bowmo, Inc. - Quarter Report: 2013 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

           For the quarterly period ended: September 30, 2013  

 

OR

 

[  ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

           For the transition period from __________ to___________  

 

Commission file number: 000-54624

 

US HIGHLAND, INC. 

(Exact name of registrant as specified in its charter)

 

              Oklahoma                                                           26-4144571 

     (State or other jurisdiction of incorporation or organization)          (I.R.S. Employer Identification No.)

                                               

       1411 N. 105^th East Avenue, Tulsa, OK                                                   74116 

      (Address of principal executive offices)                                              (Zip Code)

 

Registrant's Telephone number, including area code:  (918)-895-8300

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the part 90 days.

Yes [  ] No [x]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 

Yes [  ] No [x]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company in Rule 12b-2 of the Exchange Act.

[  ] Large accelerated filer     [  ] Accelerated filer

[  ] Non-accelerated filer       [x] Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ] No [x]

 

Number of the Registrant’s common stock outstanding as of May 5, 2014: 77,727,663 common shares

 

 

 

US Highland, Inc.

Form 10-Q

For the Fiscal Period Ended September 30, 2013

 

Table of Contents

 

Part I – Financial Information

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)                                                                                                 3

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

                      CONDITION AND RESULTS OF OPERATIONS                                                                                  16

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET

                      RISK                                                                                                                                                              18

ITEM 4. CONTROLS AND PROCEDURES                                                                                                                   18

Part II – Other Information

ITEM 1. LEGAL PROCEEDINGS                                                                                                                                     19

ITEM 1A. RISK FACTORS                                                                                                                                              19

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                     19

ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                                                                     19

ITEM 4. MINE SAFETY DISCLOSURES                                                                                                                       19

ITEM 5. OTHER INFORMATION                                                                                                                                  19

ITEM 6. EXHIBITS                                                                                                                                                            19

 

 

 

 

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PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

The Company’s unaudited interim condensed consolidated financial statements for the nine month period ended September 30, 2013 and for the comparable period in the prior year form part of this quarterly report. They are prepared in accordance with United States generally accepted accounting principles.

 

    

US Highland, Inc.

 

Index to the Unaudited Condensed Consolidated Financial Statements

 

Unaudited Condensed Consolidated Balance Sheets                                                                                                             4

Unaudited Condensed Consolidated Statements of Operations                                                                                           5

Unaudited Condensed Consolidated Statements of Cash Flows                                                                                          6

Unaudited Condensed Consolidated Statements of Stockholders' Deficiency                                                                   7

Notes to the Unaudited Condensed Consolidated Financial Statements                                                                             8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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US Highland, Inc.

Unaudited Condensed Consolidated Balance Sheets

 

 

US Highland, Inc.

Unaudited Condensed Consolidated Statements of Operations

 

 

 

 

 

US Highland, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

 

 

 

 

US Highland, Inc.

Unaudited Condensed Consolidated Statement of Stockholders’ Deficiency

 

 

 

1.         Summary of Business and Basis of Presentation

Organization and Business

US Highland, Inc. was originally formed as a Limited Liability Company on February 5, 1999 under the name The Powerhouse, L.L.C. pursuant to the laws of the State of Oklahoma.  On November 9, 2006, Powerhouse Productions, L.L.C. filed Articles of Conversion changing the entity from a limited liability company to a corporation under the name Harcom Productions, Inc.  On January 25, 2010, Articles of Merger were filed with the state of Oklahoma merging U.S. Highland, Inc., an Oklahoma corporation into Harcom Productions, Inc. and the name of the corporation was changed to US Highland, Inc. US Highland, Inc. (the “Company”) is a recreational power sports Original Equipment Manufacturer (“OEM”), developing motorcycles, quads, single cylinder engines, and v-twin engines under its own brand and for other OEMs.

Basis of Presentation

The Company’s condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States.  These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, US Highlands Electric Inc.  All significant intercompany transactions and balances have been eliminated. 

The unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and reflect all adjustments (consisting of normal recurring adjustments unless otherwise indicated) which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. Certain prior year amounts have been reclassified to conform to current year presentation.

Certain information in footnote disclosures normally included in the financial statements were prepared in conformity with accounting principles generally accepted in the United States of America and have been condensed or omitted pursuant to such principles and the financial results for the periods presented may not be indicative of the full year’s results. The Company believes the disclosures are adequate to make the information presented not misleading.

These financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto for the fiscal year ended December 31, 2012 included in the Company’s Annual Report on Form 10K filed on March 10, 2014 (the “2012 Annual Report”).

Significant Accounting Policies

There have been no material changes in the Company’s significant accounting policies to those previously disclosed in the 2012 Annual Report.

Going concern

The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company as a going-concern basis. The going concern basis assumes that assets are realized and liabilities are extinguished in the ordinary course of business at amounts disclosed in the consolidated financial statements. The Company has incurred recurring losses from operations, and as of September 30, 2013, current liabilities exceed current assets by $14,774,857, and the Company has an accumulated deficit of $69,591,662. The Company’s ability to continue as a going concern depends upon its ability to obtain adequate funding to support its operations through continuing investments of debt and/or equity by qualified investors/creditors, internally generated working capital. These factors raise substantial doubt about the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

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2.     Property and Equipment

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

Depreciation expense amounted to approximately $7,845 and $3,468 for the nine months ended September 30, 2013 and 2012, respectively.

 

3.     Loans Payable

 

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US Highland, Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

4.     Convertible Debenture

a)        Effective January 25, 2010, the Company issued a convertible note for $225,000. Pursuant to the terms of the agreement, the loan is unsecured, non-interest bearing, and was due on December 21, 2010.  The note is convertible into shares of the Company’s common stock at any time at a variable conversion price equal to 65% of the average of the closing bid prices of the common stock during the 28 trading days prior to the date of the conversion notice and 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 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. During the year ended December 31, 2010, the carrying value of the convertible note had been fully accreted over the term up to the face value of the convertible note.

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 nine months ended September 30, 2013, the Company repaid $2,000 of the note.  At September 30, 2013, the carrying value of the note is $56,333 (December 31, 2012 - $58,333). The Company did not repay the remaining outstanding principal on the maturity date. The note is in default at September 30, 2013.

b)       Effective July 25, 2013, the Company issued a convertible note to secure the demand loan of $75,000 described in Note 3(d). Pursuant to the terms of the agreement, the loan is unsecured, and due on July 31, 2014.  The note is convertible into shares of the Company’s common stock at any time at a price of $0.035.  The note bears interest at 8% per annum compounded monthly, and is due on demand.

The embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15 Derivatives and Hedging.  The initial fair value of the conversion feature of $577,797 resulted in a discount to the note payable of $75,000 and the recognition of a loss on derivatives of $502,797.  The entire discount was recorded as interest expense on July 25, 2013 as the note is due on demand.

c)        Effective July 25, 2013, the Company issued a convertible note to secure the demand loan of $45,000 described in Note 3(e). Pursuant to the terms of the agreement, the loan is unsecured, and due on July 31, 2014.  The note is convertible into shares of the Company’s common stock at any time at a price of $0.035.  The note bears interest at 8% per annum compounded monthly, and is due on demand.

The embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15 Derivatives and Hedging.  The initial fair value of the conversion feature of $346,678 resulted in a discount to the note payable of $45,000 and the recognition of a loss on derivatives of $301,678.  The entire discount was recorded as interest expense on July 25, 2013 as the note is due on demand.

d)       On July 25, 2013, the Company issued a convertible note for up to $500,000 and warrants to purchase 12,500,000 underlying shares of the Company’s common stock. The warrants are exercisable into 10,000,000 common shares of the Company at $0.05 per share and 2,500,000 shares at an exercise price of $0.10 per share until July 31, 2014.   During the nine months ended September 30, 2013, the Company received proceeds of $300,000 under the note. The note bears interest at 8% per annum compounded monthly, and principal and interest are due on July 31, 2014.  In addition, so long as any amounts are due hereunder, the Company is obligated to remit to the lender 100% of all revenues, payments and receivables from the sale of the first 50 engines sold by the Company.  The note is secured against substantially all of the assets of the Company.

