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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: June 30, 2014

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to___________ 

 

Commission file number: 000-54624

 

US HIGHLAND, INC.

(Exact name of registrant as specified in its charter)

 

Oklahoma

 

26-4144571

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

1411 N. 105thEast Avenue, Tulsa, OK 

 

74116

(Address of principal executive offices) 

 

(Zip Code)

 

Registrant's Telephone number, including area code: (918)-895-8300

 

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 preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the part 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 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 ¨ No 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 in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer 

¨

Accelerated filer

¨

Non-accelerated filer 

¨

Smaller reporting company

x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

Number of the Registrant’s common stock outstanding as of August 19, 2014: 77,727,669 common shares

 

 

 

US Highland, Inc.

Form 10-Q

For the Fiscal Period Ended June 30, 2014

 

Table of Contents

 

PART I – FINANCIAL INFORMATION

 

 

 

ITEM 1. 

FINANCIAL STATEMENTS (UNAUDITED)

 

3

 

 

 

 

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   

15

 

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   

17

 

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

   

17

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

   

18

 

 

 

 

ITEM 1A.

RISK FACTORS

   

18

 

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

   

18

 

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

   

18

 

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

   

18

 

 

 

 

ITEM 5.

OTHER INFORMATION

   

18

 

 

 

 

ITEM 6.

EXHIBITS

   

19

 

 

 
2

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

The Company’s unaudited interim condensed consolidated financial statements for the six month period ended June 30, 2014 and for the comparable period in the prior year form part of this quarterly report. They are prepared in accordance with United States generally accepted accounting principles.

 

US Highland, Inc.

 

Index to the Unaudited Condensed Consolidated Financial Statements

 

Unaudited Condensed Consolidated Balance Sheets

  4  

Unaudited Condensed Consolidated Statements of Operations

   

5

 

Unaudited Condensed Consolidated Statements of Cash Flows

   

6

 

Unaudited Condensed Consolidated Statements of Stockholders' Deficiency

   

7

 

Notes to the Unaudited Condensed Consolidated Financial Statements

   

8

 

 

 
3

 

US Highland, Inc.

Unaudited Condensed Consolidated Balance Sheets

 

  June 30,
2014

 

 

December 31,
2013

 

         

ASSETS

       
         

Current Assets

       
         

Cash

 

$

2,531

 

 

$

43,044

 

Inventory

 

 

 

 

99,826

 

Prepaid expenses

 

44,873

 

 

 

58,520

 

         

Total Current Assets

 

47,404

 

 

 

201,390

 

Long-term deposits

 

11,478

 

 

 

11,491

 

Property and Equipment, net

 

19,397

 

 

 

24,555

 

         

Total Assets

 

$

78,279

 

 

$

237,436

 

         

LIABILITIES AND STOCKHOLDERS’ DEFICIENCY

       
         

Current Liabilities

       
         

Accounts payable

 

$

494,095

 

 

$

393,617

 

Accrued liabilities ($107,907 and $66,184 related parties, respectively)

 

567,820

 

 

 

258,238

 

Convertible debentures ($607,208 and $144,362 related parties, respectively)

 

857,105

 

 

 

351,829

 

Derivative liabilities

 

38,293,760

 

 

 

29,430,719

 

Loans payable ($33,000 and $27,000 related parties, respectively)

 

121,500

 

 

 

115,500

 

         

Total Current Liabilities

 

40,334,280

 

 

 

30,549,903

 

         

Loans Payable ($425,000 and $0 related parties, respectively)

 

425,000

 

 

 

 

         

Total Liabilities

 

40,759,280

 

 

 

30,549,903

 

         

Commitments

       
         

Stockholders’ Deficiency

       
         

Preferred Stock, 3,550,000 shares authorized, par value $0.01; No shares issued and outstanding at June 30, 2014 and December 31, 2013

 

 

 

 

 

         

Common Stock, 500,000,000 shares authorized, $0.01 par value; 77,727,669 shares issued and outstanding at June 30, 2014 and  December 31, 2013

 

777,276

 

 

 

777,276

 

         

Common Stock Reserved for Future Issuance

 

136,889

 

 

 

129,881

 

         

Additional Paid-in Capital

 

54,757,845

 

 

 

54,757,845

 

         

Accumulated Deficit

(95,579,511

)

 

(85,203,969

)

         
 

(39,907,501

)

 

(29,538,967

)

         

Treasury Stock, at cost – 58,333 shares at June 30, 2014 and December 31, 2013

(773,500

)

 

(773,500

)

         

Total Stockholders’ Deficiency

(40,681,001

)

 

(30,312,467

)

         

Total Liabilities and Stockholders’ Deficiency

 

$

78,279

 

 

$

237,436

 

 

(The accompanying notes are an integral part of these condensed consolidated financial statements) 

 

 
4

 

US Highland, Inc.

Unaudited Condensed Consolidated Statements of Operations

 

    For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 
    2014     2013     2014     2013  
    $     $     $     $  
                 

Revenue

               
                 

Operating Expenses

               
                 

Depreciation

 

2,536

   

2,561

   

5,158

   

5,122

 

General and administrative

   

375,161

     

135,769

     

534,954

     

296,365

 

Professional fees

   

117,392

     

66,176

     

333,119

     

3,118,149

 

Write-down of inventory

   

125,616

     

     

125,616

     

 
                               

Total Operating Expenses

   

620,705

     

204,506

     

998,847

     

3,419,636

 
                               

Operating Loss

 

(620,705

)

 

(204,506

)

 

(998,847

)

 

(3,419,636

)

                               

Other Income (Expense)

                               
                               

Interest expense

 

(376,782

)

 

(5,514

)

 

(567,761

)

 

(13,171

)

Change in fair value of derivatives

 

(10,499,869

)

   

134,728

   

(8,809,435

)

 

(453,484

)

Other income

   

396

     

771

     

501

     

2,984

 
                               

Total Other Income (Expense)

 

(10,876,255

)

   

129,985

   

(9,376,695

)

 

(463,671

)

                               

Net (Loss)

 

(11,496,960

)

 

(74,521

)

