Notes to Unaudited Condensed Financial Statements

June 30, 2017

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization, Nature of Business and Trade Name

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

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

NOTE 2 – UNAUDITED CONDENSED CONSOLDIATED INTERIM FINANCIAL STATEMENTS

The accompanying unaudited condensed consolidated interim financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows for the periods ended June 30, 2017 and for all periods presented herein, have been made.

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s December 31, 2016 audited financial statements. The results of operations for the periods ended June 30, 2017 are not necessarily indicative of the operating results for the full year.

NOTE 3 – GOING CONCERN

The Company’s unaudited condensed consolidated interim financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. As of June 30, 2017, the Company has an accumulated deficit of $12,503,116 a working capital deficit of $5,489,496 and continued losses from operations. While the Company has recently established an ongoing source of revenues, we do not anticipate it to be sufficient to cover its operating costs and allow it to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations.

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

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

NOTE 4 - SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

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

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

Cash

The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The company does not have cash equivalents as of June 30, 2017 or December 31, 2016.

Property, Plant and Equipment

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

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

For federal income tax purposes, depreciation is computed under the modified accelerated cost recovery system. For financial statements purposes, depreciation is computed under the straight-line method. Balances of each asset class as of June 30, 2017 and December 31, 2016 were:

Depreciation expense for the three months ended June 30, 2017 and 2016 was $10,633 and $1,225, respectively. Depreciation expense for the six months ended June 30, 2017 and 2016 was $10,953 and $3,721, respectively.

Other accrued expenses mainly consist of accrued consulting fees due to management and other consulting firms. Of the $128,741 accrued for federal and state income taxes payable at June 30, 2017 and December 31, 2016, $127,141 relates to the federal income tax payable as discussed in Note 11 and $1,600 relates to state income taxes payable.

Revenues and Cost of Revenues

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

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

This amount is included in the accompanying balance sheet under the following captions at June 30, 2017 and December 31, 2016:

Fair Value Measurements

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

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

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

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

Derivative Liabilities

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

Net Income (Loss) Per Share

Net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the specified period. Diluted earnings per common share is computed by dividing net income (loss) by the weighted average number of common shares and potential common shares during the specified period. For the three and six months ended June 30, 2017, there was 14,777,479,522 such potentially dilutive shares included in the diluted weighted average shares outstanding. During the three and six months ended June 30, 2016 potential common shares are not included in the diluted net loss per share calculation as their effect would be anti-dilutive. Such potentially dilutive shares are excluded when the effect would be to reduce net loss per share. There were 12,930,676,025 such potentially dilutive shares excluded for the three and six months ended June 30, 2016. The potentially dilutive shares arise from the following instruments:

Recent Accounting Pronouncements

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

In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805) – Simplifying the Accounting for Measurement-Period Adjustments.” This update eliminates the requirement to restate prior period financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The new standard should be applied prospectively to measurement period adjustments that occur after the effective date. The new standard is effective for interim and annual periods beginning after December 15, 2015 and early adoption is permitted. The Company has adopted this guidance and the adoption of this guidance did not have an impact on the Company’s results of operations, financial position, or cash flows for the three or six months ended June 30, 2017 or 2016.

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

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

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

NOTE 5 – DERIVATIVE LIABILITIES

As discussed in Note 3, on a recurring basis, we measure certain financial assets and liabilities based upon the fair value hierarchy. The following table presents information about the Company’s liabilities measured at fair value as of June 30, 2017 and December 31, 2016:

As of June 30, 2017, the Company had a $1,135,653 derivative liability balance on the balance sheet and recorded a gain from derivative liability fair value adjustment of $1,029,777 and $10,517,438 during the three and six months ended June 30, 2017. The Company assessed its outstanding convertible notes payable as summarized in Note 8 – Convertible Notes Payable and determined certain convertible notes payable with variable conversion features contain embedded derivatives and are therefore accounted for at fair value under ASC 920, Fair Value Measurements and Disclosures and ASC 825, Financial Instruments.

