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 June 30, 2014.

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.)

 

8 Light Sky Court

Sacramento, CA 95828

(Address of principal executive offices( Zip Code)

 

(916) 379-0324

(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 ¨  No x

 

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

 

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 August 19, 2014, there were 20,119,403 shares of common stock, $0.0001 par value issued and outstanding.

 

 

INTELLIGENT HIGHWAY SOLUTIONS, INC.

TABLE OF CONTENTS

FORM 10-Q REPORT

JUNE 30, 2014

 

		Page
		Number
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements.	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	21
Item 4.	Controls and Procedures.	21
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings.	22
Item 1A.	Risk Factors.	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	23
Item 3.	Defaults Upon Senior Securities.	23
Item 4.	Mine Safety Disclosures	23
Item 5.	Other Information.	23
Item 6.	Exhibits.	23
SIGNATURES		24

 

  

PART I - FINANCIAL INFORMATION

 

Item 1.

Financial Statements.

 

 

INTELLIGENT HIGHWAY SOLUTIONS

CONDENSED BALANCE SHEETS

 

		June 30, 2014				December 31, 2013
		(Unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	58,218			$	28,664
Accounts receivable, net of allowance of $0			238,703				-
Prepaid expenses			238,082				194,481
Deferred loan costs, current			129,468				138,324
Total current assets			664,471				361,469
Property and equipment, net of accumulated depreciation of $3,455 and $1,607			16,814				1,752
Deferred loan costs, net			10,190				60,128
Total assets		$	691,475			$	423,349
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Bank overdraft		$	40			$	40
Accounts payable			198,407				89,562
Accrued expenses and other liabilities			989,245				909,105
Notes payable, current portion			89,000				252,274
Convertible notes payable, current portion, net of discounts of $173,288 and $0			203,212				30,000
Notes payable, related party, current portion			8,000				-
Derivative liability			348,826				46,023
Accrued interest			65,551				113,599
Total current liabilities			1,902,281				1,440,603
Convertible notes payable, net of discounts of $303,599 and $651,780			177,235				248,220
Total liabilities			2,079,516				1,688,823
Stockholders' deficit
Common stock, $0.00001 par value; 100,000,000 shares authorized; 17,798,408 and 11,933,666 issued; 17,748,408 and 11,933,666 outstanding at June 30, 2014 and December 31, 2013			178				119
Additional paid-in capital			4,037,517				2,071,274
Treasury stock, 50,000 shares at $.084 per share			(4,200	)			-
Accumulated deficit			(5,421,536	)			(3,336,867	)
Total stockholders' deficit			(1,388,041	)			(1,265,474	)
Total liabilities and stockholders' deficit		$	691,475			$	423,349

 

See accompanying notes to unaudited condensed financial statements.

 

 

INTELLIGENT HIGHWAY SOLUTIONS

CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

 

		Three months ended June 30,								Six months ended June 30,
		2014				2013				2014				2013
						(Restated)								(Restated)
Revenue		$	401,681			$	50,308			$	465,833			$	670,553
Cost of sales			295,865				210,982				353,880				809,764
Gross profit			105,816				(160,674	)			111,953				(139,211	)
Operating expenses
Salaries and wages			53,084				59,856				106,836				127,217
General and administrative			717,118				212,597				1,090,039				386,011
Total operating expenses			770,202				272,453				1,196,875				513,228
Loss from operations			(664,386	)			(433,127	)			(1,084,922	)			(652,439	)
Other income (expense)
Gain on extinguishment of debt			34,218				-				118,291				-
Loss on derivative fair value adjustment			(94,209	)			(16,283	)			(150,063	)			(16,283	)
Loss on settlement			(175,000	)			-				(175,000	)			-
Interest expense			(540,635	)			(145,718	)			(792,975	)			(161,503	)
Total other expense			(775,626	)			(162,001	)			(999,747	)			(177,786	)
Loss before income taxes			(1,440,012	)			(595,128	)			(2,084,669	)			(830,225	)
Provision for income taxes			-				-				-				-
Net loss		$	(1,440,012	)		$	(595,128	)		$	(2,084,669	)		$	(830,225	)
Basic and diluted loss per common share		$	(0.10	)		$	(0.06	)		$	(0.15	)		$	(0.08	)
Basic and diluted weighted average shares outstanding			14,779,792				10,404,666				13,572,784				10,404,666

 

See accompanying notes to unaudited condensed financial statements.

 

 

INTELLIGENT HIGHWAY SOLUTIONS

CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)

 

		Six months ended June 30,
		2014				2013
						(Restated)
Cash flows from operating activities
Net loss		$	(2,084,669	)		$	(830,225	)
Adjustments to reconcile net loss to net cash used in operating activities
Common stock issued for services			203,324				-
Common stock issued for settlement			287,064				-
Common stock issued as loan origination fee			-				6,250
Gain on forgiveness of debt			(118,291	)			-
Depreciation			1,848				336
Amortization of deferred loan costs			70,125				-
Amortization of loan origination fee			90,283				-
Loss on derivative fair value adjustment			150,063				16,283
Excess derivative liability charged to interest			-				70,000
Allowance for doubtful accounts			-				(13,158	)
Amortization of debt discount			578,205				55,678
Changes in operating assets and liabilities
Accounts receivable			(238,703	)			261,749
Other receivables			-				(113,009	)
Prepaid expenses			373,399				9,153
Deferred loan costs			-				(61,000	)
Accounts payable			252,136				20,254
Accrued interest			12,520				(25,571	)
Accrued expenses and other liabilities			80,360				6,650
Net cash used in operating activities			(342,336	)			(596,610	)
Cash flows from investing activities
Purchase of equipment			(16,910	)			-
Net cash used in investing activities			(16,910	)			-
Cash flows from financing activities
Repayment of bank overdraft			-				(1,678	)
Proceeds from convertible notes payable			305,000				730,000
Proceeds from notes payable			210,000				-
Repayments of notes payable			(130,000	)			(39,589	)
Proceeds from related party notes payable			8,000				-
Purchase of treasury stock			(4,200	)			-
Net cash provided by financing activities			388,800				688,733
Change in cash and cash equivalents			29,554				92,123
Cash at beginning of period			28,664				-
Cash at end of period		$	58,218			$	92,123
Supplemental disclosures of cash flow information
Cash paid for interest		$	-			$	47,507
Cash paid for income taxes		$	-			$	-
Supplemental disclosure of non-cash financing activities:
Common stock issued as loan repayment		$	602,503			$	-
Common stock issued as interest repayment		$	45,165			$	-
Debt discount on convertible notes		$	392,128			$	610,000
Initial measurements of derivative liabilities		$	312,128			$	30,000
Exchange of note payable and accrued interest for convertible note payable		$	212,526			$	-

  

See accompanying notes to unaudited condensed financial statements.