 

(10,375,542

)

 

(3,883,307

)

                               

Net (Loss) Per Common Share:

                               

- Basic and Diluted

 

(0.15

)

 

(0.00

)

 

(0.13

)

 

(0.05

)

Basic and diluted weighted average common shares outstanding

   

77,727,669

     

77,194,000

     

77,727,669

     

74,029,600

 

 

(The accompanying notes are an integral part of these condensed consolidated financial statements) 

 

 
5

 

US Highland, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

 

  For the Six Months Ended June 30, 2014

 

 

For the Six Months Ended June 30, 2013

 

         

Operating Activities

       
         

Net (loss)

 

$

(10,375,542

)

 

$

(3,883,307

)

         

Adjustments to reconcile net loss to cash used in operating activities:

       
         

Depreciation

 

5,158

 

 

 

5,122

 

Accretion expense

 

506,276

 

 

 

 

Change in fair value of derivative

 

8,809,435

 

 

 

453,484

 

Warrants issued for consulting services

 

 

 

 

2,599,801

 

Write down of inventory

 

125,616

 

 

 

 

Shares issuable for interest expense

 

7,008

 

 

 

3,698

 

         

Changes in operating assets and liabilities:

       
         

Inventory

(25,790

)

 

 

 

Prepaid expenses and deposits

 

13,660

 

 

(24,735

)

Accounts payable and accrued liabilities

 

463,666

 

 

 

547,064

 

         

Net Cash Used in Operating Activities

(470,513

)

 

(298,873

)

         

Financing Activities

       
         

Proceeds from issuance of  notes payable

 

434,300

 

 

 

 

Proceeds from loan payable

 

 

 

 

61,925

 

Repayment of loans

(4,300

)

 

(500

)

Proceeds from issuance of common stock

 

 

 

 

228,500

 

         

Net Cash Provided by Financing Activities

 

430,000

 

 

 

289,925

 

         

Increase (Decrease) In Cash

(40,513

)

 

(8,948

)

         

Cash - Beginning of Period

 

43,044

 

 

 

10,498

 

         

Cash - End of Period

 

$

2,531

 

 

$

1,550

 

         

Non-cash Investing and Financing Activities

       
         

Warrants issued to settle debt

 

53,606

 

 

 

229,942

 

Common stock issued to settle debt

 

 

 

 

21,000

 

 

(The accompanying notes are an integral part of these condensed consolidated financial statements) 

 

 
6

 

US Highland, Inc.

Unaudited Condensed Consolidated Statement of Stockholders’ Deficiency

 

                Common                  
                Stock                  
            Additional     Reserved     Stock              
    Common Stock     Paid-in     For Future     Subscriptions     Accumulated     Treasury      
    Shares     Amount     Capital     Issuance     Receivable     Deficit     Stock     Total  
    #     $     $     $     $     $     $     $  
                                 

Balance, December 31, 2012

 

67,757,669

   

672,743

   

51,337,434

   

114,303

   

(1,000

)

 

(53,096,829

)

 

(773,500

)

 

(1,746,849

)

                                                               

Shares issued upon conversion of warrants

   

5,000,000

     

50,000

     

3,202,278

     

     

     

     

     

3,252,278

 
                                                               

Subscriptions received

   

     

     

     

     

1,000

     

     

     

1,000

 
                                                               

Cancellation of shares issued in error

 

(483,333

)

   

     

     

     

     

     

     

 
                                                               

Shares issued to settle debt

   

953,333

     

9,533

     

38,133

     

     

     

     

     

47,666

 
                                                               

Shares issued for cash

   

4,500,000

     

45,000

     

180,000

     

     

     

     

     

225,000

 
                                                               

Shares issuable in payment of accrued interest

   

     

     

     

15,578

     

     

     

     

15,578

 
                                                               

Net loss for the year

   

     

     

     

     

   

(32,107,140

)

   

   

(32,107,140

)

                                                               

Balance, December 31, 2013

   

77,727,669

     

777,276

     

54,757,845

     

129,881

     

   

(85,203,969

)

 

(773,500

)

 

(30,312,467

)

                                                               

Shares issuable in payment of accrued interest

   

     

     

     

7,008

     

     

     

     

7,008

 
                                                               

Net loss for the period

   

     

     

     

     

   

(10,375,542

)

   

   

(10,375,542

)

                                                               

Balance, June 30, 2014

   

77,727,669

     

777,276

     

54,757,845

     

136,889

     

   

(95,579,511

)

 

(773,500

)

 

(40,681,001

)

 

 (The accompanying notes are an integral part of these condensed consolidated financial statements)

 

 
7

 

US Highland, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

 

1.

Summary of Business and Basis of Presentation

 

Organization and Business

 

US Highland, Inc. was originally formed as a Limited Liability Company on February 5, 1999 under the name The Powerhouse, L.L.C. pursuant to the laws of the State of Oklahoma.  On November 9, 2006, Powerhouse Productions, L.L.C. filed Articles of Conversion changing the entity from a limited liability company to a corporation under the name Harcom Productions, Inc.  On January 25, 2010, Articles of Merger were filed with the state of Oklahoma merging U.S. Highland, Inc., an Oklahoma corporation into Harcom Productions, Inc. and the name of the corporation was changed to US Highland, Inc. US Highland, Inc. (the “Company”) is a recreational power sports Original Equipment Manufacturer (“OEM”), developing motorcycles, quads, single cylinder engines, and v-twin engines under its own brand and for other OEMs.

 

Basis of Presentation

 

The Company’s condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States.  These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, US Highlands Electric Inc.  All significant intercompany transactions and balances have been eliminated. 

 

The unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and reflect all adjustments (consisting of normal recurring adjustments unless otherwise indicated) which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. Certain prior year amounts have been reclassified to conform to current year presentation.

 

Certain information in footnote disclosures normally included in the financial statements were prepared in conformity with accounting principles generally accepted in the United States of America and have been condensed or omitted pursuant to such principles and the financial results for the periods presented may not be indicative of the full year’s results. The Company believes the disclosures are adequate to make the information presented not misleading.

