Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
On March 17, 2008, our common stock was listed for the first time on the OTC Bulletin Board under the symbol “HRCM”. On March 31, 2010, due to our name change, our symbol was changed to “UHLN”. Over the course of the past 52 weeks, UHLN has traded at a low of $0.0003 and a high of $0.0091.
Registered Holders of Our Common Stock
As at December 31, 2017, there were approximately 132 record holders of our common stock.
Dividends
Holders of the Company’s common stock are entitled to receive such dividends as may be declared by its board of directors. No dividends on the Company’s common stock have ever been paid, and the Company does not anticipate that dividends will be paid on its common stock in the foreseeable future.
Securities Authorized for issuance under equity compensation plans.
No securities are authorized for issuance by the Registrant under equity compensation plans.
Recent Sales of Unregistered Securities
On July 13, 2017, the Company issued 29,788,980 shares of common stock to settle $8,800 in principal and $1,924 of interest on a debt conversion with Union Capital, LLC, a significant shareholder of the Company.
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.
Capitalization
Under our Articles of Incorporation, as amended, we are authorized to issue up to 1,000,000,000 shares of common stock, par value $0.01 per share, and up to 3,550,000 shares of “blank check” preferred stock, par value $0.01 per share. As of December 31, 2017, there were 345,450,049 shares of common stock issued and outstanding. As of December 31, 2017, 3,500,000 shares of “blank check” preferred stock were designated as Series A Preferred Stock and 10,000 shares were designated as Series B Preferred Stock, of which 3,381,520 and 5,000 were issued and outstanding, respectively.
Item 8. Financial Statements and Supplemental Data.
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of US Highland, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of US Highland, Inc. (“the Company”) as of December 31, 2017 and 2016, and the related consolidated statements of operations, changes in stockholders’ deficit, and cash flows for the years then ended, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Consideration of the Company’s Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has recurring losses from operations, an accumulated deficit, and current liabilities exceed current assets. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Fruci & Associates II, PLLC
We have served as the Company’s auditor since 2017.
Spokane, Washington
March 30, 2018
US Highland, Inc.
Consolidated Balance Sheets
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,066
|
|
|
$
|
260
|
|
Deposit in acquisition
|
|
|
75,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
78,066
|
|
|
|
260
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
78,066
|
|
|
$
|
260
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
350,465
|
|
|
$
|
283,879
|
|
Accrued liabilities ($0 and $177,852 related parties, respectively)
|
|
|
704,987
|
|
|
|
539,844
|
|
Convertible debentures, net of discounts of $0 and $180,716, respectively
|
|
|
768,753
|
|
|
|
527,150
|
|
Derivative liabilities
|
|
|
409,948
|
|
|
|
402,881
|
|
Loans payable ($0 and $370,000 related parties, respectively)
|
|
|
481,000
|
|
|
|
481,000
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
2,715,154
|
|
|
|
2,234,754
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 1,000,000,000 shares authorized, $0.01 par value; 345,450,049 and 315,661,049 shares and outstanding at December 31, 2017 and 2016 respectively
|
|
|
3,454,502
|
|
|
|
3,156,612
|
|
|
|
|
|
|
|
|
|
|
Treasury stock, at cost – 58,333 shares
|
|
|
(773,500
|
)
|
|
|
(773,500
|
)
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
69,892,158
|
|
|
|
69,892,158
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
|
(75,244,112
|
)
|
|
|
(74,543,629
|
)
|
|
|
|
|
|
|
|
|
|
Total Stockholders’ Deficit
|
|
|
(2,637,087
|
|
|
|
(2,234,494
|
)
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Deficit
|
|
$
|
78,066
|
|
|
$
|
260
|
|
(The accompanying notes are an integral part of these consolidated financial statements.)
US Highland, Inc.