 

 

INTELLIGENT HIGHWAY SOLUTIONS, INC.

Notes to Unaudited Condensed Financial Statements

June 30, 2014

 

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.

 

NOTE 2 – CONDENSED FINANCIAL STATEMENTS

 

The accompanying 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 periods ended June 30, 2014 and for all periods presented herein, have been made.

 

Certain information and footnote disclosures normally included in 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 financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s December 31, 2013 audited financial statements.  The results of operations for the periods ended June 30, 2014 are not necessarily indicative of the operating results for the full year.

 

NOTE 3 – GOING CONCERN

 

The Company’s 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. The Company has not yet established an ongoing source of revenues 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 financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

  

INTELLIGENT HIGHWAY SOLUTIONS, INC.

Notes to Unaudited Condensed Financial Statements

June 30, 2014

 

NOTE 4 - SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates

 

The preparation of 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 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 and Cash Equivalents

 

For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.

 

Accounts Receivable

 

Accounts receivable are carried at the expected net realizable value. The allowance for doubtful accounts, is based on management's assessment of the collectability of specific customer accounts and the aging of the accounts receivables. If there were a deterioration of a major customer's creditworthiness, or actual defaults were higher than historical experience, our estimates of the recoverability of the amounts due to us could be overstated, which could have a negative impact on operations. The Company had bad debt expense of $0 during the three and six months ended June 30, 2014 and a bad debt recovery of $13,158 during the three and six months ended June 30, 2013.

 

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

 

 

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 June 30, 2014 and December 31, 2013 were:

 

		June 30, 2014				December 31, 2013
Machinery and equipment		$	2,149			$	2,149
Furniture and fixtures			6,273				1,210
Vehicles			11,847				-
Sub Total		$	20,269			$	3,359
Accumulated depreciation			(3,455	)			(1,607	)
Total		$	16,814			$	1,752

 

Depreciation expense for the six months ended June 30, 2014 and 2013 was $1,848 and $336, respectively. Depreciation expense for the three months ended June 30, 2014 and 2013 was $1,577 and $168, respectively.

 

Accrued Expenses and Other Liabilities

 

Accrued expenses and other liabilities consisted of the following at June 30, 2014 and December 31, 2013:

 

		June 30, 2014				December 31, 2013
Deferred rent payable		$	1,838			$	2,673
Payroll tax liabilities			692,053				637,139
Other payroll accruals			44,973				51,711
Other			250,381				217,582
Total		$	989,245			$	909,105

 

Revenue Recognition

 

Service revenue is recognized in the period services are rendered and earned under service arrangements with clients where service fees are fixed or determinable and collectability is reasonably assured. The Company’s service revenue is largely attributable professional engineering services where the fee is based on the billable rate of the employees.

 

Cost of Sales

 

Cost of sales comprises of costs associated with providing services related to the Company’s contracts including direct labor costs, job materials, automobile fuel, insurance, maintenance and operating leases. Cost of sales totaled $295,865 and $210,982 for the three months ended June 30, 2014 and 2013, respectively. Cost of sales totaled $353,880 and $809,764 during the six months ended June 30, 2014 and 2013, respectively.

 

Reclassifications

 

Certain prior-year amounts have been reclassified in order to conform to the current-year presentation. These reclassifications related to notes payable where prior periods had incorrectly shown certain notes as being related party, when in fact they were not.

 

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.

 

 

Convertible debt

 

The Company records a beneficial conversion feature related to the issuance of convertible debts that have conversion features at fixed or adjustable rates. The beneficial conversion feature 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 beneficial conversion feature will be accreted by recording additional non-cash interest expense over the expected life of the convertible notes.

 

Net Loss Per Share

 

Net loss per share is computed by dividing net 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 by the weighted average number of common shares and potential common shares during the specified period. For the three and six months ended June 30, 2014 and 2013, 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 6,258,491 such potentially dilutive shares excluded for the three and six months ended June 30, 2014 and 2013, respectively.

 

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.

 

NOTE 5 - FAIR VALUE MEASUREMENTS

 

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 June 30, 2014 and December 31, 2013:

 

		Level 1				Level 2				Level 3				Fair Value at June 30, 2014
Liabilities
Derivative Liability			-			$	348,826				-			$	348,826

 

		Level 1				Level 2				Level 3				Fair Value at December 31, 2013
Liabilities
Derivative Liability			-				46,023				-				46,023

 

The changes in the fair value of recurring fair value measurements are measured using the Black Scholes valuation model, and relate solely to the derivative liability as follows:

 

Balance at December 31, 2013		$	46,023
Derivative liabilities recorded			312,130
Change due to note conversion			(159,390	)
Fair value adjustment			150,063
Balance at June 30, 2014		$	348,826

 

 

NOTE 6 – NOTES PAYABLE

 

On November 21, 2011 the Company received a loan in the amount of $27,000 from Byrd & Company LLC, Emerging Markets Consulting LLC, and Douglas S. Hackett ($9,000 from each party). The loan is unsecured and bears a simple interest of 12% per annum to be amortized in 6 equal installments of principal and interest commencing January 1, 2012 through June 1, 2012. Our Chief Executive Officer, Devon Jones, and our Chief Financial Officer and Chief Operating Officer, Philip Kirkland, have personally guaranteed this loan.  On March 1, 2012, the Company issued Emerging Markets Consulting, LLC shares of common stock equivalent to $19,000, $10,000 for cash and $9,000 in satisfaction of the outstanding loan.  Accordingly, the loan from Emerging Markets Consulting, LLC is no longer outstanding.   Byrd & Company was repaid $3,803 and $3,917 during the years ended December 31, 2013 and 2012 with the remaining balance of $1,200 being forgiven during the year ended December 31, 2013. Also, the Company is negotiating to amend or extend the terms of the remaining amount of the note from Douglas S. Hackett. There was $9,000 and $9,000 in principal plus accrued interest of $2,814 and $2,278 due at June 30, 2014 and December 31, 2013.