 

These financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto for the fiscal year ended December 31, 2013 included in the Company’s Annual Report on Form 10K filed on May 6, 2014 (the “2013 Annual Report”).

 

Significant Accounting Policies

 

There have been no material changes in the Company’s significant accounting policies to those previously disclosed in the 2013 Annual Report.

 

Going concern

 

The accompanying condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company as a going-concern basis. The going concern basis assumes that assets are realized and liabilities are extinguished in the ordinary course of business at amounts disclosed in the consolidated financial statements. The Company has incurred recurring losses from operations, and as of June 30, 2014, current liabilities exceed current assets by $40,286,876, and the Company has an accumulated deficit of $95,579,511. The Company’s ability to continue as a going concern depends upon its ability to obtain adequate funding to support its operations through continuing investments of debt and/or equity by qualified investors/creditors, and internally generated working capital. These factors raise substantial doubt about the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

 
8

 

US Highland, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

 

Earnings (Loss) Per Share

 

Basic earnings (loss) per share is calculated by dividing net profit attributable to common stockholders by the weighted average number of outstanding common shares during the year. The calculation of basic earnings (loss) per share excludes any dilutive effects of options, warrants and other stock-based compensation, which are included in diluted earnings per share. When a company is in a loss situation, all outstanding dilutive shares are excluded from the calculation of diluted earnings because their inclusion would be antidilutive; and the basic and fully diluted common shares outstanding are stated to be the same. At June 30, 2014 and 2013, approximately 117,033,000 and 1,637,000 shares, respectively, underlying the convertible debentures and warrants were antidilutive.

 

2.

Inventory

 

Inventory is stated at the lower of cost or market, utilizing the specific lot identification method. At December 31, 2013, inventory consisted of raw materials. During the six months ended June 30, 2014, the Company recorded an inventory write-down of $125,616 to reduce inventory to its net realizable value of $0.

 

3.

Property and Equipment

 

Property and equipment consists of the following:

 

Useful

Life

  June 30,
2014
    December 31,
2013
 
         

Computers and office equipment

 

3 years

 

$

15,930

   

$

15,930

 

Manufacturing equipment

 

5 - 10 years

   

28,408

     

28,408

 
               
   

44,338

     

44,338

 

Accumulated depreciation

 

 

(24,941

)

 

(19,783

)

               

Property and equipment, net

 

 

$

19,397

   

$

24,555

 

 

Depreciation expense amounted to approximately $5,158 and $5,122 for the six months ended June 30, 2014 and 2013, respectively.

 

 
9

 

US Highland, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

 

4.

Loans Payable

 

Loans payable consist of the following:

  June 30,
2014
    December 31,
2013
 
         

a)

Loans payable that are unsecured, non-guaranteed, past due and are non-interest bearing. 

 

$

25,000

   

$

25,000

 

b)

Note payable which is unsecured, non-guaranteed, past due and bears interest at 10% per annum.

   

7,500

     

7,500

 

c)

On January 15, 2011, the Company entered into 8 unsecured, non-guaranteed, loan agreements pursuant to which the Company received proceeds of $56,000.  If the loans were not repaid within 90 days they then bear interest at 1% per month.  In addition, if the loan was not repaid within 90 days, the Company is required to issue 167 common shares every month until the loan is repaid in full. As at June 30, 2014, the Company recognized the fair value of 6,500 (December 31, 2013 – 5,500) common shares issuable for interest expense of $122,590 (December 31, 2013 - $120,282), as shares reserved for future issuance. The Company has not yet issued these common shares.  As at June 30, 2014, the Company has also accrued interest expense of $23,240 (December 31, 2013 - $19,880).

   

56,000

     

56,000

 

d)

On May 30, 2013 and August 12, 2013, the Company received advances from a director for $2,000 and $25,000, respectively.  On August 12, 2013, the Company entered into an unsecured, non-guaranteed, demand loan agreement with the director for $27,000.  The loan bears interest at 1% per annum compounded monthly.  In addition, the Company is required to issue 5,000 common shares every month until the loan is repaid in full.  As of June 30, 2014, the Company recognized the fair value of 50,000 (December 31, 2013 - 20,000) common shares issuable for interest expense of $14,300 (December 31, 2013 - $9,600), as shares reserved for future issuance. The Company has not yet issued these common shares.  As at June 30, 2014, the Company has also accrued interest expense of $248 (December 31, 2013 - $125).

   

27,000

     

27,000

 

e)

On February 27, 2014 and May 9 2014, the Company received advances from a director of $6,000 and $3,300, respectively. The Company repaid $3,300 on June 12, 2014.  The outstanding amount is unsecured, due on demand and bears interest at 1% per annum compounded and calculated monthly.

   

6,000

         

The Company issued the following unsecured notes payable to a significant shareholder.  The notes bear interest at an annual rate of 8% per annum, are uncollateralized, and are due 2 years after the date of issuance:

               

a)

On January 17, 2014, the Company issued a $50,000 note payable.

   

50,000

     

 

b)

On January 29, 2014 the Company issued a $50,000 note payable.

   

50,000

     

 

c)

On February 19, 2014, the Company issued a $25,000 note payable.

   

25,000

     

 

d)

On March 3, 2014, the Company issued a $50,000 note payable.

   

50,000

     

 

e)

On March 19, 2014, the Company issued a $150,000 note payable.

   

150,000

     

 

f)

On April 25, 2014, the Company issued a $25,000 note payable.

   

25,000

     

 

g)

On May 19, 2014, the Company issued a $25,000 note payable.

   

25,000

     

 

h)

On June 2, 2014, the Company issued an $18,000 note payable.

   

18,000

     

 

i)

On June 12, 2014, the Company issued a $32,000 note payable.

   

32,000

     

 

Total

 

$

546,500

   

$

115,500

 

Less Short Term

 

(121,500

)

 

(115,500

)

Long Term

 

$

425,000

   

$

 

 

 
10

 

US Highland, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

 

5.