Consolidated Statements of Operations
|
|
|
For the Year Ended
December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
-
|
|
|
|
2,252
|
|
General and administrative
|
|
|
|
1,681
|
|
|
|
39,014
|
|
Professional fees
|
|
|
|
78,715
|
|
|
|
220,796
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
|
80,396
|
|
|
|
262,062
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
|
|
|
(80,396
|
)
|
|
|
(262,062
|
)
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
(325,471
|
)
|
|
|
(817,841
|
)
|
Change in fair value of derivatives
|
|
|
|
(44,084
|
)
|
|
|
16,932,425
|
|
Gain on settlement of debt
|
|
|
|
-
|
|
|
|
624,966
|
|
Loss on Disposal of Assets
|
|
|
|
(383
|
)
|
|
|
(211,681
|
)
|
Loss on Convertible Notes
|
|
|
|
(250,149
|
)
|
|
|
(2,766,193
|
)
|
Other income
|
|
|
|
-
|
|
|
|
2,311
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
|
|
|
(620,087
|
)
|
|
|
13,763,987
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income
|
|
|
$
|
(700,483
|
)
|
|
$
|
13,501,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings (Loss) Per Common Share
|
|
|
|
|
|
|
|
|
|
-Basic
|
|
|
$
|
-
|
|
|
$
|
0.11
|
|
-Diluted
|
|
|
$
|
-
|
|
|
$
|
0.06
|
|
Basic weighted average common shares outstanding
|
|
|
|
321,226,043
|
|
|
|
122,234,935
|
|
Diluted weighted average common shares outstanding
|
|
|
|
321,226,043
|
|
|
|
237,835,850
|
|
(The accompanying notes are an integral part of these consolidated financial statements.)
US Highland, Inc.
Consolidated Statement of Changes in Stockholders’ Deficit
For the Years Ended December 31, 2017 and 2016
|
|
Undesignated
Preferred Stock
40,000 shares
authorized
|
|
|
Series A
Preferred Stock
3,500,000 shares
authorized
|
|
|
Series B
Preferred Stock
100,000 shares
authorized
|
|
|
Common Stock
500,000,000 shares
authorized
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Issued
|
|
|
Par
Value
$0.01
per
share
|
|
|
Shares
Issued
|
|
|
Par
Value
$0.01
per
share
|
|
|
Shares
Issued
|
|
|
Par
Value
$0.01
per
share
|
|
|
Shares
Issued
|
|
|
Par
Value
$0.01
per
share
|
|
|
Stock
Reserved
For
Future Issuance
|
|
|
Additional
Paid in
Capital
|
|
|
Treasury
Stock
|
|
|
Accumulated
Deficit
|
|
|
Total
Shareholder’s
Equity
|
|
Balance,
December 31, 2015
|
|
|
-
|
|
|
$
|
-
|
|
|
|
3,381,520
|
|
|
$
|
33,815
|
|
|
|
5,000
|
|
|
$
|
50
|
|
|
|
58,162,669
|
|
|
$
|
581,627
|
|
|
$
|
197,865
|
|
|
$
|
69,697,929
|
|
|
$
|
(773,500
|
)
|
|
$
|
(88,045,554
|
)
|
|
$
|
(18,307,768
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued for Debt Conversions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
257,498,400
|
|
|
|
2,574,985
|
|
|
|
-
|
|
|
|
194,229
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,769,214
|
|
Write-off of shares issuable for accrued interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(197,865
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(197,865
|
)
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,501,925
|
|
|
|
13,501,925
|
|
Balance, December 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
|
3,381,520
|
|
|
$
|
33,815
|
|
|
|
5,000
|
|
|
$
|
50
|
|
|
|
315,661,069
|
|
|
$
|
3,156,612
|
|
|
$
|
-
|
|
|
$
|
69,892,158
|
|
|
$
|
(773,500
|
)
|
|
$
|
(74,543,629
|
)
|
|
$
|
(2,234,494
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued on convertible notes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29,788,980
|
|
|
|
297,890
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
297,890
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(700,483
|
)
|
|
|
(700,483
|
)
|
Balance, December 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
3,381,520
|
|
|
$
|
33,815
|
|
|
|
5,000
|
|
|
$
|
50
|
|
|
|
345,450,049
|
|
|
$
|
3,454,502
|
|
|
$
|
-
|
|
|
|
69,892,158
|
|
|
$
|
(773,500
|
)
|
|
$
|
(75,244,112
|
)
|
|
$
|
(2,637,087
|
)
|
(The accompanying notes are an integral part of these consolidated financial statements.)
US Highland, Inc.
