bowmo, Inc. - Annual Report: 2014 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549 

FORM 10-K

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

For the fiscal year ended: December 31, 2014

OR

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

For the transition period from __________ to___________

Commission file number: 000-54624

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

Securities registered pursuant to Section 12(b) of the Act: None 

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value 

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the part 90 days. Yes ¨ No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.406 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No x

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. 

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

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 as of June 30, 2014 was $27,204,684. 

As of July 9, 2015, there were 77,727,669 shares of the registrant's common stock, par value $0.01 per share outstanding.

US Highland, Inc.

Form 10-K

For the Fiscal Year Ended December 31, 2014

Table of Contents

Forward-Looking Statements 

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

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

PART I 

ITEM 1. BUSINESS 

Corporate History 

US Highland, Inc. ("US Highland" or the "Registrant" or the "Company") 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 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 corporation under the name US Highland, Inc. On November 29, 2006, articles of amendment to the certificate of incorporation increased the authorized common shares to 100,000,000 with a par value of $0.01 per share. 

On January 25, 2010, Articles of Merger were filed with the State of Oklahoma merging U.S. Highland, Inc., 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. Pursuant to the Asset Purchase Agreement dated December 21, 2009, the Registrant sold all rights, title and interest to the purchased assets to Mr. Harwell for the consideration of 950,000 common shares.  

Current Corporate Operations  

US Highland 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. US Highland moved its manufacturing equipment and tooling to the United States from Sweden and is currently prepared to begin engine assembly operations in Tulsa, Oklahoma. The operations will require an estimated $2,188,000 over the course of next twelve (12) calendar months and will include the launch later in fiscal 2015 of its single cylinder engine platform and will be followed by the launch of its twin cylinder engines.  

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.  

US Highland requires the services of many manufacturing subcontractors, as is typical for the industry. US Highland is currently operating from a single location in Tulsa, Oklahoma located at 1411 N. 105^th East Avenue in the Pine Industrial complex just southeast of the Tulsa International Airport. 

US Highland's business development strategy includes: 

- 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 60⁰ 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. 

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

OEM (Original Equipment Manufacture) Cycle 

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

On-Road Motorcycles Market 

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

On-Road Seasonality 

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

Dual Sport Market 

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

Wholesale/Custom Builder Market 

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

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. US Highland will see the benefit of working all 3 sales channels (consumer direct, wholesale and OEM) to lower parts prices 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. US Highland has established relationships with many wholesale builders. US Highland has an aggressive digital media strategy aimed at the direct consumer. Product can be directly purchased 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, US Highland is often perceived by other manufacturers as an engine supplier rather than a competitor. 

Strategic Location 

Tulsa, Oklahoma 

We have strategically located the manufacturing and distribution portions of the 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 on a contract for services basis including 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: 

- 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 to a smaller reporting company. 

ITEM 1B. UNRESOLVED STAFF COMMENTS 

Not applicable. 

ITEM 2. PROPERTY 

The registrant's principle executive and manufacturing offices are located at 1411 N. 105^th East Avenue, Tulsa, Oklahoma 74116. The registrant's primary phone number is 918-558-1358. 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 maintenance fee that is currently $862 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 

On July 8, 2014, the Company filed civil actions against John R. Fitzpatrick, III, its former Chief Executive Officer, President, Chief Financial Officer, and a former director of the Company and against Steven ("Posie") Pfaff, the former Director of Manufacturing of the Company regarding an employment dispute. Mr. Fitzpatrick and Mr. Pfaff have answered the Petition and asserted various counterclaims against US Highland, Inc., and third party claims against directors of the Company and one of the Company's attorneys.

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

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. 

ITEM 4. MINE SAFETY DISCLOSURES 

Not applicable. 

PART II 

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

Market Information 

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

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

Registered Holders of Our Common Stock 

As at July 9, 2015, there were approximately 132 shareholders of the Registrant. 

Dividends 

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

Securities Authorized for issuance under equity compensation plans.  

