bowmo, Inc. - Quarter Report: 2016 June (Form 10-Q)

uhln_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: June 30, 2016

¨ 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

U.S. 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.)

5930 Royal Lance, Suite E211, Dallas, TX		75230
(Address of principal executive offices)		(Zip Code)

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

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

With a copy to:

Philip Magri, Esq.

Magri Law, LLC

2642 NE 9th Avenue

Fort Lauderdale, FL 33334

T: (646) 502-5900

F: (646) 826-9200

pmagri@magrilaw.com

www.MagriLaw.com

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No x

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

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	x

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements.	3

Index

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	4
	Forward-Looking Statements	4
	Plan of Operations	4
	Joint Venture Agreement with M&M Sourcing	5
	Consignment Agreement with Rhino Workwear USA, Ltd.	7
	Results of Operations	9
	Liquidity and Capital Resources	10
	Off-Balance Sheet Arrangements	14
Item 3.	Quantitative and Qualitative Disclosures about Market Risk.	14
Item 4.	Controls and Procedures.	14
	Management's Report on Disclosure Controls and Procedures	14
	Changes in Internal Control over Financial Reporting	14

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings.	15
Item 1A.	Risk Factors.	15
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	15
Item 3.	Defaults Upon Senior Securities.	15
Item 4.	Mine Safety Disclosures.	16
Item 5.	Other Information.	16
Item 6.	Exhibits.	17

SIGNATURES		18

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

Table of Contents		Index

Unaudited Consolidated Balance Sheets		F-1

Unaudited Consolidated Statements of Operations		F-2

Unaudited Consolidated Statements of Cash Flows		F-3

Notes to the Unaudited Consolidated Financial Statements		F-4

US Highland, Inc.

Consolidated Balance Sheets

(Unaudited)

	June 30, 2016			December 31, 2015

ASSETS
Current Assets
Cash and cash equivalents	$	11,065		$	13,563
Prepaid expenses		2,500			93,029
Deposit in Highlon acquisition		–			150,000
Loans receivable		83,657			–

Total Current Assets		97,222			256,592
Deposits		4,664			4,664
Property and equipment, net		2,456			4,708

Total Assets		104,342		$	265,964

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable	$	634,209		$	626,883
Accrued liabilities ($313,905 and $267,596 related parties, respectively)		628,402			615,324
Advances from Highlon		–			26,000
Convertible debentures ($69,954 and $nil related parties, respectively), net		117,812			52,333
Derivative liabilities		656,365			16,886,192
Loans payable ($220,000 and $220,000 related parties, respectively)		412,000			367,000
Total Liabilities		2,448,788			18,573,732

Commitments

Stockholders' Deficit
Preferred stock, 40,000 shares authorized, par value $0.01; no shares issued and outstanding		–			–
Series A Preferred stock, 3,500,000 shares authorized, par value $0.01; 3,381,520 shares issued and outstanding		33,815			33,815
Series B Preferred stock, 10,000 shares authorized, par value $0.01; 5,000 shares issued and outstanding		50			50
Common stock, 500,000,000 shares authorized, $0.01 par value; 58,162,669 shares issued and 58,104,336 shares outstanding		581,627			581,627
Common stock reserved for future issuance; 354,500 and 316,500 shares, respectively		201,519			197,865
Treasury stock, at cost – 58,333 shares		(773,500	)		(773,500	)
Additional paid-in capital		69,697,929			69,697,929
Accumulated deficit		(72,085,886	)		(88,045,554	)
Total Stockholders' Deficit		(2,344,446	)		(18,307,768	)

Total Liabilities and Stockholders' Deficit	$	104,342		$	265,964

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

F-1

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US Highland, Inc.

Consolidated Statements of Operations

(Unaudited)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2016			2015			2016			2015

Revenue	$	–		$	–		$	–		$	–

Operating Expenses
Depreciation		1,126			1,547			2,252			3,301
General and administrative		29,923			80,191			168,178			187,776
Professional fees		53,099			31,768			117,989			54,920

Total Operating Expenses		84,148			113,506			288,419			245,997

Operating Loss		(84,148	)		(113,506	)		(288,419	)		(245,997	)

Other Income (Expense)
Interest expense		(188,241	)		(145,992	)		(249,821	)		(256,281	)
Change in fair value of derivatives		3,711,355			(35,777,246	)		16,633,366			(43,806,560	)
Loss on settlement with Highlon		–			–			(118,115	)		–
Equity in the net loss of joint venture		(19,654	)		–			(19,654	)		–
Other income		1,789			–			2,311			25

Total Other Income (Expense)		3,505,249			(35,923,238	)		16,248,087			(44,062,816	)

Net (Loss) Income		3,421,101			(36,036,744	)		15,959,668			(44,308,813	)

Net (Loss) Per Common Share:
- Basic		0.06			(0.46	)		0.27			(0.57	)
- Diluted		0.01			(0.46	)		0.06			(0.57	)
Basic weighted average common shares outstanding		58,163,000			77,728,000			58,163,000			77,728,000
Diluted weighted average common shares outstanding		282,000,000			77,728,000			282,003,000			77,728,000

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

F-2

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US Highland, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

	For the Three Months Ended June 30, 2016			For the Three Months Ended June 30, 2015
Operating Activities
Net income (loss)	$	15,959,668		$	(44,308,813	)
Adjustments to reconcile net income (loss) to cash used in operating activities:
Depreciation expense		2,252			3,301
Accretion expense		79,551			121,798
Amortization of deferred financing costs		428			–
Change in fair value of derivatives		(16,633,366	)		43,806,560
Equity in the net loss of joint venture		19,654			–
Interest expense related to derivative liability in excess of debt		103,539			–
Loss on settlement with Highlon		118,115			–
Shares issuable for interest expense		3,654			26,614
Changes in operating assets and liabilities:
Accrued interest on loans receivable		2,311			–
Prepaid expenses and deposits		90,529			5,219
Accounts payable and accrued liabilities		(20,018	)		51,115
Accrued liabilities – related parties		46,307			88,606
Net Cash Used in Operating Activities		(231,998	)		(205,600	)