Consolidated Statements of Cash Flows
|
|
For the Year Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(700,483
|
)
|
|
$
|
13,501,925
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income (loss) to cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
-
|
|
|
|
2,252
|
|
Accretion expense
|
|
|
180,716
|
|
|
|
693,785
|
|
Change in fair value of derivatives
|
|
|
44,084
|
|
|
|
(16,932,425
|
)
|
Gain on Settlement of assets and payables
|
|
|
|
|
|
|
(563,585
|
)
|
Loss on Convertible Debt
|
|
|
250,149
|
|
|
|
2,766,193
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses and deposits
|
|
|
(75,000
|
)
|
|
|
-
|
|
Accounts payable and accrued liabilities
|
|
|
431,192
|
|
|
|
94,624
|
|
Accrued liabilities – related parties
|
|
|
(177,852
|
)
|
|
|
(56,572
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Operating Activities
|
|
|
(47,194
|
)
|
|
|
(493,803
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Investing Activities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds from convertible debentures
|
|
|
50,000
|
|
|
|
285,500
|
|
Proceeds from loans payable
|
|
|
-
|
|
|
|
195,000
|
|
Net Cash Provided by Financing Activities
|
|
|
50,000
|
|
|
|
480,500
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) In Cash
|
|
|
2,806
|
|
|
|
(13,303
|
)
|
|
|
|
|
|
|
|
|
|
Cash - Beginning of Period
|
|
|
260
|
|
|
|
13,563
|
|
|
|
|
|
|
|
|
|
|
Cash - End of Period
|
|
$
|
3,066
|
|
|
$
|
260
|
|
|
|
|
|
|
|
|
|
|
Supplement Cash Flows Information:
|
|
|
|
|
|
|
|
|
Cash paid for Income Taxes:
|
|
$
|
-
|
|
|
$
|
-
|
|
Cash paid for interest
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-cash Investing and Financing Activities
|
|
|
|
|
|
|
|
|
Common shares issued for payment on convertible debt
|
|
$
|
10,724
|
|
|
$
|
2,769,213
|
|
(The accompanying notes are an integral part of these consolidated financial statements.)
US HIGHLAND, INC.
Notes to the consolidated financial statements
for the year ended December 31, 2017
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. During 2017, the Company exited the recreational power sports OEM and leisure activity vehicles markets.
On March 8, 2018, the Company entered the fast-casual restaurant space through its share-exchange acquisition of TruFood Provision Co., a healthy dining establishment that plans to expand across the south east. TruFood Provision Co. is a healthy dining pure play, and positions the Company in the rapidly growing healthy eating space.
Basis of Presentation
The 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 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.
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 December 31, 2017, current liabilities exceed current assets by $2,637,087 and the Company has an accumulated deficit of $75,244,112. 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 and marketing efforts.
Description of New Business Decisions
On September 30, 2016, the company recognized a write off of debt and prepaid expenses under the Oklahoma Statutes, Title 12, Section 12-95.A.1. and Section 12-95.A.2. for expired period of limitations.
2.
|
Summary of Significant Accounting Policies
|
|
a)
|
Principles of Consolidation
|
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, USH Distribution Corp., and Powersports Brand Alliance, Inc. All significant intercompany transactions and balances have been eliminated.
The preparation of these consolidated financial statements in accordance with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The Company regularly evaluates estimates and assumptions related to useful life and recoverability of long-lived assets, stock-based compensation, derivative liabilities, deferred income tax asset valuations, fair values of financial instruments and loss contingencies. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
Certain amounts in the prior period presented have been reclassified to conform to the current period financial statement presentation. These reclassifications have no effect on previously reported net loss.
|
d)
|
Cash and Cash Equivalents
|
The Company considers all highly liquid instruments with maturities of three months or less at the time of issuance to be cash equivalents.
|
e)
|
Fair Value Measurements
|
The Company measures and discloses the estimated fair value of financial assets and liabilities using the fair value hierarchy prescribed by US generally accepted accounting principles. The fair value hierarchy has three levels, which are based on reliable available inputs of observable data. The hierarchy requires the use of observable market data when available. The three-level hierarchy is defined as follows:
Level 1 – quoted prices for identical instruments in active markets.
Level 2 – quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations in which significant inputs and significant value drivers are observable in active markets; and.
Level 3 – fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
Financial instruments consist principally of cash and cash equivalents, accounts payable, loans payable and convertible debentures. Derivative liabilities are determined based on “Level 3” inputs, which are significant and unobservable and have the lowest priority. There were no transfers into or out of “Level 3” during the years ended December 31, 2017 or 2016. The recorded values of all other financial instruments approximate their current fair values because of their nature and respective relatively short maturity dates or durations.
