Transportation & Logistics Systems, Inc. - Quarter Report: 2022 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2022
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to ___________
Commission File No. 001-34970
Transportation and Logistics Systems, Inc.
(Exact name of registrant as specified in its charter)
| Nevada | 26-3106763 | |
| (State or Other Jurisdiction | IRS Employer | |
| of Organization) | Identification Number |
| 5500 Military Trail, Suite 22-357 | ||
| Jupiter, Florida | 33458 | |
| (Address of principal executive offices) | (Zip code) |
(833) 764-1443
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report.)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| N/A | N/A | N/A |
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | Non accelerated filer ☒ | Smaller reporting company ☒ |
| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
| Class | Outstanding as of November 14, 2022 | |
| Common Stock, $0.001 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC.
FORM 10-Q
September 30, 2022
INDEX
| 2 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30 | December 31, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 2,440,726 | $ | 6,067,692 | ||||
| Accounts receivable, net | 2,751,451 | 481,734 | ||||||
| Prepaid expenses and other current assets | 662,033 | 197,336 | ||||||
| Total Current Assets | 5,854,210 | 6,746,762 | ||||||
| OTHER ASSETS: | ||||||||
| Security deposit | 355,194 | 33,340 | ||||||
| Property and equipment, net | 1,781,180 | 577,205 | ||||||
| Right of use assets, net | 8,741,980 | |||||||
| Goodwill | 7,421,863 | |||||||
| Intangible assets, net | 1,723,830 | 2,177,382 | ||||||
| Total Other Assets | 20,024,047 | 2,787,927 | ||||||
| TOTAL ASSETS | $ | 25,878,257 | $ | 9,534,689 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Notes payable, current portion | $ | 516,836 | $ | 283,141 | ||||
| Accounts payable | 546,980 | 312,772 | ||||||
| Accrued expenses | 506,723 | 212,975 | ||||||
| Insurance payable | 329,802 | 98,255 | ||||||
| Lease liabilities, current portion | 2,000,393 | |||||||
| Accrued compensation and related benefits | 77,572 | 98,964 | ||||||
| Total Current Liabilities | 3,978,306 | 1,006,107 | ||||||
| LONG-TERM LIABILITIES: | ||||||||
| Notes payable, net of current portion | 5,432,838 | 12,455 | ||||||
| Lease liabilities, net of current portion | 6,746,178 | |||||||
| Total Long-term Liabilities | 12,179,016 | 12,455 | ||||||
| Total Liabilities | 16,157,322 | 1,018,562 | ||||||
| Commitments and Contingencies (See Note 11) | ||||||||
| SHAREHOLDERS’ EQUITY: | ||||||||
| Preferred stock, par value $; authorized shares: | ||||||||
| Series B convertible preferred stock, par value $ per share; shares designated; and shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively (Liquidation value $0 and $700, respectively) | 700 | |||||||
| Series D preferred stock, par value $ per share; shares designated; shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively ($6.00 per share liquidation value) | ||||||||
| Series E preferred stock, par value $ per share; shares designated; and shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively ($13.34 per share liquidation value) | 21 | 52 | ||||||
| Series G preferred stock, par value $ per share; shares designated; and shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively ($10.00 per share liquidation value) | 575 | 615 | ||||||
| Series H preferred stock, par value $ per share; shares designated; and shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively (No per share liquidation value) | 32 | |||||||
| Common stock, par value $ per share; shares authorized; and shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively | 3,636,692 | 2,926,529 | ||||||
| Additional paid-in capital | 129,207,348 | 124,604,718 | ||||||
| Accumulated deficit | (123,123,733 | ) | (119,016,487 | ) | ||||
| Total Shareholders’ Equity | 9,720,935 | 8,516,127 | ||||||
| Total Liabilities and Shareholders’ Equity | $ | 25,878,257 | $ | 9,534,689 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 3 |
TRANSPORTATION AND LOGISTICS SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| REVENUES | $ | 1,700,854 | $ | 1,207,305 | $ | 4,364,747 | $ | 4,273,498 | ||||||||
| COST OF REVENUES | 1,236,630 | 1,178,113 | 3,221,182 | 4,422,429 | ||||||||||||
| GROSS PROFIT (LOSS) | 464,224 | 29,192 | 1,143,565 | (148,931 | ) | |||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Compensation and related benefits | 720,339 | 351,908 | 2,770,092 | 1,064,570 | ||||||||||||
| Legal and professional fees | 259,597 | 487,473 | 948,094 | 1,470,926 | ||||||||||||
| Rent | 217,717 | 154,132 | 430,011 | 521,688 | ||||||||||||
| General and administrative expenses | 282,850 | 323,658 | 816,960 | 821,593 | ||||||||||||
| Loss on lease abandonment | 607,554 | 1,223,628 | ||||||||||||||
| Total Operating Expenses | 1,480,503 | 1,924,725 | 4,965,157 | 5,102,405 | ||||||||||||
| LOSS FROM OPERATIONS | (1,016,279 | ) | (1,895,533 | ) | (3,821,592 | ) | (5,251,336 | ) | ||||||||
| OTHER INCOME (EXPENSES): | ||||||||||||||||
| Interest expense | (14,635 | ) | (71,939 | ) | (24,397 | ) | (290,898 | ) | ||||||||
| Interest expense - related parties | (22,685 | ) | (67,315 | ) | ||||||||||||
| Warrant exercise inducement expense | (4,193,134 | ) | (4,193,134 | ) | ||||||||||||
| Gain on debt extinguishment, net | 1,564,941 | |||||||||||||||
| Gain on sale of subsidiary | (2,714 | ) | 293,975 | |||||||||||||
| Gain on deconsolidation of subsidiaries | 12,427,220 | 12,427,220 | ||||||||||||||
| Settlement income (expense) | (10,150 | ) | (237,961 | ) | ||||||||||||
| Other income | 11,001 | 194,823 | ||||||||||||||
| Derivative income | 3,284,306 | |||||||||||||||
| Total Other Income (Expenses) | (27,499 | ) | 8,150,463 | 31,617 | 12,919,943 | |||||||||||
| (LOSS) INCOME BEFORE INCOME TAXES | (1,043,778 | ) | 6,254,930 | (3,789,975 | ) | 7,668,607 | ||||||||||
| Provision for income taxes | ||||||||||||||||
| NET (LOSS) INCOME | (1,043,778 | ) | 6,254,930 | (3,789,975 | ) | 7,668,607 | ||||||||||
| Deemed dividends related to beneficial conversion features, and accrued dividends | (101,386 | ) | (21,386 | ) | (317,271 | ) | (1,007,319 | ) | ||||||||
| NET (LOSS) INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | (1,145,164 | ) | $ | 6,233,544 | $ | (4,107,246 | ) | $ | 6,661,288 | ||||||
| NET (LOSS) INCOME PER COMMON SHARE - BASIC AND DILUTED | ||||||||||||||||
| Basic | $ | (0.00 | ) | $ | 0.00 | $ | (0.00 | ) | $ | 0.00 | ||||||
| Diluted | $ | (0.00 | ) | $ | 0.00 | $ | (0.00 | ) | $ | 0.00 | ||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||||||||||
| Basic | 3,438,148,807 | 2,600,758,966 | 3,266,732,522 | 2,160,897,037 | ||||||||||||
| Diluted | 3,438,148,807 | 2,899,703,458 | 3,266,732,522 | 2,506,656,853 | ||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 4 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Unaudited)
| Preferred Stock Series B | Preferred Stock Series E | Preferred Stock Series G | Preferred Stock Series H | Common Stock | Additional Paid-in | Accumulated | Total Shareholders’ | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | 700,000 | $ | 700 | 51,605 | $ | 52 | 615,000 | $ | 615 | $ | 2,926,528,666 | $ | 2,926,529 | $ | 124,604,718 | $ | (119,016,487 | ) | $ | 8,516,127 | ||||||||||||||||||||||||||||||||
| Common stock issued for warrant exercise | - | - | - | - | 24,571,429 | 24,571 | 221,143 | 245,714 | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for services and future services | - | - | - | - | 161,671,888 | 161,672 | 88,328 | 250,000 | ||||||||||||||||||||||||||||||||||||||||||||
| Accretion of stock-based compensation | - | - | - | - | - | 586,133 | 586,133 | |||||||||||||||||||||||||||||||||||||||||||||
| Sales of Series G preferred share units | - | - | 95,000 | 95 | - | - | 854,905 | 855,000 | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series E preferred shares | - | (19,947 | ) | (20 | ) | - | - | 75,000,000 | 75,000 | (74,980 | ) | |||||||||||||||||||||||||||||||||||||||||
| Dividends accrued | - | - | - | - | - | (109,051 | ) | (109,051 | ) | |||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (2,037,231 | ) | (2,037,231 | ) | |||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2022 | 700,000 | 700 | 31,658 | 32 | 710,000 | 710 | 3,187,771,983 | 3,187,772 | 126,280,247 | (121,162,769 | ) | 8,306,692 | ||||||||||||||||||||||||||||||||||||||||
| Common stock issued for warrant exercise | - | - | - | - | 40,086,207 | 40,086 | (40,086 | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for services and future services | - | - | - | - | 969,149 | 969 | 9,031 | 10,000 | ||||||||||||||||||||||||||||||||||||||||||||
| Accretion of stock-based compensation | - | - | - | - | - | 204,034 | 204,034 | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series E preferred shares | - | (10,240 | ) | (11 | ) | - | - | 38,500,868 | 38,501 | (62,490 | ) | (24,000 | ) | |||||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series G preferred shares | - | - | (92,500 | ) | (92 | ) | - | 129,272,885 | 129,273 | (108,047 | ) | 21,134 | ||||||||||||||||||||||||||||||||||||||||
| Cancellation of Series B preferred in connection with settlement | (700,000 | ) | (700 | ) | - | - | - | - | (700 | ) | ||||||||||||||||||||||||||||||||||||||||||
| Dividends accrued | - | - | - | - | - | (106,834 | ) | (106,834 | ) | |||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (708,966 | ) | (708,966 | ) | |||||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2022 | 21,418 | 21 | 617,500 | 618 | 3,396,601,092 | 3,396,601 | 126,282,689 | (121,978,569 | ) | 7,701,360 | ||||||||||||||||||||||||||||||||||||||||||
| Accretion of stock-based compensation | - | - | - | - | - | 180,910 | 180,910 | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series G preferred shares | - | - | (42,500 | ) | (43 | ) | - | 61,178,746 | 61,179 | (42,953 | ) | 18,183 | ||||||||||||||||||||||||||||||||||||||||
| Series H preferred and common stock issued in connection with acquisition | - | - | 32,374 | 32 | 178,911,844 | 178,912 | 2,786,702 | 2,965,646 | ||||||||||||||||||||||||||||||||||||||||||||
| Dividends accrued | - | - | - | - | - | (101,386 | ) | (101,386 | ) | |||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (1,043,778 | ) | (1,043,778 | ) | |||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2022 | $ | 21,418 | $ | 21 | 575,000 | $ | 575 | 32,374 | $ | 32 | 3,636,691,682 | $ | 3,636,692 | $ | 129,207,348 | $ | (123,123,733 | ) | $ | 9,720,935 | ||||||||||||||||||||||||||||||||
| Preferred Stock Series B | Preferred Stock Series E | Preferred Stock Series G | Preferred Stock Series G | Common Stock | Additional Paid-in | Accumulated | Total Shareholders’ | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | 700,000 | $ | 700 | 105,378 | $ | 105 | $ | $ | 1,733,847,494 | $ | 1,733,848 | $ | 104,872,991 | $ | (122,621,060 | ) | $ | (16,013,416 | ) | |||||||||||||||||||||||||||||||||
| Common stock issued for debt conversion | - | - | - | - | 15,454,546 | 15,454 | 154,546 | 170,000 | ||||||||||||||||||||||||||||||||||||||||||||
| Sales of Series E preferred share units | - | 310,992 | 311 | - | - | - | 3,257,689 | 3,258,000 | ||||||||||||||||||||||||||||||||||||||||||||
| Deemed dividend related to beneficial conversion features and accrued dividends | - | - | - | - | - | 777,510 | (829,836 | ) | (52,326 | ) | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (2,269,180 | ) | (2,269,180 | ) | |||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2021 | 700,000 | 700 | 416,370 | 416 | 1,749,302,040 | 1,749,302 | 109,062,736 | (125,720,076 | ) | (14,906,922 | ) | |||||||||||||||||||||||||||||||||||||||||
| Common stock issued for debt conversion | - | - | - | - | 44,282,163 | 44,282 | 329,174 | 373,456 | ||||||||||||||||||||||||||||||||||||||||||||
| Sales of Series E preferred shares units | - | 32,126 | 32 | - | - | - | 332,468 | 332,500 | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series E preferred shares | - | (340,346 | ) | (340 | ) | - | - | 571,296,287 | 571,296 | (570,956 | ) | |||||||||||||||||||||||||||||||||||||||||
| Common stock issued for warrant exercise | - | - | - | - | 121,053,570 | 121,054 | 564,660 | 685,714 | ||||||||||||||||||||||||||||||||||||||||||||
| Beneficial conversion effect related to beneficial conversions | - | - | - | - | - | 143,872 | 143,872 | |||||||||||||||||||||||||||||||||||||||||||||
| Deemed dividend related to beneficial conversion features and accrued dividends | - | - | - | - | - | 104,533 | (156,097 | ) | (51,564 | ) | ||||||||||||||||||||||||||||||||||||||||||
| Net Income | - | - | - | - | - | 3,682,857 | 3,682,857 | |||||||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2021 | 700,000 | 700 | 108,150 | 108 | 2,485,934,060 | 2,485,934 | 109,966,487 | (122,193,316 | ) | (9,740,087 | ) | |||||||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series E preferred shares | - | (17,135 | ) | (17 | ) | - | - | 25,725,519 | 25,726 | (25,709 | ) | |||||||||||||||||||||||||||||||||||||||||
| Common stock issued for warrant exercise | - | - | - | - | 325,539,430 | 325,539 | 2,929,416 | 3,254,955 | ||||||||||||||||||||||||||||||||||||||||||||
| Warrant exercise inducement expense | - | - | - | - | - | 4,193,134 | 4,193,134 | |||||||||||||||||||||||||||||||||||||||||||||
| Deemed dividend related to beneficial conversion features and accrued dividends | - | - | - | - | - | (21,386 | ) | (21,386 | ) | |||||||||||||||||||||||||||||||||||||||||||
| Net Income | - | - | - | - | - | 6,254,930 | 6,254,930 | |||||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2021 | 700,000 | $ | 700 | 91,015 | $ | 91 | $ | $ | 2,837,199,009 | $ | 2,837,199 | $ | 117,063,328 | $ | (115,959,772 | ) | $ | 3,941,546 | ||||||||||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 5 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net (loss) income | $ | (3,789,975 | ) | $ | 7,668,607 | |||
| Adjustments to reconcile net (loss) income to net cash used in operating activities: | ||||||||
| Depreciation and amortization expense | 532,550 | 498,876 | ||||||
| Amortization of debt discount to interest expense | 83,548 | |||||||
| Stock-based compensation | 1,221,077 | |||||||
| Stock-based professional fees | 10,000 | |||||||
| Non-cash gain from sale of subsidiary | (296,689 | ) | ||||||
| Non-cash gain from deconsolidation of subsidiaries | (12,448,899 | ) | ||||||
| Derivative income, net | (3,284,306 | ) | ||||||
| Non-cash portion of gain on extinguishment of debt, net | (1,564,941 | ) | ||||||
| Non-cash portion of gain on settlement | (700 | ) | ||||||
| Loss on lease abandonment | 1,223,628 | |||||||
| Warrant exercise inducement expense | 4,193,134 | |||||||
| Rent expense | 4,591 | 1,680 | ||||||
| Bad debt recovery | (11,240 | ) | ||||||
| Other non-cash gain | (11,806 | ) | ||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | 1,173 | 173,941 | ||||||
| Prepaid expenses and other current assets | (193,392 | ) | 159,142 | |||||
| Security deposit | (3,552 | ) | 94,000 | |||||
| Accounts payable and accrued expenses | (295,981 | ) | 500,908 | |||||
| Insurance payable | 61,735 | (123,445 | ) | |||||
| Accrued compensation and related benefits | (90,514 | ) | (16,310 | ) | ||||
| NET CASH USED IN OPERATING ACTIVITIES | (2,839,677 | ) | (2,863,483 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of property and equipment | (118,617 | ) | ||||||
| Proceeds from sale of property and equipment | 3,451 | |||||||
| Cash acquired in acquisitions | 138,336 | 10,031 | ||||||
| Cash used for acquisitions | (1,930,712 | ) | (2,133,146 | ) | ||||
| Cash proceeds from sale of subsidiary | 748,500 | |||||||
| NET CASH USED IN INVESTING ACTIVITIES | (1,162,493 | ) | (2,119,664 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Net proceeds from sale of series E preferred share units | 3,590,500 | |||||||
| Payment of liquidated damages on Series E preferred shares | (24,000 | ) | ||||||
| Net proceeds from sale of series G preferred share units | 855,000 | |||||||
| Proceeds from exercise of warrants | 245,714 | 3,940,669 | ||||||
| Proceeds from notes payable | 108,395 | |||||||
| Repayment of notes payable | (809,905 | ) | (496,291 | ) | ||||
| Net proceeds (payments) of related party advances | 37,315 | |||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | 375,204 | 7,072,193 | ||||||
| NET (DECREASE) INCREASE IN CASH | (3,626,966 | ) | 2,089,046 | |||||
| CASH, beginning of period | 6,067,692 | 579,283 | ||||||
| CASH, end of period | $ | 2,440,726 | $ | 2,668,329 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | 24,397 | $ | 288,533 | ||||
| Income taxes | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Conversion of debt and accrued interest for common stock | $ | $ | 543,457 | |||||
| Reclassification of due to related parties to accrued expenses | $ | $ | 94,000 | |||||
| Deemed dividend related to price protection and beneficial conversion features | $ | $ | 882,043 | |||||
| Conversion of Series E preferred stock to common stock | $ | 31 | $ | |||||
| Conversion of Series G preferred stock and accrued dividends to common stock | $ | 39,317 | $ | |||||
| Accrual of preferred stock dividends | $ | 317,271 | $ | |||||
| Issuance of common stock for future services | $ | 5,000 | $ | |||||
| ACQUISITIONS: | ||||||||
| Assets acquired: | ||||||||
| Accounts receivable | $ | 2,270,890 | $ | 265,175 | ||||
| Prepaid expenses | 271,305 | 7,534 | ||||||
| Property and equipment | 1,466,167 | 257,416 | ||||||
| Right of use assets | 8,825,892 | 44,388 | ||||||
| Other receivable | 622,240 | |||||||
| Security deposits | 318,302 | 33,340 | ||||||
| Total assets acquired | 13,152,556 | 1,230,093 | ||||||
| Less: liabilities assumed: | ||||||||
| Accounts payable | 355,185 | 132,155 | ||||||
| Accrued expenses | 190,798 | 86,194 | ||||||
| Insurance payable | 169,812 | |||||||
| Accrued compensation and related benefits | 69,122 | |||||||
| Notes payable | 6,355,588 | 1,491,458 | ||||||
| Lease liabilities | 8,825,892 | 44,388 | ||||||
| Total liabilities assumed | 15,966,397 | 1,754,195 | ||||||
| Fair value of shares for acquisitions | 2,965,646 | |||||||
| Increase in intangible assets - non-cash | $ | 5,779,487 | $ | 524,102 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
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TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
NOTE 1 – ORGANIZATION AND BUSINESS OPERATIONS
Transportation and Logistics Systems, Inc. (“TLSS” or the “Company”), was incorporated under the laws of the State of Nevada, on July 25, 2008. The Company operates through its active subsidiaries as a logistics and transportation company specializing in ecommerce fulfillment, last mile deliveries, two-person home delivery, mid-mile, and long-haul services.
