Quarterly Report (10-q)

Date : 07/17/2017 @ 6:47AM
Source : Edgar (US Regulatory)
Stock : Intelligent Highway Solutions, Inc. (PC) (IHSI)
Quote : 0.0001  0.0 (0.00%) @ 7:55AM

Quarterly Report (10-q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2017

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: 000-55154

 

INTELLIGENT HIGHWAY SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   30-0680119
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

9516 Rossport Way

Elk Grove, CA 95624

(Address of principal executive offices (Zip Code)

 

720) 460-1390

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year,

if changed since last report)

 

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 the past 90 days.

Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 [X] No [  ]

 

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

 

Large accelerated filer [  ] Accelerated filer [  ]
   
Non-accelerated filer [  ] (do not check if smaller reporting company) Smaller reporting company [X]
   
Emerging Growth Company [  ]  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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]

 

As of July 17, 2017, there is 5,143,545,346 shares of common stock, $0.00001 par value outstanding.

 

 

 

   
 

 

INTELLIGENT HIGHWAY SOLUTIONS, INC.

TABLE OF CONTENTS

FORM 10-Q REPORT

March 31, 2017

 

  Page
  Number
PART I - FINANCIAL INFORMATION  
   
Item 1. Unaudited Condensed Consolidated Interim Financial Statements. 3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 24
Item 4. Controls and Procedures. 25
     
PART II - OTHER INFORMATION  
   
Item 1. Legal Proceedings. 26
Item 1A. Risk Factors. 26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 26
Item 3. Defaults Upon Senior Securities. 26
Item 4. Mine Safety Disclosures. 26
Item 5. Other Information. 26
Item 6. Exhibits. 26
     
SIGNATURES 27

 

  2  
 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

INTELLIGENT HIGHWAY SOLUTIONS

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    March 31, 2017     December 31, 2016  
    (Unaudited)        
ASSETS                
Current assets                
Cash and cash equivalents   $ 96,197     $ 1,002  
Contracts receivable, net     897,990       -  
Costs and estimated earnings in excess of billings on uncompleted contracts     14,981       -  
Total current assets     1,009,168       1,002  
                 
Property and equipment, net of accumulated depreciation of $8,422 and $8,101     102,524       320  
Intangible assets, net of accumulated amortization of $27,788 and $0     161,682       -  
Goodwill     1,474,907       -  
                 
Total assets   $ 2,748,281     $ 1,322  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
                 
Current liabilities                
Accounts payable   $ 1,064,877       219,098  
Accrued expenses and other liabilities     1,735,270       1,661,776  
Accrued interest     308,884       277,829  
Notes payable, current portion     589,359       258,609  
Convertible notes payable, current portion, net of discounts of $965 and $1,581     975,287       986,163  
Notes payable, related party, current portion     7,396       7,396  
Credit line payable     631,855       -  
Derivative liability     2,196,937       11,855,072  
Total current liabilities     7,509,865       15,265,943  
                 
Notes payable, net of current portion     1,146,555       -  
Total liabilities     8,656,420       15,265,943  
                 
Stockholders’ deficit                
Series A convertible preferred stock, $0.00001 par value; 10,000,000 shares authorized; 10,000,000 and 2,500,000 issued and outstanding at March 31, 2017 and December 31, 2016, respectively     100       25  
Common stock, $0.00001 par value; 10,000,000,000 shares authorized; 3,375,701,670 and 2,915,701,670 issued; 3,375,651,670 and 2,915,651,670 outstanding at March 31, 2017 and December 31, 2016, respectively     33,757       29,157  
Additional paid-in capital     7,207,302       7,009,783  
Treasury stock, 50,000 shares at $.084 per share     (4,200 )     (4,200 )
Accumulated deficit     (13,128,202 )     (22,299,386 )
Total Intelligent Highway Solutions stockholders’ deficit     (5,891,243 )     (15,264,621 )
                 
Non-controlling interest in subsidiary     (16,896 )     -  
                 
Total liabilities and stockholders’ deficit   $ 2,748,281     $ 1,322  

 

See accompanying notes to condensed consolidated financial statements.

 

  3  
 

 

INTELLIGENT HIGHWAY SOLUTIONS

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

    Three Months Ended March 31,  
    2017     2016  
Revenue   $ 633,468     $ -  
Cost of sales     559,291       -  
Gross profit     74,177       -  
                 
Operating expenses                
Salaries and wages     41,443       38,179  
General and administrative     320,929       103,463  
Total operating expenses     362,372       141,642  
                 
Loss from operations     (288,195 )     (141,642 )
                 
Other income (expense)                
Gain on extinguishment of debt     -       40  
Gain on derivative fair value adjustment     9,487,661       270,252  
Interest expense     (45,178 )     (199,701 )
Total other income (expense)     9,442,483       70,591  
                 
Income (loss) before income taxes     9,154,288       (71,051 )
                 
Income tax expense     -       -  
                 
Net income (loss) before non-controlling interest     9,154,288       (71,051 )
Net loss attributable to non-controlling interest     (16,896 )     -  
Net income (loss) attributable to Intelligent Highway Solutions   $ 9,171,184     $ (71,051 )
                 
Basic income (loss) per common share   $ 0.00     $ (0.00 )
Diluted income (loss) per common share   $ 0.00     $ (0.00 )
                 
Basic weighted average shares outstanding     3,055,651,670       2,727,711,483  
Diluted weighted average shares outstanding     15,281,582,964       2,727,711,483  

 

See accompanying notes to condensed consolidated financial statements.

 

  4  
 

 

INTELLIGENT HIGHWAY SOLUTIONS

STATEMENTS OF CASH FLOWS

UNAUDITED

 

    Three Months Ended March 31,  
    2017     2016  
Cash flows from operating activities                
Net income (loss) before non-controlling interest   $

9,154,288

    $ (71,051 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Preferred stock issued for services     6,750       -  
Depreciation     320       2,496  
Gain on derivative fair value adjustment     (9,487,661 )     (270,252 )
Amortization of deferred loan costs     -       9,254  
Amortization of debt discount     616       121,090  
Amortization of prepaid expenses     -       19,146  
Amortization of intangible assets    

24,788

      -  
Expenses paid on behalf of company     137,515       -  
Excess derivative liability charged to interest     -       36,631  
Changes in operating assets and liabilities                
Contracts receivable     (301,651 )     -  
Accounts payable     290,468       32,509  
Accrued interest     44,533       32,331  
Accrued expenses and other liabilities     61,763       42,184  
Net cash used in operating activities     (65,271 )     (45,662 )
                 
Cash flows from investing activities                
Cash acquired in acquisition     160,466       -  
Net cash used in investing activities     160,466       -  
                 
Cash flows from financing activities                
Repayments on bank overdraft     -       (2,981 )
Proceeds from notes payable     -       53,955  
Repayments of notes payable     -       (3,263 )
Net proceeds from related party payables     -       396  
Net cash provided by financing activities     -       48,107  
                 
Change in cash and cash equivalents     95,195       2,445  
Cash at beginning of period     1,002       -  
Cash at end of period   $ 96,197     $ 2,445  
                 
Supplemental disclosures of cash flow information                
Cash paid for interest   $ -     $ -  
Cash paid for income taxes   $ -     $ -  
                 
Supplemental disclosure of non-cash financing activities:                
Common stock issued for note conversion   $ 11,492     $ 5,825  
Common stock issued for accrued interest conversion   $ 13,478     $ -  
Debt discount on convertible notes   $ -     $ 83,122  
Initial measurements of derivative liabilities   $ -     $ 100,097  

 

See accompanying notes to condensed consolidated financial statements.