Investing Activities
Issuance of loans receivable - Lahva		(101,000	)		–

Net Cash Used in Investing Activities		(101,000	)		–

Financing Activities
Proceeds from convertible debentures		285,500			–
Proceeds from loans payable		45,000			189,000
Proceeds from loans payable – related parties		–			30,200
Repayment of loans		–			(8,500	)
Repayment of loans – related parties		–			(13,200	)

Net Cash Provided by Financing Activities		330,500			197,500

Decrease In Cash		(2,498	)		(8,100	)

Cash - Beginning of Period		13,563			14,035

Cash - End of Period	$	11,065		$	5,935

Supplemental Cash Flows Information:
Cash paid for income taxes	$	–		$	–
Cash paid for interest	$	–		$	–

Non-cash Investing and Financing Activities
Derivative liabilities recorded on convertible debentures	$	403,539		$	–
Series A Preferred shares issued for settlement of debt	$	–		$	12,849,776
Series B Preferred shares issued for cancellation of common shares	$	–		$	200,000
Gain on settlement of related party debts	$	–		$	1,928,307

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

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US Highland, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

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.

On September 23, 2015, the Company incorporated two wholly-owned subsidiaries, USH Distribution Corp., a Nevada corporation, and Powersports Brand Alliance, Inc., a Nevada corporation. The subsidiaries were formed to provide sales, marketing and distribution services of their power sport products and accessories.

On September 25, 2015, the Company entered into a Joint Venture Agreement with M&M Sourcing Sdn. Bhd., a Malaysian entity ("M&M") and jointly formed Lahva, Inc., a Nevada corporation ("Lahva"). The Company's and M&M's equity stake in Lahva is 40% and 60%, respectively.

Basis of Presentation

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

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

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

These financial statements should be read in conjunction with the Company's audited financial statements and the notes thereto for the fiscal year ended December 31, 2015 included in the Company's Annual Report on Form 10-K filed on April 15, 2016 (the "2015 Annual Report").

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US Highland, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

Investments in Unconsolidated Affiliates

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

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

Significant Accounting Policies

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

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

Going Concern

The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company as a going-concern basis. The going concern basis assumes that assets are realized and liabilities are extinguished in the ordinary course of business at amounts disclosed in the consolidated financial statements. The Company has incurred recurring losses from operations, and as of June 30, 2016, current liabilities exceed current assets by $2,351,566, and the Company has an accumulated deficit of $72,085,886. The Company's ability to continue as a going concern depends upon its ability to obtain adequate funding to support its operations through continuing investments of debt and/or equity by qualified investors/creditors, internally generated working capital and monetization of intellectual property assets. These factors raise substantial doubt about the Company's ability to continue as a going concern. These consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Management is currently pursuing a business strategy which includes raising the necessary funds to finance the Company's development, marketing and manufacturing efforts.

F-5

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US Highland, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

2.	Deposit on Highlon Distribution Inc. Acquisition

On December 30, 2014, the Company entered into a share exchange agreement with Highlon Distribution, Inc. (Highlon). Per the agreement, the Company will exchange 100 shares of the Company's common stock for 100% of the Highlon shares. In addition, the Company will transfer $150,000 to Highlon within five days from the execution of the agreement. Highlon is a distribution management business focusing on marketing existing product in logistics area. During the six months ended June 30, 2016, the Company wrote-off the deposit of $150,000 pursuant to a subsequent settlement agreement with Highlon and the former President of the Company. Pursuant to the settlement agreement, the Company also agreed to pay the former President of the Company an additional $20,185, offset by advances from Highlon of $26,000 and accounts payable to the former President of the Company of $5,885, resulting in a loss on settlement of debt of $118,115. Refer to Note 11(g).

3.	Investment in Joint Venture

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

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

	a)	On February 26, 2016, the Company entered into a promissory note with Lahva, Inc. for $70,000. The note receivable bears interest at 8% per annum and is due on February 26, 2017.

	b)	On March 30, 2016, the Company entered into a promissory note with Lahva, Inc. for $12,500. The note receivable bears interest at 8% per annum and is due on March 30, 2017.

	c)	On May 23, 2016, the Company entered into a promissory note with Lahva, Inc. for $11,750. The note receivable bears interest at 8% per annum and is due on May 23, 2017.

	d)	On June 1, 2016, the Company entered into a promissory note with Lahva, Inc. for $6,750. The note receivable bears interest at 8% per annum and is due on June 1, 2017.

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

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US Highland, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

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

	Six Months Ended June 30, 2016

Revenues	$	–
Expenses		49,134
Net Loss	$	(49,134	)

Total Assets	$	153,350

Total Liabilities	$	202,384
Total Partners Capital		(49,034	)
Total Liabilities and Partners Capital	$	153,350

4.	Property and Equipment

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

	Useful Life	June 30, 2016			December 31, 2015

Computers and office equipment	3 years	$	15,930		$	15,930
Manufacturing equipment	5 - 10 years		19,513			19,513

			35,443			35,443
Accumulated depreciation			(32,987	)		(30,735	)

Property and equipment, net		$	2,456		$	4,708

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

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US Highland, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

5.	Related Party Transactions

	a)	During the six months ended June 30, 2016, the Company incurred salary and wages of $nil (2015 – $58,131) and $24,000 (2015 – $40,965) to the former President of the Company and the interim Chief Financial Officer ("interim CFO") of the Company, respectively. At June 30, 2016, the Company owes the former President of the Company and the interim CFO $nil (December 31, 2015 – $5,885) and $3,000 (December 31, 2015 – $12,000), respectively, which have been included in accounts payable.

	b)	During the six months ended June 30, 2016, the Company incurred management fees of $2,000 to the President of the Company.