The note may be prepaid by the Company without penalty with 30 days prior notice.  The note is convertible into shares of the Company’s common stock at any time at a conversion price equal to $0.02 per share and is subject to adjustment upon the issuance of certain dilutive instruments and other events.  The conversion price was subsequently reduced to $0.01 per share upon the failure to file various reports with the SEC within 120 days of the issuance of the note.

Due to the potential adjustments to the conversion feature and the inability to conclude that the Company has enough unissued-authorized common shares to settle the warrants, the embedded conversion option and the warrants qualify for derivative accounting and bifurcation under ASC 815-15 Derivatives and Hedging.  The initial fair value of the conversion feature of $4,214,130 and warrants of $3,169,531 resulted in a discount to the note payable of $300,000 and the recognition of a loss on derivatives of $7,083,661. During the nine months ended September 30, 2013, the Company recorded accretion of $28,917 increasing the carrying value of the note to $28,917.

e)        On July 25, 2013, the Company issued a convertible note for up to $500,000 and warrants to purchase 10,197,916 underlying shares of the Company’s common stock. The warrants are exercisable into 8,158,333 common shares of the Company at $0.05 per share and 2,039,583 shares at an exercise price of $0.10 per share until July 31, 2014.   During the nine months ended September 30, 2013, the Company received proceeds of $125,000.The note bears interest at 8% per annum compounded monthly, and principal and interest are due on July 31, 2014.   

 

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The note may be prepaid by the Company without penalty with 30 days prior notice.  The note is convertible into shares of the Company’s common stock at any time at a conversion price equal to $0.02 per share and is subject to adjustment upon the issuance of certain dilutive instruments and other events.  The conversion price was subsequently reduced to $0.01 per share upon the failure to file various reports with the SEC within 120 days of the issuance of the note.

Due to the potential adjustments to the conversion rate of the conversion feature and the inability to conclude that the Company has enough unissued-authorized common shares to settle the warrants, the embedded conversion option and the warrants qualify for derivative accounting and bifurcation under ASC 815-15 Derivatives and Hedging.  The initial fair value of the conversion feature of $1,750,165 and warrants of $2,450,519 resulted in a discount to the note payable of $125,000 and the recognition of a loss on derivatives of $4,075,684. During the nine months ended September 30, 2013, the Company recorded accretion of $15,887 increasing the carrying value of the note to $15,887.

f)        On July 25, 2013, the Company issued a convertible note for up to $500,000 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 nine months ended September 30, 2013, the Company received proceeds of $20,000.The note bears interest at 8% per annum compounded monthly, and principal and interest are due on July 31, 2014.   

The note may be prepaid by the Company without penalty with 30 days prior notice.  The note is convertible into shares of the Company’s common stock at any time at a conversion price equal to $0.02 per share and is subject to adjustment upon the issuance of certain dilutive instruments and other events.  The conversion price was subsequently reduced to $0.01 per share upon the failure to file various reports with the SEC within 120 days of the issuance of the note.

Due to the potential adjustments to the conversion rate of the conversion feature and the inability to conclude that the Company has enough unissued-authorized common shares to settle the warrants, the embedded conversion option and the warrants qualify for derivative accounting and bifurcation under ASC 815-15 Derivatives and Hedging.  The initial fair value of the conversion feature of $281,472 and warrants of $187,531, resulted in a discount to the note payable of $20,000 and the recognition of a loss on derivatives of $449,003. During the nine months ended September 30, 2013, the Company recorded accretion of $6,446 increasing the carrying value of the note to $6,446.

