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EX-32.1 - CERTIFICATION - US Highland, Inc.uhln_ex321.htm
EX-31.1 - CERTIFICATION - US Highland, Inc.uhln_ex311.htm
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EX-32.2 - CERTIFICATION - US Highland, Inc.uhln_ex322.htm

 

 

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: March 31, 2015

 

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) 558-1358 

 

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 for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at the past 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

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY 

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes  x No ¨ 

 

Number of the Registrant's common stock outstanding as of July 9, 2015: 77,727,669 common shares. 

 

 

 

US Highland, Inc.

Form 10-Q

For the Quarterly Period Ended March 31, 2015

 

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 

 

 

17

 

 

 

 

 

 

 

 

ITEM 4. 

 

CONTROLS AND PROCEDURES 

 

 

17

 

 

 

 

 

 

 

 

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 

 

 

19

 

 

 

 

 

 

 

 

ITEM 6. 

 

EXHIBITS 

 

 

20

 

 

2

 

 

PART I - FINANCIAL INFORMATION 

 

Item 1. Financial Statements 

 

The Company's unaudited interim consolidated financial statements for the three-month period ended March 31, 2015 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. 

Unaudited Consolidated Balance Sheets 

 

 

 

March 31,
2015 

 

 

December 31,
2014
 

 

 

 

 

 

 

 

 

ASSETS      

 

Current Assets 

 

 

 

 

 

 

Cash and cash equivalents 

 

$ 14,446

 

 

$ 14,035

 

Prepaid expenses 

 

 

90,529

 

 

 

95,748

 

Deposit in Highlon acquisition 

 

 

150,000

 

 

 

150,000

 

 

 

 

 

 

 

 

 

 

Total Current Assets 

 

 

254,975

 

 

 

259,783

 

Deposits 

 

 

11,478

 

 

 

11,478

 

Property and equipment, net  

 

 

8,534

 

 

 

10,288

 

 

 

 

 

 

 

 

 

 

Total Assets 

 

$ 274,987

 

 

$ 281,549

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' DEFICIT        

 

Current Liabilities 

 

 

 

 

 

 

 

 

Accounts payable  

 

$ 520,307

 

 

$ 499,586

 

Accrued liabilities ($299,018 and $255,830 related parties, respectively) 

 

 

718,949

 

 

 

656,482

 

Convertible debentures ($48,973 and $nil related parties, respectively), net of discounts of $724,727 and $773,700, respectively 

 

 

308,606

 

 

 

259,633

 

Derivative liabilities  

 

 

54,094,831

 

 

 

46,065,517

 

Loans payable ($623,200 and $268,000 related parties, respectively) 

 

 

810,700

 

 

 

391,500

 

 

 

 

 

 

 

 

 

 

Total Current Liabilities 

 

 

56,453,393

 

 

 

47,872,718

 

 

 

 

 

 

 

 

 

 

Loans payable ($282,000 and $607,000 related parties, respectively) 

 

 

282,000

 

 

 

607,000

 

 

 

 

 

 

 

 

 

 

Total Liabilities 

 

 

56,735,393

 

 

 

48,479,718

 

 

 

 

 

 

 

 

 

 

Commitments  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' Deficit 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, 3,550,000 shares authorized, par value $0.01; no shares issued and outstanding  

 

 

--

 

 

 

--

 

 

 

 

 

 

 

 

 

 

Common stock, 500,000,000 shares authorized, $0.01 par value; 77,727,669 shares issued and outstanding  

 

 

777,276

 

 

 

777,276

 

 

 

 

 

 

 

 

 

 

Common stock reserved for future issuance; 263,000 and 244,000 shares at March 31, 2015 and December 31, 2014 

 

 

162,068

 

 

 

152,236

 

 

 

 

 

 

 

 

 

 

Treasury stock, at cost -- 58,333 shares  

 

 

(773,500 )

 

 

(773,500 )

 

 

 

 

 

 

 

 

 

Additional paid-in capital 

 

 

54,757,845

 

 

 

54,757,845

 

 

 

 

 

 

 

 

 

 

Accumulated deficit  

 

 

(111,384,095 )

 

 

(103,112,026 )

 

 

 

 

 

 

 

 

 

Total Stockholders' Deficit 

 

 

(56,460,406 )

 

 

(48,198,169 )

 

 

 

 

 

 

 

 

 

Total Liabilities and Stockholders' Deficit 

 

$ 274,987

 

 

$ 281,549

 

 

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

 

3

 

 

US Highland, Inc.