On June 18, 2018 (the “Acquisition Date”), the Company completed the acquisition of 100% of the issued and outstanding membership interests of Prime EFS, LLC, a New Jersey limited liability company (“Prime EFS”), from its members pursuant to the terms and conditions of a Stock Purchase Agreement entered into among the Company and the Prime EFS members on the Acquisition Date. Prime EFS was a New Jersey based transportation company that generated substantially all of its revenues from Amazon Logistics, Inc. (“Amazon”) in New York, New Jersey, and Pennsylvania until it ceased operations on September 30, 2020 due to Amazon’s non-renewal of its Delivery Service Partner (DSP) Agreement with Prime EFS, as described below.
On July 24, 2018, the Company formed Shypdirect LLC (“Shypdirect”), a company organized under the laws of New Jersey. Shypdirect was a transportation company with a focus on tractor trailer and box truck deliveries of product on the east coast of the United States from one distributor’s warehouse to another warehouse or from a distributor’s warehouse to the post office. Since its inception, Shypdirect generated substantially all of its revenues from Amazon, Inc. As described below, Amazon elected to terminate its Amazon Relay Carrier Terms of Service with Shypdirect. Accordingly, in June 2021, Shypdirect ceased its tractor trailer and box truck delivery services to Amazon, and in July 2021, Shypdirect ceased all operations.
On June 19, 2020, Amazon notified Prime EFS in writing (the “Prime EFS Termination Notice”), that Amazon would not renew its Delivery Service Partner (DSP) Agreement with Prime EFS when that agreement (the “In-Force Agreement”) expired on September 30, 2020 and such In-Force Agreement, in fact, expired on September 30, 2020. Additionally, on July 17, 2020, Amazon notified Shypdirect that Amazon had elected to terminate the Amazon Relay Carrier Terms of Service (the “Program Agreement”) between Amazon and Shypdirect effective as of November 14, 2020 (the “Shypdirect Termination Notice”). On August 3, 2020, Amazon offered to withdraw the Shypdirect Termination Notice and extend the term of the Program Agreement to and including May 14, 2021, conditioned on Prime EFS executing, for nominal consideration, a separation agreement with Amazon under which Prime EFS agrees to cooperate in an orderly transition of its Amazon last-mile delivery business to other service providers, Prime EFS released any and all claims it may have against Amazon, and Prime EFS covenanted not to sue Amazon (the “Aug. 3 Proposal”). On August 4, 2020, the Company, Prime EFS and Shypdirect accepted the Aug. 3 Proposal.
During the nine months ended September 30, 2022, three customers accounted for 48.2% of the Company’s total net revenues. Approximately 36.7% of the Company’s revenue of $4,273,498 for the nine months ended September 30, 2021 was attributable to Shypdirect’s now terminated mid-mile and long-haul business with Amazon. The termination of Shypdirect’s Amazon mid-mile and long-haul business, which was effective on or about May 14, 2021, had a material adverse impact on operations of Shypdirect. This impact caused Shypdirect to become insolvent and to cease operations.
While the Company has commenced replacing its Amazon business with the acquisitions as set forth below, the Company continues to: (i) seek new last-mile, mid-mile and long-haul business with other, non-Amazon, customers; (ii) explore other strategic relationships; and (iii) identify potential acquisition opportunities.
On November 13, 2020, the Company formed a wholly owned subsidiary, Shyp FX, Inc., a company incorporated under the laws of the State of New Jersey (“Shyp FX”). On January 15, 2021, through Shyp FX, the Company executed an asset purchase agreement (“APA”) and closed a transaction to acquire substantially all of the assets and certain liabilities of Double D Trucking, Inc., a northern New Jersey-based logistics provider specializing in servicing Federal Express over the past 25 years (“DDTI”), including last-mile delivery services using vans and box trucks (See Note 3). On April 28, 2022, the Company entered into an Asset Purchase Agreement (the “Asset Purchase Agreement” with an unrelated third party. Pursuant to the Asset Purchase Agreement, Shyp FX sold substantially all its asset and specific liabilities. The Asset Purchase Agreement closed in June 2022 (See Note 3).
On November 16, 2020, the Company formed a wholly owned subsidiary, TLSS Acquisition, Inc., a company incorporated under the laws of the State of Delaware (“TLSS Acquisition”). On March 24, 2021, TLSS Acquisition acquired all of the issued and outstanding shares of capital stock of Cougar Express, Inc., a New York-based full-service logistics provider specializing in pickup, warehousing, and delivery services in the tri-state area (“Cougar Express”). Cougar Express was a family-owned full-service transportation business that has been in operation for more than 30 years providing one-to-four person deliveries and offering white glove services. It utilizes its own fleet of trucks, warehouse/driver/office personnel and on-call subcontractors from its convenient and secure New York JFK airport area location, allowing it to pick-up and deliver throughout the New York tri-state area. Cougar Express serves a diverse base of commercial accounts, which are freight forwarders that work with some of the most notable retail businesses in the country (See Note 3).
On February 21, 2021, the Company formed a wholly owned subsidiary, Shyp CX, Inc., a company incorporated under the laws of the State of New York (“Shyp CX”). Shyp CX does not engage in any revenue-generating operations.
On August 4, 2022, the Company’s wholly-owned subsidiary, Cougar Express, closed on its acquisition of all outstanding stock of JFK Cartage, Inc., a New York-based full-service logistics provider specializing in pickup, warehousing and delivery services in the tri-state area (“JFK Cartage”). Joan Ton, the sole shareholder of JFK Cartage, from whom the shares were acquired, is an unrelated party. The effective date of the acquisition was July 31, 2022. With annual revenues of $3.6 million in 2021 and approximately $2.0 million for the first six months of 2022, JFK Cartage operates from a 30,000 square foot warehouse with ten drive-in doors and is strategically located approximately six miles from JFK International Airport. JFK Cartage has been in business since 2008 and has been providing warehousing, cross-dock services, pickup and deliveries, and general trucking, handling airfreight, trade show freight, expedited and hotshot demand work, LTL/cartage as well as FTL, reverse logistics, white glove and residential delivery services to a broad base of over 95 commercial accounts and residential customers. JFK Cartage operates a wide-ranging fleet of specialty vehicles, from its Sprinter vans to full 53-ft. tractor trailers. JFK Cartage, with its assets, fleet and warehouse is believed to be one of the largest leading cartage agents serving the New York Tri-State area (See Note 3).
| 7 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
Effective September 16, 2022, the Company’s newly formed wholly-owned subsidiary, TLSS-FC, Inc. (“TLSSFC”), closed on an acquisition of all outstanding stock of Freight Connections, Inc., a New Jersey-based company offering an array of transportation, warehousing, consolidating, distribution, and local cartage services throughout the New York tri-state area (“Freight Connections”). Joseph Corbisiero, the sole shareholder of Freight Connections, from whom the shares were acquired, is an unrelated party. Freight Connections was founded in 2016 and is a privately held transportation and logistics carrier headquartered in Ridgefield Park, New Jersey. Freight Connections currently operates with 30 power units and 50 trailers, including dry vans, pups, flatbeds, step decks, and double drop trailers out of three buildings in the area with 200,000 square feet of warehouse and cross dock space, strategically located within one mile of each other. Freight Connections offers customers an array of services including truckload, LTL, and consolidating of cartage, construction-trade, air, and rail freight, as well as warehousing and distribution services (See Note 3).
On August 19, 2021, the Company’s subsidiaries, Prime EFS and Shypdirect, executed Deeds of Assignment for the Benefit of Creditors in the State of New Jersey pursuant to N.J.S.A. §2A:19-1, et seq. (the “ABC Statute”), assigning all of the Prime EFS and Shypdirect assets to Terri Jane Freedman as Assignee for the Benefit of Creditors (the “Assignee”) and filing for dissolution. An “Assignment for the Benefit of Creditors,” “general assignment” or “ABC” in New Jersey is a state-law, voluntary, judicially-supervised corporate liquidation and unwinding similar to the Chapter 7 bankruptcy process found in the United States Bankruptcy Code. In the subject ABC, the debtor companies, Prime EFS and Shypdirect, together referred to as the “Assignors”, executed Deeds of Assignment, assigning all their assets to the Assignee chosen by the Company, who acts as a fiduciary similar to a Chapter 7 trustee in bankruptcy. On September 7, 2021, the ABC’s were filed with the Bergen County Clerk in Bergen County, New Jersey and filed with the Bergen County Surrogate Court, initiating judicial proceedings. The Assignee has been charged with liquidating the assets for the benefit of the Prime EFS and Shypdirect creditors pursuant to the provisions of the ABC Statute. As a result of Prime EFS and Shypdirect’s filing of the executed Deeds of Assignment for the Benefit of Creditors on September 7, 2021, the Assignee assumed all authority to manage Prime EFS or Shypdirect. Additionally, Prime EFS and Shypdirect no longer conduct any business and are not permitted by the Assignee and ABC Statute to conduct any business. For these reasons, effective September 7, 2021, the Company relinquished control of Prime EFS and Shypdirect. Further, on October 13, 2021, Prime EFS and Shypdirect filed for dissolution with the Secretary of State of New Jersey. Therefore, the Company deconsolidated Prime EFS and Shypdirect effective with the filing of executed Deeds of Assignment for the Benefit of Creditors in September 2021 (See Note 10). The Company has been advised that the Assignee anticipates that she will be able to conclude her work, make final distributions to creditors, and close out the estates of Prime EFS and Shypdirect on or before June 30, 2023.
The Company’s results of operations for the nine months ended September 30, 2021 include the results of Prime EFS and Shypdirect prior to the September 7, 2021, the filing of the executed Deeds of Assignment for the Benefit of Creditors with the State of New Jersey.
Unless the context otherwise requires, TLSS and its wholly owned subsidiaries, TLSS Acquisition, TLSSFC, Cougar Express, Shyp FX, Shyp CX, JFK Cartage, and Freight Connections, and its deconsolidated subsidiaries, Prime EFS and Shypdirect, whose results of operations for the nine months ended September 30, 2021 are included in the results of the Company prior to the September 7, 2021 filing of the executed Deeds of Assignment for the Benefit of Creditors with the State of New Jersey, are hereafter referred to as the “Company”. References herein to a “Company liability” may be to a liability which is owed solely by a subsidiary and not by TLSS.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis of presentation and principles of consolidation
The unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all the information and disclosures necessary for comprehensive presentation of financial position, results of operations or cash flow. However, these unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these unaudited interim condensed consolidated financial statements be read in conjunction with the financial statements of the Company for the year ended December 31, 2021 and notes thereto included in the Company’s annual report on SEC Form 10-K, filed on March 31, 2022.
The Company follows the same accounting policies in the preparation of its annual and interim reports. The results of operations in interim periods are not necessarily an indication of operating results to be expected for the full year.
On August 16, 2021 the Company’s subsidiaries, Prime EFS and Shypdirect executed Deed of Assignments for the Benefit of Creditors in the State of New Jersey ABC Statute, assigning all the Prime EFS and Shypdirect assets to the Assignee and filing for dissolution. The Company’s results of operations for the nine months ended September 30, 2021 include the results of Prime EFS and Shypdirect prior to the September 7, 2021 filing of the executed Deeds of Assignment for the Benefit of Creditors with the State of New Jersey. As a result of Prime EFS and Shypdirect’s filing of the executed Deeds of Assignment for the Benefit of Creditors on September 7, 2021, the Assignee assumed all authority to manage Prime EFS or Shypdirect. Additionally, Prime EFS and Shypdirect no longer conduct any business and are not permitted by the Assignee and ABC Statute to conduct any business. For these reasons, effective September 7, 2021, the Company relinquished control of Prime EFS and Shypdirect. Therefore, the Company deconsolidated Prime EFS and Shypdirect effective with the filing of executed Deeds of Assignment for the Benefit of Creditors in September 2021. Further, on October 13, 2021, Prime EFS and Shypdirect filed for dissolution with the Secretary of State of New Jersey.
The unaudited condensed consolidated financial statements of the Company include the accounts of TLSS and its wholly owned subsidiaries, TLSS Acquisition, TLSSFC, Cougar Express, Shyp FX and Shyp CX, JFK Cartage since its acquisition on July 31, 2022, and Freight Connection since its acquisition on September 16, 2022, and Prime EFS and Shypdirect through the date of deconsolidation (September 7, 2021). All intercompany accounts and transactions have been eliminated in consolidation. References below to a “Company liability” may be to a liability which is owed solely by a subsidiary and not by TLSS.
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TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
Liquidity
The accompanying unaudited condensed consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the ordinary course of business.
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. On September 30, 2022 and December 31, 2021, the Company had a cash balance of $2,440,726 and $6,067,692, respectively. The Company’s working capital was $1,875,904 on September 30, 2022. The Company reported a net decrease in cash for the nine months ended September 30, 2022 as compared to December 31, 2021 of $3,626,966 primarily as a result of the use of cash used for the repayment of notes payable of $809,905, cash used to purchase property and equipment of $118,617, cash used in operations of $2,839,677, and cash used for acquisitions of $1,930,712, offset by net cash proceeds received from the sale of Series G preferred stock units of $855,000, cash proceeds from the exercise of warrants of $245,714, proceeds from notes payable of $108,395, cash acquired in acquisitions of $138,336, and net cash proceeds received from the sale of the assets of Shyp FX of $748,500. During the year ended December 31, 2021, the Company issued an aggregate of shares of its Series E preferred stock for net proceeds of $3,590,500 and issued an aggregate of shares of its Series G preferred stock for net proceeds of $5,479,560. Additionally, during the year ended December 31, 2021, the Company received proceeds of $4,226,383 from the exercise of stock warrant. The proceeds were used for the acquisition of Cougar Express and DDTI, the repayment of debt, and for working capital purposes. Historically, the Company has primarily funded its operations with proceeds from sales of convertible debt and convertible preferred stock. Since its inception, the Company has incurred recurring losses, including a loss from operations of $3,821,592 and $5,251,336 for the nine months ended September 30, 2022 and 2021, respectively. Until such time that the Company implements its growth through acquisition strategy, it expects to continue to generate operating losses in the foreseeable future, mostly due to corporate overhead and costs of being a public company. The Company believes that its existing working capital and its future cash flows from operating activities will provide sufficient cash to enable the Company to meet its operating needs and debt requirements for the next twelve months from the issuance date of this report.
Risks and uncertainties
The COVID-19 pandemic and resulting global disruptions have affected the Company’s businesses, as well as those of the Company’s customers and their third-party suppliers and sellers. To serve the Company’s customers while also providing for the safety of the Company’s employees and service providers, the Company has adapted numerous aspects of its logistics and transportation processes. The Company continues to monitor the rapidly evolving situation and expect to continue to adapt its operations to address federal, state, and local standards as well as to implement standards or processes that the Company determines to be in the best interests of its employees, customers, and communities. The impact of the pandemic and actions taken in response to it had some effects on the Company’s results of operations. Effects include increased fulfilment costs and cost of sales, primarily due to investments in employee hiring, pay, and benefits, as well as costs to maintain safe workplaces, and higher shipping costs. The Company continues to be affected by possible procurement and shipping delays, supply chain interruptions, and increased fulfilment costs and cost of sales as a percentage of net sales and it is not possible to determine the duration and spread of the pandemic or such actions, the ultimate impact on the Company’s results of operations during 2022, or whether other currently unanticipated consequences of the pandemic are reasonably likely to materially affect the Company’s results of operations.
Use of estimates
The preparation of the unaudited condensed consolidated financial statements, in accordance with U.S. GAAP 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 unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates included in the accompanying unaudited condensed consolidated financial statements and footnotes include the valuation of accounts receivable, the useful life of property and equipment, the valuation of intangible assets, the valuation of assets acquired and liabilities assumed, the valuation of right of use assets and related liabilities, assumptions used in assessing impairment of long-lived assets, estimates of current and deferred income taxes and deferred tax valuation allowances, the fair value of non-cash equity transactions, the valuation of derivative liabilities, the valuation of beneficial conversion features, and the value of claims against the Company.
