INDEPENDENT AUDITORS' OPINION
To the Stockholders and Board of Directors
US Highland, Inc.
Jenks, Oklahoma
We have audited the accompanying balance sheet of U.S. Highland, Inc.
as of December 31, 2009 and the related statements of operations and
retained earnings and cash flows for the year then ended. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of U.S.
Highland, Inc. as of December 31, 2009, and the results of its
operations and its cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States.
Hood Sutton Robinson & Freeman CPAs., P.C.
Certified Public Accountants
Tulsa, Oklahoma
March 11, 2010
U.S. Highland, Inc.
Balance Sheet
December 31, 2009
Assets
Current Assets:
Cash $ 392,766
Accounts Receivable 116,043
Inventory 4,254,582
-----------
4,763,391
-----------
Property and Equipment:
Vehicle 20,750
Furniture and Fixtures 43,297
Tooling 300,000
Accumulated Depreciation (5,168)
-----------
358,879
-----------
Other Assets:
Investment in Harcom 143,820
Deposits 1,102
-----------
144,922
-----------
Total Assets $ 5,267,192
===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts Payable $ 264,097
Current Portion of Long-Term Debt 8,400
Accrued Liabilities 2,754
-----------
275,251
-----------
Long-term Liabilities:
Notes Payable 34,707
Current Portion of Long-Term Debt (8,400)
-----------
26,307
Deferred Income Taxes 8,386
-----------
34,693
-----------
Stockholders' Equity:
Common Stock, 100 million shares authorized,
par $0.01, 10 million shares issued and outstanding 100,000
Paid in Capital 4,810,149
Retained Earnings 47,099
-----------
Total Stockholders' Equity 4,957,248
-----------
Total Liabilities and Stockholders' Equity $ 5,267,192
===========
The accompanying notes are an integral part
of these financial statements
U.S. Highland, Inc.
Statement of Operations and Retained Earnings
For the Year Ended December 31, 2009
Revenue:
Sales $ 454,182
------------
Operating Expenses:
General and Administrative 269,484
Racing 102,031
Research and Development 15,852
Selling 3,500
Depreciation 5,168
-----------
Total Operating Expenses 396,035
-----------
Operating Income 58,147
Other Income (Expense):
Interest Income 92
-----------
Income before Provision for Income Taxes 58,239
Provision for Income Taxes 11,140
-----------
Net Income 47,099
Retained Earnings, Beginning of Year -
-----------
Retained Earnings, End of Year $ 47,099
===========
The accompanying notes are an integral part
of these financial statements
U.S. Highland, Inc.
Statement of Cash Flows
For the Year Ended December 31, 2009
Cash Flows From Operating Activities
Cash received from customers $ 454,182
Interest received 91
Cash paid to employees and suppliers (382,571)
-----------
Net Cash Provided by (Used in) Operating Activities 71,702
-----------
Cash Flows From Investing Activities
Property and equipment purchases (27,377)
Net purchase of investments (143,820)
-----------
Net Cash Provided by (Used in) Investing Activities (171,197)
-----------
Cash Flows From Financing Activities
Issuance of common stock 357,149
Proceeds from short-term debt 137,075
Repayment of long-term debt (1,963)
-----------
Net Cash Provided by (Used In) Financing Activities 492,261
-----------
Net Increase (Decrease) In Cash and Cash Equivalents 392,766
Cash And Cash Equivalents at Beginning of Year -
-----------
Cash And Cash Equivalents at End of Year $ 392,766
===========
Reconciliation of Net Income (Loss) to
Cash Provided by (Used in) Operating Activities
Net income (loss) $ 47,099
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 5,168
(Increase) decrease in prepaid assets (1,102)
(Increase) decrease in inventories (1,582)
Increase (decrease) in accounts payable 10,979
Increase (decrease) in income taxes payable 2,754
Increase (decrease) in deferred expenses 8,386
-----------
Total Adjustments 24,603
-----------
Net Cash Provided by (Used in) Operating Activities $ 71,702
===========
Supplemental Disclosures
NONCASH INVESTING AND FINANCING ACTIVITIES
Assets acquired by assumption of debt $ 36,670
Assets acquired by issuance of equity $ 4,453,000
The accompanying notes are an integral part
of these financial statements
U.S. Highland, Inc.
