 12, 2019 the Company issued 191,774,799 shares of common stock, including 35,000,000 for convertible notes payable conversions, 508,062 for employee compensation, and 156,266,737 for cash.

 

Holders of convertible notes payable converted $155,981 of outstanding principal between January 1, 2019 and April 12, 2019.

 

On January 31, 2019 43,715,482 options were forfeited by former members of the Board of Directors. On February 28, 2019, 851,286 options were forfeited by former consultants.

 

On March 19, 2019, the Board of Directors authorized a reverse split of the Company’s common stock on a one-for-twenty basis. Upon effectiveness, the Company’s authorized common stock will decrease from 4,000,000,000 to 200,000,000.

 

 

 F-23 

 

Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

 

No events occurred requiring disclosure under Item 307 and 308 of Regulation S-K during the year ended December 31, 2018.

 

Item 9A. Controls and Procedures

 

As required by Rule 13a-15 under the Securities Exchange Act of 1934, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2018. This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer.

 

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 Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our company’s reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

Based upon that evaluation, including our Chief Executive Officer and Chief Financial Officer, we have concluded that our disclosure controls and procedures were ineffective as of the end of the period covered by this annual report.

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934). Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2018 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As a result of this assessment, management concluded that, as of December 31, 2018, our internal control over financial reporting was not effective. 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.

 

We plan to take steps to enhance and improve the design of our internal control over financial reporting. During the period covered by this annual report on Form 10-K, we have not been able to remediate the material weaknesses identified above. To remediate such weaknesses, we plan to implement the following changes during our year ending December 31, 2019: (i) appoint additional qualified personnel to address inadequate segregation of duties and ineffective risk management; and (ii) adopt sufficient written policies and procedures for accounting and financial reporting. The remediation efforts set out in (i) and (ii) are largely dependent upon our securing additional financing to cover the costs of implementing the changes required. If we are unsuccessful in securing such funds, remediation efforts may be adversely affected in a material manner.

 

This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to an exemption for non-accelerated filers set forth in Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

 

 26 

 

Item 9B. Other Information

 

None.

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

The following table sets forth, as of March 29, 2019, the name, age and positions of our executive officers and directors.

 

NAME AGE POSITION
Michael Welch 65 Chairman of the Board, President and Chief Executive Officer
     
Jens Mielke 52 Chief Financial Officer
     
David Seeberger 63 Director and Vice President, Legal
     
Charles Smith 62 Director and Chief Operating Officer
     
Winton Morrison 80  Director
     
Dean Blythe 60 Director

 

The business background and certain other information about our directors and executive officers is set forth below:

 

MICHAEL WELCH – CHAIRMAN OF THE BOARD, PRESIDENT, AND CHIEF EXECUTIVE OFFICER

 

Michael Welch joined the Company in January 2016 as Chief Financial Officer. He was appointed President and Chief Executive Officer in February 2016. In September 2017 Mr. Welch was appointed Chairman of the Board of Directors. On February 5, 2019 he became a member of the Executive, Litigation and Nominating Committees of the Board of Directors.

 

Mr. Welch brings more than thirty years of executive and financial management experience to the Rocky Mountain High Brands team. Prior to joining RMHB, Mr. Welch served as CFO Managing Partner for Aventine Hill Partners, a professional services firm from July 2014 to December 2015. Mr. Welch served as Chief Financial Officer and Consultant for multiple small cap companies in Dallas, Texas from June 2011 to June 2014. Mr. Welch was the Chief Financial Officer and one of the founders of Stephan Pyles Concepts, a Dallas-based, privately-held restaurant holding company from February 2005 to May 2011.

 

In the late 90’s, Mr. Welch was part of the founders group of Resources Global Professionals (RGP), a publicly-traded, international consulting firm that was initially owned by Deloitte. Prior to his involvement with RGP, for more than ten years Mr. Welch was employed by Landmark Land Company, a publicly traded multi-state real estate developer and operator of golf and tennis resorts and hotels, commercial and residential real estate, life insurance, mortgage and savings and loans. His positions included Chief Operating Officer, Vice President of Management Systems, and Controller. Mr. Welch also served as Chief Financial Officer of Oak Tree Savings Bank, a subsidiary of Landmark Land Company and a statewide savings and loan based in New Orleans, LA.

 

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Mr. Welch is an alumnus of the audit staff at Deloitte and joined the firm immediately after earning a Bachelor of Business Administration from the University of Oklahoma. Mr. Welch is a Louisiana CPA (inactive status) and has recently completed a term on a not-for-profit board. Mr. Welch currently serves on an Advisory Board for a privately held services company with which he directed a management-led buyout from the founder of the company.

 

JENS MIELKE – CHIEF FINANCIAL OFFICER

 

Jens Mielke joined the Company in August 2016 as Chief Financial Officer.

 

Mr. Mielke has over 29 years’ experience in accounting and finance leadership positions. Prior to joining RMHB, Mr. Mielke was National Partner, Technical Accounting for Aventine Hill Partners, a Texas-based professional services firm. He founded and led that firm’s Technical Accounting Group where he provided technical accounting and finance services to public and private clients. Prior to Aventine Hill, Mr. Mielke was Chief Financial Officer for a high-growth, publicly-traded retailer, but spent the majority of his career at Deloitte where he was audit partner in the firm’s Dallas office. He also previously served as senior financial analyst at PepsiCo’s corporate headquarters in Purchase, NY. His experience includes working with public and private companies in strategic management, accounting, financial reporting, Sarbanes-Oxley compliance, investor relations, initial and secondary public offerings, mergers, acquisitions and divestitures, process improvement and systems implementations.

 

Mr. Mielke received his Master and Bachelor of Business Administration degrees from Southern Methodist University.

 

DAVID SEEBERGER – DIRECTOR AND VICE PRESIDENT, LEGAL

 

David Seeberger joined the Company in March 2016 as Vice President, Legal. In September 2017 Mr. Seeberger was appointed to the Board of Directors. On February 5, 2019 he became a member of the Executive, Litigation and Nominating Committees of the Board of Directors.

 

Mr. Seeberger received his B.A. from Grinnell College in Grinnell, Iowa and earned his J.D. from the University of Toledo - College of Law in Toledo, Ohio. Mr. Seeberger is admitted to practice before the Supreme Court of Texas and the United States District Courts for the Northern and Eastern Districts of Texas. He has also practiced in other State and Federal Courts on a pro hoc basis. Mr. Seeberger is also admitted to practice before the Securities and Exchange Commission (SEC).

 

Mr. Seeberger’s legal experience spans in excess of twenty-five years of professional practice within the Dallas, Texas area. Mr. Seeberger has been privileged to associate with and has been a partner in various small law firms throughout his legal career – for the past decade, Mr. Seeberger has been in private practice, and maintains membership in the State Bar of Texas and the Dallas Bar Association.

 

Mr. Seeberger’s career has included all areas of corporate and small business - due diligence, corporate and business litigation as well as the areas associated therewith, including general legal counsel for corporate, real estate and commercial bankruptcy proceedings and corporate turnaround efforts. Mr. Seeberger is an AV Preeminent rated attorney resulting from the AV Preeminent-Peer Review Rating as conducted by Martindale-Hubbell. Mr. Seeberger has been engaged, contracted with, or employed by RMHB since 2012.

 

CHARLES SMITH – DIRECTOR, CHIEF OPERATING OFFICER, AND PRESIDENT OF EAGLE SPIRIT LAND AND WATER COMPANY

 

Charles (Chuck) Smith joined the Company in February 2016 as a Director and Chief Operating Officer. In November 2016, Mr. Smith was also appointed President of Eagle Spirit Land & Water Company. On February 5, 2019 he became a member of the Executive, Litigation and Nominating Committees of the Board of Directors.

 

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Within the last six years, Mr. Smith has served in several key strategic roles entailing a wide-range of corporate governance. During the time period from 2007 to 2014, Mr. Smith served as a Managing Partner and Managing Member of San Carlos Associates, a multi-million-dollar investment entity located in Dallas, Texas. In addition, until the properties recently sold in 2011, Mr. Smith served as a former Managing Partner and Managing member to several investment partnerships in Midland and El Paso, Texas, with indicated values that exceed $30 million. These properties included Cornerstone Village and Villa De Madison. Similarly, Mr. Smith currently retains a partnership interest and maintains a consulting relationship at Sawyers Mill in Arlington, Texas – an entity that he has maintained a relationship with since the early 1990’s.

 

Mr. Smith graduated with honors from University of Texas at Dallas with a Bachelor's Degree in Economics and Finance. He has been an active participant in real estate investment opportunities for over 35 years.

 

WINTON MORRISON – INDEPENDENT DIRECTOR

 

Winton “Win” Morrison joined the Company in February 2016 as a Director.

 

Mr. Morrison is Principal Broker and Owner of Win Morrison Realty. Mr. Morrison spent many years as an IBM executive, based in the former IBM Kingston facility. He operated his own retail business for a time (the Snowflake Ski Shop), and also worked as an antique dealer for most of his adult life. Mr. Morrison opened the Kingston office of Win Morrison Realty in 1982. Win Morrison Realty now has five offices to serve the region. Currently, the company is actively pursuing expansion into other locations within other parts of the region.

 

DEAN BLYTHE – INDEPENDENT DIRECTOR

 

Dean Blythe joined the Company in March 2018 as a Director. On February 5, 2019 he became a member of the Executive, Litigation and Nominating Committees of the Board of Directors.

 

Mr. Blythe is the Founder and Managing Partner of TDF Resources, an advisory and investment firm he founded in January 2009 that provides advisory, management, and transaction services to public and private companies across a wide spectrum of industries.  Mr. Blythe served on the Board of Directors of Journal Communications, Inc., an NYSE-listed company, from 2013 until its sale in 2015. Mr. Blythe served on the Board of Directors of Total Outdoor Corp. from 2011 to 2013 and served as its Co-President and Chief Financial Officer from 2012 to 2013. From 2001 to 2009, Mr. Blythe was with Harte-Hanks, Inc., a NYSE-listed direct and targeted marketing services company. He served in various roles at Harte-Hanks, including as a member of the Board of Directors, President and Chief Executive Officer, Executive Vice President and Chief Financial Officer, Secretary, and Vice President – Legal. Prior to joining Harte-Hanks, Mr. Blythe served as Senior Vice President – Corporate Development & General Counsel of Hearst-Argyle Television, Inc., a NYSE-listed company, and its predecessor, Argyle Television, Inc. Mr. Blythe previously served on the Boards of Directors of Argyle Security, Inc., where he chaired its Audit Committee, and New Vision Television, Inc.

 

Mr. Blythe holds a Juris Doctor degree from Duke University and a Bachelor of Science degree from Miami University in Oxford, Ohio. 

 

Family Relationships

 

There are no family relationships between or among the directors, executive officers or persons nominated or chosen by us to become directors or executive officers.

 

Committees of the Board

 

On February 5, 2019, the Board of Directors formed three committees of the Board of Directors: Executive Committee, Litigation Committee, and the Nominations Committee. Michael Welch, Charles Smith, David Seeberger, and Dean Blythe are members of each of these committees. Until further determination by the Board, the full Board of Directors will continue to undertake the duties of the Audit Committee and Compensation Committee. Prior to this meeting, there were no committees of the Board of Directors.

