bowmo, Inc. - Quarter Report: 2014 September (Form 10-Q)

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. 105th East Avenue, Tulsa, OK

74116

(Address of principal executive offices)

(Zip Code)

Large accelerated filer  

¨

Accelerated filer

¨

Non-accelerated filer

¨

Smaller reporting company

x

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

20

ITEM 6.

EXHIBITS

20

Unaudited Condensed Consolidated Balance Sheets

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

ASSETS

Current Assets

Cash

$

1,779

$

43,044

Inventory

–

99,826

Prepaid expenses

43,873

58,520

Total Current Assets

45,652

201,390

Long-term Deposits

11,478

11,491

Property and Equipment, net

16,991

24,555

Total Assets

$

74,121

$

237,436

LIABILITIES AND STOCKHOLDERS’ DEFICIENCY

Current Liabilities

Accounts payable

$

466,534

$

393,617

Accrued liabilities ($142,587 and $66,184 related parties, respectively)

609,765

258,238

Convertible debentures ($89,549 and $144,362 related parties, respectively)

311,606

351,829

Derivative liabilities

40,286,681

29,430,719

Loans payable ($48,000 and $27,000 related parties, respectively)

171,500

115,500

Total Current Liabilities

41,846,086

30,549,903

Loans Payable ($525,000 and $0 related parties, respectively)

525,000

–

Total Liabilities

42,371,086

30,549,903

Commitments

Stockholders’ Deficiency

Preferred Stock, 3,550,000 shares authorized, par value $0.01; No shares issued and outstanding at September 30, 2014 and December 31, 2013

–

–

Common Stock, 500,000,000 shares authorized, $0.01 par value; 77,727,669 shares issued and outstanding at September 30, 2014 and December 31, 2013

777,276

777,276

Common Stock Reserved for Future Issuance

145,886

129,881

Additional Paid-in Capital

54,757,845

54,757,845

Accumulated Deficit

)

)

)

)

Treasury Stock, at cost – 58,333 shares at September 30, 2014 and December 31, 2013

)

)

Total Stockholders’ Deficiency

)

)

Total Liabilities and Stockholders’ Deficiency

$

74,121

$

237,436

$

$

$

$

Revenue

Operating Expenses

Depreciation

2,406

2,723

7,564

7,845

General and administrative

101,946

157,749

636,900

454,114

Professional fees

22,763

184,877

355,882

3,303,026

Write-down of inventory

–

–

125,616

–

Total Operating Expenses

127,115

345,349

1,125,962

3,764,985

Operating Loss

)

)

)

)

Other Income (Expense)

Interest expense

)

)

)

)

Change in fair value of derivatives

)

)

)

)

Loss on settlement of debt

814,668

–

814,668

–

Other income

500

1

1,001

2,985

Total Other Income (Expense)

)

)

)

)

Net (Loss)

)

)

)

)

Net (Loss) Per Common Share:

- Basic and Diluted

)

)

)

)

Basic and diluted weighted average common shares outstanding

77,727,669

77,194,000

77,727,669

75,100,600

Operating Activities

Net (loss)

)

)

Adjustments to reconcile net loss to cash used in operating activities:

Depreciation

7,564

7,845

Accretion expense

777,196

171,250

Change in fair value of derivative

10,800,605

12,536,990

Loss on settlement of debt

)

–

Warrants issued for consulting services

–

2,599,801

Write down of inventory

125,616

–

Shares issuable for interest expense

16,005

6,398

Changes in operating assets and liabilities:

Inventory

)

–

Prepaid expenses and deposits

14,660

)

Accounts payable and accrued liabilities

478,050

520,292

Net Cash Used in Operating Activities

)

)

Investing Activities

Investment in property and equipment

–

)

Net Cash Used in Investing Activities

–

)

Financing Activities

Proceeds from issuance of notes payable

608,300

–

Proceeds from convertible debt

–

385,000

Proceeds from loan payable

–

87,000

Repayment of loans

)

)

Proceeds from issuance of common stock

–

228,500

Net Cash Provided by Financing Activities

580,000

698,500

Increase (Decrease) In Cash

)

17,153

Cash - Beginning of Period

43,044

10,498

Cash - End of Period

1,779

27,651

Non-cash Investing and Financing Activities

Warrants issued to settle debt

53,606

229,942

Common stock issued to settle debt

–

21,000

Balance, December 31, 2012

67,757,669

672,743

51,337,434

114,303

)

