UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 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

Registrant's Telephone number, including area code: (918) 558-1358

Securities registered under Section 12(b) of the Act:

Securities registered under Section 12(g) of the Act:

Common Stock, $0.01 par value 

(Title of class)

With a copy to: 

Philip Magri, Esq. 

Magri Law, LLC 

2642 NE 9th Avenue 

Fort Lauderdale, FL 33334 

T: (646) 502-5900 

F: (646) 826-9200 

pmagri@magrilaw.com 

www.MagriLaw.com

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act  Yes ¨ No x

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 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 ¨ No x

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 232.406 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  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.

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter. $27,204,684 on June 30, 2015, the last business day of the Registrant's mostly recently completed second fiscal quarter.

As of April 14, 2016, there were 58,162,669 shares of the registrant's common stock, par value $0.01 per share outstanding.

TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K 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.

PART I

ITEM 1. BUSINESS

Corporate History

US Highland, Inc. ("US Highland" or the "Company") was originally formed as a limited liability company on February 5, 1999 under the name "The Powerhouse, L.L.C." in the state of Oklahoma. On February 26, 1999, an amendment was filed that changed the name of the entity to Powerhouse Productions, L.L.C.

On November 9, 2006, Powerhouse Productions, L.L.C. filed Articles of Conversion, changing the entity from a limited liability company to a C-corporation under the name "US Highland, Inc." On November 29, 2006, the Company amended its certificate of incorporation thereby increasing the authorized shares of common stock to 100,000,000 with a par value of $0.01 per share.

On January 25, 2010, Articles of Merger were filed with the state of Oklahoma, merging U.S. Highland, Inc. into Harcom Productions, Inc. Pursuant to the Articles of Merger, the name of the corporation was changed from Harcom Productions, Inc. to US Highland, Inc. (the "Merger"). Pursuant to an Asset Purchase Agreement, dated December 21, 2009, with Shane Harwell, the Company sold all rights, title and interest to the purchased assets to Mr. Harwell for the consideration of 950,000 shares of Common Stock.

Description of New Business Strategy

After the Merger, the Company solely focused on the business of being a recreational powersports Original Equipment Manufacturer ("OEM"). In September 2015, the Company redefined its business model to be one of a diversified holdings Company. The Company will seek investments in acquisitions, joint ventures and strategic partnerships that will development new holdings and business lines that take advantage of management's ability to sell, market, and distribute products. The Company has realigned its mission statement to include providing companies and emerging brands with the knowledge and expertise needed to launch their products in the United States marketplace.

As part of the Company's new strategy to diversify its operations by engaging in new business lines to assist companies and emerging brands launch their products in the U.S., on September 23, 2015, the Company formed two wholly-owned subsidiaries, USH Distribution Corp., a Nevada corporation ("USH"), and Powersports Brands Alliance, Inc., a Nevada corporation ("PBA") The Company formed USH to provide sales, marketing and distribution services primarily to international and domestic companies seeking sales of their products in the U.S.; and PBA to acquire brands in the powersports industry with the intended goal of being a business that sells powersports products, including, but not limited to, powersports parts and accessories, such as helmets, gloves, gear, etc.

The Company's new business strategy consists of the following divisions:

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.

Joint Venture Agreement with M&M Sourcing

On September 25, 2015, USH entered into a Joint Venture Agreement, dated September 25, 2015 (the "JV Agreement"), with M&M Sourcing Sdn. Bhd., a Malaysian entity ("M&M"). Pursuant to the JV Agreement, USH and M&M jointly formed Lahva, Inc., a Nevada corporation on September 23, 2015 ("Lahva"), for the purposes of acting as the U.S. based representative of M&M to provide apparel sourcing services to U.S. based brands and retailers, develop in-house apparel brands and invest in and develop non in-house apparel brands (the "Joint Venture").

The following is a summary of the JV Agreement:

Consignment Agreement with Rhino Workwear USA, Ltd.

