UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] x ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2013 2015
OR
[ ] ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to___________
Commission file number: 000-54624
US HIGHLAND, INC. (Exact name of registrant as specified in its charter)US HIGHLAND, INC.
Oklahoma 26-4144571
(State or other jurisdiction of incorporation or organization) (I.R.S.
Oklahoma | 26-4144571 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1411 N. 105th East Avenue, Tulsa, OK74116
(Address of principal executive offices) (Zip
5930 Royal Lane, Suite E211 Dallas TX | 75230 | |
(Address of principal executive offices) | (Zip Code) |
Registrant's Telephone number, including area code: (918)-895-8300 558-1358
Securities registered pursuant tounder Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
None | N/A |
Securities registered pursuant tounder 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]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]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]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]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.
[ ] Large accelerated filer [ ] Accelerated filer
[ ] Non-accelerated filer [x ] Smaller reporting company
Large accelerated filer | o | Accelerated filer | o |
Non-accelerated filer | o | Small Business Issuer | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] ¨ No [x]x
TheState 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, 2013 was $11,308,701.2015, the last business day of the Registrant's mostly recently completed second fiscal quarter.
As of May5, 2014April 14, 2016, there were 77,727,66958,162,669 shares of the registrant’sregistrant's common stock, par value $0.01 per share outstanding.
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS | |||||
PART I | |||||
ITEM 1. | BUSINESS | 3 | |||
ITEM 1A. | RISK FACTORS | 10 | |||
ITEM 1B. | UNRESOLVED STAFF COMMENTS | 10 | |||
ITEM 2. | PROPERTY | 10 | |||
ITEM 3. | LEGAL PROCEEDINGS | 10 | |||
ITEM 4. | MINE SAFETY DISCLOSURES | 10 | |||
PART II | |||||
ITEM 5. | MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES | 11 | |||
ITEM 6. | SELECTED FINANCIAL DATA | 17 | |||
ITEM 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 18 | |||
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 20 | |||
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | F-1 | |||
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE | 21 | |||
ITEM 9A. | CONTROLS AND PROCEDURES | 21 | |||
ITEM 9B. | OTHER INFORMATION | 23 | |||
PART III | |||||
ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE | 26 | |||
ITEM 11. | EXECUTIVE COMPENSATION | 29 | |||
ITEM 12. | SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS | 29 | |||
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE | 31 | |||
ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES | 31 | |||
PART IV | |||||
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES | 33 | |||
SIGNATURES | 35 |
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FORWARD-LOOKING STATEMENTS
US Highland, Inc.
Form 10-K
For the Fiscal Year Ended December 31, 2013
Table of Contents
Part I
ITEM 1. BUSINESS 3
ITEM 1A. RISK FACTORS 6
ITEM 1B. UNRESOLVED STAFF COMMENTS 6
ITEM 2. PROPERTIES 6
ITEM 3. LEGAL PROCEEDINGS 6
ITEM 4. MINE SAFETY DISCLOSURES 7
Part II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 7
ITEM 6. SELECTED FINANCIAL DATA 8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK 9
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 10
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 28
ITEM 9A. CONTROLS AND PROCEDURES 28
ITEM 9B. OTHER INFORMATION 29
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS, CONTROL
PERSONS AND CORPORATE GOVERANCE; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT 29
ITEM 11. EXECUTIVE COMPENSATION 30
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS 31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE 32
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 32
Part IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 33
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,”"may," "will," "should," "expects," "anticipates," "contemplates," "estimates," "believes," "plans," "projected," "predicts," "potential," or “continue”"continue" or the negative of these similar terms. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor”"safe harbor" for forward-looking information to encourage companies to provide prospective information about themselves without fear of litigation so long as that
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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"Liquidity and Capital Resources”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”Highland" or the “Registrant” or the “Company”"Company") was originally formed as a limited liability company on February 5, 1999 under the name The"The Powerhouse, L.L.C. pursuant to" in the laws of the Statestate 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 corporationC-corporation under the name US"US Highland, Inc." On November 29, 2006, articles of amendment to the Company amended its certificate of incorporation increasedthereby increasing the authorized shares of common sharesstock to 100,000,000 with a par value of $0.01 per share.
On January 25, 2010, Articles of Merger were filed with the Statestate of Oklahoma, merging U.S. Highland, Inc., an Oklahoma corporation 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.
Prior Operations
Prior to January 25, 2010, the Registrant offered professional consulting in Music-on-Hold and messaging services as well as some equipment sales and consultation services for commercial clients.
Subsequent to the merger with US Highland, Inc., an Oklahoma corporation, the Registrant no longer pursued its prior business plan. As a result, the Registrant entered into an Asset Purchase Agreement with Shane Harwell, an officer and director of the Registrant. (the "Merger"). Pursuant to thean Asset Purchase Agreement, dated December 21, 2009, with Shane Harwell, the RegistrantCompany sold all rights, title and interest to the purchased assets to Mr. Harwell for the consideration of 950,000 common shares.shares of Common Stock.
Current Corporate Operations Description of New Business Strategy
US Highland is
After the Merger, the Company solely focused on the business of being a recreational powersports Original Equipment Manufacturer (“OEM”("OEM"), developing motorcycles, quads, single cylinder engines,. 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 v-twin engines understrategic 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 own brandmission statement to include providing companies and for other OEMs.US Highland moved its manufacturing equipmentemerging brands with the knowledge and toolingexpertise needed to launch their products in the United States from Swedenmarketplace.
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As part of the Company's new strategy to diversify its operations by engaging in new business lines to assist companies and is currently preparedemerging 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 begin engine assembly operationsprovide sales, marketing and distribution services primarily to international and domestic companies seeking sales of their products in Tulsa, Oklahoma. 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 operations will require an estimated $2,188,000 overCompany's new business strategy consists of the course of next twelve (12) calendar months and will include the launch later in fiscal 2014 of its single cylinder engine platform and will be followed by the launch of its twin cylinder engines.following divisions:
1. | Distribution. Through USH, the Company's strategy is to provide sales, marketing and distribution services to primarily international and domestic companies seeking sales of their products in the U.S. Specifically, USH is expected to provide its customers with third party logistics, sales/marketing, product strategy and product development. | |
2. | Powersports. Through PBA, the Company intends 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 powersports accessories such as helmets, gloves and gear, etc. | |
3. | Apparel Sourcing. Through USH, the Company has a 40% minority equity stake in a joint venture, Lahva. The joint venture was formed with a Malaysian company, M&M, to provide apparel sourcing and supply chain management services to U.S. apparel companies and retailers for international sourcing and production of apparel items. Specifically, Lahva's goal is to provide clients with end-to-end sourcing services, managing the entire apparel supply chain from design concept to consumer point of purchase. | |
4. | Recreational Powersports OEM. The Company's original business is a recreational powersports Original Equipment Manufacturer ("OEM"), developing motorcycles, quads, single cylinder engines, and v-twin engines under its own brand and for other OEMs. The Company still owns and maintains its intellectual property rights to engine platforms and plans to continue its development of these platforms in the power sports industry. The Company's goal is to adopt a Powersports OEM business plan, with a focus on marketing its intellectual property. |
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").
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The following is a summary of the JV Agreement:
1. | USH's and M&M's equity stake in Lahva is 40% and 60%, respectively. | |
2. | In consideration for its equity stake in Lahva, USH has agreed to provide certain services to the Joint Venture, including, but not limited to the following: |
a. | Management mentoring; | ||
b. | Mentoring to brand designers and entrepreneurs; | ||
c. | Sales consulting; | ||
d. | Sales support; | ||
e. | Business advisory services; | ||
f. | U.S. market advisory services; | ||
g. | Introductions to U.S. business contacts; and | ||
h. | Use of USH offices, warehouses and business mailing address. |
3. | In consideration for its equity stake in Lahva, M&M has agreed to provide certain services to the Joint Venture, including but not limited to the following: |
a. | Management mentoring; | ||
b. | Mentoring to brand designers and entrepreneurs; | ||
c. | Client management; | ||
d. | Apparel production and supply chain development consulting; and | ||
e. | Business advisory services. |
4. | USH has the exclusive right of first offer to provide consignment sales to the Joint Venture's new customers. | ||||
5. | M&M has the exclusive right to provide international sourcing services to the Joint Venture's sourcing clients and brands (both in-house and non-in-house). | ||||
6. | Lahva's board of directors shall consist of three members, one of whom shall be appointed by USH and two by M&M (the "M&M Board Representatives"). No board resolution will be passed without at least a majority of the board voting in favor of it. |
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7. | The executive officers will be responsible for the day to day management of the Joint Venture. The M&M Board Representatives shall appoint the executive officers of the Joint Venture. | |
8. | The Joint Venture Agreement may be terminated at any time upon the mutual agreement of the parties. | |
9. | If either party materially breaches the Joint Venture Agreement, files for bankruptcy protection (voluntary or involuntary), becomes insolvent or is subject to a change of control, the other party shall be entitled to purchase its shares in the Joint Venture at a price to be determined by an independent expert. | |
10. | If Joint Venture is wound up, the parties will endeavor to ensure that assets contributed by each party will, so far as possible, be transferred back to that party. | |
11. | Lahva and each shareholder have the right of first refusal in the event the other shareholder has received a bona fide offer to purchase its Lahva equity stake. | |
12. | USH and M&M have a right of first refusal upon the Lahva's sale of securities. | |
13. | At any time during the term of the Joint Venture Agreement, M&M has the right and option to purchase all, but not less than all, USH's equity stake in the Joint Venture. The purchase price shall be equal to the USH's pro rata portion of three times Joint Venture's EBITDA (as determined by the auditors of the Joint Venture) for the prior 12 months and shall be paid at the closing. |
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").
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The following is a summary of the Consignment Agreement:
1. | USH has the exclusive right to sell the Products in the U.S., its possessions and territories (the "Territory") for a period of eighteen (18) months commencing from the date of the Consignment Agreement, and has agreed to devote its best commercial efforts to sell the Products in the Territory. | |
2. | Rhino shall supply to USH such quantity of Products, in Rhino's reasonable discretion, necessary to adequately service the Territory. Models and versions of Products are to be defined by Rhino. | |
3. | Rhino shall provide Products to USH on consignment; i.e. All Products shall remain the property of Rhino sold by USH and payment for a Product shall be made to Rhino only when USH has sold such Product. | |
4. | USH agrees to sell the Products as per the Rhino approved Products price list. USH agrees to execute a marketing program throughout the Territory for the Products as per the Rhino approved marketing program and marketing budget to be agreed upon in writing as per a marketing agreement to be finalized between the Parties within 90 days of the date of the Consignment Agreement. | |
5. | USH shall furnish Rhino with bi-monthly statements on the 1st and 15th of each month indicating a detailed list of all sales transactions during the preceding weeks, and the status of current inventory on the last day of the preceding month (with sufficient detail to show sales by item, including the date of sale, the sales price and customer name) along with a detailed accounting of all receivables for all sales. | |
6. | With the bi-monthly statement detailed above, USH shall remit payment to Rhino for Products which have been paid for by customers during the previous weeks. The payment to Rhino shall be the amount referenced on the invoices to USH from Rhino for the particular Products sold. |
7. | Failure to pay a single installment renders all debts immediately payable, even if their due date has not yet occurred. Interest on arrears applies as of right at the highest rate permitted by law per month of delay, up until complete payment of all amounts due. | |
8. | Rhino reserves the right to modify its prices at any time upon thirty (30) days written notice to USH. In turn, USH has the right to modify the sales price to the dealer. | |
9. | The Consignment Agreement shall expire and terminate eighteen (18) months from the effective date of the Consignment Agreement. Ninety (90) days prior to the expiration of the term of the Consignment Agreement, USH and Rhino have agreed to make good faith efforts to discuss extension of the term of the Consignment Agreement. | |
10. | Rhino may terminate the Consignment Agreement by written notice to USH if USH breaches any of the terms of the Consignment Agreement and has not remedied such breach within thirty (30) days of receiving notice of such breach by Rhino. |
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11. | Rhino may immediately terminate the Consignment Agreement upon the occurrence of any of the following circumstances: |
a. | Any change, transfer or attempted transfer by USH or USH affiliates, voluntarily or by operation of law, of the whole or any part of the Consignment Agreement, other than to an affiliate of USH as part of a corporate reorganization or restructuring, or any change in control outside the ordinary course of business without prior written consent of Rhino; | ||
b. | Knowingly submitting to Rhino any intentional fraudulent statement, application, report, request for issuance of reimbursement, compensation, refund or credit; | ||
c. | Knowing use by USH of any deceptive or fraudulent practice, whether willful, or intentional, in the sale of any Product; | ||
d. | Any indictment for any crime or violation of any law by USH which will have an adverse effect on the reputation of USH, USH's operations or Rhino; or any conviction in any court of original jurisdiction of USH for any crime or violation of any law which will adversely and materially affect the conduct of USH operations or will be materially harmful to the goodwill or reputation of Rhino, Products or the Rhino Trademarks; | ||
e. | USH's entering into any agreement, combination, understanding, conspiracy or contract, oral or written, with any other party with the known purpose of fixing prices of Products; | ||
f. | USH's abandonment of all of its business operations or failure to maintain a going business; | ||
g. | Insolvency by any definition of USH; or the commission of any act of bankruptcy; or the existence of facts or circumstances which would require the voluntary commencement by USH or the involuntary commencement against USH of any proceedings under any bankruptcy act or law or under any state insolvency law; or the filing of a petition by or against USH under any bankruptcy or insolvency law; or the appointment of a receiver or other officer having similar powers for USH or USH operations; or any levy under attachment, garnishment or execution or similar process which is not, within ten (10) days, vacated or removed by payment or bonding. |
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 requiresbelieves 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 servicesCompany 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 subcontractors, as is typical for the industry.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 currently operating from a single location in Tulsa, Oklahoma located at 1411 N. 105th East Avenue in the Pine Industrial complex just southeastsourcing joint-venture with M&M Sourcing Sdn Bhd, an established Malaysian apparel sourcing consortium. Lahva provides customers with end-to-end sourcing of the Tulsa International Airport.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.
US Highland's business development strategy includes:
- Multinational Business Model. US Highland anticipates launching its manufacturing operations for large and small OEMs in the United States utilizing engineering and technology developed in Sweden.
- OEM Manufacturing. US Highland will develop, license and manufacture small displacement (250cc-1150cc), metric, water-cooled engines for individual customers and both large and small OEM manufacturers and will utilize co-branding and co-marketing activities to further its business development objectives.
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- Road Shows. US Highland will utilize road shows to promote its entire line of engines and its brand.
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- Media Promotions. US Highland will fully employ both traditional and innovative marketing venues to advertise, promote, and drive US Highland brand awareness utilizing the following:
- Internet promotions
- Trade shows and events, including the Indianapolis Dealer Expo and others
- Trade publication advertisements
- Trade publication editorials and product reviews
- Trade and Business Wire press releases
- Marketing collateral
Products
US Highland products include single and twin cylinder engines from 250cc to 1150cc displacement.
Single and Twin Cylinder Engines – US Highland has four powerful engine platforms two of which are single cylinder engines and two different V-Twin engines. The single cylinder engines come in two varieties: a smaller displacement 250cc and 350cc engines and a larger displacement 350cc, 450cc and 507cc engines. The V-Twin platforms come in two separate types: a 60̊ V-Twin platform including the 750cc and 950cc engines and the 90° V-Twin platform consisting of the 1050cc and 1150cc engines. These nine engines were developed in US Highland's active race program during the years 2009 and 2010. US Highland proprietary engines are lightweight, high horsepower, and fuel injected. US Highland engines also use the proprietary US Highland throttle body, which delivers smooth, linearly proportional throttle response unlike conventional systems that deliver uneven throttle response.Powersports Industry
US Highland also has an entire line of prototype motorcycles, UTVs and ATVs that it will use to develop in the licensing process to establish joint ventures with OEMs interested in pursuing product lines based on these proprietary new technologies. These prototypes consist of the following vehicles which are based on US Highland’s entire family of engine platforms:
- 350cc Entry Level Dual Sport
- 450cc MX, Enduro, & Supermotard
- 507cc MX, Enduro, & Supermotard
- 950cc Street Tracker, Dirt Tracker, Outback, & Urban Assault
- 1050cc Viking
- Quads/ATVs/UTVs of various sizes
Intellectual Property and Trademarks
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”.
The Market, Sales, and Business Development
US Highland has created the following market analysis using information gathered from Dealer Net, Motorcycle Industry Council and JD Powers & Associates.
US Highland Target Markets
US Highland is in the business to manufacture and sell water-cooled, fuel injected small displacement metric engines through 3 sales channels. US Highland will target the global dual purpose, ATV, UTV, off-road and on-road motorcycle markets with its initial market entry of a 450cc single cylinder and 950cc twin cylinder fully capitalizing on its current product offering. These markets are to be reached through direct consumer selling, wholesale, custom builders and OEM sales channels. US Highland has plans to sell a total of 6 engines based off of the single cylinder and twin cylinder platforms.
Industry Analysis
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
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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 yearsyear'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”"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.
Pricing Analysis
Purchasing is very different between sales channels. Where OEM customers are high volume and low margin and consumer direct sales will be low volume with higher margin. Intellectual Property
US Highland will seeowns the benefit of working all 3 sales channels (consumer direct, wholesaleintellectual property corresponding to the 350cc, 450cc, 507cc, 750cc, 950cc engines and OEM)was granted limited intellectual property rights to lower parts pricesan 1150cc engine by Folan AB. The 1150cc is limited to the right to modify, manufacture and increase margin for consumer direct sales.
Sales
US Highland targets global OEM providers, looking for high quality performance motorcycles and ATVs engines. Sales through established dealer networks and custom builders are critical to any powersports company success.sell the 1150cc engine into the flat bottom boat market exclusively in the United States. US Highland has established relationships with many wholesale builders.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 an aggressive digital media strategy aimed at the direct consumer. Product can be directly purchasedalso applied on December 20, 2011 for two additional US Registered Trademarks, "POWERED BY US HIGHLAND" on December 19, 2011 and supported online.
Business Development
Developing strong relationships with global motorcycle manufacturers has been a major focus of the company over the past year. This effort is starting to pay off as US Highland hopes to announce a major Memorandum of Understanding in the second or third quarter of 2014 with a major powersports manufacturer that will utilize US Highland engines in their final products.
US Highland and its executives have a long history with other powersports OEMs. As a technology provider,"AMERICAN MADE PERFORMANCE". Currently, US Highland is often perceived by other manufacturers as an engine supplier rather than a competitor.no longer seeking trademark registration for "POWERED BY US HIGHLAND" and "AMERICAN MADE PERFORMANCE".
Strategic LocationNumber Of Total Employees And Number Of Full-Time Employees.
Tulsa, Oklahoma
We have strategically locatedAt December 31, 2015, we had a total of two full-time employees. Our President, Kevin Malone works part-time on the manufacturing and distribution portionsaffairs of the Company. Our Interim Chief Financial Officer, Deborah E. Engles works on as needed basis for the Company
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Description of Properties
The Company's business to Tulsa, retaining Rollox AB to provide enhanced product development, testing and engineering activities from its facilities in Sweden. Rollox provides US Highland with engineering and product development services onmailing address is 5930 Royal Lane, Suite E211, Dallas, TX 75230. The Company also maintains a contract for services basis includingcorporate 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)
5
the use of its engine and vehicle dyno laboratory for initial product testing and to assure product readiness for EPA certification and durability. Tulsa, Oklahoma is located relatively centrally in the United States. Tulsa is a recognized major North American shipping hub with several major interstate highways, railways, and an international airport. The following are road-based shipping distances to other major shipping hubs:(www.mic.org)
- Dallas: 257 miles
- Detroit: 947 miles
- Jacksonville: 1070 miles
- Los Angeles: 1437 miles
- Milwaukee: 771 miles
- New York City: 1348 miles
- Salt Lake City: 1206 miles
Tulsa was the original oil capital of the United States before Texas gained this status. Tulsa remains a significant producer and refiner of oil. Since the oil and gas industry requires so much equipment and equipment repair, Tulsa has a large manufacturing base, including manufacturing space, skilled labor, management and engineering talent, manufacturing equipment suppliers and service centers, and large subcontractor base for a wide variety of manufacturing services from surface coatings and heat treatments to precision machining, casting, and forging.
