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EX-32.1 - EXHIBIT 32.1 - Intelligent Highway Solutions, Inc.v406950_ex32-1.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

(Mark One)

 

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

 

For the fiscal year ended December 31, 2014

 

o 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 Identification No.)
incorporation or organization  
   
8 Light Sky Court  
Sacramento, CA 95828
(Address of principal executive offices) (Zip Code)
   

Registrant’s telephone number, including area code (916) 379-0324

 

Securities registered under Section 12(b) of the Act: None
   

Securities registered under Section 12(g) of the Act: Common Stock, par value $0.00001 per share

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o No x

 

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 o

 

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 o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference Part III of this Form 10-K or any amendment to this Form 10-K.

o

 

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 o   Accelerated filer o
         
Non-accelerated filer o   Smaller reporting company x
(Do not check if a smaller reporting company)        

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes o No x

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2014: $1,605,313.

 

As of May 7, 2015, the registrant had 35,865,589 shares of its common stock outstanding.

 

Documents Incorporated by Reference: None.

 

 
 

 

TABLE OF CONTENTS

  

        Page
    PART I    
Item 1.   Business   1
Item 1A.   Risk Factors   3
Item 1B.   Unresolved Staff Comments   3
Item 2.   Properties   3
Item 3.   Legal Proceedings   4
Item 4.   Mine Safety Disclosures   4
         
    PART II    
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   4
Item 6.   Selected Financial Data   4
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   4
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk   10
Item 8.   Financial Statements and Supplementary Data   F-1
Item 9.   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure   11
Item 9A.   Controls and Procedures   11
Item 9B.   Other Information   12
    PART III    
Item 10.   Directors, Executive Officers and Corporate Governance   13
Item 11.   Executive Compensation   14
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   15
Item 13.   Certain Relationships and Related Transactions, and Director Independence   16
Item 14.   Principal Accounting Fees and Services   16
         
    PART IV    
Item 15.   Exhibits, Financial Statement Schedules   17
SIGNATURES    

 

 
 

 

PART I

Item 1. Business.

 

Overview

 

On August 22, 2013, Intelligent Highway Solutions, Inc. (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.

 

Expatriate Corporation Status and Eligibility to Bid and Receive California Contracts

 

California Public Contract Code Section 10286 (the “Code”) disallows any California state agency to enter into any contract with an Expatriate Corporation. Section 10286.1 of the Code defines Expatriate Corporation. The definition of Expatriate Corporation includes foreign incorporated entities that publicly trade in the United States. However, foreign incorporated entities are entities that are created or organized under the laws of a foreign country or reside in a foreign country. We do not believe we are an Expatriate Corporation within the definition expressed in the Code.

 

1
 

 

In addition, the Company possesses a C-10 Electrical License from the Contractors State License Board from the State of California and is licensed as a small business with the State of California. This license allows us to contract with the State and grants us a five percent bidding preference over non-qualified entities.

 

Given that we are not an Expatriate Corporation, we possess a C-10 Electrical License, and we are licensed as a small business with the State of California, we believe that we are qualified to bid on, receive and enter into contracts with the State of California.

 

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.

 

Our Corporate History and Background

 

Devon Jones and Philip Kirkland have worked together for several years as independent electrical contractors involved with a number of contracts associated within the transportation sector. These contracts included, but were not limited to, the pulling of fiber optic cable, installation of video equipment, and the service, maintenance and installation of traffic operations systems for Caltrans. After over five years of working in the transportation industry, they decided to pool their talents and contacts and the two formed a new company to expand beyond a services based business and introduce new technology to the transportation market.

 

In April 2011, Jones and Kirkland re-organized their operations under Intelligent Highway Solutions, Inc.

 

Growth Strategy

 

IHS plans on expanding beyond the service business and plans to become more involved with all aspects of the intelligent transportation systems (“ITS”) sector. The Company will service other electrical contracting opportunities as they arise during the development phase of intelligent transportation systems technologies.

 

Phase One: The Traffic Operations Systems Networks contract with our customer was completed. There are currently no plans to pursue similar agreements.

 

Phase Two: Growth will occur in the installation division: this includes but is not limited to the installation of the new technology that the Company has licensed, acquired and/or developed. It also includes expansion beyond the borders of California.

 

Phase Three: Introduction of the Company’s proprietary technology, including, but not limited to, a new wireless and battery-less traffic sensor that can be embedded in the road and used to measure traffic flow, speed, and approximate vehicle weight.

 

Research and Development

 

Development of an alternative to inductive loop system

 

The Company entered into an agreement with a third party to test market, distribute and install an alternative to the existing loop detection technology. The flexible, dependable, low-cost, wireless vehicle detection system uses magneto-resistive wireless sensors—with what the Company’s management believes is an unprecedented 10-year battery life—to detect vehicle presence and movement.

 

The Company’s management believes the in-ground wireless sensors are rugged, install in minutes, deploy in a matter of hours, and can begin transmitting accurate, real-time detection data to signal controllers, traffic management centers, and traveler information systems. The Company’s management believes installation is fast and simple, minimizing road closures and worker exposure, and greatly reducing operating and maintenance spending. The Company’s management believes the in-ground wireless sensors have the following qualities:

 

§In-pavement installation with no wires or lead-in cabling
§10-year battery life
§Impervious to weather
§Rapid installation and deployment reduces road closures and worker exposure
§Patented, ultra-low “NanoPower” communications protocol

 

 

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§Superior accuracy, dependability, and extensibility
§Universal platform for all traffic detection applications
§Self-calibrating, self-tuning
§Re-usable and remotely upgradeable
§Easily deployed in complex configurations
§Capable of over 300 million detections

 

The objective is to use existing sensor technology and existing wireless technology to reduce the development time of this project.

 

The Company’s management expects that once fully developed and tested, the new system would replace traditional inductive loop systems. To install a loop detector and calibrate it, it is sometimes necessary to shut down traffic on the road for as much as 2 days. The Company’s management believes the new sensors can be installed by drilling a slot across the lane in the road surface of 1 inch width and 2 inches depth. Most importantly, no wiring is needed from the traffic lane to the roadside data acquisition unit. It is expected that the installation will only take a few minutes.

 

The new sensor on the roadway require no external power supply while inductive loop detectors have to be continuously powered all the time, even during the night when traffic flow might be really low.

 

The new sensors can measure number of axles and vehicle length, in addition to traffic flow rate. Thus they can be used for vehicle classification.

 

Future Products and Their Market

 

In the future, the Company plans on developing ITS to improve traffic flow, reduce emissions and synchronize traffic signals for public safety and public transportation vehicle priority. ITS can collect information at signals all around the city, correlate the real-time data and automatically regulate traffic policies across a city. ITS includes a range of applications that can benefit cities such as:

 

Intelligent Traffic Signal Management - Actively managed and coordinated traffic signals can reduce congestion and moderate traffic speeds, smoothing traffic flow and reducing auto emission levels.
Video Analytics - Real-time video enables traffic controllers to identify problems, record and ticket red light runners, gather traffic analytics information and enforce special traffic zones. Public safety workers may also access the video to identify traffic conditions so they can route around congested roads when responding to an emergency.
Information and Alerts - Variable message signs can quickly broadcast information such as weather, road conditions, stolen vehicle and other timely local information to drivers.

 

Customers

 

Currently, our only customer is Honeywell.

 

Employees

 

We currently have 3 full time employees, consisting of three executives.

 

Item 1A. Risk Factors.

 

Not applicable because we are a smaller reporting company.

 

Item 1B. Unresolved Staff Comments.

 

Not applicable because we are a smaller reporting company.

 

Item 2. Properties.

 

Our principal executive office is located at 8 Sky Light Court, Sacramento, CA 95828, and our telephone number is (916) 379-0324. We lease our office space, which consists of 9,300 square feet of office and warehouse space and pay a monthly rent of $3,700. Our lease will expire on January 9, 2016.

 

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Item 3. Legal Proceedings.

 

We are currently not involved in any litigation that we believe could have a materially 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, threatened against or affecting our company, our common stock, any of our company’s officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

 

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. There is no accrued liability for this potential payout as of December 31, 2014 given the inestimable nature of the outcome at this point.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Market Information

 

Our common stock trades on the OTCQB and OTCBB under the symbol “IHSI”. The OTCQB and OTCBB are quotation services that display real-time quotes, last-sale prices, and volume information in over-the-counter equity securities. The closing price of the common stock on May 6, 2015 was $0.0112 per share. As our stock started trading on April 24, 2013, the high and low bid prices for trading of our stock for each of the second, third, and fourth quarters of 2013 as well as each quarter of 2014 was as follows:

 

    High     Low  
Fiscal Year 2013            
Second quarter ended June 30, 2013   $ 1.18     $ 0.99  
Third quarter ended September 30, 2013   $ 1.14     $ 0.52  
Fourth quarter ended December 31, 2013   $ 0.88     $ 0.60  

 

Fiscal Year 2014            
First quarter ended March 31, 2014   $ 0.70     $ 0.20  
Second quarter ended June 30, 2014   $ 0.58     $ 0.12  
Third quarter ended September 30, 2014   $ 0.30     $ 0.038  
Fourth quarter ended December 31, 2014   $ 0.0999     $ 0.0199  

 

Approximate Number of Equity Security Holders

 

As of April 30, 2015, there were approximately 50 stockholders of record.