5.     Derivative Liabilities

The embedded conversion options of the Company’s convertible debentures described in Note 4 contain conversion features that qualify for embedded derivative classification.  The warrants described in Notes 4 and 7 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 included in other income or expenses.

The table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities for the periods ended September 30, 2013 and December 31, 2012:
 

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

 

 

 

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The Company uses Level 3 inputs for its valuation methodology for the warrant derivative liabilities and embedded conversion option liabilities as their fair values were determined by using the Black-Scholes option pricing model based on various assumptions.   The model incorporates the price of a share of the Company’s common stock (as quoted on the Over the Counter Bulletin Board), volatility, risk free rate, dividend rate and estimated life. Significant changes in any of these inputs in isolation would result in a significant change in the fair value measurement. As required, these are classified based on the lowest level of input that is significant to the fair value measurement. The following table shows the assumptions used in the calculations:

 

6.     Common Stock

Share transactions for the nine months ended September 30, 2013:

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 8(f) for cash proceeds of $2,500. 

b)       On March 13, 2013, the Company issued 4,500,000 shares of common stock in consideration for cash at $0.05 per share to a shareholder.  This transaction resulted in the shareholder becoming a significant shareholder.

c)        On March 18, 2013, a director of the Company converted $21,000 of amounts owed to him by the Company into 420,000 shares of common stock. The amount owed had no terms of repayment and was non-interest bearing.

7.     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 8(f). The Company recorded the fair value of the warrant of $2,599,801 as consulting expenses. 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 nine month period ended September 30, 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.

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b)     On April 1, 2013, the Company entered into a settlement agreement with a consultant to settle $149,971 of services provided in 2012. Pursuant to the agreement, the Company will pay $10,000 and issued a warrant to purchase 300,000 shares of common stock at $0.0005 per share for three years. The warrants meet the criteria for classification as a derivative liability and during the nine month period ended September 30, 2013, the Company recorded a loss on the change in fair value of the derivative liability of $60,055.

c)     On April 8, 2013, the Company entered into a settlement agreement with a consultant to settle $149,971 of services provided in 2012.  Pursuant to the agreement, the Company will pay $10,000 and issued a warrant to purchase 300,000 shares of common stock at $0.0005 per share for three years. The warrants meet the criteria for classification as a derivative liability and during the nine month period ended September 30, 2013, the Company recorded a loss on the change in fair value of the derivative liability of $60,055.

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 the nine month period ended September 30, 2013, the Company did not recognize a gain or loss on the change in fair value of the derivative liability was minimal.

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

 

8.     Commitments

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 nine months ended September 30, 2013, the Company recorded $10,000 (September 30, 2012 - $42,250) of professional fees. During the nine months ended September 30, 2013, the director agreed to suspend the agreement.

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 nine months ended September 30, 2013, the Company recorded $108,000 (September 30, 2012 - $104,000) of general and administrative expenses.

c)        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 nine months ended September 30, 2013, the Company recorded $48,445 (September, 2012 - $86,000) of professional fees. During the nine months ended September 30, 2013, the officer resigned and the agreement was terminated.

d)       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 nine months ended September 30, 2013, the Company recorded $264,942 (September 30, 2012 - $172,000) of professional fees. During the nine months ended September 30, 2013, the Company agreed to terminate the agreements.

e)        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 for 3 years (on February 15, 2013, the consultant exercised the warrant).  Pursuant to an amendment to the agreement entered into on January 23, 2013, the consultant will provide additional services in consideration for $20,000 per month from February 1, 2013 to March 31, 2014 and was issued a warrant to purchase 5,000,000 common shares of the Company at $0.0005 per share exercisable for 3 years (on February 15, 2013, the consultant exercised the warrant).  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 7(a) and 9(a).