Fair value of financial instruments
The Financial Accounting Standards Board (“FASB”) issued ASC 820 — Fair Value Measurements and Disclosures, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 requires disclosures about the fair value of all financial instruments, whether or not recognized, for financial statement purposes. Disclosures about the fair value of financial instruments are based on pertinent information available to the Company on September 30, 2022. Accordingly, the estimates presented in these financial statements are not necessarily indicative of the amounts that could be realized on disposition of the financial instruments. ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).
The three levels of the fair value hierarchy are as follows:
| ● | Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date. | |
| ● | Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data. | |
| ● | Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information. |
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TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
The Company measures certain financial instruments at fair value on a recurring basis. As of September 30, 2022 and December 31, 2021, the Company had no assets and liabilities measured at fair value on a recurring basis.
A roll-forward of the level 3 valuation financial instruments is as follows:
| For
the Nine Months ended September 30, 2022 | For
the Nine Months ended September 30, 2021 | |||||||
| Balance at beginning of period | $ | $ | 4,181,187 | |||||
| Gain on extinguishment of debt related to repayment or conversion of debt | (896,881 | ) | ||||||
| Change in fair value included in derivative gain | (3,284,306 | ) | ||||||
| Balance at end of period | $ | $ | ||||||
The Company accounted for its derivative financial instruments, which consisted of certain conversion options embedded in convertible instruments and warrants, at fair value using level 3 inputs. The Company determined the fair value of these derivative liabilities using the binomial lattice models, or other accepted valuation practices. When determining the fair value of its financial assets and liabilities using these methods, the Company is required to use various estimates and unobservable inputs, including, among other things, expected terms of the instruments, expected volatility of its stock price, expected dividends, and the risk-free interest rate. Changes in any of the assumptions related to the unobservable inputs identified above may change the fair value of the instrument. Increases in expected term, anticipated volatility and expected dividends generally result in increases in fair value, while decreases in the unobservable inputs generally result in decreases in fair value.
ASC 825-10 “Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.
The carrying amounts reported in the unaudited condensed consolidated balance sheets for cash, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses, insurance payable, and other payables approximate their fair values based on the short-term maturity of these instruments. The carrying amount of the Company’s promissory note obligations approximate fair value, as the terms of these instruments are consistent with terms available in the market for instruments with similar risk.
Cash and cash equivalents
For purposes of the unaudited condensed consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less at the purchase date and money market accounts to be cash equivalents. On September 30, 2022 and December 31, 2021, the Company did not have any cash equivalents.
The Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. On September 30, 2022, cash in bank in excess of FDIC insured levels amounted to approximately $2,223,000. The Company has not experienced any losses in such accounts through September 30, 2022.
Accounts receivable
Accounts receivable are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, a customer’s historical payment history, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection.
Property and equipment
Property and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives of to six years. Leasehold improvements are depreciated over the shorter of the useful life or lease term including scheduled renewal terms. Maintenance and repairs are charged to expense as incurred. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases in the value of these assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.
Intangible assets
Intangible assets are carried at cost less accumulated amortization, computed using the straight-line method over the estimated useful life, less any impairment charges.
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TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
Business acquisitions
The Company accounted for the acquisition of Cougar Express, JFK Cartage, and Freight Connections using the acquisition method of accounting where the assets acquired and liabilities assumed are recognized based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Determining the fair value of certain acquired assets and liabilities is subjective in nature and often involves the use of significant estimates and assumptions, including, but not limited to, the selection of appropriate valuation methodology, projected revenue, expenses, and cash flows, weighted average cost of capital, discount rates, and estimates of terminal values. Business acquisitions are included in the Company’s consolidated financial statements as of the date of the acquisition.
Goodwill and Other Indefinite-Lived Intangible Assets
The Company’s business acquisitions typically result in the recording of goodwill and other intangible assets, which affect the amount of amortization expense and possibly impairment write-downs that the Company may incur in future periods. Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired in business acquisitions. The Company annually reviews goodwill at the reporting unit level and intangible assets that have indefinite lives for impairment in its fiscal fourth quarter and when events or changes in circumstances indicate the carrying values of these assets might exceed their current fair values.
Leases
On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). The updated guidance requires lessees to recognize lease assets and lease liabilities for most operating leases. In addition, the updated guidance requires that lessors separate lease and non-lease components in a contract in accordance with the new revenue guidance in ASC 606. The Company applied the package of practical expedients to leases that commenced before the effective date whereby the Company elected to not reassess the following: (i) whether any expired or existing contracts contain leases and (ii) initial direct costs for any existing leases. For contracts entered into on or after the effective date, at the inception of a contract the Company assessed whether the contract is, or contains, a lease. The Company’s assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether it obtains the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether it has the right to direct the use of the asset. The Company will allocate the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments. The Company has elected not to recognize right-of-use assets and lease liabilities for short-term leases that have a term of 12 months or less.
Operating lease ROU assets represents the right to use the leased asset for the lease term and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at the adoption date in determining the present value of future payments. Lease expense for minimum lease payments is amortized on a straight-line basis over the lease term and is included in general and administrative expenses in the consolidated statements of operations.
Impairment of long-lived assets
In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value.
Deconsolidation of subsidiaries
The Company accounts for a gain or loss on deconsolidation of a subsidiary or derecognition of a group of assets in accordance with ASC 810-10-40-5. The Company measures the gain or loss as the difference between (a) the aggregate of fair value of any consideration received, the fair value of any retained noncontrolling investment and the carrying amount of any noncontrolling interest in the former subsidiary at the date the subsidiary is deconsolidated and (b) the carrying amount of the former subsidiary’s assets and liabilities or the carrying amount of the group of assets.
Segment reporting
The Company uses “the management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. The Company’s chief operating decision maker is the chief executive officer of the Company, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. During the nine months ended September 30, 2022 and 2021, the Company believes that it operates in one operating segment related to deliveries for on-line retailers in New York, New Jersey, Pennsylvania and other areas, and tractor trailer and box truck deliveries of product on the east coast of the United States from one distributor’s warehouse to another warehouse or from a distributor’s warehouse to the post office.
Derivative financial instruments
The Company had certain financial instruments that are embedded derivatives associated with capital raises. The Company evaluated all of its financial instruments to determine if those contracts or any potential embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with ASC 815-10-05-4, Derivatives and Hedging and 815-40, Contracts in Entity’s Own Equity. This accounting treatment requires that the carrying amount of any embedded derivatives be recorded at fair value at issuance and marked-to-market at each balance sheet date. In the event that the fair value is recorded as a liability, as is the case with the Company, the change in the fair value during the period is recorded as either other income or expense. Upon conversion, exercise or repayment, the respective derivative liability is marked to fair value at the conversion, repayment, or exercise date and then the related fair value amount is reclassified to other income or expense as part of gain or loss on extinguishment.
In July 2017, FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features. These amendments simplify the accounting for certain financial instruments with down-round features. The amendments require companies to disregard the down-round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining liability or equity classification.
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TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
Revenue recognition and cost of revenue
The Company adopted Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. This ASC is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASC also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer service orders, including significant judgments.
The Company recognizes revenues and the related direct costs of such revenue which generally include compensation and related benefits, gas costs, insurance, parking and tolls, truck rental fees, and maintenance fees, as of the date the freight is delivered which is when the performance obligation is satisfied. In accordance with ASC Topic 606, the Company recognizes revenue on a gross basis. Our payment terms are generally net seven days from acceptance of delivery. The Company does not incur incremental costs obtaining service orders from its customers, however, if the Company did, because all of the Company’s customer contracts are less than a year in duration, any contract costs incurred would be expensed rather than capitalized. The revenue that the Company recognizes arises from deliveries of packages on behalf of the Company’s customers. Primarily, the Company’s performance obligations under these service orders correspond to each delivery of packages that the Company makes under the service agreements. Control of the package transfers to the recipient upon delivery. Once this occurs, the Company has satisfied its performance obligation and the Company recognizes revenue.
Management has reviewed the revenue disaggregation disclosure requirements pursuant to ASC 606 and determined that no further disaggregation disclosure is required to be presented.
Stock-based compensation
Stock-based compensation is accounted for based on the requirements of ASC 718 – “Compensation – Stock Compensation”, which requires recognition in the financial statements of the cost of employee, director, and non-employee services received in exchange for an award of equity instruments over the period the employee, director, or non-employee is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee, director, and non-employee services received in exchange for an award based on the grant-date fair value of the award. The Company has elected to recognize forfeitures as they occur as permitted under ASU 2016-09 Improvements to Employee Share-Based Payment.
Pursuant to ASC 260-10-45, basic (loss) income per common share is computed by dividing net (loss) income attributable to common shareholders by the weighted average number of shares of common stock outstanding for the periods presented. Diluted (loss) income per share is computed by dividing net (loss) income attributable to common shareholders by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period. Potentially dilutive common shares consist of common stock issuable for stock options and warrants (using the treasury stock method) and shares issuable for convertible debt and Series B, E, G and H preferred shares (using the as-if converted method). These common stock equivalents may be dilutive in the future.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net (loss) income per common share - basic: | ||||||||||||||||
| Net (loss) income attributable to common stockholders | $ | (1,145,164 | ) | $ | 6,233,544 | $ | (4,107,246 | ) | $ | 6,661,288 | ||||||
| Weighted average common shares outstanding – basic | 3,438,148,807 | 2,600,758,966 | 3,266,732,522 | 2,160,897,037 | ||||||||||||
| Net (loss) income per common share – basic | $ | (0.00 | ) | $ | 0.00 | $ | (0.00 | ) | $ | 0.00 | ||||||
| Net (loss) income per common share - diluted: | ||||||||||||||||
| Net (loss) income attributable to common shareholders – basic | $ | (1,145,164 | ) | $ | 6,233,544 | $ | (4,107,246 | ) | $ | 6,661,288 | ||||||
| Add: Series E dividends | 21,386 | 1,007,319 | ||||||||||||||
| Numerator for net (loss) income per common share – diluted | $ | (1,145,164 | ) | $ | 6,254,930 | $ | (4,107,246 | ) | $ | 7,668,607 | ||||||
| Weighted average common shares outstanding – basic | 3,438,148,807 | 2,600,758,966 | 3,266,732,522 | 2,160,897,037 | ||||||||||||
| Add: dilutive shares related to: | ||||||||||||||||
| Warrants | 176,830,482 | 223,645,806 | ||||||||||||||
| Series B preferred | 700,000 | 700,00 | ||||||||||||||
| Series E preferred | 121,414,010 | 121,414,010 | ||||||||||||||
| Weighted average common shares outstanding – diluted | 3,438,148,807 | 2,899,703,458 | 3,266,732,522 | 2,506,656,853 | ||||||||||||
| Net (loss) income per common share – diluted | $ | (0.00 | ) | $ | 0.00 | $ | (0.00 | ) | $ | 0.00 | ||||||
| 12 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
| September 30, 2022 | September 30, 2021 | |||||||
| Stock warrants | 1,258,008,109 | 467,008,109 | ||||||
| Stock options | 80,000 | 80,000 | ||||||
| Series B convertible preferred stock | 700,000 | |||||||
| Series E convertible preferred stock | 28,571,600 | 121,414,010 | ||||||
| Series G convertible preferred stock | 575,000,000 | |||||||
| Series H convertible preferred stock | 323,740,000 | |||||||
| 2,185,399,709 | 589,202,119 | |||||||
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40)—Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The ASU simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for the exception. The ASU also simplifies the diluted net income per share calculation in certain areas. The new guidance is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the impact of the adoption of the standard on the unaudited condensed consolidated financial statements.
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force). The ASU clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options, warrants for instance, that remain equity classified after modification or exchange. The ASU provides guidance that will clarify whether an issuer should account for a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange as (1) an adjustment to equity and, if so, the related earnings per share effects, if any, or (2) an expense and, if so, the manner and pattern of recognition. The new guidance is effective for annual and interim periods beginning after December 15, 2021, and early adoption is permitted, including adoption in an interim period. The adoption of ASU 2021-04 did not have any impact on the Company’s unaudited condensed consolidated financial statements.
There are currently no other accounting standards that have been issued but not yet adopted that we believe will have a significant impact on our unaudited condensed consolidated financial position, results of operations or cash flows upon adoption.
NOTE 3 – ACQUISITIONS AND DISPOSITION
Acquisitions
2022
On August 4, 2022, the Company’s wholly-owned subsidiary, Cougar Express, closed on its acquisition of all outstanding stock of JFK Cartage, Inc., a New York-based full-service logistics provider specializing in pickup, warehousing and delivery services in the tri-state area (“JFK Cartage”). Joan Ton, the sole shareholder of JFK Cartage, from whom the shares were acquired, is an unrelated party (the “JFK Cartage Seller”). The effective date of the acquisition was July 31, 2022. With annual revenues of $3.6 million in 2021 and approximately $2.0 million for the first six months of 2022, JFK Cartage operates from a 30,000 square foot warehouse with ten drive-in doors and is strategically located approximately six miles from JFK International Airport. JFK Cartage has been in business since 2008 and has been providing warehousing, cross-dock services, pickup and deliveries, and general trucking, handling airfreight, trade show freight, expedited and hotshot demand work, LTL/cartage as well as FTL, reverse logistics, white glove and residential delivery services to a broad base of over 95 commercial accounts and residential customers. JFK Cartage operates a wide-ranging fleet of specialty vehicles, from its Sprinter vans to full 53-ft. tractor trailers. JFK Cartage, with its assets, fleet and warehouse is believed to be one of the largest leading cartage agents serving the New York Tri-State area. Pursuant to the Stock Purchase and Sale Agreement with Cougar Express and JFK Cartage dated May 24, 2022, the purchase price was $1,700,000 , subject to certain adjustments. The Company: (i) paid $405,712 in cash at closing; and (ii) JFK Cartage entered into a $696,935 promissory note with the JFK Cartage Seller, $98,448 of which is payable weekly, in the amount of 25% of accounts receivable collected, but in any event, no later than October 4, 2022, with the remaining balance of $598,487, payable in three annual installments of $199,496, with interest at 5.0% percent per annum on July 31, 2023, July 31, 2024 and July 31, 2025, respectively. Additionally, Cougar Express agreed to pay the $503,065 Small Business Administration (“SBA”) loan that existed on the books of JFK Cartage, which was paid in August 2022; and (iv) agreed to pay certain accrued liabilities and other notes payable that exists on the books of JFK Cartage. For accounting purposes, the total purchase consideration paid, after closing adjustments, was deemed to be $1,102,647, which includes cash of $405,712 plus the $696,935 promissory note that is in the name of JFK Cartage. The purchase consideration amount did not include the SBA loan of $503,065, and accrued liabilities and other notes payable which were treated as assumed liabilities in the purchase price allocation.
| 13 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
Effective September 16, 2022, the Company’s newly formed wholly-owned subsidiary, TLSSFC, closed on an acquisition of all outstanding stock of Freight Connections, a company offering an array of transportation, warehousing, consolidating, distribution, and local cartage services throughout the New York tri-state area. Joseph Corbisiero, the sole shareholder of Freight Connections, from whom the shares were acquired (the “Freight Connections Seller”), is an unrelated party. Freight Connections was founded in 2016 and is a transportation and logistics carrier headquartered in Ridgefield Park, New Jersey. Freight Connections currently operates with 30 power units and 50 trailers, including dry vans, pups, flatbeds, step decks, and double drop trailers out of three buildings in the area with 200,000 square feet of warehouse and cross dock space, strategically located within one mile of each other. Freight Connections offers customers an array of services including truckload, LTL, and consolidating of cartage, construction-trade, air, and rail freight, as well as warehousing and distribution services. Prior to the closing, the Company, TLSS Acquisition, Inc. (“TLSS Acquisition”) and Freight Connections Seller entered into an amendment to their Stock Purchase and Sale Agreement, dated as of May 23, 2022 (the “Amended SPA”), and TLSS Acquisition assigned its interest in the Amended SPA to TLSSFC. Pursuant to the Amended SPA, the total purchase price was $9,365,000, subject to certain adjustment. TLSSFC: (i) paid $1,525,000 in cash at closing, (ii) Freight Connections entered into a $4,544,671 secured promissory note with the Freight Connections Seller, with interest accruing at the rate of 5% per annum and then 10% per annum as of March 1, 2023 (The entire unpaid principal under the note, together with all accrued and unpaid interest thereon and all other amounts payable thereunder, shall be due and payable in one balloon payment on December 31, 2023, unless paid sooner. The promissory note is secured solely by the assets of Freight Connections), and (iii) assumed certain debt. The Company issued to the Freight Connections Seller shares of the Company’s common stock and shares of the Company’s Series H preferred stock which is convertible into an aggregate of shares of the Company’s common stock based on a conversion of shares of common stock for each share of Series H preferred stock outstanding. The common stock and the as if converted number of Series H preferred stock were valued at $ per share based on the quoted closing price of the Company’s common stock on the measurement date, for an aggregate fair value of $2,965,646. The number of shares was calculated as follows: (a) shares of common stock of the Company equal to no more than 4.99% of the number of shares of common stock outstanding immediately after such issuance, and (b) the balance of the shares in Series H Convertible Preferred Stock, a new series of non-voting, convertible preferred stock issuable to sellers in connection with acquisitions or strategic transactions approved by a majority of the directors of the Company. TLSSFC agreed to pay certain accrued liabilities and other notes payable that existed on the books of Freight Connections and agreed to pay the $4,544,671 secured promissory note which was assumed by Freight Connections. For accounting purposes, the total purchase consideration paid, after closing adjustments, was deemed to be $9,035,317 which includes (i) cash paid of $1,525,000, (ii) the aggregate fair value of common shares and Series H preferred shares issued to Freight Connections Seller of $2,965,646 , and (iii) the $4,544,671 secured promissory note in the name of Freight Connections. The purchase consideration amount does not include accrued liabilities and other notes payable which were treated as assumed liabilities in the purchase price allocation.