Notes to Financial Statements
For the year ended December 31, 2009
Note 1 - Organization and Operations
Organization
U.S. Highland, Inc. ("Highland" or the "Company") was incorporated on
January 29, 2009, under the laws of the State of Oklahoma. U.S.
Highland, Inc. merged with Harcom Productions, Inc., ("Harcom") a
public company, on January 22, 2010 with Harcom as the surviving
corporation and with US Highland, Inc. as the name of the merged
corporation. Since its formation, the Company's primary activities
have consisted of launching marketing activities and gearing up for
manufacturing in the United States (the Highland brand was originally
launched in Sweden in 1996). Manufacturing and sales activities
commenced during the last quarter of 2009.
Note 2 - Summary of Significant Accounting Policies
Description of Business
The mission of the Company is to pursue, develop and market
recreational powersports, including motorcycles, ATVs, accessories, and
related products primarily, as an original equipment manufacturer. The
Company's proprietary products include the following:
- The Highland 250-550cc single cylinder 4 stroke engine line
- The Highland 750-1150cc v-twin engine line
- The Highland single cylinder and v-twin motorcycle lines
- The Highland ATV product line
The intellectual property was developed in Sweden by the Highland
Group, originally founded in 1996.
Cash and Cash Equivalents
For purposes of the Statement of Cash Flows, this caption includes cash
on hand and in banks, and certain short-term deposits. The Company
considers all highly liquid debt instruments purchased with a maturity
of three months or less from the date of purchase to be cash
equivalents.
Note 2 - Summary of Significant Accounting Policies (continued)
Income taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income
Taxes, which is codified at FASB ASC 740, Income Taxes. SFAS No. 109
requires the recognition of deferred tax assets and liabilities for the
estimated future tax consequences attributable to temporary differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. In addition, SFAS No. 109
requires the recognition of future tax benefits, such as net operating
loss carry forwards, to the extent that realization of such benefits is
more likely than not. The amount of deferred tax liabilities or assets
is calculated using tax rates in effect for the year in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rate
is recognized in income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts more likely than not to be realized.
Use of estimates
The preparation of financial statements in conformity with U. S.
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, expenses and the disclosure of contingent assets
and liabilities. Actual results could differ from the estimates and
assumptions used.
Fair value of financial instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument held by the Company:
Current assets and current liabilities - The carrying value
approximates fair value due to the short maturity of these items.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are stated at the historical carrying amount net of
write-offs and allowance for doubtful accounts. The Company
establishes an estimated allowance for doubtful accounts receivable
based on various factors, including revenue, historical credit loss
experience, current trends, and any specific customer collection issues
that the Company has identified. Uncollectible accounts receivable are
written off when a settlement is reached for an amount that is less
than the outstanding historical balance or when the Company has
determined the balance will not be collected.
Inventory
Inventory consists of components and finished goods inventory,
powersports vehicles, equipment, and tooling and is stated at cost.
Cost is determined by using the average cost method.
Property, Plant and Equipment:
Property and equipment is recorded at original purchase cost. Major
renewals and betterments are capitalized, while maintenance and repairs
are expensed when incurred. Depreciation is computed using the
straight-line method over the estimated useful lives of the depreciable
assets, which are ten years for tooling, and five to seven years for
equipment, vehicles and furniture.