Unaudited Consolidated Statements of Operations

 

 

 

For the Three Months Ended     March 31,
2015 

 

 

For the Three Months Ended     March 31,
2014
 

 

 

 

 

 

 

 

 

Revenue 

 

$ --

 

 

$ --

 

 

 

 

 

 

 

 

 

 

Operating Expenses 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation 

 

 

1,754

 

 

 

2,622

 

General and administrative 

 

 

107,585

 

 

 

159,793

 

Professional fees 

 

 

23,152

 

 

 

215,727

 

 

 

 

 

 

 

 

 

 

Total Operating Expenses 

 

 

132,491

 

 

 

378,142

 

 

 

 

 

 

 

 

 

 

Operating Loss 

 

 

(132,491 )

 

 

(378,142 )

 

 

 

 

 

 

 

 

 

Other Income (Expense) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense 

 

 

(110,289 )

 

 

(190,979 )

Change in fair value of derivatives 

 

 

(8,029,314 )

 

 

1,690,434

 

Other income 

 

 

25

 

 

 

105

 

 

 

 

 

 

 

 

 

 

Total Other Income (Expense) 

 

 

(8,139,578 )

 

 

1,499,560

 

 

 

 

 

 

 

 

 

 

Net (Loss) Income 

 

$ (8,272,069 )

 

$ 1,121,418

 

 

 

 

 

 

 

 

 

 

Net Income (Loss) Per Common: 

 

 

 

 

 

 

 

 

- Basic 

 

$ (0.11 )

 

$ 0.01

 

- Diluted 

 

$ (0.11 )

 

$ (0.00 )

 

 

 

 

 

 

 

 

 

Basic Weighted Average Number of Common Shares Outstanding 

 

 

77,727,669

 

 

 

77,727,669

 

Diluted Weighted Average Number of Common Shares Outstanding  

 

 

77,727,669

 

 

 

188,584,669

 

 

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

 

4

 

 

US Highland, Inc.

Consolidated Statement of Stockholders' Deficit

  

 

 

  Common Stock    

 

 

 

Additional  

Paid-in  

 

 

Common
Stock
Reserved
For Future

 

 

Stock
Subscriptions 
 

 

 

Accumulated  

 

 

Treasury  

 

 

 

 

 

Shares  

 

 

Amount  

 

 

Capital  

 

 

Issuance 

 

 

Receivable 

 

 

Deficit 

 

 

Stock 

 

 

Total  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2014 

 

 

77,727,669

 

 

$ 777,276

 

 

$ 54,757,845

 

 

$ 152,236

 

 

$ --

 

 

$ (103,112,026 )

 

$ (773,500 )

 

$ (48,198,169 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares issuable for payment of accrued interest 

 

 

--

 

 

 

--

 

 

 

--

 

 

 

9,832

 

 

 

--

 

 

 

--

 

 

 

--

 

 

 

9,832

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss  

 

 

--

 

 

 

--

 

 

 

--

 

 

 

--

 

 

 

--

 

 

 

(8,272,069 )

 

 

--

 

 

 

(8,272,069 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2015 

 

 

77,727,669

 

 

$ 777,276

 

 

$ 54,757,845

 

 

$ 162,068

 

 

$ --

 

 

$ (111,384,095 )

 

$ (773,500 )

 

$ (56,460,406 )

 

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

 

5

 

 

US Highland, Inc.