)

)

)

Shares issued upon conversion of warrants

5,000,000

50,000

3,202,278

–

–

–

–

3,252,278

Subscriptions received

–

–

–

–

1,000

–

–

1,000

Cancellation of shares issued in error

)

–

–

–

–

–

–

–

Shares issued to settle debt

953,333

9,533

38,133

–

–

–

–

47,666

Shares issued for cash

4,500,000

45,000

180,000

–

–

–

–

225,000

Shares issuable in payment of accrued interest

–

–

–

15,578

–

–

–

15,578

Net loss for the year

–

–

–

–

–

)

–

)

Balance, December 31, 2013

77,727,669

777,276

54,757,845

129,881

–

)

)

)

Shares issuable in payment of accrued interest

–

–

–

16,005

–

–

–

16,005

Net loss for the period

–

–

–

–

–

)

–

)

Balance, September 30, 2014

77,727,669

777,276

54,757,845

145,886

–

)

)

)

1.

Summary of Business and Basis of Presentation

2.

Inventory

3.

Property and Equipment

Useful

Life

Computers and office equipment

3 years

$

15,930

$

15,930

Manufacturing equipment

5 - 10 years

28,408

28,408

44,338

44,338

Accumulated depreciation

)

)

Property and equipment, net

$

16,991

$

24,555

4.

Loans Payable

Loans payable consist of the following:

September 30,
2014

a)

Loans payable that are unsecured, non-guaranteed, past due and are non-interest bearing.

$

25,000

$

25,000

b)

Note payable which is unsecured, non-guaranteed, past due and bears interest at 10% per annum.

7,500

7,500

c)

On January 15, 2011, the Company entered into 8 unsecured, non-guaranteed, loan agreements pursuant to which the Company received proceeds of $56,000. If the loans were not repaid within 90 days they then bear interest at 1% per month. In addition, if the loan was not repaid within 90 days, the Company is required to issue 167 common shares every month until the loan is repaid in full. As at September 30, 2014, the Company recognized the fair value of 7,000 (December 31, 2013 – 5,500) common shares issuable for interest expense of $124,537 (December 31, 2013 - $120,282), as shares reserved for future issuance. The Company has not yet issued these common shares. As at September 30, 2014, the Company has also accrued interest expense of $24,920 (December 31, 2013 - $19,880).

56,000

56,000

d)

On May 30, 2013 and August 12, 2013, the Company received advances from a director for $2,000 and $25,000, respectively. On August 12, 2013, the Company entered into an unsecured, non-guaranteed, demand loan agreement with the director for $27,000. The loan bears interest at 1% per annum compounded monthly. In addition, the Company is required to issue 5,000 common shares every month until the loan is repaid in full. As of September 30, 2014, the Company recognized the fair value of 65,000 (December 31, 2013 - 20,000) common shares issuable for interest expense of $21,350 (December 31, 2013 - $9,600), as shares reserved for future issuance. The Company has not yet issued these common shares. As at September 30, 2014, the Company has also accrued interest expense of $317 (December 31, 2013 - $125).

27,000

27,000

e)

On February 27, 2014, May 9 2014, and July 11, 2014 the Company received advances from a director of $6,000, $3,300 and $9,000, respectively. The Company repaid $3,300 on June 12, 2014 and $9,000 on July 28, 2014. The outstanding amount is unsecured, due on demand and bears interest at 1% per annum compounded and calculated monthly.

6,000

–

f)

On September 18, 2014, the Company entered into an unsecured, non-guaranteed, loan agreement pursuant to which the Company received proceeds of $35,000. The loan bears interest at 8% per annum compounded annually and is due 1 year after the date of issuance.

35,000

–

g)

On August 26, 2014, the Company issued an unsecured $15,000 note payable to a significant shareholder. The note bears interest at an annual rate of 8% per annum, is uncollateralized, and due 1 year after the date of issuance.

15,000

–

The Company issued the following unsecured notes payable to a significant shareholder. The notes bear interest at an annual rate of 8% per annum, are uncollateralized, and are due 2 years after the date of issuance:

a)

On January 17, 2014, the Company issued a $50,000 note payable.

50,000

–

b)

On January 29, 2014 the Company issued a $50,000 note payable.