 

On April 14, 2014, the Company received a loan in the amount of $90,000 from Innovest, LLC. The loan is due on August 14, 2014 with $30,000 payment due on each June 14, 2014; July 14, 2014 and August 14, 2014. The loan is unsecured and non-interest bearing. In the event of default, the note shall bear interest at 18% per annum. Additionally, the Company is obligated to issue 50,000 shares of common stock in the event of late payments. The note holder was also issued 75,000 shares of common stock as an incentive to enter into the note.

 

On May 22, 2014, the Company entered into two separate note agreements for $50,000 ($100,000 total). The notes carried a fixed interest amount of $400 and were due on June 15, 2014. If the loans were not repaid by the due date, the Company had the obligation to issue 25,000 shares of common stock to each note holder for each consecutive week the notes were outstanding. Additionally, the note holders each received 100,000 shares of common stock as an incentive to enter into the notes and had the right to sell back 25,000 shares of common stock to the Company for $2,100. The notes, including the fixed interest amounts, were repaid on June 26, 2014. Additionally, each note holder exercised its right to sell back 25,000 shares of common stock each to the Company for $2,100. Late penalties yielded an additional 50,000 common shares being issued to each note holder.

 

On April 17, 2014, the Company received a loan in the amount of $20,000 from Seton Securities. The loan is unsecured, due on demand and non-interest bearing. There was $20,000 and $0 in principal and no accrued interest due at June 30, 2014 and December 31, 2013.

 

NOTE 7 – CONVERTIBLE NOTES PAYABLE

 

On October 26, 2012, the Company received a loan totaling $30,000 from an unrelated party. The note bears interest at 10% per annum and had an original maturity date of April 26, 2013; however, the Company is in negotiations to extend the maturity date. There was $30,000 in principal plus accrued interest of $6,115 and $4,627 at June 30, 2014 and December 31, 2013. The principal and accrued interest may be converted at the option of the holder to common stock at $0.30.

 

On February 27, 2014, the Company received a loan totaling $339,026 from an unrelated party. The note bears interest at 10% per annum and matures February 27, 2015. Of the $339,026 total note, $212,526 was paid to former note holders on our behalf and $1,500 was withheld as debt issue costs resulting in net cash proceeds to the company of $125,000. Additionally, the note may be converted to common stock at the option of the holder at a rate equal to a 35% discount from the lowest daily volume weighted average price in the five days prior to conversion, but not less than $0.00004. On various dates during the six months ended June 30, 2014, the Company accepted nine separate partial conversions of the note resulting in a total of 564,399 shares of common stock being issued in exchange for $92,526 of principal. There was $246,500 in principal plus $9,861 in accrued interest due at June 30, 2014.

 

On January 30, 2014, the Company entered into a note with an unrelated party to borrow up to $300,000 which would carry $35,000 as an original issue discount bringing the total note to $335,000 if fully borrowed. Upon closing the agreement, the Company received a loan totaling $50,000 which carried a prorated original issue discount of $5,833 bringing the total note to $55,833. An additional $55,000 was borrowed during the three months ended June 30, 2014. Additionally, the note may be converted to common stock at the option of the holder at a rate equal to the lesser of $0.65 or 60% of the lowest trade price in the twenty five (25) trading days prior to conversion, but does not become convertible until 180 days after the effective date which is July 29, 2014. The note requires a minimum of two million five hundred thousand (2,500,0000) to be held in reserve in the instance of conversion. The note carried interest at 12% per annum and is due on January 30, 2016. There was $110,833 in principal plus $2,772 in interest due at June 30, 2014.

 

 

During the year ended December 31, 2013, the Company entered into debt agreements with various individuals to borrow a total of $900,000, of which $55,664 went directly to third parties to pay off amounts owed by the Company, $83,500 went to the placement agent and were recorded as debt issuance costs to be amortized over the life of the note, leaving the Company with net proceeds of $760,836. The notes accrue interest at 10% per annum and are due in are due in full between January and December 2015 with no repayments due before maturity. The principal and accrued interest may be converted at the option of the holder to common stock at $0.30. The intrinsic value of the conversion feature in these notes resulted in debt discounts totaling $800,000 which will be amortized over the lives of the notes. $210,925 of the debt discounts were recognized in interest expense during the year ended December 31, 2013 leaving an unamortized discount of $589,075 at December 31, 2013. The following table depicts the amounts due for each note as of December 31, 2013:

 

		Maturity Date		Principal				Debt Discount				Carrying Amount				Accrued Interest
Note holder 1		1/24/2015		$	100,000			$	-			$	100,000			$	8,795
Note holder 2		4/26/2015			60,000				(39,370	)			20,630				4,126
Note holder 3		5/3/2015			25,000				(16,712	)			8,288				1,658
Note holder 4		5/9/2015			100,000				(67,671	)			32,329				6,466
Note holder 4		5/31/2015			50,000				(35,342	)			14,658				2,932
Note holder 5		5/17/2015			50,000				(33,836	)			16,164				3,233
Note holder 6		5/30/2015			100,000				(66,849	)			33,151				6,630
Note holder 7		5/9/2015			50,000				(33,836	)			16,164				3,233
Note holder 8		5/9/2015			50,000				(34,315	)			15,685				3,137
Note holder 9		6/7/2015			25,000				(17,911	)			7,089				1,418
Note holder 10		7/1/2015			100,000				(74,932	)			25,068				5,014
Note holder 10		10/29/2015			25,000				(23,048	)			1,952				390
Note holder 11		7/15/2024			50,000				(38,425	)			11,575				2,315
Note holder 12		8/20/2015			25,000				(20,925	)			4,075				815
Note holder 12		10/18/2015			25,000				(22,911	)			2,089				418
Note holder 13		10/23/2015			20,000				(18,055	)			1,945				389
Note holder 16		12/30/2015			45,000				(44,939	)			63				12
Total				$	900,000			$	(589,075	)		$	310,925			$	50,981