 

Dividends

Holders of our common stock are entitled to receive dividends if, as and when declared by the Board of Directors out of funds legally available therefore. We have never declared or paid any dividends on our common stock. We intend to retain any future earnings for use in the operation and expansion of our business. Consequently, we do not anticipate paying any cash dividends on our common stock to our stockholders for the foreseeable future.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

We do not have in effect any compensation plans under which our equity securities are authorized for issuance.

 

Item 6. Selected Financial Data.

 

Not applicable because we are a smaller reporting company.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following plan of operation provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read along with our financial statements and notes thereto. This section includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements are often identified by words like believe, expect, estimate, anticipate, intend, project and similar expressions, or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our predictions.

 

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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 transportation technology, it will accept general electrical contracting work as a revenue source.

 

Plan of Operations

 

On August 22, 2013, the Company entered into the Distribution Agreement with 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 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.

 

Results of Operations

 

Comparison of the year ended December 31, 2014 and 2013

 

Revenue

 

In 2013, we generated revenue through servicing contracts with Caltrans for the maintenance of the Tosnet system within certain areas of California.

 

In 2014, we generated revenue through our purchase orders from Honeywell for the installation of a temperature control system.

 

   Year ended December 31,     
   2014   2013   Change 
Revenue  $1,016,489   $833,528   $182,961 

   

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Revenues for the year ended December 31, 2014 were $1,016,489 compared to $833,528 for the year ended December 31, 2013. The increase of $182,961 or 22% is the result of the Company receiving purchase orders from Honeywell in 2014 which did not exist in 2014. The Company stopped servicing the contracts to maintain the Tosnet systems effective in the second quarter of 2013 which limited the potential for revenue during the second half of 2013. The Honeywell project was completed during the first quarter of 2015 and a new electrical contracting project started shortly thereafter. We will continue to accept general electrical contracting projects while we develop technologies related to our planned business of intelligent transportation services.

 

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.

 

 

   Year ended December 31,     
   2014   2013   Change 
Labor  $666,304   $582,791   $83,513 
Fuel   5,421    57,504    (52,083)
Vehicle Lease   49,804    105,523    (55,719)
Other   66,370    

32,321

    34,049 
Total  $787,899   $778,139   $9,760 

 

Cost of goods sold for the year ended December 31, 2014 was $787,899 compared to $778,139 during the year ended December 31, 2013. The increase of $9,760 or 1% is the result of increased direct labor costs associated with carrying out services for a greater number of months during the year ended December 31, 2014 than the year ended December 31, 2013 offset by decreases in fuel and vehicle lease costs. The decrease in fuel costs is due to decreased travel required to service the Honeywell projects that existed in 2014 when compared to the CalTrans projects that existed in 2013. The decreased vehicle lease costs are due to the company purchasing vehicles it previously leased early in 2014.

 

Operating Expenses

 

   Year ended December 31,     
   2014   2013   Change 
Salaries and wages  $279,735   $238,081   $41,654 
Professional services   1,328,814    1,028,533    300,281 
Accounts receivable factoring fees   -    55,684    (55,684)
Other   154,290    169,621    (15,331)
Total  $1,762,839   $1,491,919   $270,920 

 

Operating expenses for the year ended December 31, 2014 were $1,762,839 compared to $1,491,919 for the year ended December 31, 2013. The increase of $270,920 or 18% is the result of increased professional services resulting from the recognition of stock based professional fees and other expenses.

 

Other Income and Expenses

 

Other income and expenses consist of interest expense on our notes payable net of interest income, fair value adjustments to our derivative liabilities, gains or losses on extinguishments of debt and losses on settlements.

 

   Year ended December 31,     
   2014   2013   Change 
Interest expense, net  $(1,535,044)  $(490,195)  $(1,044,849)
Gain on extinguishment of debt   108,576    (87,219)   195,795 
Loss on derivative fair value adjustment   (128,969)   27,428    (156,397)
Penalties   (124,398)   -    (124,398)
Legal settlements   (354,064)   -    (354,064)
Total  $(2,033,899)  $(549,986)  $(1,483,913)

 

Other income and expenses during the year ended December 31, 2014 were $2,033,899 compared to $549,986 during the year ended December 31, 2013. The increase of $1,483,913 or approximately 270% was the result of additional non-cash interest expense recognized on the amortization of debt discounts totaling $994,126 during the year ended December 31, 2014 compared to $240,925 during the year ended December 31, 2013. The $354,064 increase in legal settlements during the year ended December 31, 2014 is the result of one-time settlement events with two separate claimants occurring in 2014 that was not present in 2013.  The increase in penalties is the result of events occurring during the year ended December 31, 2014 that did not exist during the year ended December 31, 2013 including common stock issued as default penalties on notes payable, a pre-payment penalty on a retired convertible note payable and penalties associated with the late payment of employee payroll.

 

Net loss

 

   Year ended December 31,     
   2014   2013   Change 
Net loss  $(3,568,148)  $(1,986,516)  $(1,581,632)
As a percentage of revenue   -351%   -238%   

 

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Net loss for the year ended December 31, 2014 was $3,568,148, or (351%) of revenue, compared to $1,986,516, or (238%) of revenue, for the year ended December 31, 2013. The increase in net loss of $1,581,632 is the result of increased professional fees as described above and the recognition of non-cash operating and interest expenses associated with debt discounts and derivative liabilities on certain convertible notes. 

 

Liquidity and Capital Resources

 

As of December 31, 2014, we had cash of $95,251, total current assets of $524,826 and total current liabilities of $2,141,993 creating a working capital deficit of $1,617,167. Current assets consisted of $95,251 in cash, $139,908 of contracts receivable, $115,801 of costs and estimated earnings in excess of billings, $77,161 in prepaid expenses and $96,705 in deferred loan costs. Current liabilities consisted of a bank overdraft of $40, accounts payable $170,529, current notes payable of $185,000, current convertible notes payable net of discounts of $528,929, a derivative liability of $167,970, accrued interest of $76,671 and accrued expenses and other liabilities of $1,002,854.

 

Cash Flows from Operating Activities

  

Net cash used in operating activities during the year ended December 31, 2014 was $703,809 which consisted of a net loss of $3,568,148, non-cash expenses and gains of $2,942,236 and negative changes in working capital of $77,897. Net cash used in operating activities during the same period in 2013 was $710,006 which consisted of a net loss of $1,986,516, non-cash expenses and gains of $1,035,539 and positive changes in working capital of $240,971. The change in net cash used in operating activities was primarily due to an increase in net loss of $1,581,632 and a greater change in accounts payable and accrued expenses.

 

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 Financing Activities

 

Cash flows from financing activities during the year ended December 31, 2014 were $790,708 compared to $738,670 during the same period in 2013. Cash provided by financing activities during the year ended December 31, 2014 consisted of proceeds from convertible notes payable of $583,500, proceeds from notes payable of $435,000, repayments of notes payable of $150,000, repayments of convertible notes payable of $171,508, proceeds from related party notes payable was $10,000, proceeds from common stock issued for cash of $87,916, and the cost of purchase of treasury stock of $4,200. Cash provided by financing activities during the year ended December 31, 2013 consisted of proceeds from convertible notes payable of $760,836, proceeds from notes payable of $20,000, repayments of notes payable of $40,528, the repayment of a bank overdraft of $1,678 and proceeds from a separate bank overdraft of $40.

 

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.

 

7
 

 

Outstanding Loans

 

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. During the year ended December 31, 2014, the Company issued a total of 200,000 shares of common stock in satisfaction of the remaining $9,000 principal on the note with accrued interest of $2,888 being forgiven. There was $0 and $9,000 in principal plus accrued interest of $0 and $2,278 due at December 31, 2014 and 2013, respectively.

 

On April 14, 2014, the Company received a loan in the amount of $90,000 from Innovest, LLC. The loan was 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. The Company did not make the required principal payment on July 17, 2014 resulting in 50,000 shares of common stock being issued to Innovest and the note beginning to accrue interest at the rate of 18% per annum. Additionally, the Company did not make the required principal payment on August 17, 2014 resulting in an additional 50,000 shares of common stock being issued to Innovest. There was $60,000 of principal plus accrued interest of $900 outstanding as of December 31, 2014.

 

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 August 5, 2014, the Company entered into two separate note agreements for $50,000 ($100,000 total). The notes carried a fixed interest amount of $800 and are due on October 4, 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. The Company did not repay the notes during the year ended December 31, 2014 resulting in 325,000 common shares being issued to each note holder (750,000 total common shares) as penalties. Additionally, the note holders each received 125,000 shares of common stock as an incentive to enter into the notes and had the right to sell back 50,000 shares of common stock to the Company for $4,200. There was a total of $100,000 in principal and $1,600 of accrued interest due at December 31, 2014.

 

On April 17, 2014, the Company received a loan in the amount of $20,000 from Seton Securities. An additional $5,000 was received on July 15, 2014. The loans are unsecured, due on demand and non-interest bearing. There was $25,000 and $0 in principal and no accrued interest due at December 31, 2014 and 2013.

 

On September 25, 2014, the Company received a loan from an unrelated party totaling $10,000. The note carried a fixed interest amount of $700 and was due on October 9, 2014. The note holder is entitled to receive 10,000 shares of common stock for each week beyond the due date the note is not repaid. The note was repaid on November 13, 2014 resulting in a total of 60,000 common shares being issued as a penalty. Additionally, the Company issued 25,000 shares of common stock as an incentive to enter into the note. There was no principal or accrued interest due as of December 31, 2014.