50,000

–

c)

On February 19, 2014, the Company issued a $25,000 note payable.

25,000

–

d)

On March 3, 2014, the Company issued a $50,000 note payable.

50,000

–

e)

On March 19, 2014, the Company issued a $150,000 note payable.

150,000

–

f)

On April 25, 2014, the Company issued a $25,000 note payable.

25,000

–

g)

On May 19, 2014, the Company issued a $25,000 note payable.

25,000

–

h)

On June 2, 2014, the Company issued an $18,000 note payable.

18,000

–

i)

On June 12, 2014, the Company issued a $32,000 note payable.

32,000

–

j)

On July 1, 2014, the Company issued a $25,000 note payable.

25,000

–

k)

On July 16, 2014, the Company issued a $75,000 note payable to a related party. On July 23, the note holder assigned the note to a related party.

75,000

–

Total

$

696,500

$

115,500

Less Short Term

)

)

Long Term

$

525,000

$

–

5.

Convertible Debentures

a)

Effective January 25, 2010, the Company issued a convertible note for $225,000. Pursuant to the terms of the agreement, the loan was unsecured, non-interest bearing, and was due on December 21, 2010. The note was convertible into shares of the Company’s common stock at any time at a variable conversion price equal to 65% of the average of the closing bid prices of the common stock during the 28 trading days prior to the date of the conversion notice and was subject to adjustment upon the issuance of certain dilutive instruments. Due to these provisions, the embedded conversion option qualified for derivative accounting and bifurcation under ASC 815-15 Derivatives and Hedging. The initial fair value of the derivative liability of $538,249 resulted in a full discount to the note payable of $225,000 and the recognition of a loss on derivatives of $313,249.

On June 2, 2010, the Company issued 6,386 restricted shares of common stock upon the conversion of the principal amount of $166,667. The fair value of the derivative liability at June 2, 2010, was $266,425 and $197,352 was reclassified to additional paid-in capital upon conversion. During the year ended December 31, 2013, the Company repaid $2,000 of the note and during the nine months ended September 30, 2014, the Company repaid an additional $1,000. At September 30, 2014, the carrying value of the note was $55,333 (December 31, 2013 - $56,333). The note is in default at September 30, 2014. 

b)

Effective July 25, 2013, the Company issued a convertible note to secure a demand loan of $75,000. Pursuant to the terms of the agreement, the loan is unsecured and 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. As the note is due on demand the entire discount was recorded as interest expense on July 25, 2013.

c)

Effective July 25, 2013, the Company issued a convertible note to secure the demand loan of $45,000. Pursuant to the terms of the agreement, the loan is unsecured and 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. As the note is due on demand the entire discount was recorded as interest expense on July 25, 2013.

d)

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

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

Due to the potential adjustments to the conversion feature and the inability to conclude that the Company has enough unissued-authorized common shares to settle the warrants, the embedded conversion option and the warrants qualify for derivative accounting and bifurcation under ASC 815-15 Derivatives and Hedging. The initial fair value of the conversion feature of $6,714,279 and warrants of $3,169,531 resulted in a discount to the note payable of $500,000 and the recognition of a loss on derivatives of $9,383,810.

On July 24, 2014, the Company and the note holder agreed to extend the maturity date to December 31, 2014 and increase the interest rate to 12% starting on August 1, 2014. The Company accounted for the modification in accordance with ASC 405-20 and ASC 470-50-40. As the present value of the future cash flows was more than 10% different than the cash flows of the original debt, it was determined that the original and new debt instruments are substantially different and the Company treated the original convertible note extinguished and exchanged for a new convertible note. The Company recorded a loss on extinguishment of debt of $474,668. The Company also recognized the fair value of the embedded conversion feature of $24,501,757 as a derivative liability and reduced the value of the convertible loan to $nil. The fair value of the derivative liability was $22,000,404 at September 30, 2014. During the nine months ended September 30, 2014, the Company recorded total accretion of $437,350 and at September 30, 2014 the carrying value of the note was $53,285.

e)

On July 25, 2013, the Company issued a convertible note for up to $500,000 and warrants to purchase 10,197,916 underlying shares of the Company’s common stock. The warrants are exercisable into 8,158,333 common shares of the Company at $0.05 per share and 2,039,583 shares at an exercise price of $0.10 per share until July 31, 2014. During the year ended December 31, 2013, the Company received proceeds of $273,700 under the note. At November 30, 2013, the Company had determined that no additional funding would be received pursuant to the convertible note. The note bears interest at 8% per annum compounded monthly, and principal and interest are due on July 31, 2014.