 

During the six months ended June 30, 2014, the Company entered into debt agreements with various individuals to borrow a total of $310,000 which was $305,000 in cash and $5,000 as a reduction of accounts payable. The notes accrue interest at 10% per annum and are due in are due in full between March and April 2016 with no repayments due before maturity. The principal and accrued interest may be converted at the option of the holder to common stock at $0.30. The intrinsic value of the conversion feature in these notes resulted in debt discounts totaling $310,000 which will be amortized over the lives of the notes. $10  ,007 of the debt discounts were recognized in interest expense during the six months ended June 30, 2014 leaving an unamortized discount of $69,993 at June 30, 2014. Additionally, during the six months ended June 30, 2014, the Company accepted the full conversion of eight notes and the partial conversion of third to common stock at $0.30 per share resulting in 1,699,999 shares of common stock being issued in consideration of $510,000 of principal plus 140,228 shares of common stock being issued in consideration of $45,166 of accrued interst. The following table depicts the amounts due for each note as of June 30, 2014:

 

		Maturity Date		Principal				Debt Discount				Carrying Amount				Accrued Interest
Note holder 1		1/24/2015		$	50,000			$	-			$	50,000			$	12,507
Note holder 1		4/24/2016			15,000				(13,623	)			1,377				274
Note holder 4		3/21/2016			30,000				(25,849	)			4,151				830
Note holder 7		5/9/2015			50,000				(21,438	)			28,562				5,712
Note holder 10		7/1/2015			100,000				(50,137	)			49,863				9,973
Note holder 10		10/29/2015			25,000				(16,849	)			8,151				1,630
Note holder 11		7/15/2024			50,000				(26,027	)			23,973				4,795
Note holder 12		8/20/2015			25,000				(14,726	)			10,274				2,055
Note holder 12		10/18/2015			25,000				(16,712	)			8,288				1,658
Note holder 13		10/23/2015			20,000				(13,096	)			6,904				1,381
Note holder 16		12/30/2015			45,000				(33,781	)			11,219				2,244
Note holder 17		3/26/2016			25,000				(21,712	)			3,288				692
Note holder 18		4/4/2016			10,000				(8,810	)			1,190				238
Total				$	470,000			$	(262,760	)		$	207,240			$	43,989

 

 

NOTE 8 – RELATED PARTY TRANSACTIONS

 

We have engaged an entity controlled by the director of the Company to perform consulting services related to the development of new technologies. Payments to this party totaled $1,500 and $8,000 during the three months ended June 30, 2014 and 2013 and $2,500 and $9,775 during the six months ended June 30, 2014 and 2013.

 

During the six months ended June 30, 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.

 

NOTE 9 – STOCKHOLDERS’ DEFICIT

 

The Company is authorized to issue up to 100,000,000 shares of $0.00001 par value common stock. During the six months ended June 30, 2014, the Company issued a total of 2,325,000 common shares for services provided by various consultants, 7,500 common shares as settlement of a payable, 752,616 common shares as settlements of certain claims brought against the company by two separate entities, 2,264,398 common shares for total note conversions of $602,526, 140,228 common shares for total accrued interest conversions of $45,166, 375,000 common shares as debt issue costs and repurchased a total of 50,000 common shares for $4,200 of cash.

 

There was 17,798,408 shares issued and 17,748,408 outstanding as of June 30, 2014.

 

NOTE 10 – 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.

 

As of June 30, 2014 and December 31, 2013, the Company had accrued $692,053 and $637,139 and 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.

 

Vehicle Leases

 

The Company previously had entered into twelve separate month to month leases on various vehicles which required total monthly payments of $3,971. The vehicles related to these leases were purchased by the Company in April 2014.

 

Office and Warehouse Lease

 

The Company is required under the terms of the rental lease to make monthly lease payments.

 

The Company’s property lease is for an initial period of thirteen months from October 2011 and may be extended in two separate thirteen-month increments for up to a total term of 39 months. The Company may not terminate this lease prior to the agreed upon termination date. The minimum future annual rental commitments are as follows:

 

2014			21,762
2015			1,053
Total annual lease commitments		$	22,815

 

 

NOTE 11 – DERIVATIVE LIABILITY

 

As of June 30, 2014 the Company had a $348,826 derivative liability balance on the balance sheet and recorded a loss from derivative liability fair value adjustment of $94,209 and $150,063 during the three and six months ended June 30, 2014.  The derivative liability activity comes from convertible notes payable as follows:

 

As discussed in Note 7 – “Convertible Notes Payable”, during 2012, the Company issued an aggregate of $30,000 Convertible Promissory Notes to an unrelated party that matured on April 26, 2013. The Company is currently negotiating an extension of the maturity date and anticipates to successfully do so. The note bears interest at a rate of 10% per annum and can be convertible into the Company’s common shares, at the holder’s option, at the conversion rate of $0.30 per share.  The Company analyzed the conversion feature of the agreement for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the embedded conversion features should be classified as a derivative because the exercise price of these convertible notes are subject to “reset” provisions in the event the Company subsequently issues common stock, stock warrants, stock options or convertible debt with a stock price, exercise price or conversion price lower than conversion price of these notes. If these provisions are triggered, the conversion price of the note will be reduced.  The Company has determined that the conversion feature is not considered to be solely indexed to the Company’s own stock and is therefore not afforded equity treatment. In accordance with AC 815, the Company has bifurcated the conversion feature of the note and recorded a derivative liability.