	c)	At June 30, 2016, the Company owed significant shareholders of the Company an aggregate of $190,000 (December 31, 2015 – $190,000) pursuant to unsecured, non-guaranteed loan agreements and $500,000 (December 31, 2015 – $500,000) pursuant to convertible debenture agreements. In addition, the Company owed the significant shareholders of the Company a total of $312,969 (December 31, 2015 – $266,816) in accrued interest.

	d)	At June 30, 2016, the Company owed a former director of the Company $27,000 (December 31, 2015 – $27,000) pursuant to unsecured, non-guaranteed loan agreements. In addition, the Company owes the former director of the Company accrued interest of $795 (December 31, 2015 – $658), which has been included in accrued liabilities. Refer to Note 8(c).

	e)	At June 30, 2016, the Company owed the President of the Company $3,000 (December 31, 2015 – $3,000) pursuant to unsecured, non-guaranteed loan agreements. In addition, the Company owes the President of the Company accrued interest of $139 (December 31, 2015 – $122), which has been included in accrued liabilities. Refer to Note 8(d).

	f)	On December 30, 2014, the Company entered into a share exchange agreement with a company whose Chief Executive Officer is the former President of the Company. Refer to Note 2.

6.	Convertible Debentures

	a)	Effective January 25, 2010, the Company issued a convertible note for $225,000. Pursuant to the terms of the agreement, the loan was unsecured, non-interest bearing, and was due on December 21, 2010. The note was convertible into shares of the Company'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, during the year ended December 31, 2014, the Company repaid an additional $3,000, and during the year ended December 31, 2015, the Company repaid $1,000. At June 30, 2016 and December 31, 2015, the carrying value of the note was $52,333 and $52,333, respectively. The note is in default at June 30, 2016.

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US Highland, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

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.

On December 31, 2014, the Company and the note holder agreed to extend the maturity date to December 31, 2015. Interest shall accrue at 12% per annum but may be reduced to 8% for any period of time in which the interest is paid in cash and not accrued. The Company accounted for the modification in accordance with ASC 405-20 and ASC 470-50-40. As the present value of the future cash flows was more than 10% different than the cash flows of the original debt, it was determined that the original and new debt instruments are substantially different and the Company treated the original convertible note extinguished and exchanged for a new convertible note. The Company recorded a loss on extinguishment of debt of $411,820. The Company also recognized the fair value of the embedded conversion feature of $25,088,180 as a derivative liability and reduced the value of the convertible loan to $nil.

On December 31, 2015, the Company and the note holder agreed to extend the maturity date to December 31, 2016. Interest shall accrue at 12% per annum but may be reduced to 8% for any period of time in which the interest is paid in cash and not accrued. The Company accounted for the modification in accordance with ASC 405-20 and ASC 470-50-40. As the present value of the future cash flows was more than 10% different than the cash flows of the original debt, it was determined that the original and new debt instruments are substantially different and the Company treated the original convertible note extinguished and exchanged for a new convertible note. The Company recorded a gain on extinguishment of debt of $492,585. The Company also recognized the fair value of the embedded conversion feature of $16,507,415 as a derivative liability and reduced the value of the convertible loan to $nil.

During the six months ended June 30, 2016, the Company recorded total accretion of $69,954. At June 30, 2016, and December 31, 2015, the carrying value of the note was $69,954 and $nil with unamortized discount of $430,046 and $500,000, respectively.

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US Highland, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

	c)	On February 11, 2016, the Company entered into two convertible promissory notes for a total of $275,000, pursuant to which the Company received proceeds of $237,500, net of an original issue discount of $25,000 and legal fees of $12,500. The notes are convertible at a price equal to 60% of the lowest trading price of the Company's common stock for the 20 prior trading days, bearing interest at 8% per annum and due on February 11, 2017. Due to these provisions, the embedded conversion options qualified for derivative accounting and bifurcation under ASC 815-15 Derivatives and Hedging. The initial fair value of the derivative liabilities of $308,492 resulted in a full discount to the note payable of $250,000 and the recognition of $59,492 as additional interest expense.

		During the six months ended June 30, 2016, the Company recorded total accretion of $8,704 and amortization of deferred financing cost of $396. At June 30, 2016, the carrying value of the notes was $8,704 with unamortized discount of $266,296 and deferred financing cost of $12,104.

	d)	On May 17, 2016, the Company entered into a convertible promissory note for $55,000, pursuant to which the Company received proceeds of $48,000, net of an original issue discount of $5,000 and legal fees of $2,000. The notes are convertible at a price equal to 55% of the lowest trading price of the Company's common stock for the 20 prior trading days, bearing interest at 8% per annum and due on May 17, 2017. Due to these provisions, the embedded conversion options qualified for derivative accounting and bifurcation under ASC 815-15 Derivatives and Hedging. The initial fair value of the derivative liabilities of $95,047 resulted in a full discount to the note payable of $50,000 and the recognition of $45,047 as additional interest expense.

		During the six months ended June 30, 2016, the Company recorded total accretion of $893 and amortization of deferred financing cost of $32. At June 30, 2016, the carrying value of the notes was $893 with unamortized discount of $54,107 and deferred financing cost of $1,968.

7.	Derivative Liabilities

The embedded conversion options of the Company's convertible debentures described in Note 6 contain conversion features that qualify for embedded derivative classification. The warrants described in Notes 6 and 9 also qualify for derivative classification. The fair value of these liabilities will be re-measured at the end of every reporting period and the change in fair value will be reported in the statement of operations as a gain or loss on derivative financial instruments.

