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EX-32.1 - Rocky Mountain High Brands, Inc.ex32_1.htm
EX-31.2 - Rocky Mountain High Brands, Inc.ex31_2.htm
EX-31.1 - Rocky Mountain High Brands, Inc.ex31_1.htm
EX-10.37 - Rocky Mountain High Brands, Inc.ex10_37.htm
EX-10.36 - Rocky Mountain High Brands, Inc.ex10_36.htm
EX-10.35 - Rocky Mountain High Brands, Inc.ex10_35.htm
EX-10.34 - Rocky Mountain High Brands, Inc.ex10_34.htm
EX-10.33 - Rocky Mountain High Brands, Inc.ex10_33.htm
EX-10.32 - Rocky Mountain High Brands, Inc.ex10_32.htm
EX-10.31 - Rocky Mountain High Brands, Inc.ex10_31.htm
EX-10.1 - Rocky Mountain High Brands, Inc.ex10_1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act

of 1934 for the Fiscal Year Ended June 30, 2017

 

[  ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _________ to ________
   

Commission File Number: 000-55609

 

Rocky Mountain High Brands, Inc.

(Exact name of registrant as specified in its charter)

 

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

(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 check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [ ] Accelerated filer [ ]

 

Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the 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 $24,827,241 as of December 31, 2016, using the closing price of $0.044 per share.

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 793,266,046 of as of October 10, 2017.

 

 1 

 

 

 

TABLE OF CONTENTS

 

 

PART I

 

  Page
Item 1.  Business 3
Item 1A. Risk Factors 9
Item 2.  Properties 9
Item 3.  Legal Proceedings 10
Item 4.  Mine Safety Disclosures 11
   
PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 11
Item 6.  Selected Financial Data 13
Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations 13
Item 7A.  Quantitative and Qualitative Disclosures about Market Risk 24
Item 8.  Financial Statements and Supplementary Data 24
Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 25
Item 9A. Controls and Procedures 25
Item 9B. Other Information 26
   
PART III
   
Item 10.  Directors, Executive Officers and Corporate Governance 26
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

 

 

 2 

 

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)

 

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

 

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

 

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

 

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

 

 3 

 

RMHB is a consumer goods company specializing in brand development of health conscious, hemp-infused food and beverage products. The Company currently markets a lineup of five naturally flavored hemp-infused beverages (Citrus Energy, Black Tea, Mango Energy and Lemonade) and a low-calorie hemp-infused Coconut Lime Energy drink. The Company also offers hemp-infused 2oz. Mango Energy Shots and Mixed Berry Energy Shots. In August 2016 the Company launched Eagle Spirit Spring Water, a line of naturally high alkaline spring water.

 

After developing the beverage products, RMHB completed its first production run in February of 2015. Since then RMHB has had production runs for hemp-infused beverages totaling over 3,900,000 cans. Each beverage contains approximately 50mg (our first production run) to 100mg of hempseed extract and all-natural ingredients. The hemp-infused products are shelf stable (no refrigeration necessary) with a shelf life of two years.

 

During fiscal year 2017, the Company also produced energy shots and Relaxation Brownies.

 

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

 

In March and April 2017, the Company completed additional production runs of its more popular hemp-infused beverages, Citrus Energy and Mango Energy.

 

In August 2017, the Company sold its remaining inventory of Smarterita wine-based beverages. There are currently no plans to resume production of this alcoholic beverage.

 

Corporate History

 

Rocky Mountain High Brands Inc. 10/23/2014 to present – Articles of Amendment filed with the State of

Nevada

 

f/k/a Totally Hemp Crazy Inc. 07/17/2014 to 10/23/2014 – Articles of Amendment filed with the State of

Nevada

 

f/k/a Republic of Texas Brands Incorporated 11/2011 to 07/17/2014 – Articles of Amendment filed with the State of

Nevada

 

f/k/a Legends Food Corporation 05/2011 to 11/2011 – 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.

 

 4 

 

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

 

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

 

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

 

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

 

Investments

 

On July 17, 2015, the Company acquired all of the assets of Dollar Shots Club, LLC. The purpose of the acquisition was to acquire formulas developed by Dollar Shots Club, LLC for inclusion in the Company’s hemp-based energy shots, which were being developed at the time.

 

The Company issued 2,000,000 shares of its common stock to seven individuals who owned 100% of membership units in Dollar Shots Club, LLC.  The investment in Dollar Shots Club, LLC was recorded on the Company’s books at a price of $166,000, which was based on the closing price of the Company’s common stock on the day the stock was issued.   The assets purchased included the trademark and other intellectual property of the LLC, inventory, all websites and ecommerce sites, goodwill, formulas and all other general intangibles (the “assets”).

 

On September 18, 2015, the Company sold these assets to Dollar Shots Club, Inc. in exchange for 5,000,000 shares of Dollar Shots Club, Inc. common stock. The Company retained the rights to the formulas to the shots so that it could develop a similar hemp-infused energy version of them to be sold under Rocky Mountain High Brands. To the best of the Company’s knowledge, there is no relationship between the Dollar Shots Club entities. The Company fully impaired this investment during the year ended June 30, 2016.

 

 Trademarks Related to Our Business

 

•  Rocky Mountain High Energy Drink

•  Smarterita

•  Totally Hemp Crazy

•  Blue Leaf

•  Rock the Road Trip

•  Eagle Sprint

 

Current Product Offerings

 

Under its Rocky Mountain High Brands name, the Company currently markets a lineup of five hemp-infused 16 oz. beverages including:

 

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

 

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

 

 5 

 

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

 

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

 

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

 

The Company is also currently marketing a two-flavor lineup of energy shots.

 

The Company plans to sell its remaining inventory of these products during the first half of fiscal year 2018. In order to execute this plan, the Company will offer larger discounts to distributors and retailers and higher commissions to its broker network, likely resulting in lower gross profit margins for the first and second quarter of 2018.

 

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

 

Strategic Update and Planned Product Offerings

 

The Company has recently updated its long-term strategic plan. Management’s goal is to become the category leader in the hemp-infused beverage market, a segment of the functional beverage market. Functional beverages, or beverages that convey health benefits, are the fastest growing segment within the beverage market.

 

The Company is developing four newly reformulated, sugar-free, non-energy, hemp-infused beverage flavors. In addition to the new formulas, the beverages will feature 12 oz. cans, an all-new look and will replace all current hemp-infused beverage offerings. Two of the four beverage flavors will be carbonated. Flavor choices will be similar to past offerings. Management plans to begin production on the new beverages in February 2018. Marketing will focus on the health benefits of hemp, including Omega-3 and Omega-6 fatty acids, amino acids, and natural, plant-based fiber.

 

The Company is also reviewing its other product offerings, but there are no immediate plans to produce additional Relaxation Brownies or energy shots.

 

The Board of Directors is currently evaluating its plans with regard to the Eagle Spirit Water business.

 

The Company also plans to hire a Vice President of Sales and a Director of Marketing during fiscal year 2018.

 

Sales Channels

 

The Company depends upon a network of brokers and distributors to represent its product in the market. During its first year of operation, the Company signed twenty-four distributors across the country. For the year ended June 30, 2017, the Company’s two largest distributors accounted for 50% and 7% of sales, respectively.

 

The various distribution channels differ in costs, customer relationships, complexity and the resources required to operate the channel. We strategically build sales distribution channels to match and reinforce the goals and objectives of our marketing plan. To increase competitiveness and sales, we have a specific sales strategy in order to maximize revenues that includes the following:

 

Direct Selling

 

We utilize direct sales to retailers, which eliminates the delays and additional expense of a standard distribution channel. In this way we are better able to preserve more revenue, and protect capital under the control of the company. Direct selling to certain segments supports our marketing plan that has identified, researched and segmented certain final customers.

 

 6 

 

We utilize Amazon and our two proprietary websites – www.liverockymountainhigh.com and www.eaglespiritspringwater.com – to sell directly to consumers.

 

Wholesale Distribution

 

Another sales channel includes wholesale distribution. This method is designed for our potential customers who are widely dispersed. Wholesale distribution leaves the selling to wholesalers and retailers specialized in retail sales, which enables us to focus on production. Product is sold to distributors under a variety of terms from cash to credit terms.

 

Beverage Brokers

 

Beverage brokers develop local, regional, and national product campaigns with attention to long-term sustainable success. They assist in matching brands with the needs of an evolving market. Scheduling appointments, making presentations, securing product approval, and shelf resets, have added greatly to the time line from ship to shelf, making the role of the beverage broker all the more important. Beverage brokers represent a cost-efficient method of doing business for our drink brands. A commission-based beverage broker is a variable cost directly tied to the volume sold.

 

The Company is re-assessing its go-to-market strategy. Specifically, channels of distribution and distributor and broker agreements are being reviewed. Going forward, management plans to focus on key domestic markets.

 

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. We have not executed a new contract with MBA Beverage or any other outsourced production coordinator.

 

Blues City Brewery, LLC (“Blues City”) in Memphis, Tennessee, a subsidiary of City Brewing Company, LLC, has completed all of beverage production and canning to-date. 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 stores finished product at Blues City, awaiting sale to our distributor network. The Company does not contract with Blues City directly.

 

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

 

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

 

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

 

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Since our hemp-based products are derived from industrial hemp containing a tetrahydrocannabinol (“THC”) level of 0.3% or less, they are not subject to the Controlled Substances Act. The express language of the federal Controlled Substances Act (“CSA”) provides that hemp stalk, fiber, oil, and sterilized seed are not controlled as marijuana. Thus, products containing industrial hemp – defined as the cannabis sativa plant containing a THC level of 0.3% or less - have been sold legally in every state in the U.S. for decades. In 2004, the U.S. Court of Appeals invalidated U.S. Drug Enforcement Administration (“DEA”) regulations that would have banned the manufacture and sale of edible products made from hemp seed and oil. Hemp Industries Ass’n v. Drug Enforcement Administration, 357 F.2d 1012 (9th Cir. 2004). For this reason, U.S. companies may import hemp stalk, fiber, seed and oil, to trade in it, and to use it in the manufacture of products. The Company purchases imported hemp seed extract and uses it in the manufacture of its products. The Company does not have plans to grow marijuana, distribute marijuana or infuse our food or beverage products with marijuana, as defined in the Controlled Substance Act.

 

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.

 

Possession of hemp in the United States is legal, including possession of the sterilized seed, hemp seed oil, hemp seed flour, hemp seed cake, hulled hemp seeds, hemp clothing, hemp fabrics, hemp fuel or any other product made from industrial hemp. Because the industrial hemp plant is the same species as marijuana, until recently, it has been illegal for U.S. farmers to grow the plant itself. However, in the federal Agricultural Act of 2014, Congress specifically exempted from the CSA cultivation of industrial hemp under agricultural pilot programs authorized by state law.

 

Employees and Independent Contractors

 

The Company currently has five officers and two 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 10/A filed September 29, 2016 to review our current risk factors.

 

Item 2. Properties

At present, we do not own any real property.  As of June 30, 2017, 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.

 

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

 

Water Event, Carrollton, Texas – we currently 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.

 

Blues City Brewery, Memphis, Tennessee – we currently lease space for hemp-infused beverages.

