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

Rocky Mountain High Brands, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

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

Rocky Mountain High Brands, Inc.

 Consolidated Statements of Shareholders' Deficit for the Three and Nine Months Ended September 30, 2019

(Unaudited) 

Rocky Mountain High Brands, Inc.

 Consolidated Statements of Shareholders' Deficit for the Three and Nine Months Ended September 30, 2018

(Unaudited) 

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

Rocky Mountain High Brands, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1 – General

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

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

RMHB is a consumer goods company that specializes in developing, manufacturing, marketing, and distributing high-quality, health conscious, cannabidiol (“CBD”) and hemp- infused products that span various categories including beverage, food, fitness, skin care and more. RMHB also markets a naturally high alkaline spring water and a water-based whey protein and energy drink as part of our brand portfolio.

In March 2018, the Company launched the HEMPd brand with tinctures, gummies, water soluble drops, capsules, lotions, salves, and E-juice liquids. In October 2018, the Company introduced CBD-infused waters in four flavors and plans to introduce additional HEMPd product offerings in the future. HEMPd products are marketed through the Company’s Rocky Mountain Hemp CompanyWellness For Life Colorado, Inc. subsidiary. In November 2018, the Company discontinued sales of its vape-related products.

On July 25, 2018 the Company acquired the assets of BFIT Brands, LLC (“BFIT”), an Arizona limited liability company. These assets include the cash, accounts receivable, inventory, FitWhey trademark, recipes and formulas of BFIT’s FitWhey branded water-based protein drinks containing caffeine and a vitamin-B pack.

TheOn April 22, 2019 the reverse split of the Company’s Stock, at a ratio of one share for every 20 shares, was effective. All common stock share and per share amounts in this document reflect this reverse split.

On June 12, 2019 the Company continues toorganized Sweet Rock, LLC (“Sweet Rock”), a 51% owned company, with Sweet Ally, Inc. Sweet Rock will manufacture and market its naturally flavored hemp-infused functional beverage, Mango Energy. CBD-infused chocolates, hard candies, and baked goods for distribution in the United States.

RMHB also bottles and distributes its naturally high alkaline spring water under the name Eagle Spirit Spring Water.Water and plans to re-introduce its hemp-infused energy drinks later in 2019 or early 2020.

NOTE 2 – Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q and Article 810 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of the Company’s management, the accompanying unaudited consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of September 30, 20182019 and the results of operations and cash flows for the periods presented. The results of operations for the three and nine months ended September 30, 20182019 are not necessarily indicative of the operating results for the full fiscal year or any future period. These unaudited consolidated financial statements should be read in conjunction with the financial statements and related notes thereto included in the Company’s form 10-KT10-K for the transition periodyear ended December 31, 20172018 filed with the SEC on April 2, 2018.15, 2019.

Principles of Consolidation

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

Use of Estimates

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

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

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

All sales for all periods presented were to domestic customers.

Due to the nature of the Company’s revenue from contracts with customers, the Company does not have material contract assets or liabilities that fall under the scope of ASC 606.

The Company’s revenues accounted for under ASC 606, generally, do not require significant estimates or judgments based on the nature of the Company’s revenue streams. The sales prices are generally fixed at the point of sale and all consideration from contracts is included in the transaction price. The Company’s contracts do not include multiple performance obligations or material variable consideration.

Accounts Receivable and Allowance for Doubtful Accounts Receivable

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

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

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

Inventories

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

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

Fair Value Measurements

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

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

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

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

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

Balance, December 31, 2018		$	376,172
Issued during the nine months ended September 30, 2019		$	21,192
Exercises/Conversions		$	(7,530)
Change in fair value recognized in operations		$	(126,304)
Balance, September 30, 2019		$	263,530

The estimated fair value of the derivative instruments was valued using the Black-Scholes option pricing model, using the following assumptions as of September 30, 2018:

2019:

Property and Equipment

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

Leases

The Company accounts for leases in accordance with Financial Accounting Standards Board (“FASB”) (Topic 840)Leases. In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02,Leases (Topic 842), which requires lessees to recognize on the balance sheet a right-of-use asset, representing their right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 was effective for calendar year-end public companies on January 1, 2019. The Company’s status as an emerging growth company allows it to defer the adoption of this standard by one year and the Company has elected to do so. The Company plans to adopt this new standard on January 1, 2020. The Company is currently evaluating the impact that ASU 2016-02 will have on its consolidated financial statements.