Unaudited Consolidated Statements of Cash Flows

 

 

 

For the Three Months Ended     March 31,
2015 

 

 

For the Three Months Ended     March 31,
2014
 

 

 

 

 

 

 

 

 

Operating Activities 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income  

 

$ (8,272,069 )

 

$ 1,121,418

 

 

 

 

 

 

 

 

 

 

Adjustments to reconcile net income (loss) to cash used in operating activities: 

 

 

 

 

 

 

 

 

Depreciation 

 

 

1,754

 

 

 

2,622

 

Amortization expense 

 

 

48,973

 

 

 

165,723

 

Change in fair value of derivatives 

 

 

8,029,314

 

 

 

(1,690,434 )

Shares issuable for interest expense 

 

 

9,832

 

 

 

1,080

 

 

 

 

 

 

 

 

 

 

Changes in operating assets and liabilities: 

 

 

 

 

 

 

 

 

Inventory 

 

 

--

 

 

 

(25,396 )

Prepaid expenses and deposits 

 

 

5,219

 

 

 

14,660

 

Accounts payable & accrued liabilities 

 

 

40,000

 

 

 

136,838

 

Accrued liabilities -- related parties 

 

 

43,188

 

 

 

--

 

Net Cash Used in Operating Activities 

 

 

(93,789 )

 

 

(273,489 )

 

 

 

 

 

 

 

 

 

Financing Activities 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from loans payable  

 

 

70,000

 

 

 

331,000

 

Proceeds from loans payable -- related parties 

 

 

30,200

 

 

 

--

 

Repayment of loans 

 

 

(6,000 )

 

 

--

 

Net Cash Provided by Financing Activities 

 

 

94,200

 

 

 

331,000

 

 

 

 

 

 

 

 

 

 

Increase In Cash 

 

 

411

 

 

 

57,511

 

 

 

 

 

 

 

 

 

 

Cash - Beginning of Period 

 

 

14,035

 

 

 

43,044

 

Cash - End of Period 

 

$ 14,446

 

 

$ 100,555

 

 

 

 

 

 

 

 

 

 

Supplemental Cash Flows Information: 

 

 

 

 

 

 

 

 

Cash paid for income taxes 

 

$ --

 

 

$ --

 

Cash paid for interest 

 

$ --

 

 

$ --

 

 

 

 

 

 

 

 

 

 

Non-cash Investing and Financing Activities 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants issued to settle debt 

 

$ --

 

 

$ 53,606

 

 

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

 

6

 

 

US Highland, Inc.

Notes to the Consolidated Financial Statements

For The Three Months Ended March 31, 2015

 

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 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 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, 2014 included in the Company's Annual Report on Form 10-K filed on July 9, 2015 (the "2014 Annual Report"). 

 

Significant Accounting Policies

 

There have been no material changes in the Company's significant accounting policies to those previously disclosed in the 2014 Annual Report. 

 

Going Concern

 

The accompanying 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 March 31, 2015, current liabilities exceed current assets by $56,198,418, and the Company has an accumulated deficit of $111,384,095. 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, internally generated working capital and monetization of intellectual property assets. 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. Management is currently pursuing a business strategy which includes raising the necessary funds to finance the Company's development, marketing and manufacturing efforts. 

 

7

 

 

US Highland, Inc.

Notes to the Consolidated Financial Statements

For The Three Months Ended March 31, 2015

 

 

Earnings (Loss) Per Share

 

 

 

 For the Three months Ended March 31,                  

 

 

 

 2015

 

 

2014

 

 

 

Income (Loss) 

 

 

Weighted Average Common Shares Outstanding 

 

 

Earnings (Loss)
Per Share 

 

 

Income
(Loss) 

 

 

Weighted Average Common Shares Outstanding 

 

 

Earnings (Loss)
Per Share 

 

Basic: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) attributable to common stock 

 

$ (8,269,082 )

 

 

77,727,669

 

 

$ (0.11 )

 

$ 1,121,418

 

 

 

77,727,669

 

 

$ 0.01

 

Effect of Dilutive Securities: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible Debt 

 

 

--

 

 

 

--

 

 

 

--

 

 

 

(713,111 )

 

 

89,750,000

 

 

 

(0.01 )

Warrants 

 

 

--

 

 

 

--

 

 

 

--

 

 

 

(790,747 )

 

 

21,107,000

 

 

 

(0.00 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) attributable to common stock, including assumed conversions 