 

Our monthly rents at both locations vary 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

 

Claims Against Donna Rayburn

 

RMHB and Rayburn entered into a convertible promissory note dated February 2, 2015 for the original principal amount of $165,000 (with a $5,000 original issue discount). On August 29. 2015, RMHB paid to Rayburn $197,774, representing return of principal and interested earned during the life of the loan. On February 19, 2016, Rayburn issued an additional demand of interest and penalties totaling $99,488. Rayburn has charged $137,262 in interest and penalties on a $160,000 loan for one year and 17 days for an effective annual interest rate of 85.77%. As additional consideration for the note, RMHB was required to issue a warrant to Rayburn for 10,000,000 of common stock.

 

RMHB has claims against Rayburn for violation of Florida Usury Laws. RMHB will seek a cancellation of the note and additional monetary recovery in the total amount paid to Rayburn, plus additional recovery for all usurious interest charged. RMHB will also seek to void the warrant for 10,000,000 shares of common stock, which was issued under a voidable note. The amount which RMHB will seek from Rayburn is in excess of $300,000.

  

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

Meadows claims a breach of an exchange agreement dated November 3, 2015. RMHB has denied the breach. Meadows has demanded that RMHB remove him as a Control Person under RMHB’s OTC Markets Disclosure Statement as of December 31, 2015 filed on January 29, 2016. Meadows has rejected the interest payment under the exchange agreement dated January 30, 2016. He has not given an explanation of his rejection. Meadows also demands the exchange of the Series C Preferred back to the original $1,500,000 convertible note.

 

Meadows has initiated arbitration claiming notice of an Arbitration Claim against RMHB. RMHB has objected to this claim, as well as to the arbitration process itself. Meadows seeks damages of $2,947,094. He has further demanded that RMHB comply with an Agreement dated November 16, 2015 which is a part of the litigation described in the disclosure above. This agreement, which was a requirement of Meadows to execute the Exchange Agreement, requires the Company to issue warrants for common stock of 110,760,000 for not redeeming the Series C Preferred Shares by March 24, 2016.

 

On April 4, 2016, RMHB engaged the law firm of Allred Wilcox & Hartley PLLC to act as counsel in defending these claims.

 

As a result of the arbitration, RMHB filed suit in Florida, Eighteenth Judicial Circuit Court of Seminole County, Florida, Rocky Mountain High Brands, Inc. v. Roy Meadows, David Meadows et al, Case No. 2016-CA-000958-15-W.

 

The Company filed suit for an injunction against continuation of the Meadows Arbitration. The Meadows Arbitration hearing currently has no date for commencement of the Arbitration hearing. Shortly after the suspension of the Arbitration hearing, on April 20, 2016, false, malicious, and defamatory allegations were asserted by the Shareholder Alert inappropriately released by the Law Office of A.A. McClanahan, Meadow’s attorney.

 

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

 

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

 

The Amended Suit will deal with the following:

 

RMHB has asserted usury claims in connection with $1,500,000 demand convertible note referenced below in the section pertaining to the Meadows Arbitration Claim. RMHB seeks unspecified monetary damages in connection with the Meadows Note, and further seeks cancellation of warrants for 41,454,851 and 13,641,974 shares of common stock issued to Meadows in connection with the Meadows Note and cancellation of the Meadows Note.

 

 10 

 

During the six months ended December 31, 2015, the Company issued 68,220,350 shares of common stock for the conversion of $104,220 of convertible debt to Roy Meadows and Trinexus, Inc. prior to executing the exchange agreement to Series C preferred stock.

 

RMHB believes that as a result of Meadows’ actions in this suit, the Arbitration is effectively waived and that the Court in Seminole County, Florida will resolve this matter.

 

Meadows has filed a counter claim in this suit for the damages he asserted in the arbitration claim. He has also filed for relief under elderly laws of Florida.

 

192nd Judicial District Court of Dallas County Texas, filed February 16, 201, DC-17-02058. Rocky Mountain High Brands, Inc. v. Dewmar International BMC, Inc. RMHB filed suit against Dewmar for breach of contract and for an accounting. RMHB is in the process of obtaining a default judgment against Dewmar for its failure to file an answer to the suit.

 

134th Judicial District Court of Dallas County, Texas, filed April 28, 2017. Rocky Mountain High Brands, Inc. v Lyonpride Music, LLC. RMHB filed suit against Lyonpride for fraud and for declaratory relief with respect to a contract between the parties. RMHB seeks monetary damages against said Defendant.

 

134th Judicial District Court of Dallas County, Texas. Filed June 26, 2017. Rocky Mountain High Brands, Inc. v Statewide Beverage Company, Inc. RMHB has filed suit for breach of contract, common law fraud and declaratory relief.

 

Los Angeles Superior Court, BC669367, filed July 24, 2017. Statewide Beverage Company, Inc. v. Rocky Mountain High Brands, Inc. Statewide filed a breach of contract claim, dealing with the same fact issues in the above case of RMHB v Statewide. RMHB still has not been served in this case.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Unregistered Sales of Equity Securities and Use of Proceeds

Date  Name  Shares Issued  Issue Price  Description  Exemption
11/3/2016   Crackerjack Classic LLC   750,000   $0.0067   Shares Sold   Rule 506 
11/11/2016   Universal Consulting LLC   4,870,130    0.0010   Exercise of Warrants   Rule 506 
11/30/2016   Michael R Welch   2,500,000    0.0100   Note Payable Conversion   Rule 506 
11/30/2016   Universal Consulting LLC   1,012,055    0.0100   Note Payable Conversion   Rule 506 
11/30/2016   Universal Consulting LLC   5,099,727    0.0100   Note Payable Conversion   Rule 506 
11/30/2016   Ken Radcliffe   1,023,014    0.0100   Note Payable Conversion   Rule 506 
11/30/2016   Dennis Radcliffe   10,933,699    0.0010   Note Payable Conversion   Rule 506 
11/30/2016   Jerome Grisaffi   3,776,196    0.0100   Note Payable Conversion   Rule 506 
11/30/2016   Christian Vega   1,538,122    0.0100   Note Payable Conversion   Rule 506 
11/30/2016   La Dolce Vida Trust   5,968,298    0.0100   Note Payable Conversion   Rule 506 
11/30/2016   Charles Smith   1,547,591    0.0100   Note Payable Conversion   Rule 506 
11/30/2016   ClubsCorp, Inc.   20,000    0.0010   Services Rendered   Section 4(2) 
11/30/2016   Allred, Wilcox & Hartley PLLC   502,375    0.0300   Services Rendered   Section 4(2) 
12/2/2016   Jesse Guzman   2,000,000    0.0170   Shares Sold   Rule 506 
12/7/2016   Joshua Shipkowski   500,000    0.0348   Services Rendered   Section 4(2) 
12/7/2016   Christian Vega   350,000    0.0348   Services Rendered   Section 4(2) 
12/7/2016   Kathy Fernandez   350,000    0.0348   Services Rendered   Section 4(2) 
12/7/2016   JoAnn Flaherty   350,000    0.0348   Services Rendered   Section 4(2) 
12/7/2016   Nicholas Grisaffi   300,000    0.0348   Services Rendered   Section 4(2) 
12/7/2016   Charles Smith   2,500,000    0.0348   Services Rendered   Section 4(2) 
12/7/2016   David Seeberger   700,000    0.0348   Services Rendered   Section 4(2) 
12/7/2016   Jens Mielke   700,000    0.0348   Services Rendered   Section 4(2) 
12/7/2016   Robert Smith   350,000    0.0348   Services Rendered   Section 4(2) 
12/7/2016   Rick Depp   350,000    0.0348   Services Rendered   Section 4(2) 
12/7/2016   Michael Welch   755,000    0.0348   Services Rendered   Section 4(2) 
12/7/2016   Jerome Grisaffi   700,000    0.0348   Services Rendered   Section 4(2) 
12/7/2016   Winton Morrison   350,000    0.0348   Services Rendered   Section 4(2) 
12/7/2016   Jerry Grisaffi   3,069,736    0.0348   Services Rendered   Section 4(2) 
12/7/2016   Jens Mielke   1,135,353    0.0348   Services Rendered   Section 4(2) 
12/8/2016   Tomas Gonzalez   500,000    0.0170   Shares Sold   Rule 506 
12/9/2016   Alain Salem   5,000,000    0.0100   Shares Sold   Rule 506 
12/13/2016   Michael Welch   562,800    0.0100   Note Payable Conversion   Rule 506 
12/13/2016   John Stote   325,000    0.0200   Shares Sold   Rule 506 
12/15/2016   Eagle Manufacturing Solutions   1,445,588    0.0170   Shares Sold   Rule 506 
12/15/2016   Eason L Wright   1,239,706    0.0170   Shares Sold   Rule 506 
12/22/2016   1910625 Alberta Limited   6,800,000    0.0500   Note Payable Conversion   Rule 506 
12/28/2016   Thomas Morrow   250,000    0.0200   Shares Sold   Rule 506 
12/30/2016   Stephen Harris   75,000    0.0373   Services Rendered   Section 4(2) 
12/30/2016   Stacy Thornburg   75,000    0.0373   Services Rendered   Section 4(2) 
12/30/2016   Lilly Li   5,000,000    0.0010   Exercise of Warrants   Rule 506 
1/3/2017   Louis G. Walz   588,236    0.0170   Shares Sold   Rule 506 
1/3/2017   Ruth Kerico   500,000    0.0200   Shares Sold   Rule 506 
1/3/2017   Bruce Wunsch   100,000    0.0170   Services Rendered   Section 4(2) 
1/3/2017   Eagle Manufacturing Solutions   491,176    0.0170   Services Rendered   Section 4(2) 
1/3/2017   Patricia Ann Wright   150,000    0.0170   Services Rendered   Section 4(2) 
1/3/2017   Eason Wright   500,000    0.0170   Services Rendered   Section 4(2) 
1/3/2017   John Jay Saldi   100,000    0.0170   Services Rendered   Section 4(2) 
1/3/2017   Earl Pontillo   250,000    0.0200   Shares Sold   Rule 506 
1/3/2017   Ann M. Wieringa   900,000    0.0170   Shares Sold   Rule 506 
1/4/2017   Ann M. Wieringa   900,000    0.0300   Shares Sold   Rule 506 
1/4/2017   Vista Capital Investments   10,000,000    0.0200   Shares Sold   Rule 506 
1/6/2017   Eagle Manufacturing Solutions   1,588,236    0.0170   Shares Sold   Rule 506 
1/6/2017   Leroy Wheeler   185,185    0.0270   Shares Sold   Rule 506 
1/6/2017   David Economon   200,000    0.0170   Shares Sold   Rule 506 
1/6/2017   Robert & Kimberly Payne   200,000    0.0250   Shares Sold   Rule 506 
1/6/2017   Tammie L. Borders   200,000    0.0250   Shares Sold   Rule 506 
1/6/2017   Fred and Linda Borders   600,000    0.0250   Shares Sold   Rule 506 
1/12/2017   ValueCorp Trading Company   1,000,000    0.0200   Shares Sold   Rule 506 
1/17/2017   John R Anderson   166,667    0.0300   Shares Sold   Rule 506 
1/17/2017   Muleshoe Ranch   166,667    0.0300   Shares Sold   Rule 506 
1/17/2017   Steve Gill (Shelving Exchange)   166,667    0.0300   Shares Sold   Rule 506 
1/18/2017   David Economon   350,000    0.0200   Shares Sold   Rule 506 
1/20/2017   Howard Bruckner   200,000    0.0500   Shares Sold   Rule 506 
1/20/2017   Brooks Goodson   300,000    0.0500   Shares Sold   Rule 506 
1/20/2017   Robert & Kimberly Payne   100,000    0.0500   Shares Sold   Rule 506 
1/23/2017   Ronnie Neu   555,556    0.0270   Shares Sold   Rule 506 
1/23/2017   Patricia Ann Wright   285,714    0.0350   Shares Sold   Rule 506 
1/23/2017   Crackerjack Classic LLC   1,500,000    0.0010   Exercise of Warrants   Rule 506 
1/24/2017   Arthur Rezac   100,000    0.0500   Shares Sold   Rule 506 
1/27/2017   Patrick Dennehy   100,000    0.0500   Shares Sold   Rule 506 
2/1/2017   William Penz   200,000    0.0500   Shares Sold   Rule 506 
2/15/2017   Yael Moyal   2,571,429    0.0350   Shares Sold   Rule 506 
2/17/2017   Richard B Main   222,222    0.0450   Shares Sold   Rule 506 
2/22/2017   Lily Li   10,000,000    0.1150   Services Rendered   Section 4(2) 
2/24/2017   Thomas O. Layman   200,000    0.0500   Shares Sold   Rule 506 
2/27/2017   Allred, Wilcox, & Hartley PLLC   181,600    0.0840   Services Rendered   Section 4(2) 
2/27/2017   Yeal Moyal   1,285,714    0.0350   Shares Sold   Rule 506 
2/27/2017   Kathy Fernandez   100,000    0.0200   Shares Sold   Rule 506 
2/27/2017   Mark Ussery   100,000    0.1100   Services Rendered   Section 4(2) 
2/27/2017   Terry Niedecken   100,000    0.1100   Services Rendered   Section 4(2) 
3/1/2017   Kathy Fernandez   505,096    0.0100   Note Payable Conversion   Rule 506 
3/27/2017   EPIC Group One   11,000,000    0.0850   Services Rendered   Section 4(2) 
3/31/2017   Jens Mielke   357,143    0.0420   Services Rendered   Section 4(2) 
3/31/2017   Michael Welch   206,044    0.0420   Services Rendered   Section 4(2) 
3/31/2017   David Seeberger   137,363    0.0420   Services Rendered   Section 4(2) 
4/7/2017   Small Cap Voice   300,000    0.0877   Services Rendered   Section 4(2) 
6/29/2017   Morris Rafi   1,534,089    0.0349   Note Payable Conversion   Rule 506 
8/23/2017   Universal Consulting LLC   3,147,288    0.0100   Note Payable Conversion   Rule 506 
9/15/2017   Homie Doroodian   3,093,640    0.0177   Note Payable Conversion   Rule 506 

