UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: June 30, 2016

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

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

N/A
(Former name, former address and former fiscal year, if changed since last report)

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 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.

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 CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of August 22, 2016, there were 58,162,669 shares of Common Stock, par value $0.01 per share, issued and 58,104,336 outstanding.

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

US Highland, Inc.

Consolidated Balance Sheets

(Unaudited)

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

US Highland, Inc.

Consolidated Statements of Operations

(Unaudited)

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

US Highland, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

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

US Highland, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

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.  

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 subsidiaries, US Highlands Electric Inc., USH Distribution Corp., and Powersports Brand Alliance, 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, 2015 included in the Company's Annual Report on Form 10-K filed on April 15, 2016 (the "2015 Annual Report").

US Highland, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

Investments in Unconsolidated Affiliates

The investment in, and the operating results of, 50%-or-less-owned entities not required to be consolidated are included in the consolidated financial statements on the basis of the equity method of accounting. The Company's only investment qualifying for the equity method of accounting is the Company's investment in Lahva.

The Company reviews investments in unconsolidated affiliates for impairment whenever events or changes in business circumstances indicate that the carrying amount of the investments may not be fully recoverable. Evidence of a loss in value that is other than temporary includes, but is not limited to, the absence of an ability to recover the carrying amount of the investment, the inability of the investee to sustain an earnings capacity which would justify the carrying amount of the investment, or, where applicable, estimated sales proceeds which are insufficient to recover the carrying amount of the investment. If the fair value of the investment is determined to be less than the carrying value and the decline in value is considered to be other than temporary, an appropriate write-down is recorded based on the excess of the carrying value over the best estimate of fair value of the investment.

Significant Accounting Policies

There have been no material changes in the Company's significant accounting policies to those previously disclosed in the 2015 Annual Report other than as noted below.

During the six months ended June 30, 2016, the Company adopted guidance codified in ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs. The guidance simplifies the presentation of debt issuance costs by requiring debt issuance costs to be presented as a deduction from the corresponding liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs is not affected. Therefore, these costs will continue to be amortized as interest expense using the effective interest method pursuant to ASC 835-30-35-2 through 35-3. The Company has applied this guidance retrospectively to all prior periods presented in the Company's financial statements. The reclassification did not impact previously reported net income (loss) or any prior amounts reported on the Consolidated Balance Sheets, Consolidated Statements of Operations or the Consolidated Statements of Cash Flows.

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 June 30, 2016, current liabilities exceed current assets by $2,351,566, and the Company has an accumulated deficit of $72,085,886. 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.

US Highland, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

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. During the six months ended June 30, 2016, the Company wrote-off the deposit of $150,000 pursuant to a subsequent settlement agreement with Highlon and the former President of the Company. Pursuant to the settlement agreement, the Company also agreed to pay the former President of the Company an additional $20,185, offset by advances from Highlon of $26,000 and accounts payable to the former President of the Company of $5,885, resulting in a loss on settlement of debt of $118,115. Refer to Note 11(g).

On September 25, 2015, the Company entered into a joint venture agreement and formed Lahva, Inc. The Company's 40% ownership interest in the joint venture was recorded at cost and the Company's proportionate share of net loss under the equity method of accounting is recorded within results of continuing operations.

During the six months ended June 30, 2016 the Company received the following notes from Lahva, Inc.:

The Company recognized $19,654 and $0 as its proportional share of Lahva, Inc.'s net loss during the six months ended June 30, 2016 and 2015, respectively. The total carrying value of the equity method investment in Lahva, Inc. was $0 at June 30, 2016. As the Company's share of net losses was greater than its investment in Lahva Inc., the Company has reduced the balance of interest and loans receivable from Lahva, Inc. to $83,657.

US Highland, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

Selected financial results for Lahva for the six months ended June 30, 2016 are as follows:

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

Depreciation expense amounted to $2,252 and $3,301 for the six months ended June 30, 2016 and 2015, respectively.

US Highland, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

US Highland, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

US Highland, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

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 9 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:

The following table summarizes the change in fair value of derivatives for the six-month periods ended:

US Highland, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

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:

US Highland, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

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

A reconciliation of the components of basic and diluted net income per common share is presented in the tables below:

US Highland, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

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. Unless stated otherwise, terms such as the "Company," "US Highland," "we," "us," "our," and similar terms shall refer to US Highland, Inc., an Oklahoma corporation, and its subsidiaries.