Subcontracting
Many subcontractors are required for the high variety of components required to produce engine products. US Highland uses subcontractors for tool and die work, casting, various complex machining operations, and various other capital intensive or low ROI operations which would therefore be unwise to perform in house. Vendors, suppliers, and subcontractors are pre-qualified by US Highland's quality and purchasing personnel. Suppliers must meet minimum capability, lead time, and quality requirements to be eligible to participate in US Highland's vendor and subcontractor pool. US Highland utilizes an internally developed Production Part Approval Process (PPAP) that ensures that suppliers are not only capable of producing high quality parts but also capable of scaling up production without a degradation of quality.
Final Assembly and Quality Assurance
Final assembly and quality assurance are overseen by US Highland's award winning engine designer and director of manufacturing, Steven “Posie” Pfaff, whose 120 cubic inch square block engine won engine of the year in 2011. The engine technicians are selected from a pool of highly skilled work force out of the aerospace and manufacturing support industries long associated with Tulsa’s strong growth in quality oriented manufacturing jobs.
Logistics
US Highland has in-house experts in logistics and supply chain management. These experts monitor product flow from vendors and subcontractors and to customers.
Manufacturing Management
A significant percentage of the overall budget of US Highland each year is used to support manufacturing operations, either for new product development prototyping or volume production, competent management is essential. US Highland's manufacturing managers have extensive experience in lean manufacturing as practiced in the Toyota Production System, quality assurance, MRP/ERP, Six Sigma, costing system optimization, and the various other disciplines required to operate a lean, profitable, and responsive manufacturing operation.
ITEM 1A. RISK FACTORS
Not applicable
As a "smaller reporting company," as defined by Item 10 of Regulation S-K, we are not required to a smaller reporting company.provide the information required by this item of Form 10-K.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
None.
ITEM 2. PROPERTY
The registrant's principle executive and manufacturing offices are located at 1411 N. 105th East Avenue, Tulsa, OK 74116.Company currently has no ownership or leases of property. The registrant'sCompany's business mailing address is 5930 Royal Lane, Suite E211, Dallas, TX 75230. The Company's primary phone number is 918-895-8300. Current manufacturing operations include 6,000 square feet for general manufacturing, machining, and final assembly and 2,500 square feet for administration. US Highland management believes that this current facility is adequate for its current operations. The current monthly lease rate is $5,180 per month. US Highland is operating on a seven (7) year lease that commenced on January 23, 2012 and terminates on March 31, 2019. The base lease rate increases $0.25 per square foot per year starting at $6.50 per square foot on February 1, 2014 and ending at $7.75 per square foot in 2019. There is also a variable maintenance918-558-1358.
6
fee that is currently $861.83 that increases year to year based on increases/decreases in the average utility costs. US Highland has the option to extend the lease with 180 day prior notice to the landlord with terms to be negotiated at the time of the extension.
ITEM 3. LEGAL PROCEEDINGS
None.
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 $200,000 in two installments. The Company and the directors also agreed to execute and deliver a pocket judgment against them which shall not be filed by Mr. Fitzpatrick and Mr. Pfaff unless the Company fails to make the scheduled payments under the Settlement Agreement.
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
We are currently not aware of any pending legal proceedings to which we are a party or of which any of our property is the subject, nor are we aware of any such proceedings that are contemplated by any governmental authority.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
On March 17, 2008, our common stock was listed for the first time on the OTC Bulletin Board under the symbol "HRCM". On March 31, 2010, due to our name change, our symbol was changed to “UHLN”"UHLN".
The following table sets forth the range of high and low bid quotations for the Registrant's common stock. The quotations represent interdealer prices without retail markup, markdown or commission, and may not necessarily represent actual transactions.
Quarter Ended | High Bid
| Low Bid |
|
|
|
3/31/12 | 6.90 | 0.30 |
6/30/12 | 1.25 | 0.60 |
9/30/12 | 1.50 | 0.25 |
12/31/12 | 1.01 | 0.49 |
|
|
|
3/31/13 | 0.50 | 0.50 |
6/30/13 | 0.36 | 0.36 |
9/30/13 | 0.30 | 0.30 |
12/31/13 | 0.27 | 0.27 |
Quarter Ended High Bid ($) Low Bid ($) 2014 1Q 2014 - March 31, 2014 2Q 2014 - June 30, 2014 3Q 2014 - September 30, 2014 4Q 2014 - December 31, 2014 2015 1Q 2015 - March 31, 2015 2Q 2015 - June 30, 2015 3Q 2015 - September 30, 2015 4Q 2015 - December 31, 2015 0.27 0.26 0.59 0.22 0.51 0.23 0.51 0.13 0.60 0.60 1.00 1.00 0.38 0.38 0.38 0.30
Registered Holders of Our Common Stock
As at April 30, 2014,14, 2016, there were approximately 132 shareholdersrecord holders of the Registrant.our common stock.
Dividends
Holders of the Registrant'sCompany's common stock are entitled to receive such dividends as may be declared by its board of directors. No dividends on the Registrant'sCompany's common stock have ever been paid, and the RegistrantCompany 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.
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Recent Sales of Unregistered Securities
AllThe Company issued the following securities in the three years preceding December 31, 2015:
On September 30, 2015, the Company issued an aggregate of 3,381,520 shares of Series A Preferred Stock at a fair value of $12,849,776 to settle convertible and promissory notes in the amount of $1,487,000 and accrued interest of $203,760. When issuing the aforementioned shares of Series A Preferred Stock to the noteholders, the Company relied upon the exemption from the registration requirements of the Securities Act available under Section 3(a)(9) promulgated thereunder due to the fact that Company was the same issuer of the securities, the lenders did not part with anything of value besides the notes, the exchange was exclusively with the noteholders, and the Company did not pay any commission or remuneration for the solicitation of the exchange. | ||
1. | On September 18, 2014, February 18, 2015, March 9, 2015, March 31, 2015, May 8, 2015, May 29, 2015 and July 3, 2015, the Company entered into unsecured, non-guaranteed, loan agreements pursuant to which the Company received proceeds of $35,000, $20,000, $50,000, $50,000, $65,000, $4,000, and $5,000, respectively. The loans bore interest at 8% per annum compounded annually and were due 1 year after the date of issuance. On September 30, 2015, the Company issued 384,002 shares of Series A Preferred Stock for settlement of $185,000 of notes payable and $7,001 of accrued interest. | |
2. | On August 26, 2014, December 4, 2014, December 18, 2014, January 29, 2015, August 12, 2015, August 21, 2015, September 1, 2015 and September 15, 2015, the Company issued unsecured notes payable of $15,000, $20,000, $200,000, $20,000, $20,000, $25,000, $40,000, and $25,000, respectively to a significant shareholder. The notes bore interest at an annual rate of 8% per annum, were uncollateralized, and due 1 year after the date of issuance. On September 30, 2015, the Company issued 457,734 shares of Series A Preferred Stock for settlement of $215,000 of notes payable and accrued interest of $13,867. | |
3. | The Company issued the following unsecured notes payable to a significant shareholder. The notes bore interest at an annual rate of 8% per annum, were uncollateralized, and were due 2 years after the date of issuance. On September 30, 2015, the Company issued 1,353,678 shares of Series A Preferred Stock for the settlement of all of the following $607,000 of notes payable and $69,839 of accrued interest: |
Issue Date: | Principal | |||
January 17, 2014 | 50,000 | |||
January 29, 2014 | 50,000 | |||
February 19, 2014 | 25,000 | |||
March 3, 2014 | 50,000 | |||
March 19, 2014 | 150,000 | |||
April 25, 2014 | 25,000 | |||
May 19, 2014 | 25,000 | |||
June 2, 2014 | 18,000 | |||
June 12, 2014 | 32,000 | |||
July 1, 2014 | 25,000 | |||
July 16, 2014 | 75,000 | |||
October 7, 2014 | 30,000 | |||
October 31, 2014 | 20,000 | |||
November 4, 2014 | 32,000 | |||
Total: | 607,000 |
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4. | 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 was unsecured and due on July 31, 2014. The note was convertible into shares of the Company's common stock at any time at a price of $0.035. The note bore interest at 8% per annum compounded monthly, and was due on demand. On September 30, 2015, the Company issued 190,054 shares of Series A Preferred Stock at a fair value of $722,205 upon the settlement of the principal amount of $75,000 and accrued interest of $20,027. | |
5. | Effective July 25, 2013, the Company issued a convertible note of $45,000. Pursuant to the terms of the agreement, the loan was unsecured and due on July 31, 2014. The note was convertible into shares of the Company's common stock at any time at a price of $0.035. The note bore interest at 8% per annum compounded monthly, and was due on demand. On September 30, 2015, the Company issued 113,176 shares of Series A Preferred Stock at a fair value of $430,069 upon the settlement of the principal amount of $45,000 and accrued interest of $11,588. | |
6. | 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 bore interest at 8% per annum compounded monthly, and principal and interest were originally due on July 31, 2014. In addition, so long as any amounts were 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 was prepayable by the Company without penalty with 30 days' prior notice. The note was 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. 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. 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. 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. | |
7. | 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 bore interest at 8% per annum compounded monthly, and principal and interest were due on July 31, 2014.The note was prepayable by the Company without penalty with 30 days prior notice. The note was 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. 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. 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. On September 30, 2015, the Company issued 673,010 shares of Series A Preferred Stock at a fair value of $2,557,438 upon the settlement of the principal amount of $273,700 and accrued interest of $62,805. |
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8. | Effective November 12, 2013, the Company issued a convertible note for up to $500,000 and warrants to purchase 694,445 underlying shares of the Company's common stock. The warrants are exercisable into 555,556 common shares of the Company at $0.05 per share and 138,889 shares at an exercise price of $0.10 per share until July 31, 2014. During the year ended December 31, 2013, the Company received proceeds of $20,000 under the note. At November 30, 2013, the Company had determined that no additional funding would be received pursuant to the convertible note. The note bore interest at 8% per annum compounded monthly, and principal and interest were due on July 31, 2014. The note was prepayable by the Company without penalty with 30 days prior notice. The note was 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. On September 30, 2015, the Company issued 46,478 shares of Series A Preferred Stock at a fair value of $176,616 upon the settlement of the principal amount of $20,000 and accrued interest of $3,239. | |
9. | Effective October 7, 2013, the Company issued a convertible note for up to $500,000 and warrants to purchase 868,055 underlying shares of the Company's common stock. The warrants are exercisable into 694,444 common shares of the Company at $0.05 per share and 173,611 shares at an exercise price of $0.10 per share until July 31, 2014. During the year ended December 31, 2013, the Company received proceeds of $25,000 under the note. At November 30, 2013, the Company had determined that no additional funding would be received pursuant to the convertible note. The note bore interest at 8% per annum compounded monthly, and principal and interest were due on July 31, 2014. The note was prepayable by the Company without penalty with 30 days prior notice. The note was 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. 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. On September 30, 2015, the Company issued 61,306 shares of Series A Preferred Stock at a fair value of $232,963 upon the settlement of the principal amount of $25,000 and accrued interest of $5,653. | |
10. | On July 25, 2013, the Company issued a convertible note for up to $500,000 and warrants to purchase 739,584 underlying shares of the Company's common stock. The warrants are exercisable into 591,667 common shares of the Company at $0.05 per share and 147,917 shares at an exercise price of $0.10 per share until July 31, 2014. During the year ended December 31, 2013, the Company received proceeds of $41,300 under the note. At November 30, 2013, the Company had determined that no additional funding would be received pursuant to the convertible note. The note bore interest at 8% per annum compounded monthly, and principal and interest were due on July 31, 2014. The note was prepayable by the Company without penalty with 30 days prior notice. The note was 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. 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. On September 30, 2015, the Company issued 102,082 shares of Series A Preferred Stock at a fair value of $387,912 upon the settlement of the principal amount of $41,300 and accrued interest of $9,741. | |
On November 20, 2015, the Company entered into a Share Exchange Agreement (the "Exchange Agreement"), with Craigstone. Pursuant to the Exchange Agreement, Craigstone exchanged 20,000,000 shares of common stock of the Company for an aggregate of 5,000 shares of the Company's Series B Convertible Preferred Stock, par value $0.01 per share (the "Series B Preferred Stock"), on a 1-for-4,000 basis (i.e., one share of Series B Preferred Stock for every 4,000 shares of Common Stock) (the "Exchange"). The Company retired the shares of Common Stock exchanged by Craigstone and they are deemed treasury shares. Prior to the Exchange, Craigstone held 22,666,667 shares of the Company's 78,162,669 then issued and outstanding shares of Common Stock, representing approximately 29.0% of the outstanding Common Stock. As as result of the Exchange and the retirement of the 20,000,000 shares Common Stock, Craigstone's reduced ownership of 2,666,667 shares of the Company's Common Stock represents approximately 4.6% of the 58,162,669 shares of Common Stock now deemed to be issued and outstanding. When issuing the aforementioned 5,000 shares of Series B Preferred Stock to Craigstone pursuant to the Exchange Agreement, the Company relied upon the exemption from the registration requirements of the Securities Act available under Section 3(a)(9) promulgated thereunder due to the fact that Company was the same issuer of the Common Stock and Series B Preferred Stock, Craigstone did not part with anything of value besides the outstanding Common Stock, the Exchange was exclusively to Craigstone, and the Company did not pay any commission or remuneration for the solicitation of the Exchange. |
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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, were previously reported.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:
Stated Value: | $0.50 per share |
Conversion: | Each holder of Series A Preferred Stock ("Holder") shall have the right, at such Holder's option, at any time or from time to time from and after the day immediately following the date the Series A Preferred Stock is first issued, to convert each share of Series A Preferred Stock into ten fully-paid and non-assessable share of common stock, par value $0.01 per share, of the Company (the "Common Stock"). In connection with any conversion hereunder, each Holder of Series A Convertible Preferred Stock may not convert any part of the Series A Convertible Preferred Stock if such conversion would cause such Holder or any of its assignees to beneficially own more than 4.99% of the Common Stock of the Company. |
Rank: | Generally, the Series A Preferred Stock shall, with respect to dividend rights, rights on liquidation, winding up and dissolution, rank senior to (i) all classes of Common Stock of the Company and (ii) any class or series of capital stock of the Company hereafter created (unless, with the consent of the Holder(s) of Series A Convertible Preferred Stock). |
Dividends: | The Holders of shares of Series A Preferred Stock shall not be entitled to receive any dividends. |
Splits: | The number of shares of Common Stock issuable upon the conversion the Series A Preferred Stock shall not be adjusted to reflect any forward or reverse stock splits by the Company of its outstanding shares of Common Stock. |
Voting Rights: | Generally, vote with the Common Stock as a single class and each share of Series A Preferred Stock shall have the voting equivalency of ten shares of Common Stock. |
Registration Rights: | Piggyback registration rights for a self or underwritten offering pursuant to a registration statement (other than a registration effected solely to implement an employee benefit plan or a transaction to which Rule 145 of the Securities Act is applicable, or a Registration Statement on Form S-4, S-8 or any successor form thereto or another form not available for registering the Registrable Securities for sale to the public), whether the Company's own account or for the account of one or more stockholders of the Company, subject to pro rata reductions and customary market cutbacks. |
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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:
Conversion: | Each holder of Series B Preferred Stock ("Holder") shall have the right, at such Holder's option, at any time or from time to time from and after the day immediately following the date the Series B Preferred Stock is first issued, to convert each share of Series B Preferred Stock into 4,000 fully-paid and non-assessable share of common stock, par value $0.01 per share, of the Company (the "Common Stock"). In connection with any conversion hereunder, each Holder of Series B Convertible Preferred Stock may not convert any part of the Series B Convertible Preferred Stock if such conversion would cause such Holder or any of its assignees to beneficially own more than 4.99% of the Common Stock of the Company. |
Rank: | Generally, the Series B Preferred Stock shall, with respect to dividend rights, rights on liquidation, winding up and dissolution, rank senior to (i) all classes of Common Stock of the Company and (ii) any class or series of capital stock of the Company hereafter created (unless, with the consent of the Holder(s) of Series B Convertible Preferred Stock). |
Liquidation Preference: | Except as otherwise provided by the Oklahoma General Corporation Act or elsewhere in the Certificate of Designation, in the event of any voluntary or involuntary liquidation, dissolution, or winding up of the Company, the Holders of shares of the Series B Preferred Stock then outstanding shall be entitled to be paid, out of the assets of the Company available for distribution to its stockholders, whether from capital, surplus or earnings, an amount equal to the par value. |
Dividends: | The Holders of shares of Series B Preferred Stock shall not be entitled to receive any dividends. |
Splits: | The number of shares of Common Stock issuable upon the conversion the Series B Preferred Stock shall not be adjusted to reflect any forward or reverse stock splits by the Company of its outstanding shares of Common Stock. |
Voting Rights: | Generally, the Series B Preferred Stock vote with the Common Stock as a single class and each share of Series B Preferred Stock shall have the voting equivalency of four thousand (4,000) shares of Common Stock. |
Protection Provisions: | So long as any shares of Series B Preferred Stock are outstanding, the Company shall not, without first obtaining the approval (by vote or written consent, as provided by the Act) of the Holders of at least a majority of the then outstanding shares of Series B Preferred Stock: |
(a) alter or change the rights, preferences or privileges of the Series B Preferred Stock; |
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(b) alter or change the rights, preferences or privileges of any capital stock of the Company so as to affect adversely the Series B Preferred Stock; | |
(c) create any new class or series of capital stock having a preference over the Series B Convertible Preferred Stock as to distribution of assets upon liquidation, dissolution or winding up of the Company ("Senior Securities"); | |
(d) create any new class or series of capital stock ranking pari passu with the Series B Preferred Stock as to distribution of assets upon liquidation, dissolution or winding up of the Company; | |
(e) increase the authorized number of shares of Series B Preferred Stock; | |
(f) issue any additional shares of Senior Securities; or | |
(g) redeem, or declare or pay any cash dividend or distribution on, any junior securities. | |
If Holders of at least a majority of the then outstanding shares of Series B Convertible Preferred Stock agree to allow the Company to alter or change the rights, preferences or privileges of the shares of Series B Preferred Stock pursuant to subsection (a) above, then the Company shall deliver notice of such approved change to the Holders of the Series B Preferred Stock that did not agree to such alteration or change. | |
Registration Rights: | Piggyback registration rights for a self or underwritten offering pursuant to a registration statement (other than a registration effected solely to implement an employee benefit plan or a transaction to which Rule 145 of the Securities Act is applicable, or a Registration Statement on Form S-4, S-8 or any successor form thereto or another form not available for registering the Registrable Securities for sale to the public), whether the Company's own account or for the account of one or more stockholders of the Company, subject to pro rata reductions and customary market cutbacks. |
ITEM 6. SELECTED FINANCIAL DATA
Not applicable to a smaller reporting company.
7
17 |
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”("OEM"), which develops motorcycles, quads, single cylinder engines, and v-twin engines under its own brand and for other OEMs.
Results of Operations
For the yearsThe fiscal year ended December 31, 2013 and2015 compared to the fiscal year ended December 31, 20122014
Revenues
During the year ended December 31, 2013 and 2012,2015, 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, 20132015 were $4,144,916,$513,767, which was comprised primarily of $645,186$297,352 for general and administrative expenses $545,975and $210,835 for professional expenses and $2,943,106 for consulting expenses as compared to operating expenses of $3,438,483$1,137,482 for the year ended December 31, 2012,2014, which was comprised primarily of $903,278$756,902 for general and administrative expenses, $1,154,179and $371,170 for professional expenses and $1,194,163 for consulting expenses. The decrease in general and administrative expenses of $258,092$459,550 resulted primarily from a reductionan decrease in travel expenses from $95,165 in fiscal 2012the number of employees during the year ended December 31, 2015 as compared to $18,904 in fiscal 2013, a reduction in payroll from $409,761 in fiscal 2012 to $354,987 in fiscal 2013 and athe year ended December 31, 2014. This general reduction of office expenses asis a result of budget constraints. The decrease in professional fees of $608,204$160,335 resulted primarily from the Company reducing the number of professionals utilized during the year ended December 31, 20132015 as compared to the year ended December 31, 2012. The increase in consulting fees of $1,748,943 of was a result of the granting warrants to consultants with a greater fair value in fiscal 2013 compared to fiscal 2012.2014.