 

On October 22, 2014, the Company receive a loan from an unrelated party totaling $100,000. The note carries an interest rate of 12% per annum and is due on October 22, 2016. Additionally, the note is secured by the vehicles owned by the company. There was $100,000 of principal and accrued interest of $2,302 due as of December 31, 2014.

 

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 $6,542 and $3,542 at December 31, 2014 and 2013. The principal and accrued interest may be converted at the option of the holder to common stock at $0.30.

 

8
 

 

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 year ended December 31, 2014, the Company accepted twenty separate partial conversions of the note resulting in a total of 4,063,247 shares of common stock being issued in exchange for $242,526 of principal. Additionally, the Company accepted a single conversion of accrued interest resulting in 408,727 shares being issued in exchange for $8,369 of accrued interest. There was $96,500 in principal plus $10,380 in accrued interest due at December 31, 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 year ended December 31, 2014 which carried a prorated original issue discount of $17,137. 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 and become convertible 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. During the year ended December 31, 2014, the Company accepted six separate partial conversions from the note holder resulting in 2,500,000 shares of common stock being issued in exchange for $66,462 of principal and made cash repayments of $61,508. There was no interest or principal due as of December 31, 2014.

 

On September 3, 2014, the Company received a loan totaling $100,000 from an unrelated party. The note carried fixed interest of $10,000 and was due on September 11, 2014. 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. The note holder did not elect to convert any portion of the note and the principal plus fixed interest totaling $110,000 was repaid on September 11, 2014.

 

On November 13, 2014, the Company received a loan totaling $104,000 from an unrelated party. The note carries interest at 8% per annum and is due on August 17, 2015 with a default interest rate of 22% should the note not be repaid by the maturity date. The holder has the right to convert the principal and accrued but unpaid interest to common stock at any time after 180 days from the note date at a 52% discount from the average of the lowest three trading prices of the Company’s common stock during the preceding ten trading days. There was $104,000 of principal and $1,094 of accrued interest payable at December 31, 2014.

 

On December 16, 2014, the Company received a loan totaling $54,000 from an unrelated party. The note carries interest at 8% per annum and is due on September 18, 2015 with a default interest rate of 22% should the note not be repaid by the maturity date. The holder has the right to convert the principal and accrued but unpaid interest to common stock at any time after 180 days from the note date at a 52% discount from the average of the lowest three trading prices of the Company’s common stock during the preceding ten trading days. There was $54,000 of principal and $178 of accrued interest payable at December 31, 2014.

 

On December 12, 2014, the Company received a loan totaling $50,000 from an unrelated party. The note carries interest at 10% per annum and is due on December 12, 2015. The holder has the right to convert the principal and accrued but unpaid interest to common stock at any time after 180 days from the note date at a 40% discount from the lowest closing bid price for the Company’s common stock for the fifteen prior trading days. There was $50,000 of principal and $260 of accrued interest payable at December 31, 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.

 

9
 

 

During the year ended December 31, 2014, the Company entered into additional debt agreements with various individuals to borrow a total of $80,000 which was $75,000 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 $80,000 which will be amortized over the lives of the notes. $30,171 of the debt discounts were recognized in interest expense during the year ended December 31, 2014 leaving an unamortized discount of $49,829 at December 31, 2014. Additionally, during the year ended December 31, 2014, the Company accepted the full conversion of nine notes and the partial conversion of another to common stock at $0.30 per share resulting in 1,733,332 shares of common stock being issued in consideration of $610,000 of principal plus 174,201 shares of common stock being issued in consideration of $55,358 of accrued interest.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable because we are a smaller reporting company.

 

 

10
 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors

Intelligent Highway Solutions, Inc.

 

We have audited the accompanying balance sheets of Intelligent Highway Solutions, Inc. (the Company) as of December 31, 2014 and 2013 and the related statements of operations, stockholders’ deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.  

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion the financial statements referred to above present fairly, in all material respects, the financial position of Intelligent Highway Solutions, Inc. as of December 31, 2014 and 2013, and the results of their operations and cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has not yet established an ongoing source of revenues sufficient to cover its operating costs as of December 31, 2014 which raises substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

 

/s/ Sadler, Gibb & Associates, LLC

 

Salt Lake City, UT

May 7, 2015

  

 

 

 

 

F-1
 

 

Item 8. Financial Statements and Supplementary Data.

 

INTELLIGENT HIGHWAY SOLUTIONS

BALANCE SHEETS

 

   December 31, 
   2014   2013 
         
ASSETS          
Current assets          
Cash and cash equivalents  $95,251   $28,664 
Contracts receivable, net   139,908    - 
Costs and estimated earnings in excess of billings on uncompleted contracts   115,801    - 
Prepaid expenses   77,161    194,481 
Deferred loan costs, current   96,705    182,324 
Total current assets   524,826    405,469 
           
Property and equipment, net of accumulated depreciation of $8,731 and $1,607   14,940    1,752 
Deferred loan costs, net   1,904    78,833 
Prepaid expenses   69,371    - 
           
Total assets  $611,041   $486,054 
           
LIABILITIES AND STOCKHOLDERS' DEFICIT          
           
Current liabilities          
Bank overdraft  $40   $40 
Accounts payable   170,529    89,562 
Accrued expenses and other liabilities   1,002,854    909,105 
Notes payable, current portion   185,000    252,274 
Convertible notes payable, current portion, net of discounts of $95,571 and $0   528,929    30,000 
Notes payable, related party, current portion   10,000    - 
Derivative liability   167,970    46,023 
Accrued interest   

76,671

    113,599 
Total current liabilities   2,141,993    1,440,603 
           
    Notes payable, net of current portion   100,000    - 
Convertible notes payable, net of discounts of $49,829 and $589,075   30,171    310,925 
           
Total liabilities   2,272,164    1,751,528 
           
Stockholders' deficit          
Common stock, $0.00001 par value; 100,000,000 shares authorized; 30,589,839 and 11,933,666 issued; 30,539,839 and 11,933,666 outstanding at December 31, 2014 and 2013   306    119 
Additional paid-in capital   5,247,786    2,071,274 
Treasury stock, 50,000 shares at $.084 per share   (4,200)   - 
Accumulated deficit   (6,905,015)   (3,336,867)
Total stockholders' deficit   (1,661,123)   (1,265,474)
           
Total liabilities and stockholders' deficit  $611,041   $486,054 

 

See accompanying notes to financial statements.

 

F-2
 

 

INTELLIGENT HIGHWAY SOLUTIONS

STATEMENTS OF OPERATIONS

 

   Year Ended December 31, 
   2014   2013 
Revenue  $1,016,489   $833,528 
Cost of sales   787,899    778,139 
Gross profit   228,590    55,389 
           
Operating expenses          
Salaries and wages   279,735    238,081 
General and administrative   1,483,104    1,253,838 
Total operating expenses   1,762,839    1,491,919 
           
Loss from operations   (1,534,249)   (1,436,530)
           
Other income (expense)          
Gain on extinguishment of debt   108,576    (87,219)
Loss on derivative fair value adjustment   (128,969)   27,428 
Penalties   (124,398)   - 
Legal settlements   (354,064)   - 
Interest expense   (1,535,044)   (490,195)
Total other expense   (2,033,899)   (549,986)
           
Loss before income taxes   (3,568,148)   (1,986,516)
           
Provision for income taxes   -    - 
           
Net loss  $(3,568,148)  $(1,986,516)
           
Basic and diluted loss per common share  $(0.19)  $(0.18)
           
Basic and diluted weighted average shares outstanding   19,204,776    11,056,661 

 

See accompanying notes to financial statements.

 

F-3
 

 

INTELLIGENT HIGHWAY SOLUTIONS

STATEMENT OF STOCKHOLDERS' DEFICIT

 

   Common Stock   Additional
Paid-in
   Treasury   Accumulated     
   Shares   Amount   Capital   Stock   Deficit   Total 
Balance, December 31, 2012   10,729,666   $107   $161,523   $-   $(1,350,351)  $(1,188,721)
                               
Common stock issued for services   1,104,000    11    744,604    -    -    744,615 
Common stock issued for extension of note   100,000    1    88,499    -    -    88,500 
Options issued for loan costs   -    -    276,648    -    -    276,648 
Debt discounts recorded on convertible notes payable   -    -    800,000    -    -    800,000 
Net loss, year ended December 31, 2013   -    -    -    -    (1,986,516)   (1,986,516)
Balance, December 31, 2013   11,933,666    119    2,071,274    -    (3,336,867)   (1,265,474)
                               
Common stock issued for services   5,275,000    53    828,270    -    -    828,323 
Common stock issued for loan costs   650,000    6    115,244    -    -    115,250 
Common stock issued for conversion of notes payable   8,796,579    88    952,900    -    -    952,988 
Common stock issued for conversion of interest payable   582,928    6    63,721    -    -    63,727 
Common stock issued as settlement of accounts payable   7,500    -    3,000    -    -    3,000 
Common stock issued as legal settlement   752,616    8    354,056    -    -    354,064 
Common stock issued for penalties   1,160,000    12    93,404    -    -    93,416 
Common stock issued for cash   1,431,550    14    87,902    -    -    87,916 
Common stock repurchased   (50,000)   -    -    (4,200)   -    (4,200)
Options issued for loan costs   -    -    11,331    -    -    11,331 
Debt discounts recorded on convertible notes payable   -    -    80,000    -    -    80,000 
Change in fair market value of derivative liabilities   -    -    586,786    -    -    586,684 
Net loss, year ended December 31, 2014   -    -    -    -    (3,568,148)   (3,568,148)
Balance, December 31, 2014   30,539,839   $306   $5,247,786   $(4,200)  $(6,905,015)  $(1,661,123)

 

See accompanying notes to financial statements.