The Freight Connections Seller also entered into an employment agreement, including non-competition provisions, to continue with Freight Connections after the acquisition
The assets acquired and liabilities assumed were recorded at their estimated fair values on the respective acquisition date, subject to adjustment during the measurement period with subsequent changes recognized in earnings or loss. These estimates are inherently uncertain and are subject to refinement. Management develops estimates based on assumptions as a part of the purchase price allocation process to value the assets acquired and liabilities assumed as of the business acquisition date. As a result, during the purchase price measurement period, which may be up to one year from the business acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed based on completion of valuations, with the corresponding offset to intangible assets. After the purchase price measurement period, the Company may record any adjustments to assets acquired or liabilities assumed in operating expenses in the period in which the adjustments may have been determined. Based upon the preliminary purchase price allocations, the following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of the respective 2022 acquisition:
| JFK Cartage | Freight Connections | Total | ||||||||||
| Assets acquired: | ||||||||||||
| Cash | $ | 29,280 | $ | 109,056 | $ | 138,336 | ||||||
| Accounts receivable, net | 308,365 | 1,962,525 | 2,270,890 | |||||||||
| Other assets | 206,591 | 383,016 | 589,607 | |||||||||
| Property and equipment | 44,839 | 1,421,328 | 1,466,167 | |||||||||
| Right of use assets | 1,172,972 | 7,652,920 | 8,825,892 | |||||||||
| Non-compete agreement | 150,000 | 150,000 | ||||||||||
| Goodwill | 1,077,117 | 6,344,746 | 7,421,863 | |||||||||
| Total assets acquired at fair value | 2,989,164 | 17,873,591 | 20,862,755 | |||||||||
| Liabilities assumed: | ||||||||||||
| Notes payable | (515,096 | ) | (598,886 | ) | (1,113,982 | ) | ||||||
| Accounts payable | (10,559 | ) | (344,626 | ) | (355,185 | ) | ||||||
| Accrued expenses | (187,890 | ) | (241,842 | ) | (429,732 | ) | ||||||
| Lease liabilities | (1,172,972 | ) | (7,652,920 | ) | (8,825,892 | ) | ||||||
| Total liabilities assumed | (1,886,517 | ) | (8,838,274 | ) | (10,724,791 | ) | ||||||
| Net asset acquired | $ | 1,102,647 | $ | 9,035,317 | $ | 10,137,964 | ||||||
| Purchase consideration paid: | ||||||||||||
| Cash paid | $ | 405,712 | $ | 1,525,000 | $ | 1,930,712 | ||||||
| Notes payable | 696,935 | 4,544,671 | 5,241,606 | |||||||||
| Common shares and Series H preferred shares issued | 2,965,646 | 2,965,646 | ||||||||||
| Total purchase consideration paid | $ | 1,102,647 | $ | 9,035,317 | $ | 10,137,964 | ||||||
| 14 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
2021
On January 15, 2021, through Shyp FX, the Company executed an asset purchase agreement (“APA”) and closed a transaction to acquire substantially all of the assets and certain liabilities of Double D Trucking, Inc., a northern New Jersey-based logistics provider specializing in servicing Federal Express over the past 25 years (“DDTI”), including last-mile delivery services using vans and box trucks. The purchase price was $100,000 of cash and a promissory note of $400,000. The principal assets involved in the acquisition were vehicles for cargo transport, system equipment for vehicle tracking and navigation of vehicles, and delivery route rights together with assumption of associated customer relationships. The acquisition of DDTI made the Company an approved contracted service provider of FedEx, which, the Company believes fits in well with its current geographic coverage area and may lead to additional expansion opportunities within the FedEx network.
On March 24, 2021, TLSS Acquisition acquired all issued and outstanding shares of capital stock of Cougar Express, Inc., a New York-based full-service logistics provider specializing in pickup, warehousing, and delivery services in the New York tri-state area (“Cougar Express”). The purchase price was $2,000,000 of cash plus cash for the acquisition of security deposits, a cash payment equal to 50% of the difference between cash and accounts receivable acquired and accounts payable assumed, less the assumption of truck loans and leases, and a promissory note of $350,000. The previous owner of Cougar Express is barred from competing with the Cougar Express business for five years. Cougar Express was a family-owned full-service transportation business that has been in operation for more than 30 years providing one-to-four person deliveries and offering white glove services. It utilizes its own fleet of trucks, warehouse/driver/office personnel and on-call subcontractors from its convenient and secure New York JFK airport area location, allowing it to pick-up and deliver throughout the New York tri-state area. Cougar Express serves a diverse base of approximately 50 commercial accounts, which are freight forwarders that work with some of the most notable retail businesses in the country. The Company believes that the acquisition of Cougar Express fits its current business plan, given Cougar Express’s demographic location, services offered, and diversified customer base, and given that it would provide the Company with a long-standing, well-run profitable operation as a step to begin replacing the revenue it lost as a result of Amazon terminating its delivery service provider business. Furthermore, the Company believes that, because Cougar Express is strategically based in New York and serves the tri-state area, organic growth opportunities will be available for expanding its footprint into the Company’s primary base of operations in New Jersey, as well as efficiencies that could be derived by leveraging Shypdirect’s operational capabilities.
The assets acquired and liabilities assumed were recorded at their estimated fair values on the acquisition date, subject to adjustment during the measurement period with subsequent changes recognized in earnings or loss. These estimates are inherently uncertain and are subject to refinement. Management develops estimates based on assumptions as a part of the purchase price allocation process to value the assets acquired and liabilities assumed as of the business acquisition date. As a result, during the purchase price measurement period, which may be up to one year from the business acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed based on completion of valuations, with the corresponding offset to intangible assets. After the purchase price measurement period, the Company may record any adjustments to assets acquired or liabilities assumed in operating expenses in the period in which the adjustments may have been determined. During the three months ended September 30, 2021, the Company increased the customer relations intangible asset acquired and accrued expenses by $7,057 to reflect additional funds due to the owner of Cougar Express.
Based upon the purchase price allocation, the following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of the respective 2021 acquisition:
| DDTI | Cougar Express | Total | ||||||||||
| Assets acquired: | ||||||||||||
| Cash | $ | $ | 10,031 | $ | 10,031 | |||||||
| Accounts receivable | 265,175 | 265,175 | ||||||||||
| Other assets | 40,874 | 40,874 | ||||||||||
| Transportation vehicles | 209,585 | 209,585 | ||||||||||
| Equipment | 20,000 | 27,831 | 47,831 | |||||||||
| Right of use assets | 44,388 | 44,388 | ||||||||||
| Other receivable | 622,240 | 622,240 | ||||||||||
| Non-compete agreement | 150,000 | 150,000 | ||||||||||
| Customer relations | 373,449 | 2,123,768 | 2,497,217 | |||||||||
| Total assets acquired at fair value | 647,422 | 3,239,919 | 3,887,341 | |||||||||
| Liabilities assumed: | ||||||||||||
| Notes payable | (103,034 | ) | (16,184 | ) | (119,218 | ) | ||||||
| PPP loan payable | (622,240 | ) | (622,240 | ) | ||||||||
| Accounts payable | (132,155 | ) | (132,155 | ) | ||||||||
| Accrued expenses | (40,059 | ) | (40,059 | ) | ||||||||
| Lease liabilities | (44,388 | ) | (44,388 | ) | ||||||||
| Total liabilities assumed | (147,422 | ) | (810,638 | ) | (958,060 | ) | ||||||
| Net asset acquired | $ | 500,000 | $ | 2,429,281 | $ | 2,929,281 | ||||||
| Purchase consideration paid: | ||||||||||||
| Cash paid | $ | 100,000 | $ | 2,033,146 | $ | 2,133,146 | ||||||
| Acquisition payable | 46,135 | 46,135 | ||||||||||
| Promissory notes | 400,000 | 350,000 | 750,000 | |||||||||
| Total purchase consideration paid | $ | 500,000 | $ | 2,429,281 | $ | 2,929,281 | ||||||
| 15 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
The Company shall record acquisition and transaction related expenses in the period in which they are incurred. During the nine months ended September 30, 2022 and 2021, acquisition and transaction related expenses primarily consisted of legal fees of approximately $0 and $8,200, respectively. Additionally, the Company paid expenses and fees relating to the sale of Series E preferred stock in which a portion of the proceeds were used to pay the cash portion of the consideration (see Note 9).
The following unaudited pro forma consolidated results of operations have been prepared as if the acquisition of JFK Cartage and Freight Connections had occurred as of the beginning of the following periods:
For the Nine Months Ended September 30, 2022 | For the Nine Months Ended September 30, 2021 | |||||||
| Net Revenues | $ | 13,431,250 | $ | 13,569,636 | ||||
| Net (Loss) Income | $ | (2,911,605 | ) | $ | 8,506,586 | |||
| Net (Loss) Income per Share | $ | (0.00 | ) | $ | 0.00 | |||
Pro forma data does not purport to be indicative of the results that would have been obtained had these events actually occurred at the beginning of the periods presented and is not intended to be a projection of future results.
Disposition
Sale of Shyp FX assets
On June 21, 2022, the Company sold substantially all of the assets of Shyp FX in an all-cash transaction. The purchaser was Farhoud Logistics Inc., a New Jersey corporation, an unrelated party. Under the terms of the sale, The Company sold the assets of Shyp FX consisting of transportation equipment and other equipment and the business of Shyp FX for $825,000. The Company received net proceeds of $748,500 which is net of a broker commission of $75,000 and other expenses of $4,214. $25,000 is being held in escrow, pending bulk sale tax clearance from the State of New Jersey and to cover the estimated cost of a vehicle repair. In connection with the sale of these assets, for the nine months ended September 30, 2022, the Company recorded a gain on the sale of $293,975 which consisted of the following:
| Amount | ||||
| Total sale price consideration received | $ | 825,000 | ||
| Less: | ||||
| Commissions and other fees paid | 79,214 | |||
| Write-off of unamortized intangible assets | 194,505 | |||
| Net book value of property and equipment sold | 257,306 | |||
| 531,025 | ||||
| Gain on sale of subsidiaries assets | $ | 293,975 | ||
NOTE 4 – ACCOUNTS RECEIVABLE
On September 30, 2022 and December 31, 2021, accounts receivable, net consisted of the following:
| September 30, 2022 | December 31, 2021 | |||||||
| Accounts receivable | $ | 3,053,503 | $ | 481,734 | ||||
| Allowance for doubtful accounts | (302,052 | ) | ||||||
| Accounts receivable, net | $ | 2,751,451 | $ | 481,734 | ||||
NOTE 5 - PROPERTY AND EQUIPMENT
On September 30, 2022 and December 31, 2021, property and equipment consisted of the following:
| Useful Life | September 30, 2022 | December 31, 2021 | ||||||||
| Delivery trucks and vehicles | 3 - 9 years | $ | 1,430,310 | $ | 747,889 | |||||
| Machinery and equipment | 3 - 10 years | 445,958 | 51,301 | |||||||
| Office equipment and furniture | 1 - 3 years | 97,701 | ||||||||
| Leasehold improvements | 2 years | 10,936 | ||||||||
| Subtotal | 1,984,905 | 799,190 | ||||||||
| Less: accumulated depreciation | (203,725 | ) | (221,985 | ) | ||||||
| Property and equipment, net | $ | 1,781,180 | $ | 577,205 | ||||||
On June 21, 2022, in connection with the sale of net assets of Shyp FX, the Company sold delivery trucks and equipment with a net book value of $257,306 (See Note 3).
For the nine months ended September 30, 2022 and 2021, depreciation expense is included in general and administrative expenses and amounted to $123,503 and $173,849, respectively.
| 16 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
NOTE 6 – INTANGIBLE ASSETS AND GOODWILL
On September 30, 2022 and December 31, 2021, intangible asset consisted of the following:
| Useful life | September 30, 2022 | December 31, 2021 | ||||||||
| Customer relations | 3 - 5 years | $ | 2,123,768 | 2,497,217 | ||||||
| Non-compete agreements | 3 - 5 years | 300,000 | 150,000 | |||||||
| 2,423,768 | 2,647,217 | |||||||||
| Less: accumulated amortization | (699,938 | ) | (469,835 | ) | ||||||
| $ | 1,723,830 | $ | 2,177,382 | |||||||
On September 30, 2022 and December 31, 2021, goodwill consisted of the following:
| Useful life | September 30, 2022 | December 31, 2021 | ||||||||
| Goodwill | $ | 7,421,863 | $ | |||||||
| $ | 7,421,863 | $ | ||||||||
On June 21, 2022, in connection with the sale of net assets of Shyp FX, the Company wrote off the remaining net book value of intangible assets related to the acquisition of Shyp FX of $194,505 (See Note 3).
For the nine months ended September 30, 2022 and 2021, amortization of intangible assets amounted to $409,047 and $325,027, respectively. On September 30, 2022, accumulated amortization amounted to $645,980 and $53,958 for the customer relations and non-compete, respectively.
Amortization of intangible assets attributable to future periods is as follows:
| Year ending September 30: | Amount | |||
| 2023 | $ | 504,754 | ||
| 2024 | 504,754 | |||
| 2025 | 496,420 | |||
| 2026 | 217,902 | |||
| $ | 1,723,830 | |||
NOTE 7 – CONVERTIBLE PROMISSORY NOTES PAYABLE
Q1/Q2 2020 convertible debt and related warrants
During the year ended December 31, 2020, the Company issued and sold to certain investors convertible promissory notes in the aggregate principal amount of $2,068,000 (the “Q1/Q2 2020 Notes”) and warrants to purchase up to 827,200 shares of the Company’s common stock (the “Q1/Q2 2020 Warrants”). The Company received net proceeds of $1,880,000, which is net of a 10% original issue discounts of $188,000. The Q1/Q2 2020 Notes initially bore interest at 6% per annum and become due and payable on the date that is the 24-month anniversary of the original issue date of the respective Q1/Q2 2020 Note. During the existence of an Event of Default (as defined in the Q1/Q2 2020 Notes), which included, amongst other events, any default in the payment of principal and interest payments (including Q1/Q2 2020 Note Amortization Payments) under any Q1/Q2 2020 Note or any other Indebtedness (as defined in the Q1/Q2 2020 Notes), interest accrued at the lesser of (i) the rate of 18% per annum, or (ii) the maximum amount permitted by law.
From the original issue date of a Q1/Q2 2020 Note until such Q1/Q2 2020 Note was no longer outstanding, such Q1/Q2 2020 Note was convertible, in whole or in part, at any time, and from time to time, into shares of Common Stock at the option of the holder. The “Conversion Price” in effect on any Conversion Date (as defined in the Q1/Q2 2020 Notes) means, as of any date of determination, $0.40 per share, subject to adjustment as provided therein and summarized below. If an Event of Default (as defined in the Q1/Q2 2020 Notes) has occurred, regardless of whether it has been cured or remains ongoing, the Q1/Q2 2020 Notes were convertible at the lower of: (i) $0.40 and (ii) 70% of the second lowest closing price of the common stock as reported on the Trading Market (as defined in the Q1/Q2 2020 Notes) during the 20 consecutive Trading Day (as defined in the Q1/Q2 2020 Notes) period ending and including the Trading Day immediately preceding the delivery or deemed delivery of the applicable notice of conversion. All such Conversion Price determinations were to be appropriately adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction that proportionately decreases or increases the number of shares of Common Stock outstanding.
The Q1/Q2 2020 Warrants are exercisable at any time on or after the date of the issuance and entitle the investors to purchase shares of the Company’s common stock for a period of five years from the initial date the Q1/Q2 2020 Warrants become exercisable. Under the terms of the Q1/Q2 2020 Warrants, the investors are entitled to exercise the Q1/Q2 2020 Warrants to purchase up to 827,200 shares of the Company’s common stock at an initial exercise price of $0.40, subject to adjustment as detailed in the respective Q1/Q2 2020 Warrants.
| 17 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
Due to the default of amortization payments due on our August 2019 Notes and other notes, in 2020, the Q1/Q2 2020 Notes were deemed in default. Accordingly, in 2020, the outstanding principal balance on date of default increased by 30% which amounted to approximately $620,400, default interest accrues at 18%, and the default conversion terms applied. In the third fiscal quarter of 2020, the great majority of principal amount of Q1/Q2 2020 Notes was exchanged for Common Stock at the conversion price that applied if an Event of Default occurred. It is the Company’s position (and it was the Company’s intent at issuance) that, to the extent the Q1/Q2 2020 Notes were converted for Common Stock at the advantageous conversion price applicable to post-Events of Default, the Q1/Q2 Notes are not also entitled to receive the Mandatory Default Payment (as defined in the Q1/Q2 2020 Notes) of 130% of principal amount. During 2020, since a note holder could conceivably disagree with the Company’s position in this regard, the Company has decided, out of an abundance of caution and despite its confidence that its construction of the Q1/Q2 2020 Notes is the only correct one, to accrue a reserve as if a note holder were entitled both to convert its Q1/Q2 Notes at the advantageous conversion price applicable to post-Events of Default and to receive the Mandatory Default Payment of 130% on the entire original principal amount of Q1/Q2 2020 Notes.
During the three months ended June 30, 2021, the Company and each investor entered into a letter agreement whereby the investor waived its right to any Mandatory Default Payment. Accordingly, during the year ended December 31, 2021, the Company reversed the accrued Mandatory Penalty amount due of $620,400 and principal amounts due of $44,000 and recorded a gain on debt extinguishment of $664,400. Additionally, during the year ended December 31, 2021, the Company issued shares of its common stock upon the conversion of all remaining principal and interest balances due aggregating $277,916. Hence, as of September 30, 2022 and December 31, 2021, convertible notes payable and default interest due related to the Q1/Q2 2020 Notes amounted to $0.