On September 28, 2015, the Company, though USH, entered into that certain Consignment Agreement, dated September 28, 2015 (the "Consignment Agreement"), between USH and Rhino Workwear USA, Ltd. ("Rhino"), a Nevada corporation engaged in the business of designing, manufacturing, marketing and distributing workwear apparel and other accessories for the workwear industry ("Products").

The following is a summary of the Consignment Agreement:

Market Analysis

Apparel Industry

According to the most recent data issued by the US Department of Commerce - Office of Textiles and Apparel http://otexa.trade.gov/ ("OTEXA") on December 31, 2015, US imports of apparel continued to climb in 2015, reaching almost $84.9 billion (year-end Nov. 2015) for an increase of 3.97% over the previous year. 

As the OTEXA data reflects, the growth of apparel imports into the US is being driven by the lower cost and quality improvements of offshore manufacturing, a relatively strong US dollar, and recent weakness in the Chinese yuan. According to OTEXA, shipments from China, the largest supplier of apparel to the US, were up 1.98% in the last year to $30.44 billion (35.86% of total US apparel imports). Other major manufacturers and exporters of apparel to the US are Vietnam (12.34%), Bangladesh (6.3%), Indonesia (5.78%), India (4.3%), and Mexico (4.24%).

US Highland believes it is well-positioned to take advantage of this growth trend in apparel and other imports that it expects to create numerous new business opportunities for the Company and its joint venture, Lahva, Inc., as it believes in an ongoing trend of many US companies choosing to partner with sourcing specialists to cost effectively manage their production in low-cost foreign manufacturing centers. Sourcing specialists breakdown cultural and geographic barriers between US apparel firms and international factories, providing a competitive advantage to U.S. apparel firms by reducing production cost and facilitating production of simple to complex designs.

Lahva, Inc., 40% owned by US Highland, is a sourcing joint-venture with M&M Sourcing Sdn Bhd, an established Malaysian apparel sourcing consortium. Lahva provides customers with end-to-end sourcing of the apparel supply chain. This strategy includes overseeing the entire process, including design, raw material acquisition, garment construction, packaging, shipping, distribution/warehousing, delivery to retail, and consumer purchase. Lahva also utilizes its resources to incubate and support emerging apparel brands.

Powersports Industry

Market data for the motorcycle industry shows that the industry is growing in most global market segments, with Europe showing flat sales, illustrating generally positive expected performance of the powersports industry for the next 5+ years. It is important to note that 45% for on-road motorcycles, 45% for ATV plus 10% for off-road motorcycles show a good balance within the powersports industry. Honda, Harley Davidson and Polaris Industries are the largest OEMs for many global markets. Estimated new unit sales for the U.S. powersport market is 1.4mm units annually.[1] US Highland management believes the metric parts and accessory sales volume to be approximately $3.6B annually. US Highland has chosen the U.S. market as its primary target and domicile market.

OEM (Original Equipment Manufacture) Cycle

The OEM motorcycle market is a cyclical business, with the largest sales occurring during late summer and fall for next year's models. Time to market for new products can be 8-14 months before final units are produced, tested and capable of delivery to the public. Finished goods can remain selling for 5+ years, before model changes are needed.

On-Road Motorcycles Market

Comparisons between the dirt bike sales forecast and the total motorcycle sales forecast illustrates that on-road or street motorcycles represent a much larger market segment, by a ratio of 4.5:1. Harley Davidson continues to have the largest market share of this market segment.[2]

On-Road Seasonality

On-road seasonality is even more severe than off-road seasonality. In the on-road market segment, summer month sales are the strongest, though spring sales are within 20-30% of summer sales. Winter sales are as much as 75% lower than summer sales.

Dual Sport Market

2012 data indicates this segment as the fastest growing segment, with the largest gains. US Highland engines are dual purpose ready.

Wholesale/Custom Builder Market

With the growing and positive movement in product customization, US Highland management estimates that more "NEW" powersport manufactures will be entering the market than ever before. Currently no other US supplier offers 250cc-1150cc metric engines available for sale. US Highland management believes that by comparison the V-Twin market is offering products sold specifically for the On-Road market, the estimated market size for the V-Twin parts and accessory market is $1.6B annually. US Highland will fully capitalize on this market opportunity and offer metric engines for the use in any type of powersport product representing 4 times the available sales of the V-Twin market.