The table below sets forth a summary of changes in the fair value of the Company's Level 3 financial liabilities:

	June 30, 2016			December 31, 2015

Balance at the beginning of the period	$	16,886,192		$	46,065,517

Addition of new derivative liabilities		403,539			–
Change in fair value of warrants		(289,021	)		(763,397	)
Change in fair value of embedded conversion option		(16,344,345	)		(13,840,491	)
Modification of embedded conversion options		–			7,415
Derecognize of derivative liabilities upon settlement of convertible notes		–			(14,582,852	)

Balance at the end of the period	$	656,365		$	16,886,192

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

June 30,

2016

June 30,

2015

Gain (loss) from change in fair value of derivative liabilities during the period

16,633,366

(43,806,560

)

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US Highland, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

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

	Expected Volatility	Risk-free Interest Rate	Expected Dividend Yield			Expected Life (in years)


At December 31, 2015	134% - 216%	0.20% - 1.03%		0	%	0.25-2.50

At June 30, 2016	208% - 272%	0.36% - 0.71%		0	%	0.50-2.50

8.	Loans Payable

Loans payable consist of the following:		June 30, 2016			December 31, 2015

(a)	Loans payable that are unsecured, non-guaranteed, past due and are non-interest bearing.	$	25,000		$	25,000

(b)	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 June 30, 2016, and December 31, 2015, the Company recognized the fair value of $136,082 and $135,365, respectively, of the 184,500 and 176,500 common shares issuable for interest expense as shares reserved for future issuance. The Company has not yet issued these common shares. As at June 30, 2016, the Company has also accrued interest expense of $36,680 (December 31, 2015 - $33,320).		56,000			56,000

(c)	On May 30, 2013 and August 12, 2013, the Company received advances from a director for $2,000 and $25,000, respectively. On August 12, 2013, the Company entered into an unsecured, non-guaranteed, demand loan agreement with the director for $27,000. The loan bears interest at 1% per annum compounded monthly. In addition, the Company is required to issue 5,000 common shares every month until the loan is repaid in full. As at June 30, 2016, and December 31, 2015, the Company recognized the fair value of $65,437 and $62,500, respectively, of the 170,000 and 140,000 common shares issuable for interest expense as shares reserved for future issuance. The Company has not yet issued these common shares. As at June 30, 2016, the Company has also accrued interest expense of $795 (December 31, 2015 - $658).		27,000			27,000

(d)	On February 27, 2014, and March 19, 2015, the Company received advances from a director of $6,000, and $10,200, respectively. During the year ended December 31, 2015, the Company repaid $13,200. The advances are unsecured, due on demand and bears interest at 1% per annum compounded and calculated monthly.		3,000			3,000

(e)	On September 18, 2014, May 29, 2015, July 3, 2015, December 2, 2015, and January 4, 2016, the Company entered into unsecured, non-guaranteed, loan agreements pursuant to which the Company received proceeds of $35,000, $4,000, $5,000, $22,000, and $45,000, respectively. The loans bear interest at 8% per annum compounded annually and are due 1 year after the date of issuance.		111,000			66,000

(f)	On December 4, 2014, January 29, 2015, August 12, 2015, August 21, 2015, September 1, 2015, September 15, 2015, November 13, 2015, and December 23, 2015, the Company issued unsecured notes payable of $20,000, $20,000, $20,000, $25,000, $40,000, $25,000, $30,000 and $10,000, respectively, to a significant shareholder. The notes bear interest at an annual rate of 8% per annum, are uncollateralized, and due 1 year after the date of issuance.		190,000			190,000

	Total	$	412,000		$	367,000
	Less Short-Term Portion		(412,000	)		(367,000	)
	Long-Term Loans Payable	$	–		$	–

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US Highland, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

9.	Stock Purchase Warrants

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

	Number			Weighted Average Exercise Price		Weighted Average Expected Life

Balance December 31, 2015		855,000		$	0.0005	0.48 years

Expired		(600,000	)	$	0.0005

Balance June 30, 2016		255,000		$	0.0005	0.50 years

10.

Earnings (Loss) Per Share

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

	For the Three Months Ended June 30,
	2016						2015
	Income (Loss)		Weighted Average Common Shares Outstanding		Per Share		Income (Loss)			Weighted Average Common Shares Outstanding		Per Share
Basic:
Income (loss) attributable to common stock	$	3,421,101		58,163,000	$	0.06	$	(36,036,744	)		77,728,000	$	(0.46	)

Effective of Dilutive Securities:
Share purchase warrants		–		250,000		–		–			–		–
Convertible notes		25,853		169,772,000		–		–			–		–
Preferred stock		–		53,815,000		–		–			–		–

Diluted:
Income (loss) attributable to common stock, including assumed conversions	$	3,446,954		282,000,000	$	0.01	$	(36,036,744	)		77,728,000	$	(0.46	)

	For the Six Months Ended June 30,
	2016						2015
	Income (Loss)		Weighted Average Common Shares Outstanding		Per Share		Income (Loss)			Weighted Average Common Shares Outstanding		Per Share
Basic:
Income (loss) attributable to common stock	$	15,959,668		58,163,000	$	0.27	$	(44,308,813	)		77,728,000	$	(0.57	)

Effective of Dilutive Securities:
Share purchase warrants		–		253,000		–		–			–		–
Convertible notes		47,946		169,772,000		–		–			–		–
Preferred stock		–		53,815,000		–		–			–		–

Diluted:
Income (loss) attributable to common stock, including assumed conversions	$	16,007,614		282,003,000	$	0.06	$	(44,308,813	)		77,728,000	$	(0.57	)

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US Highland, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

11.

Commitments

In 2012, the Company entered into two leases for the provision of office and warehouse space until April 30, 2015. In 2013, the Company entered into an amendment to the lease agreements. Pursuant to the amendment, one of the leases was terminated and the other was extended to June 30, 2019. During the six months ended June 30, 2016, the Company recognized $32,902 (2015 - $42,904) of rent expense. The Company's future minimum lease payments are as follows:

Fiscal year ending	Amount
December 31, 2016	$	33,068
December 31, 2017		67,963
December 31, 2018		69,956
December 31, 2019		17,863
Total	$	188,850

	b)	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.