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f)        During the year ended December 31, 2012, the Company entered into two leases for the provision of office and warehouse space until April 30, 2015.  On April 1, 2013, the Company entered into an amendment to the lease agreements. Pursuant to the amendment, one of the leases was terminated and the other was extended to March 31, 2019.  Refer to Note 9(e). During the nine months ended September 30, 2013, the Company recognized $37,203 of rent expense.  The Company’s future minimum lease payments are as follows:

9.     Subsequent Events

a)        Subsequent to September 30, 2013, the Company received an additional $200,000 of proceeds under the convertible note described in Note 4(d), $148,700 of proceeds under the convertible note described in Note 4(e) and an additional $21,300 of proceeds under the convertible note described in Note 4(f).

b)       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.   Subsequent to September 30, 2013, the Company received proceeds of $25,000 under the note.  The Company will not receive any additional funding from the note. The note bears interest at 8% per annum compounded monthly, and principal and interest are due on July 31, 2014.   

c)        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.   Subsequent to September 30, 2013, the Company received proceeds of $20,000 under the note. The Company will not receive any additional funding from the note. The note bears interest at 8% per annum compounded monthly, and principal and interest are due on July 31, 2014.   

d)       On October 25, 2013, the Company issued 533,333 common shares with a fair value of $26,667 to a consultant as part of a settlement agreement to settle $80,000 of amounts owed to the consultant. 

e)        On January 17, 2014, the Company entered into a note payable with a related party, pursuant to which the Company received proceeds of $50,000.  The note is bears interest at an annual rate of 8% per annum and due on January 17, 2016.

f)        On January 29, 2014, the Company entered into a note payable with a related party, pursuant to which the Company received proceeds of $50,000.  The note is bears interest at an annual rate of 8% per annum and due on January 29, 2016.

g)       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.

h)       On March 3, 2014, the Company entered into a note payable with a related party, pursuant to which the Company received proceeds of $50,000.  The note is bears interest at an annual rate of 8% per annum and due on March 3, 2016.

i)         On March 19, 2014, the Company entered into a note payable with a related party, pursuant to which the Company received proceeds of $150,000.  The note is bears interest at an annual rate of 8% per annum and due on March 19, 2016.

j)         On April 25, 2014, the Company entered into a note payable with a related party, pursuant to which the Company received proceeds of $25,000.  The note is bears interest at an annual rate of 8% per annum and due on April 25, 2016.

k)       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.

l)         On December 23, 2013, the Board approved an amendment to the Articles of Incorporation to increase the authorized shares of common stock to 500,000,000 shares and authorize 3,550,000 shares of “blank check” preferred stock, par value $0.01.

m)      On December 30, 2013, the Company entered into a settlement agreement with a consultant to settle $36,425 of services provided in 2012.  Pursuant to the agreement, the Company issued a warrant to purchase 135,000 shares of common stock at $0.0005 per share for three years

 

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n)       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.

o)       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.

p)       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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements. For this purpose, any statements contained in this Report that are not statements of historical fact may be deemed to be forward-looking statements. Forward-looking information includes statements relating to future actions, prospective products, future performance or results of current or anticipated products, sales and marketing efforts, costs and expenses, interest rates, outcome of contingencies, financial condition, results of operations, liquidity, business strategies, cost savings, objectives of management, and other matters. You can identify forward-looking statements by those that are not historical in nature, particularly those that use terminology such as “may,” “will,” “should,” “expects,” “anticipates,” “contemplates,” “estimates,” “believes,” “plans,” “projected,” “predicts,” “potential,” or “continue” or the negative of these similar terms. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking information to encourage companies to provide prospective information about themselves without fear of litigation so long as that information is identified as forward-looking and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in the information.

These forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions that we cannot predict. In evaluating these forward-looking statements, you should consider various factors, including the following: (a) those risks and uncertainties related to general economic conditions, (b) whether we are able to manage our planned growth efficiently and operate profitable operations, (c) whether we are able to generate sufficient revenues or obtain financing to sustain and grow our operations, (d) whether we are able to successfully fulfill our primary requirements for cash, which are explained below under “Liquidity and Capital Resources”. We assume no obligation to update forward-looking statements, except as otherwise required under the applicable federal securities laws.

