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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: September 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. 105th East 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 January 14, 2015: 77,727,669 common shares

 

 

 

US Highland, Inc.

Form 10-Q

For the Fiscal Period Ended September 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

   

16

 

 

     

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   

18

 

 

     

ITEM 4.

CONTROLS AND PROCEDURES

   

18

 

 

     

PART II – OTHER INFORMATION

 

     

ITEM 1.

LEGAL PROCEEDINGS

   

19

 

 

     

ITEM 1A.

RISK FACTORS

   

19

 

 

     

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

   

19

 

 

     

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

   

19

 

 

     

ITEM 4.

MINE SAFETY DISCLOSURES

   

19

 

 

     

ITEM 5.

OTHER INFORMATION

   

20

 

 

     

ITEM 6.

EXHIBITS

   

20

 

 

 
2

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

The Company’s unaudited interim condensed consolidated financial statements for the nine month period ended September 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

 

    September 30,
2014
    December 31,
2013
 
         

ASSETS

       
         

Current Assets

       
         

Cash

 

$

1,779

   

$

43,044

 

Inventory

   

     

99,826

 

Prepaid expenses

   

43,873

     

58,520

 
               

Total Current Assets

   

45,652

     

201,390

 

Long-term Deposits

   

11,478

     

11,491

 

Property and Equipment, net

   

16,991

     

24,555

 
               

Total Assets

 

$

74,121

   

$

237,436

 
               

LIABILITIES AND STOCKHOLDERS’ DEFICIENCY

               
               

Current Liabilities

               
               

Accounts payable

 

$

466,534

   

$

393,617

 

Accrued liabilities ($142,587 and $66,184 related parties, respectively)

   

609,765

     

258,238

 

Convertible debentures ($89,549 and $144,362 related parties, respectively)

   

311,606

     

351,829

 

Derivative liabilities

   

40,286,681

     

29,430,719

 

Loans payable ($48,000 and $27,000 related parties, respectively)

   

171,500

     

115,500

 
               

Total Current Liabilities

   

41,846,086

     

30,549,903

 
               

Loans Payable ($525,000 and $0 related parties, respectively)

   

525,000

     

 
               

Total Liabilities

   

42,371,086

     

30,549,903

 
               

Commitments

               
               

Stockholders’ Deficiency

               
               

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

   

777,276

     

777,276

 
               

Common Stock Reserved for Future Issuance

   

145,886

     

129,881

 
               

Additional Paid-in Capital

   

54,757,845

     

54,757,845

 
               

Accumulated Deficit

 

(97,204,472

)

 

(85,203,969

)

 

(41,523,465

)

 

(29,538,967

)

               

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

 

(773,500

)

 

(773,500

)

               

Total Stockholders’ Deficiency

 

(42,296,965

)

 

(30,312,467

)

               

Total Liabilities and Stockholders’ Deficiency

 

$

74,121

   

$

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
September 30,
  For the Nine Months Ended
September 30,
 
    2014     2013     2014     2013  
 

$

   

$

   

$

   

$

 
                 

Revenue

               
                 

Operating Expenses

               
                 

Depreciation

 

2,406

   

2,723

   

7,564

   

7,845

 

General and administrative

   

101,946

     

157,749

     

636,900

     

454,114

 

Professional fees

   

22,763

     

184,877

     

355,882

     

3,303,026

 

Write-down of inventory

   

     

     

125,616

     

 
                               

Total Operating Expenses

   

127,115

     

345,349

     

1,125,962

     

3,764,985

 
                               

Operating Loss

 

(127,115

)

 

(345,349

)

 

(1,125,962

)

 

(3,764,985

)

                               

Other Income (Expense)

                               
                               

Interest expense

 

(321,844

)

 

(182,672

)

 

(889,605

)

 

(195,843

)

Change in fair value of derivatives

 

(1,991,170

)

 

(12,083,506

)

 

(10,800,605

)

 

(12,536,990

)

Loss on settlement of debt

   

814,668

     

     

814,668

     

 

Other income

   

500

     

1

     

1,001

     

2,985

 
                               

Total Other Income (Expense)

 

(1,497,846

)

 

(12,266,177

)

 

(10,874,541

)

 

(12,729,848

)