 

  5  
 

 

INTELLIGENT HIGHWAY SOLUTIONS, INC.

Notes to Unaudited Condensed Financial Statements

March 31, 2017

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization, Nature of Business and Trade Name

 

Intelligent Highway Solutions, Inc. (the “Company” or “IHS”) was formed on April 22, 2011. IHS is a technology based intelligent highway solutions contractor. Through June 30, 2013, the Company’s primary focus was in the California transportation market providing services that range from providing labor, materials, and related equipment for corrective service and maintenance services for the State’s transportation infrastructure. Since that time, the Company has devoted its time to electrical service contracts. Additionally, the Company intends to develop transportation technology services that enable vehicles, roads, traffic lights, message signs, and other elements to become “intelligent” by embedding them with microchips and sensors and by empowering them to communicate with each other via wireless technologies. The acceleration of data collection and communication will allow state governments to improve transportation system performance by reducing congestion and increasing both traveler safety and convenience.

 

On March 9, 2017, the Company, through a special purpose entity in which the Company has a controlling interest and 80% ownership, acquired the outstanding ownership interests in Cresent Construction Company, a full service general contracting firm. The Company will continue to perform general contracting services as it continues its development of transportation technologies.

 

NOTE 2 – UNAUDITED CONDENSED CONSOLDIATED INTERIM FINANCIAL STATEMENTS

 

The accompanying unaudited condensed consolidated interim financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows for the period ended March 31, 2017 and for all periods presented herein, have been made.

 

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s December 31, 2016 audited financial statements. The results of operations for the period ended March 31, 2017 are not necessarily indicative of the operating results for the full year.

 

NOTE 3 – GOING CONCERN

 

The Company’s unaudited condensed consolidated interim financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. While the Company has recently established an ongoing source of revenues, we do not anticipate it to be sufficient to cover its operating costs  and allow it to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations.

 

In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management’s plan is to obtain such resources for the Company by obtaining capital from management and significant shareholders sufficient to meet its minimal operating expenses and seeking equity and/or debt financing. However management cannot provide any assurances that the Company will be successful in accomplishing any of its plans.

 

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying unaudited condensed interim financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

  6  
 

 

NOTE 4 - SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates

 

The preparation of consolidated financial statements in accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. A change in managements’ estimates or assumptions could have a material impact on the Company’s financial condition and results of operations during the period in which such changes occurred.

 

Actual results could differ from those estimates. The Company’s condensed consolidated financial statements reflect all adjustments that management believes are necessary for the fair presentation of their financial condition and results of operations for the periods presented.

 

Cash

 

The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The company does not have cash equivalents as of March 31, 2017 or December 31, 2016.

 

Property, Plant and Equipment

 

Property and equipment are carried at cost. Expenditures for maintenance and repairs are charged against operations. Renewals and betterments that materially extend the life of the assets are capitalized. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in income for the period.

 

Depreciation is computed over the estimated useful lives of the related assets. The estimated useful lives of depreciable assets are:

 

    Estimated
Useful Life
Furniture and fixtures   3 - 5 years
Machinery and equipment   5 years
Vehicles   5 years

 

  7  
 

 

For federal income tax purposes, depreciation is computed under the modified accelerated cost recovery system. For financial statements purposes, depreciation is computed under the straight-line method. Balances of each asset class as of March 31, 2017 and December 31, 2016 were:

 

    March 31, 2017     December 31, 2016  
Machinery and equipment   $ 2,676     $ 2,149  
Furniture and fixtures     14,103       6,273  
Leasehold improvements     37,270       -  
Vehicles     56,897       -  
Sub Total   $ 110,946     $ 8,422  
Accumulated depreciation     (8,422 )     (8,102 )
Total   $ 102,524     $ 320  

 

Depreciation expense for the three months ended March 31, 2017 and 2016 was $320 and $2,496, respectively.

 

Accrued Expenses and Other Liabilities

 

Accrued expenses and other liabilities consisted of the following at March 31, 2017 and December 31, 2016:

 

    March 31, 2017     December 31, 2016  
Payroll tax liabilities     761,396     $ 761,396  
Other payroll accruals     212,642       162,765  
Federal and state income taxes payable     128,741       128,741  
Other     632,491       608,874  
Total   $ 1,735,270     $ 1,661,776  

 

Other accrued expenses mainly consist of accrued consulting fees due to management and other consulting firms. Of the $128,741 accrued for federal and state income taxes payable at March 31, 2017 and December 31, 2016, $127,141 relates to the federal income tax payable as discussed in Note 11 and $1,600 relates to state income taxes payable.

 

Revenues and Cost of Revenues

 

Revenues from fixed-price and cost-plus contracts are recognized on the percentage of completion method, whereby revenues on long-term contracts are recorded on the basis of the Company’s estimates of the percentage of completion of contracts based on the ratio of the actual cost incurred to total estimated costs. This cost-to-cost method is used because management considers it to be the best available measure of progress on these contracts. Revenues from cost-plus-fee contracts are recognized on the basis of costs incurred during the period plus the fee earned, measured on the cost-to-cost method.

 

Cost of revenues include all direct material, sub-contract, labor, and certain other direct costs, as well as those indirect costs related to contract performance, such as indirect labor and fringe benefits. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changed in job performance, job conditions and estimated profitability may result in revisions to cost and income, which are recognized in the period in which the revisions are determined. Changes in estimated job profitability resulting from job performance, job conditions, contract penalty provisions, claims, change orders, and settlements, are accounted for as changes in estimates in the current period. Claims for additional contract revenue are recognized when realization of the claim in probable and the amount can be reasonably determined.

 

  8  
 

 

Fair Value Measurements

 

The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:

 

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

 

Derivative Liabilities

 

The Company records a debt discount related to the issuance of convertible debts that have conversion features at adjustable rates. The debt discount for the convertible instruments is recognized and measured by allocating a portion of the proceeds as an increase in additional paid-in capital and as a reduction to the carrying amount of the convertible instrument equal to the intrinsic value of the conversion features. The debt discount will be accreted by recording additional non-cash gains and losses related to the change in fair market values of derivative liabilities over the life of the convertible notes.