Net Income/Loss
Net lossincome for the year ended December 31, 20132015 was $32,107,140,$15,066,472, compared to net loss of $6,809,825$17,908,057 for the year ended 2012.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 20132014 includes $346,660$1,666,381 in interest expense and $27,685,283$16,442,992 loss on change in fair value of derivatives, offset by a gain on settlement of debt of $66,734. The loss in fiscal 2012 includes $3,472,010 in interest expense and $4,044,231 loss on change in fair value of derivatives, offset by a gain on settlement of debt of $4,145,969.$1,451,919.
18 |
Liquidity and Capital Resources
As of December 31, 2013,2015, we had cash of $43,044$13,563 and a working capital deficiencydeficit of $30,348,513.$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 twelve month period ending December 31, 2014.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 fiscal 2013,the year ended December 31, 2015, we used $1,076,600$401,189 in cash in operating activities and paid $4,354 to acquire property and equipment. This compares to fiscal 2012 whenactivities. During the year ended December 31, 2014, we used $2,006,775$764,929 in cash in operating activities and paid $33,271 to
8
acquire property and equipment.activities. We received proceeds of $887,000$396,200 from the issuance of notes payable and convertible debt during fiscal 2013, asfor the year ended December 31, 2015 compared to $1,720,000 in fiscal 2012.$917,300 for the year ended December 31, 2014. We made cash repayments of $2,000$21,700 for notes payable in fiscal 2013 asfor the year ended December 31, 2015 compared to $10,000$37,300 for the year ended December 31, 2014. We paid out $150,000 to Highlon, a company in fiscal 2012.the distribution management business for the deposit for a potential acquisition during the year ended December 31, 2014. We received proceeds of $228,500$217 from the issuanceexercise of common stockwarrants during fiscal 2013, as compared to $275,000 during fiscal 2012.year ended December 31, 2015.
As of December 31, 20132015, we did not have any established lines of credit with any banks or any other arrangements, agreements, or commitments for financing our operations.
Going Concern
The Company has no revenues and has incurred a net lossrecurring losses from operations as of $32,107,140 for the year ended December 31, 2013.2015. In addition, at December 31, 2013,2015, there iswas an accumulated deficit of $85,203,969.$88,045,554. These factors raise substantial doubt about the Company’sCompany's ability to continue as a going concern.
There can be no assurance that sufficient funds required during the next year or thereafter will be generated from operations or available from external sources such as debt or equity financings, or other potential sources. The inability to generate cash flow from operations or to raise capital from external sources will force the Company to substantially curtail and cease operations, therefore, having a material adverse effect on its business. Furthermore, there can be no assurance that any funds, if available, will possess attractive terms or not have a significant dilutive effect on the Company’sCompany's existing stockholders.
There is substantial doubt about the Company’sCompany's ability to continue as a going concern. Accordingly, its independent auditors included an explanatory paragraph in their report on the consolidated financial statements regarding concerns about the Company’sCompany's ability to continue as a going concern. The Company’sCompany's consolidated financial statements contain additional note disclosures describing the circumstances that lead to the auditor’sauditor's opinion. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
19 |
Management is currently pursuing a business strategy which includes raising the necessary funds to finance the Company's development, marketing and manufacturing efforts.
Off-balance sheet arrangementsCash and Cash Equivalents:
The following table summarizes the sources and uses of cash for the periods stated. The Company hasheld no cash equivalents for any of the periods presented.
For the Fiscal Year Ended 2015 2014 Cash, beginning of period Net cash provided by (used in) operating activities Net cash provided by investing activities Net cash provided by financing activities Cash, end of period
December 31,$ 14,035 $ 43,044 $ (375,189 ) $ (764,929 ) $ 0 $ (144,080 ) $ 374,717 $ 880,000 $ 13,563 $ 14,035
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
Not applicable
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.
20 |
9
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
US Highland, Inc.
Index to the Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm 11
Consolidated Balance Sheets as of December 31, 2013 and 2012 12
Consolidated Statements of Operations for the Years Ended December 31, 2013 and 2012 13
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013 and 2012 14
Consolidated Statements of Stockholders' Deficiency For the Years Ended December 31, 2013 and 2012 15
Notes to the Consolidated Financial Statements 16
Report of Independent Registered Public Accounting Firm | F-2 | |||
Consolidated Balance Sheets as of December 31, 2015 and 2014 | F-3 | |||
Consolidated Statements of Operations for the Years Ended December 31, 2015 and 2014 | F-4 | |||
Consolidated Statement of Changes in Stockholders' Deficit for the Years Ended December 31, 2015 and 2014 | F-5 | |||
Consolidated Statements of Cash Flows for the Years Ended December 31, 2015 and 2014 | F-6 | |||
Notes to the Consolidated Financial Statements | F-7 |
F-1 |
10
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, 20132015 and 2012,2014 and the related consolidated statements of operations, stockholders’ deficiency,changes in stockholders' deficit and cash flows for each of the years in the two-year period ended December 31, 2013.then ended. US Highland, Inc.’s'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 auditsaudit 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’sCompany'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, 20132015 and 20122014 and the results of its operations and its cash flows for each of the years in the two-year periodthen ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements for December 31, 2013 have been prepared assuming that the CompanyUS Highland, Inc. will continue as a going concern. As more fully noteddiscussed in Note 1 to the consolidated financial statements, the CompanyUS Highland, Inc. has incurred a substantial accumulated deficit,suffered recurring operating losses from operations and has a working capital deficiency of $30,348,513. These conditionsthat raise substantial doubt the Company’sabout its ability to continue as a going concern. Management’sManagement's plans in regardsregard to these matters are discussedalso described in Note 1. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
/s/ Friedman LLPGBH CPAs, PC
New York, New York
GBH CPAs, PC
www.gbhcpas.com
Houston, Texas
April 14, 2016
F-2 |
US Highland, Inc.
Consolidated Balance Sheets
December 31, 2015 December 31, 2014 ASSETS Current Assets Cash and cash equivalents Prepaid expenses Deposit on Highlon acquisition Total Current Assets Deposits Property and equipment, net Total Assets LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities Accounts payable Accrued liabilities ($267,598 and $255,830 related parties, respectively) Advances from Highlon Convertible debentures, net of discounts of $500,000 and $773,700, respectively Derivative liabilities Loans payable ($242,000 and $268,000 related parties, respectively) Total Current Liabilities Long-term loans payable ($nil and $607,000 related parties, respectively) Total Liabilities Commitments Stockholders' Deficit Undesignated Preferred stock, 40,000 shares authorized, par value $0.01; no shares issued and outstanding Series A Preferred stock, 3,500,000 shares authorized, par value $0.01; 3,381,520 shares issued and outstanding (2014 – no shares) Series B Preferred stock, 10,000 shares authorized, par value $0.01; 5,000 shares issued and outstanding (2014 – no shares) Common stock, 500,000,000 shares authorized, $0.01 par value; 58,162,669 shares and 77,727,669 shares issued and outstanding at December 31, 2015 and 2014, respectively Common stock reserved for future issuance; 316,500 and 244,000 shares at December 31, 2015 and 2014, respectively Treasury stock, at cost – 58,333 shares Additional paid-in capital Accumulated deficit Total Stockholders' Deficit Total Liabilities and Stockholders' Deficit $ 13,563 $ 14,035 93,029 95,748 150,000 150,000 256,592 259,783 4,664 11,478 4,708 10,288 $ 265,964 $ 281,549 $ 626,883 $ 499,586 615,324 656,482 26,000 – 52,333 259,633 16,886,192 46,065,517 367,000 391,500 18,573,732 47,872,718 – 607,000 18,573,732 48,479,718 – – 33,815 – 50 – 581,627 777,277 197,865 152,236 (773,500 ) (773,500 ) 69,697,929 54,757,844 (88,045,554 ) (103,112,026 ) (18,307,768 ) (48,198,169 ) $ 265,964 $ 281,549
May5, 2014
11
US Highland, Inc.
Consolidated Balance Sheets
|
| December 31, 2013 |
| December 31, 2012 |
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
|
Cash | $ | 43,044 | $ | 10,498 |
Inventory |
| 99,826 |
| – |
Prepaid expenses |
| 58,520 |
| 7,119 |
|
|
|
|
|
TotalCurrent Assets |
| 201,390 |
| 17,617 |
Long-term deposits |
| 11,491 |
| 11,756 |
Property and Equipment, net |
| 24,555 |
| 30,850 |
|
|
|
|
|
Total Assets | $ | 237,436 | $ | 60,223 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY |
|
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
|
Accounts payable | $ | 393,617 | $ | 402,903 |
Accrued liabilities |
| 258,238 |
| 182,472 |
Convertible debentures ($144,362 and $0 related parties, respectively) |
| 351,829 |
| 58,333 |
Derivative liabilities |
| 29,430,719 |
| 941,464 |
Loans payable ($27,000 and $0 related parties, respectively) |
| 115,500 |
| 221,900 |
|
|
|
|
|
Total Liabilities |
| 30,549,903 |
| 1,807,072 |
|
|
|
|
|
|
|
|
|
|
Commitments |
|
|
|
|
|
|
|
|
|
Stockholders’ Deficiency |
|
|
|
|
|
|
|
|
|
Preferred Stock,3,550,000 shares authorized, par value $0.01; No shares issued and outstanding at December 31, 2013 and December 31, 2012 |
| – |
| – |
|
|
|
|
|
Common Stock, 500,000,000 shares authorized, $0.01 par value; 77,727,669 and67,757,669 shares issued and outstanding at December 31, 2013 and December 31, 2012, respectively |
| 777,276 |
| 672,743 |
|
|
|
|
|
Common Stock Reserved for Future Issuance |
| 129,881 |
| 114,303 |
|
|
|
|
|
Subscriptions Receivable |
| – |
| (1,000) |
|
|
|
|
|
Additional Paid-in Capital |
| 54,757,845 |
| 51,337,434 |
|
|
|
|
|
Accumulated Deficit |
| (85,203,969) |
| (53,096,829) |
|
|
|
|
|
|
| (29,538,967) |
| (973,349) |
|
|
|
|
|
Treasury Stock, at cost – 58,333 shares at December 31, 2013 and December 31, 2012 |
| (773,500) |
| (773,500) |
|
|
|
|
|
Total Stockholders’ Deficiency |
| (30,312,467) |
| (1,746,849) |
|
|
|
|
|
Total Liabilities and Stockholders’ Deficiency | $ | 237,436 | $ | 60,223 |
|
|
|
|
|
(The accompanying notes are an integral part of these consolidated financial statements)statements.)
12
F-3 |
US Highland, Inc.
Consolidated Statements of Operations
|
| For the Year Ended December 31, 2013 |
| For the Year Ended December 31, 2012 |
|
|
|
|
|
Revenue | $ | – | $ | – |
|
|
|
|
|
Operating Expenses |
|
|
|
|
|
|
|
|
|
Consulting |
| 2,943,106 |
| 1,194,163 |
Depreciation |
| 10,649 |
| 8,444 |
General and administrative |
| 645,186 |
| 903,278 |
Professional fees |
| 545,975 |
| 1,154,179 |
Research and development |
| – |
| 178,419 |
|
|
|
|
|
Total Operating Expenses |
| 4,144,916 |
| 3,438,483 |
|
|
|
|
|
Operating Loss |
| (4,144,916) |
| (3,438,483) |
|
|
|
|
|
Other Income (Expense) |
|
|
|
|
|
|
|
|
|
Interest expense |
| (346,660) |
| (3,472,010) |
Change in fair value of derivatives |
| (27,685,283) |
| (4,044,231) |
Other income (expense) |
| 2,985 |
| (1,070) |
Gain (loss) on settlement of debt |
| 66,734 |
| 4,145,969 |
|
|
|
|
|
Total Other Income (Expense) |
| (27,962,224) |
| (3,371,342) |
|
|
|
|
|
Net Loss | $ | (32,107,140) | $ | (6,809,825) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss Per Common Share – Basic and Diluted | $ | (0.42) | $ | (0.22) |
|
|
|
|
|
Weighted Average Number of Common Shares Outstanding – Basic and Diluted |
| 75,729,000 |
| 31,585,700 |
|
|
|
|
|
For the Years Ended December 31, 2015 2014 Revenue Write-down of inventory Gross Margin (Deficit) Operating Expenses Depreciation General and administrative Professional fees Total Operating Expenses Operating Loss Other Income (Expense) Interest expense Change in fair value of derivatives liabilities Gain on settlement of debt Other income Total Other Income (Expense) Net Income (Loss) Net Earnings (Loss) Per Common Share: Basic weighted average common shares outstanding Diluted weighted average common shares outstanding $ – $ 10,930 – 125,616 – (114,686 ) 5,580 9,410 297,352 756,902 210,835 371,170 513,767 1,137,482 (513,767 ) (1,252,168 ) (1,011,790 ) (1,666,381 ) 14,603,888 (16,442,992 ) 1,988,114 1,451,919 27 1,565 15,580,239 (16,655,889 ) $ 15,066,472 $ (17,908,057 ) -Basic $ 0.20 $ (0.23 ) -Diluted $ 0.08 $ (0.23 ) 75,581,000 77,728,000 180,382,000 77,728,000
(The accompanying notes are an integral part of these consolidated financial statements)
statements.)
F-4 |
13
US Highland, Inc.
Consolidated StatementsStatement of Cash FlowsChanges in Stockholders' Deficit
For the Years Ended December 31, 2015 and 2014
|
| For the Year Ended December 31, 2013 |
| For the Year Ended December 31, 2012 |
|
|
|
|
|
Operating Activities |
|
|
|
|
|
|
|
|
|
Net loss | $ | (32,107,140) | $ | (6,809,825) |
|
|
|
|
|
Adjustments to reconcile net loss to cash used in operating activities: |
|
|
|
|
|
|
|
|
|
Depreciation |
| 10,649 |
| 8,444 |
Accretion expense |
| 295,496 |
| 3,343,038 |
Change in fair value of derivative |
| 27,685,283 |
| 4,044,231 |
Gain (loss) on settlement of debt |
| (66,734) |
| (4,145,969) |
Warrants issued for consulting services |
| 2,629,456 |
| 1,179,996 |
Shares issuable for interest expense |
| 15,578 |
| 21,203 |
Stock-based compensation |
| – |
| 14,167 |
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
Inventory |
| (99,826) |
| – |
Prepaid expenses and deposits |
| (51,136) |
| 33,384 |
Accounts payable and accrued liabilities |
| 611,774 |
| 304,556 |
|
|
|
|
|
Net Cash Used in Operating Activities |
| (1,076,600) |
| (2,006,775) |
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
Investment in property and equipment |
| (4,354) |
| (33,271) |
|
|
|
|
|
Net Cash Used in Investing Activities |
| (4,354) |
| (33,271) |
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
|
Proceeds from convertible debt |
| 860,000 |
| 1,600,000 |
Proceeds from notes payable |
| 27,000 |
| 120,000 |
Repayment of notes |
| (2,000) |
| (10,000) |
Proceeds from issuance of common stock |
| 228,500 |
| 275,000 |
|
|
|
|
|
Net Cash Provided by Financing Activities |
| 1,113,500 |
| 1,985,000 |
|
|
|
|
|
Increase (Decrease) In Cash |
| 32,546 |
| (55,046) |
|
|
|
|
|
Cash - Beginning of Year |
| 10,498 |
| 65,544 |
|
|
|
|
|
Cash - End of Year | $ | 43,044 | $ | 10,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash Investing and Financing Activities |
|
|
|
|
|
|
|
|
|
Warrants issued to settle debt | $ | 444,294 | $ | – |
Common stock issued to settle debt | $ | 47,666 | $ | 2,650,000 |
Common stock issued for services and compensation | $ | 15,578 | $ | 14,167 |
|
|
|
|
|
Undesignated Series A Series B Common Stock Common Additional Treasury Accumulated Shares Amount Shares Amount Shares Amount Shares Amount Issuance Capital Stock Deficit Total Balance, December 31, Shares issuable for Net loss Balance, December 31, Shares issued for exercise of warrants Cancellation of shares pursuant to a Share Exchange Agreement Series A Preferred shares issued for settlement of debt Gain on settlement of related party debts Shares issuable for Net income Balance, December 31,
Preferred Stock
Preferred Stock
Preferred Stock
Stock
Reserved
For Future
Paid-in
2013– $ – – $ – – $ – 77,727,669 $ 777,277 $ 129,881 $ 54,757,844 $ (773,500 ) $ (85,203,969 ) $ (30,312,467 )
accrued interest– – – – – – – – 22,355 – – – 22,355 – – – – – – – – – – (17,908,057 ) (17,908,057 )
2014– – – – – – 77,727,669 777,277 152,236 54,757,844 (773,500 ) (103,112,026 ) (48,198,169 ) – – – – – – 435,000 4,350 – (4,133 ) – – 217 – – – – 5,000 50 (20,000,000 ) (200,000 ) – 199,950 – – – – – 3,381,520 33,815 – – – – – 12,815,961 – – 12,849,776 – – – – – – – – – 1,928,307 – – 1,928,307
accrued interest– – – – – – – – 45,629 – – – 45,629 – – – – – – – – – – – 15,066,472 15,066,472
2015– $ – 3,381,520 $ 33,815 5,000 $ 50 58,162,669 $ 581,627 $ 197,865 $ 69,697,929 $ (773,500 ) $ (88,045,554 ) $ (18,307,768 )
(The accompanying notes are an integral part of these consolidated financial statements)
statements.)
F-5 |
14
US Highland, Inc.
Consolidated StatementStatements of Stockholders’ DeficiencyCash Flows
For the Years Ended December 31, 2013 and 2012
For the Year Ended December 31, 2015 For the Year Ended December 31, 2014 Operating Activities Net income (loss) Adjustments to reconcile net income (loss) to cash used in operating activities: Depreciation Accretion expense Change in fair value of derivatives Gain on sale of equipment Gain on settlement of debt Write down of inventory Shares issuable for accrued interest Changes in operating assets and liabilities: Inventory Prepaid expenses and deposits Accounts payable and accrued liabilities Accrued liabilities – related parties Net Cash Used in Operating Activities Investing Activities Payment on deposit in Highlon acquisition Proceeds from sale of property and equipment Net Cash Used in Investing Activities Financing Activities Advances from Highlon 26,000 – Proceeds from exercise of warrants Proceeds from loans payable Proceeds from loans payable – related parties Repayment of loans Repayment of loans – related parties Net Cash Provided by Financing Activities Decrease In Cash Cash - Beginning of Year Cash - End of Year Supplemental Cash Flows Information: Cash paid for income taxes Cash paid for interest Non-cash Investing and Financing Activities Warrants issued to settle debt Series A Preferred shares issued for settlement of debt Series B Preferred shares issued for cancellation of common shares Gain on settlement of related party debts $ 15,066,472 $ (17,908,057 ) 5,580 9,410 773,700 1,500,923 (14,603,888 ) 16,442,992 – (1,063 ) (1,988,114 ) (1,451,919 ) – 125,616 45,629 22,355 – (25,790 ) 9,533 (37,228 ) 131,620 442,662 158,279 115,171 (401,189 ) (764,929 ) – (150,000 ) – 5,920 – (144,080 ) 217 – 216,000 50,000 180,200 867,300 (8,500 ) (18,000 ) (13,200 ) (19,300 ) 400,717 880,000 (472 ) (29,009 ) 14,035 43,044 $ 13,563 $ 14,035 $ – $ – $ 4,580 $ 182 $ – $ 53,606 $ 12,849,776 $ – $ 200,000 $ – $ 1,928,307 $ _
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| Common Stock | Paid-in | For Future | Subscriptions | Accumulated | Treasury |
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| Shares | Amount | Capital | Issuance | Receivable | Deficit | Stock | Total | |
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Balance, December 31, 2011 | 868,778 | $ 8,687 | $ 45,845,828 | $ 93,100 | $ – | $ (46,287,004) | $ (773,500) | $ (1,112,889) | |
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Shares issued upon conversion of warrants | 2,000,000 | 20,000 | 1,180,995 | – | (1,000) | – | – | 1,199,995 | |
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Beneficial conversion features | – | – | 2,015,500 | – | – | – | – | 2,015,500 | |
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Shares issued for consulting services | 500,000 | 167 | 14,000 | – | – | – | – | 14,167 | |
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Shares issued upon conversion of debentures | 58,888,891 | 588,889 | 2,061,111 | – | – | – | – | 2,650,000 | |
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Shares issued for cash | 5,500,000 | 55,000 | 220,000 | – | – | – | – | 275,000 | |
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Shares issuable in payment of accrued interest | – | – | – | 21,203 | – | – | – | 21,203 | |
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Net loss for the year | – | – | – | – | – | (6,809,825) | – | (6,809,825) | |
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Balance, December 31, 2012 | 67,757,669 | 672,743 | 51,337,434 | 114,303 | (1,000) | (53,096,829) | (773,500) | (1,746,849) | |
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Shares issued upon conversion of warrants | 5,000,000 | 50,000 | 3,202,278 | – | – | – | – | 3,252,278 | |
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Subscriptions received | – | – | – | – | 1,000 | – | – | 1,000 | |
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Cancellation of shares issued in error | (483,333) | – | – | – | – | – | – | – | |
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Shares issued to settle debt | 953,333 | 9,533 | 38,133 | – | – | – | – | 47,666 | |
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Shares issued for cash | 4,500,000 | 45,000 | 180,000 | – | – | – | – | 225,000 | |
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Shares issuable in payment of accrued interest | – | – | – | 15,578 | – | – | – | 15,578 | |
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Net loss for the year | – | – | – | – | – | (32,107,140) | – | (32,107,140) | |
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Balance, December 31, 2013 | 77,727,669 | 777,276 | 54,757,845 | 129,881 | – | (85,203,969) | (773,500) | (30,312,467) | |
(The accompanying notes are an integral part of these consolidated financial statements)
statements.)