                               

Net (Loss)

 

(1,624,961

)

 

(12,611,526

)

 

(12,000,503

)

 

(16,494,833

)

                               

Net (Loss) Per Common Share:

                               

- Basic and Diluted

 

(0.02

)

 

(0.16

)

 

(0.15

)

 

(0.22

)

Basic and diluted weighted average common shares outstanding

   

77,727,669

     

77,194,000

     

77,727,669

     

75,100,600

 

 

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

 

 
5

 

US Highland, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

 

  Nine Months Ended
September 30,
 
    2014     2013  
    $     $  

Operating Activities

       
         

Net (loss)

 

(12,000,503

)

 

(16,494,833

)

 

 

 

 

 

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

               

Depreciation

   

7,564

     

7,845

 

Accretion expense

   

777,196

     

171,250

 

Change in fair value of derivative

   

10,800,605

     

12,536,990

 

Loss on settlement of debt

 

(814,668

)

   

 

Warrants issued for consulting services

   

     

2,599,801

 

Write down of inventory

   

125,616

     

 

Shares issuable for interest expense

   

16,005

     

6,398

 
               

Changes in operating assets and liabilities:

               

Inventory

 

(25,790

)

   

 

Prepaid expenses and deposits

   

14,660

   

(24,735

)

Accounts payable and accrued liabilities

   

478,050

     

520,292

 
               

Net Cash Used in Operating Activities

 

(621,265

)

 

(676,992

)

               

Investing Activities

               
               

Investment in property and equipment

   

   

(4,355

)

               

Net Cash Used in Investing Activities

   

   

(4,355

)

               

Financing Activities

               

Proceeds from issuance of notes payable

   

608,300

     

 

Proceeds from convertible debt

   

     

385,000

 

Proceeds from loan payable

   

     

87,000

 

Repayment of loans

 

(28,300

)

 

(2,000

)

Proceeds from issuance of common stock

   

     

228,500

 
               

Net Cash Provided by Financing Activities

   

580,000

     

698,500

 
               

Increase (Decrease) In Cash

 

(41,265

)

   

17,153

 
               

Cash - Beginning of Period

   

43,044

     

10,498

 
               

Cash - End of Period

   

1,779

     

27,651

 
               

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

   

     

     

     

16,005

     

     

     

     

16,005

 
                                                               

Net loss for the period

   

     

     

     

     

   

(12,000,503

)

   

   

(12,000,503

)

                                                               

Balance, September 30, 2014

   

77,727,669

     

777,276

     

54,757,845

     

145,886

     

   

(97,204,472

)

 

(773,500

)

 

(42,296,965

)

 

(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 September 30, 2014, current liabilities exceed current assets by $41,800,434, and the Company has an accumulated deficit of $97,204,472. 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 September 30, 2014 and 2013, approximately 91,886,000 and 51,090,000 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 nine months ended September 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

  September 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

 

(27,347

)

 

(19,783

)

               

Property and equipment, net

 

$

16,991

   

$

24,555

 

 

Depreciation expense amounted to approximately $7,564 and $7,845 for the nine months ended September 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:

 

September 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 September 30, 2014, the Company recognized the fair value of 7,000 (December 31, 2013 – 5,500) common shares issuable for interest expense of $124,537 (December 31, 2013 - $120,282), as shares reserved for future issuance. The Company has not yet issued these common shares. As at September 30, 2014, the Company has also accrued interest expense of $24,920 (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 September 30, 2014, the Company recognized the fair value of 65,000 (December 31, 2013 - 20,000) common shares issuable for interest expense of $21,350 (December 31, 2013 - $9,600), as shares reserved for future issuance. The Company has not yet issued these common shares. As at September 30, 2014, the Company has also accrued interest expense of $317 (December 31, 2013 - $125).

   

27,000

     

27,000

 

e)

On February 27, 2014, May 9 2014, and July 11, 2014 the Company received advances from a director of $6,000, $3,300 and $9,000, respectively. The Company repaid $3,300 on June 12, 2014 and $9,000 on July 28, 2014. The outstanding amount is unsecured, due on demand and bears interest at 1% per annum compounded and calculated monthly.