April 20, 2020 convertible debt
On April 20, 2020, the Company issued and sold to an investor a convertible promissory note in the principal amount of $456,500 (the “April 20 Note”). The April 20 Note contained a 10% original issue discount amounting to $41,500 for a purchase price of $415,000. The April 20 Note initially bore interest at 6% per annum and becomes due and payable on April 20, 2022 (the “April 20 Note Maturity Date”). During the existence of an Event of Default (as defined in the April 20 Note), which includes, amongst other events, any default in the payment of principal and interest payment (including any April 20 Note Amortization Payments) under any note or any other indebtedness, interest accrues at the lesser of (i) the rate of 18% per annum, or (ii) the maximum amount permitted by law.
Until the April 20 Note was no longer outstanding, it was convertible, in whole or in part, at any time, and from time to time, into shares of common stock at the option of the investor. The “Conversion Price” in effect on any Conversion Date (as defined in the April 20 Note) means, as of any Conversion Date or other date of determination, the lower of: (i) $0.40 and (ii) 70% of the second lowest closing price of the common stock as reported on the Trading Market (as defined in the April 20 Note) during the 20 consecutive Trading Day (as defined in the April 20 Note) period ending and including the Trading Day immediately preceding the delivery or deemed delivery of the applicable notice of conversion. All such Conversion Price determinations were to be appropriately adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction that proportionately decreases or increases the common stock.
Due to the default of August 2019 Note Amortization Payments due on our August 2019 Notes and other notes, the April 20 Note was deemed in default. Accordingly, in 2020, the outstanding principal balance on date of default increased by 30% which amounted to approximately $136,950, default interest accrued at 18%, and the default conversion terms applied.
During the three months ended June 30, 2021, the Company issued shares of its common stock upon the conversion of all remaining principal and interest balances due aggregating $95,540. Hence, as of September 30, 2022 and December 31, 2021, convertible notes payable and default interest due related to the April 20 Note amounted to $0.
Other convertible debt
On August 28, 2020, a note payable with a principal balance due of $185,000 was cancelled and a new convertible note was entered into with a principal balance of $185,000. This new convertible note bore no interest and was payable in monthly payments of $7,500 commencing on September 1, 2020 until paid in full. The Holder had the right, at Holder’s option, at any time prior to the close of business five or more days prior to a payment of principal and interest, to convert any of such Holder’s Note, in whole or in part (in denominations of $20.000 or multiples of it), into that number of shares of common stock of the Company at the conversion price equal to the lowest closing price of the Company’s common stock on the OTC Market during the ten trading days ending the business day before the date of conversion. During the year ended December 31, 2020, the Company repaid $15,000 of this convertible note. In January 2021, the Company issued shares of its common stock upon conversion of this convertible note and accordingly, as of September 30, 2022 and December 31, 2021, the convertible note balance is $0.
Summary of derivative liabilities
During the nine months ended September 30, 2021, the fair value of the derivative liabilities, warrants and conversion option was estimated using the Binomial valuation model with the following assumptions:
| 2021 | ||||
| Expected dividend rate | ||||
| Expected term (in years) | 0.75 to 5.00 | |||
| Volatility | 169.7% to 367.0 | % | ||
| Risk-free interest rate | 0.04% to 0.87 | % |
For the nine months ended September 30, 2022 and 2021, amortization of debt discounts related to convertible notes amounted to $0 and $83,548, respectively, which has been included in interest expense on the accompanying unaudited condensed consolidated statements of operations. The weighted average interest rate during the nine months ended September 30, 2021 was approximately 18.0%.
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TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
NOTE 8 – NOTES PAYABLE
Promissory notes
On January 15, 2021, in connection with the acquisition of DDTI, the Company issued a promissory note in the amount of $400,000. The principal amount of $400,000 was payable in four installments of $100,000 plus accrued interest as follows: $100,000 plus accrued interest was due and paid on April 15, 2021, $100,000 plus accrued interest was due and paid on July 15, 2021, $100,000 plus accrued interest is due and paid on October 15, 2021 and $100,000 plus all remaining accrued interest was due and paid on January 15, 2022. Interest accrued at 4% per annum. On September 30, 2022 and December 31, 2021, the principal amount related to this note was $0 and $100,000, respectively.
On March 24, 2021, in connection with the acquisition of Cougar Express, the Company issued a promissory note in the amount of $350,000. The principal amount of $350,000 was payable in two installments of $175,000 plus accrued interest as follows: $175,000 plus accrued interest was due and paid on September 23, 2021 and $175,000 plus all remaining accrued interest was due and paid on March 23, 2022. Interest accrued at 6% per annum. On September 30, 2022 and December 31, 2021, the principal amount related to this note was $0 and $175,000, respectively.
On July 31, 2022, in connection with the acquisition of JFK Cartage, JFK Cartage issued a promissory note in the amount of $696,935. Principal amount of $98,448 is payable weekly, in the amount of 25% of accounts receivable collected, but in any event, no later than October 4, 2022. This has not been paid as of the date of this report. The remaining balance of $598,487 is payable in three annual installments of $199,496, with interest at 5% per annum, payable on July 31, 2023, July 31, 2024 and July 31, 2025, respectively. On September 30, 2022, the principal amount related to this note was $696,935.
On September 16, 2022, in connection with the acquisition of Freight Connections, Freight Connections issued a promissory note in the amount of $4,544,671. The secured promissory accrues interest at the rate of 5% per annum and then 10% per annum as of March 1, 2023. The entire unpaid principal under the note, together with all accrued and unpaid interest thereon and all other amounts payable thereunder, shall be due and payable in one balloon payment on December 31, 2023, unless paid sooner. The promissory note is secured solely by the assets of Freight Connections. On September 30, 2022, the principal amount related to this note was $4,544,671.
In connection with the acquisition of Freight Connections, on September 16, 2022, the Company assumed a merchant loan with Paypal in the amount of $15,612. On September 30, 2022, the merchant loan amount due to Paypal was $13,589.
Equipment and auto notes payable
In November 2019, the Company entered into a promissory note for the purchase of five trucks in the amount of $460,510. The note was due in sixty monthly installments of $9,304. The first payment was paid in December 2019 and the remaining fifty-nine payments were due monthly commencing on January 27, 2020. The note was secured by the trucks and was personally guaranteed by the Company’s former chief executive officer. During the year ended December 31, 2021, this note was repaid. On September 30, 2022 and December 31, 2021, the equipment note payable to this entity amounted to $0.
In connection with the acquisition of DDTI, the Company assumed several truck notes payable liabilities due to entities. On September 30, 2022 and December 31, 2021, truck notes payable to these entities amounted to $0 and $17,985, respectively.
In connection with the acquisition of Cougar Express, the Company assumed several equipment notes payable liabilities due to entities. On September 30, 2022 and December 31, 2021, equipment notes payable to these entities amounted to $0 and $2,611, respectively.
In connection with the acquisition of JFK Cartage, on July 31, 2022, the Company assumed several equipment notes payable due to entities amounting to $15,096. On September 30, 2022, equipment notes payable to these entities amounted to $12,903.
In connection with the acquisition of JFK Cartage, on July 31, 2022, the Company assumed an SBA loan that existed on the books of JFK Cartage in the amount of $500,000 and the related accrued interest. The Company repaid this SBA loan and all accrued interest in August 2022.
On July 7, 2022, the Company entered into a promissory note for the purchase of a truck in the amount of $46,416. The note is due in sixty monthly installments of $1,019 which began in August 2022. The note was secured by the truck. During the three months ended September 30, 2022, the Company repaid $2,234 of this note. On September 30, 2022, the equipment note payable to this entity amounted to $44,182.
In connection with the acquisition of Freight Connections, on September 16, 2022, the Company assumed several equipment notes payable and capital lease liabilities due to entities amounting to $583,274. On September 30, 2022, equipment notes payable to these entities amounted to $578,705.
On September 22, 2022, the Company entered into a promissory note for the purchase of a truck in the amount of $61,979. The note is due in forty eight monthly installments of $1,645 which began in August 2022. The note was secured by the truck. During the three months ended September 30, 2022, the Company repaid $3,290 of this note. On September 30, 2022, the equipment note payable to this entity amounted to $58,689.
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TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
Paycheck Protection Program Promissory Note
During 2020, prior to the acquisition of Cougar Express by the Company, Cougar Express entered into a Paycheck Protection Program promissory note (the “Cougar PPP Loan”) in the amount of $622,240 under the SBA Paycheck Protection Program of the CARES Act. Pursuant to the Cougar Stock Purchase Agreement, the Company did not assume and shall not be responsible to pay the Cougar PPP loan. The prior shareholder of Cougar Express agreed to indemnify and hold the Buyer (and its directors, officers, employees and affiliates) harmless from and with respect to any and all claims, liabilities, losses, damages, costs and expenses, including, without limitation, the reasonable fees and expenses of counsel (collectively, the “Losses”), related to or arising directly or indirectly out of, among other items, any claim that any portion or all of the Cougar PPP loan secured by Cougar Express is to be repaid to the lender. Cougar Express filed for forgiveness of this loan and on June 10, 2021, Cougar Express received a Notice of Paycheck Protection Program Forgiveness Payment from the SBA. Accordingly, the note payable and related note receivable were reversed and no gain or loss was recorded.
Line of credit
Through December 2021, the Company’s subsidiary, Cougar Express, maintained a $5,000 line of credit with the bank. This line of credit was closed in December 2021 and was payable on demand. On December 31, 2021, principal amount outstanding under the line of credit amounted to $0.
On September 30, 2022 and December 31, 2021, notes payable consisted of the following:
| September 30, 2022 | December 31, 2021 | |||||||
| Principal amounts | $ | 5,949,674 | $ | 295,596 | ||||
| Less: current portion of notes payable | (516,836 | ) | (283,141 | ) | ||||
| Notes payable – long-term | $ | 5,432,838 | $ | 12,455 | ||||
NOTE 9– SHAREHOLDERS’ EQUITY
Preferred stock
Series B preferred shares
In August 2019, the Company designated Series B Preferred Shares consisting of shares with a par value of $ and a stated value of $0.001. The Series B preferred shares have no voting rights and are not redeemable. Each share of Series B Preferred stock is convertible into one share of common stock at the option of the holder subject to beneficial ownership limitation.
On August 16, 2019, the Company issued shares of Series B Preferred shares to Bellridge Capital, L.P. upon settlement of shares of issuable common shares. In April 2022, the Company and Bellridge entered into a settlement agreement pursuant to which the shares of Series B preferred shares were cancelled and the Company recorded settlement income of $700.
Series D preferred shares
The Board of Directors (the “Board”) created the Series D pursuant to the authority vested in the Board by the Company’s Amended and Restated Articles of Incorporation to issue up to shares of preferred stock, $ par value per share. The Company’s Amended and Restated Articles of Incorporation explicitly authorize the Board to issue any or all of such shares of preferred stock in one (1) or more classes or series and to fix the designations, powers, preferences and rights, the qualifications, limitations or restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any class or series, without further vote or action by the stockholders.
On July 20, 2020, the Board filed the Certificate of Designation of Preferences (“COD”), Rights and Limitations of Series D Preferred Stock (the “Series D COD”) with the Secretary of State of the State of Nevada designating shares of preferred stock as Series D. The Series D does not have the right to vote. The Series D has a stated value of $ per share (the “Stated Value”). Subject only to the liquidation rights of the holders of Series B Preferred Stock that is currently issued and outstanding, upon the liquidation, dissolution or winding up of the business of the Company, whether voluntary or involuntary, the Series D is entitled to receive an amount per share equal to the Stated Value and then receive a pro-rata portion of the remaining assets available for distribution to the holders of common stock on an as-converted to common stock basis. Until July 20, 2021, the holders of Series D had the right to participate, pro rata, in each subsequent financing in an amount up to 25% of the total proceeds of such financing on the same terms, conditions and price otherwise available in such subsequent financing.
Subject to a beneficial ownership limitation and customary adjustments for stock dividends and stock splits, each share of Series D is convertible into shares of common stock. A holder of Series D may not convert any shares of Series D into common stock if the holder (together with the holder’s affiliates and any persons acting as a group together with the holder or any of the holder’s affiliates) would beneficially own in excess of % of the number of shares of common stock outstanding immediately after giving effect to the conversion, as such percentage ownership is determined in accordance with the terms of the Series D COD. However, upon notice from the holder to the Company, the holder may decrease or increase the beneficial ownership limitation, which may not exceed 9.99% of the number of shares of common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Series D COD, provided that any such increase or decrease in the beneficial ownership limitation will not take effect until 61 days following notice to the Company.
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TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
Approval of at least a majority of the outstanding Series D is required to: (a) amend or repeal any provision of, or add any provision to, the Company’s Articles of Incorporation or bylaws, or file any Certificate of Designation (however such document is named) or articles of amendment to create any class or any series of preferred stock, if such action would adversely alter or change in any respect the preferences, rights, privileges or powers, or restrictions provided for the benefit, of the Series D, regardless of whether any such action shall be by means of amendment to the Articles of Incorporation or bylaws or by merger, consolidation or otherwise or filing any Certificate of Designation, it being understood that the creation of a new security having rights, preferences or privileges senior to or on parity with the Series D in a future financing will not constitute an amendment, addition, alteration, filing, waiver or repeal for these purposes; (b) increase or decrease (other than by conversion) the authorized number of Series D; (c) issue any Series D, other than to the Investors; or (d) without limiting any provision hereunder, whether or not prohibited by the terms of the Series D, circumvent a right of the Series D.
Series E preferred shares
To consummate the Series E Offerings described below, the Company’s Board of Directors (the “Board”) created the Series E Convertible Preferred Stock (the “Series E”) pursuant to the authority vested in the Board by the Company’s Amended and Restated Articles of Incorporation to issue up to shares of preferred stock, $ par value per share, of which are unissued and undesignated. The Company’s Amended and Restated Articles of Incorporation explicitly authorize the Board to issue any or all of such shares of preferred stock in one (1) or more classes or series and to fix the designations, powers, preferences and rights, the qualifications, limitations or restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any class or series, without further vote or action by the stockholders.
On October 6, 2020, the Board filed the Certificate of Designation of Preferences, Rights and Limitations of Series E Convertible Preferred Stock (the “Series E COD”) with the Secretary of State of the State of Nevada designating shares of preferred stock as Series E. On December 28, 2020, the Board filed an Amended and Restated Certificate of Designation of Preferences, Rights and Limitations of Series E Convertible Preferred Stock (the “Amended Series E COD”) with the Secretary of State of the State of Nevada. The Series E has a stated value of $ per share (the “Stated Value”). Pursuant with the Amended Series E COD,
| ● | Each holder of Series E has the right to cast the number of votes equal to the number of whole shares of Common Stock into which the shares of Series E held by such holder are convertible as of the applicable record date. | |
| ● | Unless prohibited by Nevada law governing distributions to stockholders, for a period of one-year beginning with the Original Issuance Date, as defined, the Corporation shall have the right but not the obligation to redeem all outstanding Series E (and not any part of the Series E) at a price equal to 115% of (i) the Stated Value per share plus (ii) all unpaid dividends thereon. If the Company fails to redeem all outstanding Series E on the redemption date, it shall be deemed to have waived its redemption right. |
Subject to a beneficial ownership limitation and customary adjustments for stock dividends and stock splits, each share of Series E shall be convertible into that number of shares of Common Stock calculated by dividing the Stated Value of each share of Series E being converted by the Conversion Price. The initial Conversion Price shall be $0.01 which shall be subject to adjustment as provided below. In addition, the Company shall issue the Holder converting all or any portion of Series E an additional sum (the “Make Good Amount”) equal to $210 for each $1,000 of Stated Value of the Series E converted pro-rated for amounts more or less than $1,000, increasing to $310 for each $1,000 of Stated Value during the Triggering Event Period (the “Extra Amount”). Subject to the Beneficial Ownership Limitation, the Make Good Amount shall be paid in Shares of Common Stock, as follows: The number of shares of Common Stock issuable as the Make Good Amount shall be calculated by dividing the Extra Amount by the product of 80% times the average VWAP for the five Trading Days prior to the date a Holder delivered a notice of conversion to the Company (the “Conversion Date”). During the Triggering Event Period, the number of shares of Common Stock issuable as the Make Good Amount shall be calculated by dividing the Extra Amount by the product of 70% times the average VWAP for the five Trading Days prior to the Conversion Date.
Subject to the Beneficial Ownership Limitation, at any time during the period commencing on the date of the occurrence of a Triggering Event and ending on the date of the cure of such Triggering Event (the “Triggering Event Period”), a Holder may, at such Holder’s option, by delivery of a conversion notice to the Company to convert all, or any number of Series E (such conversion amount of the Series E to be converted pursuant to this Section 6(b) (the “Triggering Event Conversion Amount”), into shares of Common Stock at the Triggering Event Conversion Price. The “Triggering Event Conversion Amount” means 125% of the Stated Value and the “Triggering Event Conversion Price” means $0.006.
Triggering events include, but are not limited to, (1) failure to satisfy Rule 144 current public information requirements; (2) ceasing to be a reporting company under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or failing to comply with the reporting requirements of a reporting company under the Exchange Act; (3) suspension from or termination of trading; (4) failure to reserve sufficient shares of Common Stock (after cure periods and subject to certain extensions); (5) various insolvency proceedings (subject to certain carveouts); (6) material breach of the Series E Offerings transaction documents; and (7) failure to comply with conversion of any Series E shares when requested by the holder thereof.