 

The embedded derivative for the note is carried on the Company’s balance sheet at fair value.  The derivative liability is marked-to-market each measurement period and any unrealized change in fair value is recorded as a component of the income statement and the associated fair value carrying amount on the balance sheet is adjusted by the change.  The Company fair values the embedded derivative using the Black-Scholes option pricing model.  The aggregate fair value of the derivative at the inception date of the note was $73,451.  Of the total, $30,000 was recorded as a debt discount, which is up to but not more than the net proceeds of the notes.  $43,451 was charged to operations as non-cash interest expense. The fair value of $73,451 was recorded as a derivative liability on the balance sheet.

 

The debt discount for the note was amortized over the term of our stock’s opening trading day to the original maturity, or two days. On June 30, 2014, the Company marked-to-market the fair value of the derivative liabilities related to note and determined an aggregate fair value of $13,308 and recorded a gain of $16,287 and loss of $151 loss from change in fair value of derivatives for three and six months ended June 30, 2014. The fair value of the embedded derivatives for the notes was determined using the Black-Scholes option pricing model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 373%, (3) risk-free interest rate of .04%, (4) expected life of 0.32 of a year, and (5) estimated fair value of the Company’s common stock of $0.18 per share.

 

As discussed in Note 7 – “Convertible Notes Payable”, on February 27, 2014, the Company issued an aggregate of $339,026 Convertible Promissory Notes to an unrelated party that mature on February 27, 2015. The note bears interest at a rate of 10% per annum and can be convertible into the Company’s common shares, at the holder’s option, at the conversion rate equal to a 35% discount from the lowest daily volume weighted average price in the five days prior to conversion, but not less than $0.00004.  The Company analyzed the conversion feature of the agreement for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the embedded conversion features should be classified as a derivative because the exercise price of these convertible notes are subject to “reset” provisions in the event the Company subsequently issues common stock, stock warrants, stock options or convertible debt with a stock price, exercise price or conversion price lower than conversion price of these notes. If these provisions are triggered, the conversion price of the note will be reduced.  The Company has determined that the conversion feature is not considered to be solely indexed to the Company’s own stock and is therefore not afforded equity treatment. In accordance with AC 815, the Company has bifurcated the conversion feature of the note and recorded a derivative liability.

 

 

The embedded derivative for the note is carried on the Company’s balance sheet at fair value.  The derivative liability is marked-to-market each measurement period and any unrealized change in fair value is recorded as a component of the income statement and the associated fair value carrying amount on the balance sheet is adjusted by the change.  The Company fair values the embedded derivative using the Black-Scholes option pricing model.  The aggregate fair value of the derivative at the inception date of the note was $312,128 which was recorded as a debt discount, which is up to but not more than the net proceeds of the notes.  The fair value of $368,056 was recorded as a derivative liability on the balance sheet.

 

The debt discount for the notes will be amortized over the term of the note, or one year. On June 30, 2014, the Company marked-to-market the fair value of the derivative liabilities related to notes and determined an aggregate fair value of $335,528 and recorded a $110,496 and $1,55,484 loss from change in fair value of derivatives for three and six months ended June 30, 2014. The fair value of the embedded derivatives for the notes was determined using the Black-Scholes option pricing model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 280%, (3) risk-free interest rate of .07%, (4) expected life of 0.66 of a year, and (5) estimated fair value of the Company’s common stock of $0.18 per share.

  

NOTE 12 – STOCK OPTIONS AND WARRANTS

 

The following table summarizes all stock option and warrant activity for the six month period ended June 30, 2014:

 

		Shares				Weighted- Average Exercise Price Per Share
Outstanding, December 31, 2013			293,333			$	0.30
Granted			201,666				0.30
Exercised			-				-
Forfeited			-				-
Expired			-				-
Outstanding, June 30, 2014			494,999			$	0.30

 

The following table discloses information regarding outstanding and exercisable options and warrants at June 30, 2014:

 

				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				494,999			$	0.30				3.15				311,666			$	0.30
					494,999			$	0.30				3.15				311,666			$	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:

 

		June 30, 2014
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	%

 

 

 

NOTE 13 - RESTATEMENT

 

The Company has restated its results for the three and six months ended June 30, 2013 to appropriately reflect the issuance of options as part of debt issue costs, the amortization of those issue costs, the recognition of prepaid expenses associated with common stock grants during the year ended December 31, 2012 and the treatment of previously capitalized leases as operating leases. The net effect on the revised balance sheet and statements of operations for June 30, 2013 are:

 

Balance Sheet:
		Original				Adjustments				As Restated
Total assets		$	285,277			$	422,497			$	707,774
Total current liabilities			1,272,058				457,042				1,729,100
Common stock			104				3				107
Additional paid in capital			751,086				222,337				973,423
Accumulated deficit			(1,122,500	)			(1,058,075	)			(2,180,575	)

  

Statement of Operations - three months ended June 30, 2013:
		Original				Adjustments				As Restated
Revenue		$	49,323			$	985	)		$	50,308
Cost of sales			201,432				9,550				210,982
Operating expenses			320,897				(48,444	)			272,453
Other income (expense)			(143,196	)			(18,805	)			(162,001	)
Provision for income taxes			-				-				-
Net loss			(616,202	)			21,074	)			(595,128	)
Net loss per common share			(0.06	)			0.00				(0.06	)
Weighted average shares outstanding			10,404,666				-				10,404,666

 

 

Statement of Operations - six months ended June 30, 2013:
		Original				Adjustments				As Restated
Revenue		$	670,553			$	-			$	670,553
Cost of sales			790,769				18,995				809,764
Operating expenses			569,116				(55,888	)			513,228
Other income (expense)			(157,827	)			(19,959	)			(177,786	)
Provision for income taxes			-				-				-
Net loss			(847,159	)			16,931				(830,225	)
Net loss per common share			(0.08	)			0.00				(0.08	)
Weighted average shares outstanding			10,404,666				-				10,404,666

 

NOTE 14 – SUBSEQUENT EVENTS

 

On various dates in July 2014, the Company accepted three separate partial note payable conversions from a convertible note holder. The three separate conversions were for 232,677 common shares valued at $25,000; 151,922 common shares valued at $15,000 and 169,683 common shares valued at $15,000. In total, the three conversions resulted in 554,282 common shares being issued in consideration of a $55,000 reduction of notes payable.