Intellectual Property

US Highland owns the intellectual property corresponding to the 350cc, 450cc, 507cc, 750cc, 950cc engines and was granted limited intellectual property rights to an 1150cc engine by Folan AB. The 1150cc is limited to the right to modify, manufacture and sell the 1150cc engine into the flat bottom boat market exclusively in the United States. US Highland has also developed a unique throttle body which allows "linear proportional air flow" control to the engine. Conventional throttle bodies do not have linear response, requiring operators to manually adjust to uneven response from the throttle. US Highland owns US Registered Trademark "HIGHLAND", which is the subject of U. S. Trademark Registration No. 2,362,734 which was issued on June 27, 2000. US Highland has also applied on December 20, 2011 for two additional US Registered Trademarks, "POWERED BY US HIGHLAND" on December 19, 2011 and "AMERICAN MADE PERFORMANCE". Currently, US Highland is no longer seeking trademark registration for "POWERED BY US HIGHLAND" and "AMERICAN MADE PERFORMANCE".

Number Of Total Employees And Number Of Full-Time Employees.

At December 31, 2015, we had a total of two full-time employees. Our President, Kevin Malone works part-time on the affairs of the Company. Our Interim Chief Financial Officer, Deborah E. Engles works on as needed basis for the Company

Description of Properties

The Company's business mailing address is 5930 Royal Lane, Suite E211, Dallas, TX 75230. The Company also maintains a corporate website at www.ushighland.com, the contents of which are not incorporated by reference herein.

_____________________

[1] Motorcycle Industry Council (www.mic.org) and ATV Safety Institute (atvsafety.org)

[2] Motorcycle Industry Council (www.mic.org)

ITEM 1A. RISK FACTORS

As a "smaller reporting company," as defined by Item 10 of Regulation S-K, we are not required to provide the information required by this item of Form 10-K.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTY

The Company currently has no ownership or leases of property. The Company's business mailing address is 5930 Royal Lane, Suite E211, Dallas, TX 75230. The Company's primary phone number is 918-558-1358.

ITEM 3. 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. US Highland, Inc., Mr. Fitzpatrick and Mr. Pfaff are all appealing these awards in Tulsa County District Court in the State of Oklahoma.

As previously reportated on Form 8-K filed on March 1, 2016, on February 22, 2016, the Company, John Fitzpatrick III, Steven Pfaff, and certain of the Company's officers and directors entered into that certain Release of Claims and Settlement Agreement (the "Settlement Agreement"). Pursuant to the Settlement Agreement, the parties, without admitting any liability or wrongdoing, fully and completely released and discharged each other from all claims, actions, demands, costs, losses, damages, expenses and causes of actions of every kind relating to Mr. Fitzpatrick's and Mr. Pfaff's previous employment with the Company, including claims separately filed by Mr. Fitzpatrick and Mr. Pfaff with the Oklahoma Department of Labor and subsequently appealed by them and the Company in the District Court in and for Tulsa County, State of Oklahoma, and the civil action between the Company and each of Mr. Fitzpatrick and Mr. Pfaff now pending in the Tulsa County District Court of Oklahoma. Pursuant to the Settlement Agreement, the Company has agreed to pay Mr. Fitzpatrick and Mr. Pfaff an aggregate settlement amount of $200,000 in two installments. The Company and the directors also agreed to execute and deliver a pocket judgment against them which shall not be filed by Mr. Fitzpatrick and Mr. Pfaff unless the Company fails to make the scheduled payments under the Settlement Agreement.

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.

We are currently not aware of any pending legal proceedings to which we are a party or of which any of our property is the subject, nor are we aware of any such proceedings that are contemplated by any governmental authority.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

On March 17, 2008, our common stock was listed for the first time on the OTC Bulletin Board under the symbol "HRCM". On March 31, 2010, due to our name change, our symbol was changed to "UHLN".