 11 

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 most recent fiscal years, 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.

 

  High Sale Low Sale
Fiscal  Quarters Price Price
     
First Quarter 2016 $0.10 $0.00
Second Quarter 2016 $0.20 $0.10
Third Quarter 2016 $0.10 $0.06
Fourth Quarter 2016 $0.10 $0.03
First Quarter 2017 $0.04 $0.03
Second Quarter 2017 $0.07 $0.03
Third Quarter 2017 $0.15     $0.04
Fourth Quarter 2017 $0.10 $0.07

On October 10, 2017, the last sales price per share of our common stock was $0.0297.

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.

Holders of Our Common Stock

As of October,9 2017, there were approximately 17,700 holders of record of our common stock .

 

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;

 

 12 

 

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.

 

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.

 

In April and June 2017, a Board member was granted 7,000,000 and 13,000,000 options to purchase common stock, respectively. In May 2017 another Board member was granted 7,000,000 options. An additional 350,000 options were granted to a consultant to the Company in April 2017. All options were granted through the 2017 Incentive Plan.

 

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

 

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 FY 2018;
Our expectation that we will sell securities on our balance sheet;
Our expectation regarding repayment of loans;
Expected uses of cash in FY2018; and
Statements with respect to having adequate liquidity

 

 13 

 

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 a number of 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 June 30, 2017 Compared to Year Ended June 30, 2016

 

Financial Summary

 

The Company’s sales for the year ended June 30, 2017 were $401,974 compared to $1,075,476 for the year ended June 30, 2016.

 

The Company’s net loss for the year ended June 30, 2017 was $9,276,251 compared to net income of $2,325,726 for the year ended June 30, 2016.

 

Sales

 

For the year ended June 30, 2017, sales were $401,974 compared to $1,075,476 for the year ended June 30, 2016, a decrease of $673,502 or 63%. The sales decrease was driven by the lack of funding for inventory production, direct sales support, and advertising and promotion of the Company’s products, as well as a restructuring of our outside broker agreements, and product returns. In the year ended June 30, 2017 sales consisted of approximately 80% distributor sales and 20% online sales, compared to 93% distributor sales and 7% online sales for the year ended June 30, 2016.

 

Cost of Sales

 

For the year ended June 30, 2017, cost of sales was $251,920 or 63% of sales, versus $1,134,636 or 105% of sales for the year ended June 30, 2016, a decrease of $882,716 or 78 %. In 2017 the Company recorded inventory obsolescence expense of $100,998 compared to $725,718 in 2016, resulting in a lower cost of sales percentage. In 2017 the obsolescence expense was comprised of a $72,161 write-off of the remaining “mountain can” packaging and a $28,837 write-off of the Company’s expired brownie inventory. In 2016 the obsolescence expense related primarily to expiring hemp-infused beverage product.

 

 14 

 

Operating Expenses

 

For the year ended June 30, 2017, operating expenses were $7,265,097 or 1,807% of sales, compared to $3,649,412 or 339% of sales for the year ended June 30, 2016, an increase of $3,615,685 or 99%. Areas in which the Company experienced material changes in operating expenses are discussed below.

 

General and Administrative

 

For the year ended June 30, 2017, general and administrative expenses were $5,751,464 or 1,431% of sales, compared to $2,142,984 or 199% of sales for the year ended June 30, 2016, an increase of $3,608,480 or 168%. The increase in general and administrative expenses in 2017 was driven by an increase in officer and employee compensation, including approximately $1,439,096 in stock option-related compensation to two new outside Board Directors in the fourth quarter of fiscal year 2017, rent and storage expenses, and expenses related to the startup of the Eagle Spirit Water brand.

 

Advertising and Marketing

 

For the year ended June 30, 2017, advertising and marketing expenses were $1,513,633 or 377% of sales, compared to $1,340,428 or 125% of sales for the year ended June 30, 2016, an increase of $173,205 or 13%. The increase in advertising and marketing expenses in 2017 was due to increased promotional spending, broker commissions, promotions contractors, and advertising and promotional expenses related to the startup of the Eagle Spirit water brand.

 

Impairment

 

For the year ended June 30, 2016, the Company recorded an impairment expense of $166,000 related to its investment in Dollar Shots Club. This represented a 100% impairment on this investment. There was no impairment recorded during the year ended June 30, 2017.

 

Other (Income) Expense

 

Interest Expense

 

For the year ended June 30, 2017, interest expense was $1,044,431, compared to $203,496 for the year ended June 30, 2016, an increase of $573,907 or 282%. The increase in interest expense, which includes the amortization of the discount on convertible debt and interest on Series C Preferred Stock, was due to increased debt in 2017.

 

Debt Inducement Expense

 

During the year ended June 30, 2016, the Company recorded debt inducement expense of $3,887,618. In order to induce the holder of certain convertible debt to convert his note, he was issued warrants to purchase 41,454,851 shares of common stock at a reduced price. There was no debt inducement expense in 2017.

  

Loss on Extinguishment of Debt

 

During the year ended June 30, 2016, the Company recorded a loss of $945,838 on the extinguishment of debt related to the settlement of convertible debt. There was no extinguishment of debt in 2017.

 

Gain on Change in Redemption Value of Series C Preferred Stock

 

For the year ended June 30, 2017, the Company recorded a gain of $834,242 on the change in the redemption value of the Series C Preferred stock. The redemption value of the Series C Preferred stock is determined based on a formula in the Company’s amended Articles of Incorporation. There was no change in the redemption value during the year ended June 30, 2016.

 

Gain on Change in Fair Value of Derivative Liability

 

For the year ended June 30, 2017, the Company recorded a loss on the change in fair value of derivative liability of $1,951,019 compared to a gain of $11,071,250 for the year ended June 30, 2016. In 2017 the loss resulted from the increase in the price of the Company’s underlying stock, which is used to calculate the fair value of the related derivative liability, over the period from July 1, 2016 to June 30, 2017. The gain in 2016 resulted from a decrease in the price of the Company’s stock during the year ended June 30, 2016 and the related decrease in the derivative liability.

 

 15 

 

Income Taxes

 

For the years ended June 30, 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 June 30, 2017, we had current assets of $1,153,976, consisting of cash of $91,675, accounts receivable (net) of $63,268, inventory of $224,695, and prepaid expenses and other current assets of $774,338. As of June 30, 2017, we had current liabilities of $8,583,643, consisting of accounts payable and accrued liabilities of $441,188, related party convertible notes payable (net) of $266,247, convertible notes payable (net) of $733,253, other notes payable of $26,130, redemption value of Series C Preferred stock of $1,661,424, accrued interest of $382,820, and derivative liability of $5,072,579. During the year ended June 30, 2017, the Company received proceeds of $991,350 related to private offering stock sales of 65,667,587 shares of common stock. Sales prices ranged from $.001 to $.05 per share.

 

Cash flows from operating activities

 

Net cash used in operating activities during the years ended June 30, 2017 and 2016 was $1,902,790 and $1,779,167, respectively. In both years the Company used funds for inventory production, sales and promotions, and administrative expenses. The increase in cash used in operating activities during the year ended June 30, 2017 was a result of increased officer and employee compensation, rent and storage expenses, and expenses related to the startup of the Eagle Spirit Water brand.

 

Cash flows from investing activities

 

Net cash used in investing activities during the years ended June 30, 2017 and 2016 was $89,870 and $119,042, respectively. In 2017 the Company invested in the startup of the Eagle Spirit Water brands as well as delivery vehicles and computer equipment. During 2016 the Company’s investment primarily related to the acquisition of several delivery vehicles.

 

Cash flows from financing activities

 

Net cash provided by financing activities during the years ended June 30, 2017 and 2016 was $1,982,080 and $1,904,738, respectively. In both years, over 50% of the net cash provided by financing activities was from the proceeds of sales of common stock with the remainder coming from net proceeds of notes payable. In 2017 the Company received proceeds of $991,350 from the issuance of common stock, compared to $1,282,406 in 2016.

 

Material Indebtedness

 

As of June 30, 2017 and 2016 the Company’s outstanding debt totaled $1,634,580 and $895,832, respectively. The increase in debt during 2017 was to fund the Company’s operations, including inventory production and the startup of the Eagle Spirit Water brand.

 

Recently, our operations have been funded primarily through the issuance of convertible promissory notes, which are convertible to common stock at fixed prices ranging from $0.001 to $0.024, or at a specified percentage discount off market prices. Discounts are generally 50% and based on a contracted look-back period. Interest rates on our notes payable range from 6% to 8%. Our ability to successfully execute our business plan is contingent upon us obtaining additional financing and/or upon realizing sales revenue sufficient to fund our ongoing expenses. Until we are able to sustain our ongoing operations through sales revenue, we intend to fund operations through debt and/or equity financing arrangements, which may be insufficient to fund our capital expenditures, working capital, or other cash requirements.