Utilizing Level 3 Inputs, the Company recorded fair market value adjustments related to convertible notes payable for the three months ended June 30, 2017 and 2016 of $1,029,777 and $(51,977) and fair value adjustments related to the convertible notes payable for the six months ended June 30, 2017 and 2016 of $10,517,438 and $218,275, respectively. The fair market value adjustments were calculated utilizing the Black-Sholes method using the following assumptions: risk free rates of 1.03% to 1.24%, dividend yield of 0%, expected lives of 0.35 to 1 years, and volatility between 405% and 488%.

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

NOTE 6 – CONCENTRATIONS OF RISK

Our revenues during the three and six months ended June 30, 2017 were generated completely from three clients. The loss of any of these clients will have a material adverse impact on our business. There were no revenues earned during the three or six months ended June 30, 2016.

Required principal payments from June 30, 2017 forward are as follows:

There was $90,372 and $27,377 of accrued interest payable on non-convertible notes payable as of June 30, 2017 and December 31, 2016.

Required principal payments from June 30, 2017 forward are as follows:

There was $278,118 and $250,452 of accrued interest payable on convertible notes payable as of June 30, 2017 and December 31, 2016.

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

NOTE 9 – RELATED PARTY TRANSACTIONS

During the year ended December 31, 2014, the Company received an interest free $8,000 loan from a related party to fund operations. The loan is unsecured, due on demand and as such is included in current liabilities. There was $5,000 due as of June 30, 2017 and December 31, 2016, respectively.

During the year ended December 31, 2014, the Company received an interest free $2,000 loan from a related party to fund operations. The related party made additional advances of $396 during the year ended December 31, 2016. The loan is unsecured, due on demand and as such is included in current liabilities. There was $2,396 due as of June 30, 2017 and December 31, 2016, respectively.

NOTE 10 – STOCKHOLDERS’ DEFICIT

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

During the six months ended June 30, 2017, the Company issued a total of 2,095,726,820 shares of common stock for the conversion of $112,942 of outstanding principal and 493,227,056 shares of common stock for the conversion of $38,591 of outstanding interest on convertible notes payable. All conversions were performed under the contractual terms of the respective notes payable. Additionally, during the six months ended June 30, 2017, the Company issued a total of 260,000,000 common shares valued at $42,000 for services performed. The common shares issued for services were valued using the close price of the Company’s common stock on the date of issuance.

During the six months ended June 30, 2017, the Company issued a total of 7,500,000 shares of Series A Convertible Preferred Stock for services rendered in connection with its acquisition of Cresent Construction Company. The shares of Series A Convertible Preferred Stock were valued on an as converted to common stock basis at $0.0009 per share resulting in a total value of $6,750.

There were 10,000,000 and 2,500,000 series A convertible preferred shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively. 

There were 5,764,655,546 and 2,915,701,670 common shares issued and 5,764,605,546 and 2,915,651,670 outstanding at June 30, 2017 and December 31, 2016, respectively.

The Company has 5,764,605,546 common shares outstanding, a total of 14,777,479,522 common share equivalents as discussed in Note 4 – Significant Accounting Policies and 448,570 exercisable options and warrants as discussed in Note 12 – Stock Options for a total of 20,542,533,638 shares of common stock and common stock equivalents as of June 30, 2017. With 10,000,000,000 shares authorized, there are insufficient common shares in treasury to meet all of the Company’s common share equivalents obligations. 14,687,479,522 of the common share equivalents arise from outstanding convertible notes payable as discussed in Note 4 – Significant Accounting Policies and Note 8 – Convertible Notes Payable and as such have been recognized as a debt obligation in conjunction with the underlying derivative liabilities as discussed in Note 5 – Derivative Liabilities . The Company plans to remediate this shortfall either through a reverse stock split or an increased in the authorized common stock of the Company.