Note 3 - Recent Accounting Pronouncements
The following are summaries of recent accounting pronouncements that
are relevant to the Company:
In June 2009, the FASB issued SFAS No. 166, "Accounting for Transfers
of Financial Assets, an Amendment of FASB Statement No. 140" ("SFAS
No. 166"). SFAS No. 166 amends SFAS No. 140 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS No. 166 improves the comparability of information that a reporting
entity provides regarding transfers of financial assets and the effects
on its financial statements. SFAS No. 166 is effective for interim and
annual reporting periods ending after November 15, 2009. The Company is
currently evaluating the effect that SFAS No. 166 will have on its
financial statements.
In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB
Interpretation No. 46(R)" ("SFAS No. 167"). SFAS No. 167 amends FIN
No. 46(R), "Consolidation of Variable Interest Entities" and changes
the consolidation guidance applicable to a variable interest entity.
Among other things, it requires a qualitative analysis to be performed
in determining whether an enterprise is the primary beneficiary of a
variable interest entity. SFAS No. 167 is effective for interim and
annual reporting periods ending after November 15, 2009. The Company is
currently evaluating the effect that SFAS No. 167 will have on its
financial statements.
In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting
Standards Codification (tm) and the Hierarchy of Generally Accepted
Accounting Principles a Replacement of FASB Statement No. 162" ("SFAS
No. 168"). SFAS No. 168 replaces SFAS No. 162, "The Hierarchy of
Generally Accepted Accounting Principles" as the source of
authoritative accounting principles recognized by the FASB to be
applied by non-governmental entities in the preparation of financial
statements in accordance with generally accepted accounting principles.
SFAS No. 168 is effective for interim and annual reporting periods
ending after September 15, 2009. On September 30, 2009, the Company
adopted SFAS No. 168, which has no effect on the Company's financial
statements as it is for disclosure purposes only.
Note 3 - Recent Accounting Pronouncements - (Continued)
In May 2009, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 165, "Subsequent Events" ("SFAS No. 165"). SFAS
No. 165 establishes the period in which management of a reporting
entity should evaluate events and transactions for recognition or
disclosure in the financial statements. It also describes the
circumstances under which an entity should recognize events or
transactions that occur after the balance sheet date. SFAS No. 165 is
effective for interim and annual reporting periods ending after
June 15, 2009. The Company does not expect the adoption of SFAS No. 165
to have a material effect on its financial statements and related
disclosures.
Note 4 - Notes Payable
On August 25, 2009 the Company financed the purchase of a van through
Security Bank. The note has an interest rate of 6.78% per annum and
matures September 1, 2013. The monthly principal and interest payments
are $877.
Below are the estimated annual principal installments due on notes
payable for the four years subsequent to December 31, 2009:
Year Principal
2010 $8,400
2011 9,000
2012 9,600
2013 7,707
Note 5 - Leases
During 2009 the Company entered into operating lease agreements for
vehicles and equipment from a single lessor, Frog Flight Financial
Group, to be used in the Company's operations. The lease terms ranged
from one year to two years. Some of the leases expired during the year
ended December 31, 2009, while the remaining leases expire December 31,
2010. Lease expense for 2009 was $13,968. Lease expense for the year
ending December 31, 2010 will be approximately $38,000.
Note 6 - Income Taxes
The components of the provision for income taxes for the years ended
December 31, 2009 is as follows:
Operating Activities:
Current $ 2,754
Deferred 8,386
--------
$11,140
The provision for deferred income taxes for the years ended December
31, 2009 was entirely comprised of the difference between book and tax
depreciation.
Note 7 - Transfer of Assets for Stock
During 2009 the Company received assets from Highland Group AB in
exchange for stock. The assets received in the exchange are summarized
below:
Intellectual property including product designs, proprietary and
patent pending technology.
The Highland brand name.
Inventory which included components and finished goods.
New product prototypes.
Note 8 - Subsequent Events
U.S. Highland, Inc. merged with Harcom Productions, Inc., a public
company, on January 22, 2010 with Harcom as the surviving corporation
and with US Highland, Inc. as the name of the merged corporation.