 

The Company has the following formal funding arrangement:

 

Eagle Equities, LLC – On July 28, 2017 we executed an agreement with Eagle Equities, LLC (“Eagle Equities”) to sell up to $500,000 in convertible notes to Eagle Equities. On that same date, we issued a 12-month, convertible note bearing interest at 8% to Eagle Equities in exchange for funding $220,000, net of fees. The note is convertible to common stock at a 45% discount to market based on a look-back formula. The Company has the ability to obtain additional funding of $220,000 by issuing another convertible note to Eagle Equities eight months from the date of the original note.

 

 16 

 

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

 

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

 

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

 

In connection with the conversion, and as an inducement for the debt holder to convert, the Company issued him two warrants to purchase a total of 55,096,825 shares of the Company’s common stock at an exercise price per share of the lesser of $.005 or an eighty percent discount to the average of the five lowest bid prices during the 30 trading days prior to the date of exercise. The warrant may be exercised, in whole or in part, beginning on the date which is the earlier of six months from the Company becoming a Reporting Company (as defined in the warrant) or one year from the date of issuance. The warrant is for a period of 3 years, and contains customary anti-dilution provisions.

 

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

 

Our prior disclosures indicating that Mr. Meadows was an affiliate of the Company were made in error. We affirm that Mr. Meadows is not, and never has been, an “affiliate” of the Company within the meaning of Rule 144(a)(1) or otherwise.

 

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

 

Future Liquidity Requirements

 

The anticipated operational shortfall for the next twelve months is approximately $2,000,000. The Company plans to utilize the Eagle Equities agreement to partially fund our operating needs and anticipates securing an equity financing arrangement or line of credit to meet its additional needs over the next 12 to 24 months. This would finance inventory production, advertising and marketing, and other working capital needs.

  

 17 

 

We anticipate that initial funds raised will be through debt financing with additional capital raised through the sale of restricted securities through an offering memorandum, the structure of which has yet to be determined.

 

Plans for Meeting Debt Obligations and Reaching Profitability

 

Going forward, the Company intends to fund its operations and meet its debt obligations through:

 

  Generating revenue through our sales and marketing efforts in our day-to-day operations.

 

  Selling common stock and debt directly to accredited investors.
     

We project increased sales revenue in fiscal year 2018 as we execute our updated strategy, which includes updating our can design and formulas.

 

We intend to retain our future earnings in order to reinvest in the development and growth of our business and, therefore, do not intend to pay dividends on our common stock for the foreseeable future.

 

Going forward, the Company intends to achieve profitability by:

 

1.Updating and maintaining its long-term strategic plan

 

The Company has recently updated its long-term strategic plan. Management’s goal is to become the category leader in the hemp-infused beverage market, a segment of the functional beverage market. Functional beverages, or beverages that convey health benefits, are the fastest growing segment within the beverage market.

 

2.Focusing on core products

 

The Company is developing four newly reformulated, sugar-free, non-energy, hemp-infused beverage flavors. In addition to the new formulas, the beverages will feature 12 oz. cans, an all-new look and will replace all current hemp-infused beverage offerings. Two of the four beverage flavors will be carbonated. Flavor choices will be similar to past offerings. Management plans to begin production on the new beverages in January 2018. Marketing will focus on the health benefits of hemp, including Omega-3 and Omega-6 fatty acids, amino acids, and natural, plant-based fiber.

 

The Company is also reviewing its other product offerings, but there are no immediate plans to produce additional Relaxation Brownies or energy shots.

 

The Board of Directors is currently evaluating its plans with regard to the Eagle Spirit Water business.

 

3.Revising its go-to-market strategy

 

The Company is re-assessing its go-to-market strategy. Specifically, channels of distribution and distributor and broker agreements are being reviewed.

 

4.Concentrating on key markets

 

Management plans to focus on key domestic markets.

 

5.Re-building its team of senior executives

 

The Company plans to hire a Vice President of Sales and a Director of Marketing during fiscal year 2018. These executives will be key to the successful roll-out of the Company’s newly reformulated products and key market strategy.

 

 18 

 

Off-Balance Sheet Arrangements

 

As of June 30, 2017, there were no off-balance sheet arrangements

 

Going Concern

 

The Company has a shareholders’ deficit of $7,304,278, an accumulated deficit of $26,154,633 as of June 30, 2017, 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 February 28, 2017, LSW Holdings, LLC (“LSW”) purchased all outstanding shares of Series A Preferred Stock from our former controlling shareholder. Our Vice President of International Sales is the Managing Member of LSW. Both parties to the agreement assured management that the purchase agreement requires LSW to provide the Company sufficient capital to move forward with its expansion plans. Management has recently obtained the executed agreement and determined that agreement contains no such requirement. As a result, management is actively pursuing other funding arrangements with outside investors and creditors.

 

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.

 

Cash

 

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

 

Revenue Recognition

 

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

 

Accounts Receivable and Allowance for Doubtful Accounts Receivable

 

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

 

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

 

 19 

 

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.

 

 20 

 

 

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

 

Balance, June 30, 2015   $ 11,504,057  
Issued during the year ended June 30, 2016     3,887,618  
Converted during the year ended June 30, 2016   $  ($2,102,681)  
Change in fair value recognized in operations   $ ($11,071,250)  
Balance, June 30, 2016   $     $2,217,744  
         
Issued during the year ended June 30, 2017   $ 1,383,650  
Exercises/Conversions   $ (479,834)  
Change in fair value recognized in operations   $ 1,951,019  
Balance, June 30, 2017   $ 5,072,579  

 

The estimated fair value of the derivative instruments were valued using the Black-Scholes option pricing model, using the following assumptions as of June 30, 2017 and June 30, 2016:

 

  2017 2016
Estimated Dividends None None
Expected Volatility 114% 45%
Risk Free Interest Rate .84% .12%
Expected Term .1 to 2.0 years .1 to 5.5 years

 

Property and Equipment

 

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

 

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. The Company recorded an impairment charge of $166,000 during the year ended June 30, 2016. No impairment charge was recorded during the year ended June 30, 2017.

 

Share-Based Payments

 

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

 

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

 

 21 

 

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).

 

Advertising

 

Advertising and marketing expenses are charged to operations as incurred.

 

Income Taxes

 

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

 

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

 

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 August 2014, the FASB issued Accounting Standard Update No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40), (ASU No. 2014-15), which requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, ASU 2014-15 provides a definition of the term substantial doubt and requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). It also requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans and requires an express statement and other disclosures when substantial doubt is not alleviated. ASU No. 2014-15 is effective for the Company beginning July 1, 2017.

 

 22 

  

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which will replace most existing revenue recognition guidance in U.S. GAAP and is intended to improve and converge with international standards the financial reporting requirements for revenue from contracts with customers. The core principle of ASU 2014-09 is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. ASU 2014-09 also requires additional disclosures about the nature, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. ASU 2014-09 allows for adoption either on a full retrospective basis to each prior reporting period presented or on a modified retrospective basis with the cumulative effect of initially applying the new guidance recognized at the date of initial application, which will be effective for the Company beginning July 1, 2019. The Company is currently evaluating the impact of ASU 2014-09, including the transition method, on its consolidated financial statements.

 

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The amendments in this update simplify the presentation of deferred income taxes and require that deferred tax liabilities and assets be classified as noncurrent in a consolidated statement of financial position. These amendments may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The amendments will be effective for the Company beginning July 1, 2018. If the Company chooses retrospective application, the impact of ASU 2015-17 would not be material to the consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases, 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 July 1, 2020. The Company is currently evaluating the impact that ASU 2016-02 will have on its consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting. The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for the Company beginning July 1, 2018 and will require us to prospectively recognize excess tax benefits and tax deficiencies in the consolidated statement of income when the awards vest or are settled. Additionally, the guidance requires excess tax benefits to be presented as an operating activity in the statement of cash flows rather than as a financing activity. The Company is currently evaluating the impact of ASU 2016-09 on its consolidated financial statements.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Measurement of Credit Losses on Financial Instruments, which requires measurement and recognition of expected credit losses for financial assets held. ASU 2016-13 is effective for the Company beginning July 1, 2021 and the Company is currently evaluating the impact that ASU 2016-13 will have on its consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business, 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 July 1, 2019. The impact on our consolidated financial statements will depend on the facts and circumstances of any specific future transactions.

 

 23 

 

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 Paritz & Company, P.A., Independent Registered Public Accounting Firm
F-2 Consolidated Balance Sheets as of June 30, 2017 and 2016
F-3 Consolidated Statements of Operations for the years ended June 30, 2017 and 2016
F-4 Consolidated Statements of Cash Flows for the years ended June 30, 2017 and 2016
F-5 Consolidated Statements of Shareholder’s Deficit for the years ended June 30, 2017 and 2016
F-6 Notes to Consolidated Financial Statements.

 

 24 

 

  Paritz

 

 

& Company, P.A

15 Warren Street, Suite 25

Hackensack, New Jersey 07601

(201) 342-7753

Fax: (201) 342-7598

E-Mail: PARITZ@paritz.com

       
  Certified Public Accountants

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders

Rocky Mountain High Brands, Inc.

 

We have audited the accompanying consolidated balance sheets of Rocky Mountain High Brands, Inc as of June 30, 2017 and 2016 and the related consolidated statements of operations, shareholders’ deficit and cash flows for the years ended June 30, 2017 and 2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, 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. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Rocky Mountain High Brands, Inc.as of June 30, 2017 and 2016, and the consolidated results of its operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated 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. As discussed in Note 3 to the financial statements the Company has a shareholders’ deficit of $7,304,278, an accumulated deficit of $26,154,633 at June 30, 2017, 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. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

/S/Paritz & Company, P.A.

 

Hackensack, New Jersey

October 11, 2017

 

 F-1 

 

Rocky Mountain High Brands, Inc.

Consolidated Balance Sheets

 

      June 30, 2017       June 30, 2016  
CURRENT ASSETS                
                 
Cash   $ 91,675     $ 102,255  
Accounts Receivable, net of allowance of $138,373 and $60,163, respectively     63,268       20,377  
Inventory     224,695       290,368  
Prepaid Expenses and Other Current Assets     774,338       1,716,551  
TOTAL CURRENT ASSETS     1,153,976       2,129,551  
                 
Property and Equipment, net     48,133       92,208  
Other Assets     77,256       33,230   
                 
TOTAL ASSETS   $ 1,279,365     $ 2,254,989  
                 
LIABILITIES AND SHAREHOLDERS’ DEFICIT                
                 
CURRENT LIABILITIES                
                 
Accounts Payable and Accrued Liabilities   $ 441,190     $ 337,866  
Related Party Convertible Notes Payable, net of debt discount     266,247       20,730  
Convertible Notes Payable, net of debt discount     733,253       597,500  
Note Payable-Other     26,130       -  
Redemption Value of Series C Preferred Stock     1,661,424       2,495,666  
Accrued Interest     382,820       58,399  
Deferred Revenue     -       500,000  
Derivative Liability     5,072,579       2,217,744  
TOTAL CURRENT LIABILITIES     8,583,643   6,227,905  
                 
SHAREHOLDERS’ DEFICIT                
Preferred Stock - Series A - Par Value of $.001  1,000,000 shares authorized;  1,000,000 shares issued and outstanding as of June 30, 2017 and 30, 2016     1,000       1,000  
Preferred Stock - Series B - Par Value of $.001  5,000,000 shares authorized as of June 30, 2017 and June 30, 2016            
Preferred Stock - Series C - Par Value of $.001  2,000,000 shares authorized; (1,107,607 Classified as a liability as of June 30, 2017 and June 30, 2016)              
Preferred Stock - Series D - Par Value of $.001  2,000,000 shares authorized; no shares issued and outstanding            
Common Stock - Par Value of $.001  950,000,000 shares authorized as of June 30, 2017; 786,525,118 shares issued and outstanding as of June 30, 2017; 800,000,000 shares authorized as of June 30, 2016; 537,989,764 shares issued and outstanding as of June 30, 2016     786,525       537,990  
Additional Paid In Capital     18,062,830       12,366,476  
Accumulated Deficit        (26,154,633 )     (16,878,382 )
TOTAL SHAREHOLDERS’ DEFICIT     (7,304,278 )     (3,972,916 )
                 
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT   $ 1,279,365     $ 2,254,989  

   

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

 

 F-2 

 

 Rocky Mountain High Brands, Inc.