 

$ (8,269,082 )

 

 

77,727,669

 

 

$ (0.11 )

 

$ (382,440 )

 

 

188,584,669

 

 

$ (0.00 )

 

2. Deposit on Highlon Distribution Inc. Acquisition

 

On December 30, 2014, the Company entered into a share exchange agreement with Highlon Distribution, Inc. (Highlon). Per the agreement, the Company will exchange 100 shares of the Company's common stock for 100% of the Highlon shares. In addition, the Company will transfer $150,000 to Highlon within five days from the execution of the agreement. Highlon is a distribution management business focusing on marketing existing product in logistics area. Currently, parties are negotiating final terms of the Share Exchange. 

 

3. Property and Equipment

 

Property and equipment is recorded at cost and is comprised of: 

 

 

 

Useful Life 

 

March 31,
2015 

 

 

December 31, 2014 

 

 

 

 

 

 

 

 

 

 

Computers and office equipment 

 

3 years

 

$ 15,930

 

 

$ 15,930

 

Manufacturing equipment 

 

5 - 10 years

 

 

19,513

 

 

 

19,513

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

35,443

 

 

 

35,443

 

Accumulated depreciation 

 

 

 

 

(26,909 )

 

 

(25,155 )

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net 

 

 

 

$ 8,534

 

 

$ 10,288

 

 

Depreciation expense amounted to approximately $1,754 and $2,622 for the three months ended March 31, 2015 and 2014, respectively. 

 

4. Related Party Transactions

 

a) During the three months ended March 31, 2015, the Company entered into an unsecured, non-guaranteed loan agreement with a significant shareholder for $20,000. Refer to Note 5(g).
b) During the three months ended March 31, 2015, the Company entered into an unsecured, non-guaranteed loan agreement with a director for $10,200. Refer to Note 5(e).

 

8

 

 

US Highland, Inc.

Notes to the Consolidated Financial Statements

For The Three Months Ended March 31, 2015

 

5. Loans Payable

 

Loans payable consist of the following:   

 

March 31,
2015 

 

 December 31,
2014 

 

 

 

 

 

 

 

 

 

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.  

 

 

1,500

 

 

 

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 March 31, 2015, and December 31, 2014, the Company recognized the fair value of 168,000 and 164,000 common shares issuable for interest expense of $162,068 and $152,236, respectively, as shares reserved for future issuance. The Company has not yet issued these common shares. As at March 31, 2015, the Company has also accrued interest expense of $28,280 (December 31, 2014 - $26,600). 

 

 

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 at March 31, 2015 and December 31, 2014, the Company recognized the fair value of 95,000 and 80,000 common shares issuable for interest expense of $34,250 and $26,500, respectively, as shares reserved for future issuance. The Company has not yet issued these common shares. As at March 31, 2015, the Company has also accrued interest expense of $453 (December 31, 2014- $385). 

 

 

27,000

 

 

 

27,000

 

e) 

 

On February 27, 2014, and March 19, 2015, the Company received advances from a director of $6,000, and $10,200, respectively. The advances are unsecured, due on demand and bears interest at 1% per annum compounded and calculated monthly. 

 

 

16,200

 

 

 

6,000

 

f) 

 

On September 18, 2014, February 18, 2015, and March 9, 2015, the Company entered into unsecured, non-guaranteed, loan agreements pursuant to which the Company received proceeds of $35,000, $20,000, and $50,000, respectively. The loans bear interest at 8% per annum compounded annually and is due 1 year after the date of issuance. 

 

 

105,000

 

 

 

35,000

 

g) 

 

On August 26, 2014, December 4, 2014, December 18, 2014, and January 29, 2015, the Company issued unsecured notes payable of $15,000, $20,000, $200,000 and $20,000, respectively to a significant shareholder. The notes bear interest at an annual rate of 8% per annum, are uncollateralized, and due 1 year after the date of issuance.  

 

 

255,000

 

 

 

235,000

 

h) 

 

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: 

 

 

 

 

 

 

 

 

1.

 

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

 

 

50,000

 

 

 

50,000

 

2.