Plan of Operations

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.

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 diversified business strategy consists of the following divisions:

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:

Results of Operations

The three months ended June 30, 2016 compared to the three months ended June 30, 2015

Revenues

The Company had no revenues during the three months ended June 30, 2016 and 2015.

Operating Expenses

Operating expenses decreased approximately 26% for the three months ended June 30, 2016 which were $84,148 and primarily comprised of $29,923 for general and administrative expenses and $53,099 for professional fees as compared to operating expenses of $113,506 for the three months ended June 30, 2015, which was comprised primarily of $80,191 for general and administrative expenses and $31,768 for professional fees. General and administrative expenses decreased during the three months ended June 30, 2016 over the three months ended June 30, 2015 as result of the termination of two former employees during the period ended June 30, 2015. Professional fees increased during the three months ended June 30, 2016 over the three months ended June 30, 2015 as result of additional legal fees related to the incorporation of two wholly-owned subsidiaries, USH and PPBA, and with the incorporation of Lahva pursuant to the joint venture agreement between USH and M&M.

Net Income (Loss)

Net income for the three months ended June 30, 2016 increased to $3,421,101, compared to net loss of $36,036,744 for the three months ended June 30, 2015. The Company incurred interest expense of $188,241 during the three months ended June 30, 2016 as compared to $145,992 during the three months ended June 30, 2015. The increase of $42,249 primarily related to interest expense recorded for derivative liabilities in excess of debt during the three months ended June 30, 2016. The Company recorded an unrealized gain as a result of a decrease in the fair value of derivatives of $3,711,355 during the three months ended June 30, 2016 as compared to an unrealized loss as a result of an increase in the fair value of derivatives of $35,777,246 during the three months ended June 30, 2015.

The six months ended June 30, 2016 compared to the six months ended June 30, 2015

Revenues

The Company had no revenues during the six months ended June 30, 2016 and 2015.

Operating Expenses

Operating expenses increased approximately 9% for the six months ended June 30, 2016 which were $288,419 and primarily comprised of $168,178 for general and administrative expenses and $117,989 for professional fees as compared to operating expenses of $245,997 for the six months ended June 30, 2015, which was comprised primarily of $187,776 for general and administrative expenses and $54,920 for professional fees. General and administrative expenses decreased during the six months ended June 30, 2016 over the six months ended June 30, 2015 as result of the termination of two former employees during the period ended June 30, 2015. Professional fees increased during the six months ended June 30, 2016 over the six months ended June 30, 2015 as result of additional legal fees related to the incorporation of two wholly-owned subsidiaries, USH and PPBA, and with the incorporation of Lahva pursuant to the joint venture agreement between USH and M&M.

Net Income (Loss)

Net income for the six months ended June 30, 2016 increased to $15,959,668, compared to net loss of $44,308,813 for the six months ended June 30, 2015. The Company incurred interest expense of $249,821 during the six months ended June 30, 2016 as compared to $256,281 during the six months ended June 30, 2015. The decrease of $6,460 was related to interest recorded for convertible debentures outstanding during the six months ended June 30, 2016 that were not outstanding during the comparative period offset by the additional interest expense recorded for derivative liabilities in excess of debt during the six months ended June 30, 2016. The Company recorded an unrealized gain as a result of a decrease in the fair value of derivatives of $16,633,366 during the six months ended June 30, 2016 as compared to an unrealized loss as a result of an increase in the fair value of derivatives of $43,806,560 during the six months ended June 30, 2015. The Company recorded a loss on settlement of debt of $118,115 during the six months ended June 30, 2016, related to a settlement agreement with the former President of the Company. The Company also recorded a write-off of prepaid expenses of $90,529 during the six months ended June 30, 2016.

Liquidity and Capital Resources

As of June 30, 2016, we had cash of $11,065 and a working capital deficiency of $2,351,566. 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 six months ended June 30, 2016, the Company received $330,500 aggregate net proceeds  from the sale of promissory notes and convertible debentures to third parties.  

We estimated that we will require $1,013,500 over the fiscal year ending December 31, 2016. The Company has $500,000 of convertible notes outstanding for which principal and interest was originally due on July 31, 2014. The convertible notes were extended and are now due on December 31, 2016. These notes are further described in Note 6 of the unaudited financial statements included in this Quarterly Report. 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.