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

Recent Sales of Unregistered Securities 

All the issuances were previously reported. 

ITEM 6. SELECTED FINANCIAL DATA 

Not applicable to a smaller reporting company. 

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

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

Overview 

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

Results of Operations  

For the years ended December 31, 2014 and December 31, 2013 

Revenues 

During the year ended December 31, 2014, the Company had revenues of $10,930 (2013 - $nil) for sale of shop equipment to one customer. 

Operating Expenses 

Operating expenses for the year ended December 31, 2014 were $1,137,482, which was comprised primarily of $756,902 for general and administrative expenses and $371,170 for professional expenses as compared to operating expenses of $4,144,916 for the year ended December 31, 2013, which was comprised primarily of $645,186 for general and administrative expenses, $545,975 for professional expenses and $2,943,106 for consulting expenses. The increase in general and administrative expenses of $111,716 resulted primarily from an increase in payroll from $354,987 in fiscal 2013 to $551,744 in fiscal 2014 offset by a reduction in advertising and promotion from $28,500 in fiscal 2013 to $6 in fiscal 2014 and a general reduction of office expenses as a result of budget constraints. The decrease in professional fees of $174,805 resulted primarily from the Company reducing the number of professionals utilized during the year ended December 31, 2014 as compared to the year ended December 31, 2013. The decrease in consulting fees of $2,943,106 was a result of the granting warrants to consultants in fiscal 2013. 

Net Loss 

Net loss for the year ended December 31, 2014 was $17,908,057, compared to net loss of $32,107,140 for the year ended December 31, 2013. The loss in fiscal 2014 includes $1,666,381 in interest expense and $16,442,992 loss on change in fair value of derivatives, offset by a gain on settlement of debt of $1,451,919. The loss in fiscal 2013 includes $346,660 in interest expense and $27,685,283 loss on change in fair value of derivatives, offset by a gain on settlement of debt of $66,734.  

Liquidity and Capital Resources  

As of December 31, 2014, we had cash of $14,035 and a working capital deficit of $47,612,935. The future of the Company is dependent upon its ability to obtain future financing, upon cash generated from our operations and our ability to borrow cash when needed from related parties. We estimated that we will require $2,188,000 over the next twelve-month period. Management believes that our cash balance will not be sufficient to meet our working capital requirements for the next twelve month period. We plan to raise the capital required to satisfy our immediate short-term needs and additional capital required to meet our estimated funding requirement for the next twelve months primarily through equity and or debt financings. There is no assurance that we will be able to obtain further funds required for our continued working capital requirements.  

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

During fiscal 2014, we used $764,929 in cash in operating activities and received $5,920 from the sale of property and equipment. This compares to fiscal 2013 when we used $1,076,600 in cash in operating activities and paid $4,354 to acquire property and equipment. We received proceeds of $917,300 from the issuance of notes payable and convertible debt during fiscal 2014, as compared to $887,000 in fiscal 2013. We made cash repayments of $37,300 for notes payable in fiscal 2014 as compared to $2,000 in fiscal 2013. We paid out $150,000 to Highlon, a company in the distribution management business for the deposit for a potential acquisition during fiscal 2014. We received proceeds of $228,500 from the issuance of common stock during fiscal 2013. 

As of December 31, 2014, 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 $17,908,057 for the year ended December 31, 2014. In addition, at December 31, 2014, there was an accumulated deficit of $103,112,026. These factors raise substantial doubt about the Company's ability to continue as a going concern. 

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

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

Management is currently pursuing a business strategy which includes raising the necessary funds to finance the Company's development, marketing and manufacturing efforts. 

Off-balance sheet arrangements: 

The Company has no off-balance sheet arrangements. 

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 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 

US Highland, Inc.

Index to the Consolidated Financial Statements 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 

To the Board of Directors and

Stockholders of US Highland, Inc.

Tulsa, Oklahoma 

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

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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, 2014 and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. 