   

6,000

     

 

f)

On September 18, 2014, the Company entered into an unsecured, non-guaranteed, loan agreement pursuant to which the Company received proceeds of $35,000. The loan bears interest at 8% per annum compounded annually and is due 1 year after the date of issuance.

   

35,000

     

 

g)

On August 26, 2014, the Company issued an unsecured $15,000 note payable to a significant shareholder. The note bears interest at an annual rate of 8% per annum, is uncollateralized, and due 1 year after the date of issuance.

   

15,000

     

 

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

     

 

j)

On July 1, 2014, the Company issued a $25,000 note payable.

   

25,000

     

 

k)

On July 16, 2014, the Company issued a $75,000 note payable to a related party. On July 23, the note holder assigned the note to a related party.

   

75,000

     

 

Total

 

$

696,500

   

$

115,500

 

Less Short Term

 

(171,500

)

 

(115,500

)

Long Term

 

$

525,000

   

$

 

 

 
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 nine months ended September 30, 2014, the Company repaid an additional $1,000. At September 30, 2014, the carrying value of the note was $55,333 (December 31, 2013 - $56,333). The note is in default at September 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.

 

 

 

 

 

On July 24, 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. The Company accounted for the modification in accordance with ASC 405-20 and ASC 470-50-40. As the present value of the future cash flows was more than 10% different than the cash flows of the original debt, it was determined that the original and new debt instruments are substantially different and the Company treated the original convertible note extinguished and exchanged for a new convertible note. The Company recorded a loss on extinguishment of debt of $474,668. The Company also recognized the fair value of the embedded conversion feature of $24,501,757 as a derivative liability and reduced the value of the convertible loan to $nil. The fair value of the derivative liability was $22,000,404 at September 30, 2014. During the nine months ended September 30, 2014, the Company recorded total accretion of $437,350 and at September 30, 2014 the carrying value of the note was $53,285.

 

 
11

 

US Highland, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements

 

 

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.

 

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.

 

The note was not repaid on July 31, 2014. On August 4, 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. The Company accounted for the modification in accordance with ASC 405-20 and ASC 470-50-40. As the present value of the future cash flows was more than 10% different than the cash flows of the original debt, it was determined that the original and new debt instruments are substantially different and the Company treated the original convertible note extinguished and exchanged for a new convertible note. The Company recorded a loss on extinguishment of debt of $273,700. The Company also recognized the fair value of the embedded conversion feature of $13,685,849 as a derivative liability and reduced the value of the convertible loan to $nil.

 

The fair value of the derivative liability was $12,043,021 at September 30, 2014. During the nine months ended September 30, 2014, the Company recorded total accretion of $257,956 and at September 30, 2014 the carrying value of the note was $36,264. 

 

 

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 was 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 nine months ended September 30, 2014, the Company recorded accretion of $13,479 increasing the carrying value of the note to $20,000. The note was not repaid on July 31, 2014. The note is in default at September 30, 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.

 

On July 24, 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. The Company accounted for the modification in accordance with ASC 405-20 and ASC 470-50-40. As the present value of the future cash flows was more than 10% different than the cash flows of the original debt, it was determined that the original and new debt instruments are substantially different and the Company treated the original convertible note extinguished and exchanged for a new convertible note. The Company recorded a loss on extinguishment of debt of $25,000. The Company also recognized the fair value of the embedded conversion feature of $1,250,082 as a derivative liability and reduced the value of the convertible loan to $nil.

 

The fair value of the derivative liability was $1,100,020 at September 30, 2014. During the nine months ended September 30, 2014, the Company recorded total accretion of $26,387 and at September 30, 2014 the carrying value of the note was $9,355. 

 

 
12

 

US Highland, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements

 

 

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.

 

On August 4, 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. The Company accounted for the modification in accordance with ASC 405-20 and ASC 470-50-40. As the present value of the future cash flows was more than 10% different than the cash flows of the original debt, it was determined that the original and new debt instruments are substantially different and the Company treated the original convertible note extinguished and exchanged for a new convertible note. The Company recorded a loss on extinguishment of debt of $41,300. The Company also recognized the fair value of the embedded conversion feature of $2,065,135 as a derivative liability and reduced the value of the convertible loan to $nil. 