If and whenever on or after the Initial Issuance Date but not after two years from the Original Issuance Date, the Company issues or sells, or is deemed to have issued or sold, additional shares of common stock, options, warrants of convertible instruments, other than an Exempt Issuance, for a consideration per share (the “Base Share Price”) less than a price equal to the Conversion Price in effect immediately prior to such issuance or sale or deemed issuance or sale (such Conversion Price then in effect is reflected to herein as the “Applicable Price”) (the foregoing a “Dilutive Issuance”), then immediately after such Dilutive Issuance, the conversion price then in effect shall be reduced to an amount equal to the Base Share Price.
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TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
From and after the Original Issuance Date, cumulative dividends on each share of Series E shall accrue, whether or not declared by the Board of Directors and whether or not there are funds legally available for the payment of dividends, on a daily basis in arrears at the rate of 6% per annum based on a 360-day year on the Stated Value plus all unpaid accrued and accumulated dividends thereon. As of September 30, 2022 and December 31, 2021, the Company has accrued dividends of $156,771 and $140,872, respectively, which has been included in accrued expenses on the accompanying unaudited condensed consolidated balance sheets.
On a pari passu basis with the holders of Series D Convertible Preferred Stock that was issued and outstanding, upon the liquidation, dissolution or winding up of the business of the Company, whether voluntary or involuntary, the Series E is entitled to receive an amount per share equal to the Stated Value and then receive a pro-rata portion of the remaining assets available for distribution to the holders of Common Stock on an as-converted to Common Stock basis. Until the date that such Series E shareholder no longer owns at least 50% of the Series E, the holders of Series E have the right to participate, pro rata, in each subsequent financing in an amount up to 25% of the total proceeds of such financing on the same terms, conditions and price otherwise available in such subsequent financing.
A holder of Series E may not convert any shares of Series E into Common Stock if the holder (together with the holder’s affiliates and any persons acting as a group together with the holder or any of the holder’s affiliates) would beneficially own in excess of 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to the conversion, as such percentage ownership is determined in accordance with the terms of the Series E COD. However, upon notice from the holder to the Company, the holder may decrease or increase the beneficial ownership limitation, which may not exceed 9.99% of the number of shares of Common Stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Amended Series E COD, provided that any such increase or decrease in the beneficial ownership limitation will not take effect until 61 days following notice to the Company.
Approval of at least a majority of the outstanding Series E is required to: (a) amend or repeal any provision of, or add any provision to, the Company’s Articles of Incorporation or bylaws, or file any Certificate of Designation (however such document is named) or articles of amendment to create any class or any series of preferred stock, if such action would adversely alter or change in any respect the preferences, rights, privileges or powers, or restrictions provided for the benefit, of the Series E, regardless of whether any such action shall be by means of amendment to the Articles of Incorporation or bylaws or by merger, consolidation or otherwise or filing any Certificate of Designation, but the creation of a new security having rights, preferences or privileges senior to or on parity with the Series E in a future financing will not constitute an amendment, addition, alteration, filing, waiver or repeal for these purposes; (b) increase or decrease (other than by conversion) the authorized number of Series E; (c) issue any Series D Convertible Preferred Stock, (d) issue any Series E in excess of or (e) without limiting any provision under the Series E COD, whether or not prohibited by the terms of the Series E, circumvent a right of the Series E.
During the three months ended March 31, 2021, the Company entered into Securities Purchase Agreements with investors pursuant to which the Investors agreed to purchase units, severally and not jointly, which consisted of an aggregate of (i) shares of Series E and (ii) Warrants to purchase 414,857,146 shares of the Company’s common stock which are equal to 1,334 warrants for each share of Series E purchased (the “Q1 2021 Series E Offering”). The gross proceeds to the Company were $3,630,000, or $ per unit. The Company paid fees of $372,000 and received net proceeds of $3,258,000. The initial exercise price of the Warrants related to the Q1 2021 Series E Offering is $0.01 per share, subject to adjustment. Additionally, the Company issued 82,971,429 warrants to the placement agent at an initial exercise price of $0.01 per share. In connection with the issuance of the Series E and related warrants, during the three months ended March 31, 2021, the Company recorded a deemed dividend of $777,510 related to the beneficial conversion features of the Series E.
During April 2021, the Company entered into Securities Purchase Agreements with investors pursuant to which the Investors agreed to purchase units, severally and not jointly, which consisted of an aggregate of (i) shares of Series E and (ii) Warrants to purchase 42,857,143 shares of the Company’s common stock which are equal to 1,334 warrants for each share of Series E purchased (the “April 2021 Series E Offering”). The gross proceeds to the Company were $375,000, or $ per unit. The Company paid fees of $42,500 and received net proceeds of $332,500. The initial exercise price of the Warrants related to the April 2021 Series E Offering is $0.01 per share, subject to adjustment. Additionally, the Company issued 8,571,429 warrants to the placement agent at an initial exercise price of $0.01 per share. In connection with the issuance of the Series E and related warrants, on April 9, 2021, the Company recorded a deemed dividend of $104,533 related to the beneficial conversion features of the Series E.
In connection with the Series E Offerings, the Company entered into Registration Rights Agreements (the “Series E Registration Rights Agreements”) pursuant to which the Company agreed to file a registration statement on Form S-1 to register the resale of the shares of Common Stock issuable to the Investors upon conversion of the Series E Preferred Stock and exercise of the Warrants. Pursuant to the Series E Registration Rights Agreements, if a registration statement registering for resale all of the shares of common stock issuable under Series E Convertible Preferred Stock and Warrants (i) is not filed with the Commission by the Company within 30 days of the closing dates or any other registration statement, (ii) is not declared effective by the Commission by the Effectiveness Date of the initial registration statement (90 days following the closing date) or any other registration statement, or (iii) after the effective date of a registration statement, such registration statement ceases for any reason to remain continuously effective as to all registrable securities included in such registration statement for more than 30 calendar days during any 12-month period (any such failure or breach being referred to as an “Event”, and the date on which such Event occurs, being referred to as “Event Date”), then, in addition to any other rights the Holders may have under the Series E Registration Rights Agreements or under applicable law, on each such Event Date and on each monthly anniversary of each such Event Date (if the applicable Event shall not have been cured by such date) until the applicable Event is cured, the Company is obligated to pay to each Holder an amount in cash, as partial liquidated damages and not as a penalty, equal to 1% of the purchase price paid by such Holder pursuant to the Series E Purchase Agreement, during which such Event continues uncured. Also pursuant to the Series E Registration Rights Agreements, the partial liquidated damages provisions summarized above apply on a daily pro rata basis for any portion of a month prior to the cure of an Event. The Company did not file its initial registration statement within 30 days of the closing date of certain of the Registration Rights Agreements (the “Filing Events”) and such registration statement was not declared effective by the Commission by the Effectiveness Date of certain of the Registration Rights Agreements (the “Effectiveness Events”). The Company filed a registration statement on Form S-1 for the shares of Common Stock issuable to the Investors upon conversion of the Series E Preferred Stock and exercise of the Warrants (the “S-1 Registration Statement”) on April 22, 2021 (the “Filing Date”), which was declared effective by the Commission on May 5, 2021 (the “Effective Date”). The filing of the S-1 Registration Statement cured the Filing Events as of the Filing Date. The declaration of effectiveness of the S-1 Registration Statement cured the Effectiveness Events as of the Effective Date.
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TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
These Series E preferred share issuances with redemption provisions that permit the issuer to settle in either cash or common stock, at the option of the issuer, were evaluated to determine whether temporary or permanent equity classification on the unaudited condensed consolidated balance sheet was appropriate. As per the terms of the Series E preferred stock agreements, the Company shall have the right but not the obligation to redeem all outstanding Series E (and not any part of the Series E) at a price equal to 115% of (i) the Stated Value per share plus (ii) all unpaid dividends thereon. As such, since Series E preferred stock is redeemable upon the occurrence of an event that is within the Company’s control, the Series E preferred stock is classified as permanent equity.
The Company concluded that the Series E Preferred Stock represented an equity host and, therefore, the redemption feature of the Series E Preferred Stock was considered to be clearly and closely related to the associated equity host instrument. The redemption features did not meet the net settlement criteria of a derivative and, therefore, were not considered embedded derivatives that required bifurcation. The Company also concluded that the conversion rights under the Series E Preferred Stock were clearly and closely related to the equity host instrument. Accordingly, the conversion rights feature on the Series E Preferred Stock were not considered an embedded derivative that required bifurcation.
On December 8, 2020, the Company entered into an Engagement Agreement (the “Engagement Agreement”) with a placement agent to act as an exclusive selling/placement agent for the Company to assist in a financing for the Company. In connection with the engagement letter, the Company agreed to pay to the placement agent at each full or incremental closing of any equity financing, convertible debt financing, debt conversion or any instrument convertible or exercisable into the Company’s common stock (the “Securities Financing”) during the Exclusive Period which is for a period of 90 days from the date of execution of this Letter Agreement; (i) a cash transaction fee in the amount of 10% of the amount of the Securities Financing; and (ii) warrants (the “Warrants”) with a 5 year term and cashless exercise, equal to 10% of the amount of securities sold (on an as converted basis) in the Securities Financing, at an exercise price equal to the investor’s warrant exercise price of the Securities Financing. In connection with this Engagement Agreement, through December 31, 2020, the Company paid the placement agent cash of $67,000 and issued 15,314,285 warrants to the placement agent at an initial exercise price of $0.01 per share. Additionally, during the year ended December 31, 2021, the Company paid the placement agent cash of $385,500 and issued 91,542,858 warrants to the placement agent at an initial exercise price of $0.01 per share. The cash fee of $400,500 was charged against the proceeds of the offering in additional paid-in capital and there is no effect on equity for the placement agent warrants.
During the three months ended June 30, 2021, the Company issued shares of its common stock in connection with the conversion of shares of Series E. The conversion ratio was based on the Series E certificate of designation, as amended.
During the three months ended September 30, 2021, the Company issued shares of its common stock in connection with the conversion of shares of Series E. The conversion ratio was based on the Series E certificate of designation, as amended.
During the three months ended December 31, 2021, the Company issued shares of its common stock in connection with the conversion of shares of Series E. The conversion ratio was based on the Series E certificate of designation, as amended.
During the three months ended March 31, 2022, the Company issued shares of its common stock in connection with the conversion of shares of Series E. The conversion ratio was based on the Series E certificate of designation, as amended.
During the three months ended June 30, 2022, the Company issued shares of its common stock in connection with the conversion of shares of Series E and paid liquidating damages of $24,000. The conversion ratio was based on the Series E certificate of designation, as amended.
Series F preferred share
Pursuant to the terms of the Securities Purchase Agreements entered in connection with the Series E Offerings by and among the Company and the investors named therein (the “Series E Investors”), the Company is required to keep reserved for issuance to the Series E Investors three times the number of shares of common stock issuable to the Series E Investors upon conversion or exercise, as applicable, of convertible notes and warrants held by the Series E Investors (the “Series E Reserve Requirement”). If the Company fails to meet the Series E Reserve Requirement within 45 days after written notice from a Series E Investor, the Company must, inter alia, sell to Company’s chief executive officer (or such other officer as the board of directors may designate) a series of preferred stock which holds voting power equal to 51% of the number of votes eligible to vote at any special or annual meeting of the Company’s stockholders (with the power to take action by written consent in lieu of a stockholders meeting) for the sole purpose of amending the Company’s Amended and Restated Articles of Incorporation to increase the number of shares of common stock that the Company is authorized to issue, which such preferred stock will be automatically cancelled upon the effectiveness of the resulting increase in the Company’s authorized stock.
On February 22, 2021, the Company sold to John Mercadante, for $10, one share of Series F Preferred Stock which has voting power equal to 51% of the number of votes eligible to vote at any special or annual meeting of the Company’s stockholders (with the power to take action by written consent in lieu of a stockholders meeting) for the sole purpose of amending the Company’s Amended and Restated Articles of Incorporation to increase the number of shares of common stock that the Company is authorized to issue. Upon the effectiveness of the amendment on April 15, 2021, the Series F Preferred Stock was automatically cancelled. The Series F Preferred Stock was not entitled to vote on any other matter, was not entitled to dividends, was not convertible into any other security of the Company and was not entitled to any distributions upon liquidation of the Company.
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TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
Series G preferred shares
On December 28, 2021, the Company’s Board of Directors (the “Board”) filed the Certificate of Designation of Preferences, Rights and Limitations of Series G Convertible Preferred Stock (the “Series G COD”) with the Secretary of State of the State of Nevada designating shares of preferred stock as Series G. The Series G has a stated value of $10.00 per share (the “Series G Stated Value”). Pursuant with the Series G COD,
| ● | Each holder of Series G has the right to cast the number of votes equal to the number of whole shares of Common Stock into which the shares of Series G held by such holder are convertible as of the applicable record date. | |
| ● | Unless prohibited by Nevada law governing distributions to stockholders, for a period of one-year beginning with the Original Issuance Date, as defined, the Corporation shall have the right but not the obligation to redeem all outstanding Series G (and not any part of the Series G) at a price equal to 115% of (i) the Stated Value per share plus (ii) all unpaid dividends thereon. If the Company fails to redeem all outstanding Series G on the redemption date, it shall be deemed to have waived its redemption right. |
Subject to a beneficial ownership limitation and customary adjustments for stock dividends and stock splits, each share of Series G shall be convertible into that number of shares of Common Stock calculated by dividing the Stated Value of each share of Series G being converted by the Conversion Price. The initial Conversion Price shall be $0.01 which shall be subject to adjustment as provided below. In addition, the Company shall issue the Holder converting all or any portion of Series G an additional sum (the “Series G Make Good Amount”) equal to $210 for each $1,000 of Stated Value of the Series G converted pro-rated for amounts more or less than $1,000 (the “Series G Extra Amount”). Subject to the Beneficial Ownership Limitation, the Make Good Amount shall be paid in Shares of Common Stock, as follows: The number of shares of Common Stock issuable as the Make Good Amount shall be calculated by dividing the Series G Extra Amount by the product of 80% times the average VWAP for the five Trading Days prior to the date a Holder delivered a notice of conversion to the Company (the “Conversion Date”), subject to beneficial ownership limitations.
If and whenever on or after the Initial Issuance Date but not after two years from the Original Issuance Date, the Company issues or sells, or is deemed to have issued or sold, additional shares of common stock, options, warrants of convertible instruments, other than an Exempt Issuance, for a consideration per share (the “Base Share Price”) less than a price equal to the Conversion Price in effect immediately prior to such issuance or sale or deemed issuance or sale (such Conversion Price then in effect is reflected to herein as the “Applicable Price”) (the foregoing a “Dilutive Issuance”), then immediately after such Dilutive Issuance, the conversion price then in effect shall be reduced to an amount equal to the Base Share Price.
From and after the Original Issuance Date, cumulative dividends on each share of Series G shall accrue, whether or not declared by the Board of Directors and whether or not there are funds legally available for the payment of dividends, on a daily basis in arrears at the rate of 6% per annum based on a 360-day year on the Stated Value plus all unpaid accrued and accumulated dividends thereon. As of September 30, 2022 and December 31, 2021, the Company has accrued dividends of $262,054 and $0, respectively, which has been included in accrued expenses on the accompanying unaudited condensed consolidated balance sheets.
On a pari passu basis with the holders of Series E Convertible Preferred Stock that was issued and outstanding, upon the liquidation, dissolution or winding up of the business of the Company, whether voluntary or involuntary, the Series G is entitled to receive an amount per share equal to the Stated Value and then receive a pro-rata portion of the remaining assets available for distribution to the holders of Common Stock on an as-converted to Common Stock basis. The holders of Series G have the right to participate, pro rata, in each subsequent financing in an amount up to 40% of the total proceeds of such financing on the same terms, conditions and price otherwise available in such subsequent financing.
A holder of Series G may not convert any shares of Series G into Common Stock if the holder (together with the holder’s affiliates and any persons acting as a group together with the holder or any of the holder’s affiliates) would beneficially own in excess of % of the number of shares of Common Stock outstanding immediately after giving effect to the conversion, as such percentage ownership is determined in accordance with the terms of the Series G COD. However, upon notice from the holder to the Company, the holder may decrease or increase the beneficial ownership limitation, which may not exceed 9.99% of the number of shares of Common Stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Series G COD, provided that any such increase or decrease in the beneficial ownership limitation will not take effect until 61 days following notice to the Company.
Approval of at least two-thirds of the outstanding Series G is required to: (a) amend or repeal any provision of, or add any provision to, the Company’s Articles of Incorporation or bylaws, or file any Certificate of Designation (however such document is named) or articles of amendment to create any class or any series of preferred stock, if such action would adversely alter or change in any respect the preferences, rights, privileges or powers, or restrictions provided for the benefit, of the Series G, regardless of whether any such action shall be by means of amendment to the Articles of Incorporation or bylaws or by merger, consolidation or otherwise or filing any Certificate of Designation, but the creation of a new security having rights, preferences or privileges senior to or on parity with the Series G in a future financing will not constitute an amendment, addition, alteration, filing, waiver or repeal for these purposes; (b) increase or decrease (other than by conversion) the authorized number of Series G; (c) issue any Series E or Series D Convertible Preferred Stock, (d) issue any Series G in excess of or (e) without limiting any provision under the Series G COD, whether or not prohibited by the terms of the Series G, circumvent a right of the Series G.
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TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
On December 31, 2021, the Company entered into Securities Purchase Agreements with investors pursuant to which the Investors agreed to purchase units, severally and not jointly, which consisted of an aggregate of (i) shares of Series G and (ii) Warrants to purchase 615,000,000 shares of the Company’s common stock which are equal to 1,000 warrants for each share of Series G purchased (the “December 2021 Series G Offering”). The gross proceeds to the Company were $6,150,000, or $ per unit. The Company paid fees of $615,507, paid cash of $54,933 for the settlement of disputed penalties related the Series E and received net proceeds of $5,479,560 The initial exercise price of the Warrants related to the December 2021 Series G Offering is $0.01 per share, subject to adjustment. In connection with the issuance of the Series G and related warrants, the Company recorded a deemed dividend of $2,041,802 related to the beneficial conversion features of the Series G.