 

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

 

 

50,000

 

 

 

50,000

 

3.

 

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

 

 

25,000

 

 

 

25,000

 

4.

 

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

 

 

50,000

 

 

 

50,000

 

5.

 

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

 

 

150,000

 

 

 

150,000

 

6.

 

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

 

 

25,000

 

 

 

25,000

 

7.

 

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

 

 

25,000

 

 

 

25,000

 

8.

 

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

 

 

18,000

 

 

 

18,000

 

9.

 

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

 

 

32,000

 

 

 

32,000

 

10.

 

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

 

 

25,000

 

 

 

25,000

 

11.

 

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

 

 

75,000

 

 

 

75,000

 

12.

 

On October 7, 2014, the Company issued a $30,000 note payable. 

 

 

30,000

 

 

 

30,000

 

13.

 

On October 31, 2014, the Company issued a $20,000 note payable. 

 

 

20,000

 

 

 

20,000

 

14.

 

On November 4, 2014, the Company issued a $32,000 note payable 

 

 

32,000

 

 

 

32,000

 

 

 

Total 

 

$ 1,092,700

 

 

$ 998,500

 

 

 

Less Short Term 

 

 

(810,700 )

 

 

(391,500 )

 

 

Long Term 

 

$ 282,000

 

 

$ 607,000

 

 

9

 

 

US Highland, Inc.

Notes to the Consolidated Financial Statements

For The Three Months Ended March 31, 2015

 

6. 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 year ended December 31, 2014, the Company repaid an additional $3,000. At March 31, 2015 and December 31, 2014, the carrying value of the note was $53,333. The note is in default at March 31, 2015.
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 due on July 31, 2014. The note is 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. At March 31, 2015 and December 31, 2014, the carrying value of the note was $75,000.
c) Effective July 25, 2013, the Company issued a convertible note to secure a demand loan of $45,000. Pursuant to the terms of the agreement, the loan is unsecured and due on July 31, 2014. The note is 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. At March 31, 2015 and December 31, 2014, the carrying value of the note was $45,000.
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.  

 

10

 

 

US Highland, Inc.

Notes to the Consolidated Financial Statements

For The Three Months Ended March 31, 2015

 

 

On December 31, 2014, the Company and the note holder agreed to extend the maturity date to December 31, 2015. Interest shall accrue at 12% per annum but may be reduced to 8% for any period of time in which the interest is paid in cash and not accrued. 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 $411,820. The Company also recognized the fair value of the embedded conversion feature of $25,088,180 as a derivative liability and reduced the value of the convertible loan to $nil. During the three months ended March 31, 2015, the Company recorded total accretion of $26,307. At March 31, 2015 and December 31, 2014, the carrying value of the note was $500,000 and $500,000 with unamortized discount of $473,693 and $500,000, respectively. 

 

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.  

 

On December 31, 2014, the Company and the note holder agreed to extend the maturity date to December 31, 2015. Interest shall accrue at 12% per annum but may be reduced to 8% for any period of time in which the interest is paid in cash and not accrued. 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 $225,431. The Company also recognized the fair value of the embedded conversion feature of $13,733,269 as a derivative liability and reduced the value of the convertible loan to $nil. During the three months ended March 31, 2015, the Company recorded total accretion of $22,666. At March 31, 2015 and December 31, 2014, the carrying value of the note was $273,700 and $273,700 with unamortized discount of $251,034 and $273,700, respectively.  

 

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.  

 

11

 

 

US Highland, Inc.

Notes to the Consolidated Financial Statements

For The Three Months Ended March 31, 2015

 

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 year ended December 31, 2014, the Company recorded accretion of $13,479. At March 31, 2015 and December 31, 2014, the carrying value of the note was $20,000. The note is in default at March 31, 2015. 

 

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.  

 

During the year ended December 31, 2014, the Company recorded total accretion of $42,032. At March 31, 2015 and December 31, 2014, the carrying value of the note was $25,000. The note is in default at March 31, 2015. 

 

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.  

 

During the year ended December 31, 2014, the Company recorded total accretion of $65,955. At March 31, 2015 and December 31, 2014, the carrying value of the note was $41,300. The note is in default at March 31, 2015. 