The Company signed an Office Lease Agreement (the "Agreement") on
February 20, 2010. The Agreement commences on March 1, 2010 with a
monthly rental of $8,500. The Agreement has a purchase option, which
if exercised by the Company, would terminate the lease.
Note 9 - Proforma Financial Statements
Following is the proforma balance sheet and income statement as if the
acquisition occurred on December 31, 2009.
U.S. Highland, Inc. Harcom Eliminations Consolidated
------------------- ------ ------------ ------------
<s> <c> <c> <c> <c>
Assets
Current Assets:
Cash and cash equivalents $ 492,766 $ 32,696 $ 425,462
Accounts receivable 116,043 41,292 157,335
Inventory 4,254,582 4,254,582
---------- --------- --------- ----------
Total current assets 4,763,391 73,988 - 4,837,379
---------- --------- --------- ----------
Property and Equipment 364,047 217,878 581,925
Accumulated depreciation (5,168) (217,878) (223,046)
---------- --------- --------- ----------
Net property and equipment 358,879 - - 358,879
---------- --------- --------- ----------
Other Assets:
Intangible assets (net of
amortization) - 72,235 72,235
Investment in subsidiary 143,820 - (143,820) -
Deposits 1,102 1,500 2,602
---------- --------- --------- ----------
Total other assets 144,922 73,735 (143,820) 74,837
---------- --------- --------- ----------
Total Assets $5,267,192 $ 147,723 $(143,820) $5,271,095
========== ========= ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 264,097 $ 17,263 $ 281,360
Due to related parties - 164,070 164,070
Current portion of
long-term debt 8,400 9,207 17,607
Accrued liabilities 2,754 2,754
---------- --------- --------- ----------
Total Current Liabilities 275,251 190,540 - 465,791
---------- --------- --------- ----------
Long-Term Liabilities:
Notes payable (net of
current portion) 26,307 131,660 157,967
Deferred income taxes 8,386 - 8,386
---------- --------- --------- ----------
Total Long-Term Liabilities 34,693 131,660 - 166,353
---------- --------- --------- ----------
Stockholders' Equity:
Common stock 100,000 16,375 116,375
Paid in surplus 4,810,149 242,887 (143,820) 4,909,216
Retained earnings(deficit) 47,099 (433,739) (386,640)
---------- --------- --------- ----------
Total Stockholders' Equity
(Deficit) 4,957,248 (174,477) (143,820) 4,638,951
---------- --------- --------- ----------
Total Liabilities and
Stockholders' Equity
(Deficit) $5,267,192 $147,723 $(143,820) $5,271,095
---------- --------- --------- ----------
U.S. Highland, Inc. Harcom Eliminations Consolidated
------------------- ------ ------------ ------------
<s> <c> <c> <c> <c>
Revenue $454,182 $ 230,120 $684,302
Cost of Goods Sold - - (88,984)
-------- --------- -------- --------
Gross Profit 454,182 141,136 - 595,318
-------- --------- -------- --------
Operating Expenses:
General and administrative 269,484 70,241 - 339,725
Racing 102,031 102,031
Research and development 15,852 15,852
Selling 35 35
Depreciation 5,168 5,168
Medical insurance 834 834
Employee compensation 167,889 167,899
-------- --------- -------- --------
Total Operating Expenses 392,570 238,964 - 631,534
Operating Income (Loss) 61,612 (97,828) (36,216)
-------- --------- -------- --------
Other Income (Expense)
Interest income 92 92
Interest expense (13,072) (13,072)
-------- --------- -------- --------
92 (13,072) - (12,980)
-------- --------- -------- --------
Net Income before Income Taxes 61,704 (110,900) (49,196)
Provision for income taxes (11,140) - (11,140)
-------- --------- -------- --------
Net Income (Loss) $ 50,564 $(110,900) $ - $(60,336)
======== ========= ======== ========
US Highland, Inc.
Notes to Financial Statements
December 31, 2009
19