 

Net Income (Loss) Per Share

 

Net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the specified period. Diluted earnings per common share is computed by dividing net income (loss) by the weighted average number of common shares and potential common shares during the specified period. For the three months ended March 31, 2017, there was 12,225,931,294 such potentially dilutive shares included in the diluted weighted average shares outstanding. During the three months ended March 31, 2016 potential common shares are not included in the diluted net loss per share calculation as their effect would be anti-dilutive. Such potentially dilutive shares are excluded when the effect would be to reduce net loss per share. There were 12,837,333,612 such potentially dilutive shares excluded for the three months ended March 31, 2016. The potentially dilutive shares arise from the following instruments:

 

    2017     2016  
Convertible notes payable and accrued interest     12,013,308,993       12,837,333,612  
Series A convertible preferred stock     212,622,301       -  
Total     12,225,931,294       12,837,333,612  

 

Recent Accounting Pronouncements

 

In February 2015, the FASB issued ASC 2015-02, “Consolidation (Topic 810) - Amendments to the Consolidation Analysis.” This standard modifies existing consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 is effective for fiscal years beginning after December 15, 2015, and requires either a retrospective or a modified retrospective approach to adoption. Early adoption is permitted. The Company adopted has this standard and determined it does not have a significant impact on its consolidated financial statements.

 

In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805) – Simplifying the Accounting for Measurement-Period Adjustments.” This update eliminates the requirement to restate prior period financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The new standard should be applied prospectively to measurement period adjustments that occur after the effective date. The new standard is effective for interim and annual periods beginning after December 15, 2015 and early adoption is permitted. The Company has adopted this guidance and the adoption of this guidance did not have an impact on the Company’s results of operations, financial position, or cash flows for the three or six months ended March 31, 2017 or 2016.

 

  9  
 

 

In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting . The amendments in this update simplify several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company adopted the new guidance on January 1, 2017. The primary impact of adoption was the recognition of excess tax benefits in our provision for income taxes rather than paid-in capital. However, as the Company has a full valuation allowance against its deferred tax asset, a corresponding adjustment was recorded to increase the valuation allowance.

 

In January 2017, the FASB issued ASU 2017-04, “ Intangibles—Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment”. The amendments in this update simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. This update is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 31, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing after January 1, 2017. The Company notes that this guidance applies to its reporting requirements and will implement the new guidance accordingly in performing goodwill impairment testing; however, the Company does not believe this update will have a material impact on the consolidated financial statements.

 

Management believes recently issued accounting pronouncements will have no impact on the financial statements of the Company.

 

NOTE 5 – DERIVATIVE LIABILITIES

 

As discussed in Note 3, on a recurring basis, we measure certain financial assets and liabilities based upon the fair value hierarchy. The following table presents information about the Company’s liabilities measured at fair value as of March 31, 2017 and December 31, 2016:

 

    Level 1     Level 2     Level 3     Fair Value at
March 31, 2017
 
Liabilities                                
Derivative Liability   $ -     $ 2,196,937     $ -     $ 2,196,937  

 

    Level 1     Level 2     Level 3     Fair Value at
December 31, 2016
 
Liabilities                                
Derivative Liability   $ -     $ 11,855,072     $ -     $ 11,855,072  

 

As of March 31, 2017, the Company had a $2,196,937 derivative liability balance on the balance sheet and recorded a gain from derivative liability fair value adjustment of $9,487,661 during the three months ended March 31, 2017. The Company assessed its outstanding convertible notes payable as summarized in Note 8 – Convertible Notes Payable and determined certain convertible notes payable with variable conversion features contain embedded derivatives and are therefore accounted for at fair value under ASC 920, Fair Value Measurements and Disclosures and ASC 825, Financial Instruments.

 

Utilizing Level 2 Inputs, the Company recorded fair market value adjustments related to convertible notes payable for the three months ended March 31, 2017 and 2016 of $9,487,661 and $270,252, respectively. The fair market value adjustments were calculated utilizing the Black-Sholes method using the following assumptions: risk free rates of 1.03%, dividend yield of 0%, expected lives of 1 year, and volatility between 325% and 327%.

 

A summary of the activity of the derivative liability is shown below:

 

Balance at December 31, 2016   $ 11,855,072  
Derivative liabilities recorded     -  
Change due to note conversion     (170,474 )
Fair value adjustment     (9,487,661 )
Balance at March 31, 2017   $ 2,196,937  

 

NOTE 6 – CONCENTRATIONS OF RISK

 

Our revenues during the three months ended March 31, 2017 were generated completely from three clients. The loss of any of these clients will have a material adverse impact on our business. There were no revenues earned during the three months ended March 31, 2016.

 

  10  
 

 

NOTE 7 – NOTES PAYABLE

 

The Company has entered into various debt agreements to fund operations. A summary of outstanding non-convertible notes payable is as follows:

 

    March 31, 2017     December 31, 2016  
Note payable to non-related party, unsecured, due on September 1, 2014, interest rate of 0%. Currently in default. Principal due on demand.   $ 20,000     $ 20,000  
                 
Note payable to non-related party, unsecured, due on December 31, 2014, interest rate of 0%. Currently in default. Principal due on demand.     5,000       5,000  
                 
Note payable to non-related party, secured by vehicles owned by the Company, due on October 22, 2016, interest rate of 15%. Currently in default. Principal and accrued interest due on demand.     100,000       100,000  
                 
Note payable to non-related party, unsecured, due on April 29, 2016, interest rate of 8%. Currently in default. Principal and accrued interest due on demand.     33,000       33,000  
                 
Note payable to non-related party, unsecured, due on June 22, 2016, interest rate of 8%. Currently in default. Principal and accrued interest due on demand.     79,755       73,455  
                 
Sale of future receivable to non-related party, secured by future accounts receivable, due on December 31, 2016. Principal due as future accounts receivable are collected.     27,154       27,154  
                 
Seller’s note from acquisition of Cresent Construction Company, due on March 31, 2022, interest rate of 6%.     1,300,000       -  
                 
Bonding note from acquisition of Cresent Construction Company, due on March 31, 2020, interest rate of 8%.     160,466          
                 
Vehicle loans     10,539          
Total principal outstanding     1,735,914       258,609  
Less: debt discounts     -       -  
Total balance   $ 1,735,914     $ 258,609  

 

Required principal payments from March 31, 2017 forward are as follows:

 

2017   $ 433,287  
2018     329,801  
2019     263,757  
2020     270,965  
2021     287,678  
2022     150,426  
Total   $ 1,735,914  

 

There was $40,589 and $27,377 of accrued interest payable on non-convertible notes payable as of March 31, 2017 and December 31, 2016.