Consolidated Statements of Operations

 

    Year Ended
    June 30, 2017   June 30, 2016
         
Sales   $ 401,974     $ 1,075,476  
                 
Cost of Sales     150,922       408,918  
Inventory Obsolescence     100,998       725,718  
                 
Gross Profit (Loss)     150,054       (59,160)  
                 
Operating Expenses                
General and Administrative     5,751,464       2,142,984  
Advertising and Marketing     1,513,633       1,340,428  
Impairment     -       166,000  
Total Operating Expenses     7,265,097       3,649,412  
                 
Loss from Operations     (7,115,043 )     (3,708,572 )
                 
Other (Income) Expenses:                
Interest Expense     1,044,431       203,496  
Debt Inducement Expense     -       3,887,618  
Loss on Extinguishment of Debt     -       945,838  
Gain on Change in Redemption Value of Series C Preferred Stock     (834,242)       –   
(Gain) Loss on Change in Fair Value of Derivative Liability     1,951,019       (11,071,250 )
Total Other (Income) Expenses:     2,161,208       (6,034,298 )
                 
Income (Loss) Before Income Tax Provision     (9,276,251     2,325,726  
                 
Income Tax Provision     -       -  
                 
Net Income (Loss) $ (9,276,251)     $ 2,325,726  
                 
Net Income (Loss) per Common Share - Basic and Diluted   $ (0.01)     $ 0.01  
                 
Weighted Average Shares Outstanding     699,508,915       474,571,836  

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

 

 F-3 

 

Rocky Mountain High Brands, Inc.

Consolidated Statements of Cash Flows

 

    Year Ended
    June 30, 2017   June 30, 2016
Operating Activities:                
Net Income (Loss)   $ (9,276,251)     $ 2,325,726  
Adjustments to reconcile net loss to net cash used in operating activities:                
  Stock-based compensation     1,917,159       611,881  
  Stock-based payments to vendors     1,013,351       -  
  Warrants issued for services rendered     2,074,228          
  Non-cash interest expense     1,044,431       203,496  
  Impairment expense     -       166,000  
Gain on change in redemption value of Series C Preferred stock     (834,242)          
  (Gain) Loss on change in fair value of derivative liability     1,951,019       (11,071,250 )
  Loss on extinguishment of debt     -       945,838  
  Warrants issued for debt inducement     -       3,887,618  
  Bad debt expense     184,966       152,750  
  Loss on disposal of equipment     59,133       1,560  
  Depreciation expense     30,786       22,122  
  Inventory write-off     100,998       725,728  
Changes in operating assets and liabilities:                
  Accounts receivable     (227,857 )     (40,926 )
  Inventory     (35,325 )     (260,625 )
  Prepaid expenses     (8,508 )     (48,940 )
  Other assets     -       (13,486 )
  Accounts payable and accrued liabilities     103,322       144,853  
  Deferred revenue     -       470,048  
NET CASH USED IN OPERATING ACTIVITIES     (1,902,790 )     (1,779,167 )
                 
Investing Activities:                
  Investment in Rocky Mountain High Water Company       (44,026 )     -  
  Investment in product development             (19,400 )
  Acquisition of property and equipment     (45,844 )     (99,642 )
NET CASH USED IN INVESTING ACTIVITIES     (89,870 )     (119,042 )
                 
Financing Activities:                
  Proceeds from issuance of convertible notes     700,000       500,000  
  Proceeds from issuance of related party convertible notes     289,600       318,332  
  Repayment of convertible notes     -       (165,000)  
  Repayment of related party convertible notes     (25,000 )     (31,000)  
  Proceeds from issuance of note payable-other     35,960       318,332  
  Repayment of note payable-other     (9,830 )     -  
  Proceeds from issuance of common stock     991,350       1,282,406  
                 
NET CASH PROVIDED BY FINANCING ACTIVITIES     1,982,080       1,904,738  
                 
INCREASE (DECREASE) IN CASH     (10,580     6,529  
                 
CASH - BEGINNING OF YEAR     102,255       95,726  
                 
CASH - END OF YEAR   $ 91,675     $ 102,255  
                 
Supplemental disclosure of non-cash financing and investing activities:                
  Common stock issued for conversion of debt   $ 189,455     $ 143,600  
  Common stock issued for acquisition   $ -     $ 166,000  
  Debt and accrued interest converted for common stock   $ 504,736     $ -  
  Common stock issued as part of a legal settlement   $ 500,000     $ -  
  Derivative liability incurred for debt discount   $ 659,150     $ -  
  Beneficial conversion feature recognized as debt discount   $ 212,771     $ -  
  Series C preferred stock issued for conversion of debt   $ -     $ 2,495,666  
  Conversion of debt to common stock   $ 348,532     $ 179,220  
  Derivative liability relieved upon conversion of related debt   $ 352,625     $ 2,102,681  

 

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

 

 F-4 

 

Rocky Mountain High Brands, Inc.

Consolidated Statements of Shareholders’ Deficit

 

      Common Stock       Preferred Stock A       Preferred Stock C               Accumulated       Equity/  
      Shares       Amount       Shares       Amount       Shares       Amount       APIC       Deficit       (Deficit)  
Balance - June 30, 2015     400,356,154     $ 400,356       1,000,000     $ 1,000       —       $ —       $ 7,625,395     $ (19,204,108 )   $ (11,177,357 )
                                                                      —    
Shares issued for acquisition     2,000,000       2,000                                       164,000               166,000  
                                                                         
Shares issued for services rendered     5,107,143       5,107                                       248,959               254,066  
                                                                         
Shares issued upon conversion of convertible notes     103,005,455       103,005                                       1,067,843               1,170,848  
                                                                         
Issuance of common stock for cash     38,521,012       38,521                                       1,243,885               1,282,406  
                                                                      —    
Return of employee shares as part of settlement agreements     (11,000,000 )     (11,000 )                                     (148,940 )             (159,940 )
                                                                         
Warrants issued for compensation                                                     1,244,661               1,244,661  
                                                                         
Beneficial conversion feature on convertible related party notes payable                                                     298,332               298,332  
                                                                         
Gain on extinguishment of related party convertible notes                                                     622,342               622,342  
                                                                         
Net income for the year ended June 30, 2016     —         —         —         —         —         —         —         2,325,726       2,325,726  
                                                                         
Balance - June 30, 2016     537,989,764     $ 537,990       1,000,000     $ 1,000           $     $ 12,366,477     $ (16,878,382 )   $ (3,972,916 )
                                                                      —    
Issuance of common stock for cash     65,667,587       65,668                                       925,682               991,350  
                                                                         
Shares issued for services rendered     28,724,139       28,724                                       979,903               1,008,627  
                                                                         
Shares issued for compensation     22,634,107       22,634                                       993,052               1,015,686  
                                                                         
Shares issued upon conversion of convertible notes     77,800,687       77,801                                       320,997               398,798  
                                                                         
Cashless warrant exercise     46,908,834       46,909                                       311,614               358,523  
                                                                      —    
Shares issued as part of legal settlement     6,800,000       6,800                                       493,200               500,000  
                                                                         
Stock option issued for services rendered                                                     1,459,134               1,459,134  
                                                                         
Beneficial conversion feature on convertible notes payable                                                     212,771               212,771  
                                                                         
Net loss for the year ended June 30, 2017     —         —         —         —         —         —         —         (9,276,251)       (9,276,251)  
                                                                         
Balance - June 30, 2017     786,525,118     $ 786,525       1,000,000     $ 1,000           $     $ 18,062,830     $ (26,154,633 )   $ (7,304,278 )

 

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

 

 F-5 

 

Rocky Mountain High Brands, Inc.

Notes to Consolidated Financial Statements

 

NOTE 1 – General

 

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

 

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

On December 16, 2013 the Company filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division, Case Number 13-36434-bjh-11. In early 2013, the Company sought to acquire a barbeque company and sought to raise capital and entered into an agreement with Empire Capital LLC (“Empire”) to assist in the raising of capital for the acquisition. By late 2013, the acquisition had fallen through due to the inability to obtain the needed financing. Empire then sued the Company claiming it was owed approximately $200,000 for its services on behalf of the Company along with additional damages. The Company disputed the claims, and filed the Chapter 11 bankruptcy to restructure its current indebtedness and to provide a framework for moving forward. On May 22, 2014 the Company filed its Disclosure Statement and Plan of Reorganization, and on July 2, 2014 a hearing was held and the Plan of Reorganization was confirmed by written order of the Bankruptcy Court dated July 11, 2014.

In the Plan of Reorganization, the Company’s shareholders and controlling shareholder through the Series A Preferred Shares were not diluted, thus control of the Company remained the same as before, during and after the confirmed Plan of Reorganization. Therefore, “Fresh Start” Accounting described in ACS 852-10-45-19 did not apply to the Company.

 

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.

 

 F-6 

 

Use of Estimates

 

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

 

Cash

 

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

 

Revenue Recognition

 

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

 

Accounts Receivable and Allowance for Doubtful Accounts Receivable

 

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

 

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

 

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

 

Inventories

 

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

 

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

 

Fair Value Measurements

 

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

 

 F-7 

 

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, 2015  $11,504,057 
Issued during the year ended June 30, 2016   3,887,618 
Converted during the year ended June 30, 2016  $(2,102,681)
Change in fair value recognized in operations  $(11,071,250)
Balance, June 30, 2016  $2,217,744 

 

Issued during the year ended June 30, 2017  $1,383,650 
Exercises/Conversions  $(479,834)
Change in fair value recognized in operations  $1,951,019 
Balance, June 30, 2017  $5,072,579 

 

The estimated fair value of the derivative instruments were valued using the Black-Scholes option pricing model, using the following assumptions as of June 30, 2017 and June 30, 2016:

 

   2017  2016
Estimated Dividends  None  None
Expected Volatility   114%   45%
Risk Free Interest Rate   .84%   .12%
Expected Term   .1 to 2.0 years   .1 to 5.5 years

 

Property and Equipment

 

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

 

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.

 

 F-8 

 

Share-based Payments

 

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

 

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

 

Convertible Instruments

 

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

 

Preferred Stock

 

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

 

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.

 

 F-9 

 

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.

 

Recent 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 August 2014, the FASB issued Accounting Standard Update No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40), (ASU No. 2014-15), which requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, ASU 2014-15 provides a definition of the term substantial doubt and requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). It also requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans and requires an express statement and other disclosures when substantial doubt is not alleviated. ASU No. 2014-15 is effective for the Company beginning July 1, 2017.