 

F-4
 

 

INTELLIGENT HIGHWAY SOLUTIONS

STATEMENTS OF CASH FLOWS

 

   Year Ended December 31, 
   2014   2013 
Cash flows from operating activities          
Net loss  $(3,568,148)  $(1,986,516)
Adjustments to reconcile net loss to net cash used in operating activities          
Common stock issued for services   828,323    314,616 
Common stock issued for penalties   93,417    - 
Common stock issued for legal settlements   354,064    - 
Excess fair value of common stock issued for conversion of note payable   25,000    - 
Gain on forgiveness of debt   (108,576)   87,219 
Depreciation   7,124    672 
Amortization of deferred loan costs   243,130    366,240 
Amortization of prepaid expenses   232,949    - 
Loss on derivative fair value adjustment   128,969    (27,428)
Excess derivative liability charged to interest   109,210    43,451 
Allowance for doubtful accounts   -    (45,820)
Amortization of debt discount   994,126    240,925 
Expenses paid on behalf of company   34,500    55,664 
Changes in operating assets and liabilities          
Contracts receivable   (139,908)   512,106 
Earnings in excess of billings   (115,801)     
Other receivables   -    120 
Deposits   -    6,005 
Prepaid expenses   -    21,965 
Deferred loan costs   -    - 
Accounts payable   47,015    23,374 
Accrued interest   37,048    76,481 
Accrued expenses and other liabilities   93,749    (399,080)
Net cash used in operating activities   (703,809)   (710,006)
           
Cash flows from investing activities          
Purchase of equipment   (20,312)   - 
Net cash used in investing activities   (20,312)   - 
           
Cash flows from financing activities          
Repayment of bank overdraft   -    (1,678)
Proceeds from bank overdraft   -    40 
Proceeds from convertible notes payable   583,500    760,836 
Repayments of convertible notes payable   (171,508)   - 
Proceeds from notes payable   435,000    20,000 
Repayments of notes payable   (150,000)   (40,528)
Proceeds from related party notes payable   10,000    - 
Proceeds from common stock issued for cash   87,916    - 
Purchase of treasury stock   (4,200)   - 
Net cash provided by financing activities   790,708    738,670 
           
Change in cash and cash equivalents   66,587    28,664 
Cash at beginning of period   28,664    - 
Cash at end of period  $95,251   $28,664 
           
Supplemental disclosures of cash flow information          
Cash paid for interest  $16,129   $25,271 
Cash paid for income taxes  $-   $- 
           
Supplemental disclosure of non-cash financing activities:          
Common stock issued for note conversion  $952,988   $- 
Common stock issued for accrued interest conversion  $63,727   $- 
Common stock issued for debt issuance costs  $69,251   $- 
Assumption of note payable  $212,526   $- 
Debt discount from warrants and beneficial conversion features issued with debt  $11,331   $- 
Debt discount on convertible notes  $80,000   $800,000 
Initial measurements of derivative liabilities  $470,451   $30,000 
Conversion of derivative liabilities  $586,683   $  
Stock options issued for prepaid expenses  $-   $276,648 
Common stock issued for prepaid expenses  $185,000   $518,000 

  

See accompanying notes to financial statements.

 

F-5
 

 

INTELLIGENT HIGHWAY SOLUTIONS, INC.

Notes to Financial Statements

December 31, 2014 and 2013

 

NOTE 1 – ORGANIZATION

 

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 – 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.

 

NOTE 3 - 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.

 

F-6
 

 

INTELLIGENT HIGHWAY SOLUTIONS, INC.

Notes to Financial Statements

December 31, 2014 and 2013

 

NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

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.

 

Contracts Receivable

 

Contracts receivable from construction, operations and maintenance are based on amounts billed to customers. The Company provides an allowance for doubtful collections which is based upon a review of outstanding receivable, historical collection information, and existing economic conditions. Normal contracts receivable are due 30 days after issuance of the invoice. Contract retentions are usually due 30 days after completion of the project and acceptance by the owner. Contracts receivable past due more than 60 days are considered delinquent. Delinquent contracts receivable are written off based on individual credit evaluation and specific circumstances of the customer. The Company had bad debt expense of $0 and $1,607 during the years ended December 31, 2014 and 2013, respectively. The allowance for doubtful accounts is $0 as of December 31, 2014.

 

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 December 31, 2014 and 2013 were:

 

F-7
 

 

INTELLIGENT HIGHWAY SOLUTIONS, INC.

Notes to Financial Statements

December 31, 2014 and 2013

 

NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Property, Plant and Equipment (continued)

 

   December 31, 2014   December 31, 2013 
Machinery and equipment  $2,149   $2,149 
Furniture and fixtures   6,273    1,210 
Vehicles   15,249    - 
Sub Total  $23,671   $3,359 
           
Accumulated depreciation   (8,731)   (1,607)
Total  $14,940   $1,752 

 

Depreciation expense for the years ended December 31, 2014 and 2013 was $7,123 and $672, respectively.

 

Accrued Expenses and Other Liabilities

 

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

 

   December 31, 2014   December 31, 2013 
Deferred rent payable  $(51)  $2,673 
Payroll tax liabilities   767,109    637,139 
Other payroll accruals   25,234    51,711 
Other   210,562    217,582 
Total  $1,002,854   $909,105 

 

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.

 

F-8
 

 

INTELLIGENT HIGHWAY SOLUTIONS, INC.

Notes to Financial Statements

December 31, 2014 and 2013

 

NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Revenues and Cost of Revenues (continued)

 

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.

 

The asset, “cost and estimated earnings in excess of billings on uncompleted contracts” represents revenues recognized in excess of amounts billed. The liability, “billings in excess of costs and estimated earnings on uncompleted contracts,” represents billings in excess of revenues recognized.

 

Cost of sales totaled $787,899 and $778,139 during the years ended December 31, 2014 and 2013, respectively.

 

Reclassifications

 

Certain prior-year amounts have been reclassified in order to conform to the current-year presentation.

 

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 years ended December 31, 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 9,303,825 and 3,274,868 such potentially dilutive shares excluded for the years ended December 31, 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.

 

F-9
 

 

INTELLIGENT HIGHWAY SOLUTIONS, INC.

Notes to Financial Statements

December 31, 2014 and 2013

 

 

 

NOTE 4 – CONTRACTS RECEIVABLE, NET

 

Contracts receivable consisted of the following at December 31, 2014:

 

Completed contracts  $- 
Contracts in progress   139,908 
Unbilled   - 
    139,908 
Retentions:     
Completed contracts   - 
Contracts in progress   - 
    - 
    139,908 
Allowance for doubtful accounts   - 
   $139,908 

 

 

NOTE 5 – COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

 

The following is a summary of the contracts in progress at December 31, 2014:

 

Costs incurred on uncompleted contracts  $1,001,458 
Estimated net loss on uncompleted contracts   - 
    1,001,458 
Billings to date   (885,657)
   $115,801 

 

This amount is included in the accompanying balance sheet under the following captions at December 31, 2014:

 

Costs and estimated earnings in excess of billings on uncompleted contracts  $115,801 

 

NOTE 6 - 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 December 31, 2014 and 2013:

 

   Level 1   Level 2   Level 3   Fair Value at
December 31, 2014
 
Liabilities                
Derivative Liability   -   $167,970    -   $167,970 

  

   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   579,661 
Change due to note conversion   (586,683)
Fair value adjustment   128,969 
Balance at December 31, 2014  $167,970 

 

NOTE 7 – 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. During the year ended December 31, 2014, the Company issued a total of 200,000 shares of common stock in satisfaction of the remaining $9,000 principal on the note with accrued interest of $2,888 being forgiven. There was $0 and $9,000 in principal plus accrued interest of $0 and $2,278 due at December 31, 2014 and 2013, respectively.

 

F-10
 

 

INTELLIGENT HIGHWAY SOLUTIONS, INC.

Notes to Financial Statements

December 31, 2014 and 2013

 

NOTE 7 – NOTES PAYABLE (CONTINUED)

 

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. The Company did not make the required principal payment on July 17, 2014 resulting in 50,000 shares of common stock being issued to Innovest and the note beginning to accrue interest at the rate of 18% per annum. Additionally, the Company did not make the required principal payment on August 17, 2014 resulting in an additional 50,000 shares of common stock being issued to Innovest. There was $60,000 of principal plus accrued interest of $900 outstanding as of December 31, 2014.

 

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 August 5, 2014, the Company entered into two separate note agreements for $50,000 ($100,000 total). The notes carried a fixed interest amount of $800 and are due on October 4, 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. The Company did not repay the notes during the year ended December 31, 2014 resulting in 325,000 common shares being issued to each note holder (750,000 total common shares) as penalties. Additionally, the note holders each received 125,000 shares of common stock as an incentive to enter into the notes and had the right to sell back 50,000 shares of common stock to the Company for $4,200. There was a total of $100,000 in principal and $1,600 of accrued interest due at December 31, 2014.