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

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

	e)	On July 8, 2014, the Company filed civil actions against John R. Fitzpatrick, III, its former Chief Executive Officer, President, Chief Financial Officer, and a former director of the Company and against Mr. Steven ("Posie") Pfaff, the Director of Manufacturing of the Company regarding an employment dispute. Mr. Fitzpatrick and Mr. Pfaff have answered the Petition and asserted various counterclaims against US Highland, Inc. and third party claims against directors of the Company and one of the Company's attorneys. Mr. Fitzpatrick and Mr. Pfaff also filed complaints with the Oklahoma Department of Labor. On March 3, 2015, the Oklahoma Department of Labor entered awards of $72,000 in favor of Mr. Fitzpatrick and $54,000 in favor of Mr. Pfaff.

		On February 22, 2016, the Company entered into a Release of Claims and Settlement Agreement with John R. Fitzpatrick, III, Steven Pfaff, and certain of the Company's officers and directors. Pursuant to the settlement agreement, the parties discharged each other from all claims actions, demands, costs, losses, damages, and expenses relating to Mr. Fitzpatrick's and Mr. Pfaff's previous employment with the Company in consideration for an aggregate settlement amount of $200,000 in two installments. The Company and the directors also agreed to execute and deliver a pocket judgement against them which shall not be filed unless the Company fails to make the scheduled payments under the settlement agreement. During the six months ended June 30, 2016, the Company paid $50,000 towards the settlement.

	f)	On September 28, 2015, USH Distribution, Corp., a wholly owned subsidiary of the Company, ("USH Distribution") entered into a consignment agreement whereby USH Distribution will sell workwear apparel manufactured by the consignor in the United States. The agreement shall expire and terminate 18 months from the effective date of the agreement.

	g)	On April 4, 2016, the Company entered into a Settlement Agreement (the "Settlement Agreement"), with Mr. Whitaker and Highlon Distribution, Inc. ("Highlon"), an Oklahoma corporation wholly-owned and operated by Mr. Whitaker. Pursuant to the Settlement Agreement, the parties acknowledged that the Company had paid Mr. Whitaker an aggregate of $174,000 in consideration for services rendered by Mr. Whitaker to the Company pursuant to his two employment agreements, dated May 28, 2014 and February 9, 2015, respectively, with the Company (the "Employment Agreements"); the Company agreed to pay an additional aggregate amount of $20,185 (the "Payment") to Mr. Whitaker for reimbursement of expenses incurred by him. Upon the receipt by Mr. Whitaker of the Payment, the parties agreed that all expenses incurred by Mr. Whitaker shall be deemed fully reimbursed; and the Company shall be released from its obligations to pay Mr. Whitaker $81,000 for services rendered by Mr. Whitaker to the Company under the Employment Agreements. The parties also represented and warranted that that certain Share Exchange Agreement, dated December 30, 2014, between the Company and Highlon, including a deposit of $150,000 made by the Company, pursuant to which the Company was to acquire 100% of Highlon, was terminated and neither party had any outstanding obligation to the other in connection with the Share Exchange Agreement. The Company recorded this settlement transaction as of March 31, 2016.

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

Forward-Looking Statements

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

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

Plan of Operations

US Highland, Inc. (the "Company") is a recreational power sports Original Equipment Manufacturer ("OEM"), developing motorcycles, quads, single cylinder engines, and v-twin engines under its own brand and for other OEMs.

As part of the Company's new strategy to diversify its operations by engaging in new business lines to assist companies and emerging brands launch their products in the U.S., on September 23, 2015, the Company formed two wholly-owned subsidiaries, USH Distribution Corp., a Nevada corporation ("USH"), and Powersports Brands Alliance, Inc., a Nevada corporation ("PBA") The Company formed USH to provide sales, marketing and distribution services primarily to international and domestic companies seeking sales of their products in the U.S.; and PBA to acquire brands in the powersports industry with the intended goal of being a business that sells powersports products, including, but not limited to, powersports parts and accessories, such as helmets, gloves, gear, etc.

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The Company's diversified business strategy consists of the following divisions:

	1.	Distribution. Through USH, the Company's strategy is to provide sales, marketing and distribution services to primarily international and domestic companies seeking sales of their products in the U.S. Specifically, USH is expected to provide its customers with third party logistics, sales/marketing, product strategy and product development.

	2.	Powersports. Through PBA, the Company intends to acquire brands in the powersports industry with the intended goal of being a business that sells powersports products, including, but not limited to, powersports parts and powersports accessories such as helmets, gloves and gear, etc.

	3.	Apparel Sourcing. Through USH, the Company has a 40% minority equity stake in a joint venture, Lahva. The joint venture was formed with a Malaysian company, M&M, to provide apparel sourcing and supply chain management services to U.S. apparel companies and retailers for international sourcing and production of apparel items. Specifically, Lahva's goal is to provide clients with end-to-end sourcing services, managing the entire apparel supply chain from design concept to consumer point of purchase.

	4.	Recreational Powersports OEM. The Company's original business is a recreational powersports Original Equipment Manufacturer ("OEM"), developing motorcycles, quads, single cylinder engines, and v-twin engines under its own brand and for other OEMs. The Company intends to continue this line of business, currently in the research and development stage. The Company's goal is to adopt a Powersports OEM business plan, with a focus on marketing its intellectual property.

Joint Venture Agreement with M&M Sourcing

On September 25, 2015, USH entered into a Joint Venture Agreement, dated September 25, 2015 (the "JV Agreement"), with M&M Sourcing Sdn. Bhd., a Malaysian entity ("M&M"). Pursuant to the JV Agreement, USH and M&M jointly formed Lahva, Inc., a Nevada corporation on September 23, 2015 ("Lahva"), for the purposes of acting as the U.S. based representative of M&M to provide apparel sourcing services to U.S. based brands and retailers, develop in-house apparel brands and invest in and develop non in-house apparel brands (the "Joint Venture").

The following is a summary of the JV Agreement:

	1.	USH's and M&M's equity stake in Lahva is 40% and 60%, respectively.

	2.	In consideration for its equity stake in Lahva, USH has agreed to provide certain services to the Joint Venture, including, but not limited to the following:

	a.	Management mentoring;

	b.	Mentoring to brand designers and entrepreneurs;

	c.	Sales consulting;

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	d.	Sales support;

	e.	Business advisory services;

	f.	U.S. market advisory services;

	g.	Introductions to U.S. business contacts; and

	h.	Use of USH offices, warehouses and business mailing address.