Results of Operations

For the periods ended September 30, 2013 and September 30, 2012

Revenues

The Company had no revenues during the three month periods ended September 30, 2013 and 2012.

The Company had no revenues during the nine month periods ended September 30, 2013 and 2012.

Operating Expenses

Operating expenses for the three month period ended September 30, 2013 were $345,349, which was comprised primarily of $157,749 for general and administrative expenses, and $184,877 for professional fees as compared to operating expenses of $571,137 for the three month period ended September 30, 2012, which was comprised primarily of $229,844 for general and administrative expenses, and $318,123 for professional fees. The decrease in general and administrative expenses of $72,095 resulted primarily from a reduction in travel expenses from $29,635 in fiscal 2012 to $10,055 in fiscal 2013, and a reduction in payroll from $113,254 in fiscal 2012 to $81,688 in fiscal 2013.  The decrease in professional fees of $133,246 resulted primarily from the Company reducing the number of consultants utilized during the three month period ended September 30, 2013 as compared to the three month period ended September 30, 2012.

Operating expenses for the nine month period ended September 30, 2013 were $3,764,985, which was comprised primarily of $454,114 for general and administrative expenses, and $3,303,026 for professional fees as compared to operating expenses of $1,882,359 for the nine month period ended September 30, 2012, which was comprised primarily of $701,626 for general and administrative expenses, $170,776 for research and development expenses, and $1,006,489 for professional fees. The decrease in general and administrative expenses of $247,512  resulted primarily a reduction in travel expenses from $93,927 in fiscal 2012 to $16,483 in fiscal 2013, and a reduction in payroll from $309,922 in fiscal 2012 to $251,101 in fiscal 2013.  The increase in professional fees of $2,296,537 resulted primarily from the issuance of a warrant to a consultant to purchase common shares, which was recorded at a fair value of $2,599,801 offset by a general reduction in other professional fees. The Company did not issue any warrants for services during the nine months ended September 30, 2012.

Net Loss

Net loss for the three month period ended September 30, 2013 was $12,611,526, compared to net loss of $3,094,483 for the three month period ended September 30, 2012. The loss in fiscal 2013 includes $182,672 in interest expense

 

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as compared to $2,630,224 in fiscal 2012. The decrease of $2,447,552 resulted primarily from the decrease in accretion expense. The Company recognized $171,250 of accretion during the three months ended September 30, 2013 as compared to $2,618,278 during the three months ended September 30, 2012. The Company recognized a loss on change in fair value of derivatives of $12,083,506 during the three months ended September 30, 2013 as compared to a gain on change in fair value of derivatives of $105,747 during the three months ended September 30, 2012.

Net loss for the nine month period ended September 30, 2013 was $16,494,833, compared to net loss of $5,299,971 for the nine month period ended September 30, 2012. The loss in fiscal 2013 includes $195,843 in interest expense as compared to $3,464,093 in fiscal 2012. The increase of in net loss of $11,194,862 resulted primarily from an increase in loss on derivatives and a decrease in the gain on settlement of debt offset by the decrease in accretion expense. The Company recognized a loss on change in fair value of derivatives of $12,536,990 during the nine months ended September 30, 2013 as compared to a loss on change in fair value of derivatives of $4,098,649 during the nine months ended September 30, 2012. The Company recognized a gain on settlement of debt of $4,144,559 during the nine months ended September 30, 2012. The Company did not settle any debt during the nine months ended September 30, 2013. The Company recognized $171,250 of accretion during the nine months ended September 30, 2013 as compared to $3,343,038 during the nine months ended September 30, 2012.