 

The fair value of the derivative liability was $1,817,233 at September 30, 2014. During the nine months ended September 30, 2014, the Company recorded total accretion of $42,024 and at September 30, 2014, the carrying value of the note was $17,369. 

 

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:

 

    September 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

 

(5,346,878

)

 

(627,690

)

Change in fair value of embedded conversion option

   

16,152,736

     

9,128,915

 

Expiration of warrants

 

(3,502

)

   

 

Conversion of warrants

   

   

(3,249,778

)

               

Balance at the end of the period

 

$

40,286,681

   

$

29,430,719

 

 

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

 

    Change in Fair Value of Derivative Liabilities  
 

$

 
     

Three months ended September 30, 2014:

   
     

Change in fair value of derivative liabilities during the three months ended September 30, 2014

 

(1,991,170

)

       

Change in fair value of derivatives

 

(1,991,170

)

       

Three months ended September 30, 2013:

       
       

Fair value of derivative liabilities in excess of note proceeds received

 

(12,412,823

)

Change in fair value of derivative liabilities during the three months ended September 30, 2013

   

329,317

 
       

Change in fair value of derivatives

 

(12,083,506

)

 

 
13

 

US Highland, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements

 

  Change in Fair Value of Derivative Liabilities  
 

$

 
   

Nine months ended September 30, 2014:

   
   

Change in fair value of derivative liabilities during the nine months ended September 30, 2014

 

(10,800,605

)

       

Change in fair value of derivatives

 

(10,800,605

)

       

Nine months ended September 30, 2013:

       
       

Fair value of derivative liabilities in excess of note proceeds received

 

(12,412,823

)

Change in fair value of derivative liabilities during the nine months ended September 30, 2013

 

(124,167

)

       

Change in fair value of derivatives

 

(12,536,990

)

 

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 September 30, 2014

   

117% - 228%

     

0.02% - 0.58%

     

0

   

0.17-2.26

 

 

7.

Common Stock

  

There were no share transactions during the nine months ended September 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

   

Expired

 

(25,133,333

)

   

0.0677

   
                 

Balance September 30, 2014

   

2,279,583

   

$

0.17

 

1.34 years

 

 

 
14

 

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 nine months ended September 30, 2014, the Company recorded $nil (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 nine months ended September 30, 2014, the Company recognized $46,454 (2013 - $37,203) of rent expense. The Company’s future minimum lease payments are as follows:

 

Twelve months ending September 30, 2015

 

$

53,147

 

Twelve months ending September 30, 2016

   

55,140

 

Twelve months ending September 30, 2017

   

57,133

 

Twelve months ending September 30, 2018

   

59,126

 

Twelve months ending September 30, 2019

   

30,223

 
 

$

254,769

 

 

 

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.

 

 

 
 

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.

 

 

 
 

h)

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 September 30, 2014, the Company had accrued a total of $252,000 pursuant to the Administrative Order of Determination.

 

 

 
i)

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.

 

10.

Subsequent Events

 

 

a)

On October 7, 2014, the Company received an advance from a director of $7,000. The outstanding amount is unsecured, due on demand and bears interest at 1% per annum compounded and calculated monthly. The loan was repaid on October 8, 2014.

 

 

 
 

b)

On October 7, 2014, the Company entered into a note payable with a related party, pursuant to which the Company received proceeds of $30,000. The note is bears interest at an annual rate of 8% per annum and due on October 7, 2016.

 

 

 
 

c)

On October 31, 2014, the Company entered into a note payable with a related party, pursuant to which the Company received proceeds of $20,000. The note is bears interest at an annual rate of 8% per annum and due on October 31, 2016.

 

 

 
 

d)

On November 4, 2014, the Company entered into a note payable with a related party, pursuant to which the Company received proceeds of $32,000. The note is bears interest at an annual rate of 8% per annum and due on November 4, 2016.

 

 

 
 

e)

The Company failed to repay the convertible notes described in Notes 5(d), (e), (g) and (h) when they became due on December 31, 2014. The Company is attempting to negotiate a further extension.