In consideration for its equity stake in Lahva, M&M has agreed to provide certain services to the Joint Venture, including but not limited to the following:

	a.	Management mentoring;

	b.	Mentoring to brand designers and entrepreneurs;

	c.	Client management;

	d.	Apparel production and supply chain development consulting; and

	e.	Business advisory services.

	4.	USH has the exclusive right of first offer to provide consignment sales to the Joint Venture's new customers.

	5.	M&M has the exclusive right to provide international sourcing services to the Joint Venture's sourcing clients and brands (both in-house and non- in-house).

	6.	Lahva's board of directors shall consist of three members, one of whom shall be appointed by USH and two by M&M (the "M&M Board Representatives"). No board resolution will be passed without at least a majority of the board voting in favor of it.

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	7.	The executive officers will be responsible for the day to day management of the Joint Venture. The M&M Board Representatives shall appoint the executive officers of the Joint Venture.

	8.	The Joint Venture Agreement may be terminated at any time upon the mutual agreement of the parties.

	9.	If either party materially breaches the Joint Venture Agreement, files for bankruptcy protection (voluntary or involuntary), becomes insolvent or is subject to a change of control, the other party shall be entitled to purchase its shares in the Joint Venture at a price to be determined by an independent expert.

	10.	If Joint Venture is wound up, the parties will endeavor to ensure that assets contributed by each party will, so far as possible, be transferred back to that party.

	11.	Lahva and each shareholder have the right of first refusal in the event the other shareholder has received a bona fide offer to purchase its Lahva equity stake.

	12.	USH and M&M have a right of first refusal upon the Lahva's sale of securities.

	13.	At any time during the term of the Joint Venture Agreement, M&M has the right and option to purchase all, but not less than all, USH's equity stake in the Joint Venture. The purchase price shall be equal to the USH's pro rata portion of three times Joint Venture's EBITDA (as determined by the auditors of the Joint Venture) for the prior 12 months and shall be paid at the closing.

Consignment Agreement with Rhino Workwear USA, Ltd.

On September 28, 2015, the Company, though USH, entered into that certain Consignment Agreement, dated September 28, 2015 (the "Consignment Agreement"), between USH and Rhino Workwear USA, Ltd. ("Rhino"), a Nevada corporation engaged in the business of designing, manufacturing, marketing and distributing workwear apparel and other accessories for the workwear industry ("Products").

The following is a summary of the Consignment Agreement:

	1.	USH has the exclusive right to sell the Products in the U.S., its possessions and territories (the "Territory") for a period of eighteen (18) months commencing from the date of the Consignment Agreement, and has agreed to devote its best commercial efforts to sell the Products in the Territory.

	2.	Rhino shall supply to USH such quantity of Products, in Rhino's reasonable discretion, necessary to adequately service the Territory. Models and versions of Products are to be defined by Rhino.

	3.	Rhino shall provide Products to USH on consignment; i.e. All Products shall remain the property of Rhino sold by USH and payment for a Product shall be made to Rhino only when USH has sold such Product.

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	4.	USH agrees to sell the Products as per the Rhino approved Products price list. USH agrees to execute a marketing program throughout the Territory for the Products as per the Rhino approved marketing program and marketing budget to be agreed upon in writing as per a marketing agreement to be finalized between the Parties within 90 days of the date of the Consignment Agreement.

	5.	USH shall furnish Rhino with bi-monthly statements on the 1st and 15th of each month indicating a detailed list of all sales transactions during the preceding weeks, and the status of current inventory on the last day of the preceding month (with sufficient detail to show sales by item, including the date of sale, the sales price and customer name) along with a detailed accounting of all receivables for all sales.

	6.	With the bi-monthly statement detailed above, USH shall remit payment to Rhino for Products which have been paid for by customers during the previous weeks. The payment to Rhino shall be the amount referenced on the invoices to USH from Rhino for the particular Products sold.

	7.	Failure to pay a single installment renders all debts immediately payable, even if their due date has not yet occurred. Interest on arrears applies as of right at the highest rate permitted by law per month of delay, up until complete payment of all amounts due.

	8.	Rhino reserves the right to modify its prices at any time upon thirty (30) days written notice to USH. In turn, USH has the right to modify the sales price to the dealer.

	9.	The Consignment Agreement shall expire and terminate eighteen (18) months from the effective date of the Consignment Agreement. Ninety (90) days prior to the expiration of the term of the Consignment Agreement, USH and Rhino have agreed to make good faith efforts to discuss extension of the term of the Consignment Agreement.

	10.	Rhino may terminate the Consignment Agreement by written notice to USH if USH breaches any of the terms of the Consignment Agreement and has not remedied such breach within thirty (30) days of receiving notice of such breach by Rhino.

11.

Rhino may immediately terminate the Consignment Agreement upon the occurrence of any of the following circumstances:

	a.	Any change, transfer or attempted transfer by USH or USH affiliates, voluntarily or by operation of law, of the whole or any part of the Consignment Agreement, other than to an affiliate of USH as part of a corporate reorganization or restructuring, or any change in control outside the ordinary course of business without prior written consent of Rhino;

	b.	Knowingly submitting to Rhino any intentional fraudulent statement, application, report, request for issuance of reimbursement, compensation, refund or credit;