To date, we have funded our capital needs by the sale of the following promissory notes. See also Note 6 to the unaudited financial statements included in this Quarterly Report on Form 10-Q:

Going Concern

The Company has no revenues and has incurred net losses. In addition, at June 30, 2016, there was an accumulated deficit of $72,085,886. 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 June 30, 2016 in ensuring that material information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.

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

Changes in Internal Control over Financial Reporting

There were no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended June 30, 2016 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

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.

On May 17, 2016, the Company issued a convertible promissory note for $55,000, pursuant to which the Company received proceeds of $48,000, net of an original issue discount of $5,000 and legal fees of $2,000. The notes are convertible at a price equal to 55% of the lowest trading price of the Company's common stock for the 20 prior trading days, bearing interest at 8% per annum and due on May 17, 2017.

The Company issued the above-mentioned notes in reliance on the exemption provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the "Securities Act") for the offer and sale of securities not involving a public offering, and Regulation D promulgated under the Securities Act. The Company's reliance upon Section 4(a)(2) of the Securities Act in issuing the securities was based upon the following factors: (a) the issuance of the securities was an isolated private transaction by us which did not involve a public offering; (b) there was only one recipient; (c) there were no subsequent or contemporaneous public offerings of the securities by the Company; (d) the securities were not broken down into smaller denominations; (e) the negotiations for the issuance of the securities took place directly between the individual and the Company; and (f) each purchaser of the securities was an "accredited investor," as defined under the Securities Act.

Item 3. Defaults Upon Senior Securities.

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. On June 2, 2010, the Company issued 6,386 restricted shares of common stock upon the conversion of the principal amount of $166,667. 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 June 30, 2016 and December 31, 2015, the carrying value of the note was $52,333. The note is in default at June 30, 2016. The amount of the default and total arrearage of this note is $52,333 as of the date of filing this report.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

As previously disclosed, on April 19, 2016, Mr. Robert H. Harris resigned as the Chairman of the Board, effective immediately. Mr. Robert Harris served as a Chairman of the board of the Company since September 2011. Mr. Harris' resignation was due to personal health reasons and not due to any disagreement with the Company.

In connection with Josh Whitaker's resignation from the Company on January 7, 2016, on April 4, 2016, the Company entered into a Settlement Agreement, dated April 4, 2016 (the "Settlement Agreement"), with Mr. Whitaker and Highlon Distribution, Inc., an Oklahoma corporation wholly-owned and operated by Mr. Whitaker ("Highlon").Pursuant to the Settlement Agreement, (i) the parties acknowledged that the Company had paid Mr. Whitaker an aggregate of $174,000 in consideration for services rendered by Mr. Whitaker to the Company pursuant to his two employment agreements, dated May 28, 2014 and February 9, 2015, respectively, with the Company (the "Employment Agreements"); (ii) the Company agreed to pay an additional aggregate amount of $20,185 (the "Payment") to Mr. Whitaker for reimbursement of expenses incurred by him and to apply it to the outstanding principal amount and accrued interest under that certain promissory note issued by Highlon to the Company on December 30, 2014 in the aggregate principal amount of $150,000, bearing interest at the rate of 8% per annum and maturing on December 30, 2016. As of the Termination Date, the outstanding principal amount and accrued interest under the Note was $136,482. Upon the receipt by Mr. Whitaker of the Payment, the parties agreed that (i) the Note shall be extinguished with no further obligation owed Mr. Whitaker by the Company under the Note; (ii) all expenses incurred by Mr. Whitaker shall be deemed fully reimbursed; and (iii) the Company shall be released from its obligations to pay Mr. Whitaker $81,000 for services rendered by Mr. Whitaker to the Company under the Employment Agreements. The parties also represented and warranted that that certain Share Exchange Agreement, dated December 30, 2014, between the Company and Highlon, pursuant to which the Company was to acquire 100% of Highlon, was terminated and neither party had any outstanding obligation to the other in connection with the Share Exchange Agreement.

Also, pursuant to the Settlement Agreement, Mr. Whitaker released the Company, its agents, executives, officers, and directors from all claims, controversies, grievances, disputes, and actions of every kind, known or unknown, vested or contingent, past or present, arising out of his employment at the Company or the Share Exchange Agreement; and the Company released Mr. Whitaker and Highlon, their agents, executives, officers, and directors from all claims, controversies, grievances, disputes, and actions of every kind, known or unknown, vested or contingent, past or present, arising out of the Note or the Share Exchange Agreement.

Item 6. Exhibits.

___________

* 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.

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.