Forward-Looking Statements

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





Company Overview

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





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




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




  •  Rocky Mountain Productions, Inc. ("RMPI"), an active Nevada corporation
     (Subsidiary)




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




  •  Rocky Mountain High Water Company, LLC ("WaterCo"), an active Delaware
     limited liability company (Subsidiary)




  • FitWhey Brands Inc. ("FitWhey"), an active Nevada corporation (Subsidiary)




  •  Sweet Rock, LLC ("Sweet Rock"), an active Michigan limited liability company
     (Subsidiary)




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




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

RMHB is a consumer goods company that specializes in the developing, manufacturing, marketing, and distributing high-quality, health conscious, hemp oil and hemp extract-infused products that span various categories including beverage, food, fitness, skin care, and more. RMHB also markets a naturally high alkaline spring water as part of our brand portfolio. All products comply with federal regulations on hemp products and contain 0.0% tetrahydrocannabinol ("THC"), the psychoactive constituent of cannabis. Recently, through a newly created subsidiary of RMHB, Rocky Mountain Productions, Inc., the Company acquired a bottling and canning facility and is now also in the business of canning both its own beverages as well as canning beverages for other customers. Furthermore, as a result of equipment included in the acquisition of the facility, RMHB is also in the business of bottling hand sanitizer.

Because of the demand resulting with the COVID-19 pandemic, RMHB anticipates continuing in the bottling of hand sanitizer for the foreseeable future.





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In March 2018, the Company launched the HEMPd brand with gummies, water soluble drops, capsules, tinctures, lotions, and salves. The Company introduced four flavors of HEMPd CBD-infused waters in 12 oz. cans in November 2018 and sold those beverages in carbonated and non-carbonated offerings in 2019.

In July 2018, the Company acquired the assets of BFIT Brands, LLC and formed a new subsidiary, FitWhey Brands LLC. FitWhey marketed a line-up of five water-based protein drinks that include caffeine and B vitamins. In August 2019 management determined the Company would suspend the production of FitWhey branded products until it develops a related hemp or CBD-infused product.

On June 12, 2019, the Company organized Sweet Rock, LLC ("Sweet Rock"), a 51% owned company, with Sweet Ally, Inc. Sweet Rock will manufacture and market CBD-infused chocolates, hard candies, and baked goods for distribution in the United States.

On April 29, 2020, the Company formed Rocky Mountain Productions, Inc. ("RMPI"), a wholly owned Nevada corporation. On April 30, 2020, RMPI purchased certain assets of Raw Pharma, LLC ("Raw Pharma") including machinery, equipment, and fixtures. The facility has the capability to can and bottle products, including 12 oz. regular and sleek cans, 16 oz. cans, shots, and bottles.

RMHB also bottles and distributes its naturally high alkaline spring water under the name Eagle Spirit Spring Water.

RMHB has entered into the business of producing National Brand Equivalent (NBE) products. RMHB is currently finalizing the production process for the filling of Pediatric Electrolyte drink under the Great Choice brand, which brand was licensed by RMHB.





Results of Operations

Three Months Ended June 30, 2020, Compared to Three Months Ended June 30, 2019





Financial Summary

The Company's sales for the three months ended June 30, 2020, were $669,489 compared to sales of $36,572 for the three months ended June 30, 2019.

The Company's net loss for the three months ended June 30, 2020, was 1,207,165 compared to a net loss of $667,170 for the three months ended June 30, 2019.





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Sales

For the three months ended June 30, 2020, sales were $669,489 compared to sales of $36,572 for the three months ended June 30, 2019, an increase of $632,917 or 1.73%. The sales increase was driven by the sale of private label beverages to CBD Life. The increase was partially offset by a reduction in sales of HEMPd branded products as the Company sold off inventory in anticipation of a change in suppliers and lower Eagle Spirit Water sales in 2020. For the three months ended June 30, 2020, sales consisted of approximately 70% private label sales, 18% online sales, 11% distributor sales, and 1% direct to retailer sales, compared to approximately 80% online sales, 2% distributor sales, and 18% direct to retailer sales for the three months ended June 30, 2019.