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	c.	Knowing use by USH of any deceptive or fraudulent practice, whether willful, or intentional, in the sale of any Product;

	d.	Any indictment for any crime or violation of any law by USH which will have an adverse effect on the reputation of USH, USH's operations or Rhino; or any conviction in any court of original jurisdiction of USH for any crime or violation of any law which will adversely and materially affect the conduct of USH operations or will be materially harmful to the goodwill or reputation of Rhino, Products or the Rhino Trademarks;

	e.	USH's entering into any agreement, combination, understanding, conspiracy or contract, oral or written, with any other party with the known purpose of fixing prices of Products;

	f.	USH's abandonment of all of its business operations or failure to maintain a going business;

	g.	Insolvency by any definition of USH; or the commission of any act of bankruptcy; or the existence of facts or circumstances which would require the voluntary commencement by USH or the involuntary commencement against USH of any proceedings under any bankruptcy act or law or under any state insolvency law; or the filing of a petition by or against USH under any bankruptcy or insolvency law; or the appointment of a receiver or other officer having similar powers for USH or USH operations; or any levy under attachment, garnishment or execution or similar process which is not, within ten (10) days, vacated or removed by payment or bondin

Results of Operations

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

Revenues

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

Operating Expenses

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

Net Income (Loss)

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

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

Revenues

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

Operating Expenses

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

Net Income (Loss)

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

Liquidity and Capital Resources

As of June 30, 2016, we had cash of $11,065 and a working capital deficiency of $2,351,566. The future of the Company is dependent upon its ability to obtain future financing, upon cash generated from our operations and our ability to borrow cash when needed from related parties. During the six months ended June 30, 2016, the Company received $330,500 aggregate net proceeds from the sale of promissory notes and convertible debentures to third parties.

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We estimated that we will require $1,013,500 over the fiscal year ending December 31, 2016. The Company has $500,000 of convertible notes outstanding for which principal and interest was originally due on July 31, 2014. The convertible notes were extended and are now due on December 31, 2016. These notes are further described in Note 6 of the unaudited financial statements included in this Quarterly Report. Management believes that our cash balance will not be sufficient to meet our working capital requirements for the next twelve-month period. We plan to raise the capital required to satisfy our immediate short-term needs and additional capital required to meet our estimated funding requirement for the next twelve months primarily through equity and or debt financings. There is no assurance that we will be able to obtain further funds required for our continued working capital requirements.

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

	n	Effective January 25, 2010, the Company issued a convertible note for $225,000. Pursuant to the terms of the agreement, the loan was unsecured, non-interest bearing, and was due on December 21, 2010. The note was convertible into shares of the Company's common stock at any time at a variable conversion price equal to 65% of the average of the closing bid prices of the common stock during the 28 trading days prior to the date of the conversion notice and was subject to adjustment upon the issuance of certain dilutive instruments. On June 2, 2010, the Company issued 6,386 restricted shares of common stock upon the conversion of the principal amount of $166,667. During the year ended December 31, 2013, the Company repaid $2,000 of the note, during the year ended December 31, 2014, the Company repaid an additional $3,000, and during the year ended December 31, 2015, the Company repaid $1,000. At June 30, 2016 and December 31, 2015, the carrying value of the note was $52,333. The note is in default at June 30, 2016.

	n	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 were 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 originally bore interest at 8% per annum compounded monthly, and principal and interest were originally due on July 31, 2014. In addition, so long as any amounts 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. On July 24, 2014, the Company and the note holder agreed to extend the maturity date to December 31, 2014, and increase the interest rate to 12% starting on August 1, 2014. On December 31, 2014, the Company and the note holder agreed to extend the maturity date to December 31, 2015 and that interest shall accrue at 12% per annum but may be reduced to 8% for any period of time in which the interest is paid in cash and not accrued. On December 31, 2015, the Company and the note holder agreed to extend the maturity date to December 31, 2016 and that interest shall accrue at 12% per annum but may be reduced to 8% for any period of time in which the interest is paid in cash and not accrued.

	n	On February 11, 2016, the Company entered into two convertible promissory notes for a total of $275,000 to Adar Bay, LLC and Union Capital, LLC, pursuant to which the Company received proceeds of $237,500, net of an original issue discount of $25,000 and legal fees of $12,500. The notes are convertible at a price equal to 60% of the lowest trading price of the Company's common stock for the 20 prior trading days, bearing interest at 8% per annum and due on February 11, 2017.

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Adar Bays, LLC

On February 11, 2016, the Company completed a financing pursuant to a Securities Purchase Agreement with Adar Bays, LLC ("Adar Bays") providing for the purchase of four convertible promissory notes of the Company in the aggregate principal amount of $275,000, with the first note being in the amount of $137,500, the second note being in the amount of $41,250, the third note being in the amount of $41,250, and the fourth note being in the amount of $55,000 (together with any note(s) issued in replacement thereof or as a dividend thereon or otherwise with respect thereto in accordance with the terms thereof, the "Notes"). The First Note was funded on February 17, 2016 and matures on February 11, 2017. The First Note may be converted by the holder, at its option, to convert all or any amount of the principal face amount of the First Note then outstanding into shares of the Company's Common Stock at a price for each share of Common Stock equal to 60% of the lowest trading price of the Common Stock as reported on the OTCQB maintained by the OTC Markets Group, Inc. upon which the Company's shares are traded or any exchange upon which the Common Stock may be traded in the future, for the 20 prior trading days including the day upon which a Notice of Conversion is received by the Company or its transfer agent.

Upon (i) a transfer of all or substantially all of the assets of the Company to any person in a single transaction or series of related transactions, (ii) a reclassification, capital reorganization or other change or exchange of outstanding shares of the Common Stock, or (iii) any consolidation or merger of the Company with or into another person or entity in which the Company is not the surviving entity (other than a merger which is effected solely to change the jurisdiction of incorporation of the Company and results in a reclassification, conversion or exchange of outstanding shares of Common Stock solely into shares of Common Stock) (each of items (i), (ii) and (iii) being referred to as a "Sale Event"), then, in each case, the Company shall, upon request of the Holder, redeem this Note in cash for 150% of the principal amount, plus accrued but unpaid interest through the date of redemption, or at the election of the Holder, such Holder may convert the unpaid principal amount of this Note (together with the amount of accrued but unpaid interest) into shares of Common Stock immediately prior to such Sale Event at the Conversion Price.