 

12

 

 

US Highland, Inc.

Notes to the Consolidated Financial Statements

For The Three Months Ended March 31, 2015

 

7. Derivative Liabilities

 

The embedded conversion options of the Company's convertible debentures described in Note 6 contain conversion features that qualify for embedded derivative classification. The warrants described in Notes 6 and 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: 

 

 

 

March 31,
2015 

 

 

December 31,
2014
 

 

 

 

 

 

 

 

 

Balance at the beginning of the period 

 

$ 46,065,517

 

 

$ 29,430,719

 

 

 

 

 

 

 

 

 

 

Addition of new derivative liabilities (warrants) 

 

 

103,187

 

 

 

53,606

 

Change in fair value of warrants 

 

 

7,926,127

 

 

 

(5,184,569 )

Change in fair value of embedded conversion option 

 

 

--

 

 

 

21,627,561

 

Modification of embedded conversion options 

 

 

--

 

 

 

138,200

 

 

 

 

 

 

 

 

 

 

Balance at the end of the period  

 

$ 54,094,831

 

 

$ 46,065,517

 

 

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

 

 

 

March 31,
2015 

 

 

March 31,
2014
 

 

 

 

 

 

 

 

 

Change in fair value of derivative liabilities during the period  

 

$ (8,029,314 )

 

$ (1,690,434 )

 

 

 

 

 

 

 

 

 

Change in fair value of derivatives 

 

$ (8,029,314 )

 

$ (1,690,434 )

 

13

 

 

US Highland, Inc.

Notes to the Consolidated Financial Statements

For The Three Months Ended March 31, 2015

 

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, 2014 

 

167% - 369

%

0.04% - 0.67

 

0 %

 

0.25-2.50

 

At March 31, 2015 

 

175% - 263

0.05% - 0.89

 

0 %

 

0.01-2.50

 

 

8. Stock Purchase Warrants

 

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

 

 

 

Number 

 

 

Weighted Average Exercise Price 

 

 

Weighted Average Expected Life 

 

 

 

 

 

 

 

 

 

Balance December 31, 2014 

 

 

2,246,250

 

 

$ 0.08

 

 

1.10 years 

 

 

 

 

 

 

 

 

 

 

 

Expired 

 

 

(43,750 )

 

 

0.0005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance March 31, 2015 

 

 

2,202,500

 

 

$ 0.08

 

 

0.88 years 

 

9. Commitments

 

a) 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 three months ended March 31, 2015, the Company recognized $21,091 (2014 - $12,788) of rent expense. The Company's future minimum lease payments are as follows:

 

Fiscal year ending 

 

Amount 

 

December 31, 2015 

 

 

48,116

 

December 31, 2016 

 

 

65,982

 

December 31, 2017 

 

 

67,975

 

December 31, 2018 

 

 

69,968

 

December 31, 2019 

 

 

17,866

 

 

 

$ 269,907

 

 

14

 

 

US Highland, Inc.

Notes to the Consolidated Financial Statements

For The Three Months Ended March 31, 2015

 

b) 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.

 

c) 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.
d) 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. On March 25, 2015, the Company signed a settlement agreement with the debtor and payments totaling $12,000 are to be made. At March 31, 2015, the Company had repaid $6,000. The remaining $6,000 was paid subsequent to March 31, 2015.
e) 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.
f) 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 Mr. Steven ("Posie") Pfaff, the Director of Manufacturing of the Company regarding an employment dispute. Mr. Fitzpatrick and Mr. Pfaff have answered the Petition and asserted various counterclaims against US Highland, Inc. and third party claims against directors of the Company and one of the Company's attorneys. Mr. Fitzpatrick and Mr. Pfaff also filed complaints with the Oklahoma Department of Labor. On March 3, 2015, the Oklahoma Department of Labor entered awards of $72,000 in favor of Mr. Fitzpatrick and $54,000 in favor of Mr. Pfaff. Mr. Fitzpatrick and Mr. Pfaff are appealing these awards in Tulsa County District Court in the State of Oklahoma.