Capitalized Software

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

Impairment of Long-Lived Assets

The Company evaluates intangible assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. The Company assesses the recoverability of the assets based on the undiscounted future cash flow and recognizes an impairment loss when the estimated undiscounted future cash flow expected to result from the use of the asset plus the net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When the Company identifies an impairment, it reduces the carrying amount of the asset to its estimated fair value based on a discounted cash flow approach or, when available and appropriate, to comparable market values. In August 2019 the Company recorded a $118,066 impairment on the intangible assets recorded as a result of the BFIT Brands, LLC acquisition in July 2018. No other impairment charges were recorded during the three and nine months ended September 30, 20182019 and 2017.2018.

Share-based Payments

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

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

Convertible Instruments

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

Preferred Stock

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

Advertising

Advertising and marketing expenses are charged to operations as incurred.

Income Taxes

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

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

NOTE 3 – Going Concern

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has a shareholders’ deficit of $764,655,$1,039,280 and an accumulated deficit of $36,364,245, and a working capital deficit of $990,329$37,867,494 as of September 30, 20182019 and has generated operating losses since inception. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern. The Company’s continuation as a going concern is dependent upon its ability to generate revenues and its ability to continue raising capital.

On June 27, 2018, the Company entered into a Securities Purchase Agreement (“SPA”) with GHS Investments, LLC (“GHS”), which provides for GHS to purchase up to $15,000,000 of the Company’s common stock over a 24-month period based on a contractually agreed upon market discount. The SPA replaces the Equity Financing Agreement the Company entered into with GHS on October 12, 2017. On August 8, 2018, the Company filed a registration statement with the Securities and Exchange Commission (“SEC”) to register up to 320,000,00016,000,000 shares of our common stock to be purchased by GHS under the SPA. The registration statement became effective on October 10, 2018.2018 and the Company sold all the available shares under the SPA. On May 15, 2019, the Company filed a registration statement for 30,000,000 shares to be purchased by GHS. This registration statement became effective on June 18, 2019 and the Company began selling shares in June. Management believes the SPA, along with bridge financing from GHS, will provide sufficient cash flows until cash flows from operations become consistently positive.

NOTE 4 – Inventory

As of September 30, 2018 and December 31, 2017, inventory consistedInventory consists of the following:

For the three and nine months ended September 30, 2019 the Company recorded inventory obsolescence expense of $107,594 for each period. This expense primarily represented the write-down of expired FitWhey beverages and ingredients, obsolete FitWhey labels, and other expired ingredients.

For the three and nine months ended September 30, 2018 the Company recorded inventory obsolescence expense of $13,721 and $25,145, respectively. The expense primarily represented the write-down of expired hemp-infused beverages and shots. 

NOTE 5 – Prepaid Expenses and Other Current Assets

As of September 30, 2018 and December 31, 2017, prepaidPrepaid expenses and other current assets were as follows:consist of the following:

NOTE 6 – Property and Equipment

As of September 30, 2018 and December 31, 2017, propertyProperty and equipment were as follows:consist of the following:

For the three months ended September 30, 20182019 and 2017,2018, depreciation expense was $4,367$3,550 and $4,584,$4,367, respectively. For the nine months ended September 30, 20182019 and 2017,2018, depreciation expense was $14,496$11,554 and $16,679, respectively.

