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

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: March 31, 2016

OR

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

For the transition period from __________ to___________

Commission File Number: 000-54624

(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.

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:

Table of Contents

 
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

US Highland, Inc.

Consolidated Financial Statements

US Highland, Inc.

Unaudited Consolidated Balance Sheets

(Unaudited)

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

US Highland, Inc.

Unaudited Consolidated Statements of Operations

(Unaudited)

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

US Highland, Inc.

Unaudited Consolidated Statements of Cash Flows

(Unaudited)

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

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. As at March 31, 2016, there were no activities in Lahva.

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").

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.

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 March 31, 2016, current liabilities exceed current assets by $5,807,194, and the Company has an accumulated deficit of $75,527,172. 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.

US Highland, Inc. 

Notes to Consolidated Financial Statements

(Unaudited)

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 three months ended March 31, 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 $138,300. Refer to Note 12(b).

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

Depreciation expense amounted to $1,126 and $1,754 for the three months ended March 31, 2016 and 2015, respectively.

US Highland, Inc. 

Notes to Consolidated Financial Statements

(Unaudited)

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:

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

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

US Highland, Inc. 

Notes to Consolidated Financial Statements

(Unaudited)

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

US Highland, Inc. 

Notes to Consolidated Financial Statements

(Unaudited)

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

 
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

As announced by the Company in a Form 8-K filed on September 25, 2015, 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.

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

As announced by the Company in a Form 8-K filed 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:

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:

Results of Operations

The three months ended March 31, 2016 compared to the three months ended March 31, 2015

Revenues

The Company had no revenues during the three months ended March 31, 2016 and 2015.

Operating Expenses

Operating expenses increased approximately 54% for the three months ended March 31, 2016 which were $204,271, that was comprised primarily of $138,255 for general and administrative expenses and $64,890 for professional fees as compared to operating expenses of $132,491 for the three months ended March 31, 2015, which was comprised primarily of $107,585 for general and administrative expenses and $23,152 for professional fees. General and administrative expenses decreased during the three months ended March 31, 2016 over the three months ended March 31, 2015 as result of the termination of two former employees during the period ended March 31, 2015. Professional fees increased during the three months ended March 31, 2016 over the three months ended March 31, 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)

Liquidity and Capital Resources

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.

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.

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 (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.

Also, as previously reported on a Form 8-K filed on March 2, 2016, on March 1, 2016, the Company entered into that certain agreement (the "Agreement") with Mr. John D. Gibbs ("Gibbs" or the "Lender"), relating to that certain convertible promissory note, as amended, issued by the Company to Gibbs on July 23, 2013 for the principal amount of $500,000 and secured by all of the tangible and intangible assets of the Company pursuant to that certain Security Agreement, dated July 23, 2013, between the Company and the Lender (the "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.

Going Concern

The Company has no revenues and has incurred net losses. In addition, at March 31, 2016, there was an accumulated deficit of $75,527,172. These factors raise substantial doubt about the Company's ability to continue as a going concern.

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

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

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 March 31, 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

On January 7, 2016, Josh W. Whitaker resigned, effective immediately, as the President and Chief Executive Officer of the Company and from its Board of Directors, as well as an executive officer and director of the Company's two subsidiaries, USH Distribution Corp. ("USH") and Powersports Brands Alliance, Inc. ("PBA") On January 8, 2016, the Board of Directors of the Company appointed Kevin G. Malone as the President of the Company, to serve at the pleasure of the Board until his respective successor is duly appointed or until his earlier resignation or removal. Also on January 8, 2016, Mr. Malone was appointed by each of the Boards of Directors of USH and PBA as the President of USH and PBA, respectively, to serve at the pleasure of each Board until his respective successor is duly appointed or until his earlier resignation or removal.

Other than the foregoing, 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 March 31, 2016 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

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

As previously reported on Form 8-K filed on March 1, 2016, on February 22, 2016, the Company, John Fitzpatrick III, Steven Pfaff, and certain of the Company's officers and directors entered into that certain Release of Claims and Settlement Agreement (the "Settlement Agreement"). Pursuant to the Settlement Agreement, the parties, without admitting any liability or wrongdoing, fully and completely released and discharged each other from all claims, actions, demands, costs, losses, damages, expenses and causes of actions of every kind relating to Mr. Fitzpatrick's and Mr. Pfaff's previous employment with the Company, including claims separately filed by Mr. Fitzpatrick and Mr. Pfaff with the Oklahoma Department of Labor and subsequently appealed by them and the Company in the District Court in and for Tulsa County, State of Oklahoma, and the civil action between the Company and each of Mr. Fitzpatrick and Mr. Pfaff now pending in the Tulsa County District Court of Oklahoma. Pursuant to the Settlement Agreement, the Company has agreed to pay Mr. Fitzpatrick and Mr. Pfaff an aggregate settlement amount of $200,000 in two installments. The Company and the directors also agreed to execute and deliver a pocket judgment against them, which shall not be filed by Mr. Fitzpatrick and Mr. Pfaff unless the Company fails to make the scheduled payments under the Settlement Agreement.

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

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.

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 Notes was an "accredited investor," as defined under the Securities Act.

Item 3. Defaults Upon Senior Securities.

None

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Due to a dispute between the Company and Pine Street Investment Group, LLC, the landlord (the "Landlord") of the Company's former warehouse located at 1411 N. 105th E. Avenue, Tulsa, OK 74116 (the "Warehouse"), relating to outstanding rent, incurred expenses and legal fees for the aggregate of amount of $92,581, the assets of the Company stored in the warehouse were offered for sale at a public auction on March 3, 2016 at the Warehouse. The Company had rented the Warehouse pursuant to a Lease Agreement, dated January 27, 2012, as amended.

All proceeds of the public auction were used by the Landlord to pay the Company's outstanding rental obligations under the Lease Agreement for the Warehouse. If the auction proceeds are more than the outstanding rent, the Landlord will remit such amount to the Company. The Company still owns and maintains its intellectual property rights to engine platforms and plans to continue its development of these platforms in the power sports industry.

As of the date of this Quarterly Report, the parties have not completed the reconciliation between the auction proceeds and outstanding amount owed the Landlord under the Lease.

Subsequent Events

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.

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.

Item 6. Exhibits.

Exhibit Description

________________

* 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.

 
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.