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial statement. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
See
Note 8 for additional information.
The Company accounts for income taxes using the asset and liability method. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized in income or expense in the period that the change is effective. Tax benefits are recognized when it is probable that the deduction will be sustained. A valuation allowance is established when it is more likely that not that all or a portion of a deferred tax asset will not be realized. The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. No such interest or penalties were recognized during the period presented. The Company had no accruals for interest and penalties at December 31, 2017 or 2016.
|
g)
|
Research and Development
|
Research and development costs are expensed as incurred.
|
h)
|
Basic and Diluted Net Loss Per Common Share
|
Basic earnings (loss) per common share is calculated by dividing net profit attributable to common stockholders by the weighted average number of outstanding common shares during the year. The calculation of basic earnings (loss) per share excludes any dilutive effects of options, warrants and other stock-based compensation, which are included in diluted earnings per share. When a company is in a loss situation, all outstanding dilutive shares are excluded from the calculation of diluted earnings because their inclusion would be antidilutive; and the basic and fully diluted common shares outstanding are stated to be the same. At December 31, 2017 and 2016, approximately 518,500,000 and 115,600,915 shares, respectively, underlying the convertible debentures and preferred shares were antidilutive.
The Company’s management reviewed all material events through the issuance date of this report for disclosure purpose.
|
j)
|
Recently Issued Accounting Pronouncements
|
The Company has implemented all new accounting pronouncements that are in effect and that may impact its consolidated financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
3.
|
Deposit on TruFood Provisions Co. Acquisition
|
On March 8, 2018, the Company entered into a share exchange agreement with TruFood Provisions Co (TruFood). Per the agreement, the Company will exchange 65% of the issued and outstanding stocks of US Highland and $75,000 for 100% of the equity of TruFood. It is expected that all other debt related to the operation of TruFood will be retired at or prior to the closing date. As of December 31, 2017, the Company had deposited $30,000 related to this acquisition and recorded the remaining balance of $45,000 in accounts payable.
4.
|
Property and Equipment
|
Depreciation expense amounted to $0 and $2,252 for the year ended December 31, 2017 and 2016, respectively.
On September 30, 2016, the company wrote off the property and equipment that was disposed.
Loans payable consist of the following:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
a)
|
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.
|
|
$
|
27,000
|
|
|
$
|
27,000
|
|
b)
|
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
|
|
c)
|
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
|
|
|
$
|
111,000
|
|
d)
|
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
|
|
f)
|
On September 2, 2016 the Company issued an unsecured note payable of $100,000 respectively to a significant shareholder. The note bears interest at an annual rate of 5% per annum, is uncollateralized, and due 1 year after the date of issuance.
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
g)
|
On September 2, 2016 the Company issued an unsecured note payable of $50,000 respectively to a significant shareholder. The note bears interest at an annual rate of 5% per annum, is uncollateralized, and due 1 year after the date of issuance.
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
481,000
|
|
|
$
|
481,000
|
|
|
Less Short-Term Portion
|
|
|
(481,000
|
)
|
|
|
(481,000
|
)
|
|
Long Term Loans Payable
|
|
$
|
-
|
|
|
$
|
-
|
|
As of December 31, 2017, these loans are past due and therefore classified as current debt.
6.
|
Related Party Transactions
|
Certain directors and management are no longer with the Company, and as such, there are no longer any related-party transactions. Prior year amounts consisted of notes payable, accrued interest, and wages and consulting fee expenses accrued and owed to former officers and directors.
7.
|
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. The note was written off during 2016 under the statute of limitations (
See
Note 1).
|
|
|
|
|
b)
|
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.