Convertible Debentures

 

 

a)

Effective January 25, 2010, the Company issued a convertible note for $225,000. Pursuant to the terms of the agreement, the loan was unsecured, non-interest bearing, and was due on December 21, 2010. The note was convertible into shares of the Company’s common stock at any time at a variable conversion price equal to 65% of the average of the closing bid prices of the common stock during the 28 trading days prior to the date of the conversion notice and was subject to adjustment upon the issuance of certain dilutive instruments. Due to these provisions, the embedded conversion option qualified for derivative accounting and bifurcation under ASC 815-15 Derivatives and Hedging. The initial fair value of the derivative liability of $538,249 resulted in a full discount to the note payable of $225,000 and the recognition of a loss on derivatives of $313,249.

 

On June 2, 2010, the Company issued 6,386 restricted shares of common stock upon the conversion of the principal amount of $166,667. The fair value of the derivative liability at June 2, 2010, was $266,425 and $197,352 was reclassified to additional paid-in capital upon conversion. During the year ended December 31, 2013, the Company repaid $2,000 of the note and during the three months ended June 30, 2014, the Company repaid an additional $1,000. At June 30, 2014, the carrying value of the note was $55,333 (December 31, 2013 - $56,333). The note is in default at June 30, 2014.

 

 

b)

Effective July 25, 2013, the Company issued a convertible note to secure a demand loan of $75,000. Pursuant to the terms of the agreement, the loan is unsecured and convertible into shares of the Company’s common stock at any time at a price of $0.035. The note bears interest at 8% per annum compounded monthly, and is due on demand.

 

The embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15 Derivatives and Hedging. The initial fair value of the conversion feature of $577,797 resulted in a discount to the note payable of $75,000 and the recognition of a loss on derivatives of $502,797. As the note is due on demand the entire discount was recorded as interest expense on July 25, 2013.

 

 

c)

Effective July 25, 2013, the Company issued a convertible note to secure the demand loan of $45,000. Pursuant to the terms of the agreement, the loan is unsecured and convertible into shares of the Company’s common stock at any time at a price of $0.035. The note bears interest at 8% per annum compounded monthly, and is due on demand.

 

The embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15 Derivatives and Hedging. The initial fair value of the conversion feature of $346,678 resulted in a discount to the note payable of $45,000 and the recognition of a loss on derivatives of $301,678. As the note is due on demand the entire discount was recorded as interest expense on July 25, 2013.

 

 

d)

On July 25, 2013, the Company issued a convertible note for up to $500,000 and warrants to purchase 12,500,000 underlying shares of the Company’s common stock. The warrants are exercisable into 10,000,000 common shares of the Company at $0.05 per share and 2,500,000 shares at an exercise price of $0.10 per share until July 31, 2014. During the year ended December 31, 2013, the Company received proceeds of $500,000 under the note. The note bears interest at 8% per annum compounded monthly, and principal and interest are due on July 31, 2014. In addition, so long as any amounts are due hereunder, the Company is obligated to remit to the lender 100% of all revenues, payments and receivables from the sale of the first 50 engines sold by the Company. The note is secured against substantially all of the assets of the Company.

 

The note may be prepaid by the Company without penalty with 30 days prior notice. The note is convertible into shares of the Company’s common stock at any time at a conversion price equal to $0.02 per share and is subject to adjustment upon the issuance of certain dilutive instruments and other events. The conversion price was subsequently reduced to $0.01 per share upon the failure to file various reports with the SEC within 120 days of the issuance of the note.

 

Due to the potential adjustments to the conversion feature and the inability to conclude that the Company has enough unissued-authorized common shares to settle the warrants, the embedded conversion option and the warrants qualify for derivative accounting and bifurcation under ASC 815-15 Derivatives and Hedging. The initial fair value of the conversion feature of $6,714,279 and warrants of $3,169,531 resulted in a discount to the note payable of $500,000 and the recognition of a loss on derivatives of $9,383,810. During the six months ended June 30, 2014, the Company recorded accretion of $300,417 increasing the carrying value of the note to $392,771. The note was not repaid on July 31, 2014. Subsequent to June 30, 2014, the Company and the note holder agreed to extend the maturity date to December 31, 2014 and increase the interest rate to 12% starting on August 1, 2014.

 

 

e)

On July 25, 2013, the Company issued a convertible note for up to $500,000 and warrants to purchase 10,197,916 underlying shares of the Company’s common stock. The warrants are exercisable into 8,158,333 common shares of the Company at $0.05 per share and 2,039,583 shares at an exercise price of $0.10 per share until July 31, 2014. During the year ended December 31, 2013, the Company received proceeds of $273,700 under the note. At November 30, 2013, the Company had determined that no additional funding would be received pursuant to the convertible note. The note bears interest at 8% per annum compounded monthly, and principal and interest are due on July 31, 2014.

 

The note may be prepaid by the Company without penalty with 30 days prior notice. The note is convertible into shares of the Company’s common stock at any time at a conversion price equal to $0.02 per share and is subject to adjustment upon the issuance of certain dilutive instruments and other events. The conversion price was subsequently reduced to $0.01 per share upon the failure to file various reports with the SEC within 120 days of the issuance of the note.

 

 
11

 

US Highland, Inc.

 Notes to the Unaudited Condensed Consolidated Financial Statements

 

Due to the potential adjustments to the conversion rate of the conversion feature and the inability to conclude that the Company has enough unissued-authorized common shares to settle the warrants, the embedded conversion option and the warrants qualify for derivative accounting and bifurcation under ASC 815-15 Derivatives and Hedging. The initial fair value of the conversion feature of $5,278,978 and warrants of $2,450,519 resulted in a discount to the note payable of $273,700 and the recognition of a loss on derivatives of $7,455,797. During the six months ended June 30, 2014, the Company recorded accretion of $162,429 increasing the carrying value of the note to $214,437. The note was not repaid on July 31, 2014. Subsequent to June 30, 2014, the Company and the note holder agreed to extend the maturity date to December 31, 2014 and increase the interest rate to 12% starting on August 1, 2014.