 

On April 17, 2014, the Company received a loan in the amount of $20,000 from Seton Securities. An additional $5,000 was received on July 15, 2014. The loans are unsecured, due on demand and non-interest bearing. There was $25,000 and $0 in principal and no accrued interest due at December 31, 2014 and 2013.

 

On September 25, 2014, the Company received a loan from an unrelated party totaling $10,000. The note carried a fixed interest amount of $700 and was due on October 9, 2014. The note holder is entitled to receive 10,000 shares of common stock for each week beyond the due date the note is not repaid. The note was repaid on November 13, 2014 resulting in a total of 60,000 common shares being issued as a penalty. Additionally, the Company issued 25,000 shares of common stock as an incentive to enter into the note. There was no principal or accrued interest due as of December 31, 2014.

 

On October 22, 2014, the Company received a loan from an unrelated party totaling $100,000. The note carries an interest rate of 12% per annum and is due on October 22, 2016. Additionally, the note is secured by the vehicles owned by the company. There was $100,000 of principal and accrued interest of $2,301 due as of December 31, 2014.

 

NOTE 8 – 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 $6,542 and $4,627 at December 31, 2014 and 2013. The principal and accrued interest may be converted at the option of the holder to common stock at $0.30.

 

F-11
 

 

INTELLIGENT HIGHWAY SOLUTIONS, INC.

Notes to Financial Statements

December 31, 2014 and 2013

 

NOTE 8 – CONVERTIBLE NOTES PAYABLE (CONTINUED)

 

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 year ended December 31, 2014, the Company accepted twenty separate partial conversions of the note resulting in a total of 4,063,247 shares of common stock being issued in exchange for $242,526 of principal. Additionally, the Company accepted a single conversion of accrued interest resulting in 408,727 shares being issued in exchange for $8,369 of accrued interest. There was $96,500 in principal plus $10,165 in accrued interest due at December 31, 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 year ended December 31, 2014 which carried a prorated original issue discount of $17,137. 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 and become convertible 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. During the year ended December 31, 2014, the Company accepted six separate partial conversions from the note holder resulting in 2,500,000 shares of common stock being issued in exchange for $66,462 of principal and made cash repayments of $27,917. There was no interest or principal due as of December 31, 2014.

 

On September 3, 2014, the Company received a loan totaling $100,000 from an unrelated party. The note carried fixed interest of $10,000 and was due on September 11, 2014. 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. The note holder did not elect to convert any portion of the note and the principal plus fixed interest totaling $110,000 was repaid on September 11, 2014.

 

On November 13, 2014, the Company received a loan totaling $104,000 from an unrelated party. The note carries interest at 8% per annum and is due on August 17, 2015 with a default interest rate of 22% should the note not be repaid by the maturity date. The holder has the right to convert the principal and accrued but unpaid interest to common stock at any time after 180 days from the note date at a 52% discount from the average of the lowest three trading prices of the Company’s common stock during the preceding ten trading days. There was $104,000 of principal and $1,094 of accrued interest payable at December 31, 2014.

 

On December 16, 2014, the Company received a loan totaling $54,000 from an unrelated party. The note carries interest at 8% per annum and is due on September 18, 2015 with a default interest rate of 22% should the note not be repaid by the maturity date. The holder has the right to convert the principal and accrued but unpaid interest to common stock at any time after 180 days from the note date at a 52% discount from the average of the lowest three trading prices of the Company’s common stock during the preceding ten trading days. There was $54,000 of principal and $178 of accrued interest payable at December 31, 2014.

 

On December 12, 2014, the Company received a loan totaling $50,000 from an unrelated party. The note carries interest at 10% per annum and is due on December 12, 2015. The holder has the right to convert the principal and accrued but unpaid interest to common stock at any time after 180 days from the note date at a 40% discount from the lowest closing bid price for the Company’s common stock for the fifteen prior trading days. There was $50,000 of principal and $260 of accrued interest payable at December 31, 2014.

 

F-12
 

  

INTELLIGENT HIGHWAY SOLUTIONS, INC.

Notes to Financial Statements

December 31, 2014 and 2013

 

NOTE 8 – CONVERTIBLE NOTES PAYABLE (CONTINUED)

 

During the year ended December 31, 2013, the Company entered into additional 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 convertible note as of December 31, 2013:

 

   Maturity Date  Principal   Debt Discount   Carrying
Amount, Current
Portion
   Carrying
Amount, Long Term
Portion
   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 
Note holder 19  4/26/2013   30,000    -    30,000    -    4,627 
                             
Total     $930,000   $(589,075)  $30,000   $

310,925

   $55,608 

  

F-13
 

 

INTELLIGENT HIGHWAY SOLUTIONS, INC.

Notes to Financial Statements

December 31, 2014 and 2013

 

NOTE 8 – CONVERTIBLE NOTES PAYABLE (CONTINUED)

 

During the year ended December 31, 2014, the Company entered into debt agreements with various individuals to borrow a total of $80,000 which was $75,000 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 $80,000 which will be amortized over the lives of the notes. $30,171 of the debt discounts were recognized in interest expense during the year ended December 31, 2014 leaving an unamortized discount of $49,829 at December 31, 2014. Additionally, during the year ended December 31, 2014, the Company accepted the full conversion of nine notes and the partial conversion of another to common stock at $0.30 per share resulting in 1,733,332 shares of common stock being issued in consideration of $610,000 of principal plus 174,201 shares of common stock being issued in consideration of $55,358 of accrued interest.

 

The following table depicts the amounts due for each convertible note as of December 31, 2014:

 

   Maturity Date  Principal   Debt Discount   Carrying
Amount, Current
Portion
   Carrying
Amount,
Long Term
Portion
   Accrued Interest 
Note holder 1  1/24/2015  $50,000   $-   $50,000   $-   $14,124 
Note holder 1  4/28/2016   15,000    (9,842)   -    5,158    732 
Note holder 4  3/21/2016   30,000    (18,288)   -    11,712    2,342 
Note holder 7  5/9/2015   50,000    (8,836)   41,164    -    8,233 
Note holder 10  11/4/2015   25,000    (10,548)   14,452    -    2,890 
Note holder 11  7/15/2024   50,000    (13,425)   36,575    -    7,315 
Note holder 12  9/3/2015   25,000    (8,425)   16,575    -    3,315 
Note holder 12  10/31/2015   25,000    (10,411)   14,589    -    2,918 
Note holder 13  10/21/2015   20,000    (8,055)   11,945    -    2,389 
Note holder 16  12/30/2015   45,000    (22,438)   22,562    -    4,512 
Note holder 17  3/26/2016   25,000    (15,411)   -    9,589    1,918 
Note holder 18  4/4/2016   10,000    (6,288)   -    3,712    742 
Note holder 19  4/26/13   30,000    -    30,000    -    6,542 
Note holder 20  2/27/15   96,500    (13,434)   83,066    -    10,165 
Note holder 21  8/17/15   104,000    -    104,000    -    1,094 
Note holder 21  9/18/15   54,000    -    54,000    -    178 
Note holder 22  12/12/15   50,000    -    50,000    -    260 
                             
Total     $704,500   $(145,400)  $528,929   $30,717   $51,430 

 

NOTE 9 – 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 $2,500 and $12,625 during the year ended December 31, 2014 and 2013, respectively.

 

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.

 

During the year ended December 31, 2014, the Company received an interest free $2,000 loan from a related party to fund operations. The loan is unsecured, due on demand and as such is included in current liabilities.

 

During the year ended December 31, 2014, the Company received a $10,000 loan from a related party to fund operations. The loan plus fixed interest of $1,000 was repaid in December 2014.

 

F-14
 

 

INTELLIGENT HIGHWAY SOLUTIONS, INC.

Notes to Financial Statements

December 31, 2014 and 2013

 

NOTE 10 – COMMON STOCK

 

The Company is authorized to issue up to 100,000,000 shares of $0.00001 par value common stock. During the year ended December 31, 2014, the Company issued a total of 5,275,000 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; 8,796,579 common shares for total note conversions of $927,988; 582,928 common shares for total accrued interest conversions of $63,727; 1,431,550 common shares for total cash proceeds of $87,916; 1,160,000 common shares valued at $93,416 for default penalties on notes payable; 650,000 common shares as debt issue costs and repurchased a total of 50,000 common shares for $4,200 of cash.

 

There was 30,589,839 shares issued and 30,539,839 outstanding as of December 31, 2014.

 

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 December 31, 2014 and 2013, the Company had accrued $767,109 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.

 

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. There is no accrued liability for this potential payout as of December 31, 2014 given the inestimable nature of the outcome at this point.

 

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 lease was extended for an additional twelve month period commencing on January 9, 2015 requiring monthly rental payments of $3,700. The Company may not terminate this lease prior to the agreed upon termination date. The minimum future annual rental commitments are as follows:

 

2015   44,480 

2016

   973 
      
Total annual lease commitments  $45,453 

 

F-15
 

 

INTELLIGENT HIGHWAY SOLUTIONS, INC.

Notes to Financial Statements

December 31, 2014 and 2013

 

NOTE 12 – DERIVATIVE LIABILITY

 

As of December 31, 2014 the Company had a $167,970 derivative liability balance on the balance sheet and recorded a loss from derivative liability fair value adjustment of $128,969 during the year ended December 31, 204.  The derivative liability activity comes from convertible notes payable as follows:

 

As discussed in Note 8 – “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 December 31, 2014, the Company marked-to-market the fair value of the derivative liabilities related to note and determined an aggregate fair value of $1,594 and recorded a gain of $44,429 from change in fair value of derivatives for year ended December 31, 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 481%, (3) risk-free interest rate of 0%, (4) expected life of 0.25 of a year, and (5) estimated fair value of the Company’s common stock of $0.03 per share.