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

/s/ GBH CPAs, PC                             

GBH CPAs, PC

www.gbhcpas.com

Houston, Texas

July 9, 2015 

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 sheet of US Highland, Inc. as of December 31, 2013, and the related consolidated statements of operations, stockholders' deficiency, and cash flows for the year then ended. US Highland, Inc.'s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audit. 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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, 2013, and the results of its operations and its cash flows for the year then ended 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 Company will continue as a going concern. As more fully noted in Note 1 to the consolidated financial statements, the Company has incurred substantial accumulated deficit, recurring operating losses and has a working capital deficiency of $30,348,513. These conditions raise substantial doubt the Company's ability to continue as a going concern. Management's plans in regards to these matters are discussed in Note 1. The consolidated 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 LLP                   

New York, New York

May 5, 2014

US Highland, Inc.

Consolidated Balance Sheets

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

US Highland, Inc.

Consolidated Statements of Operations 

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

US Highland, Inc.

Consolidated Statement of Changes in Stockholders' Deficit

For the Years Ended December 31, 2014 and 2013

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

US Highland, Inc.

Consolidated Statements of Cash Flows

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

US Highland, Inc.

Notes to Consolidated Financial Statements

For The Years Ended December 31, 2014 and 2013

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. 

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 its operations, and as of December 31, 2014, current liabilities exceed current assets by $47,612,935, and the Company has an accumulated deficit of $103,112,026. The Company's ability to continue as a going concern depends upon its ability to obtain adequate funding to support its operations through continuing investments of debt and/or equity by qualified investors/creditors, internally generated working capital and monetization of intellectual property assets. These factors raise substantial doubt about the Company's ability to continue as a going concern. These consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Management is currently pursuing a business strategy which includes raising the necessary funds to finance the Company's development, marketing and manufacturing efforts. 

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

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

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

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

US Highland, Inc.

 Notes to Consolidated Financial Statements

 For The Years Ended December 31, 2014 and 2013

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

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: 

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

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

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

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

Financial instruments consist principally of cash and cash equivalents, accounts payable, loans payable and convertible debentures. Derivative liabilities are determined based on "Level 3" inputs, which are significant and unobservable and have the lowest priority. There were no transfers into or out of "Level 3" during the years ended December 31, 2014 or 2013. 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 8 for additional information. 

The Company accounts for income taxes using the asset and liability method. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized in income or expense in the period that the change is effective. Tax benefits are recognized when it is probable that the deduction will be sustained. A valuation allowance is established when it is more likely that not that all or a portion of a deferred tax asset will not be realized. The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. No such interest or penalties were recognized during the period presented. The Company had no accruals for interest and penalties at December 31, 2014 or 2013. 

US Highland, Inc.

 Notes to Consolidated Financial Statements

 For The Years Ended December 31, 2014 and 2013

US Highland, Inc.

 Notes to Consolidated Financial Statements

 For The Years Ended December 31, 2014 and 2013

 US Highland, Inc.

 Notes to Consolidated Financial Statements

 For The Years Ended December 31, 2014 and 2013

 US Highland, Inc.

 Notes to Consolidated Financial Statements

 For The Years Ended December 31, 2014 and 2013

US Highland, Inc.

 Notes to Consolidated Financial Statements

 For The Years Ended December 31, 2014 and 2013

US Highland, Inc.

 Notes to Consolidated Financial Statements

 For The Years Ended December 31, 2014 and 2013

US Highland, Inc.

 Notes to Consolidated Financial Statements

 For The Years Ended December 31, 2014 and 2013

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

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

US Highland, Inc.

 Notes to Consolidated Financial Statements

 For The Years Ended December 31, 2014 and 2013

US Highland, Inc.

 Notes to Consolidated Financial Statements

 For The Years Ended December 31, 2014 and 2013

US Highland, Inc.

 Notes to Consolidated Financial Statements

 For The Years Ended December 31, 2014 and 2013

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