  

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which will replace most existing revenue recognition guidance in U.S. GAAP and is intended to improve and converge with international standards the financial reporting requirements for revenue from contracts with customers. The core principle of ASU 2014-09 is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. ASU 2014-09 also requires additional disclosures about the nature, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. ASU 2014-09 allows for adoption either on a full retrospective basis to each prior reporting period presented or on a modified retrospective basis with the cumulative effect of initially applying the new guidance recognized at the date of initial application, which will be effective for the Company beginning July 1, 2019. The Company is currently evaluating the impact of ASU 2014-09, including the transition method, on its consolidated financial statements.

 

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The amendments in this update simplify the presentation of deferred income taxes and require that deferred tax liabilities and assets be classified as noncurrent in a consolidated statement of financial position. These amendments may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The amendments will be effective for the Company beginning July 1, 2018. If the Company chooses retrospective application, the impact of ASU 2015-17 would not be material to the consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases, 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 July 1, 2020. The Company is currently evaluating the impact that ASU 2016-02 will have on its consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting. The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for the Company beginning July 1, 2018 and will require us to prospectively recognize excess tax benefits and tax deficiencies in the consolidated statement of income when the awards vest or are settled. Additionally, the guidance requires excess tax benefits to be presented as an operating activity in the statement of cash flows rather than as a financing activity. The Company is currently evaluating the impact of ASU 2016-09 on its consolidated financial statements.

 

 F-10 

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Measurement of Credit Losses on Financial Instruments, which requires measurement and recognition of expected credit losses for financial assets held. ASU 2016-13 is effective for the Company beginning July 1, 2021 and the Company is currently evaluating the impact that ASU 2016-13 will have on its consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business, 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 July 1, 2019. The impact on our consolidated financial statements will depend on the facts and circumstances of any specific future transactions.

 

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 $7,304,278, an accumulated deficit of $26,154,633 as of June 30, 2017, 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 February 28, 2017, LSW Holdings, LLC (“LSW”) purchased all outstanding shares of Series A Preferred Stock from our former controlling shareholder. Our Vice President of International Sales is the Managing Member of LSW. Both parties to the agreement assured management that the purchase agreement requires LSW to provide the Company sufficient capital to move forward with its expansion plans. Management has recently obtained the executed agreement and determined that agreement contains no such requirement. As a result, management is actively pursuing other funding arrangements with outside investors and creditors.

 

NOTE 4 – Inventory

 

As of June 30, 2017 and 2016 inventory consisted of the following:

 

   June 30, 2017  June 30, 2016
Finished inventory  $216,711   $290,368 
Raw materials and packaging   7,984    —   
Total  $224,695   $290,368 

 

NOTE 5 – Prepaid Expenses and Other Current Assets

 

As of June 30, 2017 and 2016 prepaid expenses and other current assets consisted of the following:

 

 F-11 

 

   2017  2016
Prepaid officers’ compensation  $521,916   $1,334,261 
Prepaid directors’ compensation   206,090    323,855 
Prepaid marketing expenses   19,250    33,000 
Other prepaid expenses and current assets   27,082    25,435 
Total  $774,338   $1,716,551 

 

NOTE 6 – Property and Equipment

 

As of June 30, 2017 and 2016 property and equipment consisted of the following:

 

   June 30, 2017  June 30, 2016
Vehicles  $29,598   $112,817 
Furniture and equipment   41,042    343 
Personal computers   3,315    1,170 
    73,955    114,330 
Less:  accumulated depreciation   25,822    22,122 
Total  $48,133   $92,208 

 

NOTE 7 – Investments

 

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

 

As of June 30, 2016, the Company concluded that the investment was impaired and recorded an impairment on this investment of $166,000.

 

NOTE 8 – Convertible Notes Payable

 

As of June 30, 2017 and 2016, the Company’s convertible notes payable consisted of the following:

 

   Interest Rates  Term  June 30, 2017  June 30, 2016
Convertible notes payable  6% - 12%   0 - 2 years     $1,115,000   $597,500 
Discount             (381,747)   —   
Total            $733,253   $597,500 

 

The convertible notes are convertible to shares of the Company’s common stock at prices ranging from $.01 to 50% of market price. For the years ended June 30, 2017 and 2016, interest expense on these notes, including amortization of the discount, was $172,594 and $26,762, respectively.

 

The Company has determined that the conversion feature embedded in the notes referred to above that contain a potential variable conversion amount constitutes a derivative which has been bifurcated from the note and recorded as a derivative liability, with a corresponding discount recorded to the associated debt. The excess of the derivative value over the face amount of the note is recorded immediately to interest expense at inception. The Company recorded $222,127 and $0 of interest expense for the years ended June 30, 2017 and 2016, respectively, at the inception of the notes relating to the excess of derivative value over the face of the notes.

 

 F-12 

 

NOTE 9 – Related Party Notes Payable

 

As of June 30, 2017 and 2016, the Company’s related party convertible notes payable consisted of the following:

 

   Interest Rate  Term  March 31, 2017  June 30, 2016
Related party convertible notes payable   6%   0 - 1 year   $493,450   $298,332 
Discount            (227,203)    (277,602) 
Total           $266,247   $20,730 

 

The related party convertible notes are convertible to shares of the Company’s common stock at prices ranging from $.01 to 50% of market price. For the years ended June 30, 2017 and 2016, interest expense on these notes, including amortization of the discount, was $337,852 and $16,308, respectively.

 

As of June 30, 2017, Jerry Grisaffi, our former Chairman of the Board, held two notes payable with principal amounts of $200,150 and $184,300. The $200,150 note, which is 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 has been 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 year ended June 30, 2017 the Company made two (nonconvertible) notes payable to Mr. Grisaffi in connection with loans and previously recorded as deferred compensation. The Company repaid $25,000 on these notes during the fourth quarter of 2017. The remaining balance of principal and interest was converted to the $200,150 convertible note payable. Prior to conversion, interest expense on the notes was $2,939 for the year ended June 30, 2017.

 

The Company has determined that the conversion feature embedded in the notes referred to above that contain a potential variable conversion amount constitutes a derivative which has been bifurcated from the note and recorded as a derivative liability, with a corresponding discount recorded to the associated debt. The excess of the derivative value over the face amount of the note is recorded immediately to interest expense at inception. The Company recorded $44,901 and $0 of interest expense for the years ended June 30, 2017 and 2016, respectively, at the inception of the notes relating to the excess of derivative value over the face of the notes.

 

NOTE 10 – Note Payable-Other

 

On September 1, 2016, the Company purchased used office furniture and equipment from its landlord. The Company executed a note payable in the amount of $40,122 at an interest rate of 0% and with monthly payments of $1,115. The Company imputed interest on the note and recorded a discounted note balance of $36,634 on September 1, 2016. The term of the note is three years. The balance on the note was $26,130 on June 30, 2017. For the year ended June 30, 2017, interest expense on this note was $1,755.

 

NOTE 11 – Deferred Revenue

 

In June 2015, the Company entered into an exclusive manufacture and supply agreement with Rodney Peterson (an unrelated third party) or his designee, Rocky Mountain High Canada, Inc. (RMHC) for distribution rights to RMHC. Under the agreement, RMHC was required to pay the Company $500,000 before June 30, 2015 and submit an additional $150,000 prior to a production run of 1,000,000 cans of product covered under the agreement. The Company received $200,000 on July 29, 2015 and $300,000 on August 28, 2015, which was recorded as deferred revenue as of June 30, 2016. The additional $150,000 was not received. The Company filed a breach of contract lawsuit with the objective of recovering outstanding obligations. During the year ended June 30, 2017 the Company settled the case with RMHC and issued 6,800,000 shares of common stock in exchange for the $500,000 already received.

 

NOTE 12 – Shareholders’ Deficit

 

 F-13 

 

Common Stock

 

During the year ended June 30, 2017 the Company issued 248,535,354 shares of common stock, including 77,800,687 for convertible notes payable conversions, 46,908,834 for warrant exercises, 29,724,139 for services rendered, 21,634,107 for compensation, 6,800,000 as part of a legal settlement, and 65,667,587 for cash. During the year ended June 30, 2016 the Company issued 101,495,350 shares of common stock for convertible notes payable conversions, the acquisition of Dollar Shots Club, cash purchases, and services rendered.

  

On December 29, 2016 the Company executed a securities purchase agreement for the sale of 1,000,000 shares of its common stock. The agreement includes a “true-up” provision whereby the Company must provide the purchaser additional shares of common stock if the stock price is below a predetermined level six months from the date of the agreement. In accordance with this provision, the Company was also required to reserve 10,000,000 shares of common stock in the event that the true-up provision is triggered. The shares will be released if the provision is not triggered six months from the date of the agreement. The fair value of the true-up calculation was $67,000 at inception of the agreement and $11,000 as of March 31, 2017. The true-up provision expired on June 29, 2017 with no additional shares being issued.

 

On March 14, 2017, the Board of Directors and holders of a majority of the voting capital stock of the Company approved an amendment to the Company’s Articles of Incorporation to increase its authorized shares of common stock from 800,000,000 to 950,000,000. The Board of Directors fixed March 14, 2017 as the record date for determining the holders of its voting capital stock entitled to notice of these actions and receipt of this Information Statement. The increase in the authorization was effective June 7, 2017.

 

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 the Company’s officers and directors returned a total of 25,041,732 shares of common stock to treasury for cancellation. On that same date, these officers and directors were granted 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.

 

In April and June 2017, a Board member was granted 7,000,000 and 13,000,000 options to purchase common stock, respectively. In May 2017 another Board member was granted 7,000,000 options. An additional 350,000 options were granted to a consultant to the Company in April 2017. All options were granted through the 2017 Incentive Plan.

 

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

 

Preferred Stock

 

On March 14, 2017, the Board of Directors and holders of a majority of the voting capital stock of the Company approved an amendment to the Company’s Articles of Incorporation to increase its authorized shares of preferred stock from 10,000,000 to 20,000,000 of which 10,000,000 have been specifically designated to a series of preferred stock and 10,000,000 remain undesignated. The Board of Directors fixed March 14, 2017 as the record date for determining the holders of its voting capital stock entitled to notice of these actions and receipt of this Information Statement. The increase in the authorization was effective June 7, 2017.

 

Series A Preferred Stock

 

The Company has 1,000,000 shares of Series A Preferred stock authorized and outstanding as of June 30, 2017 and 2016.

 

On March 13, 2017, our 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 were convertible to common stock at a rate of 1,200 shares of common stock for every share of Series A Preferred stock.

 

 F-14 

 

On July 5, 2017, the Company amended the Certificate of Designation for our Series A Preferred stock. The amendment changes 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 our board directors and 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 for every share of Series A Preferred stock.

  

Series B Preferred Stock

 

The Company has 5,000,000 shares of Series B Preferred stock authorized and none outstanding as of June 30, 2017 and 2016.

 

Series C Preferred Stock

 

The Company amended its Articles of Incorporation on November 13, 2015 to create a Series C Preferred stock, which are 12% interest bearing, cumulative, exchangeable, non-voting, convertible preferred stock of the Company. Each Series C Preferred share has a par value of $.001 and is convertible to 50 shares of common stock.

 

On November 16, 2015, the holder of a convertible note aggregating $1,107,607 of principal and accrued interest, agreed to a dollar for dollar exchange for same number of Preferred C shares. As of June 30, 2017 and 2016 there were 1,107,607 shares of Series C Preferred shares outstanding.