 

As discussed in Note 8 – “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.

 

 

F-16
 

 

INTELLIGENT HIGHWAY SOLUTIONS, INC.

Notes to Financial Statements

December 31, 2014 and 2013

 

NOTE 12 – DERIVATIVE LIABILITY (CONTINUED)

 

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 $260,398 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 $260,398 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 December 31, 2014, the Company marked-to-market the fair value of the derivative liabilities related to notes and determined an aggregate fair value of $166,376 and recorded a $271,390 loss from change in fair value of derivatives for year ended December 31, 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 492%, (3) risk-free interest rate of 0%, (4) expected life of 0.16 of a year, and (5) estimated fair value of the Company’s common stock of $0.03 per share.

 

As discussed in Note 8 – “Convertible Notes Payable”, on January 30, 2014, the Company entered into a note with an unrelated party to borrow up to $300,000. 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 and become convertible 180 days after the effective date which is July 29, 2014. 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 date the note became convertible was $174,114 which resulted in a debt discount equal to the outstanding principal at the time of $100,053 with an excess of $74,061 being charged to interest expense.  The fair value of $174,114 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 December 31, 2014, the Company marked-to-market the fair value of the derivative liabilities related to notes and determined an aggregate fair value of $0 and recorded a $47,157 loss from change in fair value of derivatives for year ended December 31, 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 262%, (3) risk-free interest rate of .11%, (4) expected life of 1.25 of a year, and (5) estimated fair value of the Company’s common stock of $0.06 per share.

 

F-17
 

 

INTELLIGENT HIGHWAY SOLUTIONS, INC.

Notes to Financial Statements

December 31, 2014 and 2013

 

NOTE 12 – DERIVATIVE LIABILITY (CONTINUED)

 

As discussed in Note 8 – “Convertible Notes Payable”, on September 3, 2014, the Company received a loan totaling $100,000 from an unrelated party. The note carried fixed interest of $10,000 and was due on September 11, 2014. 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. 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 on the date the note was entered into was $100,055 which resulted in a debt discount equal to the face value of the note of $100,000 an excess of $55 being charged to interest expense.  The fair value of $100,055 was recorded as a derivative liability on the balance sheet.

 

The debt discount for the note was amortized over the term of the note, or one week. On September 17, 2014, the note was repaid resulting in the elimination of the derivative liability and a gain on change in fair market value of derivatives of $145.149.

 

NOTE 13 – STOCK OPTIONS AND WARRANTS

 

The following table summarizes all stock option and warrant activity for the year month period ended December 31, 2014:

 

   Shares   Weighted-
Average
Exercise Price
Per Share
 
Outstanding, December 31, 2013   293,333   $0.30 
Granted   338,572    0.30 
Exercised   -    - 
Forfeited   -    - 
Expired   -    - 
Outstanding, December 31, 2014   631,905   $0.30 

 

F-18
 

 

INTELLIGENT HIGHWAY SOLUTIONS, INC.

Notes to Financial Statements

December 31, 2014 and 2013

 

The following table discloses information regarding outstanding and exercisable options and warrants at December 31, 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    631,905   $0.30    2.48    631,905   $0.30 
      631,905   $0.30    2.48    631,905   $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:

 

   December 31, 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%

  

F-19
 

 

INTELLIGENT HIGHWAY SOLUTIONS, INC.

Notes to Financial Statements

December 31, 2014 and 2013

 

NOTE 14 – INCOME TAXES

 

We did not provide any current or deferred U.S. federal income tax provision or benefit for any of the periods presented because we have experienced operating losses since inception.  When it is more likely than not that a tax asset cannot be realized through future income the Company must allow for this future tax benefit.  We provided a full valuation allowance on the net deferred tax asset, consisting of net operating loss carry forwards, because management has determined that it is more likely than not that we will not earn income sufficient to realize the deferred tax assets during the carry forward period.

 

The Company has not taken a tax position that, if challenged, would have a material effect on the financial statements for the years ended December 2014 or 2013 applicable under FASB ASC 740.  We did not recognize any adjustment to the liability for uncertain tax position and therefore did not record any adjustment to the beginning balance of accumulated deficit on the balance sheet.   All tax returns for the Company remain open.

 

The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before provision for income taxes. The sources and tax effects of the differences for the periods presented are as follows:

 

Income tax provision at the federal statutory rate   35%
Effect on operating losses   (35)%

 

Changes in the net deferred tax assets consist of the following:

 

    2014     2013  
Net operating loss carry forward   $ 1,080,910     $ 797,485  
Valuation allowance     (1,080,910 )     (797,485 )
Net deferred tax asset   $ -     $ -  

  

A reconciliation of income taxes computed at the statutory rate is as follows:

 

    2014     2013  
Computed federal income tax expense at statutory rate of 35%   $ (1,248,852 )   $ (695,281 )
Stock options issued for services     289,913       110,116  
Amortization of deferred loan costs     85,096       128,184  
Amortization of debt discount     347,944       84,324  
Depreciation and amortization     2,493       235  
Change in derivative liability     45,139       16,108  
Stock issued for legal settlement     123,922       -  
Stock issued for penalties     32,696       -  
Excess derivative liability charged to interest     38,224       -  
Change in valuation allowance     283,425       356,314  
Income tax expense   $ -     $ -  

 

The net federal operating loss carry forward will expire in 2031.  This carry forward may be limited upon the consummation of a business combination under IRC Section 381.

 

NOTE 15 – SUBSEQUENT EVENTS

 

On various dates from January to April 2015, the Company accepted six partial conversions of an outstanding note payable to common stock. As a result, the Company issued a total of 5,150,750 shares of common stock for a reduction of $39,000 of outstanding principal.

 

F-20
 

 

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

 

None.

 

Item 9A. Controls and Procedures.

 

Evaluation of Disclosure 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”) 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.

 

Management's Annual Report on Internal Control Over Financial Reporting.

 

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Our internal control system was designed to, in general, provide reasonable assurance to the Company’s management and board regarding the preparation and fair presentation of published financial statements, but because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014. 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 Interim CFO have determined and concluded that, as of December 31, 2014, 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 December 31, 2014:

 

  (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.

 

  (2) 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.

 

11
 

 

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 Annual Report fairly present our financial position, results of operations and cash flows for the years covered thereby in all material respects.

 

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm as we are a smaller reporting company and not required to provide the report.

 

Changes in Internal Control over Financial Reporting

 

No change in our system of internal control over financial reporting occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information.

 

On November 21, 2014 (the “Closing Date”), the Company closed a financing transaction by entering into a Purchase Agreement dated November 13, 2014 (the “Purchase Agreement”) with KBM Worldwide, Inc. (the “Purchaser”) for an aggregate principal amount of $104,000 (the “Purchase Price”). Pursuant to the Purchase Agreement, the Company issued an 8% Convertible Promissory Note (the “Note”).

 

The terms of the Note are as follows:

 

Convertible Promissory Note

 

The Note earns an interest rate per annum equal to 8% and has a maturity date of August 17, 2015 (the “Maturity Date”). The Note is convertible any time during the period beginning on the date which is one hundred eighty (180) days following the date of the issuance of the Note and ending on the later of (i) the Maturity Date and (ii) the date of payment of the Default Amount (as defined in the Note) at a conversion price equal to 52% discount to the average of the lowest three (3) trading prices for the common stock during the ten (10) Trading Day (as defined in the Note) period immediately prior the conversion date. The conversion price is subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances of securities below the conversion price of the Note.

 

Unless permitted by the applicable rules and regulations of the principal securities market on which the common stock is then listed or traded, in no event shall the Company issue upon conversion of or otherwise pursuant to the Note and the other Notes issued pursuant to the Purchase Agreement more than the maximum number of shares of common stock that the Company can issue pursuant to any rule of the principal United States securities market on which the common stock is then traded (the “Maximum Share Amount”), which shall be 4.99% of the total shares outstanding on the Closing Date, subject to equitable adjustment from time to time for stock splits, stock dividends, combinations, capital reorganizations and similar events relating to the common stock occurring after the Closing Date. As of the Closing Date, the Maximum Share Amount was 1,449,871 shares of common stock (4.99% of the 29,055,535 shares of common stock that were outstanding on the Closing Date).

 

If there is an “Event of Default” (as defined in the Note) the Purchaser has the right to require the Company to repay in cash all or a portion of the Note at a price equal to 150% of the aggregate principal amount of the Note plus all accrued and unpaid interest on the principal amount of the Note. In addition, in the event of a: (i) sale, conveyance or disposition of all or substantially all of the assets of the Company, (ii) transaction in which more than 50% of the voting power of the Company is disposed of, or (iii) consolidation, merger or other business combination of the Company with or into any other Person (as defined in the Note) when the Company is not the survivor (“Major Event”), the Purchaser has the option to treat the Major Event as an Event of Default or may immediately convert the remaining balance on the Note and shall be entitled to receive as many shares as the Purchaser would have been entitled to immediately prior to the Major Event.

 

The foregoing description of the terms of the Purchase Agreement and the Note do not purport to be complete and are qualified in their entirety by reference to the provisions of such agreements filed as exhibits 4.9 and 10.9 to this report.