F-6 |
15
US Highland, Inc. Notes to the Consolidated Financial Statements For The Years Ended December 31, 2015 and 2014 |
1. Summary of Business and Basis of Presentation
Organization and Business
US Highland, Inc.
Notes to the Consolidated Financial Statements
For The Years Ended December 31, 2013 and 2012
1.Nature of Operations
US Highland, Inc. was originally formed as a Limited Liability Companylimited 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 stateState 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”"Company") is a recreational power sports Original Equipment Manufacturer (“OEM”("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 concernConcern
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 December 31, 2013,2015, current liabilities exceed current assets by $30,348,513,$18,317,140, and the Company has an accumulated deficit of $85,203,969.$88,045,554. The Company’sCompany'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’sCompany'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.
2. Summary of Significant Accounting Policies
a)Basis of Presentation and Principles of Consolidation
The Company’sCompany's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary,subsidiaries, US Highlands Electric Inc., USH Distribution Corp., and Powersports Brand Alliance, Inc. All significant intercompany transactions and balances have been eliminated.
F-7 |
US Highland, Inc. Notes to the Consolidated Financial Statements For The Years Ended December 31, 2015 and 2014 |
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’sCompany'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.
d)Inventory
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.
e)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:
Computers and office equipment | 3 years | |||
Manufacturing equipment | 5 - 10 years |
16
US Highland, Inc.
Notes to the Consolidated Financial Statements
For The Years Ended December 31, 2013 and 2012
f)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.
F-8 |
US Highland, Inc. Notes to the Consolidated Financial Statements For The Years Ended December 31, 2015 and 2014 |
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”"Level 3" inputs, which are significant and unobservable and have the lowest priority. There were no transfers into or out of “Level 3”"Level 3" during the years ended December 31, 20132015 or 2012.2014. 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.
g)Basic and Diluted Net Loss Per Share
Basic earnings (loss) per share is calculated by dividing net profit attributable to common stockholders by the weighted average number of outstanding common shares during the year. The calculation of basic earnings (loss) per share excludes any dilutive effects of options, warrants and other stock-based compensation, which are included in diluted earnings per share. When a company is in a loss situation, all outstanding dilutive shares are excluded from the calculation of diluted earnings because their inclusion would be antidilutive; and the basic and fully diluted common shares outstanding are stated to be the same.At December 31, 2013 and 2012, approximately 113,500,000 and 1,130,000 shares, respectively, underlying the convertible debentures and warrants were antidilutive.
h)Research and Development
Research and development costs are expensed as incurred.
i)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.Therealized. 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, 20132015, or 2012.2014.
j)
i) Revenue Recognition
For revenue from product sales, the Company recognizes revenue in accordance with Staff Accounting Bulletin ("SAB") No. 104,Revenue Recognition, which superseded SAB No. 101,Revenue Recognition in Financial Statements. SAB No. 101 requires thatusing 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.
17j) Advertising
US Highland, Inc.
Notes to the Consolidated Financial Statements
For The Years Ended December 31, 2013 and 2012
k)Advertising
The Company expenses advertising costs as incurred. Such costs totaled approximately $28,500$11,000 and $13,159$6 for 20132015, and 2012,2014, 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.
F-9 |
US Highland, Inc. Notes to the Consolidated Financial Statements For The Years Ended December 31, 2015 and 2014 |
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 wereCompany had sales of $10,930 to one customer during the year ended December 31, 2014 and no sales during the yearsyear ending December 31, 2013 and 2012.2015.
m)
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:
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| Useful Life | December 31, 2013 | December 31, 2012 |
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Computers and office equipment |
| 3 years | $ 15,930 | $ 14,130 |
Manufacturing equipment |
| 5 - 10 years | 28,408 | 25,853 |
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| 44,338 | 39,983 |
Accumulated depreciation |
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Property and equipment, net |
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| $ 24,555 | $ 30,850 |
Useful Life December 31, 2015 December 31, 2014 Computers and office equipment 3 years Manufacturing equipment 5 - 10 years Subtotal Accumulated depreciation Property and equipment, net $ 15,930 $ 15,930 19,513 19,513 35,443 35,443 (30,735 ) (25,155 ) $ 4,708 $ 10,288
Depreciation expense amounted to approximately $10,649$5,580 and $8,444$9,410 for the yearyears ended December 31, 20132015 and 2012,2014, respectively.
4.
F-10 |
US Highland, Inc. Notes to the Consolidated Financial Statements For The Years Ended December 31, 2015 and 2014 |
5. Related Party Transactions
a)During the year ended December 31, 2013,2015, the Company issued a convertible note payableincurred 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 for cash proceeds of $500,000. Referthe Company an aggregate of $190,000 (2014 – $842,000) pursuant to Note 6(g).
b)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, 2013,2015, the Company issued a convertible note payable2,484,422 shares of Series A Preferred stock to a significant shareholder for cash proceeds of $273,700.the Company to settle $822,000 of loans payable, a $273,700 convertible note and $146,511 of accrued interest. Refer to Note 6(h)Notes 6(e), 8(g) and 8(h).
c)During the year ended At December 31, 2013,2015, the Companyentered into an unsecured, non-guaranteed loan agreement with the director for $27,000. Refer to Note 5(f).
d)On March 18, 2013,Company owed a director of the Company converted $21,000 of amounts owed$27,000 (2014 – $27,000) pursuant to him byunsecured, non-guaranteed loan agreements. In addition, the Company into 420,000 sharesowes the director of common stock. The amount owed had no terms of repayment and was non-interest bearing.
e)On March 13, 2013, the Company issued 4,500,000 sharesaccrued interest of common stock$658 (2014 – $385), which has been included in consideration for cash at $0.05 per shareaccrued liabilities. Refer to a shareholder. This transaction resulted in the shareholder becoming a significant shareholder.Note 8(d).
18
US Highland, Inc.
Notes to the Consolidated Financial Statements
For The Years Endedd) At December 31, 2013 and 2012
5. Loans Payable2015, 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).
Loans payable consist of the following: | December 31, 2013 $ | December 31, 2012 $ | |
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a) | Loans payable that are unsecured, non-guaranteed, past due and are non-interest bearing. During the year ended December 31, 2013, the Company settled $13,400 of loans payable through the transfer of inventory previously written off. | 25,000 | 38,400 |
b) | Note payable which is unsecured, non-guaranteed, past due and bears interest at 10% per annum. | 7,500 | 7,500 |
c) | On January 15, 2011, the Company entered into 8 unsecured, non-guaranteed, loan agreements pursuant to which the Company received proceeds of $56,000. If the loans were not repaid within 90 days they then bear interest at 1% per month. In addition, if the loan was not repaid within 90 days, the Company is required to issue 167 common shares every month until the loan is repaid in full. As at December 31, 2013 and 2012, the Company recognized the fair value of 5,500 and 3,500 common shares issuable for interest expense of $120,282 and $114,303, respectively, as shares reserved for future issuance. The Company has not yet issued these common shares. As at December 31, 2013, the Company has also accrued interest expense of $19,880 (2012 - $13,160). | 56,000 | 56,000 |
d) | On August 28, 2012, the Company entered into an unsecured, non-guaranteed, demand loan agreement pursuant to which the Company received proceeds of $75,000. The loan bears interest at an annual rate of 7% payable monthly. The loan is repayable on demand. On July 25, 2013, the note was secured with a convertible note. Refer to Note 6(e). | – | 75,000 |
e) | On October 3, 2012, the Company entered into an unsecured, non-guaranteed, demand loan agreement pursuant to which the Company received proceeds of $45,000. The loan bears interest at an annual rate of 7% payable monthly. The loan is repayable on demand. On July 25, 2013, the note was secured with a convertible note. Refer to Note 6(f). | – | 45,000 |
f) | On May 30, 2013 and August 12, 2013, the Company received advances from a director for $2,000 and $25,000, respectively. On August 12, 2013, the Company entered into an unsecured, non-guaranteed, demand loan agreement with the director for $27,000. The loan bears interest at 1% per annum compounded monthly. In addition, the Company is required to issue 5,000common shares every month until the loan is repaid in full. As of December 31, 2013, the Company recognized the fair value of 20,000 common shares issuable for interest expense of $5,550, as shares reserved for future issuance. The Company has not yet issued these common shares. As at December 31, 2013, the Company has also accrued interest expense of $125. | 27,000 | – |
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| 115,500 | 221,900 |
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.
19
US Highland, Inc.
Notes to the Consolidated Financial Statements
For The Years Ended December 31, 2013 and 2012
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’sCompany'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 815-15Derivatives 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.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, 2013,2015 and 2014, the carrying value of the note is $56,333 (2012 - $58,333).was $52,333 and $53,333, respectively. The note is in default at December 31, 2013.2015.
b)Effective May 18, 2011, the Company issued a convertible note for $700,000. Pursuant to the terms of the agreement, the loan was unsecured, bore interest at 10% and was due on May 18, 2012. The note was convertible into shares of the Company’s common stock at any time at a variable conversion price equal to 75% of the average of the closing bid prices of the common stock during the 30 trading days prior to the date of the conversion notice and is 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.
On June 1, 2012, the Company entered into an amended securities purchase agreement and received additional proceeds of $150,000. Pursuant to the amended securities purchase agreement, the Company issued a new convertible note (the “2012 Note”) for total aggregate proceeds received of $850,000. The 2012 Note bore interest at 10% per annum and all unpaid principal and accrued interest on the modified note shall be due and payable on June 1, 2013. The 2012 Note was convertible, at any time, in whole or in part into common stock of the Company at a conversion price equal to $0.045 per share. In addition, the Company issued the lender a warrant to purchase 212,500 shares of the Company’s common stock for three years at an exercise price equal to the lower of $0.20 per share or 75% of the average closing bid price for the 30 trading days preceding the exercise date.
As the present value of the future cash flows was well over 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 as extinguished and exchanged for a new convertible note. During the year ended December 31, 2012, the Company recorded accretion of the discount of the original note to the modification date of $574,064. The fair value of the modified debt was compared to the carrying value of the old debt and the Company recorded a gain on extinguishment of debt of $1,744,770.
The net proceeds of $850,000 of the 2012 Note were allocated to the convertible note and the warrants issued at time of issuance. The Company allocated $210,000 of the net proceeds to the warrants. This resulted in a warrant derivative liability of $210,000 and the convertible debt is initially recorded at $640,000 (net of the discount that arises from the allocation of proceeds to the warrants $210,000). The Company recognized the intrinsic value of the embedded beneficial conversion feature of $640,000 as additional-paid-in capital and an equivalent discount that reduced the carrying value of the convertible debt to $0.
On July 12, 2012, the Company settled the 2012 Note by issuing 18,888,889 shares of the Company’s common stock. The recorded $850,000 of accretion relating to the discount on the 2012 Note as the Company recognized the unamortized discount as interest expense upon conversion.
c)Effective December 21, 2011, the Company issued a $350,000 convertible note and a warrant to purchase 11,667 shares of the Company’s common stock. Pursuant to the terms of the agreement, the loan was unsecured, bore interest at 10% and was due on December 21, 2012. The Company received additional subscriptions of $650,000 and issued an additional $650,000 of convertible notes and a warrant to purchase 21,667 shares of the Company’s common stock in fiscal 2012
The note was convertible into shares of the Company’s common stock at any time at a variable conversion price equal to 75% of the average of the closing bid prices of the common stock during the 30 trading days prior to the date of the conversion notice and is subject to adjustment upon the issuance of certain dilutive instruments. The warrants are exercisable into shares of the Company’s common stock at any time at a variable exercise price equal to the lower of $6.00 per post-reverse split share and 75% of the average of the closing bid prices of the common stock during the 30 trading days prior to the date of the conversion notice and is subject to adjustment upon the issuance of certain dilutive instruments. Due to these provisions, 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 $418,939 and warrants of $146,864, resulted in a discount to the note payable of $350,000 and the recognition of a loss on derivatives of $215,803.
20
US Highland, Inc.
Notes to the Consolidated Financial Statements
For The Years Ended December 31, 2013 and 2012
On June 1, 2012, the Company entered into an amended securities purchase agreement and received additional proceeds of $150,000. Pursuant to the amended securities purchase agreement, the Company issued a new convertible note (the “Second 2012 Note”) for total aggregate proceeds received of $1,150,000. The Second 2012 Note bore interest at 10% per annum and all unpaid principal and accrued interest on the modified note was due and payable on June 1, 2013. The 2012 Note is convertible, at any time, in whole or in part into common stock of the Company at a conversion price equal to $0.045 per share. In addition, the Company issued the lender a warrant to purchase 287,500 shares of the Company’s common stock for three years at an exercise price equal to the lower of $0.20 per share, or 75% of the average Closing Bid Price for the 30 trading days preceding the exercise date.
As the present value of the future cash flows was well over 10% different than the cash flows of the original debt, it is determined that the original and new debt instruments are substantially different and the Company treated the original convertible note as extinguished and exchanged for a new convertible note. During the year ended December 31, 2012, the Company recorded accretion of the discount of the original note to the modification date of $109,553. The fair value of the modified debt was compared to the carrying value of the old debt and the Company recorded a gain on extinguishment of debt of $1,711,361.
The net proceeds of $1,150,000 of the Second 2012 Note were allocated to the convertible note and the warrants issued at time of issuance. The Company allocated $284,100 of the net proceeds to the warrants. This resulted in a warrant derivative liability of $284,100 and the convertible debt is initially recorded at $865,900 (net of the discount that arises from the allocation of proceeds to the warrants $284,100). The Company recognized the intrinsic value of the embedded beneficial conversion feature of $865,900 as additional-paid-in capital and an equivalent discount that reduced the carrying value of the convertible debt to $0.
On July 12, 2012, the Company settled the 2012 Note by issuing 25,555,556 shares of the Company’s common stock. The Company recorded recognized the unamortized discount as interest expense upon conversion. The recorded $650,000 of accretion relating to the discount on the 2012 Note as the Company recognized the unamortized discount as interest expense upon conversion.
d)During the year ended December 31, 2012, the Company issued a convertible note for $500,000 a warrant to purchase 250,000 split shares of the Company’s common stock. Pursuant to the terms of the agreement, the loan was unsecured, bore interest at 10% and was due on April 1, 2013. The warrant is exercisable into common shares of the Company at the lower of $0.20 or 75% of the average closing bid price of the 30 trading days immediately preceding the exercise date. The note is convertible into shares of the Company’s common stock at any time at a variable conversion price equal to 75% of the average of the closing bid prices of the common stock during the 30 trading days prior to the date of the conversion notice and is 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 conversion feature of $595,788 and warrants of $252,373, resulted in a discount to the note payable of $500,000 and the recognition of a loss on derivatives of $348,161.
On June 1, 2012, the Company entered into an amended securities purchase agreement and received additional proceeds of $150,000. Pursuant to the amended securities purchase agreement, the Company issued a new convertible note (the “Third 2012 Note”) for total aggregate proceeds received of $650,000. The Third 2012 Note bore interest at 10% per annum and all unpaid principal and accrued interest on the modified note was due and payable on June 1, 2013. The Third 2012 Note was convertible, at any time, in whole or in part into common stock of the Company at a conversion price equal to $0.045 per share. In addition, the Company issued the lender a warrant to purchase 162,500 shares of the Company’s common stock for three years at an exercise price equal to the lower of $0.20 per share, or 75% of the average Closing Bid Price for the 30 trading days preceding the exercise date.
As the present value of the future cash flows was well over 10% different than the cash flows of the original debt, it is determined that the original and new debt instruments are substantially different and the Company treated the original convertible note as extinguished and exchanged for a new convertible note. During the year ended December 31, 2012, the Company recorded accretion of the discount of the original note to the modification date of $9,379. The fair value of the modified debt was compared to the carrying value of the old debt and the Company recorded a gain on extinguishment of debt of $732,909.
The net proceeds of $650,000 of the Third 2012 Note were allocated to the convertible note and the warrants issued at time of issuance. The Company allocated $140,400 of the net proceeds to the warrants. This resulted in a warrant derivative liability of $140,400 and the convertible debt is initially recorded at $509,600 (net of the discount that arises from the allocation of proceeds to the warrants $140,400). The Company recognized the intrinsic value of the embedded beneficial conversion feature of $509,600 as additional-paid-in capital and an equivalent discount that reduced the carrying value of the convertible debt to $0.
On July 12, 2012, the Company settled the 2012 Note by issuing 14,444,444 shares of the Company’s common stock. The Company recognized the unamortized discount as interest expense upon conversion. The recorded $1,150,000 of accretion relating to the discount on the 2012 Note as the Company recognized the unamortized discount as interestexpense upon conversion.
21
US Highland, Inc.
Notes to the Consolidated Financial Statements
For The Years Ended December 31, 2013 and 2012
e)b) Effective July 25, 2013, the Company issued a convertible note to secure thea demand loan of $75,000 described in Note 5(d).$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’sCompany's common stock at any time at a price of $0.035.$0.035 per share. The note bears interest at 8% per annum compounded monthly, and is due on demand.
F-11 |
US Highland, Inc. Notes to the Consolidated Financial Statements For The Years Ended December 31, 2015 and 2014 |
The embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15 Derivatives and Hedging.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, 20132013.
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 is due on demand.was $nil and $75,000, respectively.
f)
c) Effective July 25, 2013, the Company issued a convertible note to secure the demand loan of $45,000 described in Note 5(e).$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’sCompany's common stock at any time at a price of $0.035.$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, 20132013.
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 is due on demand.was $nil and $45,000, respectively.
g)
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’sCompany'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’sCompany'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.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.
F-12 |
US Highland, Inc. Notes to the Consolidated Financial Statements For The Years Ended December 31, 2015 and 2014 |
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, 2013,2015, the Company recorded total accretion of $92,354 increasing$500,000. At December 31, 2015, and 2014, the carrying value of the note to $92,354.was $nil and $nil with unamortized discount of $500,000 and $500,000, respectively.
h)
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’sCompany'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’sCompany'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.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.
F-13 |
US Highland, Inc. Notes to the Consolidated Financial Statements For The Years Ended December 31, 2015 and 2014 |
On December 31, 2014, the Company and the note holder agreed to extend the maturity date to December 31, 2015. Interest shall accrue at 12% per annum but may be reduced to 8% for any period of time in which the interest is paid in cash and not accrued. The Company accounted for the modification in accordance with ASC 405-20 and ASC 470-50-40. As the present value of the future cash flows was more than 10% different than the cash flows of the original debt, it was determined that the original and new debt instruments are substantially different and the Company treated the original convertible note extinguished and exchanged for a new convertible note. The Company recorded a loss on extinguishment of debt of $225,431. The Company also recognized the fair value of the embedded conversion feature of $13,733,269 as a derivative liability and reduced the value of the convertible loan to $nil. During the year ended December 31, 2013,2015, the Company recorded total accretion of $52,008 increasing$273,700.