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

Due to the potential adjustments to the conversion rate of the conversion feature and the inability to conclude that the Company has enough unissued-authorized common shares to settle the warrants, the embedded conversion option and the warrants qualify for derivative accounting and bifurcation under ASC 815-15 Derivatives and Hedging. The initial fair value of the conversion feature of $5,278,978 and warrants of $2,450,519 resulted in a discount to the note payable of $273,700 and the recognition of a loss on derivatives of $7,455,797.

The note was not repaid on July 31, 2014. On August 4, 2014, the Company and the note holder agreed to extend the maturity date to December 31, 2014 and increase the interest rate to 12% starting on August 1, 2014. The Company accounted for the modification in accordance with ASC 405-20 and ASC 470-50-40. As the present value of the future cash flows was more than 10% different than the cash flows of the original debt, it was determined that the original and new debt instruments are substantially different and the Company treated the original convertible note extinguished and exchanged for a new convertible note. The Company recorded a loss on extinguishment of debt of $273,700. The Company also recognized the fair value of the embedded conversion feature of $13,685,849 as a derivative liability and reduced the value of the convertible loan to $nil.

The fair value of the derivative liability was $12,043,021 at September 30, 2014. During the nine months ended September 30, 2014, the Company recorded total accretion of $257,956 and at September 30, 2014 the carrying value of the note was $36,264. 

f)

Effective November 12, 2013, the Company issued a convertible note for up to $500,000 and warrants to purchase 694,445 underlying shares of the Company’s common stock. The warrants are exercisable into 555,556 common shares of the Company at $0.05 per share and 138,889 shares at an exercise price of $0.10 per share until July 31, 2014. During the year ended December 31, 2013, the Company received proceeds of $20,000 under the note. At November 30, 2013, the Company had determined that no additional funding would be received pursuant to the convertible note. The note bears interest at 8% per annum compounded monthly, and principal and interest was 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 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 $250,021 and warrants of $145,943 resulted in a discount to the note payable of $20,000 and the recognition of a loss on derivatives of $375,964. During the nine months ended September 30, 2014, the Company recorded accretion of $13,479 increasing the carrying value of the note to $20,000. The note was not repaid on July 31, 2014. The note is in default at September 30, 2014. 

g)

Effective October 7, 2013, the Company issued a convertible note for up to $500,000 and warrants to purchase 868,055 underlying shares of the Company’s common stock. The warrants are exercisable into 694,444 common shares of the Company at $0.05 per share and 173,611 shares at an exercise price of $0.10 per share until July 31, 2014. During the year ended December 31, 2013, the Company received proceeds of $25,000 under the note. At November 30, 2013, the Company had determined that no additional funding would be received pursuant to the convertible note. The note bears interest at 8% per annum compounded monthly, and principal and interest are due on July 31, 2014.

The note may be prepaid by the Company without penalty with 30 days prior notice. The note is convertible into shares of the Company’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 $312,522 and warrants of $182,522 resulted in a discount to the note payable of $25,000 and the recognition of a loss on derivatives of $470,045.

On July 24, 2014, the Company and the note holder agreed to extend the maturity date to December 31, 2014 and increase the interest rate to 12% starting on August 1, 2014. The Company accounted for the modification in accordance with ASC 405-20 and ASC 470-50-40. As the present value of the future cash flows was more than 10% different than the cash flows of the original debt, it was determined that the original and new debt instruments are substantially different and the Company treated the original convertible note extinguished and exchanged for a new convertible note. The Company recorded a loss on extinguishment of debt of $25,000. The Company also recognized the fair value of the embedded conversion feature of $1,250,082 as a derivative liability and reduced the value of the convertible loan to $nil.