 

On July 8, 2014, the Company accepted the conversion of one of its convertible note holders resulting in 333,333 shares of common stock being issued as a reduction of $100,000 note plus 33,973 shares of common stock being issued in consideration of $10,192 of accrued interest.

 

On July 25, 2014, the Company agreed to issue 200,000 shares of common stock as settlement of a $9,000 note payable plus $2,814 of accrued interest.

 

On July 30, 2014, the Company accepted a partial conversion from one of its convertible note holders to issue 150,000 shares of common stock as a conversion of $9,000 of principal.

 

On July 14, 2014, the Company issued 500,000 shares of common stock for services performed on behalf of the Company. The shares were valued at the closing price of the stock on that day of $0.19 resulting in a total value of $95,000.

 

On July 18, 2014, the Company entered into an agreement to sell 800,000 shares of common stock at $0.14 per share resulting in net proceeds to the Company of $112,000. However, $84,083 was returned to the investor on August 15, 2014 resulting net proceeds of $27,917 in exchange for 199,407 common shares being issued.

 

On August 6, 2014, the Company entered into a $50,000 note with an unrelated party. The note carries fixed interest of $400 if it is repaid within 30 days and $800 if repaid thereafter with the note maturing on October 6, 2014. Additionally, the note holder was issued 175,000 shares of common stock of which the holder has the option to sell back 50,000 for $2,100 of cash if the note is repaid within 30 days and $4,200 if repaid thereafter. If the note is not repaid within 30 days, the holder is entitled to receive an additional 125,000 shares of common stock. If the note is not repaid within 60 days, the holder is entitled to an additional 25,000 shares of common stock for each week there remains unpaid principal.

 

On August 8, 2014, the Company entered into a $50,000 note with an unrelated party. The note carries fixed interest of $400 if it is repaid within 30 days and $800 if repaid thereafter with the note maturing on October 6, 2014. Additionally, the note holder was issued 175,000 shares of common stock of which the holder has the option to sell back 50,000 for $2,100 of cash if the note is repaid within 30 days and $4,200 if repaid thereafter. If the note is not repaid within 30 days, the holder is entitled to receive an additional 125,000 shares of common stock. If the note is not repaid within 60 days, the holder is entitled to an additional 25,000 shares of common stock for each week there remains unpaid principal.

 

 

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 and plans to provide 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.

 

 

Plan of Operations

 

The Company plans to provide service and maintenance for California’s transportation sector.  The Company plans to seek further contracts in counties and municipalities throughout California and expand to neighboring states.

 

Additionally, the Company intends to expand to provide full service turn-key electrical services for the expanding intelligent highway services market sector. These contracts are typically bid on through the State and municipal entities. Typically, they involve the installation and purchase of materials and labor to provide a complete, operational system. Our primary focus will be in systems that are related to the intelligent highway sector, such as, but not limited to: (1) installation and materials for the installation of fiber optic cables; (2) installation and distribution of materials for the video monitoring systems deployed on the highway corridors; and (3) the distribution and installation of monitor devices and signage used in conjunction with the transportation network.

 

As an additional step, the Company, building off its experience in the service and maintenance of traffic monitoring systems, intends to develop wireless systems to replace existing hardwire loop detection systems, video monitoring systems, etc. The Company, in the fourth quarter of 2014, intends to introduce a wireless/battery-less loop detection system. The Company has received the approval of two service districts in California to deploy the new technology in a real-time, real-world application. The application of this new technology can be used on any freeway entrance ramps; freeway lanes to monitor traffic flow; at intersections to monitor traffic and send information to traffic signals and alert management of congestion.

 

Recent Developments

 

On April 24, 2013, the Company was informed that Mr. Michael Sullivan received notice on the same day from the Division of Procurement and Contracts of the California Department of Transportation (“Caltrans”) that Caltrans is terminating the nine Caltrans contracts (the “Caltrans Agreements”), dated as of June 1, 2011, between Michael J. Sullivan Communications and Caltrans effective upon receipt of the notice pursuant to its right to terminate the Caltrans Agreements upon thirty (30) days notice (the “Termination”). On June 21, 2011, the Company purchased the Caltrans Agreements from Mr. Sullivan. Pursuant to the Caltrans Agreements, the Company provided on-call, as needed, maintenance and repair of Caltrans’ Traffic Operations System Network.

 

As a result of the Termination, the Company is negotiating with Caltrans to enter into a new agreement to perform the same services as agreed upon in the CaltTrans Agreements. However, as of the date hereof, the Company has not entered into an agreement and cannot make any assurance that an agreement will be executed.

 

On August 22, 2013 (the “Effective Date”), 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.  If the Company does not make sales in the first year with revenues to SCS in the amount of Three Million dollars ($3,000,000), then the Distribution Agreement will become non-exclusive.

 

The Distribution Agreement’s initial term is for one (1) year from the Effective Date and will automatically renew for additional 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.

 

 

Results of Operations

 

Revenue

 

Through the second quarter of 2013, we generated revenue through servicing contracts with CalTrans for the maintenance of the Tosnet system within certain areas of California. The contracts with CalTrans accounted for 100% of revenue during the three months ended March 31, 2013. During the first quarter of 2014, we entered into an agreement with Honeywell Building Solutions (“Honeywell”) to provide electrical contracting services in connection with ongoing construction projects. This agreement accounted for 100% of our revenues during the three and six months ended June 30, 2014.