The closing of the Second Note shall occur on the third (3rd) monthly anniversary of the closing of the First Note. The closing of the Third Note shall occur on the fourth (4th) monthly anniversary of the closing of the First Note. The closing of the Fourth Note shall occur on the sixth (6th) monthly anniversary of the closing of the First Note. Each closing shall be contingent upon the Common Stock of the Company maintaining a closing bid price in excess of $0.18 for the 10 prior trading days and an aggregate trading volume of not less than $200,000 for the ten prior trading days. The Notes shall contain a 10% OID such that the purchase price shall be: $125,000 for the First Note, $37,500 for the Second Note, $37,500 for the Third Note, and $55,000 for the Fourth Note.

	o	Union Capital, LLC

		On February 11, 2016, the Company entered into a Securities Purchase Agreement, dated February 11, 2016, with Union Capital, LLC ("Union Capital") providing for the purchase of four convertible promissory notes of the Company in the aggregate principal amount of $275,000, with the first note being in the amount of $137,500, the second note being in the amount of $41,250, the third note being in the amount of $41,250, and the fourth note being in the amount of $55,000 (together with any note(s) issued in replacement thereof or as a dividend thereon or otherwise with respect thereto in accordance with the terms thereof, the "Notes"). The First Note was funded on February 19, 2016 and matures on February 11, 2017. The First Note may be converted by the holder, at its option, to convert all or any amount of the principal face amount of the First Note then outstanding into shares of the Company's Common Stock at a price for each share of Common Stock equal to 60% of the lowest trading price of the Common Stock as reported on the OTCQB maintained by the OTC Markets Group, Inc. upon which the Company's shares are traded or any exchange upon which the Common Stock may be traded in the future, for the 20 prior trading days including the day upon which a Notice of Conversion is received by the Company or its transfer agent.

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The closing of the Second Note shall occur on the third (3^rd) monthly anniversary of the closing of the First Note. The closing of the Third Note shall occur on the fourth (4^th) monthly anniversary of the closing of the First Note. The closing of the Fourth Note shall occur on the sixth (6^th) monthly anniversary of the closing of the First Note. Each closing shall be contingent upon the Common Stock of the Company maintaining a closing bid price in excess of $0.18 for the 10 prior trading days and an aggregate trading volume of not less than $200,000 for the ten prior trading days. The Notes shall contain a 10% OID such that the purchase price shall be: $125,000 for the First Note, $37,500 for the Second Note, $37,500 for the Third Note, and $55,000 for the Fourth Note.

The Notes also contain certain representations, warranties, covenants and events of default, and increases in the amount of the principal and interest rates under the Notes in the event of such defaults. The Notes may be prepaid by the Company at any time during the first 180 days after the date of issuance of the Notes subject to the payment of prepayment penalties as described in the Notes.

	n	On March 1, 2016, the Company entered into that certain agreement (the "Agreement") with Mr. John D. Gibbs ("Gibbs" or the "Lender"), relating to that certain convertible promissory note, as amended, issued by the Company to Gibbs on July 23, 2013 for the principal amount of $500,000 and secured by all of the tangible and intangible assets of the Company pursuant to that certain Security Agreement, dated July 23, 2013, between the Company and the Lender (the "Note").

		The Note, as amended, matures on December 31, 2016. From July 23, 2013, the issue date of the Note, until July 31, 2014, the original maturity date, the principal amount of the Note bore interest at a rate of 8%, compounded monthly, per annum. On December 31, 2015, the parties agreed that, effective as of August 31, 2014, the interest rate was increased to 12% per annum; provided, however, that it may be reduced to 8% for any period of time in which interest is paid in cash and not accrued.

	n	On May 17, 2016, the Company issued a convertible promissory note for $55,000, pursuant to which the Company received proceeds of $48,000, net of an original issue discount of $5,000 and legal fees of $2,000. The notes are convertible at a price equal to 55% of the lowest trading price of the Company's common stock for the 20 prior trading days, bearing interest at 8% per annum and due on May 7, 207.

Going Concern

The Company has no revenues and has incurred net losses. In addition, at June 30, 2016, there was an accumulated deficit of $72,085,886. These factors raise substantial doubt about the Company's ability to continue as a going concern.

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

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Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not applicable

Item 4. Controls and Procedures.

Management's Report on Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the ''Exchange Act''). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective as of June 30, 2016 in ensuring that material information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.

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

Changes in Internal Control over Financial Reporting

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

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

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

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

Item 3. Defaults Upon Senior Securities.

Effective January 25, 2010, the Company issued a convertible note for $225,000. Pursuant to the terms of the agreement, the loan was unsecured, non-interest bearing, and was due on December 21, 2010. The note was convertible into shares of the Company's common stock at any time at a variable conversion price equal to 65% of the average of the closing bid prices of the common stock during the 28 trading days prior to the date of the conversion notice and was subject to adjustment upon the issuance of certain dilutive instruments. On June 2, 2010, the Company issued 6,386 restricted shares of common stock upon the conversion of the principal amount of $166,667. During the year ended December 31, 2013, the Company repaid $2,000 of the note, during the year ended December 31, 2014, the Company repaid an additional $3,000, and during the year ended December 31, 2015, the Company repaid $1,000. At June 30, 2016 and December 31, 2015, the carrying value of the note was $52,333. The note is in default at June 30, 2016. The amount of the default and total arrearage of this note is $52,333 as of the date of filing this report.

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Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

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

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

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

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Item 6. Exhibits.

Exhibit		Description

31.1		Section 302 Certification of Principal Executive Officer

31.2		Section 302 Certification of Principal Financial and Accounting Officer

32.1		Section 906 Certification of Principal Executive Officer

32.2		Section 906 Certification of Principal Financial and Accounting 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

In accordance with to requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	US HIGHLAND, INC.

Dated: August 22, 2016	By:	/s/ Kevin G. Malone
	Name:	Kevin G. Malone
	Title:	President
		(Principal Executive Officer)

Dated: August 22, 2016	By:	/s/ Deborah Engles
	Name:	Deborah Engles
	Title:	Interim Chief Financial Officer
		(Principal Financial and Accounting Officer)