 

Nominating Committee

 

On February 5, 2019 our Board of Directors formed a nominating committee with Michael Welch, Charles Smith, David Seeberger, and Dean Blythe as members. Currently, no written charter governs the director nomination process. When evaluating director nominees, our directors consider the following factors:

 

The appropriate size of our Board of Directors;
Our needs with respect to the particular talents and experience of our directors;
The knowledge, skills and experience of nominees, including experience in finance, administration or public service, in light of prevailing business conditions and the knowledge, skills and experience already possessed by other members of the Board;
Experience in political affairs;
Experience with accounting rules and practices; and
The desire to balance the benefit of continuity with the periodic injection of the fresh perspective provided by new Board members.

 

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Our goal is to assemble a Board that brings together a variety of perspectives and skills derived from high quality business and professional experience. In doing so, the Board will also consider candidates with appropriate non-business backgrounds.

 

Other than the foregoing, there are no stated minimum criteria for director nominees, although the Board may also consider such other factors as it may deem are in our best interests as well as our stockholders. In addition, the Board identifies nominees by first evaluating the current members of the Board willing to continue in service. Current members of the Board with skills and experience that are relevant to our business and who are willing to continue in service are considered for re-nomination. If any member of the Board does not wish to continue in service or if the Board decides not to re-nominate a member for re-election, the Board then identifies the desired skills and experience of a new nominee in light of the criteria above. Current members of the Board are polled for suggestions as to individuals meeting the criteria described above. The Board may also engage in research to identify qualified individuals. To date, we have not engaged third parties to identify or evaluate or assist in identifying potential nominees, although we reserve the right in the future to retain a third-party search firm, if necessary. The Board does not typically consider shareholder nominees because it believes that its current nomination process is sufficient to identify directors who serve our best interests.

 

Audit Committee

 

We do not have a separately designated standing audit committee. The entire Board of Directors performs the functions of an audit committee, but no written charter governs the actions of the Board when performing the functions of what would generally be performed by an audit committee. The Board approves the selection of our independent accountants and meets and interacts with the independent accountants to discuss issues related to financial reporting. In addition, the Board reviews the scope and results of the audit with the independent accountants, reviews with management and the independent accountants our annual operating results, considers the adequacy of our internal accounting procedures and considers other auditing and accounting matters including fees to be paid to the independent auditor and the performance of the independent auditor.

 

Advisory Board to the Board of Directors

In March 2018 the Board of Directors formed an informal Advisory Board consisting of non-employee members who provide advice to the Board of Directors. The Advisory Board was dissolved on October 31, 2018.

 

Code of Conduct

In August 2017 the Company adopted a Code of Conduct for all directors, officers, employees, and contractors.

 

Item 11. Executive Compensation

Summary Compensation Table

 

The following table sets forth the compensation earned by Executive Officers during the years ended December 31, 2018 and 2017:

Name and Principal Position  Year  Salary  Bonus  Stock Awards  Warrant Awards  Non-Equity Incentive Plan Compensation  Non-Qualified Deferred Compensation Earnings  All Other Compensation  Total
                                     
Michael Welch, President and CEO (1)   2018   $146,192   $—     $108,801   $—     $—     $—     $—     $254,993
    2017    93,143    —      27,004    —      —      —      —     $100,643
Jens Mielke, Chief Financial Officer (2)   2018    136,446    —      94,334    —      —      —      —     $230,780
    2017    72,077    —      23,861    —      —      —      —     $95,938
Charles Smith, Chief Operating Officer (3)   2018    104,769    —      68,557    —      —      —      —     $173,326
    2017    30,000    —      18,083    —      —      —      —     $48,083
David Seeberger, Vice Presidentand General Counsel (4)   2018    116,954    —      125,202     —      —      —      —     $242,156
    2017    81,368    —      9,172    —     —      —      —     $90,540
Lily Li, Former Executive Vice President (5)   2018    —      —          —      —      —      —     $— 
    2017    —      —      575,000    —      —      —      —     $—  
John Blackington, Former Chief Commercialization Officer (6)   2018    119,539     —      59,834    —     —      —      —     $179,373
    2017    —      —      —          —      —      —     $

 

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Narrative Disclosure to the Summary Compensation Table

 

1.Michael Welch was employed as a 1099 contractor in December 2015 and received compensation of $10,000. Mr. Welch initially joined the Company as Chief Financial Officer on January 1, 2016 at a salary of $120,000 per year and also became President and Chief Executive Officer on March 1, 2016 and also served as Chief Financial Officer until August 22, 2016. His salary was increased to $150,000 per year. In addition, Mr. Welch received 10,000,000 warrants with an anti-dilution clause and a cashless exercise option for common stock at a strike price of $.001 on January 4, 2016 which were exercised on July 25, 2016 for 10,434,419 shares of common stock. On February 25, 2017, Mr. Welch agreed to take 60% of his base salary in shares of common stock. On September 19, 2017 Mr. Welch was granted 789,474 shares of Series E Preferred Stock in lieu of cash compensation. On November 1, 2017 Mr. Welch converted his 789,474 shares of Series E Preferred Stock to 789,474 common shares. Mr. Welch was granted 755,000 shares of common stock as compensation on December 7, 2017. On December 19, 2017, Mr. Welch was awarded 7,000,000 stock options. On February 1, 2018, the Company entered into a new three-year employment agreement with Mr. Welch. The new agreement includes base compensation of $150,000 per year and discretionary bonuses as approved by the Board of Directors.

 

2.Jens Mielke joined the Company as Chief Financial Officer on August 22, 2016 at a salary of $120,000 per year. At that time, Mr. Mielke agreed to take 50% of his base salary in shares of common stock. Prior to joining the Company as an officer in August 2016, Mr. Mielke earned $1,892 as a non-employee consultant in July and August 2016. During the fiscal year ended June 30, 2017, Mr. Mielke was granted an additional 700,000 shares of common stock as compensation. On October 1, 2017 the Board of Directors changed Mr. Mielke’s annual base salary to $140,000 and changed the cash portion of Mr. Mielke’s compensation to 80%. On December 19, 2017, Mr. Mielke was awarded 5,000,000 stock options. On February 1, 2018, the Company entered into a three-year employment agreement with Mr. Mielke. The agreement includes base compensation of $140,000 per year and discretionary bonuses as approved by the Board of Directors. In March 2018, Mr. Mielke’s base compensation was changed to 100% cash.

 

3.Charles (Chuck) Smith is a member of the Board of Directors, and is Chief Operating Officer. He agreed to forego a salary until the Company was fully-funded. On October 1, 2017, Mr. Smith began accruing an annual base salary of $120,000. On Mr. Smith was awarded 7,000,000 warrants with an anti-dilution clause and a cashless exercise option for common stock at a strike price of $.001 on February 28, 2016 for his service on the Board of Directors. His options were exercised on July 29, 2016 for 7,216,500 shares of common stock, which is included in the Director Compensation Table. During fiscal year ended June 30, 2017, Mr. Smith was granted 2,500,000 shares of common stock as compensation. On December 19, 2017 Mr. Smith was awarded 3,500,000 stock options. On February 1, 2018, the Company entered into a three-year employment agreement with Mr. Smith. The agreement includes base compensation of $120,000 per year and discretionary bonuses as approved by the Board of Directors.

 

4.David Seeberger’s contract specifies that he receive compensation at the rate of $120,000 per year once the Company is fully-funded and Mr. Seeberger was awarded 2,000,000 shares of the Company’s common stock on August 21, 2014 valued at $33,200 at the time of issuance. Since the Company has not yet received fully-funded status, he was paid $62,915 in fiscal year 2016 as a 1099 contractor. The Company added Mr. Seeberger to its payroll as of March 1, 2016 at a salary of $120,000 per year. In addition, Mr. Seeberger received 6,000,000 warrants with an anti-dilution clause and a cashless exercise option for common stock at a strike price of $.001 on January 4, 2016, which were exercised on July 29, 2016 for 6,282,771 shares of common stock. On February 25, 2017, Mr. Seeberger agreed to take 50% of his base salary in shares of common stock. During the fiscal year ended June 30, 2017, Mr. Seeberger was granted an additional 700,000 shares of common stock as compensation. On December 19, 2017 Mr. Seeberger was awarded 8,000,000 stock options. This included 2,000,000 options available to Mr. Seeberger under his original employment agreement dated July 2, 2014. On February 1, 2018, the Company entered into a new three-year employment agreement with Mr. Seeberger. The new agreement includes base compensation of $120,000 per year and discretionary bonuses as approved by the Board of Directors.

 

5.Lily Li was appointed Executive Vice President on December 20, 2016. She agreed to forego a salary, but received compensation via common stock grants. In December 2016, Ms. Li exercised 5,000,000 warrants that had been granted to her prior to her employment with the Company. In February 2017 Ms. Li was granted 10,000,000 shares of common stock as compensation.

 

6.John Blackington was employed by the Company beginning February 1, 2018. From November 1, 2017 until January 31, 2018, Mr. Blackington was a non-employee contractor to the Company and accrued $6,000 per month for his services. On December 19, 2017 Mr. Blackington was awarded 7,000,000 stock options. On December 18, 2017, the Company entered into a five-year employment agreement with John Blackington, Chief Commercialization Officer. The agreement included base compensation of $140,000 per year, 7,000,000 common stock options, an annual bonus of up to 30%, and discretionary bonuses as approved by the Board of Directors. The contract was terminated effective February 6, 2019.

 

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Outstanding Equity Awards at December 31, 2018

 

As of December 31, 2018, there were no unexercised options, unexercised warrants, stock that has not vested, and equity incentive plan awards for any executive officer.

 

Compensation of Directors Table

 

The table below summarizes all compensation paid to our Directors during the year ended December 31, 2018:

 

Name     Fees Earned or Paid in Cash  Stock Awards  Option Awards  Non-Equity Incentive Plan Compensation  Non-Qualified Deferred Compensation Earnings  All Other Compensation  Total
                        
Michael Welch (1)    $—     $—     $36,166   $—     $—     $—     $—  
Charles Smith (2)     —      —      18,083    —      —      —     $—  
David Seeberger (3)     —      —      42,980    —      —      —     $—  
Winton Morrison(4)     —      1,932    —      —      —      —     $1,932
Dean Blythe (5)     25,000    22,888    —      —      —      —     $

47,888

Gerry David (6)     24,000    —      56,000    —      —         $80,000
Kevin Harrington (6)     24,000    —      56,000    —      —      —     $80,000

 

 

Narrative Disclosure to the Director Compensation Table

 

(1)Michael Welch joined the Board of Directors as Chairman on September 11, 2017. His compensation as President and CEO is included in the Summary Compensation Table.
(2)Charles Smith joined the Board of Directors in February 2016. His compensation as Chief Operating Officer is included in the Summary Compensation Table.
(3)David Seeberger joined the Board of Directors on September 11, 2017. His compensation as Vice President and General Counsel is included in the Summary Compensation Table.
(4)Winton Morrison joined the Board of Directors in February 2016. Mr. Morrison receives $500 per month as a fee for his Board service, but has deferred payment. On February 9, 2018, Mr. Morrison was awarded 166,667 shares of common stock.
(5)Dean Blythe joined the Board of Directors on March 19, 2018. He is paid Board fees of $5,000 per quarter and was paid $10,000 to Chair an Independent Committee of the Board. On April 2, 2018, Mr. Blythe was awarded 2,000,000 shares of common stock.
(6)Gerry David and Kevin Harrington joined the Board of Directors on May 11, 2019 and left the Board on September 11, 2017. Subsequent to their Board service, they provided consulting services to the Company and were compensated with cash and options to purchase the Company’s common stock. Their contracts were terminated on October 31, 2018. All stocks options awards to Messrs. David and Harrington were forfeited by them on January 31, 2019. This table only reflects compensation paid to them during their tenure on the Board of Directors.