 

The redemption value of the Series C Preferred stock has been reclassified to current liabilities in accordance with the agreement executed between the Company and the holder of the shares.

 

Series D Preferred Stock

 

The Company amended its Articles of Incorporation on March 21, 2016 to create the Series D Preferred stock class, a non-voting, non-interest bearing convertible preferred stock with a par value of $.001. Each Series D preferred share is convertible to 100 shares of common stock. As of June 30, 2017 and 2016, there are no Series D preferred shares outstanding.

 

Warrants

 

During the year ended June 30, 2017 the Company granted 9,725,000 warrants to purchase common stock and 47,008,834 were exercised. During the year ended June 30, 2016 the Company granted 39,000,000 warrants to purchase common stock and 3,658,914 were exercised. As of June 30, 2017 and 2016, there were 56,934,325 and 94,218,159 warrants outstanding.

 

Options

 

During the fourth quarter of 2017, the Company issued 27,000,000 options to purchase common stock to two new directors. The options have an exercise price ranging from $.035 and $.045 and vested immediately. The Company recognized $1,459,134 as compensation expense. The Company also granted 350,000 options to a vendor at an exercise price of $.045. None of these options had been exercised as of June 30, 2017. There were no options granted or outstanding during fiscal year 2016. The options were valued using the Black-Scholes model using an expected volatility of 114%, expected terms of 2 years, a risk-free interest rate of .84%, and no estimated dividends.

 

 F-15 

 

NOTE 12 – Concentrations

 

During the year ended June 30, 2017, the Company’s two largest customers accounted for approximately 50% and 7% of sales, respectively. During the year ended June 30, 2016, the Company’s two largest customers accounted for approximately 27% and 26% of sales, respectively.  

 

NOTE 13 – Income Taxes

 

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

 

   2017  2016
U.S federal statutory rate   (34%)  (34%)
State income tax, net of federal benefit   (0.0%)   (0.0%)
Increase in valuation allowance   34%   34%
Income tax provision (benefit)   0.0%   0.0%

 

 

The tax effects of temporary differences that give rise to the Company’s net deferred tax liability as of June 30, 2017 and 2016 consisted of the following:   

 

   2017  2016
Deferred Tax Assets          
Net Operating Losses  $4,482,000   $2,227,000 
Less:  Valuation Allowance   $(4,482,000)  $(2,227,000)
Deferred Tax Assets – Net   —      —   

 

As of June 30, 2017, the Company had approximately $13,184,000 of federal and state net operating loss carryovers (“NOLs”), which begin to expire in 2027. Utilization of the NOLs may be subject to limitation under the Internal Revenue Code Section 382 should there be a greater than 50% ownership change as determined under regulations.

 

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

 

NOTE 14 – Commitments

 

Office Lease

 

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

 

Other Leases

 

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

 

Employee Agreements

 

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

 

In 2013, the Company entered into a ten-year employment agreement with Jerry Grisaffi, Chairman of the Board of Directors. Under the agreement, the Company agreed to compensate Mr. Grisaffi at a rate of $125,000 per year and to bonus obligations based on the profitability of the Company. The Company issued 1,000,000 shares of Preferred

 

 F-16 

 

Series A stock to Mr. Grisaffi under the terms of the agreement. Mr. Grisaffi sold all of his shares of Preferred A stock in 2017 and resigned from the Company’s Board of Directors effective June 30, 2017.

 

In 2014, the Company entered into a five-year employment agreement with  David M. Seeberger, Vice President – Legal. 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.

 

In January 2016, the Company entered into a five-year employment agreement with Michael Welch, then 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.

 

NOTE 15 – Legal Proceedings

 

Claims Against Donna Rayburn

 

RMHB and Rayburn entered into a convertible promissory note dated February 2, 2015 for the original principal amount of $165,000 (with a $5,000 original issue discount). On August 29. 2015, RMHB paid to Rayburn $197,774, representing return of principal and interested earned during the life of the loan. On February 19, 2016, Rayburn issued an additional demand of interest and penalties totaling $99,488. Rayburn has charged $137,262 in interest and penalties on a $160,000 loan for one year and 17 days for an effective annual interest rate of 85.77%. As additional consideration for the note, RMHB was required to issue a warrant to Rayburn for 10,000,000 of common stock.

 

RMHB has claims against Rayburn for violation of Florida Usury Laws. RMHB will seek a cancellation of the note and additional monetary recovery in the total amount paid to Rayburn, plus additional recovery for all usurious interest charged. RMHB will also seek to void the warrant for 10,000,000 shares of common stock, which was issued under a voidable note. The amount which RMHB will seek from Rayburn is in excess of $300,000.

  

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

Meadows claims a breach of an exchange agreement dated November 3, 2015. RMHB has denied the breach. Meadows has demanded that RMHB remove him as a Control Person under RMHB’s OTC Markets Disclosure Statement as of December 31, 2015 filed on January 29, 2016. Meadows has rejected the interest payment under the exchange agreement dated January 30, 2016. He has not given an explanation of his rejection. Meadows also demands the exchange of the Series C Preferred back to the original $1,500,000 convertible note.

 

Meadows has initiated arbitration claiming notice of an Arbitration Claim against RMHB. RMHB has objected to this claim, as well as to the arbitration process itself. Meadows seeks damages of $2,947,094. He has further demanded that RMHB comply with an Agreement dated November 16, 2015 which is a part of the litigation described in the disclosure above. This agreement, which was a requirement of Meadows to execute the Exchange Agreement, requires the Company to issue warrants for common stock of 110,760,000 for not redeeming the Series C Preferred Shares by March 24, 2016.

 

On April 4, 2016, RMHB engaged the law firm of Allred Wilcox & Hartley PLLC to act as counsel in defending these claims.

 

As a result of the arbitration, RMHB filed suit in Florida, Eighteenth Judicial Circuit Court of Seminole County, Florida, Rocky Mountain High Brands, Inc. v. Roy Meadows, David Meadows et al, Case No. 2016-CA-000958-15-W.

 

The Company filed suit for an injunction against continuation of the Meadows Arbitration. The Meadows Arbitration hearing currently has no date for commencement of the Arbitration hearing. Shortly after the suspension of the Arbitration hearing, on April 20, 2016, false, malicious, and defamatory allegations were asserted by the Shareholder Alert inappropriately released by the Law Office of A.A. McClanahan, Meadow’s attorney.

 

 F-17 

 

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

 

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

 

The Amended Suit will deal with the following:

 

RMHB has asserted usury claims in connection with $1,500,000 demand convertible note referenced below in the section pertaining to the Meadows Arbitration Claim. RMHB seeks unspecified monetary damages in connection with the Meadows Note, and further seeks cancellation of warrants for 41,454,851 and 13,641,974 shares of common stock issued to Meadows in connection with the Meadows Note and cancellation of the Meadows Note.

 

During the six months ended December 31, 2015, the Company issued 68,220,350 shares of common stock for the conversion of $104,220 of convertible debt to Roy Meadows and Trinexus, Inc. prior to executing the exchange agreement to Series C preferred stock.

 

RMHB believes that as a result of Meadows’ actions in this suit, the Arbitration is effectively waived and that the Court in Seminole County, Florida will resolve this matter.

 

Meadows has filed a counter claim in this suit for the damages he asserted in the arbitration claim. He has also filed for relief under elderly laws of Florida.

 

192nd Judicial District Court of Dallas County Texas, filed February 16, 201, DC-17-02058. Rocky Mountain High Brands, Inc. v. Dewmar International BMC, Inc. RMHB filed suit against Dewmar for breach of contract and for an accounting. RMHB is in the process of obtaining a default judgment against Dewmar for its failure to file an answer to the suit.

 

134th Judicial District Court of Dallas County, Texas, filed April 28, 2017. Rocky Mountain High Brands, Inc. v Lyonpride Music, LLC. RMHB filed suit against Lyonpride for fraud and for declaratory relief with respect to a contract between the parties. RMHB seeks monetary damages against said Defendant.

 

134th Judicial District Court of Dallas County, Texas. Filed June 26, 2017. Rocky Mountain High Brands, Inc. v Statewide Beverage Company, Inc. RMHB has filed suit for breach of contract, common law fraud and declaratory relief.

 

Los Angeles Superior Court, BC669367, filed July 24, 2017. Statewide Beverage Company, Inc. v. Rocky Mountain High Brands, Inc. Statewide filed a breach of contract claim, dealing with the same fact issues in the above case of RMHB v Statewide. RMHB still has not been served in this case.

 

NOTE 16 – 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.

 

 F-18 

 

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

 

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

 

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

 

NOTE 17 – Subsequent Events

 

Between July 1 and September 27. 2017, the Company issued 6,740,928 shares of common stock. Of these shares, 6,240,928 were for debt conversions and 500,000 were cash purchases.

 

On July 28, 2017, we executed an agreement with Eagle Equities, LLC (“Eagle Equities”) to sell up to $500,000 in convertible notes to Eagle Equities. On that same date, we issued a 12-month, convertible note bearing interest at 8% to Eagle Equities in exchange for funding $220,000, net of fees. The note is convertible to common stock at a 45% discount to market based on a look-back formula. The Company has the ability to obtain additional funding of $220,000 by issuing another convertible note to Eagle Equities eight months from the date of the original note.

 

On September 19, 2017, the Board of Directors approved a new Series E Preferred stock. Holders of Series E Preferred stock are entitled to cast 2,000 votes per share of Series E Preferred stock on any proposal to increase our authorized capital stock, with no other voting rights. Upon effectiveness of an increase in our authorized capital stock, all shares of Series E Preferred stock will convert to common stock on a 1 for 1 basis. On the same day, the Board granted our Chairman 789,474 shares of Series E Preferred stock as payment for his deferred compensation.

 

Also on September 19, 2017, the Board of Directors and holders of a majority of the voting capital stock of the Company, approved an amendment to the Company’s Articles of Incorporation to increase its authorized shares of common stock to 4,000,000,000. The increase is expected to be effective in October 2017.

 

 F-19 

 

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 fiscal year ended June 30, 2017.

 

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 the end of the fiscal year ended June 30, 2017. 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 June 30, 2017 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 June 30, 2017, 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 fiscal year ending June 30, 2018: (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.

 25 

 

Item 9B. Other Information

None.

PART III 

Item 10. Directors, Executive Officers and Corporate Governance

The following table sets forth, as of September 27, 2017, the name, age and positions of our executive officers and directors.

 

NAME AGE POSITION
Michael Welch 63 Chairman of the Board, President and Chief Executive Officer
     
Jens Mielke 51 Chief Financial Officer
     
David Seeberger 61 Director and Vice President, Legal
     
Charles Smith 60 Director and Chief Operating Officer
     
Winton Morrison 79  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.

 

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.

 

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 28 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. He has been a Certified Public Accountant in the State of Texas since 1991. He serves on the Board of Directors of the Dallas Chapter of Financial Executives International.

 

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.

 

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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 almost 35 years.

 

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.

 

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.

 

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.

 

Term of Office

 

Our directors are appointed for a one-year term to hold office until the next annual general meeting of our shareholders or until removed from office in accordance with our bylaws. Our officers are appointed by our Board of Directors and hold office until removed by the Board.

 

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. 

 

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Involvement in Certain Legal Proceedings

 

To the best of our knowledge, during the past ten years, none of the following occurred with respect to a present or former director, executive officer, or employee: (1) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time other than the Chapter 11 bankruptcy proceeding of the Company in 2013 - 2014; (2) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his or her involvement in any type of business, securities or banking activities; and (4) being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.