 

  11  
 

 

NOTE 8 – CONVERTIBLE NOTES PAYABLE

 

The Company has entered into various convertible debt agreements to fund operations. A summary of outstanding convertible notes payable is as follows:

 

    March 31, 2017     December 31, 2016  
Convertible note payable to non-related party, unsecured, interest of 10%, due on February 13, 2015. Currently in default. May be converted at the option of the holder into common stock at a rate of $0.30 per share. Payable on demand.   $ 50,000     $ 50,000  
                 
Convertible note payable to non-related party, unsecured, interest of 10%, due on April 8, 2016. Currently in default. May be converted at the option of the holder into common stock at a rate of $0.30 per share. Payable on demand.     15,000       15,000  
                 
Convertible note payable to non-related party, unsecured, interest of 10%, due on March 21, 2016. Currently in default. May be converted at the option of the holder into common stock at a rate of $0.30 per share. Payable on demand.     30,000       30,000  
                 
Convertible note payable to non-related party, unsecured, interest of 10%, due on May 9, 2015. Currently in default. May be converted at the option of the holder into common stock at a rate of $0.30 per share. Payable on demand.     50,000       50,000  
                 
Convertible note payable to non-related party, unsecured, interest of 10%, due on November 4, 2015. Currently in default. May be converted at the option of the holder into common stock at a rate of $0.30 per share. Payable on demand.     25,000       25,000  
                 
Convertible note payable to non-related party, unsecured, interest of 10%, due on July 15, 2015. Currently in default. May be converted at the option of the holder into common stock at a rate of $0.30 per share. Payable on demand.     50,000       50,000  
                 
Convertible note payable to non-related party, unsecured, interest of 10%, due on September 3, 2015. Currently in default. May be converted at the option of the holder into common stock at a rate of $0.30 per share. Payable on demand.     25,000       25,000  
                 
Convertible note payable to non-related party, unsecured, interest of 10%, due on October 31, 2015. Currently in default. May be converted at the option of the holder into common stock at a rate of $0.30 per share. Payable on demand.     25,000       25,000  
                 
Convertible note payable to non-related party, unsecured, interest of 10%, due on October 21, 2015. Currently in default. May be converted at the option of the holder into common stock at a rate of $0.30 per share. Payable on demand.     20,000       20,000  
                 
Convertible note payable to non-related party, unsecured, interest of 10%, due on December 30, 2015. Currently in default. May be converted at the option of the holder into common stock at a rate of $0.30 per share. Payable on demand.     45,000       45,000  
                 
Convertible note payable to non-related party, unsecured, interest of 10%, due on March 26, 2016. Currently in default. May be converted at the option of the holder into common stock at a rate of $0.30 per share. Payable on demand.     25,000       25,000  
                 
Convertible note payable to non-related party, unsecured, interest of 10%, due on April 26, 2013. Currently in default. May be converted at the option of the holder into common stock at a rate of $0.30 per share. Payable on demand.     30,000       30,000  
                 
Convertible note payable to non-related party, interest of 10%, unsecured, due on June 11, 2016. Currently in default. May be converted at the option of the holder into common stock at a price equal to a 50% discount from the lowest trading price during the five days prior to conversion. The Company may not repay the convertible note in cash.     59,800       59,800  
                 
Convertible note payable to non-related party, interest rate of 10%, unsecured, due on December 12, 2015. Currently in default. May be converted at the option of the holder into common stock at a price equal to a 40% discount from the lowest closing bid price during the fifteen days prior to conversion. The Company may not repay the convertible note in cash.     55,000       55,000  
                 
Convertible note payable to non-related party, interest rate of 10%, unsecured, due on July 7, 2016. Currently in default. May be converted at the option of the holder into common stock at a price equal to a 40% discount from the lowest closing bid price during the fifteen days prior to conversion. The Company may not repay the convertible note in cash.     27,466       27,466  
                 
Convertible note payable to non-related party, interest rate of 12%, unsecured, due on May 15, 2016. Currently in default. May be converted at the option of the holder into common stock at a price equal to a 45% discount from the lowest intra-day trading price of the Company’s common stock during the twenty trading days prior to conversion. The Company may not repay the convertible note in cash.     8,642       20,134  

 

  12  
 

 

    March 31, 2017     December 31, 2016  
Convertible note payable to non-related party, interest rate of 10%, unsecured, due on June 25, 2016. Currently in default. May be converted at the option of the holder into common stock at a price equal to a 45% discount from the lowest intra-day trading price of the Company’s common stock during the twenty trading days prior to conversion. The Company may not repay the convertible note in cash.     5,500       5,500  
                 
Convertible note payable to non-related party, interest rate of 8%, unsecured, due on July 7, 2016. Currently in default. May be converted at the option of the holder into common stock at a price equal to a 45% discount from the lowest intra-day trading price of the Company’s common stock during the twenty trading days prior to conversion. The Company may not repay the convertible note in cash.     77,947       77,947  
                 
Convertible note payable to non-related party, interest rate of 8%, unsecured, due on July 7, 2016. Currently in default. May be converted at the option of the holder into common stock at a price equal to a 45% discount from the lowest intra-day trading price of the Company’s common stock during the twenty trading days prior to conversion. The Company may not repay the convertible note in cash.     80,236       80,236  
                 
Convertible note payable to non-related party, interest rate of 10, unsecured, due on June 15, 2016. Currently in default. May be converted at the option of the holder into common stock at a price equal to a 45% discount from the lowest intra-day trading price of the Company’s common stock during the twenty trading days prior to conversion. The Company may not repay the convertible note in cash.     11,500       11,500  
                 
Convertible note payable to non-related party, interest rate of 12%, unsecured, due on May 19, 2016. Currently in default. May be converted at the option of the holder into common stock at a price equal to a 50% discount from the average of the three lowest trading prices during days prior to conversion. The Company may not repay the convertible note in cash.     60,000       60,000  
                 
Convertible note payable to non-related party, interest rate of 12%, unsecured, due on September 30, 2016. Currently in default. May be converted at the option of the holder into common stock at a price equal to a 50% discount from the average of the three lowest trading prices during days prior to conversion. The Company may not repay the convertible note in cash.     47,000       47,000  
                 
Convertible note payable to non-related party, interest rate of 12%, unsecured, due on August 19, 2015. Currently in default. May be converted at the option of the holder into common stock at a price equal to a 50% discount from the average of the three lowest trading prices during days prior to conversion. The Company may not repay the convertible note in cash.     16,018       16,018  
                 
Convertible note payable to non-related party, interest rate of 22%, unsecured, due on October 12, 2015. Currently in default. May be converted at the option of the holder into common stock at a price equal to a 50% discount from the lowest trading price during the twenty days prior to conversion. The Company may not repay the convertible note in cash.     58,941       58,941  
                 
Convertible note payable to non-related party, interest rate of 12%, unsecured, due on August 30, 2016. Currently in default. May be converted at the option of the holder into common stock at a price equal to a 50% discount from the lowest trading price during the twenty days prior to conversion. The Company may not repay the convertible note in cash.     36,000       36,000  
                 
Convertible note payable to non-related party, interest rate of 12%, unsecured, due on November 3, 2017. May be converted at the option of the holder into common stock at a price equal to a 50% discount from the lowest trading price during the twenty days prior to conversion effective May 3, 2017. The Company may repay the note in cash through May 3, 2017 and not thereafter.     16,500       16,500  
                 

Convertible note payable to non-related party, interest rate of 15%, default interest rate of 22%, unsecured, due on September 11, 2015. Currently in default. May be converted at the option of the holder into common stock at a price equal to a 60% discount from the average of the three lowest trading prices during the twenty five days prior to conversion. The Company may not repay the convertible note in cash

    16,651       16,651  
                 
Convertible note payable to non-related party, interest rate of 22%, unsecured, due on October 28, 2015. Currently in default. May be converted at the option of the holder into common stock at a price equal to a 60% discount from the average of the three lowest trading prices during the twenty five trading days prior to conversion. The Company may not repay the convertible note in cash.     9,050       9,050  
Total principal outstanding     976,252       987,744  
Less: debt discounts     (965 )     (1,581 )
Total balance   $ 975,287     $ 986,163  

 

  13  
 

 

Required principal payments from March 31, 2017 forward are as follows:

 

2017   $ 976,252  
2018     -  
2019     -  
2020        
2021     -  
Total   $ 976,252  

 

There was $263,662 and $250,452 of accrued interest payable on convertible notes payable as of March 31, 2017 and December 31, 2016.