 

 

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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The following table sets forth, as of April 10, 2019, the beneficial ownership of the Company’s capital stock by each Executive Officer and Director, by each person known to beneficially own more than 5% of our common stock and by the executive officers and directors as a group. Except as otherwise indicated, all shares are owned directly and the percentage shown is based on 2,083,392,171 shares of common stock issued and outstanding.

 

Title of class Name and address of beneficial owner(1) Amount of beneficial ownership Percent of class(2) Percent of Voting Power (3)
Current Executive Officers & Directors:  
Common Stock

Michael R. Welch 10626 Cox Lane

Dallas, TX 75229

26,836,071 1.29% 1.29%
Common Stock

Jens R. Mielke 4403 Vandelia St.

Dallas, TX 75219

9,743,153 0.47% 0.47%
Common Stock

Charles Smith 479 Medina Dr.

Highland Village, TX 75077

18,042,839 0.87% 0.87%
Common Stock

David M. Seeberger 1252 N. Selva

Dallas, TX 75218

25,261,241 1.21% 1.21%
Common Stock

Dean Blythe

11059 Windjammer Dr.

Frisco, TX 75034

2,000,000 0.10% 0.10%
Common Stock

Winton Morrison

277 Driftwood Rd., SE St. Petersburg, FL 33705

13,295,667 .63% 0.63%
Common Stock Total of All Current Directors and Officers: 95,178,971 4.57% 4.57%
       
More than 5% Beneficial Owners      
None             

 

(1) As used in this table, “beneficial ownership” means the sole or shared power to vote, or to direct the voting of, a security, or the sole or shared investment power with respect to a security (i.e., the power to dispose of, or to direct the disposition of, a security). In addition, for purposes of this table, a person is deemed, as of any date, to have “beneficial ownership” of any security that such person has the right to acquire within 60 days after such date.

(2) Based on 2,083,392,171 shares of common stock issued and outstanding as of April 10, 2019.

(3) Based on a total of 2,083,392,171 possible votes consisting of shares of common stock issued and outstanding as of April 10, 2019.

 

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Item 13. Certain Relationships and Related Transactions, and Director Independence

 

Except as described below, there have been no transactions or presently proposed transactions since our incorporation to which we have been a participant in which: (1) the amount involved exceeded or will exceed the lesser of: (i) $120,000, or (ii) one percent of the average of our total assets at year-end for the last two completed fiscal years; and (2) any of our directors or executive officers, nor any proposed nominee for election as a director, nor any person who beneficially owns, directly or indirectly, more than 5% of any class of our voting securities, nor any members of the immediate family (including spouse, parents, children, siblings, and in-laws) of any of the foregoing persons, has any material interest, direct or indirect:

 

1.In 2014, the Company entered into a five-year employment agreement with David M. Seeberger, Vice President and General Counsel. Under the agreement, we agreed to compensate Mr. Seeberger at a rate of $120,000 per year and to bonus obligations based on the profitability of the Company. We also agreed to grant Mr. Seeberger an option to purchase 2,000,000 shares of common stock for par value at any time after January 1, 2015. On February 1, 2018, the Company entered into a new three-year employment agreement with Mr. Seeberger. The new agreement includes base compensation of $120,000 per year and discretionary bonuses as approved by the Board of Directors.

 

2.In January 2016, the Company entered into a five-year employment agreement with Michael Welch, Chief Financial Officer. Under the agreement, we agreed to compensate Mr. Welch at a rate of $120,000 per year and to pay a bonus based on the profitability of the Company. Mr. Welch became Chief Executive Officer on March 1, 2016. His salary was increased to $150,000 per year. In addition, Mr. Welch received 10,000,000 warrants for common stock at a price of $.001 on January 4, 2016 that were exercisable on July 25, 2016. During fiscal year 2017, Mr. Welch was granted an additional 755,000 shares of common stock as compensation. On February 1, 2018, the Company entered into a new three-year employment agreement with Mr. Welch. The new agreement includes base compensation of $150,000 per year and discretionary bonuses as approved by the Board of Directors. In 2018, the Company advanced Mr. Welch $21,500 to pay OTC Markets and Hemp Roundtable membership fees on behalf of the Company.

 

3.On December 18, 2017, the Company entered into a five-year employment agreement with John Blackington, Chief Commercialization Officer. The agreement includes base compensation of $140,000 per year, 7,000,000 common stock options, an annual bonus of up to 30%, and discretionary bonuses as approved by the Board of Directors. The contract was terminated effective February 6, 2019.

 

4.On February 1, 2018, the Company entered into a three-year employment agreement with Jens Mielke, Chief Financial Officer. The agreement includes base compensation of $140,000 per year and discretionary bonuses as approved by the Board of Directors.

 

5.On February 1, 2018, the Company entered into a three-year employment agreement with Charles Smith, Chief Operating Officer. The agreement includes base compensation of $120,000 per year and discretionary bonuses as approved by the Board of Directors.

 

6.As of December 31, 2017 and June 30, 2017 the Company had two notes payable to our former Chairman of the Board and shareholder Jerry Grisaffi in the aggregate amount of $384,450. Accrued interest on these notes as of December 31, 2017 and June 30, 2017 was $23,118 and $11,420, respectively. One note in the amount of $184,300 relates to Mr. Grisaffi’s deferred compensation in fiscal years 2015 and 2016. The other note in the amount of $200,150 relates to advances Mr. Grisaffi made to the Company. Both notes bear interest at 6% and are convertible to common stock at prices ranging from $.01 to 50% of market. Both notes were voided ab initio by a court in August 2018 and extinguished from the financial statements.

 

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7.In June 2017, Mr. Grisaffi resigned from the Board of Directors. In connection with his resignation, the Company and Mr. Grisaffi entered into an Indemnification and Release Agreement whereby both parties agreed to mutually release each other from the terms of Mr. Grisaffi’s employment agreement. The Company is seeking to void the Indemnification and Release Agreement.

 

8.On May 19, 2017 the Company made a convertible promissory note to LSW Holdings, LLC (“LSW”). Lily Li, was then our Executive Vice President and is Managing Member of LSW. The principal amount of the note is $79,000 with a term of six months. The note bears interest at 6% annually and is convertible to the Company’s common stock at 50% of market price, as defined in the note. On July 11, 2017 the Company made another convertible promissory note to LSW. The principal amount of the note is $100,000 with a term of six months. The note bears interest at 6% annually and is convertible to the Company’s common stock at 50% of market price, as defined in the note. Ms. Li was terminated from her position on April 5, 2018. The notes are the subject of a lawsuit brought by the Company against Ms. Li and LSW.

 

We are not a “listed issuer” within the meaning of Item 407 of Regulation S-K and there are no applicable listing standards for determining the independence of our directors. Applying the definition of independence set forth in Rule 4200(a)(15) of The NASDAQ Stock Market, Inc., we have two independent directors: Dean Blythe and Winton Morrison.

 

Item 14. Principal Accountant Fees and Services

 

The following table presents the aggregate fees billed for the years ended December 31, 2018 and 2017 by the Company’s independent registered public accounting firm, Prager Metis, CPAs, LLC (which acquired Paritz & Company, P.A. in 2018), in connection with the audit of the Company’s consolidated financial statements and other professional services rendered.

 

Year Ended:  Audit Services  Audit Related Fees  Tax Fees  Other Fees
 December 31, 2018   $44,000   $   $   $ 
 

December 31, 2017

   $29,000   $   $   $ 

 

 

Audit fees represent the professional services rendered for the audit of the Company’s annual financial statements and the review of the Company’s financial statements included in quarterly reports, along with services normally provided by the accounting firm in connection with statutory and regulatory filings or other engagements. Audit-related fees represent professional services rendered for assurance and related services by the accounting firm that are reasonably related to the performance of the audit or review of the Company’s consolidated financial statements that are not reported under audit fees.

 

Tax fees represent professional services rendered by the accounting firm for tax compliance, tax advice, and tax planning. All other fees represent fees billed for products and services provided by the accounting firm, other than the services reported for the other categories.

 

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PART IV

 

Item 15. Exhibits, Financial Statements Schedules

 

(a)Financial Statements and Schedules

 

The following financial statements and schedules listed below are included in this Form 10-K.

Financial Statements (See Item 8)

(b)Exhibits:

 

3.1 Articles of Incorporation, as Amended (Incorporated by reference to Registration Statement on Form 10 filed June 22, 2016)
   
3.2 By-laws, as Amended (Incorporated by reference to Registration Statement on Form 10 filed June 22, 2016)
   
3.3 Certificate of Amendment of Articles of Incorporation (Incorporated by reference to Current Report on Form 8-K filed March 22, 2019)
   
10.1 Employment Agreement with Michael Welch (Incorporated by reference to Current Report on Form 8-K filed February 23, 2018)
   
10.2 Employment Agreement with Jens Mielke (Incorporated by reference to Current Report on Form 8-K filed February 23, 2018)
   
10.3 Employment Agreement with David M. Seeberger (Incorporated by reference to Current Report on Form 8-K filed February 23, 2018)
   
10.4 Employment Agreement with Charles Smith (Incorporated by reference to Current Report on Form 8-K filed February 23, 2018)
   
10.5 Rocky Mountain High Brands, Inc. 2017 Incentive Plan (Incorporated by reference to Current Report on Form 8-K filed April 3, 2017)
   
10.6 Service Agreement for offices at 9101 LBJ Freeway, Suite 200, Dallas, TX (Incorporated by reference to Registration Statement on Form 10 filed June 22, 2016)
   
10.7 Distributorship Agreement with Vega Bros. Sales and Distribution, LLC (Incorporated by reference to Registration Statement on Form 10 filed June 22, 2016)
   
10.8  Water Purchase Agreement (Incorporated by reference to Amended Registration Statement on Form 10 filed September 29, 2016)
   
10.9  Operating and Management Agreement (Incorporated by reference to Amended Registration Statement on Form 10 filed September 29, 2016)
   
10.10  Membership Interest Purchase Agreement (Incorporated by reference to Amended Registration Statement on Form 10 filed September 29, 2016)
   
10.11 First Amended Operating and Management Agreement of Rocky Mountain High Water Company, LLC (Incorporated by reference to Annual Report on Form 10-K filed October 11, 2017)
   