Cost of Sales

For the three months ended June 30, 2020, cost of sales was $624,209 or .93% of sales, compared to $38,855 or 1.06% of sales for the three months ended June 30, 2019, an increase of $141,350 or 187%. The increase in 2020 was primarily due to the accrual of additional production costs related to CBD Life, our private label customer. In July 2020, the customer informed the Company that numerous cans of the delivered product were leaking. The Company agreed to replace the entire production run at its own expense. As of June 30, 2020, the Company established an accrual of $68,648 for the estimated production costs with a corresponding increase in cost of sales. The Company also incurred start-up costs and production overruns related to CBD Life that increased the related cost of sales to approximately $109,000, resulting in a negative gross margin. Additionally in 2020, the Company sold off HEMPd inventory in anticipation of supplier changes and the resulting promotions caused a deterioration in gross margin.





Operating Expenses

For the three months ended June 30, 2020, operating expenses were $1,096,091 or 1.63% of sales, compared to $858,831 or 2.35% of sales for the three months ended June 30, 2019. Areas in which the Company experienced significant changes in operating expenses are discussed below.





General and Administrative

For the three months ended June 30, 2020, general and administrative expenses were $1,094,09169 or 1.63% of sales, compared to $696,846 or 19.05% of sales for the three months ended June 30, 2019, a increase of $397,282 or 59%. The decrease in general and administrative expenses in 2020 was primarily driven by decreases in compensation and legal expenses.





Advertising and Marketing

For the three months ended June 30, 2020, advertising and marketing expenses were $1,963 or .3% of sales, compared to $158,985 or 4.34% of sales for the three months ended June 30, 2019, a decrease of $157,022 or 23%. The decrease in advertising and marketing expenses in 2020 was primarily due to the Company's reduction in online advertising and outside marketing consultant and agency fees. Additionally, the Company incurs no advertising or marketing expenses related to private label sales.





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Other (Income) Expense



Interest Expense

For the three months ended June 30, 2020, interest expense was $119,525, compared to $339,368 for the three months ended March 31, 2019, a decrease of $219,843. The decrease in interest expense, which includes the amortization of the discount on convertible debt, and the excess of the beneficial conversion feature on certain convertible notes payable, was due to decreased debt activity in 2020.

Loss on Extinguishment of Debt

For the three months ended June 30, 2020, the Company recorded a loss on extinguishment of debt of $37,429 related to the amendment and settlement of convertible notes payable. There $689,991 extinguishment of debt during the three months ended June 30, 2019.

Gain on Change in Fair Value of Derivative Liability

For the three months ended June 30, 2020, the Company recorded a loss on the change in fair value of derivative liability of $37,429 compared to a loss of $390,520 for the three months ended June 30, 2019. In 2020 the loss resulted from the change in the convertibility of two convertible notes payable that were made in February and March 2020 and increase in the valuation of the related derivative liability based on the change in the market value of the Company's common stock. The gain in 2019 was due to the decrease in the market value of the Company's common stock between January 1, 2019, and March 31, 2019.





Income Taxes

For the three months ended June 30, 2020, and 2019 the Company recorded no income tax provision due to a full valuation allowance provided on deferred tax assets resulting from net operating losses.

Net Loss Attributable to Noncontrolling Interests

For the three months ended June 30, 2020, the Company recorded no income or loss attributable to noncontrolling interests as there was no activity in its 51%-owned subsidiary, Sweet Rock. There were no noncontrolling interests in 2019.

Liquidity and Capital Resources

As of June 30, 2020, the Company had working capital of ($3,300,316). The Company had current assets of $1,215,178, consisting of cash and restricted cash of $31,245, accounts receivable (net) of $0, inventory of $149,940, and prepaid expenses and other current assets of $1,033,993. As of March 31, 2020, the Company had current liabilities of $4,515,494, consisting of accounts payable and accrued liabilities of $1,100,928, convertible notes payable (net) of $1,033,776, notes payable of $30,000, accrued interest of $90,551, deferred revenue of $445,925, and derivative liability of $413,678.