The following table sets forth the range of high and low bid quotations for the Registrant's common stock. The quotations represent interdealer prices without retail markup, markdown or commission, and may not necessarily represent actual transactions.

Registered Holders of Our Common Stock

As at April 14, 2016, there were approximately 132 record holders of our common stock.

Dividends

Holders of the Company's common stock are entitled to receive such dividends as may be declared by its board of directors. No dividends on the Company's common stock have ever been paid, and the Company does not anticipate that dividends will be paid on its common stock in the foreseeable future.

Securities Authorized for issuance under equity compensation plans.

No securities are authorized for issuance by the Registrant under equity compensation plans.

Recent Sales of Unregistered Securities

The Company issued the following securities in the three years preceding December 31, 2015:

Unless otherwise noted, when issuing the aforementioned securities, the Company relied on the exemption from the registration requirements of the Securities Act available under Section 4(a)(2) due to the fact that they were isolated issuances, did not involve a public offering of securities and there was no advertising or solicitation involved.

Capitalization

Under our Articles of Incorporation, as amended, we are authorized to issue up to 500,000,000 shares of common stock, par value $0.01 per share, and up to 3,550,000 shares of "blank check" preferred stock, par value $0.01 per share. As of December 31, 2015, there were 58,162,669 shares of common stock issued and outstanding. As of December 31, 2015, 3,500,000 shares of "blank check" preferred stock were designated as Series A Preferred Stock and 10,000 shares were designated as Series B Preferred Stock, of which 3,381,520 and 5,000 were issued and outstanding, respectively.

Series A Preferred Stock

On September 30, 2015, the Board of Directors of the Company unanimously designated 3,500,000 shares of the Company's 3,550,000 authorized "blank check" Preferred Stock as "Series A Convertible Preferred Stock" having the following preferences, limitations, restrictions and relative rights:

Series B Preferred Stock

On November 20, 2015, the Board of Directors of the Company unanimously designated Ten Thousand (10,000) shares of the Company's authorized "blank check" preferred stock, par value $0.01 ("Preferred Stock") as "Series B Convertible Preferred Stock" having the following preferences, limitations, restrictions and relative rights:

ITEM 6. SELECTED FINANCIAL DATA

Not applicable to a smaller reporting company.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain statements contained in this Annual Report, including statements regarding the anticipated development and expansion of our business, our intent, belief or current expectations, primarily with respect to our future operating performance and other statements contained herein regarding matters that are not historical facts, are "forward-looking" statements. Future filings with the SEC, future press releases and future oral or written statements made by us or with our approval, which are not statements of historical fact, may contain forward-looking statements, because such statements include risks and uncertainties, and actual results may differ materially from those expressed or implied by such forward-looking statements. All forward-looking statements speak only as of the date on which they are made and reflect our plans, estimates and beliefs. Our actual results could differ materially from those anticipated in these forward-looking statements. We undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made. The following discussion and analysis should be read in conjunction with the audited financial statements and notes thereto included elsewhere in this Annual Report.

Overview

The Company is a recreational powersports original equipment manufacturer ("OEM"), which develops motorcycles, quads, single cylinder engines, and v-twin engines under its own brand and for other OEMs.

Results of Operations The fiscal year ended December 31, 2015 compared to the fiscal year ended December 31, 2014 Revenues

During the year ended December 31, 2015, the Company had no revenues, as compared to $10,930 for the fiscal year ended December 31, 2014.

Operating Expenses

Operating expenses for the year ended December 31, 2015 were $513,767, which was comprised primarily of $297,352 for general and administrative expenses and $210,835 for professional expenses as compared to operating expenses of $1,137,482 for the year ended December 31, 2014, which was comprised primarily of $756,902 for general and administrative expenses, and $371,170 for professional expenses and consulting expenses. The decrease in general and administrative expenses of $459,550 resulted primarily from an decrease in the number of employees during the year ended December 31, 2015 as compared to the year ended December 31, 2014. This general reduction of office expenses is a result of budget constraints. The decrease in professional fees of $160,335 resulted primarily from the Company reducing the number of professionals utilized during the year ended December 31, 2015 as compared to the year ended December 31, 2014.