On September 30, 2015, the Company issued 673,010 shares of Series A preferred stock with a fair value of $2,557,438 upon the settlement of the principal amount of $273,700 and accrued interest of $62,805. At September 30, 2015, the fair value of the derivative liability was $10,126,900. The Company recorded an adjustment to additional paid-in capital of $7,905,967 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 an adjustment to additional paid-in capital as the note holder is a significant shareholder of the Company. At December, 2015, and 2014, the carrying value of the note to $52,008.was $nil and $nil with unamortized discount of $nil and $273,700, respectively.
i)
f) Effective November 12, 2013, the Company issued a convertible note for up to $500,000 and warrants to purchase 694,445 underlying shares of the Company’sCompany's common stock. The warrants are exercisable into 555,556 common shares of the Company at $0.05 per share and 138,889 shares at an exercise price of $0.10 per share until July 31, 2014. During the year ended December 31, 2013, the Company received proceeds of $20,000 under the note. At November 30, 2013, the Company had determined that no additional funding would be received pursuant to the convertible note. The note bears interest at 8% per annum compounded monthly, and principal and interest are due on July 31, 2014.
22
US Highland, Inc.
Notes to the Consolidated Financial Statements
For The Years Ended December 31, 2013 and 2012
The note may be prepaid by the Company without penalty with 30 days prior notice. The note is convertible into shares of the Company’sCompany'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.Hedging. The initial fair value of the conversion feature of $250,021 and warrants of $145,943, resulted in a discount to the note payable of $20,000 and the recognition of a loss on derivatives of $375,964. During the year ended December 31, 2013,2014, the Company recorded accretion of $6,521 increasing$13,479.
On September 30, 2015, the Company issued 46,478 shares of Series A preferred stock at a fair value of $176,616 upon the settlement of the principal amount of $20,000 and accrued interest of $3,239. At September 30, 2015, the fair value of the derivative liability was $745,788. The Company recognized a gain of $592,411 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 to $6,521.was $nil and $20,000, respectively.
j)
g) Effective October 7, 2013, the Company issued a convertible note for up to $500,000 and warrants to purchase 868,055 underlying shares of the Company’sCompany's common stock. The warrants are exercisable into 694,444 common shares of the Company at $0.05 per share and 173,611 shares at an exercise price of $0.10 per share until July 31, 2014. During the year ended December 31, 2013, the Company received proceeds of $25,000 under the note. At November 30, 2013, the Company had determined that no additional funding would be received pursuant to the convertible note. The note bears interest at 8% per annum compounded monthly, and principal and interest are due on July 31, 2014.
The note may be prepaid by the Company without penalty with 30 days prior notice. The note is convertible into shares of the Company’sCompany'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.
F-14 |
US Highland, Inc. Notes to the Consolidated Financial Statements For The Years Ended December 31, 2015 and 2014 |
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.Hedging. The initial fair value of the conversion feature of $312,522 and warrants of $182,522 resulted in a discount to the note payable of $25,000 and the recognition of a loss on derivatives of $470,045.
On July 24, 2014, the Company and the note holder agreed to extend the maturity date to December 31, 2014 and increase the interest rate to 12% starting on August 1, 2014.The Company accounted for the modification in accordance with ASC 405-20 and ASC 470-50-40. As the present value of the future cash flows was more than 10% different than the cash flows of the original debt, it was determined that the original and new debt instruments are substantially different and the Company treated the original convertible note extinguished and exchanged for a new convertible note. The Company recorded a loss on extinguishment of debt of $25,000. The Company also recognized the fair value of the embedded conversion feature of $1,250,082 as a derivative liability and reduced the value of the convertible loan to $nil. During the year ended December 31, 2013,2014, the Company recorded total accretion of $7,968 increasing$42,032.
On September 30, 2015, the Company issued 61,306 shares of Series A preferred stock with a fair value of $232,963 upon the settlement of the principal amount of $25,000 and accrued interest of $5,653. At September 30, 2015, the fair value of the derivative liability was $932,152. The Company recognized a gain of $729,842 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 to $7,968.was $nil and $25,000, respectively.
k)
h) On July 25, 2013, the Company issued a convertible note for up to $500,000 and warrants to purchase 739,584 underlying shares of the Company’sCompany's common stock. The warrants are exercisable into 591,667 common shares of the Company at $0.05 per share and 147,917 shares at an exercise price of $0.10 per share until July 31, 2014. During the year ended December 31, 2013, the Company received proceeds of $41,300 under the note. At November 30, 2013, the Company had determined that no additional funding would be received pursuant to the convertible note. The note bears interest at 8% per annum compounded monthly, and principal and interest are due on July 31, 2014.
The note may be prepaid by the Company without penalty with 30 days prior notice. The note is convertible into shares of the Company’sCompany's common stock at any time at a conversion price equal to $0.02 per share and is subject to adjustment upon the issuance of certain dilutive instruments and other events. The conversion price was subsequently reduced to $0.01 per share upon the failure to file various reports with the SEC within 120 days of the issuance of the note.
Due to the potential adjustments to the conversion feature and the inability to conclude that the Company has enough unissued-authorized common shares to settle the warrants, the embedded conversion option and the warrants qualify for derivative accounting and bifurcation under ASC 815-15 Derivatives and Hedging. The initial fair value of the conversion feature of $547,736 and warrants of $187,531, resulted in a discount to the note payable of $41,300 and the recognition of a loss on derivatives of $693,967.
On August 4, 2014, the Company and the note holder agreed to extend the maturity date to December 31, 2014 and increase the interest rate to 12% starting on August 1, 2014. The Company accounted for the modification in accordance with ASC 405-20 and ASC 470-50-40. As the present value of the future cash flows was more than 10% different than the cash flows of the original debt, it was determined that the original and new debt instruments are substantially different and the Company treated the original convertible note extinguished and exchanged for a new convertible note. The Company recorded a loss on extinguishment of debt of $41,300. The Company also recognized the fair value of the embedded conversion feature of $2,065,135 as a derivative liability and reduced the value of the convertible loan to $nil. During the year ended December 31, 2013,2014, the Company recorded total accretion of $16,645 increasing$65,955.
On September 30, 2015, the Company issued 102,082 shares of Series A preferred stock at a fair value of $387,912 upon the settlement of the principal amount of $41,300 and accrued interest of $9,741. At September 30, 2015, the fair value of the derivative liability was $1,539,915. The Company recognized a gain of $1,203,044 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 to $16,645.was $nil and $41,300, respectively.
F-15 |
23
US Highland, Inc. Notes to the Consolidated Financial Statements For The Years Ended December 31, 2015 and 2014 |
US Highland, Inc.
Notes to the Consolidated Financial Statements
For The Years Ended December 31, 2013 and 2012
7. Derivative Liabilities
The embedded conversion options of the Company’sCompany's convertible debentures described in Note 6 contain conversion features that qualify for embedded derivative classification. The warrants described in Notes 6 and 911 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’sCompany's Level 3 financial liabilities:
|
| December 31, 2013 |
| December 31, 2012 |
|
|
|
|
|
Balance at the beginning of year | $ | 941,464 | $ | 646,831 |
|
|
|
|
|
Addition of new derivative liabilities (embedded conversion options) |
| 14,028,014 |
| 1,010,478 |
Addition of new derivative liabilities (warrants) |
| 9,209,794 |
| 2,134,182 |
Change in fair value of warrants |
| (627,690) |
| (364,842) |
Change in fair value of embedded conversion option |
| 9,128,915 |
| 4,059,964 |
Conversion of warrants |
| (3,249,778) |
| (1,199,995) |
Settlement of embedded conversion options |
| – |
| (5,345,154) |
|
|
|
|
|
Balance at the end of the year | $ | 29,430,719 | $ | 941,464 |
Year Ended December 31, 2015 Year Ended December 31, 2014 Balance at the beginning of the year Addition of new derivative liabilities (warrants) Change in fair value of warrants Change in fair value of embedded conversion option Modification of embedded conversion options Derecognize of derivative liabilities upon settlement of convertible notes Balance at the end of the year $ 46,065,517 $ 29,430,719 – 53,606 (763,397 ) (5,184,569 ) (13,840,491 ) 21,627,561 7,415 138,200 (14,582,852 ) – $ 16,886,192 $ 46,065,517
The following table summarizes the change in fair value of derivatives:derivatives for the years ended:
|
| December 31, 2013 |
| December 31, 2012 |
|
|
|
|
|
Fair value of derivative liabilities in excess of note proceeds received | $ | (19,184,058) | $ | (349,109) |
Change in fair value of derivative liabilities during year |
| (8,501,225) |
| (3,695,122) |
|
|
|
|
|
Change in fair value of derivatives | $ | (27,685,283) | $ | (4,044,231) |
December 31, 2015 December 31, 2014 Change in fair value of derivative liabilities during the period Change in fair value of derivatives $ (14,603,888 ) $ (16,442,992 ) $ (14,603,888 ) $ (16,442,992 )
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’sCompany'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:
F-16 |
US Highland, Inc. Notes to the Consolidated Financial Statements For The Years Ended December 31, 2015 and 2014 |
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| Expected Volatility | Risk-free Interest Rate | Expected Dividend Yield | Expected Life (in years) | ||||||
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At December 31, |
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| |||||||
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0.67% |
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| 0 | % | 0.25-2.50 | ||||||
At December 31, 2015 | 134% - 216% | 0.20% - 1.03% |
|
| 0 | % | 0.25-2.50 |
8. Loans Payable
December 31, December 31, 2015 2014 Loans payable consist of the following: a) Loans payable that are unsecured, non-guaranteed, past due and are non-interest bearing. b) Note payable which is unsecured, non-guaranteed, past due and bears interest at 10% per annum. c) On January 15, 2011, the Company entered into 8 unsecured, non-guaranteed, loan agreements pursuant to which the Company received proceeds of $56,000. If the loans were not repaid within 90 days they then bear interest at 1% per month. In addition, if the loan was not repaid within 90 days, the Company is required to issue 167 common shares every month until the loan is repaid in full. As at December 31, 2015, and 2014, the Company recognized the fair value of $135,365 and $125,736, respectively, of the 180,000 and 164,000 common shares issuable for interest expense as shares reserved for future issuance. The Company has not yet issued these common shares. As at December 31, 2015, the Company has also accrued interest expense of $33,320 (2014 - $26,600). d) On May 30, 2013 and August 12, 2013, the Company received advances from a director for $2,000 and $25,000, respectively. On August 12, 2013, the Company entered into an unsecured, non-guaranteed, demand loan agreement with the director for $27,000. The loan bears interest at 1% per annum compounded monthly. In addition, the Company is required to issue 5,000 common shares every month until the loan is repaid in full. As at December 31, 2015, and 2014, the Company recognized the fair value of $62,500 and $26,500, respectively, of the 140,000 and 80,000 common shares issuable for interest expense as shares reserved for future issuance. The Company has not yet issued these common shares. As at December 31, 2015, the Company has also accrued interest expense of $658 (2014 - $385). e) On February 27, 2014, and March 19, 2015, the Company received advances from a director of $6,000, and $10,200, respectively. During the year ended December 31, 2015, the Company repaid $13,200. The advances are unsecured, due on demand and bears interest at 1% per annum compounded and calculated monthly. f) On September 18, 2014, February 18, 2015, March 9, 2015, March 31, 2015, May 8, 2015, May 29, 2015 , July 3, 2015, and December 2, 2015, the Company entered into unsecured, non-guaranteed, loan agreements pursuant to which the Company received proceeds of $35,000, $20,000, $50,000, $50,000, $65,000, $4,000, $5,000 and $22,000, respectively. The loans bear interest at 8% per annum compounded annually and is due 1 year after the date of issuance. On September 30, 2015, the Company issued 384,002 shares of Series A preferred stock for settlement of $185,000 of notes payable and $7,001 of accrued interest. The Series A preferred shares had a fair value of $1,459,208, and the Company recorded a loss on settlement of debt of $1,267,206. g) On August 26, 2014, December 4, 2014, December 18, 2014, January 29, 2015, August 12, 2015, August 21, 2015, September 1, 2015, September 15, 2015, November 13, 2015 and December 23, 2015, the Company issued unsecured notes payable of $15,000, $20,000, $200,000, $20,000, $20,000, $25,000, $40,000, $25,000, $30,000 and $10,000, respectively to a significant shareholder. The notes bear interest at an annual rate of 8% per annum, are uncollateralized, and due 1 year after the date of issuance. On September 30, 2015, the Company issued 457,734 shares of Series A preferred stock for settlement of $215,000 of notes payable and accrued interest of $13,867. The Series A preferred shares had a fair value of $1,739,389. The settlement of debt resulted an adjustment to additional paid-in capital of $1,510,522. h) On January 17, 2014, January 29, 2014, February 19, 2014, March 3, 2014, March 19, 2014, April 25, 2014, May 19, 2014, June 2, 2014, June 12, 2014, July 1, 2014, July 16, 2014, October 7, 2014, October 31, 2014, and November 3, 2014, the Company issued unsecured notes payable of $50,000, $50,000, $25,000, $50,000, $150,000, $25,000, $25,000, $18,000, $32,000, $25,000, $75,000, $30,000, $20,000 and $32,000, respectively to a significant shareholder. The Company issued the following unsecured notes payable to a significant shareholder. The notes bear interest at an annual rate of 8% per annum, are uncollateralized, and are due 2 years after the date of issuance. On September 30, 2015, the Company issued 1,353,678 shares of preferred stock for the settlement of all of the following $607,000 of notes payable and $69,839 of accrued interest. The preferred shares had a fair value of $5,143,976. The settlement of debt resulted an adjustment to additional paid-in capital of $4,467,138. Total Less Short-Term Portion ) ) Long-Term Loans Payable $ 25,000 $ 25,000 – 7,500 56,000 56,000 27,000 27,000 3,000 6,000 66,000 35,000 190,000 235,000 – 607,000 $ 367,000 $ 998,500 (367,000 (391,500 $ – $ 607,000
F-17 |
US Highland, Inc. Notes to the Consolidated Financial Statements For The Years Ended December 31, 2015 and 2014 |
9. Preferred Stock
a) On September 30, 2015, the Company designated 3,500,000 shares of the Company's 3,550,000 authorized "blank check" preferred stock as Series A Convertible Preferred Stock. The Series A Convertible Preferred Stock shall, with respect to dividend rights, rights on liquidation, winding up and dissolution, rank senior to (i) all classes of common stock of the Company and (ii) any class or series of capital stock of the Company hereafter created (unless, with the consent of the holders of Series A Convertible Preferred Stock). The holders of the Series A Preferred Stock shall not entitled to receive any dividends and shall have the voting equivalency of 10 shares of common stock. Each holder of Series A Preferred Stock shall have the right at any time or from time to time from and after the day immediately following the date the Series A Preferred Stock is first issued, to convert each share of Series A Preferred Stock into 10 fully-paid and non-assessable share of common stock, par value $0.01 per share, of the Company. In connection with any conversion hereunder, each holder of Series A Convertible Preferred Stock if such conversion would cause such holder or any of its assignees to beneficially own more than 4.99% of the common stock of the Company.
b) On September 30, 2015, the Company issued an aggregate of 3,381,520 shares of Series A Convertible Preferred Stock at a fair value of $12,849,776 to settle convertible and promissory notes in the amount of $1,487,000 and accrued interest of $203,760. The Company recorded a gain on settlement of debt of $1,495,529.
c) On November 20, 2015, the Company designated 10,000 shares of the Company's 3,550,000 authorized "blank check" preferred stock as Series B Convertible Preferred Stock. The Series B Convertible Preferred Stock shall, with respect to dividend rights, rights on liquidation, winding up and dissolution, rank senior to (i) all classes of common stock of the Company and (ii) any class or series of capital stock of the Company hereafter created (unless, with the consent of the holders of Series B Convertible Preferred Stock). The holders of the Series B Preferred Stock shall not entitled to receive any dividends and shall have the voting equivalency of 4,000 shares of common stock. Each holder of Series B Preferred Stock shall have the right at any time or from time to time from and after the day immediately following the date the Series B Preferred Stock is first issued, to convert each share of Series B Preferred Stock into 4,000 fully-paid and non-assessable share of common stock, par value $0.01 per share, of the Company. In connection with any conversion hereunder, each holder of Series B Convertible Preferred Stock if such conversion occurred would cause such holder or any of its assignees to beneficially own more than 4.99% of the common stock of the Company.
10. Common Stock
a) On April 13, 2012,October 8, 2015, the Company effected a reverse split of the issue and outstandingissued 435,000 shares of common stock onfor proceeds of $217 upon the exercise of warrants.
b) On November 20, 2015, the Company entered into a 30 for 1 basis. All share and per share amounts have been retroactively adjusted for all periods presented.
On December 23, 2013,exchange agreement with a significant shareholder of the Board approved an amendment toCompany, whereby the Articles of Incorporation to increase the authorizedshareholder exchanged 20,000,000 shares of common stock to 500,000,000 shares and authorize 3,550,000for 5,000 shares of “blank check” preferred stock, par value $0.01.Series B Convertible Preferred Stock.
Share
There were no share transactions forduring the year ended December 31, 2013:2014.
F-18 |
US Highland, Inc. Notes to the Consolidated Financial Statements For The Years Ended December 31, 2015 and 2014 |
a)On February 15, 2013, the Company issued 5,000,000 shares of common upon the exercise of a warrant at $0.0005 per share described in Note 9(f) for cash proceeds of $2,500. 11. Stock Purchase Warrants
b)On March 13, 2013, the Company issued 4,500,000 shares of common stock in consideration for cash at $0.05 per share.
c)On March 18, 2013, a directorA summary of the Company converted $21,000 of amounts owed to him bychanges in the Company into 420,000 shares ofCompany's common stock. The amount owed had no terms of repayment and was non-interest bearing.
24share purchase warrants is presented below:
US Highland, Inc.
Notes to the Consolidated Financial Statements
For The Years Ended December 31, 2013 and 2012
d)On October 25, 2013, the Company issued 533,333 shares to a consultant as part of a settlement agreement to settle $80,000 of amounts owed to the consultant. The fair value of the shares was $26,667 and the Company recorded a gain on the settlement of debt of $53,333.
9. Stock Purchase Warrants
a)On January 23, 2013, the Company issued a warrant to purchase 5,000,000 common shares at $0.0005 per share exercisable for three years pursuant to the management securities agreement described in Note 10(f). The Company recorded the fair value of the warrant of $2,599,801 as consulting expense. On February 15, 2013 the Company issued 5,000,000 common shares upon the exercise of the warrant. Upon the exercise of the warrants the Company reclassified the fair value of the warrant of $3,249,778 to additional paid in capital. During the year ended December 31, 2013, the Company recorded a loss on the change in fair value of the derivative liability of $649,977 prior to the exercise of the warrant.
b)On April 1, 2013,2, 2014, the Company entered into a settlement agreement with a consultant to settle $149,971$11,800 of services provided in 2012. Pursuant to the agreement, the Company will pay $10,000 and issued a warrant to purchase 300,00043,750 shares of common stock at $0.0005 per share for three years. The warrants meet the criteria for classification as a derivative liability and duringthe Company uses Level 3 inputs for its valuation methodology for the warrant derivative liabilities as their fair values were determined by using the Black-Scholes option pricing model based on various assumptions described in note 8. The initial value of these warrants was $41,806. During the year ended December 31, 2013,2014, the Company recorded a gainloss on the change in fair value of the derivative liability of $69,085.$37,169. As of December 31, 2015, these warrants expired without exercised.
c)
b) On April 8, 2013,January 3, 2014, the Company entered into a settlement agreement with a consultant to settle $149,971$41,806 of services provided in 2012. Pursuant to the agreement, the Company will pay $10,000 and issued a warrant to purchase 300,000155,000 shares of common stock at $0.0005 per share for three years. The warrants meet the criteria for classification as a derivative liability and duringthe Company uses Level 3 inputs for its valuation methodology for the warrant derivative liabilities as their fair values were determined by using the Black-Scholes option pricing model based on various assumptions described in note 8. The initial value of these warrants was $11,800. During the year ended December 31, 2013,2014, the Company recorded a loss on the change in fair value of the derivative liability of $69,084.
d)On September 4, 2013, the Company issued a consultant 100,000 warrants for $29,655 of services. The warrant meets the criteria for classification as a derivative liability and during$10,491. During the year ended December 31, 2013,2015, the Company recorded a gain on the change in fair value of the derivative liability of $3,138.$26,352.