On January 25, 2022, the Company entered into Securities Purchase Agreements with investors pursuant to which the Investors agreed to purchase units, severally and not jointly, which consisted of an aggregate of (i) shares of Series G and (ii) Warrants to purchase 70,000,000 shares of the Company’s common stock which are equal to 1,000 warrants for each share of Series G purchased (the “January 2022 Series G Offering”). The gross proceeds to the Company were $700,000, or $ per unit. The Company paid placement agent fees of $70,000 and received net proceeds of $630,000. On March 4, 2022, the Company entered into a Securities Purchase Agreement with an investor pursuant to which the Investor agreed to purchase units, severally and not jointly, which consisted of an aggregate of (i) shares of Series G and (ii) Warrants to purchase 25,000,000 shares of the Company’s common stock which are equal to 1,000 warrants for each for each share of Series G purchased (the “March 2022 Series G Offering”). The gross proceeds to the Company were $250,000, or $ per unit. The Company paid placement agent fees of $25,000 and received net proceeds of $225,000. The initial exercise price of the Warrants related to the January 2022 and March 2022 Series G Offerings is $0.01 per share, subject to adjustment. Additionally, the Company issued 19,000,000 warrants to the placement agent at an initial exercise price of $0.01 per share. The aggregate cash fees of $95,000 was charged against the proceeds of the offering in additional paid-in capital and there is no effect on equity for the placement agent warrants.
In connection with the Series G Offerings, the Company entered into Registration Rights Agreements (the “Series G Registration Rights Agreements”) pursuant to which the Company agreed to file a registration statement on Form S-1 to register the resale of the shares of Common Stock issuable to the Investors upon conversion of the Series G Preferred Stock and exercise of the Warrants. Pursuant to the Series G Registration Rights Agreements, if a registration statement registering for resale all of the shares of common stock issuable under Series G Convertible Preferred Stock and Warrants (i) is not filed with the Commission by the Company within 45 days of the closing dates or any other registration statement, (ii) is not declared effective by the Commission by the Effectiveness Date of the initial registration statement (90 days following the closing date) or any other registration statement, or (iii) after the effective date of a registration statement, such registration statement ceases for any reason to remain continuously effective as to all registrable securities included in such registration statement for more than 30 calendar days during any 12-month period (any such failure or breach being referred to as an “Event”, and the date on which such Event occurs, being referred to as “Event Date”), then, in addition to any other rights the Holders may have under the Series G Registration Rights Agreements or under applicable law, on each such Event Date and on each monthly anniversary of each such Event Date (if the applicable Event shall not have been cured by such date) until the applicable Event is cured, the Company is obligated to pay to each Holder an amount in cash, as partial liquidated damages and not as a penalty, equal to 1% of the purchase price paid by such Holder pursuant to the Series G Purchase Agreement, during which such Event continues uncured. Also pursuant to the Series G Registration Rights Agreements, the partial liquidated damages provisions summarized above apply on a daily pro rata basis for any portion of a month prior to the cure of an Event. The Company filed a registration statement on Form S-1 for the shares of Common Stock issuable to the Investors upon conversion of the Series G Preferred Stock and exercise of the Warrants (the “S-1 Registration Statement”) on January 28, 2022 (the “Filing Date”), which was declared effective by the Commission om\n May 13, 2022. The filing of the S-1 Registration Statement cured the Filing Events as of the Filing Date. The declaration of effectiveness of the S-1 Registration Statement cured the Effectiveness Events as of the Effective Date.
These Series G preferred share issuances with redemption provisions that permit the issuer to settle in either cash or common stock, at the option of the issuer, were evaluated to determine whether temporary or permanent equity classification on the unaudited condensed consolidated balance sheet was appropriate. As per the terms of the Series G preferred stock agreements, the Company shall have the right but not the obligation to redeem all outstanding Series G (and not any part of the Series E) at a price equal to 115% of (i) the Stated Value per share plus (ii) all unpaid dividends thereon. As such, since Series G preferred stock is redeemable upon the occurrence of an event that is within the Company’s control, the Series G preferred stock is classified as permanent equity.
The Company concluded that the Series G Preferred Stock represented an equity host and, therefore, the redemption feature of the Series G Preferred Stock was considered to be clearly and closely related to the associated equity host instrument. The redemption features did not meet the net settlement criteria of a derivative and, therefore, were not considered embedded derivatives that required bifurcation. The Company also concluded that the conversion rights under the Series G Preferred Stock were clearly and closely related to the equity host instrument. Accordingly, the conversion rights feature on the Series G Preferred Stock were not considered an embedded derivative that required bifurcation.
In connection with issuance of the Series G, on December 31, 2021, the Company paid the placement agent cash of $609,507 and issued 123,000,000 warrants to the placement agent at an initial exercise price of $0.01 per share. The cash fee of $609,507 was charged against the proceeds of the offering in additional paid-in capital and there is no effect on equity for the placement agent warrants.
In connection with issuance of the Series G, during the nine months ended September 30, 2022, the Company paid the placement agent cash of $95,000 and issued 19,000,000 warrants to the placement agent at an initial exercise price of $0.01 per share. The cash fee of $95,000 was charged against the proceeds of the offering in additional paid-in capital and there is no effect on equity for the placement agent warrants.
During the three months ended June 30, 2022, the Company issued shares of its common stock in connection with the conversion of shares of Series G and accrued dividends payable of $21,134. The conversion ratio was based on the Series G certificate of designation, as amended.
During the three months ended September 30, 2022, the Company issued shares of its common stock in connection with the conversion of shares of Series G and accrued dividends payable of $18,183. The conversion ratio was based on the Series G certificate of designation, as amended.
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TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
Series H preferred shares
On September 20, 2022, the Company’s Board of Directors (the “Board”) Board filed the Certificate of Designation of Preferences, Rights and Limitations of Series H Convertible Preferred Stock (the “Series H COD”) with the Secretary of State of the State of Nevada designating shares of preferred stock as Series H. The Series H has no stated value. Pursuant with the Series H COD,
| ● | Each holder of Series H shall have no voting rights. | |
| ● | Each share of Series H shall be convertible into shares of the Company’s common stock, subject to beneficial ownership limitations. The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the common stock outstanding immediately after giving effect to the issuance of shares of common stock issuable upon conversion of the Series H held by the Holder. The Holder and the Company, by mutual consent, may increase or decrease the Beneficial Ownership Limitation provisions of the Series H COD, provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares of the common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the Series H held by the Holder. | |
| ● | Upon the liquidation, dissolution or winding up of the business of the Company, whether voluntary or involuntary, each holder of Series H preferred stock shall be entitled to receive out of assets of the Company legally available therefor the same amount that a holder of the Company’s common stock would receive on an as-converted basis (without regard to the beneficial ownership limitation or any other conversion limitations hereunder). The right of a Series H Holder to receive such payment shall be preferential to the right of holders of common stock but shall be subordinate to the rights of the holder of any other series of preferred stock of the Company. |
In connection with the acquisitions of Freight Connections, in September 2022, the Company issued shares of Series H preferred stock.
Common stock
On February 23, 2021, stockholders holding at least 51% of the voting power of the stock of the Company entitled to vote thereon consented, in writing, to amend the Company’s Amended and Restated Articles of Incorporation, by adoption of the Certificate of Amendment to the Amended and Restated Articles of Incorporation of the Company to authorize an increase of the number of shares of common stock that the Company may issue to shares, par value $ (the “2021 Amendment”). The increase in the number of authorized shares was needed to meet the share reserve requirements under the Series E.
The Company filed a preliminary information statement on Schedule 14C regarding the stockholders’ consent to the Authorized Share Increase Amendment with the SEC on March 3, 2021. This consent was sufficient to approve the 2021 Amendment under Nevada law. The Company filed a definitive information statement on Schedule 14C on March 15, 2021 and first mailed that information statement to stockholders on March 15, 2021.
Shares issued in connection with conversion of convertible debt and interest
On January 11, 2021, the Company issued shares of its common stock in connection with the conversion of a convertible note payable of $. The conversion price was based on contractual terms of the related debt.
During the three months ended June 30, 2021, the Company and each Q1/Q2 2020 Note investor entered into a letter agreement whereby the investor waived its right to any Mandatory Default Payment. Accordingly, during the three months ended June 30, 2021, the Company reversed the accrued Mandatory Penalty amount due of $664,400 and recorded a gain on debt extinguishment of $664,400. Additionally, during the three months ended June 30, 2021, the Company issued shares of its common stock upon the conversion of all remaining Q1/Q2 2020 Note principal and interest balances due aggregating $277,916.
During the three months ended June 30, 2021, the Company issued shares of its common stock upon the conversion of all remaining April 20 Note principal and interest balances due aggregating $95,540. The Company accounted for the conversion of these convertible notes pursuant to the guidance of ASC 470-20, Debt with Conversion and Other Options. Under ASC 470-20, the Company recognized an aggregate loss on debt extinguishment upon conversion in the amount of $143,872 which is associated with the difference between the fair market value of the shares issued upon conversion and the conversion price and is equal to the fair value of the shares of common stock transferred upon conversion.
Shares issued in connection with conversion of Series E preferred shares
During the three months ended June 30, 2021, the Company issued shares of its common stock in connection with the conversion of shares of Series E. The conversion ratio was based on the Series E certificate of designation, as amended.
During the three months ended September 30, 2021, the Company issued shares of its common stock in connection with the conversion of shares of Series E. The conversion ratio was based on the Series E certificate of designation, as amended.
On January 19, 2022, the Company issued shares of its common stock in connection with the conversion of shares of Series E. The conversion ratio was based on the Series E certificate of designation, as amended.
On April 13, 2022, the Company issued shares of its common stock in connection with the conversion of shares of Series E preferred shares and paid liquidating damages of $. The conversion ratio was based on the Series E certificate of designation, as amended.
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TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
Shares issued in connection with conversion of Series G preferred shares
During the three months ended June 30, 2022, the Company issued shares of its common stock in connection with the conversion of shares of Series G and accrued dividends payable of $21,134. The conversion ratio was based on the Series G certificate of designation, as amended.
During the three months ended September 30, 2022, the Company issued shares of its common stock in connection with the conversion of shares of Series G and accrued dividends payable of $18,183. The conversion ratio was based on the Series G certificate of designation, as amended.
Shares issued upon exercise of warrants
During the three months ended June 30, 2021, the Company issued shares of its common stock in connection with the cashless exercise of warrants. The exercise price was based on contractual terms of the related warrant.
In May and June 2021, the Company issued shares of its common stock and received proceeds of $ from the exercise of warrants at $ per share.
During the three months ended September 30, 2021, the Company issued shares of its common stock and received proceeds of $3,254,955 from the exercise of warrants at $0.01 per share.
During the three months ended March 31, 2022, the Company issued shares of its common stock and received proceeds of $245,714 from the exercise of warrants at $0.01 per share.
During the three months ended June 30, 2022, the Company issued shares of its common stock in connection with the cashless exercise of warrants. The exercise price was based on contractual terms of the related warrant.
Shares issued in connection with acquisition
In connection with the acquisition of Freight Connections, as part of the purchase price consideration, the Company issued shares of its common stock. The Company valued these common shares at a fair value of $, or $ per common share, based on the quoted closing price of the Company’s common stock on the measurement date.
Shares issued for compensation
On March 11, 2022, pursuant to an employment agreement with the Company’s chief executive officer dated January 4, 2022, the Company’s Board of Directors granted the chief executive officer shares of its common stock which were valued at $, or $ per common share, based on the quoted closing price of the Company’s common stock on the measurement date. These shares will vest in equal annual installments with the first installment of shares vesting on January 3, 2022, and common shares vesting each year quarter through January 3, 2025. In connection with these shares, the Company valued these common shares at a fair value of $ and will record stock-based compensation expense over the vesting period which is included in the aggregate accretion of stock-based compensation reflected below.
On March 11, 2022 and effective January 4, 2022, the Company agreed to grant restricted stock awards to three independent members of the Company’s board of directors for an aggregate of common shares of the Company which were valued at $60,000, or $ per common share, based on the quoted closing price of the Company’s common stock on the measurement date. These shares will vest in equal quarterly installments with the first installment of shares vesting on March 31, 2022, and common shares vesting each quarter through December 31, 2022. In connection with these shares, the Company valued these common shares at a fair value of $60,000 and will record stock-based compensation expense over the vesting period which is included in the aggregate accretion of stock-based compensation reflected below.
On March 11, 2022 and effective January 4, 2022, the Company agreed to grant restricted stock awards to the Company’s chief financial officer for common shares of the Company which were valued at $125,000, or $ per common share, based on the quoted closing price of the Company’s common stock on the measurement date. These shares will vest in equal quarterly installments with the first installment of shares vesting on March 31, 2022, and common shares vesting each quarter through December 31, 2022. In connection with these shares, the Company valued these common shares at a fair value of $125,000 and will record stock-based compensation expense over the vesting period which is included in the aggregate accretion of stock-based compensation reflected below.
During the nine months ended September 30, 2022 and 2021, aggregate accretion of stock-based compensation expense on the above granted shares amounted to $ and $, respectively. Total unrecognized compensation expense related to these vested and unvested common shares on September 30, 2022 amounted to $ which will be amortized over the remaining vesting period of approximately to years.
On March 11, 2022, the Company agreed to grant restricted stock awards to the Company’s former chief executive officer and current member of the Company’s board of directors for common shares of the Company which were valued at $250,000, or $ per common share, based on the quoted closing price of the Company’s common stock on the measurement date. These shares vested immediately. In connection with these shares, the Company valued these common shares at a fair value of $250,000 and recorded stock-based compensation expense of $.
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TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
On February 1, 2022 and amended on May 1, 2022, the Company issued an aggregate of of its common shares pursuant to a consulting agreement. These shares were valued at $10,000, or a share price ranging from $ to $, based on the quoted closing price of the Company’s common stock on the measurement dates. In connection with these shares, the Company valued these common shares at a fair value of $10,000 and the Company recorded stock-based professional fees of $8,333 and prepaid expenses of $1,667 which will amortized over the remaining service period of one month.
The following table summarizes activity related to non-vested shares:
| Number
of Non-Vested Shares | Weighted Average Grant Date Fair Value | |||||||
| Non-vested, December 31, 2021 | $ | |||||||
| Granted | 138,944,615 | 0.011 | ||||||
| Shares vested | (43,145,244 | ) | (0.011 | ) | ||||
| Non-vested, September 30, 2022 | 95,799,371 | $ | 0.011 | |||||
Warrants
Warrants exercised in connection with Series E preferred shares
In connection with the sale of Series E preferred shares, during the nine months ended September 30, 2021, the Company issued warrants to purchase 457,714,289 shares of the Company’s common stock at an initial exercise price of $0.01 per share. Additionally, the Company issued 91,542,858 warrants to the placement agent at an initial exercise price of $0.01 per share. (See Series E preferred shares above).
During the three months ended June 30, 2021, the Company issued shares of its common stock in connection with the cashless exercise of 98,557,429 warrants. The exercise price was based on contractual terms of the related warrant.
In May and June 2021, the Company issued shares of its common stock and received proceeds of $ from the exercise of warrants at $ per share.
During the three months ended September 30, 2021, the Company issued shares of its common stock and received proceeds of $ from the exercise of warrants at $ per share.
During the nine months ended September 30, 2021, the Company entered into Securities Purchase Agreements with certain of the holders of its existing Series E preferred warrants (“Exercising Warrants Holders”). Pursuant to the Securities Purchase Agreements, the Exercising Warrants Holders and the Company agreed that the Exercising Warrants Holders would cash exercise their existing warrants, into shares of common stock underlying such existing warrants Shares. In order to induce the Exercising Warrant Holders to cash exercise their existing Warrants, the Securities Purchase Agreements provided for the issuance of new warrants (“New Warrants”) with such New Warrants to be issued in an amount equal to 50% of the number of shares acquired by the Existing Warrant Holder through the exercise of existing warrants for cash. The New Warrants are exercisable upon issuance and terminate five years following the initial exercise date. The New Warrants have an exercise price per share of $0.01. During the nine months ended September 30, 2021, of the warrants exercised for cash, a total of 382,682,287 existing warrants were exercised for cash contemporaneously with the execution of the Securities Purchase Agreements resulting in total proceeds to the Company of $3,826,383. In connection with the exercise of these existing warrants for cash, the Company issued an aggregate of New Warrants. The New Warrants issued in connection with the Securities Purchase Agreements were considered inducement warrants and are classified in equity. The fair value of the New Warrants issued was $4,193,134 and were expensed as warrant exercise inducement expense on the accompanying condensed consolidated statement of operations.
During the three months ended March 31, 2022, the Company issued shares of its common stock and received proceeds of $ from the exercise of warrants at $ per share.
During the three months ended June 30, 2022, the Company issued shares of its common stock in connection with the cashless exercise of warrants. The exercise price was based on contractual terms of the related warrant.
Warrants issued in connection with Series G preferred shares
In connection with the sale of Series G preferred shares, during the nine months ended September 30, 2022, the Company issued warrants to purchase 95,000,000 shares of the Company’s common stock at an initial exercise price of $0.01 per share. Additionally, the Company issued 19,000,000 warrants to the placement agent at an initial exercise price of $0.01 per share.