The fair value of the derivative liability was $1,100,020 at September 30, 2014. During the nine months ended September 30, 2014, the Company recorded total accretion of $26,387 and at September 30, 2014 the carrying value of the note was $9,355. 

h)

On July 25, 2013, the Company issued a convertible note for up to $500,000 and warrants to purchase 739,584 underlying shares of the Company’s common stock. The warrants are exercisable into 591,667 common shares of the Company at $0.05 per share and 147,917 shares at an exercise price of $0.10 per share until July 31, 2014. During the year ended December 31, 2013, the Company received proceeds of $41,300 under the note. At November 30, 2013, the Company had determined that no additional funding would be received pursuant to the convertible note. The note bears interest at 8% per annum compounded monthly, and principal and interest are due on July 31, 2014.

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

Due to the potential adjustments to the conversion feature and the inability to conclude that the Company has enough unissued-authorized common shares to settle the warrants, the embedded conversion option and the warrants qualify for derivative accounting and bifurcation under ASC 815-15 Derivatives and Hedging. The initial fair value of the conversion feature of $547,736 and warrants of $187,531, resulted in a discount to the note payable of $41,300 and the recognition of a loss on derivatives of $693,967.

On August 4, 2014, the Company and the note holder agreed to extend the maturity date to December 31, 2014 and increase the interest rate to 12% starting on August 1, 2014. The Company accounted for the modification in accordance with ASC 405-20 and ASC 470-50-40. As the present value of the future cash flows was more than 10% different than the cash flows of the original debt, it was determined that the original and new debt instruments are substantially different and the Company treated the original convertible note extinguished and exchanged for a new convertible note. The Company recorded a loss on extinguishment of debt of $41,300. The Company also recognized the fair value of the embedded conversion feature of $2,065,135 as a derivative liability and reduced the value of the convertible loan to $nil. 

The fair value of the derivative liability was $1,817,233 at September 30, 2014. During the nine months ended September 30, 2014, the Company recorded total accretion of $42,024 and at September 30, 2014, the carrying value of the note was $17,369. 

6.

Derivative Liabilities

Balance at the beginning of period

$

29,430,719

$

941,464

Addition of new derivative liabilities (embedded conversion options)

–

14,028,014

Addition of new derivative liabilities (warrants)

53,606

9,209,794

Change in fair value of warrants

)

)

Change in fair value of embedded conversion option

16,152,736

9,128,915

Expiration of warrants

)

–

Conversion of warrants

–

)

Balance at the end of the period

$

40,286,681

$

29,430,719

$

Three months ended September 30, 2014:

Change in fair value of derivative liabilities during the three months ended September 30, 2014

)

Change in fair value of derivatives

)

Three months ended September 30, 2013:

Fair value of derivative liabilities in excess of note proceeds received

)

Change in fair value of derivative liabilities during the three months ended September 30, 2013

329,317

Change in fair value of derivatives

)

$

Nine months ended September 30, 2014:

Change in fair value of derivative liabilities during the nine months ended September 30, 2014

)

Change in fair value of derivatives

)

Nine months ended September 30, 2013:

Fair value of derivative liabilities in excess of note proceeds received

)

Change in fair value of derivative liabilities during the nine months ended September 30, 2013

)

Change in fair value of derivatives

)

Expected
Volatility

Risk-free Interest Rate

Expected Dividend Yield

Expected Life (in years)

At December 31, 2013

29% - 209%

0.10% - 0.58%

0

%

0.58-3.00

At issuance

209%

0.38%

0

%

3.00

At September 30, 2014

117% - 228%

0.02% - 0.58%

0

0.17-2.26

7.

Common Stock

8.

Stock Purchase Warrants

a)

On January 2, 2014, the Company entered into a settlement agreement with a consultant to settle $11,800 of services provided in 2012. Pursuant to the agreement, the Company issued a warrant to purchase 43,750 shares of common stock at $0.0005 per share for three years.

b)

On January 3, 2014, the Company entered into a settlement agreement with a consultant to settle $41,806 of services provided in 2012. Pursuant to the agreement, the Company issued a warrant to purchase 155,000 shares of common stock at $0.0005 per share for three years.

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

Weighted Average Remaining Term

Balance December 31, 2013

27,214,166

$

0.08

0.70 years

Issued

198,750

0.0005

Expired

)

0.0677

Balance September 30, 2014

2,279,583

$

0.17

1.34 years

9.