10.12 LyonPride Music Sponsorship/Promo/Marketing Agreement with Rocky Mountain High Brands, Inc. (Incorporated by reference to Annual Report on Form 10-K filed October 11, 2017)

 

 36 

 

10.13 LSW Holdings, LLC Convertible Promissory Note dated May 19, 2017 (Incorporated by reference to Registration Statement on Form S-1 filed July 6, 2018) 
   
10.14 LSW Holdings, LLC Convertible Promissory Note dated July 11, 2017 (Incorporated by reference to Annual Report on Form 10-K filed October 11, 2017)
   
10.15 Secured Promissory Note with GHS Investments, LLC ($212,328,77 – Exchange for Note issued 11/2/17) (Incorporated by reference to Current Report on Form 8-K filed July 2, 2018)
   
10.16 Securities Purchase Agreement with GHS Investments, LLC, dated June 27, 2018 (Incorporated by reference to Current Report on Form 8-K filed July 2, 2018)
   
10.17 Registration Rights Agreement with GHS Investments, LLC, dated June 27, 2018 (Incorporated by reference to Current Report on Form 8-K filed July 2, 2018)
   
10.18 Agreement with KeHE Distributors, LLC (Incorporated by reference to Registration Statement on Form S-1 filed July 6, 2018)
   
10.19 Master Services Agreement with Tandem Theory, LLC (Incorporated by reference to Registration Statement on Form S-1 filed July 6, 2018)
   
10.20 Consulting Agreement with Giovanni Gallucci (Incorporated by reference to Registration Statement on Form S-1 filed July 6, 2018)
   
10.21 Asset Purchase Agreement with BFIT Brands, LLC (Incorporated by reference to Current Report on Form 8-K filed July 27, 2018)
   
10.22 Non-competition Agreement with members of BFIT Brands, LLC (Incorporated by reference to Current Report on Form 8-K filed July 27, 2018)
   
10.23 Employment Agreement with Erik Rothchild (Incorporated by reference to Current Report on Form 8-K filed July 27, 2018)
   
10.24 Secured Promissory Note with GHS Investments, LLC ($157,500, issued 7/24/18) (Incorporated by reference to Registration Statement on Form S-1/A filed August 8, 2018)
   
10.25 Secured Promissory Note with GHS Investments, LLC ($157,500 issued 8/9/18) (Incorporated by reference to Registration Statement on Form S-1/A filed September 7, 2018)  
   
10.26 Secured Promissory Note with GHS Investments, LLC ($105,000 issued 8/30/18) (Incorporated by reference to Registration Statement on Form S-1/A filed September 7, 2018)  
   
10.27 Addenda to Secured Promissory Notes (Incorporated by reference to Registration Statement on Form S-1/A filed September 7, 2018)  
   
10.28 Secured Promissory Note with GHS Investments, LLC ($131,250 issued 9/14/18) (Incorporated by reference to Registration Statement on Form S-1/A filed October 9, 2018)
   
10.29 Secured Promissory Note with GHS Investments, LLC ($55,000 issued 9/28/18) (Incorporated by reference to Registration Statement on Form S-1/A filed October 9, 2018)
   
10.30 Co-Packing Agreement with Optimus Fulfill, LLC (Incorporated by reference to Current Report on Form 8-K filed January 25, 2019)

 

 37 

 

10.31 Second Addendum to Master Manufacturer Agreement (Incorporated by reference to Current Report on Form 8-K filed January 25, 2019)
   
10.32 Beverage Manufacture and Supply Agreement with Texas Wellness Center, LLC (Incorporated by reference to Current Report on Form 8-K filed February 26, 2019)
   
10.33 Secured Promissory Note with GHS Investments, LLC ($52,500 issued 10/12/18)*
   
10.34 Consulting Service Agreement with Mihok & Associates, Inc.*
   
10.35 Consulting Agreement with E & E Communications*
   
14.1 Code of Conduct (Incorporated by reference to Current Report on Form 8-K filed February 23, 2018)
   
14.2 Insider Trading Policy (Incorporated by reference to Current Report on Form 8-K filed October 12, 2017)
   
21.1 List of Subsidiaries*
   
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002*
   
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) 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 Rule 18 U.S.C Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley act of 2002
   
101 Interactive Data Files#

 

* Filed herewith

 

# Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed “furnished” and not “filed” or part of a registration statement or prospectus for purposes of Sections 11 and 12 of the Securities Act of 1933, or deemed “furnished” and not “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to liability under these sections.

 

 38 

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Rock Mountain High Brands, Inc.

By: /s/ Michael Welch
Michael Welch
Chairman of the Board of Directors,

President and Chief Executive Officer
April 15, 2019

 

In accordance with Section 13 or 15(d) of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

 

By: /s/ Michael Welch
Michael Welch
Chairman of the Board of Directors,

President and Chief Executive Officer
April 15, 2019

 

By: /s/ Jens Mielke
Jens Mielke
Chief Financial Officer and Principal Accounting Officer
April 15, 2019

 

By: /s/ David Seeberger
David Seeberger
Director and Vice President and General Counsel
April 15, 2019

 

By: /s/ Charles Smith
Charles Smith
Director and Chief Operating Officer
April 15, 2019

 

By: /s/ Dean Blythe
Dean Blythe
Director
April 15, 2019

 39 

 

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS NOTE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.

 

Principal Balance: $52,500

Issue Date: October 12, 2018

Maturity Date: July 12, 2019

 

 

SECURED PROMISSORY NOTE

 

 

Rocky Mountain High Brands, Inc., (hereinafter called the “Company”), hereby promises to pay to the order of GHS Investments, LLC, a Nevada limited liability company, or its registered assigns (the “Holder”) the sum of $52,500 by July 12, 2019 (the “Maturity Date”) in installments (as outlined below) together with any interest as set forth herein, and to pay interest on the unpaid principal balance hereof at the rate of ten percent (10%) (the “Interest Rate”) per annum from the date hereof (the “Issue Date”) until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. This Note is being issued with a five percent (5%) Original Issuance Discount to offset transaction costs.

 

This Note may not be prepaid in whole or in part except as otherwise explicitly set forth herein. Following any Event of Default, all amounts owing pursuant to this Note shall bear interest at the rate of the lesser of (a) twenty percent (20%) per annum or (b) the maximum interested allowed by law, from the due date thereof until the same is paid (“Default Interest”). Interest shall be computed on the basis of a 365-day year and the actual number of days elapsed. All payments due hereunder (to the extent not made in common stock) shall be made in lawful money of the United States of America.

 

All payments shall be made at such address as the Holder shall hereafter give to the Company by written notice made in accordance with the provisions of this Note. Whenever any amount expressed to be due by the terms of this Note is due on any day which is not a business day, the same shall instead be due on the next succeeding day which is a business day and, in the case of any interest payment date which is not the date on which this Note is paid in full, the extension of the due date thereof shall not be taken into account for purposes of determining the amount of interest due on such date. As used in this Note, the term “business day” shall mean any day other than a Saturday, Sunday or a day on which commercial banks in the city of New York, New York are authorized or required by law or executive order to remain closed. Each capitalized term used herein, and not otherwise defined, shall have the meaning ascribed thereto in the supporting documents of same date (attached hereto).

 

  
 

 

This Note is free from all taxes, liens, claims and encumbrances with respect to the issue thereof and shall not be subject to preemptive rights or other similar rights of shareholders of the Company and will not impose personal liability upon the holder thereof.

 

The following terms shall apply to this Note:

 

ARTICLE I. CONVERSION RIGHTS

 

1.1                               Conversion Right. Following the execution of this Note, the Holder shall have the right to convert all or any part of the outstanding and unpaid principal amount of this Note into fully paid and non- assessable shares of Common Stock, as such Common Stock exists on the Issue Date, or any shares of capital stock or other securities of the Company into which such Common Stock shall hereafter be changed or reclassified at the conversion price (the “Conversion Price”) determined as provided herein (a “Conversion”).

(a)  Beneficial Ownership Limitation. In no event shall the Holder be entitled to convert any portion of this Note in excess of that portion of this Note upon conversion of which the sum of (1) the number of shares of Common Stock beneficially owned by the Holder and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of the Notes or the unexercised or un-converted portion of any other security of the Company subject to a limitation on conversion or exercise analogous to the limitations contained herein) and (2) the number of shares of Common Stock issuable upon the conversion of the portion of this Note with respect to which the determination of this proviso is being made, would result in beneficial ownership by the Holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock. For purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Regulations 13D-G there under. The number of shares of Common Stock to be issued upon each conversion of this Note shall be determined by dividing the Conversion Amount (as defined below) by the applicable Conversion Price then in effect on the date specified in the notice of conversion, (the “Notice of Conversion”), delivered to the Company by the Holder in accordance with the Sections below; provided that the Notice of Conversion is submitted by facsimile or e-mail (or by other means resulting in, or reasonably expected to result in, notice) to the Company before 6:00 p.m., New York, New York time on such conversion date (the “Conversion Date”).

(b)  The term “Conversion Amount” means, with respect to any conversion of this Note, the sum of (1) the principal amount of this Note to be converted in such conversion plus (2) at the Company’s option, accrued and unpaid interest, if any, on such principal amount at the interest rates provided in this Note to the Conversion Date, plus (3) at the Company’s option, Default Interest, if any, on the amounts referred to in the immediately preceding clauses (1) and/or (2) plus (4) at the Holder’s option, any amounts owed to the Holder. Omit.

(c)  Conversion Price. At any time after the execution of this Note, the Holder shall have the right, at its option, to convert all or any portion of this Note into shares of fully paid and non-assessable Common Stock of the Company at the price of $0.008 per share, (the "Conversion Price"). If, however, during any time while this Note remains issued and outstanding, the lowest reported trading price for the Company’s common stock is equal to or less than $0.009 for any two (2) consecutive trading days, then the Conversion Price shall be adjusted to $0.005 per share for any remaining amounts due and owing hereunder. In addition, for so long as the Company is not in Default under the terms of this Note, the Holder shall not, on any individual trading day, sell an amount of shares of common stock received upon conversion of all Notes issued by the Company to the Holder that is in excess of fifteen percent (15%) of the total trading volume for such trading day.

 

 2 
 

 

1.2                               Authorized Shares. The Company covenants that during the period the conversion right exists the Company will reserve from its authorized and unissued Common Stock a sufficient number of shares, free from preemptive rights, to provide for the issuance of Common Stock upon the full conversion of this Note. The Company is required at all times to have authorized and reserved three times the number of shares that is actually issuable upon full conversion of the Note (based on the Conversion Price of the Notes in effect from time to time)(the “Reserved Amount”). The Reserved Amount shall be increased from time to time in accordance with the Company’s obligations.

 

The Company represents that upon issuance, such shares will be duly and validly issued, fully paid and non-assessable. In addition, if the Company shall issue any securities or make any change to its capital structure which would change the number of shares of Common Stock into which the Notes shall be convertible at the then current Conversion Price, the Company shall at the same time make proper provision so that thereafter there shall be a sufficient number of shares of Common Stock authorized and reserved, free from preemptive rights, for conversion of the outstanding Notes.