 

The Company has recorded a derivative liability for each convertible note payable with a variable conversion rate. See Note 5 for further discussion.

 

  14  
 

 

NOTE 9 – RELATED PARTY TRANSACTIONS

 

During the year ended December 31, 2014, the Company received an interest free $8,000 loan from a related party to fund operations. The loan is unsecured, due on demand and as such is included in current liabilities. There was $5,000 due as of March 31, 2017 and December 31, 2016, respectively.

 

During the year ended December 31, 2014, the Company received an interest free $2,000 loan from a related party to fund operations. The related party made additional advances of $396 during the year ended December 31, 2016. The loan is unsecured, due on demand and as such is included in current liabilities. There was $2,396 due as of March 31, 2017 and December 31, 2016, respectively.

 

NOTE 10 – STOCKHOLDERS’ DEFICIT

 

The Company is authorized to issue up to 10,000,000,000 shares of $0.00001 par value common stock and 50,000,000 shares of $0.0001 par value blank check preferred stock of which 10,000,000 has been designated as Series A Convertible Preferred Stock. Each share of Series A Convertible Preferred Stock may be converted to common stock at the option of the holder at the greater of one share of common for each share of Series A Convertible Preferred Stock or the par value of the stock divided by a 10% discount from the volume weighted average price of the common stock of the preceding ten trading days.

 

During the three months ended March 31, 2017, the Company issued a total of 212,465,932 shares of common stock for the conversion of $11,492 of outstanding principal and 247,534,068 shares of common stock for the conversion of $13,478 of outstanding interest on convertible notes payable. All conversions were performed under the contractual terms of the respective notes payable.

 

During the three months ended March 31, 2017, the Company issued a total of 7,500,000 shares of Series A Convertible Preferred Stock for services rendered in connection with its acquisition of Cresent Construction Company. The shares of Series A Convertible Preferred Stock were valued on an as converted to common stock basis at $0.0009 per share resulting in a total value of $6,750.

 

There were 3,375,701,670 and 2,915,701,670 common shares issued and 3,375,651,670 and 2,915,651,670 outstanding at March 31, 2017 and December 31, 2016, respectively.

 

There were 10,000,000 and 2,500,000 series A convertible preferred shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively.

 

NOTE 11 – COMMITMENTS AND CONTINGENCIES

 

The Company could become a party to various legal actions arising in the ordinary course of business. Matters that are probable of unfavorable outcomes to the Company and which can be reasonably estimated are accrued. Such accruals are based on information known about the matters, the Company’s estimates of the outcomes of such matters and its experience in contesting, litigating and settling similar matters.

 

As of the date of this report, except as described below, there are no material pending legal proceedings to which the Company is a party or of which any of their property is the subject, nor are there any such proceedings known to be contemplated by governmental authorities.

 

Payroll Tax Liabilities

 

As of March 31, 2017 and December 31, 2016 the Company had accrued $761,396 in payroll tax liabilities. The payment of these liabilities has not been made due to our limited profitability. Due to the uncertainty regarding our future profitability, it is difficult to predict our ability to pay these liabilities. As a result, a federal tax lien has been levied that will have to be satisfied.

 

Federal Income Tax Liability

 

On January 29, 2015, we received a notification from the Internal Revenue Service (the “IRS”) regarding deficiencies in our tax return for the year ended December 31, 2011. The notice was the result of not filing our tax return for the year then ended and included the results of an IRS examination which yielded an income tax amount due of $92,804 plus penalties and interest totaling $34,337 for a total amount due of $127,141. While we believe we will be able to successfully reduce the tax liability and assessed penalties to zero or near zero due to our net loss sustained during the year ended December 31, 2011, the possibility exists we will be unsuccessful and could face an assessment for the full amount of $127,141. As detailed in Note 4, there is an accrued liability of $127,141 for this potential payout as of March 31, 2017 and December 31, 2016.

 

  15  
 

 

NOTE 12 – STOCK OPTIONS

 

The following table summarizes all stock option activity for the three month period ending March 31, 2017:

 

    Shares     Weighted-
Average
Exercise Price
Per Share
 
Outstanding, December 31, 2016     448,570     $ 0.30  
Granted     -       -  
Exercised     -       -  
Forfeited     -       -  
Expired     -          
Outstanding, March 31, 2017     448,570     $ 0.30  

 

The following table discloses information regarding outstanding and exercisable options at March 31, 2017:

 

      Outstanding     Exercisable  
Exercise
Prices
    Number of
Option Shares
    Weighted
Average
Exercise
Price
    Weighted
Average
Remaining
Life
(Years)
    Number of
Option Shares
    Weighted
Average
Exercise
Price
 
$ 0.30       448,570     $ 0.30       1.14       448,570     $ 0.30  
          448,570     $ 0.30       1.14       448,570     $ 0.30  

 

In determining the compensation cost of the stock options granted, the fair value of each option grant has been estimated on the date of grant using the Black-Scholes option pricing model. The assumptions used in these calculations are summarized as follows:

 

    March 31, 2017  
Expected term of options granted     2 - 5 years  
Expected volatility range     394 - 408 %
Range of risk-free interest rates     1.70 – 1.73 %
Expected dividend yield     0 %

 

  16  
 

 

NOTE 13 – ACQUISTION

 

On March 9, 2017, the Company, through a newly created special purpose entity, executed a share purchase agreement to acquire all outstanding ownership interests in Crescent Construction Company, Inc. a full service general contracting firm for total consideration of $1,800,000. The agreement required a cash payment of $500,000 at closing plus a note payable for $1,300,000. The note carries interest of 6%, matures on March 31, 2022 and requires equal quarterly payments of $152,693. Additionally, the Company entered into a separate note payable with the seller for cash proceeds of $160,466. Because this note was executed simultaneously with the purchase agreement, it was considered part of the acquisition price which brought the total consideration to $1,960,466.