Number Weighted Average Exercise Price Weighted Average Expected Life Balance December 31, 2013 0.70 years Issued Expired Balance December 31, 2014 1.10 years Exercised Expired Balance December 31, 2015 0.48 years 27,214,166 $ 0.08 198,750 0.0005 (25,166,666 ) 0.08 2,246,250 $ 0.08 (435,000 ) 0.0005 (956,250 ) 0.19 855,000 $ 0.0005
12. Earnings (Loss) Per Share
e)On December 23, 2013, the Company entered into a settlement agreement with a consultant to settle $88,445 of services provided in 2012. Pursuant to the agreement, the Company will pay $7,500 and issued a warrant to purchase 300,000 shares of common stock at $0.0005 per share for three years. The warrant meets the criteria for classification as a derivative liability and during the year ended December 31, 2013, the Company did not recognize a gain or loss on the change in fair value
A reconciliation of the derivative liability.
f)On December 30, 2013, the Company entered into a settlement agreement with a consultant to settle $36,425components of services provided in 2012. Pursuant to the agreement, the Company issued a warrant to purchase 135,000 shares ofbasic and diluted net income per common stock at $0.0005 per share for three years. The warrant meets the criteria for classification as a derivative liability and during the year ended December 31, 2013, the Company did not recognize a gain or loss on the change in fair value of the derivative liability.
g)On December 30, 2013, the Company entered into a settlement agreement with a consultant to settle $26,982 of services provided in 2012. Pursuant to the agreement, the Company issued a warrant to purchase 100,000 shares of common stock at $0.0005 per share for three years. The warrant meets the criteria for classification as a derivative liability and during the year ended December 31, 2013, the Company did not recognize a gain or loss on the change in fair value of the derivative liability
h)During the year ended December 31, 2013, the Company issued 25,000,000 (2012 - 934,166) warrants to purchase 25,000,000 (2012 - 934,166) shares of common stock pursuant to the convertible note agreements described in Note 6(g) to (k). (2012 - Notes 6(b), 6(c) and 6(d)).
A summary of the changesis presented in the Company’s common share purchase warrants is presentedtables below:
|
Number | Weighted Average Exercise Price | Weighted Average Expected Life |
|
|
|
|
Balance December 31, 2011 | 45,000 | $ 6.00 | 2.75 years |
|
|
|
|
Issued | 2,934,166 | 0.11 |
|
Exercised | (2,000,000) | 0.0005 |
|
|
|
|
|
Balance December 31, 2012 | 979,166 | $ 0.59 | 2.33 years |
|
|
|
|
Issued | 31,235,000 | 0.0481 |
|
Exercised | (5,000,000) | 0.0005 |
|
|
|
|
|
Balance December 31, 2013 | 27,214,166 | $ 0.08 | 0.70 years |
For the Year Ended December 31, 2015 2014 Net Income Weighted Average Common Shares Outstanding Per Share Net Loss Weighted Average Common Shares Outstanding Per Share Basic: Income (loss) attributable to common stock Effective of Dilutive Securities: Share purchase warrants Convertible notes Preferred stock Diluted: Income (loss) attributable to common stock, including assumed conversions 25$ 15,066,472 75,581,000 $ 0.20 $ (17,908,057 ) 77,728,000 $ (0.23 ) – 855,000 – – – – 71,510 50,131,000 – – – – – 53,815,000 – $ 15,137,982 180,382,000 $ 0.08 $ (17,908,057 ) 77,728,000 $ (0.23 )
F-19 |
US Highland, Inc.
Notes to the Consolidated Financial Statements
For The Years Ended December 31, 2013 and 2012
10. Commitments
US Highland, Inc. Notes to the Consolidated Financial Statements For The Years Ended December 31, 2015 and 2014 |
a)The Company entered into a consulting agreement dated September 20, 2011 with a director of the Company for services to be provided for a term of three years. The Company agreed to pay $2,250 per month, as well as issue 16,667 post-reverse split shares of common stock. On July 31, 2012, the Company issued 500,000 shares of common stock. The Company erred and should have issued the director 16,667 shares and cancelled 483,333 of the shares during the year ended December 31, 2013. During the year ended December 31, 2013, the Company recorded $10,000 (December 31, 2012 - $42,250) of professional fees. During year ended December 31, 2013, the director agreed to suspend the agreement.13. Commitments
b)The Company entered into an employment agreement dated October 14, 2011 with an officer of the Company for services to be provided for an initial term of three years, and on a year-to-year basis thereafter. The Company agreed to pay $8,000 per month, increasing to $10,000 per month on the seventh month, and further to $12,000 per month on the tenth month. During the year ended December 31, 2013, the Company recorded $144,000 (December 31, 2012 - $140,000) of general and administrative expenses.
c)The Company entered into a consulting agreement dated October 20, 2011 with a director of the Company for services to be provided for a term of three years. The Company agreed to pay $2,250 per month, as well as issue 6,667 post-reverse split shares of common stock. The shares were issued on October 25, 2011. The Company recorded $24,750 of general and administrative expenses during the year ended December 31, 2012. The agreement was terminated in 2013 and no fees were recorded.
d)The Company entered into an employment agreement dated November 10, 2011 with an officer of the Company for services to be provided for an initial term of three years, and on a year-to-year basis thereafter. The Company agreed to pay $6,000 per month, increasing to $8,000 per month on the seventh month, and further to $10,000 per month on the tenth month. During the year ended December 31, 2013, the Company recorded $48,445 (December 31, 2012 - $116,000) of professional fees. During the year ended December 31, 2013, the Company agreed to terminate the agreements.
e)The Company entered into two employment agreements dated November 10, 2011, effective June 15, 2011, with two employees for services to be provided for an initial term of three years, and on a year-to-year basis thereafter. The Company agreed to pay each employee $6,000 per month, increasing to $8,000 per month on the seventh month, and further to $10,000 per month on the tenth month.During the year ended December 31, 2013, the Company recorded $264,942 (December 31, 2012 - $232,000) of professional fees. During the year ended December 31, 2013, the Company agreed to terminate the agreements.
f)On October 1, 2012, the Company entered into a management securities agreement with a consultant. Pursuant to the agreement the Consultant will provide management services for a period of one year in consideration for a warrant to purchase 2,000,000 common shares of the Company at $0.0005 per share exercisable for 3 years (exercised). An amendment to the services agreement entered into on January 23, 2013. Pursuant to the amendment the consultant will provide additional services in consideration for $20,000 per month from February 1, 2013 to March 31, 2014 and a warrant to purchase 5,000,000 common shares of the Company at $0.0005 per share for 3 years (exercised subsequently). On October 28, 2013, the Company entered into a settlement agreement to terminate the contract with the consultant effective July 10, 2013. Refer to Note 9(a).
g)During the year ended December 31,a) In 2012, the Company entered into two leases for the provision of office and warehouse space until April 30, 2015. On April 1,In 2013, the Company entered into an amendment to the lease agreements. Pursuant to the amendment, one of the leases was terminated and the other was extended to March 31,June 30, 2019. During the year ended December 31, 2013,2015, the Company recognized $49,659$74,927 (2014 - $61,994) of rent expense. The Company’sCompany's future minimum lease payments are as follows:
Fiscal year ending Amount December 31, 2016 December 31, 2017 December 31, 2018 December 31, 2019 Total 65,970 67,963 69,956 17,863 $ 221,752
On March 2, 2016, due to a dispute between the Company and Pine Street Investment Group, LLC, the landlord (the "Landlord") of the Company's warehouse located at 1411 N. 105th E. Avenue, Tulsa, OK 74116 (the "Warehouse") relating to outstanding rent, incurred expenses and legal fees for the aggregate of amount of $92,581, the assets of the Company stored in the warehouse were offered for sale at a public auction held at 8:00 a.m. (Central Time) on March 3, 2016 at the Warehouse.
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h)
b) The Company issued a $500,000 convertible note on July 25, 2013, of whichso long as any amounts are due hereunder, the Company is obligated to remit to the lender 100% of all revenues, payments and receivables from the sale of the first 50 engines sold by the Company.
c) On June 17, 2014, the Company was informed that a debtor will be instituting legal proceedings against the Company for collection of the sum of $76,712. The Company believes it owes the debtor $9,986 which it has recorded as owing. Accordingly, the Company is currently defending these potential matters vigorously.
d) On December 16, 2013, the Company was informed that a vendor will be instituting legal proceedings against the Company for collection of the sum of $12,455. The Company believes it does not owe the vendor anything. Accordingly, the Company is currently defending these potential matters vigorously.
e) On July 8, 2014, the Company filed civil actions against John R. Fitzpatrick, III, its former Chief Executive Officer, President, Chief Financial Officer, and a former director of the Company and against Mr. Steven ("Posie") Pfaff, the Director of Manufacturing of the Company regarding an employment dispute. Mr. Fitzpatrick and Mr. Pfaff have answered the Petition and asserted various counterclaims against US Highland, Inc. and third party claims against directors of the Company and one of the Company's attorneys. Mr. Fitzpatrick and Mr. Pfaff also filed complaints with the Oklahoma Department of Labor. On March 3, 2015, the Oklahoma Department of Labor entered awards of $72,000 in favor of Mr. Fitzpatrick and $54,000 in favor of Mr. Pfaff. Subsequent to the year ended December 31, 2015, the Company entered into a Release of Claims and Settlement Agreement with Mr. Fitzpatrick and Mr. Pfaff, whereby it agreed to pay a total of $200,000. Refer to Note 15(d).
f) On September 28, 2015, USH Distribution, Corp., a wholly owned subsidiary of the Company, ("USH Distribution") entered into a consignment agreement whereby USH Distribution will sell workwear apparel manufactured by the consignor in the United States. The agreement shall expire and terminate 18 months from the effective date of the agreement.
F-20 |
26
US Highland, Inc. Notes to the Consolidated Financial Statements For The Years Ended December 31, 2015 and 2014 |
14. Income Taxes
US Highland, Inc.
Notes to the Consolidated Financial Statements
For The Years Ended December 31, 2013 and 2012
11. Income Taxes
Pursuant to ASC 740 the Company is required to compute tax asset benefits for net operating losses carried forward. The potential benefit of net operating losses have not been recognized in the consolidated financial statements because the Company cannot be assured that it is more likely than not that it will utilize the net operating losses carried forward in future years. The Company did not incur any income tax expense for the years ended December 31, 20132015, and 2012.2014. At December 31, 2013, $8,373,4212015, $10,378,495 of federal and state net operating losses were available to the Company to offset future taxable income, which will expire commencing in 2030. Given the short history of the Company and the uncertainty as to the likelihood of future taxable income, the Company has recorded a 100% valuation reserve against the anticipated recovery from the use of the net operating losses created at the inception or generated thereafter. The Company will evaluate the appropriateness of the valuation allowance on an annual basis and adjust the allowance as considered necessary.
The components of the net deferred tax asset at December 31, 2013,2015, and 2012,2014, the statutory tax rate, the effective tax rate, and the amount of the valuation allowance are indicated below:
|
|
|
| December 31, 2013 |
| December 31, 2012 |
|
|
|
|
|
|
|
Net loss before taxes |
|
| $ | (32,107,140) | $ | (6,809,825) |
Statutory rate |
|
|
| 34% |
| 34% |
|
|
|
|
|
|
|
Computed expected tax (recovery) |
|
| $ | (10,916,428) | $ | (2,315,341) |
Depreciation |
|
|
| 3,621 |
| 2,871 |
Accretion |
|
|
| 100,469 |
| 1,136,633 |
Loss on derivatives |
|
|
| 9,412,996 |
| 1,375,039 |
Loss (gain) on settlement of debt |
|
|
| (22,690) |
| (1,409,629) |
Stock-based compensation |
|
|
| 899,313 |
| 413,224 |
Net operating loss |
|
|
| 522,719 |
| 797,203 |
Valuation allowance |
|
|
| (522,719) |
| (797,203) |
|
|
|
|
|
|
|
Net deferred taxes |
|
| $ | – | $ | – |
December 31, 2015 December 31, 2014 Net operating loss carryforwards Valuation allowance Net deferred taxes $ 3,528,688 $ 3,290,476 (3,528,688 ) (3,290,476 ) $ – $ –
The items accounting for the difference between income taxes computed at the statutory rates and the provisions for income taxes are as follows for the years ended December 31, 2015 and 2014:
December 31, 2015 December 31, 2014 Net loss before taxes Statutory rate Computed expected tax (recovery) Depreciation Accretion Loss on derivatives Loss on write-down of inventory Gain on settlement of debt Gain on sale of equipment Shares issuable for interest expense Net operating loss Change in valuation allowance Net deferred taxes $ 15,066,472 $ (17,908,057 ) 34 % 34 % $ 5,122,600 $ (6,088,739 ) 1,897 3,199 263,058 510,314 (4,965,322 ) 5,590,617 – 42,709 (675,959 ) (493,652 ) – (361 ) 15,514 7,601 238,212 428,312 (238,212 ) (428,312 ) $ – $ –
The Company follows the provisions of FASB ASC Subtopic 740-10-65-1, Income Taxes. As of December 31, 20132015, and 2012,2014, the Company did not recognize any liability for unrecognized tax benefits.
12.
F-21 |
US Highland, Inc. Notes to the Consolidated Financial Statements For The Years Ended December 31, 2015 and 2014 |
15. Subsequent Events
a)On January 2, 2014, the Company entered into a settlement agreement with a consultant to settle $11,800 of services provided in 2012. Pursuant to the agreement, the Company issued a warrant to purchase 43,750 shares of common stock at $0.0005 per share for three years.
b)On January 3, 2014, the Company entered into a settlement agreement with a consultant to settle $41,806 of services provided in 2012. Pursuant to the agreement, the Company issued a warrant to purchase 155,000 shares of common stock at $0.0005 per share for three years.
c)On January 17, 2014,4, 2016, the Company entered into a note payable with a relatedthird party, pursuant to which the Company received proceeds of $50,000.$45,000. The note is bears interest at an annual rate of 8% per annum and is due on January 17, 2016.4, 2017.
d)
b) On January 29, 2014,February 11, 2016, the Company entered into a convertible promissory note payable with a relatedthird party, pursuant to which the Company received proceeds of $50,000.$137,500. The note is convertible at a price equal to 60% of the lowest trading price of the Company's common stock for the 20 prior trading days, bears interest at an annual rate of 8% per annum and is due on January 29, 2016.February 11, 2017.
e)
c) On February 27, 2014, the Company received additional advances of $6,000 from a director. The amount is unsecured, non-interest bearing and due on demand.
f)On March 3, 2014,11, 2016, the Company entered into a convertible promissory note payable with a relatedthird party, pursuant to which the Company received proceeds of $50,000.$137,500. The note is convertible at a price equal to 60% of the lowest trading price of the Company's common stock for the 20 prior trading days, bears interest at an annual rate of 8% per annum and is due on March 3, 2016.February 11, 2017.
g)
d) On March 19, 2014,February 22, 2016, the Company entered into a note payableRelease of Claims and Settlement Agreement with a related party, pursuantJohn R. Fitzpatrick, III, Steven Pfaff, and certain of the Company's officers and directors. Pursuant to whichthe settlement agreement, the parties discharged each other from all claims actions, demands, costs, losses, damages, and expenses relating to Mr. Fitzpatrick's and Mr. Pfaff's previous employment with the Company received proceedsin consideration for an aggregate settlement amount of $150,000.$200,000 in two installments. The note is bears interest at an annual rate of 8% per annumCompany and due on March 19, 2016.the directors also agreed to execute and deliver a pocket judgement against them which shall not be filed unless the Company fails to make the scheduled payments under the settlement agreement.
h)
e) On April 25, 2014,February 26, 2016, the Company entered into a promissory note payable with a related party, pursuantUSH Distribution Corp. ("Maker"). The Maker promises to whichpay the Company received proceedsa principal sum of $25,000.$70,000. The note is bears interest at an annual rate of 8% per annum and is due on April 25, 2016.February 26, 2017.
f) On March 30, 2016, the Company entered into a promissory note with USH Distribution Corp. The Maker promises to pay the Company a principal sum of $12,500. The note bears interest at 8% per annum and is due on March 30, 2017.
27
F-22 |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable
As previously reported in a Form 8-K filed and amended on May 22, 2015, May 19, 2015, we engaged GBH CPAs, PC ("GBH") as our principal independent accountants. On May 19, 2015, we dismissed Friedman LLP ("Friedman") as our independent registered public accounting firm. The decision to terminate the services of Friedman and retain GBH as the principal independent accountants was approved by our board of directors.
In connection with the foregoing change in accountants, there was no disagreement of the type described in paragraph (a)(1)(iv) if Item 304 of Regulation S-K or any reportable event as described in paragraph (a)(1)(v) of such Item.
ITEM 9A. CONTROLS AND PROCEDURESEvaluation of Controls and Procedures.
Disclosure Controls
In accordance with Exchange Act Rules 13a-15 and Procedures
We carried out15d-15, our management is required to perform an evaluation under the supervision and with the participation of ourthe Company's 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 itsCompany's principal executive and principal financial officers, or persons performing similar functions, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as appropriate to allow timely decisions regarding required disclosure. of the end of the period.
Based uponon their evaluation of our evaluation,disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2015, our chief executive officerPrincipal Executive Officer and chief financial officerPrincipal Financial Officer have concluded that our disclosure controls and procedures were not effective, as of December 31, 2013, 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.effective.
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.
The Company had not filed its quarterly reports or any annual reports with the SEC since the fourth quarter of 2012. Management intends to implement internal controls to ensure that similar situations do not occur in the future and that required SEC filings will be timely. Management has retained the services of a new accounting firm, as well as an auditing firm specializing in public companies and a strong reputation in the auditing community. We have also hired a highly qualified Chief Financial Officer with extensive experience with public companies in the manufacturing industry. This newly implemented three tier process ties the Company’s bookkeeping activities with a full service accounting firm that handles all financial reporting activities and the Company’s interface with the selected auditing firm.
Management's Annual Report on Internal Control overOver Financial Reporting:
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in RulesRule 13a-15(f) andor 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, a company’sthe Company's principal executive and principal financial officers, or persons performing similar functions, and effected by a company’sthe Company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted accounting principles. Our internal control over financial reportingin the United States of America and includes those policies and procedures that: pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Our
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As of December 31, 2015, management assessed the effectiveness of our internal control over financial reporting asbased on the criteria for effective internal control over financial reporting established in Internal Control-Integrated Framework of December 31, 2013. In making this assessment, management used the 1992 framework set forth in the report entitledInternal Control—Integrated Framework 1992issued by the Committee of Sponsoring Organizations of the Treadway Commission or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information("COSO") and communication, and (v) monitoring.SEC guidance on conducting such assessments. Based on our assessment,that evaluation under this framework, our management has concluded that as of the year ended December 31, 2013,2015, our internal control over financial reporting iswas not effective based on those criteria.because of the following material weaknesses:
Changes
· | Due to our small number of employees and resources, we have limited segregation of duties, as a result of which there is insufficient independent review of duties performed. | |
· | As a result of the limited number of accounting personnel, we rely on outside consultants for the preparation of our financial reports, including financial statements and management discussion and analysis, which could lead to overlooking items requiring disclosure. | |
· | The Company's Board of Directors has only two directors and does not have an audit committee or an independent audit committee financial expert. While not being legally obligated to have an audit committee or independent audit committee financial expert, it is the management's view that to have an audit committee, comprised of independent board members, and an independent audit committee financial expert is an important entity-level control over the Company's financial statements. |
A "material weakness" is a deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) auditing standard 5) or combination of deficiencies in Internal Control over Financial Reporting
There were no changes in our system of internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. Management has determined that a material weakness exists due to the items stated above, resulting from the Company's limited resources and personnel.