 

The foregoing securities under Purchase Agreement were offered and sold without registration under the Securities Act of 1933 (the “Securities Act”) in reliance on the exemptions provided by Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder and in reliance on similar exemptions under applicable state laws.

 

12
 

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.

 

The following table sets forth the name and age of officers and director as of May 7, 2015.

 

Name   Age   Position
David D. Singer   65   President, Chief Technology Officer and Director
Devon Jones   36   Chief Executive Officer and Director
Philip Kirkland   50   Chief Financial Officer, Chief Operating Officer and Director

 

Set forth below is a brief description of the background and business experience of our executive officer and director for the past five years.

 

David D. Singer is the President and Chief Technology Officer (CTO) of the Intelligent Highway Solutions, Inc. From 2009 to 2011, he served as the CEO of American Control Technologies, a privately held company. From 2007 to 2009 he was President of Homeland Security Corporation (OTC: HSCC). From 2004 to 2007, he served as the COO of Tarallax, a privately held company. Mr. Singer’s service as President of Homeland Security Corporation has given him the requisite experience needed to serve as an officer and director of the Company.

 

Devon Jones is the Chief Executive Officer (CEO) of the Company. From June 2002 to November 2006, Mr. Jones served as the CEO of Connect One Communications, a telecom provider. He has a variety of electrical service certifications and has the requisite knowledge and skill in the electrical service industry which led to the conclusion that he should serve as a director of the Company.

 

Philip Kirkland is the Chief Operating Officer (COO) and Chief Financial Officer (CFO) of the Company. He founded Kid Conduit, Inc., a privately held business in 1996. He has a variety of electrical service certifications including an electrical contractor’s license which led to the conclusion that he should serve as a director of the Company.

 

Family Relationships

 

There are no family relationships among any of our officers or directors.

 

Involvement in Certain Legal Proceedings

 

To the best of our knowledge, none of our directors or executive officers has, during the past ten years:

 

been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
   
had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time;
   
been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity;
   
been found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
   
been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
   
been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

 

Except as set forth in our discussion below in “Certain Relationships and Related Transactions,” none of our directors or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the Commission.

 

13
 

 

Term of Office

 

Our directors are appointed for a one-year term to hold office until the next annual general meeting of our shareholders or until removed from office in accordance with our bylaws. Our officers are appointed by our board of directors and hold office until removed by the board.

 

Code of Ethics

 

We do not have a code of ethics that applies to our officers, employees and directors.

 

Corporate Governance

 

The business and affairs of the company are managed under the direction of our board. In addition to the contact information in this annual report, each stockholder will be given specific information on how he/she can direct communications to the officers and directors of the corporation at our annual stockholders meetings. All communications from stockholders are relayed to the members of the board of directors.

 

Role in Risk Oversight

 

Our board of directors is primarily responsible for overseeing our risk management processes. The board of directors receives and reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding our company’s assessment of risks. The board of directors focuses on the most significant risks facing our company and our company’s general risk management strategy, and also ensures that risks undertaken by our company are consistent with the board’s appetite for risk. While the board oversees our company’s risk management, management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing our company and that our board leadership structure supports this approach.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Under Section 16(a) of the Exchange Act, our directors and certain of our officers, and persons holding more than 10 percent of our common stock are required to file forms reporting their beneficial ownership of our common stock and subsequent changes in that ownership with the United States Securities and Exchange Commission.

 

Based solely upon a review of copies of such forms filed on Forms 3, 4, and 5, and amendments thereto furnished to us, we believe that as of the date of this report, our executive officers, directors and greater than 10 percent beneficial owners complied on a timely basis with all Section 16(a) filing requirements.

 

Item 11. Executive Compensation.

 

The following executives of the Company received compensation in the amounts set forth in the chart below for the fiscal years ended December 31, 2014 and 2013. No other item of compensation was paid to any officer or director of the Company other than reimbursement of expenses.

 

Summary Compensation Table

Name and
Principal
Position
  Year  Salary   Bonus   Stock
Awards
($)
   Option
Awards
   Non-
Qualified
Deferred
Compensation
Earnings
   All Other
Compensation
   Totals ($) 
David D. Singer  2014  $0   $0   $0   $0   $0   $2,500   $2,500 
President and Chief Technology Officer  2013  $0   $0   $0   $0   $0   $12,625(1)  $12,625 
Devon Jones  2014  $50,000   $0   $0   $0   $0   $150,000(2)  $200,000 
Chief Executive Officer  2013  $50,000   $0   $0   $0   $0   $146,220(3)  $196,220 
Philip Kirkland  2014  $50,000   $0   $0   $0   $0   $150,000(4)  $200,000 
COO and Chief Financial Officer  2013  $50,000   $0   $0   $0   $0   $156,720(5)  $206,720 

  

(1)This amount is for consulting services that were paid to Mr. Singer’s entity AWS Services, Inc.
(2)This amount includes the following: (i) $120,000 pursuant to Mr. Jones’ consulting agreement and (ii) $30,000 for his yearly car allowance.
(3)This amount includes the following: (i) $116,220 pursuant to Mr. Jones’ consulting agreement and (ii) $30,000 for his yearly car allowance. From January 1, 2013 through December 31, 2014, compensation due to Mr. Jones in the amount of $63,846 has accrued, but has not been paid.
(4)This amount includes the following: (i) $120,000 pursuant to Mr. Kirkland’s consulting agreement and (ii) $30,000 for his yearly car allowance.
(5)This amount includes the following: (i) $126,720 pursuant to Mr. Kirkland’s consulting agreement and (ii) $30,000 for his yearly car allowance. From January 1, 2013 through December 31, 2014, compensation due to Mr. Kirkland in the amount of $107,114 has accrued, but has not been paid.

  

14
 

 

Outstanding Equity Awards at Fiscal Year-End Table

 

There were no outstanding equity awards for the year ended December 31, 2014.

 

Compensation of Directors

 

The Company has not compensated any of its directors for service on the Board of Directors. Management directors are not compensated for their service as directors; however they may receive compensation for their services as employees of the Company. The compensation received by our management directors is shown in the “Summary Compensation Table” above.

 

Employment Agreements

 

On January 1, 2012, we entered into an employment agreement with our Chief Financial Officer, Philip Kirkland. Pursuant to the agreement, Mr. Kirkland’s employment will be for a term of three (3) years, unless removed earlier, and be compensated with an annual base salary of $50,000 plus a $30,000 yearly car allowance.

 

On January 1, 2012, we entered into an employment agreement with our Chief Executive Officer, Devon Jones. Pursuant to the agreement, Mr. Jones’s employment will be for a term of three (3) years, unless removed earlier, and be compensated with an annual base salary of $50,000 plus a $30,000 yearly car allowance.

 

Consulting Agreements

 

On April 22, 2011, we entered into a consulting agreement with Philip Kirkland to provide advisory, consulting and other services in relation to the Company’s operations. Pursuant to the agreement, Mr. Kirkland was paid a monthly consulting fee of $10,560, which continued until the termination of the agreement on December 31, 2012. The agreement was renewed on January 1, 2013 to extend through December 31, 2013. On January 1, 2014, the Company entered into a separate consulting agreement with Philip Kirkland to provide advisory, consulting and other services in relation to the Company’s operations which required total annual compensation of $120,000.

 

On April 22, 2011, we entered into a consulting agreement with Devon Jones to provide advisory, consulting and other services in relation to the Company’s operations. Pursuant to the agreement, Mr. Jones was paid a monthly consulting fee of $9,685, which continued until the termination of the agreement on December 31, 2012. . The agreement was renewed on January 1, 2013 to extend through December 31, 2013. On January 1, 2014, the Company entered into a separate consulting agreement with Devon Jones to provide advisory, consulting and other services in relation to the Company’s operations which required total annual compensation of $120,000.

 

From January 1, 2013 through December 31, 2014, compensation due to Mr. Jones in the amount of $63,846 has accrued, but has not been paid.

 

From January 1, 2013 through December 31, 2014, compensation due to Mr. Kirkland in the amount of $107,114 has accrued, but has not been paid.

 

We do not have any other employment agreements with our officers or directors.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management.

 

The following table sets forth certain information regarding our shares of common stock beneficially owned as of May 7, 2015, for (i) each stockholder known to be the beneficial owner of 5% or more of our outstanding shares of common stock, (ii) each named executive officer and director, and (iii) all executive officers and directors as a group. A person is considered to beneficially own any shares: (i) over which such person, directly or indirectly, exercises sole or shared voting or investment power, or (ii) of which such person has the right to acquire beneficial ownership at any time within 60 days through an exercise of stock options or warrants. Unless otherwise indicated, voting and investment power relating to the shares shown in the table for our directors and executive officers is exercised solely by the beneficial owner or shared by the owner and the owner’s spouse or children.

 

For purposes of this table, a person or group of persons is deemed to have “beneficial ownership” of any shares of common stock that such person has the right to acquire within 60 days of May 7, 2015. For purposes of computing the percentage of outstanding shares of our common stock held by each person or group of persons named above, any shares that such person or persons has the right to acquire within 60 days of May 7, 2015 is deemed to be outstanding, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. The inclusion herein of any shares listed as beneficially owned does not constitute an admission of beneficial ownership. Unless otherwise specified, the address of each of the persons set forth below is care of the company at the address of: 8 Sky Light Court, Sacramento, CA 9582.