 

The Company applied the acquisition method to the business combination and valued each of the assets acquired (cash, contracts receivable, equipment, non-compete agreements and contracts in progress) and liabilities assumed (accounts payable and accrued expenses and notes payable) at fair value as of the acquisition date. The cash, contracts receivable, accounts payable and accrued expenses and notes payable were deemed to be recorded at fair value as of the acquisition date. The Company determined the fair value of all equipment to be historical book value. The preliminary allocation of the purchase price was based on estimates of the fair value of the assets and liabilities assumed based on provisional amounts. The allocation of the excess purchase price is not final and the amounts allocated to intangible assets are subject to change pending the completion of final valuations of certain assets and liabilities. Under the purchase agreement, the Company paid cash of $500,000 and issued a total of $1,460,466 of promissory notes for total consideration of $1,960,466. The following table shows the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

 

ASSETS ACQUIRED        
Cash   $ 160,466  
Contracts receivable     611,320  
Equipment     102,524  
Non-compete agreement     32,468  
Contracts in progress     157,002  
Goodwill     1,474,907  
Total assets acquired   $ 2,538,687  
         
LIABILITIES ASSUMED        
Accounts payable and accrued expenses   $ 567,042  
Notes payable     11,179  
Total liabilities assumed     578,221  
         
NET ASSETS ACQUIRED   $ 1,960,466  

 

In accordance with ASC 805-10-50, the Company is providing the following unaudited pro-forma condensed consolidated statements of operations to present a summary of the combined results of the Company’s condensed consolidated operations as if the acquisition had been completed as of the beginning of the reporting period. Adjustments were made to eliminate any inter-company transactions in the periods presented.

 

  17  
 

 

INTELLIGENT HIGHWAY SOLUTIONS

PRO-FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

    Three Months Ended March 31,  
    2017     2016  
Revenue   $ 1,399,750     $ 1,858,038  
Cost of sales     1,426,641       1,638,598  
Gross (loss) profit     (26,891 )     219,440  
                 
Operating expenses                
Salaries and wages     66,824       59,100  
General and administrative     172,484       133,457  
Total operating expenses     239,308       192,557  
                 

Income (loss) from operations

    (266,199 )     26,883  
                 
Other income (expense)                
Gain on extinguishment of debt     -       40  
Gain on derivative fair value adjustment     9,487,661       270,252  
Interest expense     (32,349 )     (199,701 )

Total other income (expense), net

    9,455,312       70,591  
                 

Income before income taxes

    9,189,113       97,474  
                 
Income tax expense     -       -  
                 
Net income before non-controlling interest     9,189,113       97,474  
Net (loss) income attributable to non-controlling interest     (9,931 )     33,705  
Net income attributable to Intelligent Highway Solutions   $ 9,199,044     $ 63,769  

 

NOTE 14 – EQUITY LINE OF CREDIT

 

On August 6, 2015, the Company entered into line of credit whereby it has the right to sell to the investor up to $5,000,000 of common stock over a period of 24 months. The Company may sell up to $100,000 of common stock, but not less than $5,000, at any time at is sole discretion by issuing a put notice to the investor. The sales price of the stock will be equal to a 30% discount from the average of the lowest two closing bid prices in the preceding five trading days. There is a minimum of ten trading days between put notices. The agreement requires the Company to issue 3% of the total credit line, or $150,000, in common stock with an issue price equal to the average of the daily volume weighted average prices of the Company’s common stock during the five business days immediately preceding the due date of the issuance. The Company did not exercise its rights under the agreement during the period ended March 31, 2017.

 

NOTE 15 – LINE OF CREDIT

 

On March 9, 2017, the Company entered into a revolving line of credit to borrow up to $5,000,000 dollars of which $631,855 was drawn immediately. Of the amount drawn on March 9, 2017, $500,000 was paid to the seller of Cresent Construction Company as the cash component of the acquisition and $131,855 was drawn to pay seller and financer acquisition related costs. The credit line carries interest at 12% per annum. There was $631,855 and $0 of principal drawn as of March 31, 2017 and December 31, 2016, respectively. There was $4,634 and $0 of accrued interest due at March 31, 2017 and December 31, 2016, respectively.

 

NOTE 16 – SUBSEQUENT EVENTS

 

Common Stock Issuances

 

On various dates through July 17, 2017, the Company issued a total of 1,438,816,488 common shares for the conversion of a total of $75,028 of outstanding principal on convertible notes payable. All conversions were done under contractual terms within each respective convertible note payable.

 

On various dates through July 17, 2017, the Company issued a total of 69,077,188 common shares for the conversion of a total of $3,682of outstanding accrued interest on convertible notes payable. All conversions were done under contractual terms within each respective convertible note payable.

 

On various dates through July 17, 2017, the Company issued a total of 260,000,000 common shares for services provided by consultants. The shares were valued using the closing price on the dates of issuance which was from $0.0001 to $0.0002 per share resulting in a total value of $42,000.

 

Convertible Notes Payable

 

On April 25, 2017, the Company executed a securities purchase agreement with an existing convertible noteholder to enter into an additional $21,230 of convertible notes payable with each carrying a 10% original issue discount resulting in net cash borrowings of $19,300 being available to the Company. The note is carries interest at 12% and each tranche of cash received is due nine months after receipt. The note is convertible into shares of the Company’s common stock at a rate equal to a 42% discount from the lowest intra-day trading price for the Company’s common stock during the twenty days prior to conversion. The Company has received all of the available cash borrowings under the convertible note payable resulting in $21,230 being outstanding as of July 17, 2017.

 

On May 10, 2017, the Company executed a securities purchase agreement with an existing convertible noteholder to enter into an additional $11,250 of convertible notes payable with and original issue discount totaling $1,500 resulting in net cash borrowings of $9,750 being available to the Company. The note carries interest at 12% and each tranche of cash received is due nine months after receipt. The note is convertible into shares of the Company’s common stock at a rate equal to a 42% discount from the lowest intra-day trading price for the Company’s common stock during the twenty days prior to conversion. The Company has received all of the available cash borrowings under the convertible note payable resulting in $11,250 being outstanding as of July 17, 2017.

 

  18  
 

 

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

 

Cautionary Notice Regarding Forward Looking Statements

 

The information contained in Item 2 contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results may materially differ from those projected in the forward-looking statements as a result of certain risks and uncertainties set forth in this report. Although management believes that the assumptions made and expectations reflected in the forward-looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact, prove to be correct or that actual results will not be different from expectations expressed in this report.

 

This filing contains a number of forward-looking statements which reflect management’s current views and expectations with respect to our business, strategies, products, future results and events, and financial performance. All statements made in this filing other than statements of historical fact, including statements addressing operating performance, events, or developments which management expects or anticipates will or may occur in the future, including statements related to distributor channels, volume growth, revenues, profitability, new products, adequacy of funds from operations, statements expressing general optimism about future operating results, and non-historical information, are forward looking statements. In particular, the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “may,” variations of such words, and similar expressions identify forward-looking statements, but are not the exclusive means of identifying such statements, and their absence does not mean that the statement is not forward-looking. These forward-looking statements are subject to certain risks and uncertainties, including those discussed below. Our actual results, performance or achievements could differ materially from historical results as well as those expressed in, anticipated, or implied by these forward-looking statements. We do not undertake any obligation to revise these forward-looking statements to reflect any future events or circumstances.

 

Overview

 

Intelligent Highway Solutions, Inc. (the “Company” or “IHS”) was formed in April 22, 2011; IHS is a technology based intelligent highway solutions contractor. The Company’s primarily focus is in the California transportation market providing services that range from providing labor, materials, and related equipment for corrective service and maintenance services for the state’s transportation infrastructure. Additionally, the Company intends to develop transportation technology services that enable vehicles, roads, traffic lights, message signs, and other elements to become “intelligent” by embedding them with microchips and sensors and by empowering them to communicate with each other via wireless technologies. The acceleration of data collection and communication will allow state governments to improve transportation system performance by reducing congestion and increasing both traveler safety and convenience. While the Company develops technologies related to transportation, it will accept general electrical contracting work as a revenue source.