Net Income/Loss

Net income for the year ended December 31, 2015 was $15,066,472, compared to net loss of $17,908,057 for the year ended December 31, 2014. The income in fiscal 2015 includes $14,603,888 gain on change in fair value of derivatives and gain on settlement of debt of $1,988,114, offset by $1,011,790 in interest expense. The loss in fiscal 2014 includes $1,666,381 in interest expense and $16,442,992 loss on change in fair value of derivatives, offset by a gain on settlement of debt of $1,451,919.

Liquidity and Capital Resources

As of December 31, 2015, we had cash of $13,563 and a working capital deficit of $18,317,140. 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. We estimated that we will require $2,188,000 over the next twelve-month period. 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 year ended December 31, 2015, we used $401,189 in cash in operating activities. During the year ended December 31, 2014, we used $764,929 in cash in operating activities. We received proceeds of $396,200 from the issuance of notes payable and convertible debt for the year ended December 31, 2015 compared to $917,300 for the year ended December 31, 2014. We made cash repayments of $21,700 for notes payable for the year ended December 31, 2015 compared to $37,300 for the year ended December 31, 2014. We paid out $150,000 to Highlon, a company in the distribution management business for the deposit for a potential acquisition during the year ended December 31, 2014. We received proceeds of $217 from the exercise of warrants during year ended December 31, 2015.

As of December 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 recurring losses from operations as of December 31, 2015. In addition, at December 31, 2015, there was an accumulated deficit of $88,045,554. 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. 

There is substantial doubt about the Company's ability to continue as a going concern. Accordingly, its independent auditors included an explanatory paragraph in their report on the consolidated financial statements regarding concerns about the Company's ability to continue as a going concern. The Company's consolidated financial statements contain additional note disclosures describing the circumstances that lead to the auditor's opinion. The financial statements do not include any adjustments that might be necessary if we are 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.

Cash and Cash Equivalents

 The following table summarizes the sources and uses of cash for the periods stated. The Company held no cash equivalents for any of the periods presented.

Off-Balance Sheet Arrangements

Our liquidity is not dependent on the use of off-balance sheet financing arrangements (as that term is defined in Item 303(a) (4) (ii) of Regulation S-K) and as of December 31, 2015, we had no such arrangements. There has been no material change in our contractual obligations other than in the ordinary course of business since the fiscal year ended December 31, 2015.

Recent Pronouncements

Management does not anticipate that the new accounting pronouncements listed above will have a material impact on the financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a "smaller reporting company," as defined by Item 10 of Regulation S-K, we are not required to provide the information required by this item of Form 10-K.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

US Highland, Inc. 

Index to the Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and  

Stockholders of US Highland, Inc.
Tulsa, Oklahoma

We have audited the accompanying consolidated balance sheets of US Highland, Inc. as of December 31, 2015 and 2014 and the related consolidated statements of operations, changes in stockholders' deficit and cash flows for the years then ended. US Highland, Inc.'s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of US Highland, Inc. as of December 31, 2015 and 2014 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that US Highland, Inc. will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, US Highland, Inc. has suffered recurring losses from operations and has a working capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ GBH CPAs, PC

GBH CPAs, PC
www.gbhcpas.com
Houston, Texas
April 14, 2016

US Highland, Inc. 

Consolidated Balance Sheets

US Highland, Inc. 

Consolidated Statements of Operations

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

US Highland, Inc. 

Consolidated Statement of Changes in Stockholders' Deficit 

For the Years Ended December 31, 2015 and 2014

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

US Highland, Inc. 

Consolidated Statements of Cash Flows

 (The accompanying notes are an integral part of these 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.

On September 23, 2015, the Company incorporated two wholly-owned subsidiaries, USH Distribution Corp., a Nevada corporation, and Powersports Brand Alliance, Inc., a Nevada corporation. The subsidiaries were formed to provide sales, marketing and distribution services of their power sport products and accessories.