 

The Company (i) acknowledges that it will irrevocably instruct its transfer agent to issue certificates for the Common Stock issuable upon conversion of this Note, and (ii) agrees that its issuance of this Note shall constitute full authority to its officers and agents who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Common Stock in accordance with the terms and conditions of this Note.

 

If, at any time the Company does not maintain the Reserved Amount it will be considered an Event of Default as defined in this Note.

 

1.3Method of Conversion.

 

(a)    Mechanics of Conversion. This Note may be converted by the Holder, in whole or in part, at any time following execution by submitting to the Company a Notice of Conversion (by facsimile, e-mail or other reasonable means of communication dispatched on the Conversion Date prior to 6:00 p.m., New York, New York time).

 

(b)    Surrender of Note Upon Conversion. Notwithstanding anything to the contrary set forth herein, upon conversion of this Note in accordance with the terms hereof, the Holder shall not be required to physically surrender this Note to the Company unless the entire unpaid principal amount of this Note is so converted. The Holder and the Company shall maintain records showing the principal amount so converted and the dates of such conversions or shall use such other method, reasonably satisfactory to the Holder and the Company, so as not to require physical surrender of this Note upon each such conversion. In the event of any dispute or discrepancy, such records of the Holder shall, prima facie, be controlling and determinative in the absence of manifest error. The Holder and any assignee, by acceptance of this Note, acknowledge and agree that, by reason of the provisions of this paragraph, following conversion of a portion of this Note, the unpaid and unconverted principal amount of this Note represented by this Note may be less than the amount stated on the face hereof.

 

c)  Payment of Taxes. The Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock or other securities or property on conversion of this Note in a name other than that of the Holder (or in street name), and the Company shall not be required to issue or deliver any such shares or other securities or property unless and until the person or persons (other than the Holder or the custodian in whose street name such shares are to be held for the Holder’s account) requesting the issuance thereof shall have paid to the Company the amount of any such tax or shall have established to the satisfaction of the Company that such tax has been paid.

 

 3 
 

 

(d)    Delivery of Common Stock upon Conversion. Upon receipt by the Company from the Holder of a facsimile transmission or e-mail (or other reasonable means of communication) of a Notice of Conversion meeting the requirements for conversion as provided in this Section, the Company shall issue and deliver or cause to be issued and delivered to or upon the order of the Holder certificates for the Common Stock issuable upon such conversion within three (3) business days after such receipt (the “Deadline”) (and, solely in the case of conversion of the entire unpaid principal amount hereof, surrender of this Note) in accordance with the terms hereof and the Purchase Agreement. The Company will pay any and all legal, deposit and transfer agent fees that may be incurred or charged in connection with the issuance of shares of the Company's Common Stock to the Holder arising out of or relating to the conversions of this Note.

 

(e)   Obligation of Company to Deliver Common Stock. Upon receipt by the Company of a Notice of Conversion, the Holder shall be deemed to be the holder of record of the Common Stock issuable upon such conversion, the outstanding principal amount and the amount of accrued and unpaid interest on this Note shall be reduced to reflect such conversion, and, unless the Company defaults on its obligations under this Article I, all rights with respect to the portion of this Note being so converted shall forthwith terminate except the right to receive the Common Stock or other securities, cash or other assets, as herein provided, on such conversion. If the Holder shall have given a Notice of Conversion as provided herein, the Company’s obligation to issue and deliver the certificates for Common Stock shall be absolute and unconditional, irrespective of the absence of any action by the Holder to enforce the same, any waiver or consent with respect to any provision thereof, the recovery of any judgment against any person or any action to enforce the same, any failure or delay in the enforcement of any other obligation of the Company to the holder of record, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder of any obligation to the Company, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Holder in connection with such conversion. The Conversion Date specified in the Notice of Conversion shall be the Conversion Date so long as the Notice of Conversion is received by the Company before 6:00 p.m., New York, New York time, on such date.

 

(f)    Delivery of Common Stock by Electronic Transfer. In lieu of delivering physical certificates representing the Common Stock issuable upon conversion, provided the Company is participating in the Depository Trust Company (“DTC”) Fast Automated Securities Transfer (“FAST”) program, upon request of the Holder and its compliance with the provisions contained in Section 1.1 and in this Section 1.4, the Company shall use its best efforts to cause its transfer agent to electronically transmit the Common Stock issuable upon conversion to the Holder by crediting the account of Holder’s Broker with DTC through its Deposit Withdrawal Agent Commission (“DWAC”) system.

 

(g)    Failure to Deliver Common Stock Prior to Deadline. Without in any way limiting the Holder’s right to pursue other remedies, including actual damages and/or equitable relief, the parties agree that if delivery of the Common Stock issuable upon conversion of this Note is not delivered by the Deadline the Company shall pay to the Holder $2,000 per day in cash, for each day beyond the Deadline that the Company fails to deliver such Common Stock. Such cash amount shall be paid to Holder by the fifth day of the month following the month in which it has accrued or, at the option of the Holder (by written notice to the Company by the first day of the month following the month in which it has accrued), shall be added to the principal amount of this Note, in which event interest shall accrue thereon in accordance with the terms of this Note and such additional principal amount shall be convertible into Common Stock in accordance with the terms of this Note. The Company agrees that the right to convert is a valuable right to the Holder. The damages resulting from a failure, attempt to frustrate, and interference with such conversion right are difficult if not impossible to qualify.

 

 4 
 

Accordingly the parties acknowledge that the liquidated damages provision contained in this Section are justified. Any delay or failure of performance by the Company hereunder shall be excused if and to the extent caused by Force Majeure. For purposes of this agreement, Force Majeure shall mean a cause or event that is not reasonably foreseeable and not caused by the Company, including acts of God, fires, floods, explosions, riots wars, hurricanes, etc.

 

1.4                               Concerning the Shares. The shares of Common Stock issuable upon conversion of this Note may not be sold or transferred unless (i) such shares are sold pursuant to an effective registration statement under the Act or (ii) the Company or its transfer agent shall have been furnished with an opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in com parable transactions) to the effect that the shares to be sold or transferred may be sold or transferred pursuant to an exemption from such registration or (iii) such shares are sold or transferred pursuant to Rule 144 under the Act (or a successor rule) (“Rule 144”) or (iv) such shares are transferred to an “affiliate” (as defined in Rule 144) of the Company who agrees to sell or otherwise transfer the shares only in accordance with this Section 1.5 and who is an Accredited Investor. Except as otherwise provided herein (and subject to the removal provisions set forth below), until such time as the shares of Common Stock issuable upon conversion of this Note have been registered under the Act or otherwise may be sold pursuant to Rule 144 without any restriction as to the number of securities as of a particular date that can then be immediately sold, each certificate for shares of Common Stock issuable upon conversion of this Note that has not been so included in an effective registration statement or that has not been sold pursuant to an effective registration statement or an exemption that permits removal of the legend, shall bear a legend substantially in the following form, as appropriate:

 

“NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144 A UNDER SAID ACT. NOT WITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.”

 

The legend set forth above shall be removed and the Company shall issue to the Holder a new certificate therefore free of any transfer legend if (i) the Company or its transfer agent shall have received an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions, to the effect that a public sale or transfer of such Common Stock may be made without registration under the Act, which opinion shall be accepted by the Company so that the sale or transfer is effected or (ii) in the case of the Common Stock issuable upon conversion of this Note, such security is registered for sale by the Holder under an effective registration statement filed under the Act or otherwise may be sold pursuant to Rule 144 without any restriction as to the number of securities as of a particular date that can then be immediately sold. In the event that the Company does not accept the opinion of counsel provided by the Buyer with respect to the transfer of Securities pursuant to an exemption from registration, such as Rule 144 or Regulation S, at the Deadline, it will be considered an Event of Default pursuant to this note.

 

 5 
 

 

1.5Effect of Certain Events.

 

(a)    Effect of Merger, Consolidation, Etc. At the option of the Holder, the sale, conveyance or disposition of all or substantially all of the assets of the Company, the effectuation by the Company of a transaction or series of related transactions in which more than 50% of the voting power of the Company is disposed of, or the consolidation, merger or other business combination of the Company with or into any other Person (as defined below) or Persons when the Company is not the survivor shall either: (i) be deemed to be an Event of Default (as defined in Article III) pursuant to which the Company shall be required to pay to the Holder upon the consummation of and as a condition to such transaction an amount equal to the Default Amount (as defined in Article III) or (ii) be treated pursuant to Section 1.6(b) hereof. “Person” shall mean any individual, corporation, limited liability company, partnership, association, trust or other entity or organization.

(b)   Adjustment Due to Merger, Consolidation, Etc. If, at any time when this Note is issued and outstanding and prior to conversion of all of the Notes, there shall be any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock of the Company shall be changed into the same or a different number of shares of another class or classes of stock or securities of the Company or another entity, or in case of any sale or conveyance of all or substantially all of the assets of the Company other than in connection with a plan of complete liquidation of the Company, then the Holder of this Note shall thereafter have the right to receive upon conversion of this Note, upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock immediately theretofore issuable upon conversion, such stock, securities or assets which the Holder would have been entitled to receive in such transaction had this Note been converted in full immediately prior to such transaction (without regard to any limitations on conversion set forth herein), and in any such case appropriate provisions shall be made with respect to the rights and interests of the Holder of this Note to the end that the provisions hereof (including, without limitation, provisions for adjustment of the Conversion Price and of the number of shares issuable upon conversion of the Note) shall thereafter be applicable, as nearly as may be practicable in relation to any securities or assets thereafter deliverable upon the conversion hereof. The Company shall not affect any transaction described in this Section 1.6(b) unless (a) it first gives, to the extent practicable, thirty (30) days prior written notice (but in any event at least fifteen (15) days prior written notice) of the record date of the special meeting of shareholders to approve, or if there is no such record date, the consummation of, such merger, consolidation, exchange of shares, recapitalization, reorganization or other similar event or sale of assets (during which time the Holder shall be entitled to convert this Note) and (b) the resulting successor or acquiring entity (if not the Company) assumes by written instrument the obligations of this Section 1.6(b). The above provisions shall similarly apply to successive consolidations, mergers, sales, transfers or share exchanges.

 

(c)  Adjustment Due to Distribution. If the Company shall declare or make any distribution of its assets (or rights to acquire its assets) to holders of Common Stock as a dividend, stock repurchase, by way of return of capital or otherwise (including any dividend or distribution to the Company’s shareholders in cash or shares (or rights to acquire shares) of capital stock of a subsidiary (i.e., a spin-off)) (a “Distribution”), then the Holder of this Note shall be entitled, upon any conversion of this Note after the date of record for determining shareholders entitled to such Distribution, to receive the amount of such assets which would have been payable to the Holder with respect to the shares of Common Stock issuable upon such conversion had such Holder been the holder of such shares of Common Stock on the record date for the determination of shareholders entitled to such Distribution.