Management's Remediation Initiatives
In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, if and when the Company obtains sufficient capital resources, management intends to hire personnel with sufficient U.S. GAAP knowledge and experience and to segregate appropriate duties among them. We also intend to appoint one or more independent members to our Board of Directors who shall also be appointed to a standing audit committee which will undertake the oversight in the establishment and monitoring of required internal controls and procedures such as reviewing and approving estimates and assumptions made by management. While we are actively seeking outside members, including candidates with accounting experience, we cannot provide any assurance that we will be successful. Given the size of our Company, lack of revenues and current lack of financing to continue with our business, it is unlikely that we will be able to hire any additional personnel or that anyone will agree to join our Board until general economic conditions and our own business prospects improve significantly.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management's report in this annual report.
Changes in Internal Controls
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 yearfourth quarter ended December 31, 20132015 that havehas materially affected, or areis reasonably likely to materially affect, ourthe Company's internal control over financial reporting.
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ITEM 9B. OTHER INFORMATION
Subsequent Events
None
· | As previously reportated on Form 8-K filed on January 13, 2016, on January 7, 2016, Josh W. Whitaker resigned as the President and Chief Executive Officer of the Company and from its Board of Directors, as well as an executive officer and director of the Company's two subsidiaries, USH Distribution Corp., a Nevada corporation ("USH"), and Powersports Brands Alliance, Inc., a Nevada corporation ("PBA"). Mr. Whitaker's resignations were not due to any disagreement with the Company, USH or PBA on any matter relating to their respective operations, policies or practices. | |
On January 8, 2016, the Board of Directors of the Company appointed Kevin G. Malone as the President of the Company, to serve at the pleasure of the Board until his respective successor is duly appointed or until his earlier resignation or removal. Also on January 8, 2016, Mr. Malone was appointed by each of the Boards of Directors of USH and PBA as the President of USH and PBA, respectively, to serve at the pleasure of each Board until his respective successor is duly appointed or until his earlier resignation or removal. | ||
· | As previously reportated on Form 8-K filed on Febuary 23, 2016, on February 11, 2016, the Company completed a financing pursuant to a Securities Purchase Agreement with Adar Bays, LLC ("Adar Bays") providing for the purchase of four (4) convertible promissory notes of the Company in the aggregate principal amount of $275,000, with the first note being in the amount of $137,500, the second note being in the amount of $41,250, the third note being in the amount of $41,250, and the fourth note being in the amount of $55,000) (together with any note(s) issued in replacement thereof or as a dividend thereon or otherwise with respect thereto in accordance with the terms thereof, the "Notes"). The First Note was funded on February 17, 2016 and matures on February 11, 2017. The First Note may be converted by the holder, at its option, to convert all or any amount of the principal face amount of the First Note then outstanding into shares of the Company's Common Stock at a price for each share of Common Stock equal to 60% of the lowest trading priceof the Common Stock as reported on the OTCQB maintained by the OTC Markets Group, Inc. upon which the Company's shares are traded or any exchange upon which the Common Stock may be traded in the future, for the 20 prior trading days including the day upon which a Notice of Conversion is received by the Company or its transfer agent. |
Upon (i) a transfer of all or substantially all of the assets of the Company to any person in a single transaction or series of related transactions, (ii) a reclassification, capital reorganization or other change or exchange of outstanding shares of the Common Stock, or (iii) any consolidation or merger of the Company with or into another person or entity in which the Company is not the surviving entity (other than a merger which is effected solely to change the jurisdiction of incorporation of the Company and results in a reclassification, conversion or exchange of outstanding shares of Common Stock solely into shares of Common Stock) (each of items (i), (ii) and (iii) being referred to as a "Sale Event"), then, in each case, the Company shall, upon request of the Holder, redeem this Note in cash for 150% of the principal amount, plus accrued but unpaid interest through the date of redemption, or at the election of the Holder, such Holder may convert the unpaid principal amount of this Note (together with the amount of accrued but unpaid interest) into shares of Common Stock immediately prior to such Sale Event at the Conversion Price.
The closing of the Second Note shall occur on the third (3rd) monthly anniversary of the closing of the First Note. The closing of the Third Note shall occur on the fourth (4th) monthly anniversary of the closing of the First Note. The closing of the Fourth Note shall occur on the sixth (6th) monthly anniversary of the closing of the First Note. Each closing shall be contingent upon the Common Stock of the Company maintaining a closing bid price in excess of $0.18 for the 10 prior trading days and an aggregate trading volume of not less than $200,000 for the ten prior trading days. The Notes shall contain a 10% OID such that the purchase price shall be: $125,000 for the First Note, $37,500 for the Second Note, $37,500 for the Third Note, and $55,000 for the Fourth Note.
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· | As previously reportated on Form 8-K filed on Febuary 23, 2016, on February 11, 2016, the Company entered into a Securities Purchase Agreement, dated February 11, 2016, with Union Capital, LLC ("Union Capital") providing for the purchase of four convertible promissory notes of the Company in the aggregate principal amount of $275,000, with the first note being in the amount of $137,500, the second note being in the amount of $41,250, the third note being in the amount of $41,250, and the fourth note being in the amount of $55,000) (together with any note(s) issued in replacement thereof or as a dividend thereon or otherwise with respect thereto in accordance with the terms thereof, the "Notes"). The First Note was funded on February 19, 2016 and matures on February 11, 2017. The First Note may be converted by the holder, at its option, to convert all or any amount of the principal face amount of the First Note then outstanding into shares of the Company's Common Stock at a price for each share of Common Stock equal to 60% of the lowest trading priceof the Common Stock as reported on the OTCQB maintained by the OTC Markets Group, Inc. upon which the Company's shares are traded or any exchange upon which the Common Stock may be traded in the future, for the 20 prior trading days including the day upon which a Notice of Conversion is received by the Company or its transfer agent. |
Upon (i) a transfer of all or substantially all of the assets of the Company to any person in a single transaction or series of related transactions, (ii) a reclassification, capital reorganization or other change or exchange of outstanding shares of the Common Stock, or (iii) any consolidation or merger of the Company with or into another person or entity in which the Company is not the surviving entity (other than a merger which is effected solely to change the jurisdiction of incorporation of the Company and results in a reclassification, conversion or exchange of outstanding shares of Common Stock solely into shares of Common Stock) (each of items (i), (ii) and (iii) being referred to as a "Sale Event"), then, in each case, the Company shall, upon request of the Holder, redeem this Note in cash for 150% of the principal amount, plus accrued but unpaid interest through the date of redemption, or at the election of the Holder, such Holder may convert the unpaid principal amount of this Note (together with the amount of accrued but unpaid interest) into shares of Common Stock immediately prior to such Sale Event at the Conversion Price.
The closing of the Second Note shall occur on the third (3rd) monthly anniversary of the closing of the First Note. The closing of the Third Note shall occur on the fourth (4th) monthly anniversary of the closing of the First Note. The closing of the Fourth Note shall occur on the sixth (6th) monthly anniversary of the closing of the First Note. Each closing shall be contingent upon the Common Stock of the Company maintaining a closing bid price in excess of $0.18 for the 10 prior trading days and an aggregate trading volume of not less than $200,000 for the ten prior trading days. The Notes shall contain a 10% OID such that the purchase price shall be: $125,000 for the First Note, $37,500 for the Second Note, $37,500 for the Third Note, and $55,000 for the Fourth Note.
The Notes also contain certain representations, warranties, covenants and events of default, and increases in the amount of the principal and interest rates under the Notes in the event of such defaults. The Notes may be prepaid by the Company at any time during the first 180 days after the date of issuance of the Notes subject to the payment of prepayment penalties as described in the Notes. The foregoing is only a brief description of the material terms of the Securities Purchase Agreement and First Note, and does not purport to be a complete description of the rights and obligations of the parties thereunder, and such descriptions are qualified in their entirety by reference to the agreements which are filed as an exhibit to this Current Report. The issuance of the Notes was made 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 Notes was an "accredited investor," as defined under the Securities Act.
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· | As previously reportated on Form 8-K filed on March 1, 2016, on February 22, 2016, the Company, John Fitzpatrick III, the Company's former President, Chief Executive Officer, Chief Financial Officer; Steven Pfaff, the Company's former Director of Marketing; 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. | |
· | As previously reportated on Form 8-K filed on March 2, 2016, on March 1, 2016, the Company entered into that certain agreement (the "Agreement") with Mr. John D. Gibbs ("Gibbs" or the "Lender"), relating to that certain convertible promissory note, as amended, issued by the Company to Gibbs on July 23, 2013 for the principal amount of $500,000 and secured by all of the tangible and intangible assets of the Company pursuant to that certain Security Agreement, dated July 23, 2013, between the Company and the Lender (the "GibbsNote"). |
The Note, as amended, matures on December 31, 2016. From July 23, 2013, the issue date of the Note, until July 31, 2014, the original maturity date, the principal amount of the Note bore interest at a rate of 8%, compounded monthly, per annum. On December 31, 2015, the parties agreed that, effective as of August 31, 2014, the interest rate was increased to 12% per annum; provided, however, that it may be reduced to 8% for any period of time in which interest is paid in cash and not accrued. As of the date of this Form 8-K, the outstanding principal and accrued interest on the Note is an aggregate of $648,375.
· | As previously reported on Form 8-K filed on March 2, 2016, due to a dispute between the Company and Pine Street Investment Group, LLC, the landlord (the "Landlord") of the Company's warehouse located at 1411 N. 105th E. Avenue, Tulsa, OK 74116 (the "Warehouse") relating to outstanding rent, incurred expenses and legal fees for the aggregate of amount of $92,581, the assets of the Company stored in the warehouse were offered for sale at a public auction held at 8:00 a.m. (Central Time) on March 3, 2016 at the Warehouse. The Company rented the Warehouse pursuant to that certain Lease Agreement, dated January 27, 2012, as amended. |
All proceeds of the public auction will be used to pay the Company's outstanding rental obligations to the Landlord. If the auction proceeds are more than the outstanding rent, the Landlord will remit such amount to the Company. Pursuant to the Agreement, the Company has agreed to remit all auction proceeds received from the Landlord in excess of the Company's outstanding obligations under the Lease to the Lender. Any amounts received by the Lender shall be applied, first, towards accrued interest and second, towards the principal amount under the Gibbs Note.
The Company still owns and maintains its intellectual property rights to engine platforms and plans to continue its development of these platforms in the power sports industry.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The following table sets forth certain information regarding our directors and executive officers:
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Robert H. Harris | 52 | Chairman of the Board of Directors | September 2011 | |||
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Kevin G. Malone | 50 | President, Director | February 2013 | |||
Deborah E. Engles | 49 | Interim Chief Financial Officer | -- |
Directors are elected to serve until the next annual meeting of stockholders and until their successors are elected and qualified. Directors are elected by a plurality of the votes cast at the annual meeting of stockholders and hold office until the expiration of the term for which he or she was elected and until a successor has been elected and qualified.
A majority of the authorized number of directors constitutes a quorum of the Board of Directors for the transaction of business. The directors must be present at the meeting to constitute a quorum. However, any action required or permitted to be taken by the Board of Directors may be taken without a meeting if all members of the Board of Directors individually or collectively consent in writing to the action.
Executive officers are appointed by, and serve at the pleasure of, the Board of Directors of the Company, subject to any contractual arrangements.
Business ExperienceRobert H. Harris, Chairman of the Board & Directorof Directors.
Mr. Robert Harris has served as a Chairman of the board of US Highland, Inc. since September 2011. From 2007 until 2013, he served as senior financial consultant and regional manager for St. James International, an independent investment consultancy firm headquartered in Malaga Spain. From 2005 to 2007, Mr. Harris founded, established and created a sports entertainment organization called Elite Fighting Federation Ltd. where he served as president. From 2004 to 2007, Mr. Harris was a licensed real estate broker in B.C., Canada specializing in investment real estate. From 1992 to 2004, Mr. Harris served in management and supervisory capacities with Carter Dodge Chrysler Ltd.
John R. Fitzpatrick, President, CEO, CFO &
Kevin G. Malone, Director
Mr. Fitzpatrick has been
On January 8, 2016, the Chief Executive Officer, President, Chief Financial Officer and a directorBoard of Directors of the Company since September 2011. From January 2010 through September 2011 he was Vice President of American Tissue Services Foundation, a company which provides allograph tissue for human transplants. From September 2001 through January 2010, he was president and chief executive officer ofLifeGuard America, a company he founded in the organ, tissue and eye procurement industry. Since 2008, he has served as a director ofAdvanced Law Enforcement Reserve Organization, a not for profit charitable company he founded to provide tactical training to law enforcement personnel at no cost to the officer.
Patrick Holmes, Director
Mr Holmes is a director and investor of US Highland, Inc. since September 2013. From 2011 to the present Mr. Holmes continues as a nationally recognized restorer and historian of vintage and antique motorcycles. From 1998 until 2011 Mr Holmes built a two location business in the field of vehicle collision repair in the city of Colorado Springs, Colorado. From 1996 until 1998 Mr. Holmes was General Manager of the “Otis Chandler Vintage Museum or Transport and Wildlife in Oxnard, California. From 1990 to 1996 Mr Holmes opened and operated two Pizza
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restaurants in Santa Barbara, California which he sold in 1996. Mr Patrick Holmes emigrated from England to the United States, as East coast manager for a holiday tour wholesaler in 1984.
appointed Kevin G. Malone Director
Sinceas the President of the Company. Also on January 8, 2016, Mr. Malone was appointed by each of the Boards of Directors of USH and PBA as the President of USH and PBA, respectively, to serve at the pleasure of each Board until his respective successor is duly appointed or until his earlier resignation or removal. Mr. Malone has been serving as a member of the Company's Board of Directors since February 2013 Kevin Malone has servedand of each of the Boards of Directors of USH and PBA since their respective incorporations on September 23, 2015. From 1985 until his joining the board of US Highland Inc. Prior to joining US HighlandCompany in February 2013, Mr. Malone has worked in the financial service industry since 1985.industry. From March 2009 through October 2012, Mr. Malone served as head trader for R.F. Lafferty & Company, Inc. From January 2006 until March 2009, Mr. Malone worked in the same capacity at Westminster Securities Corporation. From December 2002 through January 2006, Mr. Malone worked for Aegis Capital Corporation.
Adrian Lee
Adrian Lee
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Deborah E. Engles, Interim Chief Financial Officer
Deborah E. Engles has been serving as the Interim Chief Financial Officer of the Company since August 2014. From 2012 to 2014, she served onas its Executive Manager of Administration and Finance, and from 2009 to 2012, she served as US Highland Inc.'s Office Manager. From 2006 to 2010, she served as Officer Manager to several small startup companies.
Director Independence
We are not currently subject to listing requirements of any national securities exchange or inter-dealer quotation system which has requirements that a majority of the Board of Directors from October 2011 until February 2013 when he resignedbe "independent" and, was replaced by Kevin Malone. From 2006 until 2010, Mr. Lee founded his own automotive dealership called Prestigious Motorcar Retail Company, located in the United Kingdom, which focused on restoration of vintage cars which he sold in November 2010. From January 2003 to December 2006, he served as a Commercial Sales Directorresult, we are not at this time required to have our Board of Stonacre Automotive Dealership located in Doncaster, Yorkshire, United Kingdom. From 1986 until 1992 Mr. Lee served Her Majesty’s Royal Navy ForcesDirectors comprised of a majority of "independent directors." Nevertheless, Robert H. Harris would qualify as a Clearance Diver. Adrian Lee is an expert in mechanical engineeringindependent under the applicable standards of the SEC and retail salesthe NASDAQ stock market and has extensive experience in the automotive and tool making industries.
Cathy S. Allison, Chief Operating Officer (COO)
Cathy Allison served as the COO for the Company from June 2011 until December 2013 when she resigned as COO and accepted a consulting role with the Company as its Quality Consultant. From November 2008Kevin G. Malone would not qualify due to the present Ms. Allison serves as a Business Technology Analyst atfact that he is also an executive officer of the Missouri University of Science & Technology. From May 2007 through October 2008 Ms. Allison served as a Production Planning Manager at Brewer Science Inc. From September 2002 until May 2007 Ms. Allison was the Operations Division Manager at Brewer Science Inc.Company.
Each director holds office until the next annual meeting of stockholders or until their successor has been duly elected and qualified. Executive officers are elected annually and serve at the discretion of our board of directors.
Family Relationships
There are no familial relationships among any of our directors or officers.
Involvement in Certain Legal Proceedings
None of our directors or officers is a director in any other U.S. reporting companies other than as disclosed above. None of our directors orexecutive officers has been affiliated withinvolved in any companyof the following events during the past ten years:
· | any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; | |
· | any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offences); | |
· | being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his or her involvement in any type of business, securities or banking activities; or | |
· | being found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated. |
Audit Committee
We currently do not have a separately standing Audit Committee due to our limited size and our Board performs the functions that has filed for bankruptcy within the last ten years. would otherwise be performed by an Audit Committee.
Compensation Committee
The Company does not have a Compensation Committee due to our limited size and our Board performs the functions that would otherwise be performed by a Compensation Committee. Our Board intends to form a Compensation Committee when needed.
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Other Committees
We do not currently have a separately-designated standing nominating committee. Further, we do not have a policy with regard to the consideration of any director candidates recommended by security holders. To date, no security holders have made any such recommendations. The entire Board of Directors performs all functions that would otherwise be performed by committees. Given the present size of our Board, it is not practical for us to have committees other than those described above, or to have more than two directors on such committees. If we are able to grow our business and increase our operations, we intend to expand the size of our board and our committees and allocate responsibilities accordingly.
Potential Conflicts of Interest
Since we do not have an audit or compensation committee comprised of independent directors, the functions that would have been performed by such committees are performed by our directors. The Board of Directors has not established an audit committee and does not have a financial expert, nor has the Board established a nominating committee. The Board is of the opinion that such committees are not necessary since the Company has only five directors, and to date, such directors have been performing the functions of such committees. Thus, there is a potential conflict of interest in that our directors and officers have the authority to determine issues concerning management compensation, nominations, and audit issues that may affect management decisions. We are not aware of any proceedings to whichother conflicts of interest with any of the Company’sour executive officers or directors.
Significant Employees
We do not have any significant employees other than our current executive officers and directors or any associate of any such officer or director, is a party adverse to the Company or any of the Company’s subsidiaries or has a material interest adverse to it or any of its subsidiaries.named in this Report.
Code of Ethics
We have not yet adopted a code of business conduct and ethics for all of our employees, including our principal executive officer, principal financial officer, principal accounting officer, and directors. Our codes of business conductWe intend to do so in the near future and ethics are availableto post it on our Web sitewebsite at www.ushighland.com. www.ushighland.com.
Our Web site and the information contained therein or incorporated therein are not intended to be incorporated into this Annual Report on Form 10-K or our other filings with the SEC.
Potential Conflicts of Interest
Since we do not have an audit or compensation committee comprised of independent directors, the functions that would have been performed by such committees are performed by our directors. The Board of Directors has not established an audit committee and does not have a financial expert, nor has the Board established a nominating committee. The Board isCompliance with Section 16(a) of the opinion that such committees are not necessary sinceSecurities Exchange Act of 1934
Section 16(a) of the Company has only five directors, and to date, such directors have been performing the functions of such committees. Thus, there is a potential conflict of interest in that our directors and officers have the authority to determine issues concerning management compensation, nominations, and audit issues that may affect management decisions. We are not aware of any other conflicts of interest with any ofExchange Act requires our executive officers or directors.
Involvementand directors and persons who own more than 10% of a registered class of our equity securities to file with the SEC initial statements of beneficial ownership, reports of changes in Certain Legal Proceedings
Thereownership and annual reports concerning their ownership of our common stock and other equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% shareholders are no legal proceedingsrequired by the SEC regulations to furnish us with copies of all Section 16(a) reports that have occurred within the past ten years concerning our directors, or control persons which involved a criminal conviction, a criminal proceeding, an administrative or civil proceeding limiting one's participation in the securities or banking industries, or a finding of securities or commodities law violations.they file.
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· | During the fiscal year ended December 31, 2015, none of our officers and directors filed Section 16(a) reports. The Company's current officers and directors intends to file such reports in the near future. |
Other than the foregoing, based solely on our review of the copies of such forms received by us, we believe that all filing requirements applicable to our greater than 10% beneficial owners were complied with under Section 16(a) of the Exchange Act during the fiscal year ended December 31, 2015.