On September 25, 2015, the Company entered into a Joint Venture Agreement with M&M Sourcing Sdn. Bhd., a Malaysian entity ("M&M") and jointly formed Lahva, Inc., a Nevada corporation ("Lahva"). The Company's and M&M's equity stake in Lahva is 40% and 60%, respectively. As at December 31, 2015, there were no activities in Lahva.

Going Concern

2. Summary of Significant Accounting Policies

a)        Basis of Presentation and Principles of Consolidation

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 subsidiaries, US Highlands Electric Inc., USH Distribution Corp., and Powersports Brand Alliance, Inc. All significant intercompany transactions and balances have been eliminated.

b)       Use of Estimates

The preparation of these consolidated financial statements in accordance with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The Company regularly evaluates estimates and assumptions related to useful life and recoverability of long-lived assets, stock-based compensation, derivative liabilities, deferred income tax asset valuations, fair values of financial instruments and loss contingencies. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company's estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

c)        Reclassifications

Certain amounts in the prior period presented have been reclassified to conform to the current period financialstatement presentation. These reclassifications have no effect on previously reported net loss.

d)       Cash and Cash Equivalents

The Company considers all highly liquid instruments with maturities of three months or less at the time of issuance to be cash equivalents.

e)        Inventory

Inventory is stated at the lower of cost or market, utilizing the specific lot identification method. Inventory consists of goods and parts for resale.

f)        Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. The Company computes depreciation using the straight-line method over the estimated useful lives of the assets acquired as follows:

g)       Fair Value Measurements

The Company measures and discloses the estimated fair value of financial assets and liabilities using the fair value hierarchy prescribed by US generally accepted accounting principles. The fair value hierarchy has three levels, which are based on reliable available inputs of observable data. The hierarchy requires the use of observable market data when available. The three-level hierarchy is defined as follows:

Level 1 – quoted prices for identical instruments in active markets.

Level 2 – quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations in which significant inputs and significant value drivers are observable in active markets; and.

Level 3 – fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

Financial instruments consist principally of cash and cash equivalents, loan receivable, accounts payable, loans payable and convertible debentures. Derivative liabilities are determined based on "Level 3" inputs, which are significant and unobservable and have the lowest priority. There were no transfers into or out of "Level 3" during the years ended December 31, 2015 or 2014. The recorded values of all other financial instruments approximate their current fair values because of their nature and respective relatively short maturity dates or durations.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial statement. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. See Note 7 for additional information.

h)       Income Taxes

The Company accounts for income taxes using the asset and liability method. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized in income or expense in the period that the change is effective. Tax benefits are recognized when it is probable that the deduction will be sustained. A valuation allowance is established when it is more likely that not that all or a portion of a deferred tax asset will not be realized. The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. No such interest or penalties were recognized during the period presented. The Company had no accruals for interest and penalties at December 31, 2015, or 2014.

i)         Revenue Recognition

For revenue from product sales, the Company recognizes revenue using the four basic criteria that must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required.

j)         Advertising

The Company expenses advertising costs as incurred. Such costs totaled approximately $11,000 and $6 for 2015, and 2014, respectively.

k)       Research and Development

Research and development costs are expensed as incurred.

l)         Basic and Diluted Net Loss Per Common Share

Basic earnings (loss) per Common 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 December 31, 2015, and 2014, approximately 50,986,000 and 91,852,000 shares, respectively, underlying the convertible debentures and warrants were antidilutive.

m)      Concentration of Business and Credit risk

The Company maintains cash balances in several financial institutions which currently are insured by the Federal Deposit Insurance Corporation. Balances in these accounts may, at times, exceed the federally insured limits. The Company provides credit in the normal course of business to customers and performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information. There Company had sales of $10,930 to one customer during the year ended December 31, 2014 and no sales during the year ending December 31, 2015.

n)       Subsequent Events

The Company's management reviewed all material events through the issuance date of this report for disclosure purpose.

o)       Recently Issued Accounting Pronouncements

The Company has implemented all new accounting pronouncements that are in effect and that may impact its consolidated financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.