 

 

f)

Effective November 12, 2013, the Company issued a convertible note for up to $500,000 and warrants to purchase 694,445 underlying shares of the Company’s common stock. The warrants are exercisable into 555,556 common shares of the Company at $0.05 per share and 138,889 shares at an exercise price of $0.10 per share until July 31, 2014. During the year ended December 31, 2013, the Company received proceeds of $20,000 under the note. At November 30, 2013, the Company had determined that no additional funding would be received pursuant to the convertible note. The note bears interest at 8% per annum compounded monthly, and principal and interest are due on July 31, 2014.

 

The note may be prepaid by the Company without penalty with 30 days prior notice. The note is convertible into shares of the Company’s common stock at any time at a conversion price equal to $0.02 per share and is subject to adjustment upon the issuance of certain dilutive instruments and other events. The conversion price was subsequently reduced to $0.01 per share upon the failure to file various reports with the SEC within 120 days of the issuance of the note.

 

Due to the potential adjustments to the conversion feature and the inability to conclude that the Company has enough unissued-authorized common shares to settle the warrants, the embedded conversion option and the warrants qualify for derivative accounting and bifurcation under ASC 815-15 Derivatives and Hedging. The initial fair value of the conversion feature of $250,021 and warrants of $145,943, resulted in a discount to the note payable of $20,000 and the recognition of a loss on derivatives of $375,964. During the six months ended June 30, 2014, the Company recorded accretion of $10,534 increasing the carrying value of the note to $17,055. The note was not repaid on July 31, 2014. Subsequent to June 30, 2014, the Company and the note holder agreed to extend the maturity date to December 31, 2014 and increase the interest rate to 12% starting on August 1, 2014.

 

 

g)

Effective October 7, 2013, the Company issued a convertible note for up to $500,000 and warrants to purchase 868,055 underlying shares of the Company’s common stock. The warrants are exercisable into 694,444 common shares of the Company at $0.05 per share and 173,611 shares at an exercise price of $0.10 per share until July 31, 2014. During the year ended December 31, 2013, the Company received proceeds of $25,000 under the note. At November 30, 2013, the Company had determined that no additional funding would be received pursuant to the convertible note. The note bears interest at 8% per annum compounded monthly, and principal and interest are due on July 31, 2014.

 

The note may be prepaid by the Company without penalty with 30 days prior notice. The note is convertible into shares of the Company’s common stock at any time at a conversion price equal to $0.02 per share and is subject to adjustment upon the issuance of certain dilutive instruments and other events. The conversion price was subsequently reduced to $0.01 per share upon the failure to file various reports with the SEC within 120 days of the issuance of the note.

 

Due to the potential adjustments to the conversion feature and the inability to conclude that the Company has enough unissued-authorized common shares to settle the warrants, the embedded conversion option and the warrants qualify for derivative accounting and bifurcation under ASC 815-15 Derivatives and Hedging. The initial fair value of the conversion feature of $312,522 and warrants of $182,522 resulted in a discount to the note payable of $25,000 and the recognition of a loss on derivatives of $470,045. During the six months ended June 30, 2014, the Company recorded accretion of $13,281 increasing the carrying value of the note to $21,249. The note was not repaid on July 31, 2014. Subsequent to June 30, 2014, the Company and the note holder agreed to extend the maturity date to December 31, 2014 and increase the interest rate to 12% starting on August 1, 2014.

 

 

h)

On July 25, 2013, the Company issued a convertible note for up to $500,000 and warrants to purchase 739,584 underlying shares of the Company’s common stock. The warrants are exercisable into 591,667 common shares of the Company at $0.05 per share and 147,917 shares at an exercise price of $0.10 per share until July 31, 2014. During the year ended December 31, 2013, the Company received proceeds of $41,300 under the note. At November 30, 2013, the Company had determined that no additional funding would be received pursuant to the convertible note. The note bears interest at 8% per annum compounded monthly, and principal and interest are due on July 31, 2014.

 

The note may be prepaid by the Company without penalty with 30 days prior notice. The note is convertible into shares of the Company’s common stock at any time at a conversion price equal to $0.02 per share and is subject to adjustment upon the issuance of certain dilutive instruments and other events. The conversion price was subsequently reduced to $0.01 per share upon the failure to file various reports with the SEC within 120 days of the issuance of the note.

 

Due to the potential adjustments to the conversion feature and the inability to conclude that the Company has enough unissued-authorized common shares to settle the warrants, the embedded conversion option and the warrants qualify for derivative accounting and bifurcation under ASC 815-15 Derivatives and Hedging. The initial fair value of the conversion feature of $547,736 and warrants of $187,531, resulted in a discount to the note payable of $41,300 and the recognition of a loss on derivatives of $693,967. During the six months ended June 30, 2014, the Company recorded accretion of $19,615 increasing the carrying value of the note to $36,260. The note was not repaid on July 31, 2014. Subsequent to June 30, 2014, the Company and the note holder agreed to extend the maturity date to December 31, 2014 and increase the interest rate to 12% starting on August 1, 2014.

 

 
12

 

US Highland, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

 

6.

Derivative Liabilities

 

The embedded conversion options of the Company’s convertible debentures described in Note 5 contain conversion features that qualify for embedded derivative classification. The warrants described in Note 8 also qualify for derivative classification. The fair value of these liabilities will be re-measured at the end of every reporting period and the change in fair value will be reported in the statement of operations as a gain or loss on derivative financial instruments.