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 year ended December 31, 2015, the Company recorded total accretion of $500,000. At December 31, 2017 and 2016, the carrying value of the note was $500,000.
|
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 year ended December 31, 2017, the entire balance of the discounts and costs were recognized in full. At December 31, 2017 and 2016, the carrying value of the notes was $275,000 and $135,260 with unamortized discount of $nil and $139,740, respectively. These notes are past due as of the issuance of these financial statements, as a result the interest rate increased to 24%.
|
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.
|
At December 31, 2017 and 2016, the carrying value of the notes was $55,000 and $9,544 with unamortized discount of $nil and $45,456, respectively. These notes are past due as of the issuance of these financial statements, as a result the interest rate increased to 24%.
|
e)
|
On October 30, 2017, the Company entered into a convertible promissory note for $25,000, pursuant to which the Company received proceeds of $25,000. The notes are convertible at any time after September 13, 2018 at a mutually agreed upon conversion price, bearing interest rate at 10% per annum and due on October 30, 2019. Due to these provisions, the embedded conversion options does not currently qualify for derivative accounting and bifurcation under ASC 815-15 Derivatives and Hedging.
|
At December 13, 2017, the carrying value of the note was $25,000.
|
f)
|
On November 18, 2017, the Company entered into a convertible promissory note for $25,000, pursuant to which the Company received proceeds of $25,000. The notes are convertible at any time after September 13, 2018 at a mutually agree upon conversion price, bearing interest rate at 10% per annum and due on November 30, 2019. Due to these provisions, the embedded conversion options does not currently quality for derivative accounting and bifurcation under ASC 815-15 Derivatives and Hedging.
|
At December 13, 2017, the carrying value of the note was $25,000.
8.
|
Derivative Liabilities
|
The embedded conversion options of the Company’s convertible debentures described in Note 7 contain conversion features that qualify for embedded 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:
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Balance at the beginning of the period
|
|
$
|
402,881
|
|
|
$
|
16,886,192
|
|
|
|
|
|
|
|
|
|
|
Addition of new derivative liabilities
|
|
|
-
|
|
|
|
403,539
|
|
Change in fair value of warrants
|
|
|
-
|
|
|
|
(290,276
|
)
|
Change in fair value of embedded conversion option
|
|
|
44,084
|
|
|
|
(16,596,574
|
)
|
Derecognition of derivative liabilities upon settlement of convertible notes
|
|
|
(37,017
|
)
|
|
|
-
|
|
Balance at the end of the period
|
|
$
|
409,948
|
|
|
$
|
402,881
|
|
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, 2016
|
134% - 216%
|
|
0.20% - 1.03%
|
|
0%
|
|
0.25 - 2.50
|
At December 31, 2017
|
335%
|
|
1.39%
|
|
0%
|
|
0.25
|
|
a)
|
On September 30, 2015, the Company designated 3,500,000 shares of the Company’s 3,550,000 authorized “blank check” preferred stock as Series A Convertible Preferred Stock. The Series A Convertible Preferred Stock shall, with respect to dividend rights, rights on liquidation, winding up and dissolution, rank senior to (i) all classes of common stock of the Company and (ii) any class or series of capital stock of the Company hereafter created (unless, with the consent of the holders of Series A Convertible Preferred Stock). The holders of the Series A Preferred Stock shall not entitled to receive any dividends and shall have the voting equivalency of 10 shares of common stock. Each holder of Series A Preferred Stock shall have the right at any time or from time to time from and after the day immediately following the date the Series A Preferred Stock is first issued, to convert each share of Series A Preferred Stock into 10 fully-paid and non-assessable share of common stock, par value $0.01 per share, of the Company. In connection with any conversion hereunder, each holder of Series A Convertible Preferred Stock if such conversion would cause such holder or any of its assignees to beneficially own more than 4.99% of the common stock of the Company.
|
|
|
|
|
b)
|
On September 30, 2015, the Company issued an aggregate of 3,381,520 shares of Series A Convertible Preferred Stock at a fair value of $12,849,776 to settle convertible and promissory notes in the amount of $1,487,000 and accrued interest of $203,760. The Company recorded a gain on settlement of debt of $1,495,529.
|
|
|
|
|
c)
|
On November 20, 2015, the Company designated 10,000 shares of the Company’s 3,550,000 authorized “blank check” preferred stock as Series B Convertible Preferred Stock. The Series B Convertible Preferred Stock shall, with respect to dividend rights, rights on liquidation, winding up and dissolution, rank senior to (i) all classes of common stock of the Company and (ii) any class or series of capital stock of the Company hereafter created (unless, with the consent of the holders of Series B Convertible Preferred Stock). The holders of the Series B Preferred Stock shall not entitled to receive any dividends and shall have the voting equivalency of 4,000 shares of common stock. Each holder of Series B Preferred Stock shall have the right at any time or from time to time from and after the day immediately following the date the Series B Preferred Stock is first issued, to convert each share of Series B Preferred Stock into 4,000 fully-paid and non-assessable share of common stock, par value $0.01 per share, of the Company. In connection with any conversion hereunder, each holder of Series B Convertible Preferred Stock if such conversion occurred would cause such holder or any of its assignees to beneficially own more than 4.99% of the common stock of the Company.