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Cash flows from operating activities

Net cash used in operating activities during the three months ended June 30, 2020, was $1,720,087 compared to $2,045,372 used during the three months ended March 31, 2019. The change was principally driven by the reduced net loss and increase in accounts payable in 2020.

Cash flows from investing activities

Net cash provided by investing activities was $1,549,025 during the three months ended June 30, 2020. This represents the Company's proceeds from the sale of miscellaneous office furnishings. There were no cash flows from investing activities during the three months ended June 30, 2019.

Cash flows from financing activities

Net cash provided by financing activities during the three months ended June 30, 2020, was $3,717,947 compared to $1,500,249 during the three months ended June 30, 2019. During the three months ended March 31, 2020, the Company received proceeds of $275,000 from the issuance of convertible notes payable and $211,000 from the issuance of preferred stock. During the three months ended June 30, 2019, the Company received proceeds from the issuance of common stock of $1,139,173 and paid $6,424 on notes payable.

Outstanding Material Indebtedness

Recently, the Company's operations have been funded primarily through the private sales of common stock or the issuance of convertible promissory notes, which are currently convertible to common stock at a fixed prices ranging from $0.01 to $0.03 or at a discount to market price (as defined in the agreements) of 50%. As of June 30, 2020, the Company had total notes payable outstanding of $1,607,158, less a discount of $332,857.

Known Trends and Uncertainties Expected to Have a Material Impact on Revenues

We expect our revenues to increase materially during the remainder of 2020 and in 2021, primarily due to anticipated sales of hand sanitizer. We also expect revenue growth from our HEMPd branded CBD-infused flavored waters and other HEMPd branded products.

Future Liquidity Requirements

The Company's anticipated operational shortfall for the next twelve months is $1,500,000 to $2,000,000. We plan to utilize the SPA executed with GHS in June 2018, as well as bridge financing, to raise the required capital.

Off Balance Sheet Arrangements

As of June 30, 2020, there are no off-balance sheet arrangements.





Going Concern

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of June 30, 2020, the Company has a shareholders' deficit of $1,709,064 and an accumulated deficit of $42,471,932 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.





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The Company has historically funded its operations with sales of equity and debt securities. The COVID-19 pandemic of 2020 has added uncertainty into the financial markets that the Company relies on for its operating and investment funding. It is unclear how long, or to what extent, the pandemic will impact the Company in 2020 and beyond. On April 30, 2020, the Company purchased certain assets of Raw Pharma, LLC ("Raw Pharma") and agreed to sublease Raw Pharma's production facility. Management believes its Securities Purchase Agreement dated December 20, 2019, with GHS Investments, LLC ("GHS"), along with bridge financing from GHS or other sources, will provide sufficient funds to make up for any operating cash flows.

The Company's business has been adversely affected by the instability, disruption, and quarantine restrictions caused by the recent COVID-19 pandemic. The COVID-19 pandemic may cause customers to suspend their decisions on ordering our products, make it impossible to attend or sponsor trade shows or other conferences in which our products are presented to distributors, customers and potential customers, for our customers to visit our physical location, and give rise to sudden significant changes in regional and global economic conditions and cycles that could interfere with purchases of goods, or commitments to develop new brands and private label products.

Significant disruptions to communications and travel, including travel restrictions and other protective quarantine measures against COVID-19 by governmental agencies, have increased the difficulty in delivering goods to our customers and could ultimately make such deliveries impossible. Travel restrictions and protective measures against COVID-19 could cause us to incur additional unexpected labor costs and expenses or could restrain our ability to retain the highly skilled personnel we need for our operations.

The COVID-19 pandemic has added uncertainty to the financial markets that the Company relies on for its operating and investment funding. It has also negatively impacted the Company's ability to meet its external financial reporting deadlines.

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