 

The table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities:

 

  June 30,
2014

 

 

December 31,
2013

 

         

Balance at the beginning of period

 

$

29,430,719

 

 

$

941,464

 

         

Addition of new derivative liabilities (embedded conversion options)

 

 

 

 

14,028,014

 

Addition of new derivative liabilities (warrants)

 

53,606

 

 

 

9,209,794

 

Change in fair value of warrants

 

1,675,400

 

 

(627,690

)

Change in fair value of embedded conversion option

 

7,134,035

 

 

 

9,128,915

 

Conversion of warrants

 

 

 

(3,249,778

)

         

Balance at the end of the period

 

$

38,293,760

 

 

$

29,430,719

 

 

The following table summarizes the change in fair value of derivatives:

 

  June 30,
2014

 

 

June 30,
2013

 

         

Change in fair value of derivatives

 

$

8,809,435

 

 

$

453,484

 

 

The Company uses Level 3 inputs for its valuation methodology for the warrant derivative liabilities and embedded conversion option liabilities as their fair values were determined by using the Black-Scholes option pricing model based on various assumptions. The model incorporates the price of a share of the Company’s common stock (as quoted on the Over the Counter Bulletin Board), volatility, risk free rate, dividend rate and estimated life. Significant changes in any of these inputs in isolation would result in a significant change in the fair value measurement. As required, these are classified based on the lowest level of input that is significant to the fair value measurement. The following table shows the assumptions used in the calculations:

 

 

Expected Volatility

 

 

Risk-free Interest Rate

 

 

Expected Dividend Yield

 

 

Expected Life (in years)

 

         

At December 31, 2013

 

29% - 209

 

0.10% - 0.58

 

0

 

0.58-3.00

 

At issuance

 

209

 

0.38

 

0

 

3.00

 

At June 30, 2014

 

72% - 200

 

0.2% - 0.68

 

0

 

0.08-2.51

 

 

7.

Common Stock

 

There were no share transactions during the six months ended June 30, 2014.

 

8.

Stock Purchase Warrants

 

 

a)

On January 2, 2014, the Company entered into a settlement agreement with a consultant to settle $11,800 of services provided in 2012. Pursuant to the agreement, the Company issued a warrant to purchase 43,750 shares of common stock at $0.0005 per share for three years.

 

 

 
 

b)

On January 3, 2014, the Company entered into a settlement agreement with a consultant to settle $41,806 of services provided in 2012. Pursuant to the agreement, the Company issued a warrant to purchase 155,000 shares of common stock at $0.0005 per share for three years.

 

A summary of the changes in the Company’s common share purchase warrants is presented below:

 

    Number     Weighted Average Exercise Price  

Weighted Average Remaining Term

           

Balance December 31, 2013

 

27,214,166

   

$

0.08

 

0.70 years

                 

Issued

   

198,750

     

0.0005

   
                 

Balance June 30, 2014

   

27,412,916

   

$

0.08

 

0.21 years

 

 
13

 

US Highland, Inc.

 Notes to the Unaudited Condensed Consolidated Financial Statements

 

9.

Commitments and Contingencies

 

 

a)

The Company entered into a consulting agreement dated September 20, 2011 with a director of the Company for services to be provided for a term of three years. The Company agreed to pay $2,250 per month, as well as issue 16,667 shares of common stock. The agreement was subsequently suspended. During the six months ended June 30, 2014, the Company recorded $0 (June 30, 2013 - $10,000) of professional fees.

 

 

 
 

b)

During the year ended December 31, 2012, the Company entered into two leases for the provision of office and warehouse space until April 30, 2015. On April 1, 2013, the Company entered into an amendment to the lease agreements. Pursuant to the amendment, one of the leases was terminated and the other was extended to March 31, 2019. During the six months ended June 30, 2014, the Company recognized $30,914 (2013 - $24,746) of rent expense. The Company’s future minimum lease payments are as follows:

 

Twelve months ending June 30, 2015

 

$

52,648

 

Twelve months ending June 30, 2016

   

54,641

 

Twelve months ending June 30, 2017

   

56,634

 

Twelve months ending June 30, 2018

   

58,627

 

Twelve months ending June 30, 2019

   

45,173

 
 

$

267,723

 

 

 

c)

The Company issued a $500,000 convertible note on July 25, 2013, of which so long as any amounts are due hereunder, the Company is obligated to remit to the lender 100% of all revenues, payments and receivables from the sale of the first 50 engines sold by the Company.

 

 

 
 

d)

On May 13, 2014, the Company terminated the former CEO and President of the Company’s employment agreement in accordance with its terms. Also on May 13, 2014, the Company terminated an employment agreement with an employee in accordance with its terms. Refer to Note 10(b).

 

 

 
 

e)

On June 17, 2014, the Company was informed that a debtor will be instituting legal proceedings against the Company for collection of the sum of $76,712. The Company believes it owes the debtor $9,986 which it has recorded as owing. Accordingly, the Company intends to defend these potential matters vigorously.

 

 

 
 

f)

On June 26, 2014, the Company was informed that a debtor will be instituting legal proceedings against the Company for collection of the sum of $17,534. The Company believes it owes the debtor $11,705 which it has recorded as owing. Accordingly, the Company intends to defend these potential matters vigorously.

 

 

 
 

g)

On December 16, 2013, the Company was informed that a vendor will be instituting legal proceedings against the Company for collection of the sum of $12,455. The Company believes it does not owe the vendor anything. Accordingly, the Company intends to defend these potential matters vigorously.

 

10.

Subsequent Events

 

 

a)

On July 1, 2014, the Company issued a note payable with a related party, pursuant to which the Company received proceeds of $25,000. The note is bears interest at an annual rate of 8% per annum and due on July 1, 2016.

 

 

 
 

b)

On July 8, 2014, the Company filed civil actions against the former CEO and President, and against a former employee of the Company. The petitions allege they breached the terms and conditions of their employment agreements with the Company, converted property belonging to the Company, and filed false and wrongful claims with the Oklahoma Department of Labor. Neither former employee has filed answers to the petitions, although the Company expects them to do so and to file counterclaims against the Company. On August 7, 2014, the Oklahoma Department of Labor entered an Administrative Order of Determination in favor of the former CEO and President of the Company in the amount of $72,000 and liquidated damages of $72,000; and also entered an Administrative Order of Determination in favor of the former employee in the amount of $54,000 and liquidated damages of $54,000. The Company has requested a rehearing, re-opening and reconsideration of the administrative orders with the Oklahoma Department of Labor. At June 30, 2014, the Company had accrued a total of $252,000 pursuant to the Administrative Order of Determination.

 

 

 
 

c)

On July 11, 2014, the Company received an advance from a director of $9,000. The outstanding amount is unsecured, due on demand and bears interest at 1% per annum. The loan was repaid on July 18, 2014.