Commitments and Contingencies

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 shares of common stock. The agreement was subsequently suspended. During the nine months ended September 30, 2014, the Company recorded $nil (2013 - $10,000) of professional fees.

b)

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. During the nine months ended September 30, 2014, the Company recognized $46,454 (2013 - $37,203) of rent expense. The Company’s future minimum lease payments are as follows:

Twelve months ending September 30, 2015

$

53,147

Twelve months ending September 30, 2016

55,140

Twelve months ending September 30, 2017

57,133

Twelve months ending September 30, 2018

59,126

Twelve months ending September 30, 2019

30,223

$

254,769

c)

The Company issued a $500,000 convertible note on July 25, 2013, of which 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.

d)

On May 13, 2014, the Company terminated the former CEO and President of the Company’s employment agreement in accordance with its terms. Also on May 13, 2014, the Company terminated an employment agreement with an employee in accordance with its terms.

e)

On June 17, 2014, the Company was informed that a debtor will be instituting legal proceedings against the Company for collection of the sum of $76,712. The Company believes it owes the debtor $9,986 which it has recorded as owing. Accordingly, the Company intends to defend these potential matters vigorously.

f)

On June 26, 2014, the Company was informed that a debtor will be instituting legal proceedings against the Company for collection of the sum of $17,534. The Company believes it owes the debtor $11,705 which it has recorded as owing. Accordingly, the Company intends to defend these potential matters vigorously.

g)

On December 16, 2013, the Company was informed that a vendor will be instituting legal proceedings against the Company for collection of the sum of $12,455. The Company believes it does not owe the vendor anything. Accordingly, the Company intends to defend these potential matters vigorously.

h)

On July 8, 2014, the Company filed civil actions against the former CEO and President, and against a former employee of the Company. The petitions allege they breached the terms and conditions of their employment agreements with the Company, converted property belonging to the Company, and filed false and wrongful claims with the Oklahoma Department of Labor. Neither former employee has filed answers to the petitions, although the Company expects them to do so and to file counterclaims against the Company. On August 7, 2014, the Oklahoma Department of Labor entered an Administrative Order of Determination in favor of the former CEO and President of the Company in the amount of $72,000 and liquidated damages of $72,000; and also entered an Administrative Order of Determination in favor of the former employee in the amount of $54,000 and liquidated damages of $54,000. The Company has requested a rehearing, re-opening and reconsideration of the administrative orders with the Oklahoma Department of Labor. At September 30, 2014, the Company had accrued a total of $252,000 pursuant to the Administrative Order of Determination.

On August 8, 2014, the Company entered into an employment agreement with an existing employee.  Pursuant to the agreement the employee will act as the Interim CFO and Secretary of the Company for an initial period of six months in consideration for $1,200 per month in addition to the employee’s current salary structure of $60,000 per year.

10.

Subsequent Events

a)

On October 7, 2014, the Company received an advance from a director of $7,000. The outstanding amount is unsecured, due on demand and bears interest at 1% per annum compounded and calculated monthly. The loan was repaid on October 8, 2014.

b)

On October 7, 2014, the Company entered into a note payable with a related party, pursuant to which the Company received proceeds of $30,000. The note is bears interest at an annual rate of 8% per annum and due on October 7, 2016.

c)

On October 31, 2014, the Company entered into a note payable with a related party, pursuant to which the Company received proceeds of $20,000. The note is bears interest at an annual rate of 8% per annum and due on October 31, 2016.

d)

On November 4, 2014, the Company entered into a note payable with a related party, pursuant to which the Company received proceeds of $32,000. The note is bears interest at an annual rate of 8% per annum and due on November 4, 2016.

e)

The Company failed to repay the convertible notes described in Notes 5(d), (e), (g) and (h) when they became due on December 31, 2014. The Company is attempting to negotiate a further extension.

(a)

pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the registrant;

(b)

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the registrant are being made only in accordance with authorizations of management and directors of the registrant; and

(c)

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the registrant's assets that could have a material effect on the financial statements.

Exhibit

Description

31

Section 302 Certification of Principal Executive Officer

32

Section 906 Certification of Principal Executive Officer

101.INS*

XBRL Instance

101.SCH*

XBRL Taxonomy Extension Schema

101.CAL*

 XBRL Taxonomy Extension Calculations

101.DEF*

XBRL Taxonomy Extension Definitions

101.LAB*

XBRL Taxonomy Extension Labels

101.PRE*

XBRL Taxonomy Extension Presentation

/s/ Deborah Engles

Deborah Engles 

Interim Chief Financial Officer