 

 6 
 

 

(d) Adjustment Due to Dilutive Issuance. If, at any time when any Notes are issued and outstanding, the Borrower issues or sells, or in accordance with this Section 1.6(d) hereof is deemed to have issued or sold, any shares of Common Stock in connection with a financing transaction executed and made effective subsequent to the date of this Note based on a variable price formula (the “Alternative Variable Price Formula”) that is more favorable to the investor in such financing transaction than the formula for calculating the Conversion Price in effect on the date of such issuance (or deemed issuance) of such shares of Common Stock (a “Dilutive Issuance”), then immediately upon the Dilutive Issuance, the formula for the Conversion Price will be adjusted to match the Alternative Variable Price Formula. If it is unclear whether the Alternative Variable Price Formula is better or worse, then Holder, in its sole discretion, may elect at the time of such issuance whether to switch to the Alternative Variable Price Formula or not.

 

(e)  Purchase Rights. If, at any time when any Notes are issued and outstanding, the Company issues any convertible securities or rights to purchase stock, warrants, securities or other property (the “Purchase Rights”) pro rata to the record holders of any class of Common Stock, then the Holder of this Note will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such Holder could have acquired if such Holder had held the number of shares of Common Stock acquirable upon complete conversion of this Note (without regard to any limitations on conversion contained herein) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights.

 

(f)  Notice of Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price as a result of the events described in this Section 1.6, the Company, at its expense, shall promptly compute such adjustment or readjustment and prepare and furnish to the Holder of a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, upon the written request at any time of the Holder, furnish to such Holder a like certificate setting forth (i) such adjustment or readjustment, (ii) the Conversion Price at the time in effect and (iii) the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon conversion of the Note.

 

1.6                               Security. As Security for the Company's obligations contained herein and in all Notes issued by the Company to the Holder, the Holder shall be granted an unconditional first priority interest in and to, any and all property of the Company and its subsidiaries, of any kind or description, tangible or intangible, whether now existing or hereafter arising or acquired until the balance of all Notes has been reduced to $0. “Any and all property,” as described herein shall be inclusive of, but not limited to, assets reported by the Company on its SEC filings, cash, inventory, accounts receivable, intellectual property rights, equipment and property. The Investor is authorized to make all filings the Investor, in its discretion, deems necessary to evidence its security interests.

 

1.7                               Status as Shareholder. Upon submission of a Notice of Conversion by a Holder, (i) the shares covered thereby (other than the shares, if any, which cannot be issued because their issuance would exceed such Holder’s allocated portion of the Reserved Amount or Maximum Share Amount) shall be deemed converted into shares of Common Stock and (ii) the Holder’s rights as a Holder of such converted portion of this Note shall cease and terminate, excepting only the right to receive certificates for such shares of Common Stock and to any remedies provided herein or otherwise available at law or in equity to such Holder because of a failure by the Company to comply with the terms of this Note.

 

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Notwithstanding the foregoing, if a Holder has not received certificates for all shares of Common Stock prior to the tenth (10th) business day after the expiration of the Deadline with respect to a conversion of any portion of this Note for any reason, then (unless the Holder otherwise elects to retain its status as a holder of Common Stock by so notifying the Company) the Holder shall regain the rights of a Holder of this Note with respect to such unconverted portions of this Note and the Company shall, as soon as practicable, return such unconverted Note to the Holder or, if the Note has not been surrendered, adjust its records to reflect that such portion of this Note has not been converted. In all cases, the Holder shall retain all of its rights and remedies (including, without limitation, (i) the right to receive Conversion Default Payments pursuant to Section 1.3 to the extent required thereby for such Conversion Default and any subsequent Conversion Default and (ii) the right to have the Conversion Price with respect to subsequent conversions determined in accordance with Section 1.3) for the Company’s failure to convert this Note.

 

1.8                               Prepayment. Maker may prepay this Note for 135% of the outstanding amount then due in one payment.

 

1.9                               No Short Sales. No short sales shall be permitted by the Holder or its affiliates at any time while this Note is issued and outstanding in any amount.

ARTICLE II. CERTAIN COVENANTS

 

2.1                               Distributions on Capital Stock. So long as the Company shall have any obligation under this Note, the Company shall not without the Holder’s written consent (a) pay, declare or set apart for such payment, any dividend or other distribution (whether in cash, property or other securities) on shares of capital stock other than dividends on shares of Common Stock solely in the form of additional shares of Common Stock or (b) directly or indirectly or through any subsidiary make any other payment or distribution in respect of its capital stock except for distributions pursuant to any shareholders’ rights plan which is approved by a majority of the Company’s disinterested directors.

 

2.2                               Restriction on Stock Repurchases. So long as the Company shall have any obligation under this Note, the Company shall not without the Holder’s written consent redeem, repurchase or otherwise acquire (whether for cash or in exchange for property or other securities or otherwise) in any one transaction or series of related transactions any shares of capital stock of the Company or any warrants, rights or options to purchase or acquire any such shares.

 

2.3                               Borrowings. So long as the Issuer shall have any obligation under this Note, the Issuer shall not, without written notice to the holder, create, incur, assume guarantee, endorse, contingently agree to purchase or otherwise become liable upon the obligation of any person, firm, partnership, joint venture or corporation, except by the endorsement of negotiable instruments for deposit or collection, or suffer to exist any liability for borrowed money, except (a) borrowings in existence or committed on the date hereof and of which the Issuer has informed Holder in writing prior to the date hereof, (b) indebtedness to trade creditors or financial institutions incurred in the ordinary course of business or (c) borrowings, the proceeds of which shall be used to repay this Note.

 

2.4                               Sale of Assets. So long as the Company shall have any obligation under this Note, the Company shall not, without the Holder’s written consent, sell, lease or otherwise dispose of any significant portion of its assets outside the ordinary course of business. Any consent to the disposition of any assets may be conditioned on a specified use of the proceeds of disposition.

 

2.5                               Advances and Loans. So long as the Company shall have any obligation under this Note, the Company shall not, without the Holder’s written consent, lend money, give credit or make advances to any person, firm, joint venture or corporation, including, without limitation, officers, directors, employees, subsidiaries and affiliates of the Company, except loans, credits or advances (a) in existence or committed on the date hereof and which the Company has informed Holder in writing prior to the date hereof, (b) made in the ordinary course of business or (c) not in excess of $50,000.

 

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ARTICLE III. EVENTS OF DEFAULT

 

If any of the following events of default (each, an “Event of Default”) shall occur:

 

3.1    Failure to Pay Principal or Interest. The Company fails to pay the principal hereof or interest thereon when due on this Note, whether at maturity, upon acceleration or otherwise.

 

3.2    Conversion and the Shares. The Company fails to issue shares of Common Stock to the Holder (or announces or threatens in writing that it will not honor its obligation to do so) upon exercise by the Holder of the conversion rights of the Holder in accordance with the terms of this Note, fails to transfer or cause its transfer agent to transfer (issue) (electronically or in certificated form) any certificate for shares of Common Stock issued to the Holder upon conversion of or otherwise pursuant to this Note as and when required by this Note, the Company directs its transfer agent not to transfer or delays, impairs, and/or hinders its transfer agent in transferring (or issuing) (electronically or in certificated form) any certificate for shares of Common Stock to be issued to the Holder upon conversion of or otherwise pursuant to this Note as and when required by this Note, or fails to remove (or directs its transfer agent not to remove or impairs, delays, and/or hinders its transfer agent from removing) any restrictive legend (or to withdraw any stop transfer instructions in respect thereof) on any certificate for any shares of Common Stock issued to the Holder upon conversion of or otherwise pursuant to this Note as and when required by this Note (or makes any written announcement, statement or threat that it does not intend to honor the obligations described in this paragraph) and any such failure shall continue uncured (or any written announcement, statement or threat not to honor its obligations shall not be rescinded in writing) for three (3) business days after the Holder shall have delivered a Notice of Conversion. It is an obligation of the Company to remain current in its obligations to its transfer agent. It shall be an event of default of this Note, if a conversion of this Note is delayed, hindered or frustrated due to a balance owed by the Company to its transfer agent. If at the option of the Holder, the Holder advances any funds to the Company’s transfer agent in order to process a conversion, such advanced funds shall be paid by the Company to the Holder within forty eight (48) hours of a demand from the Holder.

 

3.3     Breach of Covenants. The Company breaches any covenant or other term or condition contained in this Note and any collateral documents including but not limited to the Equity Financing Agreement and the Registration Rights Agreement.

 

3.4    Breach of Representations and Warranties. Any representation or warranty of the Company made herein or in any agreement, statement or certificate given in writing pursuant hereto or in connection herewith (including, without limitation, the Purchase Agreement), shall be false or misleading in any material respect when made and the breach of which has (or with the passage of time will have) a material adverse effect on the rights of the Holder with respect to this Note or the Equity Financing Agreement and the Registration Rights Agreement.

 

3.5    Receiver or Trustee. The Company or any subsidiary of the Company shall make an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business, or such a receiver or trustee shall otherwise be appointed.

 

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3.6    Judgments. Any money judgment, writ or similar process shall be entered or filed against the Company or any subsidiary of the Company or any of its property or other assets for more than $50,000, and shall remain unvacated, unbonded or unstayed for a period of twenty (20) days unless otherwise consented to by the Holder, which consent will not be unreasonably withheld.

 

3.7    Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings, voluntary or involuntary, for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Company or any subsidiary of the Company.

 

3.8    Delisting of Common Stock. If the Company shall fail to maintain in good standing the listing of the Common Stock on the over-the-counter market operated by OTC Markets Group, Inc. or an equivalent replacement exchange, the Nasdaq National Market, the Nasdaq Small Cap Market or the New York Stock Exchange or if the Company's shall lose the "bid" price for its common stock on any given trading day.

 

3.9    Failure to Comply with the Exchange Act. If the Company shall fail to comply, in a timely manner, with the reporting requirements of the Exchange Act; and/or the Company shall cease to be subject to the reporting requirements of the Exchange Act.

 

3.10   Liquidation. Any dissolution, liquidation, or winding up of Company or any substantial portion of its business.

3.11    Cessation of Operations. Any cessation of operations by Company or Company admits it is otherwise generally unable to pay its debts as such debts become due, provided, however, that any disclosure of the Company’s ability to continue as a “going concern” shall not be an admission that the Company cannot pay its debts as they become due.

 

3.12    Maintenance of Assets. The failure by Company to maintain any material intellectual property rights, personal, real property or other assets which are necessary to conduct its business (whether now or in the future).

 

3.13    Financial Statement Restatement. The restatement of any financial statements filed by the Company with the SEC for any date or period from two years prior to the Issue Date of this Note and until this Note is no longer outstanding, if the result of such restatement would, by comparison to the original financial statement, have constituted a material adverse effect on the rights of the Holder with respect to this Note or supporting documents.

 

3.14    Reverse Splits. The Company effectuates a reverse split of its Common Stock without at least twenty (20) days prior written notice to the Holder.

3.15    Replacement of Transfer Agent. In the event that the Company proposes to replace its transfer agent, the Company fails to provide, prior to the effective date of such replacement, a fully executed Irrevocable Transfer Agent Instructions in a form as initially delivered pursuant to the Purchase Agreement (including but not limited to the provision to irrevocably reserve shares of Common Stock in the Reserved Amount) signed by the successor transfer agent to Company and the Company.