 

 

 
 

d)

On July 16, 2014, the Company issued a note payable with a related party, pursuant to which the Company received proceeds of $75,000. The note is bears interest at an annual rate of 8% per annum and due on July 16, 2016. On July 23, the note was assigned by the debtor to a significant shareholder.

 

 

 
 

e)

Subsequent to June 30, 2014, the Company and the note holders described in Notes 5(d), (e), (f), (g) and (h) agreed to extend the maturity dates of the notes to December 31, 2014 and increase the interest rates to 12% starting on August 1, 2014.

 

 

 
 

f)

On August 8, 2014, the Company entered into an employment agreement with an existing employee. Pursuant to the agreement the employee will act as the Interim CFO and Secretary of the Company for an initial period of six months in consideration for $1,200 per month in addition to the employee’s current salary structure of $60,000 per year.

 

 
14

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains forward-looking statements. For this purpose, any statements contained in this Report that are not statements of historical fact may be deemed to be forward-looking statements. Forward-looking information includes statements relating to future actions, prospective products, future performance or results of current or anticipated products, sales and marketing efforts, costs and expenses, interest rates, outcome of contingencies, financial condition, results of operations, liquidity, business strategies, cost savings, objectives of management, and other matters. You can identify forward-looking statements by those that are not historical in nature, particularly those that use terminology such as “may,” “will,” “should,” “expects,” “anticipates,” “contemplates,” “estimates,” “believes,” “plans,” “projected,” “predicts,” “potential,” or “continue” or the negative of these similar terms. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking information to encourage companies to provide prospective information about themselves without fear of litigation so long as that information is identified as forward-looking and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the information.

 

These forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions that we cannot predict. In evaluating these forward-looking statements, you should consider various factors, including the following: (a) those risks and uncertainties related to general economic conditions, (b) whether we are able to manage our planned growth efficiently and operate profitable operations, (c) whether we are able to generate sufficient revenues or obtain financing to sustain and grow our operations, (d) whether we are able to successfully fulfill our primary requirements for cash, which are explained below under “Liquidity and Capital Resources”. We assume no obligation to update forward-looking statements, except as otherwise required under the applicable federal securities laws.

 

Results of Operations

 

For the periods ended June 30, 2014 and June 30, 2013

 

Revenues

 

The Company had no revenues during the six month periods ended June 30, 2014 and 2013.

 

Operating Expenses

 

Operating expenses for the three month period ended June 30, 2014 were $620,705, which was comprised primarily of $375,161 for general and administrative expenses, $117,392 for professional fees and $125,616 for write-down of inventory as compared to operating expenses of $204,506 for the three month period ended June 30, 2013, which was comprised primarily of $135,769 for general and administrative expenses, and $66,176 for professional fees. General and administrative expenses increased during the three month periods ended June 30, 2014 over the three months ended June 30, 2013 as result of the accrual of severance fees as a result of the termination of two former employees. The increase in professional fees during the three month period was attributable to costs associated with various EDGAR filings which were not completed in the comparative period. The increase in write-down in inventory of $125,616 was the result of a write-down of inventory costs to their net realizable value.

 

Operating expenses for the six month period ended June 30, 2014 were $998,847, which was comprised primarily of $534,954 for general and administrative expenses, $333,119 for professional fees and $125,616 for write-down of inventory as compared to operating expenses of $3,419,636 for the six month period ended June 30, 2013, which was comprised primarily of $296,365 for general and administrative expenses, and $3,118,149 for professional fees. General and administrative expenses increased during the six month periods ended June 30, 2014 over the six months ended June 30, 2013 as result of the accrual of severance fees as a result of the termination of two former employees. The decrease in professional fees of $3,118,149 resulted primarily from the issuance of a warrant to a consultant to purchase common shares, which was recorded at a fair value of $2,599,801. The Company did not issue any warrants for services provided during the six months ended June 30, 2014. The only warrants issued during the six months ended June 30, 2014 were to settle amounts owing from the previous fiscal year. The remaining decrease was a result of a decrease in operations. The increase in write-down in inventory of $125,616 was the result of a write-down of inventory costs to their net realizable value.

 

 
15

 

Net Loss

 

Net loss for the three month period ended June 30, 2014 was $11,496,960, compared to net loss of $74,521 for the three month period ended June 30, 2013. The income in 2014 includes $376,782 in interest expense as compared to $5,514 in 2013. The increase of $371,268 related to interest recorded for convertible debentures outstanding during the period ended June 30, 2014 that were not outstanding during the comparative period. The Company recognized $340,553 of accretion during the three months ended June 30, 2014 as compared to $0 during the three months ended June 30, 2013. The Company recorded an unrealized loss as a result of an increase in the fair value of derivatives of $10,499,869 during the three months ended June 30, 2014 as compared to an unrealized gain as a result of a decrease in the fair value of derivatives of $134,728 during the three months ended June 30, 2013.

 

Net loss for the six month period ended June 30, 2014 was $10,375,542, compared to net loss of $3,883,307 for the six month period ended June 30, 2013. The loss in fiscal 2014 includes $567,761 in interest expense as compared to $13,171 in fiscal 2013. The increase of $554,590 related to interest recorded for convertible debentures outstanding during the period ended June 30, 2014 that were not outstanding during the comparative period. The Company recorded an unrealized loss as a result of the increase in the fair value of derivatives of $8,809,435 during the six months ended June 30, 2014 as compared to an unrealized loss as a result of the increase in the fair value of derivatives of $453,484 during the six months ended June 30, 2013.

 

Liquidity and Capital Resources

 

As of June 30, 2014, we had cash of $2,531 and a working capital deficiency of $40,286,876. The future of the Company is dependent upon its ability to obtain future financing, upon cash generated from our operations and our ability to borrow cash when needed from related parties. During the fiscal period ended June 30, 2014, the Company received $434,300 of proceeds for the issuance notes payable. Subsequent to June 30, 2014, we received an additional $100,000 of proceeds for the issuance notes payable. We estimated that we will require $2,188,000 over the twelve month period ending June 30, 2015. The Company has $980,000 of convertible notes outstanding for which principal and interest was due on July 31, 2014. The convertible notes were extended and are now due on December 31, 2014. These notes are further described in Note 5 of the financial statements. Management believes that our cash balance will not be sufficient to meet our working capital requirements for the next twelve month period. We plan to raise the capital required to satisfy our immediate short-term needs and additional capital required to meet our estimated funding requirement for the next twelve months primarily through equity and or debt financings. There is no assurance that we will be able to obtain further funds required for our continued working capital requirements. 