 

Three months ended June 30, 2014 and 2013

 

		Three months ended June 30,
		2014				2013				Change
Revenue		$	401,681			$	50,308			$	351,373

 

Revenues for the three months ended June 30, 2014 were $401,681 compared to $50,308 during the same period in 2013. The increase of $351,373 or 698% is the result of discontinuing the Tosnet contracts early in the second quarter of 2013 and providing services to Honeywell Building Solutions during the full second quarter of 2014.

 

Six months ended June 30, 2014 and 2013

 

		Six months ended June 30,
		2014				2013				Change
Revenue		$	465,833			$	670,553			$	(204,720	)

 

Revenues for the six months ended June 30, 2014 were $465,833 compared to $670,553 during the same period in 2013. The decrease of $204,720 or 31% is the result of the Company no longer servicing the contracts to maintain the Tosnet systems and instead engaging Honeywell Building Solutions on a much smaller scale project.

 

Cost of Goods Sold

 

Cost of goods sold consist of the costs associated with direct labor, truck leases and job materials associated with servicing the Honeywell contract in 2014 and maintaining the Tosnet systems during 2013. Such costs consist of direct labor and vehicle related costs including maintenance, rental, fuel, and insurance.

 

Three months ended June 30, 2014 and 2013

 

		Three months ended June 30,
		2014				2013				Change
Labor		$	257,377			$	142,745			$	114,632
Fuel			1,367				31,321				(29,954	)
Vehicle Lease™			19,990				26,768				(6,778	)
Other			17,131				10,148				6,983
Total		$	295,865			$	210,982			$	84,886

  

 

Cost of goods sold for the three months ended June 30, 2014 were $295,865 compared to $210,964 during the same period in 2013. The increase of $84,886 or 40% is the result of the timing of the loss of our contracts with CalTrans to maintain the Tosnet system which occurred early in the second quarter of 2013. During the six months ended June 30, 2014, we entered into an agreement with Honeywell as described previously which is a much smaller scale project. Although the project is smaller in scale, we serviced it for the full three months ended June 30, 2014 where the CalTrans contract during the second quarter of 2013 was serviced for a shorter amount of time.

 

Six months ended June 30, 2014 and 2013

  

		Six months ended June 30,
		2014				2013				Change
Labor		$	279,224			$	661,624			$	(382,400	)
Fuel			2,258				73,748				(71,490	)
Vehicle Lease			29,372				52,040				(22,668	)
Other			43,026				22,352				20,674
Total		$	353,880			$	809,764			$	(455,884	)

 

Cost of goods sold for the six months ended June 30, 2014 were $353,880 compared to $809,764 during the same period in 2013. The decrease of $455,884 or 56% is the result of the loss of our contracts with CalTrans to maintain the Tosnet system. As a result of the loss of these contracts, we terminated the employment of the employees previously maintaining the system and incurred no other costs to maintain these contracts as we were no longer servicing them. During the six months ended June 30, 2014, we entered into an agreement with Honeywell as described previously which is a much smaller scale project. We require fewer employees to service this contract as well as lesser overall vehicle related expenses.

 

Operating Expenses

 

Three months ended June 30, 2014 and 2013

 

		Three months ended June 30,
		2014				2013				Change
Salaries and wages		$	53,084			$	59,856			$	(6,772	)
Professional services			503,015				199,090				303,925
Accounts receivable factoring fees			-				26,509				(26,509	)
Other			214,103				(13,002	)			227,105
Total		$	770,202			$	272,453			$	497,749

 

Operating expenses for the three months ended June 30, 2014 were $770,202 compared to $272,453 during the same period in 2013. The increase of approximately 183% is the result of additional non-cash professional fees related to the recognition of stock based expenses that occurred in 2014 and were not existent in 2013. These fees were incremental to those incurred during the six months ended June 30, 2013. Additionally we incurred incremental costs in 2014 associated with the settlement of certain claims by former service providers.

 

 

Six months ended June 30, 2014 and 2013

 

		Six months ended June 30,
		2014				2013				Change
Salaries and wages		$	106,836			$	127,217			$	(20,381	)
Professional services			844,743				318,113				526,630
Accounts receivable factoring fees			-				55,684				(55,684	)
Other			245,296				12,214				233,082
Total		$	1,196,875			$	513,228			$	683,647

 

Operating expenses for the six months ended June 30, 2014 were $1,196,875 compared to $513,228 during the same period in 2013. The increase of approximately 133% is the result of additional non-cash professional fees related to the recognition of stock based expenses that occurred in 2014 and were not existent in 2013. These fees were incremental to those incurred during the six months ended June 30, 2013. Additionally we incurred incremental costs in 2014 associated with the settlement of certain claims by former service providers.

 

Other Income and Expenses

 

Three months ended June 30, 2014 and 2013

 

		Three months ended June 30,
		2014				2013				Change
Interest expense, net		$	(540,635	)		$	(145,718	)		$	(394,917	)
Gain on extinguishment of debt			34,218				-				34,218
Loss on settlement			(175,000	)			-				(175,000	)
Loss on derivative fair value adjustment			(94,209	)			(16,283	)			(77,926	)
Total		$	(775,626	)		$	(162,001	)		$	(613,625	)

 

Other income and expenses during the three months ended June 30, 2014 were a net expense of $775,626 compared to $162,001 for the same period in 2013, The increase of $613,625 or approximately 379% was the result of additional non-cash interest expense recognized on the amortization of debt discounts and original debt issue costs totaling $514,100 during the three months ended June 30, 2014 compared to $54,524 during the same period in 2013. The $77,926 increase in loss on derivative fair value adjustment during the three months ended June 30, 2014 is the result of the change in the fair value of the derivative associated with a convertible note that was not present in 2013.