 

Plan of Operations

 

On August 22, 2013, the Company entered into a distribution agreement (the “Distribution Agreement”) with SCS Lighting Solutions Inc. (“SCS”), whereby SCS appointed the Company as its exclusive distributer of SCS products in Sacramento, California and other locations, as determined by both parties in the future. The SCS products include standard lighting solutions, as well as custom lighting products for indoor and outdoor applications. The Distribution Agreement is no longer exclusive.

 

The Distribution Agreement’s term automatically renews for one (1) year increments, unless either party elects to terminate the Agreement by giving not less than sixty (60) days’ notice prior to the end of the current term.

 

On March 19, 2014, the Company announced it had received a significant purchase order from Honeywell International Inc. (“Honeywell”) for the installation of a temperature control system and associated sensors in a state owned office building in Alameda, California.

 

On July 1, 2014, the Company announced it had received a second purchase order from Honeywell. The purchase order is for additional work in office buildings owned by the State of California.

 

These purchase orders with Honeywell were the Company’s sole source of income in 2014. The Honeywell project was completed during the first quarter of 2015 and a new electrical contracting project started shortly thereafter.

 

On March 9, 2017, the Company, through a special purpose entity in which the Company has a controlling interest and 80% ownership, acquired the outstanding ownership interests in Cresent Construction Company, a full service general contracting firm. The Company will continue to perform general contracting services as it continues its development of transportation technologies.

 

Results of Operations

 

Revenue

 

All revenue during the three months ended March 31, 2017 were generated from general construction contracting services performed by Cresent Construction Company. We did not generate revenue during the three months ended March 31, 2016.

 

  19  
 

 

Three months ended March 31, 2017 and 2016

 

    Three months ended March 31,        
    2017     2016     Change  
Revenue   $ 633,468     $ -     $ 633,468  

 

Revenues for the three months ended March 31, 2017 were $633,468 compared to $0 during the same period in 2016. The increase in revenue was the result of the Company’s acquisition of Cresent Construction Company as all revenues generated during the three months ended March 31, 2017 were from services performed by Cresent.

 

Cost of Goods Sold

 

Cost of revenues include all direct material, sub-contract, labor, and certain other direct costs, as well as those indirect costs related to contract performance, such as indirect labor and fringe benefits. Additionally, the amortization of intangibles assets resulting from the acquisition of Cresent Contraction Company are recorded as costs of goods sold.

 

Three months ended March 31, 2017 and 2016

 

    Three months ended March 31,        
    2017     2016     Change  
Labor   $ 517,930     $ -     $ 517,930  
Amortization of intangible assets     27,888       -       27,888  
Other     13,573       -       13,573  
Total   $ 559,291     $ -     $ 559,291  

 

Cost of goods sold for the three months ended March 31, 2017 were $559,291 compared to $0 during the same period in 2016. The increase in cost of revenue was the result of the Company’s acquisition of Cresent Construction Company as all costs of revenues generated during the three months ended March 31, 2017 were from services performed by Cresent.

 

  20  
 

 

Operating Expenses

 

Three months ended March 31, 2017 and 2016

 

    Three months ended March 31,        
    2017     2016     Change  
Salaries and wages   $ 41,443     $ 38,179     $ 3,264  
Professional services     173,779       96,947       76,832  
Other     147,150       6,516       140,634  
Total   $ 362,372     $ 141,642     $ 220,730  

 

Operating expenses for the three months ended March 31, 2017 were $362,372 compared to $141,642 for the three months ended March 31, 2016. The increase of $220,730 or 156% is the result of the Company’s increased operations from its acquisition completed during the three months ended March 31, 2017. Salaries and wages consist of management compensation during each period presented which is relatively unchanged due to the renewal of existing employment agreements in 2017 under the substantially the same terms as agreements in place for 2016. Professional fees increased $76,832, or 79%, during the three months ended March 31, 2017 as the result of acquisition related legal costs incurred during the three months ended March 31, 2017 that were not present in 2016. The increase in other operating expenses is the result of the Company incurring acquisition related costs of $131,855 as part of the acquisition closed during the three months ended March 31, 2017.

 

  21  
 

 

Other Income and Expenses

 

Three months ended March 31, 2017 and 2016

 

    Three months ended March 31,        
    2017     2016     Change  
Interest expense, net   $ (45,178 )   $ (199,701 )   $ 154,523  
Gain on extinguishment of debt     -       40       (40 )
Gain on derivative fair value adjustment     9,487,661       270,252       9,217,409  
Total   $ 9,442,483     $ 70,591     $ 9,371,892  

 

Other income and expense during the three months ended March 31, 2017 was a net gain of $9,442,483 compared to a net gain of $70,591 during the three months ended March 31, 2016. The increase in net gain of $9,371,892 was the result of increased gains recognized on the fair value adjustment of derivative liabilities. We do not expect this amount of gain to be recurring.

 

Net Income (Loss)

 

Three months ended March 31, 2017 and 2016

 

    Three months ended March 31,        
    2017     2016     Change  
Net income (loss) before non-controlling interest   $ 9,154,288     $ (71,051 )   $ 9,225,339  
Non-controlling interest     (16,896 )     -       (16,896 )
Net income (loss) after non-controlling interest   $ 9,171,184     (71,051 )    $ 9,208,443  

 

Net income for the three months ended March 31, 2017 was $9,171,184 compared to a net loss of $71,051 for the three months ended March 31, 2016. The increase in net income during the three months ended March 31, 2017 is attributable to the increased gain on the fair market value of derivatives partially offset by increased acquisition related costs.

 

  22  
 

 

Liquidity and Capital Resources

 

As of March 31, 2017, we had cash of $96,197, total current assets of $1,009,168 and total current liabilities of $7,509,865 creating a working capital deficit of $6,500,697. Current assets consisted of $96,197 in cash, $897,990 of net contracts receivable and $14,981 of costs in excess of billings. Current liabilities consisted of accounts payable $1,064,877, current notes payable of $589,359, current convertible notes payable net of discounts of $975,287, a derivative liability of $2,196,937, accrued interest of $308,884, related party notes payable of $7,396, a credit line payable of $631,855 and accrued expenses and other liabilities of $1,735,270.

 

As of December 31, 2016, we had $1,002 of cash on hand, total current assets of $1,002 and total current liabilities of $15,265,943 creating a working capital deficit of $15,264,941. Current assets consisted of $1,002 of cash. Current liabilities consisted of accounts payable of $219,098, accrued expenses and other liabilities of $1,661,776, notes payable net of discounts of $258,609, convertible notes payable net of discounts of $986,163, related party notes payable of $7,396, derivative liabilities of $11,855,072 and accrued interest of $277,829.

 

We expect our cash needs to fund operations during the twelve months to be approximately $500,000. The Company will need additional financing to continue operations in 2017 and beyond which management anticipates will be generated from short term related party loans, convertible notes with non-related parties and non-convertible notes with non-related parties.