Liquidity and Capital Resources

As of September 30, 2013, we had cash of $27,651 and a working capital deficiency of $14,774,857. The future of the Company is dependent upon its ability to obtain future financing, upon cash generated from our operations and our ability to borrow cash when needed from related parties. During the fiscal year ended December 31, 2013, the Company received $860,000 of proceeds for the issuance convertible notes.  We estimated that we will require $2,188,000 over the twelve month period ending December 31, 2014. Management believes that our cash balance will not be sufficient to meet our working capital requirements for the next twelve month period. We plan to raise the capital required to satisfy our immediate short-term needs and additional capital required to meet our estimated funding requirement for the next twelve months primarily through equity and or debt financings. There is no assurance that we will be able to obtain further funds required for our continued working capital requirements. 

We cannot be certain that the required additional financing will be available or available on terms favorable to us. We currently do not have any arrangements or commitments in place for any other financings. If additional funds are raised by the issuance of our securities, existing stockholders will experience dilution of their ownership interest. If adequate funds are not available or not available on acceptable terms, we may be unable to fund our operations.

During the nine month period ended September 30, 2013, we used $676,992 in cash in operating activities and paid $4,355 to acquire property and equipment.  This compares to the nine month period ended September 30, 2012 when we used $1,704,968 in cash in operating activities and paid $33,271 to acquire property and equipment. We received proceeds of $87,000 from the issuance of loans payable, $385,000 from the issuance of convertible debt and $228,500 from the issue of common stock during the nine months ended September 30, 2013. This compares to the nine month period ended September 30, 2012 when we received $75,000 from the issuance of loans payable, $1,600,000 from the issuance of convertible debt. We made cash repayments of $2,000 for notes payable during the nine months ended September 30, 2013 as compared to $10,000 during the nine months ended September 30, 2012.

As of September 30, 2013 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 loss of approximately $16,494,833 for the nine month period ended September 30, 2013. In addition, at September 30, 2013, there is an accumulated deficit of $69,591,662.  These factors raise substantial doubt about the Company’s ability to continue as a going concern.

There can be no assurance that sufficient funds required during the next year or thereafter will be generated from operations or available from external sources such as debt or equity financings, or other potential sources. The inability to generate cash flow from operations or to raise capital from external sources will force the Company to substantially curtail and cease operations, therefore, having a material adverse effect on its business. Furthermore, there can be no assurance that any funds, if available, will possess attractive terms or not have a significant dilutive effect on the Company’s existing stockholders. 

Off-balance sheet arrangements: 

The Company has no off-balance sheet arrangements.

 

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Recent Pronouncements  

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable

ITEM 4.  CONTROLS AND PROCEDURES

Management’s Report on Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective, as of September 30, 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.

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.

Changes in Internal Control over Financial Reporting: 

During the quarter covered by this report there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting

The term “internal control over financial reporting” is defined as a process designed by, or under the supervision of, the registrant's principal executive and principal financial officers, or persons performing similar functions, and effected by the registrant's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

 

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

As a “small reporting company”, we are not required to provide the information required by this Item.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On September 4, 2013, the Company issued a consultant 100,000 warrants for $29,655 of services to purchase shares of common stock at $0.005 per share exercisable for three years. The issuance was conducted in reliance upon an exemption from registration provided under Section 4(2) of the Securities Act of 1933, as amended.

On July 25, 2013, the Company issued warrants to purchase 12,500,000 underlying shares of the Company’s common stock in connection with a convertible note. 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.

On July 25, 2013, the Company issued warrants to purchase 10,197,916 underlying shares of the Company’s common stock in connection with a convertible note. 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.

On July 25, 2013, the Company issued warrants to purchase 739,584 underlying shares of the Company’s common stock in connection with a convertible note. 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.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit                            Description     

31.1                        Rule 13(a)-14(a)/15(d)-14(a) Certification of Principal Executive and Financial Officer

32.1                        Rule 1350 Certification of Principal Executive and Financial 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 the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned duly authorized person.

 

 

                                                                                 US Highland, Inc.

 

By:/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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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