 

 
15

 

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 September 30, 2014 and September 30, 2013

 

Revenues

 

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

 

Operating Expenses

 

Operating expenses for the three month period ended September 30, 2014 were $127,115, which was comprised primarily of $101,946 for general and administrative expenses, and $22,763 for professional fees as compared to operating expenses of $345,349 for the three month period ended September 30, 2013, which was comprised primarily of $157,749 for general and administrative expenses, and $184,877 for professional fees. General and administrative expenses decreased during the three month period ended September 30, 2014 over the three months ended September 30, 2013 primarily as result of a decrease in payroll of $16,539, travel of $9,080, repairs & maintenance of $4,772 and other expenses of $17,352. The decrease in professional fees during the three month period was attributable to costs associated with various EDGAR filings incurred during 2013 which were not incurred in the current period.

 

Operating expenses for the nine month period ended September 30, 2014 were $1,125,962, which was comprised primarily of $636,900 for general and administrative expenses, $355,882 for professional fees and $125,616 for write-down of inventory as compared to operating expenses of $3,764,985 for the nine month period ended September 30, 2013, which was comprised primarily of $454,114 for general and administrative expenses, and $3,303,026 for professional fees. General and administrative expenses increased during the nine month periods ended September 30, 2014 over the nine months ended September 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 $2,947,144 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 nine months ended September 30, 2014. The only warrants issued during the nine months ended September 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 zero, their net realizable value.

 

 
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Net Loss

 

Net loss for the three month period ended September 30, 2014 was $1,624,961, compared to net loss of $12,611,526 for the three month period ended September 30, 2013. The loss in 2014 includes $321,844 in interest expense as compared to $182,672 in 2013. The increase of $139,172 related to interest recorded for convertible debentures outstanding during the period ended September 30, 2014 that were not outstanding during the comparative period. The Company recognized $270,920 of accretion during the three months ended September 30, 2014 as compared to $171,250 during the three months ended September 30, 2013. The Company recorded a charge to operations as a result of a change in fair value of derivatives of $1,991,170 during the three months ended September 30, 2014 as compared to a charge to operations as a result of a change in fair value of derivatives of $12,083,506 during the three months ended September 30, 2013.

 

Net loss for the nine month period ended September 30, 2014 was $12,000,503, compared to net loss of $16,494,833 for the nine month period ended September 30, 2013. The loss in fiscal 2014 includes $889,605 in interest expense as compared to $195,843 in fiscal 2013. The increase of $693,762 related to interest recorded for convertible debentures outstanding during the period ended September 30, 2014 that were not outstanding during the comparative period. The Company recorded a charge to operations as a result of a change in fair value of derivatives of $10,800,605 during the nine months ended September 30, 2014 as compared to a charge to operations as a result a change in fair value of derivatives of $12,536,990 during the nine months ended September 30, 2013.

 

Liquidity and Capital Resources

 

As of September 30, 2014, we had cash of $1,779 and a working capital deficiency of $41,910,434. 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 September 30, 2014, the Company received $608,300 of proceeds for the issuance notes payable. Subsequent to September 30, 2014, we received an additional $82,000 of proceeds for the issuance notes payable. We estimated that we will require $2,188,000 over the twelve month period ending September 30, 2015. The Company has $980,000 of convertible notes outstanding for which principal and interest was due on July 31, 2014. $960,000 of 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 nine month period ended September 30, 2014, we used $621,265 in cash in operating activities and did not use any cash for investing activities. This compares to the nine month period ended September 30, 2013, we used $676,992 in cash in operating activities and did not use any cash for investing activities. We received proceeds of $608,300 from the issuance of notes payable during the nine month period ending September 30, 2014 and received proceeds of $87,000 from the issuance of loans payable, $385,000 from the issuance of convertible debt and $228,500 from the issue of common stock during the nine months ended September 30, 2013.

 

As of September 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 September 30, 2014, there is an accumulated deficit of $97,204,472. 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.

 

 
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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 September 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 to assist with the financial reporting and bookkeeping. 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 nine months ended September 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.

 

ITEM 6. EXHIBITS

 

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: January 15, 2015 By: /s/ Josh W. Whitaker  
    Josh W. Whitaker  
    Interim President and Chief Executive Officer  
 
Dated: January 15, 2015 By:

/s/ Deborah Engles

Deborah Engles 

Interim Chief Financial Officer 

 

 

 

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