On December 16, 2013 the Company filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division, Case Number 13-36434-bjh-11. In early 2013, the Company sought to acquire a barbeque company and sought to raise capital and entered into an agreement with Empire Capital LLC (“Empire”) to assist in the raising of capital for the acquisition. By late 2013, the acquisition had fallen through due to the inability to obtain the needed financing. Empire then sued the Company claiming it was owed approximately $200,000 for its services on behalf of the Company along with additional damages. The Company disputed the claims, and filed the Chapter 11 bankruptcy to restructure its current indebtedness and to provide a framework for moving forward. On May 22, 2014 the Company filed its Disclosure Statement and Plan of Reorganization, and on July 2, 2014 a hearing was held and the Plan of Reorganization was confirmed by written order of the Bankruptcy Court dated July 11, 2014.

The material terms of the Order Confirming Debtor’s Plan of Reorganization (the “Bankruptcy Order”) are contained within the Amended Plan of Reorganization (the “Plan”). The Plan was a consensual plan, in that a majority of all creditors in all classes and the equity holders voting voted to accept the Plan. The fundamental material terms of the Plan relate to the allowance or disallowance of claims and treatment of allowed claims and classes of claims, and then to the means for execution of the Plan.

The Plan created five classes of creditors. The Plan contained a separate and distinct obligation of the Company for each of the classes of creditors. The treatment of the Company’s obligation for each class was set forth in Article 5 of the Plan. The Class 1 Claimants consisted of allowed administrative claims, and were to be paid in full on the effective date of the Plan. The only Class 1 Claimant was the Debtor’s attorney, who was paid in full after Court approval of his fee application. Class 2 Claimants consisted of allowed non-insider general unsecured claims. Those Class 2 Claimants were to be paid in full on their claims by receiving 5% of their allowed claim on the effective date of the Plan, and the remainder in 60 equal monthly payments. The Class 3 Claimants consisted of allowed insider general unsecured claims. The Class 3 Claimants consisted of three claimants and their claims were resolved by the issuance of stock of the Debtor. Class 4 Claimants consisted of the allowed claims of the Empire Group, as defined in Class 4. The Class 4 Claimants consisted of four claimants and their claims were resolved by the settlement of pending bankruptcy and non-bankruptcy litigation and other matters with the Class 4 Claimants, which included the return of shares of Debtor’s stock to treasury by one claimant of that Class and the issuance of other shares and delivery of a payment of $50,000.00 to another claimant of that Class. Class 5 Claimants consisted of allowed equity interest holders, and those claimants retained their shares of stock in the Debtor.

The means for execution of the Plan are set forth in Article 6 of the Plan, which contains the matters to be addressed by the Company, primarily those dealing with the obligations to the classes of creditors.

 

Committees of the Board

 

Until further determination by the Board, the full Board of Directors will undertake the duties of the Audit Committee, Compensation Committee, and Nominating Committee.

 

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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. Our Board of Directors, which performs the functions of an audit committee, does not have a member who would qualify as an “audit committee financial expert” within the definition of Item 407(d)(5)(ii) of Regulation S-K. We believe that, at our current size and stage of development, the addition of a special audit committee financial expert to the Board is not necessary.

 

Nominating Committee

 

Our Board of Directors does not maintain a nominating committee. As a result, no written charter governs the director nomination process. Our size and the size of our Board, at this time, do not require a separate nominating committee.

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.

 

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.

 

Code of Conduct

 

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

 

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Item 11. Executive Compensation

Compensation Discussion and Analysis

In 2013, the Company entered into a ten-year employment agreement with Jerry Grisaffi, Chairman of the Board of Directors. Under the agreement, we agreed to compensate Mr. Grisaffi at a rate of $125,000 per year and to a bonus of $30,000 annually, or a greater amount as approved by the Company's Board of Directors. We also issued 10,000,000 shares of Series A preferred stock, 1,000,000 shares of Series B preferred stock, and 1,500,000,000 shares of restricted common stock to Mr. Grisaffi under the terms of the agreement. In June 2017, the Company and Mr. Grisaffi entered into a Indemnification and Release Agreement whereby both parties agreed to mutually release each other from the terms of Mr. Grisaffi’s employment agreement.

 

In 2014, the Company entered into a five-year employment agreement with David M. Seeberger, Vice President – Legal. 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.

 

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.

 

Summary Compensation Table

 

The following table sets forth the compensation earned by Executive Officers during the last two fiscal years:

 

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)   2017   $150,000   $—     $26,274   $—     $—     $—     $—     $176,274 
    2016    68,540    —      —      447,654    —      —      10,000   $526,194 
Jens Mielke, Chief Financial Officer (2)   2017    98,077    —      24,360    —      —      —      1,892   $124,329 
    2016    —      —      —      —      —      —      —     $—   
Charles Smith, Chief Operating Officer (3)   2017    —      —      87,000    —      —      —      —     $87,000 
    2016    —      —      —      —      —      —      —     $—   
David Seeberger, Vice President Legal (4)   2017    120,000    —      24,360    —      —      —      —     $144,360 
    2016    38,473    —           268,511    —      —      62,915   $369,899 
Lily Li, Vice President of International Sales (5)   2017    —      —      1,150,000    —      —      —      —     $1,150,000 
    2016    —      —      —      —      —      —      —     $—   
Jerry Grisaffi, Founder, Former Secretary and Former Chairman of the Board (6)   2017    12,946    —      131,187    —      —      —      —     $144,133 
    2016    36,923    —      —      —      —      —      22,500   $59,423 
Andrew Newsom, Former VP Strategy (7)   2017    —      —      —      —      —      —      —     $—   
    2016    —      —      —      175,200    —      —      10,800   $186,000 

 

 

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Narrative Disclosure to the Summary Compensation Table

 

The Company paid its officers as 1099 Contractors during the first two quarters of 2016 due to the shortage of operating cash in the company during those time periods. All officers were converted to payroll during the third quarter of fiscal year 2016.

 

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. During fiscal year 2017, Mr. Welch was granted an additional 755,000 shares of common stock as compensation.

 

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 1099 contractor in July and August 2017. During fiscal year 2017, Mr. Mielke was granted an additional 700,000 shares of common stock as compensation.

 

3.Charles (Chuck) Smith is an investor in the Company, and is a member of the Board of Directors and is Chief Operating Officer. He has agreed to forego a salary until the Company is fully-funded. 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 2017, Mr. Smith was granted 2,500,000 shares of common stock as compensation.

 

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 fiscal year 2017, Mr. Seeberger was granted an additional 700,000 shares of common stock as compensation.

 

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.Jerry Grisaffi’s employment contract called for compensation at $125,000 per year. In fiscal year 2016 he received $59,423 and in fiscal year 2017 he received $12,946 before he agreed to suspend his salary. In the Indemnification and Release Agreement executed by Mr. Grisaffi and the Company, he agreed to forego $112,054 related to fiscal year 2017 unpaid compensation. Mr. Grisaffi resigned from the Company on June 30, 2017.

 

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7.Andrew Newsom was employed by the Company as a 1099 contractor in fiscal year 2016 and earned $10,080. In addition, Mr. Newsom received 4,000,000 warrants with an anti-dilution clause and a cashless exercise option for common stock at a strike price of $.001 on January 4, 2016 that were exercised on July 29, 2016 for 4,188,514 shares of common stock. Mr. Newsom ended his contract with the Company in April 2016.

 

Outstanding Equity Awards at June 30, 2017 Table

 

The table below summarizes all unexercised options, stock that has not vested, and equity incentive plan awards for each named executive officer as of June 30, 2017:

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

 

Name   Number of Securities Underlying Unexercised Options Warrants (#) Exercisable    Number of Securities Underlying Unexercised Options Warrants (#) Unexercisable    Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Warrants
(#)
    Warrant Exercise  Price
 ($)
    Warrant Expiry Date    Number of Shares or Units of Stock That Have Not Vested
(#)
    Market Value of Shares or Units of Stock That Have Not Vested
($)
    Equity Incentive  Plan Awards:  Number of Unearned  Shares, Units or Other Rights That Have Not Vested
(#)
    Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not  Vested
(#)
 

David Seeberger, Director and VP Legal

(1)

   —      —      —      —      —      —      —      —      —   

Narrative Disclosure to the Outstanding Equity Awards Table

 

1.David Seeberger’s employment contract calls for him to be granted 2,000,000 options for shares of common stock at par value any time after January 1, 2015. Mr. Seeberger has not yet been granted those options. If granted, these options would have had a value of $139,000 as of June 30, 2017.

 

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 Compensation of Directors Table

 

The table below summarizes all compensation paid to our directors during the year ended June 30, 2017:

   Fees Earned or Paid in Cash  Stock Awards  Option Awards  Non-Equity Incentive Plan Compensation  Non-Qualified Deferred Compensation Earnings  All Other Compensation  Total
                      
                      
Name                                   
                             
Charles Smith  $—     $87,000   $—     $—     $—     $—     $87,000 
Jerry Grisaffi   12,946    131,187    —      —      —      —     $131,187 
Winton Morrison   —      12,180    —      —      —      —     $12,180 
Gerry David   16,000    —      1,098,316    —      —      —     $1,114,316 
Kevin Harrington   —      —      340,777    —      —      —     $340,777 

 

 

Narrative Disclosure to the Director Compensation Table

 

Both Charles Smith and Winton Morrison became Board Members in February 2016 and are not included in this table. As Board members, the Company agreed to issue each of them 7,000,000 warrants with an anti-dilution clause and a cashless exercise option for common stock at a strike price of $.001 and exercisable for a five-year period after a one year holding period. Both Mr. Smith and Mr. Morrison exercised their warrants on July 29, 2016 in exchange for 7,216,500 shares of common stock.

 

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

The following table sets forth, as of September 27, 2017, 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. The table gives effect to the Series E Preferred stock approved by the Board of Directors on September 19, 2017 and the issuance of 789,744 shares of Series E Preferred stock issued to our Chairman of the Board on the same day. Except as otherwise indicated, all shares are owned directly and the percentage shown is based on 793,266,046 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 –All Other Actions(3) Percent of Voting Power – Actions to Increase Authorized Stock(4)
Current Executive Officers & Directors:    
Common Stock

Michael R. Welch(5)

10626 Cox Lane

Dallas, TX 75229

17,648,097 1.97% 1.41% 57.56%
Common Stock

Jens R. Mielke

4403 Vandelia St.

Dallas, TX 75219

2,250,250 0.25% 0.19% 0.08%
Common Stock

Charles Smith

479 Medina Dr.

Highland Village, TX 75077

11,964,901 1.34% 1.00% 0.43%
Common Stock

David M. Seeberger

1252 N. Selva

Dallas, TX 75218

14,845,074 1.66% 1.24% 0.54%
Common Stock

Winton Morrison

277 Driftwood Rd., SE

St. Petersburg, FL 33705

9,629,000 1.08% 0.81% 0.35%
Common Stock

Lily Li(6)

4858 Route 32

Catskill, NY 12414

116,000,000 12.97% 34.86% 15.01%
Common Stock Total of All Current Directors and Officers: 172,337,322 19.27% 39.51% 73.97%
         
More than 5% Beneficial Owners        
Series A Preferred Stock LSW Holdings, LLC(7) 1,000,000 100% 33.52% 14.43%
Series E Preferred Stock Michael Welch 789,474 100% 0% 56.96%