 

Six months ended June 30, 2014 and 2013

 

		Six months ended June 30,
		2014				2013				Change
Interest expense, net		$	(792,975	)		$	(161,503	)		$	(631,472	)
Gain on extinguishment of debt			118,291				-				118,291
Loss on settlement			(175,000	)			-				(175,000	)
Loss on derivative fair value adjustment			(150,063	)			(16,283	)			(133,780	)
Total		$	(999,747	)		$	(177,786	)		$	(821,961	)

 

Other income and expenses during the six months ended June 30, 2014 were a net expense of $999,747 compared to $177,786 for the same period in 2013, The increase of $821,961 or approximately 462% was the result of additional non-cash interest expense recognized on the amortization of debt discounts and original debt issue costs totaling $648,330 during the six months ended June 30, 2014 compared to $55,678 during the same period in 2013. The $133,780 increase in loss on derivative fair value adjustment during the six months ended June 30, 2014 is the result of the change in the fair value of the derivative associated with a convertible note that was not present in 2013.

 

 

Net Loss

 

Three months ended June 30, 2014 and 2013

 

		Three months ended June 30,
		2014				2013				Change
Net loss		$	(1,440,012	)		$	(595,110	)		$	(844,902	)
As a percentage of revenue			-358	%			-1183	%			824	%

 

Net loss for the three months ended June 30, 2014 was $1,440,012 compared to $595,110 during the same period in 2013. The decrease of $844,902 is the result of reduced revenues from the loss of the Tosnet systems maintenance contracts, increased professional fees as described above and the recognition of non-cash operating and interest expenses associated with debt discounts and derivative liability on certain convertible notes.

 

Six months ended June 30, 2014 and 2013

 

		Six months ended June 30,
		2014				2013				Change
Net loss		$	(2,084,669	)		$	(830,225	)		$	(1,254,444	)
As a percentage of revenue			-448	%			-124	%			-324	%

 

Net loss for the six months ended June 30, 2014 was $2,084,669 compared to $830,225 during the same period in 2013. The decrease of $1,254,444 is the result of reduced revenues from the loss of the Tosnet systems maintenance contracts, increased professional fees as described above and the recognition of non-cash operating and interest expenses associated with debt discounts and derivative liability on certain convertible notes.

 

Liquidity and Capital Resources

 

As of March 31, 2014, we had cash of $58,218, total current assets of $664,471 and total current liabilities of $1,902,281 creating a working capital deficit of $1,237,810. Current assets consisted of $58,218 in cash, $238,703 of accounts receivable, $238,082 of prepaid expenses and current deferred loan costs of $129,468. Current liabilities consisted of a bank overdraft of $40, accounts payable $198,407, current notes payable of $89,000, current convertible notes payable net of discounts of $203,212, a derivative liability of $348,826, accrued interest of $65,551, a related party loan of $8,000 and accrued expenses and other liabilities of $989,245.

 

Cash Flows from Operating Activities

 

Cash flows used in operating activities during the six months ended June 30 was $342,336 which consisted of a net loss of $2,084,669, non-cash expenses and gains of $1,330,912 and positive changes in working capital of $411,421. Net cash used in operating activities during the same period in 2013 was $596,610 which consisted of a net loss of $830,225, non-cash expenses of $135,389 and positive changes in working capital of $98,226. The change in net cash used in operating activities was primarily due to an increase in net loss of $1,254,444 which was offset by a significantly greater amount of non-cash expenses and gains, a greater changes in prepaid expenses, accounts receivable, accounts payable and accrued liabilities.

 

We expect our cash used in operating activities will increase over the next twelve months as we are uncertain of our opportunities to generate revenue in the near term while we will still recognize significant non-cash expenses.

 

Cash Flows from Investing Activities

 

During the six months ended June 30, 2014, we used $16,910 of cash in investing activities for the purchase of equipment compared to $0 during the six months ended June 30, 2013.

 

 

Cash Flows from Financing Activities

 

Cash flows from financing activities during the six months ended June 30, 2014 were $388,800 compared to $688,733 during the same period in 2013. Cash provided by financing activities during the six months ended June 30, 2014 consisted of proceeds from convertible notes payable of $305,000, proceeds from notes payable of $210,000, proceeds of related party notes of $8,000, repayments of notes payable of $130,000 and the purchase of 50,000 shares of treasury stock for $4,200. Cash provided by financing activities during the same period in 2013 consisted of repayments of a bank overdraft totaling $1,678, proceeds from convertible notes payable of $730,000 and repayments of notes payable of $39,589.

 

During the next twelve months, we anticipate generating additional cash from financing activities from entering into additional debt agreements and the additional issuance of common stock for cash as these activities will be required to fund operations.

 

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 are a development stage company that has generated very little revenue and have limited tangible assets. Our company has a limited operating history and must be considered in the development stage. 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.

 

Recent Accounting Pronouncements

 

Critical Accounting Policies

 

There have been no changes in the Company's significant accounting policies for the three months ended June 30, 2014 as compared to those disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2013.

 

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.

 

Item 4.

Controls and Procedures.

 

Disclosure of controls and procedures.

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports, filed under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable and not absolute assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

 

As required by the SEC Rule 13a-15(b), we carried out an evaluation under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses described below.

   

In light of the material weaknesses described below, we performed additional analysis and other post-closing procedures to ensure our financial statements were prepared in accordance with generally accepted accounting principles.  Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

 

A material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) or combination of control deficiencies that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.  Management has identified the following two material weaknesses which have caused management to conclude that as of June 30, 2014 our disclosure controls and procedures were not effective at the reasonable assurance level:

 

1.

We do not have written documentation of our internal control policies and procedures.  Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act which is applicable to us for the quarter ended June 30, 2014.  Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

 

2.

We do not have sufficient segregation of duties within accounting functions, which is a basic internal control.  Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible.  However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals.  Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

 

To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.

 

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.

 

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.

 

None.

 

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.
31.2		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

 

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

 

* Furnished herewith. XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

 

SIGNATURES

 

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: August 19, 2014	By:	/s/ Devon Jones
		Devon Jones
		Chief Executive Officer
		(Principal Executive Officer)
Date: August 19, 2014	By:	/s/ Philip Kirkland
		Philip Kirkland
		Chief Financial Officer
		(Principal Financial and Accounting Officer)