 

10. Subsequent Events

 

a) On March 31, 2015, the Company entered into an unsecured, non-guaranteed, loan agreement pursuant to which the Company received proceeds of $50,000 on April 3, 2015. The loan bears interest at 8% per annum compounded annually and is due 1 year after the date of issuance.
b) On May 8, 2015, the Company entered into an unsecured, non-guaranteed, loan agreement pursuant to which the Company received proceeds of $65,000. The loan bears interest at 8% per annum compounded annually and is due 1 year after the date of issuance.
c) On May 29, 2015, the Company entered into an unsecured, non-guaranteed, loan agreement pursuant to which the Company received proceeds of $4,000. The loan bears interest at 8% per annum compounded annually and is due 1 year after the date of issuance.

 

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 three months ended March 31, 2015 and March 31, 2014 

 

Revenues 

 

The Company had no revenues during the three months ended March 31, 2015 and 2014. 

 

Operating Expenses 

 

Operating expenses declined approximately 65% for the three months ended March 31, 2015 which were $132,492, that was comprised primarily of $107,585 for general and administrative expenses and $23,152 for professional fees as compared to operating expenses of $378,142 for the three months ended March 31, 2014, which was comprised primarily of $159,793 for general and administrative expenses and $215,727 for professional fees. General and administrative expenses decreased during the three months ended March 31, 2015 over the three months ended March 31, 2014 as result of the accrual of severance fees as a result of the termination of two former employees during the period ended March 31, 2014.  

 

Net Loss 

 

Net loss for the three months ended March 31, 2015 increased approximately 838% to $8,272,069, compared to net income of $1,121,418 for the three months ended March 31, 2014. The expenses in 2014 includes $190,979 in interest expense as compared to $110,289 in 2015. The decrease of $88,690 related to interest recorded for convertible debentures outstanding during the three months ended March 31, 2015 that were not outstanding during the comparative period. The Company recorded an unrealized loss as a result of an increase in the fair value of derivatives of $8,029,314 during the three months ended March 31, 2015 as compared to an unrealized gain as a result of a decrease in the fair value of derivatives of $1,690,434 during the three months ended March 31, 2014. 

 

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Liquidity and Capital Resources  

 

As of March 31, 2015, we had cash of $14,446 and a working capital deficiency of $56,198,418. 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 three months ended March 31, 2015, the Company received $100,200 of proceeds for the issuance notes payable. Subsequent to March 31, 2015, we received an additional $119,000 of proceeds for the issuance notes payable. We estimated that we will require $2,188,000 over the twelve month period ending December 31, 2015. The Company has $773,700 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, 2015. 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. 

 

As of March 31, 2015 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 March 31, 2015, there is an accumulated deficit of $111,381,008. 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. 

 

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 March 31, 2015, 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. 

 

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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 March 31, 2015, 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 regarding an employment dispute. Mr. Fitzpatrick and Mr. Pfaff have answered the Petition and asserted various counterclaims against US Highland, Inc., and third party claims against directors of the Company and one of the Company's attorneys. 

 

Mr. Fitzpatrick and Mr. Pfaff also filed complaints with the Oklahoma Department of Labor. On March 3, 2015, the Oklahoma Department of Labor entered awards of $72,000 in favor of Mr. Fitzpatrick and $54,000 in favor of Mr. Pfaff. Mr. Fitzpatrick and Mr. Pfaff are appealing these awards in Tulsa County District Court in the State of Oklahoma.  

 

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 

 

There were no sales of unregistered securities during the three months ended March 31, 2015. 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES  

 

The Company is in default under the terms of a secured convertible promissory note dated July 25, 2013, that was due and payable on July 31, 2014, which remains unpaid and because of unpaid judgments the Company is negotiating a waiver of these provisions.  

 

ITEM 4. MINE SAFETY DISCLOSURES 

 

Not applicable. 

 

ITEM 5. OTHER INFORMATION 

 

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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: July 9, 2015 

By:

/s/ Josh W. Whitaker 

Josh W. Whitaker 

Interim President and Chief Executive Officer

 

 

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