 

Name of Beneficial Owner  Amount and Nature of
Beneficial Ownership
of Common Stock
   Percent of Common
Stock (1)
 
5% Shareholders        
SCS, LLC   4,040,000(2)   11%
LRK Holdings, LLC   4,090,000(3)   11%
           
Directors and
Executive Officers
          
David D. Singer   774,900    2%
Devon Jones   4,040,000    11%
Philip Kirkland   4,090,000    11%
All directors and officers as a group (3 people)   8,904,900    25%

 

(1) Based on 35,865,589 shares of common stock outstanding as of May 7, 2015.

 

(2) The beneficial owner of SCS, LLC is Devon Jones.
   
(3) The beneficial owner of LRK Holdings, LLC is Philip Kirkland.
   

(4) The beneficial owner of AWS Services, Inc. is David D. Singer.

 

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Item 13. Certain Relationships and Related Transactions, and Director Independence.

 

We have engaged an entity controlled by David Singer, a director of the Company to perform consulting services related to the development of new technologies. Payments to this party totaled $2,500 and $12,625 during the periods ended December 31, 2014 and 2013.

 

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.

 

During the year ended December 31, 2014, the Company received an interest free $2,000 loan from a related party to fund operations. The loan is unsecured, due on demand and as such is included in current liabilities.

 

During the year ended December 31, 2014, the Company received a $10,000 loan from a related party to fund operations. The loan plus fixed interest of $1,000 was repaid in December 2014.

  

Director Independence

 

We do not have any independent directors. Because our common stock is not currently listed on a national securities exchange, we have used the definition of “independence” of The NASDAQ Stock Market to make this determination. NASDAQ Listing Rule 5605(a)(2) provides that an “independent director” is a person other than an officer or employee of the company or any other individual having a relationship which, in the opinion of the Company’s Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The NASDAQ listing rules provide that a director cannot be considered independent if:

 

the director is, or at any time during the past three years was, an employee of the company;
   
the director or a family member of the director accepted any compensation from the company in excess of $120,000 during any period of 12 consecutive months within the three years preceding the independence determination (subject to certain exclusions, including, among other things, compensation for board or board committee service);

 

a family member of the director is, or at any time during the past three years was, an executive officer of the company;
   
the director or a family member of the director is a partner in, controlling stockholder of, or an executive officer of an entity to which the company made, or from which the company received, payments in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenue for that year or $200,000, whichever is greater (subject to certain exclusions);

 

the director or a family member of the director is employed as an executive officer of an entity where, at any time during the past three years, any of the executive officers of the company served on the compensation committee of such other entity; or
   
the director or a family member of the director is a current partner of the company’s outside auditor, or at any time during the past three years was a partner or employee of the company’s outside auditor, and who worked on the company’s audit.

 

Messrs. Jones, Singer, and Kirkland are not considered independent because they are employees of the Company.

 

We do not currently have a separately designated audit, nominating or compensation committee.

 

Item 14. Principal Accounting Fees and Services.

 

The following presents aggregate fees for professional services rendered by our independent registered public accounting firm, Sadler Gibb and Associates, LLC, for the audit of our annual consolidated financial statements during the years ended December 31, 2014 and 2013.

 

Audit Fees

 

For the Company’s fiscal years ended December 31, 2014 and 2013, we were billed approximately $47,000 and $24,000 for professional services rendered for the audit and review of our financial statements.

  

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Audit Related Fees

 

There were no fees for audit related services for the years ended December 31, 2014 and 2013.

 

Tax Fees

 

There were no fees billed during the years ended December 31, 2014 and 2013 for tax compliance, advice and filings.

 

All Other Fees

 

The Company did not incur any other fees related to services rendered by our principal accountant for the fiscal years ended December 31, 2014 and 2013.

 

Effective May 6, 2003, the Securities and Exchange Commission adopted rules that require that before our auditor is engaged by us to render any auditing or permitted non-audit related service, the engagement be:

 

- approved by our audit committee; or

 

- entered into pursuant to pre-approval policies and procedures established by the audit committee, provided the policies and procedures are detailed as to the particular service, the audit committee is informed of each service, and such policies and procedures do not include delegation of the audit committee's responsibilities to management.

 

We do not have an audit committee. Our entire board of directors pre-approves all services provided by our independent auditors. The pre-approval process has just been implemented in response to the new rules. Therefore, our board of directors does not have records of what percentage of the above fees was pre-approved. However, all of the above services and fees were reviewed and approved by the entire board of directors either before or after the respective services were rendered.

 

PART IV

 

Item 15. Exhibits, Financial Statement Schedules.

 

(a) The following documents are filed as part of this report:

 

(1) Financial Statements and Report of Independent Registered Public Accounting Firm, which are set forth in the index to Consolidated Financial Statements on pages F-1 through F-19 of this report.

 

Report of Independent Registered Public Accounting Firm   F-1
Balance Sheet   F-2
Statement of Operations   F-3
Statement of Stockholders' Deficit   F-4
Statement of Cash Flows   F-5
Notes to Financial Statements   F-6 - F-20

 

(2) Financial Statement Schedule: None.

 

(3) Exhibits

 

EXHIBIT
NUMBER
  DESCRIPTION
3.1   Articles of Incorporation, incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1/A, filed with the Securities and Exchange Commission on June 25, 2012.
3.2   By-Laws, incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1/A, filed with the Securities and Exchange Commission on June 25, 2012.
4.1   Promissory Note dated June 17, 2011, with three addendums, incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1/A, filed with the Securities and Exchange Commission on October 18, 2012.
4.2   Promissory Note dated April 29, 2011 with Addendum, incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on May 15, 2012.
4.3   Promissory Note dated November 21, 2011, for Byrd & Company, LLC, incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-1/A, filed with the Securities and Exchange Commission on October 18, 2012.
4.4   Promissory Note dated December 15, 2011, incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on May 15, 2012.
4.5   Promissory Note dated December 15, 2011 Addendums, incorporated by reference to Exhibit 4.5 to the Company’s Registration Statement on Form S-1/A, filed with the Securities and Exchange Commission on October 18, 2012.
4.6   Promissory Note dated April 29, 2011 Addendum, incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on May 15, 2012.

 

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4.7   Promissory Note dated April 29, 2011 Second and Third Addendum, incorporated by reference to Exhibit 4.7 to the Company’s Registration Statement on Form S-1/A, filed with the Securities and Exchange Commission on November 9, 2012.
4.8   Convertible Debenture dated October 19, 2012, incorporated by reference to Exhibit 4.8 to the Company’s Registration Statement on Form S-1/A, filed with the Securities and Exchange Commission on November 9, 2012.
4.9*   Convertible Promissory Note Issued to KBM Worldwide, Inc., dated November 13, 2014.
10.1   Copy of Intelligent Highways Solutions, Inc. C-10 Electrical Contractor License, incorporated by reference to Exhibit 10.6 to the Company’s Registration Statement on Form S-1/A, filed with the Securities and Exchange Commission on June 25, 2012.
10.2   Copy of Standard Industrial/Commercial Multi-Tenant Lease, incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement on Form S-1/A, filed with the Securities and Exchange Commission on June 25, 2012.
10.3   Copy of California Small Business, incorporated by reference to Exhibit 10.8 to the Company’s Registration Statement on Form S-1/A, filed with the Securities and Exchange Commission on September 17, 2012.
10.4   Copy of Philip Kirkland Employment Agreement, incorporated by reference to Exhibit 10.9 to the Company’s Registration Statement on Form S-1/A, filed with the Securities and Exchange Commission on September 17, 2012.
10.5   Copy of Devon Jones Employment Agreement, incorporated by reference to Exhibit 10.10 to the Company’s Registration Statement on Form S-1/A, filed with the Securities and Exchange Commission on September 17, 2012.
10.6   Copy of Philip Kirkland Consulting Agreement, incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on Form S-1/A, filed with the Securities and Exchange Commission on September 17, 2012.
10.7   Copy of Devon Jones Consulting Agreement, incorporated by reference to Exhibit 10.12 to the Company’s Registration Statement on Form S-1/A, filed with the Securities and Exchange Commission on September 17, 2012.
10.8   Distribution Agreement between SCS Lighting Solutions Inc. and Intelligent Highway Solutions, Inc. dated August 22, 2013 incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on September 11, 2013.
10.9*   Purchase Agreement, dated November 13, 2014, by and between Intelligent Highway Solutions, Inc. and KBM Worldwide, Inc.

10.10*

 

Management Consulting Extension Agreement with Devon Jones, dated January 1, 2014.

10.11*

  Management Consulting Extension Agreement with Philip Kirkland, dated January 1, 2014.
21.1   List of Subsidiaries – None.
31.1*   Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*   Certification of Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1+   Certification of Chief Executive Officer of the Company, 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 Chief Financial Officer of the Company, 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.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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: May 7, 2015 By:  /s/ Devon Jones
    Devon Jones
    Chief Executive Officer
    (Principal Executive Officer)
     
Date: May 7, 2015 By: /s/ Philip Kirkland
    Philip Kirkland
    Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature   Title   Date
         
/s/ Devon Jones   Chief Executive Officer and Director   May 7, 2015
Devon Jones   (Principal Executive Officer)    
         
/s/ David D. Singer   President and Director   May 7, 2015
David D. Singer        
         
/s/ Philip Kirkland   Chief Financial Officer, Chief Operating Officer and Director   May 7, 2015
Philip Kirkland   (Principal Financial and Accounting Officer)    

  

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