3. 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 2014, the Company transferred $150,000 to Highlon as a deposit. Highlon is a distribution management business focusing on marketing existing product in logistics area. Currently, the parties are negotiating final terms of the share exchange.

4. Property and Equipment

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

Depreciation expense amounted to $5,580 and $9,410 for the years ended December 31, 2015 and 2014, respectively.

5. Related Party Transactions

a)       During the year ended December 31, 2015, the Company incurred salary and wages of $88,598 (2014 – $97,376) and $69,409 (2014 – $72,567) to the former President of the Company and the interim Chief Financial Officer ("CFO") of the Company, respectively. At December 31, 2015, the Company owes the former President of the Company and the interim CFO $5,885 (2014 – $2,700) and $12,000 (2014 – $nil), respectively, which has been included in accounts payable.

b)       At December 31, 2015, the Company owed a significant shareholder of the Company an aggregate of $190,000 (2014 – $842,000) pursuant to unsecured, non-guaranteed loan agreements and $500,000 (2014 – $773,700) pursuant to convertible debenture agreements. In addition, the Company owed the significant shareholder of the Company a total of $266,816 (2014 – $255,382) in accrued interest. During the year ended December 31, 2015, the Company issued 2,484,422 shares of Series A Preferred stock to a significant shareholder of the Company to settle $822,000 of loans payable, a $273,700 convertible note and $146,511 of accrued interest. Refer to Notes 6(e), 8(g) and 8(h).

c)     At December 31, 2015, the Company owed a director of the Company $27,000 (2014 – $27,000) pursuant to unsecured, non-guaranteed loan agreements. In addition, the Company owes the director of the Company accrued interest of $658 (2014 – $385), which has been included in accrued liabilities. Refer to Note 8(d).

d)     At December 31, 2015, the Company owed the President of the Company $3,000 (2014 – $6,000) pursuant to unsecured, non-guaranteed loan agreements. In addition, the Company owes the President of the Company accrued interest of $122 (2014 – $62), which has been included in accrued liabilities. Refer to Note 8(e).

e)     On December 30, 2014, the Company entered into a share exchange agreement with a company whose Chief Executive Officer ("CEO") is the former President of the Company. Refer to Note 3.

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, during the year ended December 31, 2014, the Company repaid an additional $3,000 and during the year ended December 31, 2015, the Company repaid $1,000. At December 31, 2015 and 2014, the carrying value of the note was $52,333 and $53,333, respectively. The note is in default at December 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 per share. 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.

On September 30, 2015, the Company issued 190,054 shares of Series A preferred stock with a fair value of $722,205 upon the settlement of the principal amount of $75,000 and accrued interest of $20,027. At September 30, 2015, the fair value of the derivative liability was $773,811. The Company recognized a gain of $146,633 on settlement of debt. The difference between the value of the debt and the derivative liability and the fair value of the Series A preferred shares was recorded as a gain or loss on settlement of debt. At December 31, 2015 and 2014, the carrying value of the note was $nil and $75,000, respectively.

c)        Effective July 25, 2013, the Company issued a convertible note 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 per share. 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.

On September 30, 2015, the Company issued 113,176 shares of Series A preferred stock with a fair value of $430,069 upon the settlement of the principal amount of $45,000 and accrued interest of $11,588. At September 30, 2015, the fair value of the derivative liability was $464,286. The Company recognized a gain of $90,805 on settlement of debt. The difference between the value of the debt and the derivative liability and the fair value of the Series A preferred shares was recorded as a gain or loss on settlement of debt. At December 31, 2015, and 2014, the carrying value of the note was $nil and $45,000, respectively.

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.

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.

On December 31, 2015, the Company and the note holder agreed to extend the maturity date to December 31, 2016. 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 gain on extinguishment of debt of $492,585. The Company also recognized the fair value of the embedded conversion feature of $16,507,415 as a derivative liability and reduced the value of the convertible loan to $nil.

During the year ended December 31, 2015, the Company recorded total accretion of $500,000. At December 31, 2015, and 2014, the carrying value of the note was $nil and $nil with unamortized discount of $500,000 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.