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ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual and long-termtotal compensation of our chiefpaid or accrued by the Company during the last two fiscal years indicated to (i) all individuals that served as the Company's principal executive officer and chief financial officer andor acted in a similar capacity for the Company at any time during the fiscal year ended December 31, 2015; (ii) the two most highly compensated employees and/or executive officers who servedwere serving as executive officers of the Company at the end of the fiscal years December 31, 2013 and 2012, and whose salary and bonus exceeded $100,000 for the fiscal yearsyear ended December 31, 20132015whose total compensation exceeded $100,000; and 2012,(iii) up to two additional individuals for services rendered in all capacitieswhom disclosure would have been provided pursuant to us.clause (ii) above but for the fact that the individual was not serving as an executive officer of the Company at the end of the fiscal year ended December 31, 2015.
Summary Compensation Table
Name & Principal Position Year Ended December 31, Salary ($) Bonus ($) Stock Awards ($) Option Awards ($) Non-Equity Incentive Plan Compensation ($) Nonqualified Deferred Compensation Earnings ($) All Other Compensation ($) Total ($) Josh W. Whitaker (1) 2015 2014 90,000144,000 (2) 0 0 0 0 0 0 144,000 (2) 90,000 0 0 0 0 0 0
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DIRECTOR COMPENSATION
Director Compensation
The RegistrantCompany does not compensate its directors other than the Chairman of the Board for their services as such. The RegistrantCompany paid Robert H. Harris as Chairman of the Board of Directors $0 in 20132015 and $42,500$0 in 2012.2014. The Registrant reimburses the directors for their reasonable out-of pocket expenses for attending meetings of the board of directors.
Long-Term Incentive Plans.
As of December 31, 2013, we2015, the Company had no group life, health, hospitalization, or medical reimbursement or relocation plans in effect. Further, wethe Company had no pension plans or plans or agreements which provide compensation on the event of termination of employment or corporate change in control.
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. In accordance with Securities and Exchange Commission rules, shares of our Common Stock which may be acquired upon exercise of stock options or warrants which are currently exercisable or which become exercisable within 60 days of the date of the applicable table below are deemed beneficially owned by the holders of such options and warrants and are deemed outstanding for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage of ownership of any other person. Subject to community property laws, where applicable, the persons or entities named in the tables below have sole voting and investment power with respect to all shares of our Common Stock indicated as beneficially owned by them.
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The following table lists,sets forth information with respect to the beneficial ownership of each class of our voting securities as of April 30, 2014, the number of shares of common stock of our Company that are beneficially owned15, 2016, by (i) each person or entityof our directors and executive officers, (iii) all of our directors and executive officers as a group and (iii) each stockholder known to our Companyby us to be the beneficial owner of more than 5% of our outstanding voting capital stock. To the outstanding common stock; (ii) each officer and directorbest of our Company; and (iii) all officers and directorsknowledge, except as a group. Information relating to beneficial ownership of common stock by our principal shareholders and management is based upon information furnished byotherwise indicated, each person using “beneficial ownership” concepts under the rules of the Securities and Exchange Commission. Under these rules, a person is deemed to be a beneficial owner of a security if that person has or shares voting power, which includespersons named in the power to vote or direct the voting of the security, or investment power, which includes the power to vote or direct the voting of the security. The person is also deemed to be a beneficial owner of any security of which that person has a right to acquire beneficial ownership within 60 days. Under the Securities and Exchange Commission rules, more than one person may be deemed to be a beneficial owner of the same securities, and a person may be deemed to be a beneficial owner of securities as to which he or she may not have any pecuniary beneficial interest. Except as noted below, each persontable has sole voting and investment power.power with respect to the shares of our capital stock beneficially owned by such person, except to the extent such power may be shared with a spouse. To our knowledge, none of the shares listed below are held under a voting trust or similar agreement, except as noted. To our knowledge, there is no arrangement, including any pledge by any person of securities of the Company or any of its parents, the operation of which may at a subsequent date result in a change in control of the Company.
Unless otherwise indicated in the following table, the address for each person named in the table is c/o US Highland, Inc. 1411 N. 105th East Avenue, Tulsa, OK 74116.
Common Stock Series A Preferred Stock Series B Preferred Stock Name and Address of Beneficial Owner Amount Percent of Class Amount Percent of Class Amount Percent of Class (1) (2) (3) Officers & Directors: Robert H. Harris -Chairman of the Board of Directors * Kevin G. Malone -President and Director * Deborah E. Engles -Interim Chief Financial Officer * All Directors and Officers as a group (3 persons) * 5% Stockholders: John D. Gibbs Tri Power Resources P.O. Box 849 Ardmore, OK 73402 AMHC Managed Services 2 North Cascade Ave., Suite 1400 Colorado Springs, CO 80903 Craigstone, Ltd. 88 Wood Street 10th Floor London, EC2V 7RS United Kingdom 436,557 0 0 0 0 1,875 0 0 0 0 8,669 0 0 0 0 447,211 0 0 0 0 8,818,374 15.16 % 4,915,707 (4) 8.45 % 2,484,422 73.47 % 5,000 100 %
__________________
* | Represents less than 1%. |
(1) | Based on 58,162,785 shares of Common Stock outstanding as of April 15, 2016. |
(2) | Based on 3,381,520 shares of Series A Preferred Stock outstanding as of April 15, 2016. |
(3) | Based on 5,000 shares of Series B Preferred Stock outstanding as of April 15, 2016. |
(4) | David Levine has voting and dispositive control of AMHC Managed Services and is deemed to be the indirect beneficial owner of these shares. |
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Securities Authorized for Issuance under Equity Compensation Plans
We have not adopted any equity compensation plans.
Changes in Control
We are not aware of any arrangements, including any pledge by any person of our securities, the operation of which may result in a change in control of the Company. However, pursuant to our Articles of Incorporation, our board has the authority, without further stockholder approval, to provide for the issuance of up to 3,550,000 shares of our preferred stock in one or more series and to determine the dividend rights, conversion rights, voting rights, rights in terms of redemption, liquidation preferences, the number of shares constituting any such series and the designation of such series. Our Board has the power to afford preferences, powers and rights (including voting rights) to the holders of any preferred stock preferences, such rights and preferences being senior to the rights of holders of common stock. As of April 14, 2016, 40,000 shares of "blank check" preferred stock remain available for designation and issuance. Although we have no present intention to issue any additional shares of preferred stock, the issuance of shares of preferred stock, or the issuance of rights to purchase such shares, may have the effect of delaying, deferring or preventing a change in control of our Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.
Under Rule 404 of Regulation S-K, we are required to describe any transaction, since the beginning of December 31, 2014, or any currently proposed transaction, in which the Company was or is to be a participant and in which any related person has or will have a direct or indirect material interest involving the lesser of $120,000 or one percent (1%) of the average of the Company's total assets as of the end of last two completed fiscal years. A related person is any executive officer, director, nominee for director, or holder of 5% or more of the Company's Common Stock, or an immediate family member of any of those persons.
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· | On March 13, 2013, the Company issued 4,500,000 shares of common stock to John Gibbs, a principal stockholder, in consideration for $0.05 per share, for a total purchase price of $225,000 in cash. | |
· | On March 18, 2013, the Company issued 420,000 shares of common stock to Robert Harris, a director, to convert a demand loan held by Mr. Harris. The shares were valued at $0.05 per share, the fair value on the date of grant. | |
· | On February 15, 2013, the Company issued 5,000,000 shares of common stock to AMHC Managed Services Inc. upon exercise of a warrant by AMHC at an exercise price of $0.0005 per share, for a total of $2,500. | |
· | On December 10, 2013, the Company issued 2,000,000 shares of common stock to AMHC Managed Services Inc. upon exercise of a warrant by AMHC at an exercise price of $0.0005 per share, for a total of $2,500. |
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
On May 19, 2015, we appointed GBH CPAs, PC of Houston, Texas, as our new independent certified public accountants for its year ended December 31, 2014, and for subsequent periods.
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Audit Fees
The aggregate fees billed the Company for the fiscal years ended December 31, 2015 and December 31, 2014 for professional services rendered by GBH CPAs, our principal accountants. for their audit of our annual financial statements and review of financial statements included in our quarterly reports or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years were:
Fiscal Year Ended December 31, 2015: Fiscal year ended December 31, 2014: $ 46,000 $ 7,000
Audit-Related Fees
The aggregate fees billed the Company for the fiscal years ended December 31, 2015 and 2014 for assurance and related services by the principal accountant that are reasonably related to the performance of the audit or review of the registrant's financial statements and are not reported under Item 9(e)(1) of Schedule 14A.
Fiscal Year Ended December 31, 2015: Fiscal year ended December 31, 2014: $ 0 $ 0
Tax Fees
The aggregate fees billed the Company for the fiscal years ended December 31, 2015 and 2014 for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning.
Fiscal Year Ended December 31, 2015: Fiscal year ended December 31, 2014: $ 0 $ 0
All Other Fees
The aggregate fees billed the Company for the fiscal years ended December 31, 2013 and 2014 for products and services provided by the principal accountant, other than the services reported in Items 9(e)(1) through 9(e)(3) of Schedule 14A.
Fiscal Year Ended December 31, 2015: Fiscal year ended December 31, 2014: $ 0 $ 0
Pre-Approval Policies and Procedures
We have not used GBH for financial information system design and implementation. These services, which include designing or implementing a system that aggregates source data underlying the financial statements or generates information that is significant to our financial statements, are provided internally or by other service providers. We never engaged GBH to provide compliance outsourcing services.
Our board of directors pre-approves all services provided by our independent auditors. All of the above services and fees were reviewed and approved by the board of directors either before or after the respective services were rendered. The board of directors has considered the nature and amount of fees billed by GBH and believes that the provision of services for activities unrelated to the audit is compatible with maintaining our independence.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Financial statements included in Part II hereof: | ||||
Consolidated Balance Sheets as at December 31, 2015 and 2014 | ||||
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Consolidated Statement of Changes in Stockholders' Deficit for the years ended December 31, 2015 and 2014 | ||||
Consolidated Statements of Cash Flows for the years ended December 31, 2015 and 2014 | ||||
Notes to the Consolidated Financial Statements |
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AMHC Managed Services 2 North Cascade Avenue, Suite 1400 Colorado Springs, Colorado 80903
| 7,533,333 | 9.69% |
Groupo Vargas SA | 3,968,056 (3) | 5.08% |
Brookstone Partners LLC Henville Building Prince Charles Street Charlestown, Nevis
| 5,990,278 (4) | 7.69% |
Robert H. Harris, Board Chairman Selene 32, B41, Bella Vista Santo Domingo, District National Dominican Republic
| 436,667 | 0.56% |
Patrick Holmes, Director 2825 Black Canyon Road Colorado Springs CA 80904
| 500,000 | 0.64% |
Kevin G. Malone, Director 9 Wellsley Road Rockville Centre, New York 11570
| 1,875 | 0.002% |
Directors and Officers as a group (3 persons) | 938,542 | 1.21% |
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(1) Includes Warrants for:
·8,158,333 shares of common stock at an exercise price of $0.05 that expire on July 31, 2014,
·2,039,583 shares of common stock at an exercise price of $0.10 that expire July 31, 2014,
·33,333 shares for common stock at an exercise price of the lower of $6.00 and 75% of the average closing bid price for the 30 trading days preceding the exercise date that expire December 21, 2014,
·287,500 shares of common stock at an exercise price of $0.20 or 75% of the average closing bid price for the 30 trading days preceding the exercise date that expire June 1, 2015.
(2) Includes Warrants for 10,000,000 shares of common stock at an exercise price of $0.05 and 2,500,000 shares of common stock at an exercise price of $0.10. Both Warrants expires July 31, 2014.
(3) Includes Warrants for:
·162,500 shares of common stock at an exercise price of $0.20 or 75% of the average closing bid price for the 30 trading days preceding the exercise date that expire June 1, 2015.
·250,000 shares of common stock at an exercise price of $0.20 or 75% of the average closing bid price for the 30 trading days preceding the exercise date that expire June 1, 2015.
Exhibit No: Description: 3.1 Certificate of Designation for the Series A Convertible Preferred Stock (Filed as an exhibit to Form 8-K filed on October 9, 2015 and incorporated by reference herein.) 3.2 Certificate of Designation for the Series B Convertible Preferred Stock (Filed as an exhibit to Form 8-K filed on November 23, 2015 and incorporated by reference herein.) 10.1 Joint Venture Agreement, dated September 25, 2015, between USH Distribution Corp. and M&M Sourcing Sdn. Bhd. (Filed as an exhibit to Form 8-K filed on September 29, 2015 and incorporated by reference herein.) 10.2 Consignment Agreement, dated September 28, 2015, between USH Distribution, Corp. and Rhino Workwear USA, Ltd. (Filed as an exhibit to Form 8-K filed on September 29, 2015 and incorporated by reference herein.) 10.3 Share Exchange Agreement, dated November 20, 2015, between US Highland, Inc. and Craigstone, Ltd. (Filed as an exhibit to Form 8-K filed on November 23, 2015 and incorporated by reference herein.) 10.4 Form of Debt Conversion Agreement, dated September 30, 2015, between US Highland, Inc. and each of the lenders (Filed as an exhibit to Form 8-K filed on October 9, 2015 and incorporated by reference herein.) 10.5 Agreement, dated March 1, 2016, between US Highland, Inc. and John D. Gibbs (Filed as an exhibit to Form 8-K filed on May 2, 2016 and incorporated by reference herein.) 10.6 Securities Purchase Agreement, dated February 11, 2016, between US Highland, Inc. and Adar Bays, LLC (Filed as an exhibit to Form 8-K filed on May 2, 2016 and incorporated by reference herein.) 10.7 8% Convertible Promissory Note in the amount of $137,500, dated February 11, 2016, issued by US Highland, Inc. to Adar Bays, LLC (Filed as an exhibit to Form 8-K filed on February 23, 2016 and incorporated by reference herein.) 10.8 Securities Purchase Agreement, dated February 11, 2016, between US Highland, Inc. and Union Capital, LLC (Filed as an exhibit to Form 8-K filed on February 23, 2016 and incorporated by reference herein.) 10.9 8% Convertible Promissory Note in the amount of $137,500, dated February 11, 2016, issued by US Highland, Inc. to Union Capital, LLC (Filed as an exhibit to Form 8-K filed on February 23, 2016 and incorporated by reference herein.) 16.1 Letter, dated May 12, 2015, from Friedman, LLP to the SEC (Filed as an exhibit to Form 8-K filed on May 22, 2015 and incorporated by reference herein.) 21.1 Subsidiaries of the Registrant (4) Includes Warrants for 212,500 shares of common stock at an exercise price of $0.20 or 75% of the average closing bid price for the 30 trading days preceding the exercise date that expire June 1, 2015.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
On October 28, 2013, the Company issued 533,333 shares of common stock to AMHC Managed Services Inc. in consideration for the early termination of their management services contract.The shares were valued at $0.05 per share, the fair value on the date of grant.
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31.1 | Certification of Principal Executive Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of Principal Financial and Accounting Officer Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2 | Certification of Principal Financial and Accounting Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101.INS * | XBRL Instance Document | |
101.SCH* | XBRL Taxonomy Extension Schema Document | |
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.LAB* | XBRL Taxonomy Extension Labels Linkbase Document | |
101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document | |
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document |
* | Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under those sections. |
On March 13, 2013, the Company issued 4,500,000 shares of common stock to John Gibbs in consideration for cash.The shares were valued at $0.05 per share, the fair value on the date of grant.
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On March 18, 2013, the Company issued 420,000 shares of common stock to Robert Harris, a director, to convert a demand loan held by Mr. Harris. The shares were valued at $0.05 per share, the fair value on the date of grant.
On February 15, 2013, the Company issued 5,000,000 shares of common stock to AMHC Managed Services Inc. upon exercise of a warrant by AMHC at a share price of $0.0005.
On December 10, 2013, the Company issued 2,000,000 shares of common stock to AMHC Managed Services Inc. upon exercise of a warrant by AMHC at a share price of $0.0005.
On December 3, 2012, the Company issued 500,000 shares of common stock to Patrick Holmes, a director,in consideration for cash. The shares were valued at $0.05 per share, the fair value on the date of grant.
On November 2, 2012, the Company issued 5,000,000 shares of common stock to John Gibbs in consideration for cash.The shares were valued at $0.05 per share, the fair value on the date of grant.
On July 31, 2012, the Company issued 500,000 shares of common stock with a fair value of $14,167 to a director for services. As the Company erred and should have issued the director 16,667 shares and cancelled 483,333 of the shares.
On August 24, 2012, the Company issued 2,222,222 shares of common stock to Conception Capital Ltd. in consideration for the conversion of their convertible note with the Company.The shares were valued at $0.045 per share, the fair value on the date of grant.
On August 24, 2012, the Company issued 22,666,667 shares of common stock to Craigstone Ltd. in consideration for the conversion of their convertible note with the Company.The shares were valued at $0.045 per share, the fair value on the date of grant.
All the foregoing issuances were conducted in reliance upon an exemption from registration provided under Section 4(2) of the Securities Act of 1933, as amended.
Director Independence
We are not subject to listing requirements of any national securities exchange or national securities association and, as a result, we are not at this time required to have our board comprised of a majority of “independent directors.”
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Audit FeesSIGNATURES
We incurred aggregate fees of approximately $50,000 and $40,000 from Friedman LLP for the 2013 and 2012 fiscal years, respectively. Such fees included work completed for our annual audits and reviews.
Audit Related Fees
We did not incur any audit related fees from Friedman LLP during fiscal 2013 or 2012.
Tax Fees
We did not incur any fees for tax compliance, tax advice or tax planning for the 2013 or the 2012 fiscal years.
All Other Fees
We did not incur any other fees from Friedman LLP during fiscal 2013 or 2012.
The board of directors, acting as the Audit Committee considered whether, and determined that, the auditor's provision of non-audit services was compatible with maintaining the auditor's independence. All of the services described above for fiscal years 2013 and 2012 were approved by the board of directors pursuant to its policies and procedures. We intend to continue using Friedman LLP solely for audit and audit-related services, tax consultation and tax compliance services, and, as needed, for due diligence in acquisitions.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Financial statements included in Part II hereof:
Consolidated Balance Sheets as at December 31, 2013 and 2012
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2013 and 2012
Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2013 and 2012
Notes to the Consolidated Financial Statements
ExhibitDescription
31 Section 302 Certification of Principal Executive Officer
32 Section 906 Certification of Principal Executive Officer
101.INS* XBRL Instance
101.SCH* XBRL Taxonomy Extension Schema
101.CAL* XBRL Taxonomy Extension Calculations
101.DEF* XBRL Taxonomy Extension Definitions
101.LAB* XBRL Taxonomy Extension Labels
101.PRE* XBRL Taxonomy Extension Presentation
* XBRL Information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized person.authorized.
US Highland, Inc.
US HIGHLAND, INC. | |||
Date: April 15, 2016 | By: | /s/ Kevin G. Malone | |
Kevin G. Malone | |||
President (Principal Executive Officer) |
By: /s/ John R. Fitzpatrick, III,
John r. Fitzpatrick, III
President, Chief Executive Officer and Chief Financial Officer
(Principal Executive, Financial and Accounting Officer)
Date: May 5, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrantRegistrant and in the capacities and on the dates indicated.indicated:
/s/John R. Fitzpatrick,III President, CEO, CFO and Director May5, 2014
John R. Fitzpatrick, III (Principal Executive, Financial and Accounting Officer)
/s/ Robert Harris Director May5, 2014
Robert Harris
/s/ Kevin MaloneDirector May5, 2014
Kevin Malone
/s/ Patrick Holmes Director May5, 2014
Patrick Holmes
Signature | Title | Date | ||
/s/ Robert H. Harris | Chairman of the Board | April 15, 2016 | ||
Robert H. Harris | ||||
/s/ Kevin G. Malone | President and Director | April 15, 2016 | ||
Kevin G. Malone | (Principal Executive Officer) | |||
/s/ Deborah E. Engles | Interm Chief Financial Officer | April 15, 2016 | ||
Deborah E. Engles | (Principal Financial and Accounting Officer) |
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