 

We cannot be certain that the required additional financing will be available or available on terms favorable to us. We currently do not have any arrangements or commitments in place for any other financings. If additional funds are raised by the issuance of our securities, existing stockholders will experience dilution of their ownership interest. If adequate funds are not available or not available on acceptable terms, we may be unable to fund our operations.

 

During the six month period ended June 30, 2014, we used $470,513 in cash in operating activities and did not use any cash for investing activities. This compares to the six month period ended June 30, 2013, we used $298,873 in cash in operating activities and did not use any cash for investing activities. We received proceeds of $434,300 from the issuance of notes payable during the six month period ending June 30, 2014 and received proceeds of $61,925 from the issuance of loans payable and $228,500 from the issue of common stock during the six months ended June 30, 2013. 

 

As of June 30, 2014 we did not have any established lines of credit with any banks or any other arrangements, agreements, or commitments for financing our operations.

 

Going Concern

 

The Company has no revenues and has incurred net losses. In addition, at June 30, 2014, there is an accumulated deficit of $95,579,511. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

There can be no assurance that sufficient funds required during the next year or thereafter will be generated from operations or available from external sources such as debt or equity financings, or other potential sources. The inability to generate cash flow from operations or to raise capital from external sources will force the Company to substantially curtail and cease operations, therefore, having a material adverse effect on its business. Furthermore, there can be no assurance that any funds, if available, will possess attractive terms or not have a significant dilutive effect on the Company’s existing stockholders. 

 

Off-balance sheet arrangements:

 

The Company has no off-balance sheet arrangements.

 

 
16

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable

 

ITEM 4. CONTROLS AND PROCEDURES

 

Management’s Report on Disclosure Controls and Procedures

 

We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective, as of June 30, 2014, in ensuring that material information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.

 

The effectiveness of our disclosure controls and procedures and our internal control over financial reporting is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error, and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time. Because of these limitations, there can be no assurance that any system of disclosure controls and procedures or internal control over financial reporting will be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management.

 

Management has implemented internal controls to ensure that its quarterly reports and annual reports are filed with the SEC on a timely basis. Management has retained the services of a new accounting firm. We have also hired a highly qualified financial consultant with extensive experience with public companies in the manufacturing industry. This newly implemented three tier process ties the Company’s bookkeeping activities with a full service accounting firm that handles all financial reporting activities and the Company’s interface with the selected auditing firm.

 

Changes in Internal Control over Financial Reporting:

 

During the three months ended June 30, 2014, the Company changed Chief Financial Officers. The new Chief Financial Officer assumed the same role as the former Chief Financial Officer and accordingly there were no changes in internal controls over financial reporting. During the quarter covered by this report there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting other than as described above.

 

The term “internal control over financial reporting” is defined as a process designed by, or under the supervision of, the registrant's principal executive and principal financial officers, or persons performing similar functions, and effected by the registrant's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

 

(a)

pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the registrant;

   

(b)

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the registrant are being made only in accordance with authorizations of management and directors of the registrant; and

   

(c)

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the registrant's assets that could have a material effect on the financial statements.

 

 
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PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

On July 8, 2014, the Company filed civil actions against John R. Fitzpatrick, III, its former Chief Executive Officer, President, chief financial officer, and a former director of the Company and against Steven ("Posie") Pfaff, the former Director of Manufacturing of the Company. The petitions allege that Mr. Fitzpatrick and Mr. Pfaff breached the terms and conditions of their employment agreements with the Company, the conversion of property belonging to the Company, and by filing false and wrongful claims with the Oklahoma Department of Labor. Neither Mr. Fitzpatrick nor Mr. Pfaff have filed answers to the petitions, although the Company expects them to do so and to file counterclaims against the Company.

 

On August 7, 2014, the Oklahoma Department of Labor entered an Administrative Order of Determination in favor of Mr. Fitzpatrick in the amount of $72,000 and liquidated damages of $72,000; and also entered an Administrative Order of Determination in favor of Mr. Pfaff in the amount of $54,000 and liquidated damages of $54,000. The Company has requested a rehearing, re-opening and reconsideration of the administrative orders with the Oklahoma Department of Labor.

 

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.

 

ITEM 1A. RISK FACTORS

 

As a “small reporting company”, we are not required to provide the information required by this Item.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

 
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ITEM 5. OTHER INFORMATION

 

On August 8, 2014, the Company entered into an employment agreement with Deborah Engles. Pursuant to the agreement Deborah Engles will act as the Interim CFO and Secretary of the Company for an initial period of six months.

 

The Company has recently instituted discussions with DTC to regain eligibility. However, there is no assurance that the Company will be successful in obtaining eligibility.

 

Exhibit

 

Description 

 

 

 

31

 

Section 302 Certification of Principal Executive Officer

 

 

 

32

 

Section 906 Certification of Principal Executive Officer

 

 

 

101.INS*

 

XBRL Instance

 

 

 

101.SCH*

 

XBRL Taxonomy Extension Schema

 

 

 

101.CAL*

 

 XBRL Taxonomy Extension Calculations

 

 

 

101.DEF*

 

XBRL Taxonomy Extension Definitions

 

 

 

101.LAB*

 

XBRL Taxonomy Extension Labels

 

 

 

101.PRE*

 

XBRL Taxonomy Extension Presentation

_______________  

* XBRL Information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

 
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SIGNATURES

 

In accordance with to requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

  U.S. HIGHLAND, INC.  
       
Dated: August 19, 2014 By /s/ Josh W. Whitaker  
    Josh W. Whitaker  
    Interim President and Chief Executive Officer  

 

Dated: August 19, 2014 By /s/ Deborah Engles  
    Deborah Engles  
    Interim Chief Financial Officer  

 

 

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