NOTE 7 – Acquisition

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

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

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

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

In August 2019 management determined the Company would suspend the production of water-based protein and caffeine-infused products until it develops a related hemp or CBD-infused product. As a result, the Company fully impaired the intangible assets related to its purchase of FitWhey. This resulted in an impairment charge of $118,066 for the three and nine months ended September 30, 2019. Because all intangible assets were 100% impaired, it was determined that completion of an outside valuation was no longer necessary.

The following represents the unaudited pro forma statement of operations of the Company for the three and nine months ended September 30, 2018 had FitWhey been acquired on January 1, 2018:

NOTE 78 – Accounts Payable and Accrued Liabilities

As of September 30, 2018 and December 31, 2017, accountsAccounts payable and accrued liabilities consistedconsist of the following:

NOTE 89 – Convertible Notes Payable

As of September 30, 2018 and December 31, 2017, the Company’s convertibleConvertible notes payable were as follows:consist of the following:

For the three months ended September 30, 20182019 and 2017,2018, interest expense on these notes, including amortization of the discount, was $308,239$295,585 and $124,584,$308,239, respectively. For the nine months ended September 30, 20182019 and 2017,2018, interest expense on these notes, including amortization of the discount, was $1,048,765$928,142 and $219,435,$1,048,765, respectively.

The Company has determined that the conversion feature embedded in certainAll tangible and intangible assets of the notes referred to above that contain a potential variable conversion amount constitutes a derivative which has been bifurcated from the note and recordedCompany are pledged as a derivative liability, with a corresponding discount recorded to the associated debt. The excesssecurity.

NOTE 10 – Notes Payable

Notes payable consist of the derivative value over the face amount of the note is recorded immediately to interest expense at inception. The Company recorded no interest expense for the three and nine months ended September 30, 2018 and 2017, respectively, related to the excess of derivative value over the face amount of convertible notes payable.following:

The Company recorded $268,021 and $0, interest expense for the three months ended September 30, 2018 and 2017, respectively, at the inception of certain convertible notes payable relating to the excess of the derivative over the face amount of the related convertible notes payable. The Company recorded $2,700,930 and $0 interest expense for the nine months ended September 30, 2018 and 2017, respectively, at the inception of certain convertible notes payable relating to the excess of the derivative over the face amount of the related convertible notes payable.

		Interest Rate		Term				September 30, 2019				December 31, 2018
Notes payable		0 %			Due			$	30,000			$	37,493

NOTE 9 – Notes Payable

As of September 30, 2018 and 2017,2019, notes payable includes two non-interest bearing notes totaling $30,000 that originated prior to the Company’s 2014 bankruptcy proceedings. As of December 31, 2018, notes payable were as follows:

Onalso includes a three-year note executed on September 1, 2016 relating to the Company purchasedpurchase of used office furniture and equipment from itsour landlord. The Company executed athe note payable in the amount of $40,122 at an interest rate of 0% and with monthly payments of $1,114.$1,115. The Company imputed interest on the note and recorded a discounted note balance of $36,634 on September 1, 2016.$36,634. The term of theoffice furniture note is three years.

On November 30, 2017 the Company amended two notes payable to GHSwas repaid in the aggregate principal amount of $500,000. The notes, which were originally made on October 12 and November 2, 2017 and included conversion prices at a 20% discount off market price, as defined in the agreements. The amendments removed the conversion features in the notes. Upon amendment, the Company recorded a loss on extinguishment of these notes of $15,256. As of December 31, 2017 the notes, which were previously included in Convertible Notes Payable are included in Notes Payable. On January 9, 2018 the notes were again amended to reinstate the conversion feature. These notes are included in Convertible Notes Payable as of September 30, 2018.August 2019.

For the three months ended September 30, 20182019 and 2017,2018, interest expense on these notesthe furniture and equipment note was $559$0 and $416,$559, respectively. For the nine months ended September 30, 20182019 and 2017,2018, interest expense on these notesthe furniture and equipment note was $1,779$197 and $1,461,$1,779, respectively.