 

Cash Flows from Operating Activities

 

Cash flows used in operating activities during the three months ended March 31, 2017 was $65,271 which consisted of a net income before non-controlling interest of $9,154,288, non-cash expenses and gains of $9,314,672, mainly due to a gain on the fair market value of derivative liabilities of $9,487,661 offset by expenses paid on behalf of the Company of $137,515, and negative changes in working capital of $95,113.

 

Cash flows used in operating activities during the three months ended March 31, 2016 was $45,662 which consisted of a net loss of $71,051, non-cash expenses and gains of $81,635, mainly due to a gain on the fair market value of derivative liabilities of $270,252 offset by the amortization of debt discounts of $121,090, and negative changes in working capital of $107,024.

 

  23  
 

 

Cash Flows from Investing Activities

 

During the three months ended March 31, 2017 and 2016, we generated $160,466 and $-0- of cash in investing activities. Cash generated from investing activities during the three months ended March 31, 2017 consisted solely of cash acquired in the acquisition of Cresent Construction Company.

 

Cash Flows from Financing Activities

 

The Company did not generate cash from or use cash in financing activities during the three months ended March 31, 2017.

 

Cash provided by financing activities during the three months ended March 31, 2016 was $48,107 which consisted of proceeds from notes payable of $53,955, repayments of notes payable of $3,263, repayments of bank overdrafts of $2,981 and proceeds from related party notes payable of $396.

 

Going Concern

 

Based on our financial history since inception, our independent registered public accounting firm has expressed substantial doubt as to our ability to continue as a going concern. We have generated very little revenue and have limited tangible assets. Our company has a limited operating history. Our company’s operations will be subject to all the risks inherent in the establishment of a developing enterprise and the uncertainties arising from the absence of a significant operating history. We may be unable to on a profitable basis. If our business plan is not successful, and we are not able to operate profitably, investors may lose some or all of their investment in our company.

 

Management plans to continue to fund operations via short term related party loans and additional convertible as well as non-convertible debt from non-related parties.

 

Recent Accounting Pronouncements

 

The Company has evaluated recent accounting pronouncements and their adoption has not had or is not expected to have a material impact on the Company’s financial position, or statements.

 

Critical Accounting Policies

 

There have been no changes in the Company’s significant accounting policies for the three months ended March 31, 2017 as compared to those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission on June 29, 2017.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

We are a Smaller Reporting Company and are not required to provide the information under this item.

 

  24  
 

 

Item 4. Controls and Procedures.

 

Disclosure of controls and procedures.

 

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) (the Company’s principal executive officer) and Chief Financial Officer (“CFO”) (the Company’s principal financial and accounting officer), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures are not effective to ensure that: (1) information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms; and (2) that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

 

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting 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 March 31, 2017. The framework used by management in making that assessment was the criteria set forth in the document entitled “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, our CEO and CFO have determined and concluded that, as of March 31, 2017, the Company’s internal control over financial reporting was not effective.

 

As defined by Auditing Standard No. 5, “An Audit of Internal Control Over Financial Reporting that is Integrated with an Audit of Financial Statements and Related Independence Rule and Conforming Amendments,” established by the Public Company Accounting Oversight Board (“PCAOB”), a material weakness is a deficiency or combination of deficiencies that result in a more than a remote likelihood that a material misstatement of annual or interim financial statements will not be prevented or detected. In connection with the assessment described above, management identified the following control deficiencies that represent material weaknesses as of March 31, 2017:

 

  (1) Lack of an independent audit committee or audit committee financial expert. Although our board of directors serves as the audit committee it has no independent directors. Further, we have not identified an audit committee financial expert on our board of directors. These factors are counter to corporate governance practices as defined by the various stock exchanges and may lead to less supervision over management.

 

We do not have sufficient experience from our accounting personnel with the requisite U.S. GAAP public company reporting experience that is necessary for adequate controls and procedures.

 

Our management determined that these deficiencies constituted material weaknesses.

 

Due to our small size, we were not able to immediately take any action to remediate these material weaknesses but plan to address these items in the near future. Notwithstanding the assessment that our Internal Controls over Financial Reporting was not effective and that there were material weaknesses identified herein, we believe that our consolidated financial statements contained in this report fairly present our financial position, results of operations, and cash flows for the quarter covered thereby in all material respects.

 

Changes in internal controls over financial reporting.

 

There has been no change in our internal control over financial reporting that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

  25  
 

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

We are not currently involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

 

Item 1A. Risk Factors.

 

We are a Smaller Reporting Company and are not required to provide the information under this item.

 

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

 

During the three months ended March 31, 2017, the Company issued a total of 212,465,932 shares of common stock for the conversion of $11,492 of outstanding principal and 247,534,068 shares of common stock for the conversion of $13,478 of outstanding interest on convertible notes payable.

 

During the three months ended March 31, 2017, the Company issued a total of 7,500,000 shares of Series A Convertible Preferred Stock for services rendered in connection with its acquisition of Cresent Construction Company.

 

The above shares were issued in reliance on the exemption under Section 4(2) of the Securities Act. These shares of our common stock qualified for exemption under Section 4(2) since the issuance shares by us did not involve a public offering. The offering was not a “public offering” as defined in Section 4(2) due to the insubstantial number of persons involved in the deal, manner of the issuance and number of shares issued. We did not undertake an offering in which we sold a high number of shares to a high number of investors. In addition, the investors had the necessary investment intent as required by Section 4(2) since they either: (1) agreed to and received share certificates bearing a legend stating that such shares are restricted pursuant to Rule 144 of the Act. This restriction ensures that these shares would not be immediately redistributed into the market and therefore not be part of a “public offering”; or (2) received shares pursuant to conversions of notes and the notes themselves had been held for longer than 6 months prior to conversion into unrestricted shares. Based on an analysis of the above factors, we have met the requirements to qualify for exemption under Section 4(2) of the Securities Act for this transaction.

 

Item 3. Defaults Upon Senior Securities.

 

None

 

Item 4. Mine Safety Disclosures.

 

Not applicable

 

Item 5. Other Information.

 

None

 

Item 6. Exhibits.

 

Exhibit    
Number   Exhibit Title
     
31.1*   Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2*   Certification of Principal Financial Office pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1+   Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2+   Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS *   XBRL Instance Document
     
101.SCH *   XBRL Taxonomy Schema
     
101.CAL *   XBRL Taxonomy Calculation Linkbase
     
101.DEF *   XBRL Taxonomy Definition Linkbase
     
101.LAB *   XBRL Taxonomy Label Linkbase
     
101.PRE *   XBRL Taxonomy Presentation Linkbase

 

* Filed herewith.

 

+ In accordance with SEC Release 33-8238, Exhibit 32.1 and 32.2 are being furnished and not filed.

 

  26  
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  INTELLIGENT HIGHWAY SOLUTIONS, INC.
   

Date: July 17, 2017

By: /s/ Devon Jones
    Devon Jones
    Chief Executive Officer
    (Principal Executive Officer)
     

Date: July 17, 2017

By: /s/ Philip Kirkland
    Philip Kirkland
    Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

  27  
 

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