 

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3.16    Cross-Default. Notwithstanding anything to the contrary contained in this Note or the other related or companion documents, a breach or default by the Company of any covenant or other term or condition contained in any of the Other Agreements, after the passage of all applicable notice and cure or grace periods, shall, at the option of the Holder, be considered a default under this Note and the Other Agreements, in which event the Holder shall be entitled (but in no event required) to apply all rights and remedies of the Holder under the terms of this Note and the Other Agreements by reason of a default under said Other Agreement or hereunder. “Other Agreements” means, collectively, all agreements and instruments between, among or by: (1) the Company, and, or for the benefit of, (2) the Holder and any affiliate of the Holder, including, without limitation, promissory notes; provided, however, the term “Other Agreements” shall not include the related or companion documents to this Note. Each of the loan transactions between the Holder and the Company will be cross-defaulted with each other loan transaction and with all other existing and future debt of Company.

 

Further, the Company shall not be deemed in default under this Note as a result of any actual or alleged breach or default under any of the following agreements:

 

·$184,300 1 Year 6% Convertible Promissory Note dated June 30, 2017 by and between Rocky Mountain High Brands, Inc. and Jerome Grisaffi

 

·$200,150.20 6 Month 6% Convertible Promissory Note dated June 19, 2017 by and between Rocky Mountain High Brands, Inc. and Jerome Grisaffi

 

·$79,000 6 Month 6% Convertible Promissory Note dated May 19, 2017 by and between Rocky Mountain High Brands, Inc. and LSW Holdings, LLC

 

·$100,000 6 Month 6% Convertible Promissory Note dated July 11, 2017 by and between Rocky Mountain High Brands, Inc. and LSW Holdings, LLC.

 

Upon the occurrence and during the continuation of any Event of Default specified in Section 3.1 (solely with respect to failure to pay the principal hereof or interest thereon when due at the Maturity Date), the Note shall become immediately due and payable and the Company shall pay to the holder, in full satisfaction of its obligations hereunder, an amount equal to the Default Sum (as defined herein).

 

UPON THE OCCURRENCE AND DURING THE CONTINUATION OF ANY EVENT OF DEFAULT SPECIFIED IN SECTION 3.2, THE NOTE SHALL BECOME IMMEDIATELY DUE AND PAYABLE AND THE COMPANY SHALL PAY TO THE HOLDER, IN FULL SATISFACTION OF ITS OBLIGATIONS HEREUNDER, AN AMOUNT EQUAL TO: (Y) THE DEFAULT SUM (AS DEFINED HEREIN); MULTIPLIED BY (Z) TWO (2). Upon the occurrence and during the continuation of any Event of Default specified in Sections 3.1 (solely with respect to failure to pay the principal hereof or interest thereon when due on this Note upon a Trading Market Prepayment Event pursuant to Section 1.7 or upon acceleration), 3.3, 3.4, 3.6, 3.8, 3.9, 3.11, 3.12, 3.13, 3.14, and/or 3. 15 exercisable through the delivery of written notice to the Company by such Holders (the “Default Notice”), and upon the occurrence of an Event of Default specified the remaining sections of Articles III, the Note shall become immediately due and payable and the Company shall pay to the Holder, in full satisfaction of its obligations hereunder, an amount equal to the greater of (i) 150% times the sum of (w) the then outstanding principal amount of this Note plus (x) accrued and unpaid interest on the unpaid principal amount of this Note to the date of payment (the “Mandatory Prepayment Date”) plus (y)

 

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Default Interest, if any, on the amounts referred to in clauses (w) and/or (x) plus (z) any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof (the then outstanding principal amount of this Note to the date of payment plus the amounts referred to in clauses (x),(y) and (z) shall collectively be known as the “Default Sum”) or (ii) the “parity value” of the Default Sum to be prepaid, where parity value means (a) the highest number of shares of Common Stock issuable upon conversion of or otherwise pursuant to such Default Sum in accordance with Article I, treating the Trading Day immediately preceding the Mandatory Prepayment Date as the “Conversion Date” for purposes of determining the lowest applicable Conversion Price, unless the Default Event arises as a result of a breach in respect of a specific Conversion Date in which case such Conversion Date shall be the Conversion Date), multiplied by (b) the highest Closing Price for the Common Stock during the period beginning on the date of first occurrence of the Event of Default and ending one day prior to the Mandatory Prepayment Date (the “Default Amount”) and all other amounts payable hereunder shall immediately become due and payable, all without demand, presentment or notice, all of which hereby are expressly waived, together with all costs, including, without limitation, legal fees and expenses, of collection, and the Holder shall be entitled to exercise all other rights and remedies available at law or in equity.

 

If the Company fails to pay the Default Amount within five (5) business days of written notice that such amount is due and payable, then the Holder shall have the right at any time, so long as the Company remains in default (and so long and to the extent that there are sufficient authorized shares), to require the Company, upon written notice, to immediately issue, in lieu of the Default Amount, the number of shares of Common Stock of the Company equal to the Default Amount divided by the Conversion Price then in effect.

 

 

ARTICLE IV. MISCELLANEOUS

4.1                               Failure or Indulgence Not Waiver. No failure or delay on the part of the Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privileges. All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available.

 

4.2                              Notices. All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and, unless otherwise specified herein, shall be (i) personally served, (ii) deposited in the mail, registered or certified, return receipt requested, postage prepaid, (iii) delivered by reputable air courier service with charges prepaid, or (iv) transmitted by hand delivery, email, or facsimile, addressed as set forth below or to such other address as such party shall have specified most recently by written notice. Any notice or other communication required or permitted to be given hereunder shall be deemed effective (a) upon hand delivery or delivery by facsimile, with accurate confirmation generated by the transmitting facsimile machine, at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall be:

 

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If to the Company, to:

 

Rocky Mountain High Brands, Inc.

9101 LBJ Freeway, Suite 200

Dallas, TX 75243

Attn: Michael Welch, President & CEO

 

If to the Holder:

 

GHS Investments, LLC.

420 Jericho Tpke Suite 207

Jericho, NY 11753

 

4.3                               Amendments. This Note and any provision hereof may only be amended by an instrument in writing signed by the Company and the Holder. The term “Note” and all reference thereto, as used throughout this instrument, shall mean this instrument (and the other Notes issued pursuant to the Purchase Agreement) as originally executed, or if later amended or supplemented, then as so amended or supplemented.

4.4                               Assignability. This Note shall be binding upon the Company and its successors and assigns, and shall inure to be the benefit of the Holder and its successors and assigns. Notwithstanding anything in this Note to the contrary, this Note may be pledged as collateral in connection with a bona fide margin account or other lending arrangement.

 

4.5                               Cost of Collection. If default is made in the payment of this Note, the Company shall pay the Holder hereof costs of collection, including reasonable attorneys’ fees.

 

4.6                                Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of Nevada without regard to principles of conflicts of laws. Any action brought by either party against the other concerning the transactions contemplated by this Note shall be brought only in the state or federal courts located in New York City, New York. The parties to this Note hereby irrevocably waive any objection to jurisdiction and venue of any action instituted hereunder and shall not assert any defense based on lack of jurisdiction or venue or based upon forum non conveniens. The Company and Holder waive trial by jury. The prevailing party shall be entitled to recover from the other party its reasonable attorney's fees and costs. In the event that any provision of this Note or any other agreement delivered in connection herewith is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of any agreement. Each party hereby irrevocably waives personal service of process and consents to process being served in any suit, action or proceeding in connection with this Agreement or any other Transaction Document by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by, unenforceable or invalid under any jurisdiction, such provision shall as to such jurisdiction, be severable and be ineffective to the extent of such prohibition or invalidity, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction.

 

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4.7                               Certain Amounts. Whenever pursuant to this Note the Company is required to pay an amount in excess of the outstanding principal amount (or the portion thereof required to be paid at that time) plus accrued and unpaid interest plus Default Interest on such interest, the Company and the Holder agree that the actual damages to the Holder from the receipt of cash payment on this Note may be difficult to determine and the amount to be so paid by the Company represents stipulated damages and not a penalty and is intended to compensate the Holder in part for loss of the opportunity to convert this Note and to earn a return from the sale of shares of Common Stock acquired upon conversion of this Note at a price in excess of the price paid for such shares pursuant to this Note. The Company and the Holder hereby agree that such amount of stipulated damages is not plainly disproportionate to the possible loss to the Holder from the receipt of a cash payment without the opportunity to convert this Note into shares of Common Stock.

4.8                               Equity Financing Agreement. By its acceptance of this Note, each party agrees to be bound by the applicable terms of the Equity Financing Agreement and supporting documents of same date.

4.9                               Notice of Corporate Events. Except as otherwise provided below, the Holder of this Note shall have no rights as a Holder of Common Stock unless and only to the extent that it converts this Note into Common Stock. The Company shall provide the Holder with prior notification of any meeting of the Company’s shareholders (and copies of proxy materials and other information sent to shareholders). In the event of any taking by the Company of a record of its shareholders for the purpose of determining shareholders who are entitled to receive payment of any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire (including by way of merger, consolidation, reclassification or recapitalization) any share of any class or any other securities or property, or to receive any other right, or for the purpose of determining shareholders who are entitled to vote in connection with any proposed sale, lease or conveyance of all or substantially all of the assets of the Company or any proposed liquidation, dissolution or winding up of the Company, the Company shall mail a notice to the Holder, at least twenty (20) days prior to the record date specified therein (or thirty (30) days prior to the consummation of the transaction or event, whichever is earlier), of the date on which any such record is to be taken for the purpose of such dividend, distribution, right or other event, and a brief statement regarding the amount and character of such dividend, distribution, right or other event to the extent known at such time. The Company shall make a public announcement of any event requiring notification to the Holder hereunder substantially simultaneously with the notification to the Holder in accordance with the terms of this Section 4.9.

 

4.10                                Remedies. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holder, by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Note will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Note, that the Holder shall be entitled, in addition to all other available remedies at law or in equity, and in addition to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing any breach of this Note and to enforce specifically the terms and provisions thereof, without the necessity of showing economic loss and without any bond or other security being required. 

 

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IN WITNESS WHEREOF, Holder and Company have caused this Second Amended and Restated Note to be signed in its name by its respective duly authorized officer:

 

 

GHS Investments, LLC

 

 

By: Mark Grober

Mark Grober, Member

 

 

Rocky Mountain High Brands, Inc.

 

 

By: /s/ Michael R. Welch

Michael R. Welch, President & CEO

 

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Consulting Service Agreement

 

This Consulting Service Agreement (this “Agreement”) is made and entered into the 17th day of March 2019 by Rocky Mountain High Brands (Company) and Mihok & Associates, Inc. (the “Consultant Service”) a Pennsylvania Corporation with offices at 39 Fairway Drive, Exeter, PA 18643

 

WITNESSETH

 

WHEREAS, the Consultant Service and the Company deem it in their best interests that the Company retain the Consultant Service in connection with the strategic development of the Company’s beverage business.