NOTE 1011 – Related Party Convertible Notes PayableDeferred Revenue

AsIn December 2017, the Company executed a three-year Master Manufacturing Agreement with CBD Alimentos SA de CV (“CBD-Alimentos”), a Mexican food and beverage distributor. Under the agreement (as amended), CBD Alimentos, through its sister company, CBD Life, will be our exclusive distributor in Mexico for all of our CBD-infused energy and functional beverages. In turn,wewill be CBD Alimentos’ exclusive supplier of such products. The beverages supplied to CBD Alimentos will be private label products made to order for CBD Alimentos, andwewill cooperate on laboratory and taste-testing of each batch of beverages at the co-packing facility. In accordance with the Agreement, RMHB opened a separate operating bank account for all deposits made by CBD Alimentos towards the purchase of ingredients and packaging. CBD Alimentos is required to maintain a positive cash balance in the account at all times. The Company has full unilateral authority to disburse funds from the bank account to vendors, suppliers, co-packers and the Company solely for the purposes of production and the Company’s margin on the sale. CBD Alimentos’ initial purchase order, including a deposit of $466,300 was received in December 2018. The $466,300 is accounted for as Deferred Revenue as of September 30, 2019 and December 31, 2018 as production and 2017, the Company’s related party convertible notes payable were as follows:

The Company has determined that the conversion feature embedded in certain of the notes referred to above that contain a potential variable conversion amount constitutes a derivative which hasfinished product had not yet been bifurcated from the note and recorded as a derivative liability, with a corresponding discount recorded to the associated debt. The excess of the derivative value over the face amount of the note is recorded immediately to interest expense at inception. The Company recorded no interest expense for the three and nine months ended September 30, 2018 and 2017, respectively, at the inception of the notes relating to the excess of derivative value over the face of the notes.completed.

The balance of these notes was reclassified to convertible notes payable as of April 5, 2018 upon the termination of the Company’s Executive Vice President, Lily Li, who is the Managing Member of LSW Holdings, LLC (“LSW”), the holder of these notes.

NOTE 1112 – Shareholders’ Deficit

Common Stock

As of September 30, 2018,2019, the Company has 4,000,000,000200,000,000 shares of common stock authorized.authorized and 126,162,146 shares issued and outstanding. On April 22, 2019 the Company effected a 1-for-20 reverse stock split. All common share amounts in this report reflect this stock split.

During the three months ended September 30, 2019 the Company issued 17,182,155 shares of common stock, all of which were issued for cash.

During the nine months ended September 30, 20182019 the Company issued 551,074,37031,581,277 shares of common stock, including 244,267,2804,065,980 shares for convertible notes payable conversions, 250,000,00027,486,424 shares for cash, 29,096,402and 25,403 shares for option exercises, 20,248,000compensation. The remaining 3,470 shares for services rendered, and 7,462,688 forwere issued as a result of the FitWhey acquisition. In September 2018, the Company also cancelled 1,818,180 shares as part of a legal settlement.Company’s reverse stock split, which was effective on April 22, 2019.

Preferred Stock

The Company has 20,000,000 shares of preferred stock authorized as of September 30, 2018,2019, of which 12,789,474 are specifically designated to a series of preferred stock and 7,210,526 remain undesignated.

Series A Preferred Stock

The Company has 1,000,000 shares of Series A Preferred Stock designated, andof which none were outstanding as of September 30, 20182019 and December 31, 2017.2018. LSW isHoldings LLC was the holder of these shares. Lily Li, who was the Company’s Executive Vice President until April 5, 2018, is the Managing Member of LSW and, in that capacity, hashad the authority to direct voting and investment decisions with regard to its holdings in the Company. On October 26, 2018 these shares were ruled voidab initioby a District Court in Dallas County, Texas. The Company cancelled these shares effective that date.