|
|
a)
|
During August, 2016, the Company issued 38,479,487 shares of common stock to settle $47,904 on debt conversions with two significant shareholders of the Company.
|
|
|
|
|
b)
|
During September, 2016, the Company issued 115,989,052 shares of common stock to settle $56,552 on a debt conversion with two significant shareholders of the Company.
|
|
|
|
|
c)
|
On October 6, 2016, the Company issued 24,655,278 shares of common stock to settle $4,330 on a debt conversion with two significant shareholders of the Company.
|
|
|
|
|
d)
|
During November, 2016, the Company issued 78,374,583 shares of common stock to settle $11,234 on a debt conversion with two significant shareholders of the Company.
|
|
|
|
|
e)
|
On July 13, 2017, the Company issued 29,788,980 shares of common stock to settle $8,800 of principal and $1,924 of interest on a debt conversion with a significant shareholder of the Company.
|
|
|
|
|
f)
|
As of September 30, 2017, there was an insufficient amount of the Company’s authorized common stock to satisfy the potential number of shares that would be required to satisfy the outstanding convertible preferred shares and convertible debt into common stock. In accordance with ASC 815 Derivatives and hedging, the Company analyzed which contracts could be classified as equity through the following sequencing methodology: contracts with no maturity date (convertible preferred shares) then contracts with the earliest maturity date first. Under this methodology, the management determined there was no additional liability, as there is already a derivative liability recorded for the embedded conversion feature.
|
|
a)
|
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. On September 6, 2016, the company paid the remaining $150,000 to settle this dispute in full
|
|
|
|
|
b)
|
On October 5, 2017, the Company entered into a letter of intent for an acquisition of 100% equity of TruFood Provisions Co in exchange for 65% of US Highland’s issued and outstanding stock and $75,000. This letter shall terminate, unless extended by mutual written agreement, upon the earliest to occur of a) written notice by the Company to TruFood, b) execution of a purchase agreement, or c) January 31, 2018. As of December 31, 2017, the company had paid $30,000 as deposit for this acquisition and $45,000 in accounts payable for the remaining balance due.
|
12.
|
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 Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
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
|
|
$
|
(700,483
|
)
|
|
|
321,226,043
|
|
|
$
|
-
|
|
|
$
|
13,501,925
|
|
|
|
122,234,935
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) attributable to common stock, including assumed conversions
|
|
$
|
(700,483
|
)
|
|
|
321,226,043
|
|
|
$
|
-
|
|
|
$
|
13,501,925
|
|
|
|
237,835,850
|
|
|
$
|
0.06
|
|
The Company is required to compute tax asset benefits for net operating losses carried forward. The potential benefit of net operating losses have not been recognized in the consolidated financial statements because the Company cannot be assured that it is more likely than not that it will utilize the net operating losses carried forward in future years. The Company did not incur any income tax expense for the years ended December 31, 2017, and 2016. At December 31, 2017, $6,758,513 of federal and state net operating losses were available to the Company to offset future taxable income, which will expire commencing in 2030. Given the short history of the Company and the uncertainty as to the likelihood of future taxable income, the Company has recorded a 100% valuation reserve against the anticipated recovery from the use of the net operating losses created at the inception or generated thereafter. The Company will evaluate the appropriateness of the valuation allowance on an annual basis and adjust the allowance as considered necessary. There is a potential that the NOL not be able to be used. The company is currently evaluating the ability to use the NOL in future periods.