 

NOW, THEREFORE, in consideration of the mutual promises, covenants and obligations in this Agreement, the receipt and sufficiency of which are hereby acknowledged, the Company and the Consultant Service agree to the following:

 

1) Retention of Service-The Company agrees to retain the Consultant, and the Consultant Service agrees to serve the Company, upon the following terms and conditions.

 

2) Term-The Term for which the Consultant Service shall be March 31, 2019 through September 30, 2019. The Consultant Service shall perform the duties in Section 3 to the best of their abilities. The Company may, at its sole option terminate this agreement at any time by providing thirty days written notice to Consultant Service with no further compensation being due after the termination.

 

3) Duties of Consultant-Mihok & Associates, Inc. agrees that it shall provide consulting services with respect to the Sales, Marketing and Distribution of the Company’s Products including the following:

1) Call on New York City area Distributors for the Company Brands distribution.

2) Call on Customers in New York City area for the Company Brands products.

3) Assist on Competitive Analysis, Packaging, Pricing, etc.

 

4) Compensation-In consideration of the services to be rendered to the Company

pursuant to this agreement, the monthly compensation shall be 5000.00 paid bimonthly on the 15th and last day of the month via electronic funds transfer. Compensation shall immediately cease if this agreement is terminated by Company, or after term has expired. Any unpaid amount from the date of the last payment through the termination date will be prorated and paid upon termination.

 

5) Expenses-The Company shall pay all customary business expenses provided by the Consultant Service normally associated with developing the Company’s Business. The Company shall also pay for “other” expenses including samples shipping, trade show costs, etc. but again only those expenditures which have been pre-approved in writing. Consultant Service shall endeavor to identify in writing such anticipated expenses as far in advance as possible.

 

  
 

 

6) Nature of Services-The parties hereto agrees that the services provided by the Consultant Service hereunder shall be advisory in nature and that all decisions relating to the policies and procedures of the Company shall be made solely by the Company

 

7) Relationship of the Parties-The parties agree that the Consultant Service shall provide the services specified hereunder as an independent contractor, and nothing contained in this Agreement shall be construed to create a joint venture or a partnership between the Consultant Service and the Company and neither party shall have the authority to enter into any contracts or agreements on behalf of the other or bind the other in any way. The parties further agree that since the Consultant Service will be an independent contractor rather than an employee of the Company under this Agreement, the Consultant Service shall be responsible for his own life and health insurance, retirement and death benefits.

 

8) Confidentiality-The Consultant Service agrees to receive any confidential and proprietary information of the Company in confidence and not to disclose such information to others, except pursuant to the performance of his duties specified hereunder, unless and until such information has become public knowledge or has come into the possession of such others by legal and proper means.

 

9) Binding Effect-This agreement shall be binding upon and inure to the benefit of the parties and their respective heirs, legal representatives, executors, administrators, successors, and assigns.

 

10) Entire Agreement-This Agreement constitutes the entire agreement between the parties and supersedes and cancels any prior agreements, representations, warranties or communications, whether oral or written, between the Consultant Service and the Company relating to the transactions contemplated hereby or the subject matter herein. Neither this Agreement nor any provision hereof may be changed, waived, discharged, or terminated, except by an agreement in writing signed by the party against whom or which the enforcement of such change, waiver, discharge or termination is sought.

 

11) Waiver-Any failure on the part of either party to comply with with any of its obligations, agreements, or conditions under this Agreement may be waived by the party to which such compliance is owed. No waiver of any provision of this Agreement shall be deemed, or shall constitute a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver.

 

12) Termination of Contract- In the event of termination, the parties shall be required to fulfill their obligations as provided in Paragraph 4 of this agreement.

 

13) Severability- If anyone or more of the provisions of this Agreement shall be determined to be invalid, illegal, or unenforceable in any respect for any reason, the validity, legality, and enforceability of any such provision in every other respect and of the remaining provisions of this Agreement shall not be impaired in any way.

 

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14) Non- Assignment- This Agreement may not be assigned by either party without the prior written consent of the other party.

 

15) Headings- The headings used in this Agreement have been inserted for the convenience of reference only, are not part of this Agreement and shall not affect the meaning or interpretation of this Agreement.

 

16) Governing Law- This Agreement shall be governed by and construed in accordance with the laws of the State of Texas, and the sole an exclusive jurisdiction and venue for any disputes relating to or arising under this Agreement shall be with the state and federal courts in Dallas County, Texas.

 

17) Counterparts- This Agreement may be executed simultaneously in two or more counterparts, each of which shall be an original and all of which together shall constitute one and the same, agreement.

 

18) Indemnity

A) The Consultant Service, at its sole expense, shall indemnify, hold harmless and defend the Company, its shareholders, directors, officers, employees, and clients (“Indemnified Parties”) from and against any and all claims, liabilities, damages, expenses (including, without limitation, attorney’s fees and other costs), and any other losses sustained by any Indemnified Parties that arise out of or the result from (a) conduct, or omission of Consultant Service or its personnel (“Personnel”); (b) Consultant Service’s or Personnel breach of or failure to perform any obligation under this Agreement (c) the inaccuracy or breach of any representation or warranty in this Agreement; or (d) any violation by Consultant Service or Personnel. Consultant Service’s Indemnifications obligations set forth in this Section shall not in any way limit, reduce, or alter in any of Consultant Service’s other obligations to Company and shall not preclude Company from obtaining any other relief or damages from Consultant Service, whether at law, under this Agreement, or in equity.

 

B) The Company, at its sole expense, shall indemnify, hold harmless and defend the Consultant Service, its shareholders, directors, officers, employees, and clients (“Indemnified Parties”) from and against any and all claims, liabilities, damages, expenses (including, without limitation, attorney’s fees and other costs), and any other losses sustained by any Indemnified Parties that arise out of or the result from (a) conduct, or omission of the Company or its personnel (“Personnel”); (b) The Company’s or Personnel breach of or failure to perform any obligation under this Agreement (c) the inaccuracy or breach of any representation or warranty in this Agreement; or (d) any violation by the Company’s or Personnel. Consultant Service’s Indemnifications obligations set forth in this Section shall not in any way limit, reduce, or alter in any of the Company’s other obligations to Consultant Service’s and shall not preclude.

Consultant Service’s from obtaining any other relief or damages from the Company, whether at law, under this Agreement, or in equity.

 

 3 
 

 

19) Notices- Any notice required, permitted or desired to be given pursuant to any of the provisions of this agreement shall be deemed to have been sufficiently given or served for all purposes if delivered in person or sent by certified mail, return receipt requested, postage and fees prepaid, or by national overnight delivery prepaid service to the parties at their addresses set forth above. Copies of notices to the Company or the Consultant Service shall be sent to the attention of the party or parties executing this Agreement.

 

IN WITMESS WHEREOF, each party hereto has executed or caused to be executed this Agreement on its behalf, all on the day and year first above written.

 

 

Michael Welch

President, CEO & Chairman

Rocky Mountain High Brands, Inc.

Email: [email protected]

 

 

By: /s/ Michael Welch

 

Date: 03/17/2019

 

 

By: /s/ Joseph E. Mihok

 

Date: 03/17/2019

Joseph E. Mihok

President

Mihok & Associates, Inc.

Email: [email protected]

 

 4 
 

 

 

 

 

 

 

 

 

 

 

 

 

CONSULTING AGREEMENT

 

 

This Agreement is made between Rocky Mountain High Brands, Inc., 9101 LBJ Freeway, Suite 200, Dallas, Texas 75243 and E & E Communications, 8604 Gardenia Dr., Denton, TX. 76207. This agreement is made and entered into on February 22, 2019.

 

AGREEMENTS

 

1.E & E Communications will provide to Rocky Mountain High Brands the following services on an as needed basis:

 

·Assist with the preparation of news releases.
·Pitch Company stories to the media, including national, feature and trade press.
·Develop story lines to make the Company attractive to the major media and financial community. Effectively communicate the non-financial factors driving performance and value.
·Prepare targeted materials for the media and potential investors. Assist in continuous communications that emphasize the key strengths and competitive advantages of the Company’s management and business plan.
·Prepare a Corporate Profile for the investment community.
·Handle shareholder calls and e-mails, effectively communicating the strategic value of corporate actions and accomplishments.
·Assist in the development of strategic investor communications to create shareholder value. Assist in defining and executing these strategies.
·Serve as a conduit between the Company and the investment community, providing feedback in both directions. Advise management on major issues impacting valuation.
·Help attract individual investors who believe in Rocky Mountain High Brands.
·Advise management on what creates and destroys value. Assist in quantifying the likely market reaction to the Company’s actions.
·Assist in aligning the Company’s IR and PR programs to its strategic priorities.

 

   
 

 

COMPENSATION

 

1.Rocky Mountain High Brands will pay E & E Communications $2000 per month for the work described above, payable upon receipt of an invoice from E & E Communications.

 

2.This agreement can be cancelled by either party within five days upon notice.

 

 

 

  /s/ Paul Knopick  

/s/ Michael Welch Sr. 

 
         
  Paul Knopick   Michael Welch Sr.  
  Principal   President & CEO  
  E & E Communications   Rocky Mountain High Brands, Inc.  

 

 

 2 
 

 

Subsidiaries of the Registrant

 

Wellness For Life Colorado, Inc. (f/k/a Rocky Mountain Hemp Company and Wellness For Life, Inc.), an active Colorado corporation

Eagle Spirit Land & Water Company, an active Oklahoma corporation

Rocky Mountain High Water Company, LLC, an active Delaware limited liability company

FitWhey Brands Inc., an active Nevada corporation

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

Smarterita, LLC, an inactive Texas limited liability company

 

 

 

CERTIFICATIONS

 

I, Michael Welch, certify that;

 

1.   I have reviewed this annual report on Form 10-K for the year ended December 31, 2018 of Rocky Mountain High Brands, Inc. (the “registrant”);

 

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a.   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b.   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c.   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d.   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a.   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b.   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: April 15, 2019

 

/s/ Michael Welch

By: Michael Welch

Title: Chief Executive Officer

CERTIFICATIONS

 

I, Jens Mielke, certify that;

 

1.   I have reviewed this annual report on Form 10-K for the year ended December 31, 2018 of Rocky Mountain High Brands, Inc. (the “registrant”);

 

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a.   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b.   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c.   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d.   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a.   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b.   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: April 15, 2019

 

Jens Mielke

By: Jens Mielke

Title: Chief Financial Officer

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

 

In connection with the annual Report of Rocky Mountain High Brands, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission (the “Report”), I, Michael Welch, Chief Executive Officer of the Company, and I, Jens Mielke, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

1.The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

 

2.The information contained in the Report fairly presents, in all material respects, the consolidated financial condition of the Company as of the dates presented and the consolidated result of operations of the Company for the periods presented.

 

 

By: /s/ Michael Welch
Name: Michael Welch
Title: Principal Executive Officer
Date: April 15, 2019

 

By: /s/ Jens Mielke
Name: Jens Mielke
Title: Principal Financial Officer
Date: April 15, 2019

 

This certification has been furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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