Series B Preferred Stock

The Company has 7,000,000 shares of Series B Preferred Stock designated, of which none were outstanding as of September 30, 20182019 and December 31, 2017.2018.

Series C Preferred Stock

The Company has 2,000,000 shares of Series C Preferred Stock designated, of which none were outstanding as of September 30, 20182019 and December 31, 2017.2018. Series C Preferred Stock is 12% interest bearing, cumulative, exchangeable, non-voting, convertible preferred stock of the Company. Each Series C Preferred share is convertible to 502.5 shares of common stock.

Series D Preferred Stock

The Company has 2,000,000 shares of Series D Preferred Stock designated, of which none were outstanding as of September 30, 20182019 and December 31, 2017.2018. Series D Preferred Stock is a non-voting, non-interest bearing convertible preferred stock. Each Series D preferred share is convertible to 1005 shares of common stock.

Series E Preferred Stock

On September 19, 2017, the Board of Directors approved a new Series E Preferred Stock. Holders of Series E Preferred Stock are entitled to cast 2,000100 votes per share of Series E Preferred Stock on any proposal to increase our authorized capital stock, with no other voting rights. Series E Preferred Stock is convertible to common stock on a 1:20:1 basis. On the same day, the Board granted our Chairman 789,474 shares of Series E Preferred stock as payment for his deferred compensation. On October 31, 2017, Mr. Welch converted his 789,474 shares of Series E Preferred Stock to 789,47439,474 shares of common stock. As of September 30, 20182019 and December 31, 20172018 there were no shares outstanding.

Warrants

During the nine months ended September 30, 20182019 the Company granted no common stock warrants none were exercised, and none were cancelled.exercised. During that period, 25,000 warrants were forfeited.

Options

During the nine months ended September 30, 20182019 the Company granted 11,469,613500,000 options to purchase common stock with terms ranging from two to fivea term of three years and an exercise pricesprice of $.003, holders$.06. The options never vested and were forfeited in May 2019. No options were exercised 23,607,193 options, and noneno others were cancelled.cancelled during the nine months ended September 30, 2019.

NOTE 12– Concentrations13– Noncontrolling Interests

In July 2019, the Company invested $500 in Sweet Rock, LLC, a Michigan limited liability company. The Company owns 51% and Sweet Ally, Inc. (“Sweet Ally”) invested $495 and owns 49%. The Company consolidates the financial statements of Sweet Rock and accounts for Sweet Ally’s ownership as a noncontrolling interest. During the three and nine months ended September 30, 2019 Sweet Rock incurred marketing expenses of $3,120. This activity is included in the consolidated financial statements of the Company with corresponding noncontrolling interests.

NOTE 14– Concentrations

During the three months ended September 30, 2019 the Company’s two largest customers accounted for approximately 91% and less than 1% of sales, respectively. During the three months ended September 30, 2018, the Company’s two largest customers accounted for approximately 12% and 3% of sales, respectively.

During the threenine months ended September 30, 2017,2019 the Company’s two largest customers accounted for approximately 10%69% and 5%3% of sales, respectively. During the nine months ended September 30, 2018, the Company’s two largest customers accounted for approximately 6% and 6% of sales, respectively. During the nine months ended September 30, 2017, the Company’s two largest customers accounted for approximately 23% and 14% of sales, respectively.

NOTE 1315 – Income Taxes

The reconciliation of income tax benefit at the U.S. statutory rate of 21% to the Company’s effective rate for the periods presented is as follows:

The tax effects of temporary differences that give rise to the Company’s net deferred tax liability as of September 30, 20182019 and December 31, 2017 are as follows:

2018 are:

		September 30, 2019				December 31, 2018
Deferred Tax Assets
Net Operating Losses		$	4,400,000			$	3,960,000
Less: Valuation Allowance		$	(4,400,000	)		$	(3,960,000)
Deferred Tax Assets – Net			—				—