The items accounting for the difference between income taxes computed at the statutory rates and the provisions for income taxes are as follows for the years ended December 31, 2017 and 2016:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Net income (loss) before taxes
|
|
$
|
(700,483
|
)
|
|
$
|
13,501,925
|
|
Statutory rate
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
|
|
|
|
|
|
|
Computed expected tax (recovery)
|
|
$
|
(238,164
|
)
|
|
$
|
4,590,655
|
|
Depreciation
|
|
|
-
|
|
|
|
2,252
|
|
Accretion
|
|
|
61,443
|
|
|
|
693,784
|
|
Gain/Loss on derivatives and convertible notes
|
|
|
(100,039
|
)
|
|
|
(14,166,232
|
)
|
Gain/Loss on write-down of assets and liabilities
|
|
|
130
|
|
|
|
413,285
|
|
Net operating loss
|
|
|
(119,441
|
)
|
|
|
(8,466,256
|
)
|
Valuation allowance
|
|
|
119,441
|
|
|
|
8,466,256
|
|
|
|
|
|
|
|
|
|
|
Net deferred taxes
|
|
$
|
–
|
|
|
$
|
–
|
|
The Company follows the provisions of FASB ASC Subtopic 740-10-65-1, Income Taxes. As of December 31, 2017, and 2016, the valuation allowance was $6,526,656 and $6,407,215, respectively. The change in the valuation allowance was $119,441 and $8,228,044 for the years ended December 31, 2017 and 2016. As of December 31, 2017, and 2016, the Company did not recognize any liability for unrecognized tax benefits.
The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduces the U.S., federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. As of December 31, 2017, the Company has not completed the accounting for the tax effects of enactment of the Act; however, as described below, it has made a reasonable estimate of the effects on existing deferred tax balances. These amounts are provisional and subject to change operations.
14. Subsequent Events
|
a)
|
Subsequent to year end the deposit due to Tru-Food was paid in full.
|
|
b)
|
Subsequent to year end Adar Bays converted $11,159.39 of principal into 11,702,490 shares of common stock. In Addition, GW holdings, also converted $16,000.00 in principal into 29,023,731 shares of common stock
|
|
c)
|
On January 4
th
2018, the Company issued a convertible note payable of $25,000. The note bears interest at an annual rate of 10% per annum, is uncollateralized, and matures 1 year after the date of issuance. Monthly payment are required beginning on the maturity date. The note becomes convertible September 13, 2018.
|
|
d)
|
On January 14
th
2018 the Company issued a convertible note payable of $25,000. The note bears interest at an annual rate of 10% per annum, is uncollateralized and and matures 1 year after the date of issuance. Monthly payment are required beginning on the maturity date. The note becomes convertible September 13, 2018.
|
|
e)
|
Refer to 8-K’s filed subsequent to year end.
|
|
f)
|
Subsequent to year end the articles were amended to increase the authorized to 1 billion.
|
Item 9A. Controls and Procedures
Evaluation of 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 principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report, 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 in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our 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 December 31, 2017 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.
Based on the foregoing, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses described below.
To address these material weaknesses, management engaged financial consultants, performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.
Management’s Annual Report on Internal Control Over Financial Reporting.
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (“ICFR”) for the Company. Our internal control system was designed to, in general, provide reasonable assurance to the Company’s management and board regarding the preparation and fair presentation of published financial statements, but because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017. The framework used by management in making that assessment was the criteria set forth in the document entitled “2013 Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, management concluded that, during the period covered by this report, such internal controls and procedures were not effective as of December 31, 2017 and that material weaknesses in ICFR existed as more fully described below.
A material weakness is a deficiency, or a combination of deficiencies, within the meaning of Public Company Accounting Oversight Board (“PCAOB”) Auditing Standard AS 2201, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. Management has identified certain material weaknesses, described below, which have caused management to conclude that as of December 31, 2017 our internal controls over financial reporting were not effective at the reasonable assurance level. We do not have written documentation of our internal control policies and procedures and we do not have sufficient resources in our accounting function, which restricts the Company’s ability to gather, analyze and properly review information related to financial reporting in a timely manner. In addition, management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures. Finally, management evaluated the impact of the lack of timely communication between non–financial personnel and financial personnel on our assessment of our reporting controls and procedures. As a result of such evaluations, management has concluded that these control deficiencies represent material weaknesses.
Notwithstanding the assessment that our ICFR was not effective and that there are material weaknesses as identified herein, we believe that our consolidated financial statements contained in this Annual Report fairly present our financial position, results of operations and cash flows for the years covered thereby in all material respects.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm as we are a smaller reporting company and are not required to provide the report.
Changes in Internal Control over Financial Reporting
There were no changes 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 December 31, 2017 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.