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 June 30, 2017 and December 31, 2016 the Company had accrued $761,396 in payroll tax liabilities. The payment of these liabilities has not been made due to our limited profitability. Due to the uncertainty regarding our future profitability, it is difficult to predict our ability to pay these liabilities. As a result, a federal tax lien has been levied that will have to be satisfied.

Federal Income Tax Liability

On January 29, 2015, we received a notification from the Internal Revenue Service (the “IRS”) regarding deficiencies in our tax return for the year ended December 31, 2011. The notice was the result of not filing our tax return for the year then ended and included the results of an IRS examination which yielded an income tax amount due of $92,804 plus penalties and interest totaling $34,337 for a total amount due of $127,141. While we believe we will be able to successfully reduce the tax liability and assessed penalties to zero or near zero due to our net loss sustained during the year ended December 31, 2011, the possibility exists we will be unsuccessful and could face an assessment for the full amount of $127,141. As detailed in Note 4, there is an accrued liability of $127,141 for this potential payout as of June 30, 2017 and December 31, 2016.

Litigation

During the second quarter of 2017, the Company filed a lawsuit in the Superior Court in the County of Sacramento against TCA Global Credit Master Fund, LP (“TCA”) alleging lending fraud as TCA is not licensed or authorized to conduct investment banking or lending business in the State of California under the California Finance Lenders Law and default on the credit line for not having made the credit line available for use. The Company has requested a summary judgement in the amount of $1,730,046 for damages and attorney fees. TCA has filed counter suit claiming default on the credit line. Given the uncertain nature of the outcome of the suit and countersuit, the Company has not accrued for potential costs associated with an unfavorable outcome or potential gain associated with a favorable outcome.

The following table discloses information regarding outstanding and exercisable options at June 30, 2017:

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:

NOTE 13 – ACQUISTION

On March 9, 2017, the Company, through a newly created special purpose entity, executed a share purchase agreement to acquire all outstanding ownership interests in Crescent Construction Company, Inc. a full service general contracting firm for total consideration of $1,800,000. The agreement required a cash payment of $500,000 at closing plus a note payable for $1,300,000. The note carries interest of 6%, matures on March 31, 2022 and requires equal semi-annual payments of $152,693. Additionally, the Company entered into a separate note payable with the seller for cash proceeds of $160,466. Because this note was executed simultaneously with the purchase agreement, it was considered part of the acquisition price which brought the total consideration to $1,960,466. The suit discussed in Note 11 – Commitments and Contingencies notwithstanding, TCA fulfilled its obligation to advance the Company the initial $500,000 against the credit line as discussed in Note 15 – Line of Credit which was paid to the seller as the initial cash payment due at closing.

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

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

NOTE 14 – EQUITY LINE OF CREDIT

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

NOTE 15 – LINE OF CREDIT

On March 9, 2017, the Company entered into a revolving line of credit to borrow up to $5,000,000 dollars of which $631,855 was drawn immediately. Of the amount drawn on March 9, 2017, $500,000 was paid to the seller of Cresent Construction Company as the cash component of the acquisition and $131,855 was drawn to pay seller and financer acquisition related costs. The credit line carries interest at 12% per annum and matures on September 9, 2017 with all outstanding principal being due at maturity. Under the terms of the credit facility, the parties shall not incur or have outstanding funded indebtedness outside of those allowed under the terms of the agreement, enter into or permit and liens, enter into new investments in additional businesses outside of those permitted within the agreement, enter into a transfer of shares or merger, make capital expenditures or issue additional shares of stock without the consent of the credit line maker.

As of June 30, 2017, there was borrowing capacity of $4,368,145. There was $631,855 and $0 of principal drawn as of June 30, 2017 and December 31, 2016, respectively. There was $23,800 and $0 of accrued interest due at June 30, 2017 and December 31, 2016, respectively. The Company has filed suit against TCA claiming default and TCA has filed countersuit against the Company claiming default as discussed in Note 11 – Commitments and Contingencies.