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TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
Warrant activities for the nine months ended September 30, 2022 are summarized as follows:
| Number
of Shares Issuable Upon Exercise of Warrants | Weighted Average Exercise Price | Weighted
Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Balance Outstanding December 31, 2021 | 1,190,722,395 | $ | 0.015 | $ | 3,831,380 | |||||||||||
| Granted | 114,000,000 | 0.010 | ||||||||||||||
| Exercises | (46,714,286 | ) | 0.010 | |||||||||||||
| Balance Outstanding September 30, 2022 | 1,258,008,109 | $ | 0.014 | $ | 0 | |||||||||||
| Exercisable, September 30, 2022 | 1,258,008,109 | $ | 0.014 | $ | 0 | |||||||||||
Stock options
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Balance Outstanding December 31, 2021 | 80,000 | $ | 8.85 | $ | ||||||||||||
| Granted/Cancelled | ||||||||||||||||
| Balance Outstanding September 30, 2022 | 80,000 | $ | 8.85 | $ | ||||||||||||
| Exercisable, September 30, 2022 | 60,000 | $ | 8.85 | $ | ||||||||||||
NOTE 10 – ASSIGNMENT FOR THE BENEFIT OF CREDITORS
On August 19, 2021, the Company’s subsidiaries, Prime EFS and Shypdirect, executed Deeds of Assignments for the Benefit of Creditors in the State of New Jersey pursuant to N.J.S.A. §2A:19-1, et seq. (the “ABC Statute”), assigning all Prime EFS and Shypdirect assets to Terri Jane Freedman as Assignee for the Benefit of Creditors (the “Assignee”) and filing for dissolution. An “Assignment for the Benefit of Creditors,” “general assignment” or “ABC” in New Jersey is a state-law, voluntary, judicially-supervised corporate liquidation and unwinding similar to the Chapter 7 bankruptcy process found in the United States Bankruptcy Code. In the subject ABC, the debtor companies, here Prime EFS and Shypdirect, together referred to as the “assignors”, executed Deeds of Assignment, assigning all of their assets to an Assignee chosen by the Company, who acts as a fiduciary similar to a Chapter 7 trustee in bankruptcy. Due to the termination of their respective agreements with Amazon, Prime EFS and Shypdirect became insolvent and unable to pay their debts when they became due. Accordingly, the Company deemed it to be desirable and in the best interest of Prime EFS and Shypdirect and its creditors to make an assignment of all of Prime EFS and Shypdirect’s assets for the benefit of the Prime EFS and Shypdirect’s creditors in accordance with the ABC Statute.
On September 7, 2021, the ABC’s were filed with the Bergen County Clerk in Bergen County, New Jersey and filed with the Bergen County Surrogate Court, initiating a judicial proceeding. The Assignee has been charged with liquidating the assets for the benefit of the Prime EFS and Shypdirect creditors pursuant to the provisions of the ABC Statute. The Company’s results of operations for the nine months ended September 30, 2021 include the results of Prime EFS and Shypdirect prior to the September 7, 2021 filing of the executed Deeds of Assignment for the Benefit of Creditors with the State of New Jersey. As a result of Prime EFS and Shypdirect’s filing of the executed Deeds of Assignment for the Benefit of Creditors on September 7, 2021, the Assignee assumed all authority to manage Prime EFS or Shypdirect. Additionally, Prime EFS and Shypdirect no longer conduct any business and are not permitted by the Assignee and ABC Statute to conduct any business. For these reasons, effective September 7, 2021, the Company relinquished control of Prime EFS and Shypdirect. Further, on October 13, 2021, Prime EFS and Shypdirect filed for dissolution with the Secretary of State of New Jersey. Therefore, the Company deconsolidated Prime EFS and Shypdirect effective with the filing of executed Deeds of Assignment for the Benefit of Creditors in September 2021. The Company has been advised that the Assignee anticipates that she will be able to conclude her work, make final distributions to creditors, and close out the estates of Prime EFS and Shypdirect on or before June 30, 2023.
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TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
In order to deconsolidate Prime EFS and Shypdirect, the carrying values of the assets and liabilities of Prime EFS and Shypdirect were removed from the Company’s consolidated balance sheet as of September 7, 2021. In connection with the deconsolidation, the Company recognized a gain on deconsolidation of subsidiaries of $12,363,449 which is included in “Gain on deconsolidation of subsidiaries” within other income (expenses) during the year ended December 31, 2021 and consisted of the following:
| September 7, 2021 | ||||
| Liabilities deconsolidated: | ||||
| Notes payable (a) | $ | 3,908,050 | ||
| Accounts payable | 1,242,421 | |||
| Accrued expenses | 314,927 | |||
| Insurance payable | 1,678,556 | |||
| Contingency liabilities | 3,311,272 | |||
| Lease liabilities, current portion | 1,263,494 | |||
| Accrued compensation and related benefits | 827,753 | |||
| Total liabilities deconsolidated | 12,546,473 | |||
| Assets deconsolidated: | ||||
| Cash | 21,679 | |||
| Accounts receivable | 1,078 | |||
| Property and equipment, net | 96,496 | |||
| Total assets deconsolidated | 119,253 | |||
| Gain on deconsolidation of subsidiaries | 12,427,220 | |||
| Less: additional cash payments made on behalf of deconsolidated subsidiaries | (63,771 | ) | ||
| Gain on deconsolidation of subsidiaries | $ | 12,363,449 | ||
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Legal matters
From time to time, we may be involved in litigation or received claims arising out of our operations in the normal course of business. Other than discussed below, we are not currently a party to any other legal proceeding or are aware of claims that we believe would, if decided adversely, have a material adverse effect on our business, financial condition, or operating results. We also disclose any recent settlements and accruals taken in connection therewith, whether material or not.
Disputes Between ELRAC LLC and Enterprise Leasing Company of Philadelphia, LLC on the one hand, and Prime EFS, LLC on the other hand
In 2021 and as of December 31, 2021, the Company’s prior subsidiary, Prime EFS, LLC (“Prime EFS”), was a party to an arbitration with two companies, ELRAC LLC (“ELRAC”), and Enterprise Leasing Company of Philadelphia, LLC (“ELC”).
As previously disclosed, since the Company deconsolidated Prime EFS effective with the filing of executed Deeds of Assignment for the Benefit of Creditors in September 2021, as of December 31, 2021, the Company’s consolidated balance sheet no longer included an accrual for this matter.
Solely to avoid the expense and distraction of the matter, effective March 31, 2022, the Company and Prime EFS, on the one hand, and ERLAC and ELC, on the other hand, settled the above matter for a single payment, by TLSS, to ERLAC and ELC, in an immaterial amount. Pursuant to the settlement, the Company and Prime, on the one hand, and ERLAC and ELC, on the other hand, exchanged mutual general releases, thereby releasing and discharging any and all claims between the Company, Prime EFS and their affiliates, on the one hand, and ERLAC, ELC and their affiliates, on the other hand. In connection with this settlement, in April 2022, the Company paid ERLAC and ELC $30,000, which amount as December 31, 2021 had been accrued and included in accrued expenses on the accompanying unaudited condensed consolidated balance sheets.
Bellridge Capital, L.P. v. TLSS and Mercadante
On September 11, 2020, a prior lender to the Company, Bellridge Capital, LP. filed a civil action against TLSS, John Mercadante and Douglas Cerny in the U.S. District Court for the Southern District of New York, captioned Bellridge Capital, L.P. v. Transportation and Logistics Systems, Inc., John Mercadante and Douglas Cerny. The case was assigned Case No. 20-cv-7485. The complaint alleged claims, inter alia, for purported violations of section 10(b) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”); for breach of an exchange agreement dated April 13, 2019 (the “Exchange Agreement”); and for the alleged failure to pay certain amounts allegedly due under certain TLSS promissory notes.
After discontinuing the foregoing federal action voluntarily and without prejudice, on April 23, 2021, Bellridge filed a civil action in New York Supreme Court, New York County, against the Company and Mercadante. This matter, the “Bellridge State Court Action,” was assigned civil action number 652728/2021. The Complaint in the Bellridge State Court Action essentially repeated the claims in the federal action.
On June 4, 2021, the Company and Mercadante moved to dismiss the Bellridge State Court Action for failure to state a claim and, as to Mercadante, for lack of jurisdiction. On October 20, 2021, the Court decided the MTD, dismissing all claims in the case against both Defendants predicated on fraud and negligent misrepresentation. The Court thereby dismissed the Complaint insofar as alleged against Mercadante. On October 29, 2021, the Company filed its Answer in this case. On November 18, 2021, Bellridge filed an Amended Complaint purporting to revive its claims for fraud and negligent misrepresentation against both Defendants. Both Defendants filed objections to the Amended Complaint as procedurally improper. On December 17, 2021, the Defendants filed a renewed motion to dismiss the Amended Complaint with prejudice. That motion was fully briefed. In February 2022, all proceedings in this action were stayed 60 days to facilitate a March 2022 mediation.
On April 29, 2022, all parties to the Bellridge State Court Action agreed to settle the case and exchange mutual general releases for a cash payment by the Company to Bellridge of $250,000, which amount was paid in May 2022, at which time the releases took effect. In partial consideration for the settlement, the Company and Bellridge also cancelled the shares of Series B Preferred Stock previously held by Bellridge, as reflected on the Company’s balance sheets as of December 31, 2021. In connection with this settlement, during the nine months ended September 30, 2022, the Company recorded settlement expense of $227,811.
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TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
SCS, LLC v. TLSS
On January 14, 2021, a former financial consultant to the Company, SCS, LLC, filed an action against the Company in the Circuit Court of the 15th Judicial Circuit, Palm Beach County, Florida, captioned SCS, LLC v. Transportation and Logistics Systems, Inc. The case was assigned Case No. 50-2020-CA-012684.
In this action, SCS alleges that it entered into a renewable six-month consulting agreement with the Company dated September 5, 2019 and that the Company failed to make certain monthly payments due thereunder for the months of October 2019 through March 2020, summing to $42,000. The complaint alleges claims for breach of contract, quantum meruit, unjust enrichment and account stated.
On February 9, 2021, the Company filed its answer, defenses and counterclaims in this action. Among other things, the Company avers that SCS’s claims are barred by its unclean hands and other inequitable conduct, including breach of its duties (i) to maintain the confidentiality of information provided to SCS and (ii) to work only in furtherance of the Company’s interests, not in furtherance of SCS’s own, and conflicting, interests. The Company also avers, in its counterclaims, that SLS owes the Company damages in excess of the $42,000 sought in the main action because SLS was at least grossly negligent in any due diligence it undertook before recommending that the Company acquire Prime EFS LLC in June 2018. SCS filed a motion to strike TLSS’s defenses and counterclaims, and TLSS opposed that application. Those motions remain sub judice.
A two-day non-jury trial was held in this action in Palm Beach County, Florida, on April 20-21, 2022. However, at the end of the second day a mistrial was declared because SCS had not withdrawn its motion to strike and answered the counterclaims. Since the mistrial, there have been no further filings or proceedings in this case.
The Company believes it has substantial defenses to all claims alleged in SCS’s complaint. The Company therefore intends to defend this case vigorously.
Because there have been no further filings or proceedings on this case since April 2022, it is not possible to evaluate the likelihood of a favorable or unfavorable outcome, nor is it possible to estimate the amount or range of any potential loss in the matter. However, the demand remains $42,000.
Shareholder Derivative Action
On June 25, 2020, the Company was served with a putative shareholder derivative action filed in the Circuit Court of the 15th Judicial Circuit in and for Palm Beach County, Florida (the “Court”) captioned SCS, LLC, derivatively on behalf of Transportation and Logistics Systems, Inc. v. John Mercadante, Jr., Douglas Cerny, Sebastian Giordano, Ascentaur LLC and Transportation and Logistics Systems, Inc. The action has been assigned Case No. 2020-CA-006581.
The plaintiff in this action, SCS, alleges it is a limited liability company formed by a former chief executive officer and director of the Company, Lawrence Sands. The complaint alleges that between April 2019 and June 2020, the immediately prior chairman and chief executive officer of the Company, Mercadante, the former chief development officer of the Company, Cerny, and, since February 2020, the Company’s then restructuring consultant who is now chairman and chief executive officer of the Company, Giordano, breached fiduciary duties owed to the Company. Prior to becoming CEO, Giordano rendered his services to the Company through the final named defendant in the action, Ascentaur LLC.
Briefly, the complaint alleges that Mercadante breached duties to the Company by, among other things, requesting, in mid-2019, that certain preferred equity holders, including SCS, convert their preferred shares into Company Common Stock in order to facilitate an equity offering by the Company and then not consummating that offering. The complaint also alleges that Mercadante and Cerny caused the Company to engage in purportedly wasteful and unnecessary transactions such as taking merchant cash advances (MCA) on disadvantageous terms. The complaint further alleges that Mercadante and Cerny “issued themselves over two million shares of common stock without consideration.” The complaint seeks unspecified compensatory and punitive damages on behalf of the Company for breach of fiduciary duty, negligent breach of fiduciary duty, constructive fraud, and civil conspiracy and the appointment of a receiver or custodian for the Company.
Company management tendered the complaint to the Company’s directors’ and officers’ liability carrier for defense and indemnity purposes, which coverage is subject to a $250,000 self-insured retention. Each of the individual defendants and Ascentaur LLC has advised that they vigorously deny each and every allegation of wrongdoing alleged in the complaint. Among other things, Mercadante asserts that he made every effort to consummate an equity offering in late 2019 and early 2020 and could not do so solely because of the Company’s precarious financial condition. Mercadante also asserts that he made clear to SCS and other preferred equity holders, before they converted their shares into common stock, that there was no guarantee the Company would be able to consummate an equity offering in late 2019 or early 2020. In addition, Mercadante and Cerny assert that they received equity in the Company on terms that were entirely fair to the Company and entered into MCA transactions solely because no other financing was available to the Company.
On August 5, 2020, all defendants moved to dismiss the complaint (the “MTD”) for failure to state a claim upon which relief can be granted. Among other things, movants asserted that, through this lawsuit, SCS is improperly attempting to second-guess business decisions made by the Company’s Board of Directors, based solely on hindsight (as opposed to any well-pleaded facts demonstrating a lack of care or good faith). Movants also asserted that the majority of the claims are governed by Nevada law because they concern the internal affairs of the Company. Movants further asserted that, under Nevada law, each of the business decisions challenged by SCS is protected by the business judgment rule. Movants further asserted that, even if SCS could rebut the presumption that the business judgment rule applies to all such transactions, SCS failed to allege facts demonstrating that intentional misconduct, fraud, or a knowing violation of the law occurred, a requirement under Nevada law in order for director or officer liability to arise. Movants further asserted that, because SCS’s constructive fraud claim simply repackages Plaintiff’s claims for breach of fiduciary duty, it too must fail. Movants also contended that in the absence of an adequately-alleged independent cause of action, let alone an unlawful agreement between the defendants entered into for the purpose of harming the Company, SCS’s claim for civil conspiracy must also be dismissed. Finally, movants contended that SCS’s extraordinary request that a receiver or custodian be appointed to manage and supervise the Company’s activities and affairs throughout the duration of this unfounded action is without merit inter alia because SCS does not allege the Company is subject to loss so serious and significant that the appointment of a receiver or custodian is “absolutely necessary to do complete justice.”
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TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
On September 9, 2022 the Court heard argument on defendants’ MTD and, in a Decision issued September 15, 2022, the Court dismissed the Complaint, finding (a) that SCS had failed to adequately allege it has standing and (b) that the complaint fails to allege a claim. The dismissal was without prejudice, meaning SCS could attempt to replead its claims. On October 5, 2022, SCS filed an amended complaint (the “AC”) which, on the fact of it, (i) contains no new factual averments supporting standing and (ii) fails to address any of the specific deficiencies which the Court identified in the original, now dismissed, complaint. On October 14, 2022, defendants moved to dismiss the AC with prejudice. Defendants also moved to strike the AC on the ground that it was not filed within the 20-period mandated by the Court. The Court has set arguments on both these motions for December 13, 2022.
While they hope to prevail on the renewed motion to dismiss, win or lose, Company management and Ascentaur LLC advise that they believe the action is frivolous and intend to mount a vigorous defense to this action, as they believe the action to be entirely bereft of merit.
Owing to the fact that no discovery has occurred in the case, it is not possible to evaluate the likelihood of a favorable or unfavorable outcome, nor is it possible to estimate the amount or range of any potential loss in the matter.
Jose R. Mercedes-Mejia v. Shypdirect LLC, Prime EFS LLC et al.
On August 4, 2020, an action was filed against Shypdirect, Prime EFS and others in the Superior Court of New Jersey for Bergen County captioned Jose R. Mercedes-Mejia v. Shypdirect LLC, Prime EFS LLC et al. The case was assigned docket number BER-L-004534-20. In this action, the plaintiff seeks reimbursement of his medical expenses and damages for personal injuries following an accident with a box truck leased by Prime EFS and being driven by a Prime EFS employee, in which the plaintiff’s ankle was injured. Plaintiff has thus far transmitted medical bills exceeding $789,000. Prime EFS and Shypdirect have demanded their vehicle liability carrier assume the defense of this action. To date, the carrier has not done so, allegedly inter alia because the box truck was not on the list of insured vehicles at the time of the accident.
On November 9, 2020, Prime EFS and Shypdirect filed their answer to the complaint in this action and also filed a third-party action against the insurance company in an effort to obtain defense and indemnity for this action.
On May 21, 2021, Prime EFS and Shypdirect also filed in action in the Supreme Court, State of New York, Suffolk County (the “Suffolk County Action”), seeking defense and indemnity for the Mercedes-Mejia action from the insurance brokerage, Acrisure LLC, which sold the County Hall insurance policy to Prime.
On August 19, 2021, the Plaintiff filed a motion for leave to file a first amended complaint to name four (4) additional parties as defendants – TLSS, Shyp CX, Inc., Shyp FX, Inc. and Cougar Express, Inc. On September 16, 2021, each of these entities filed papers in opposition to this motion.
On September 24, 2021, the Court granted Plaintiff’s motion for leave to amend the complaint herein, thus adding TLSS, Shyp CX, Inc., Shyp FX, Inc. and Cougar Express, Inc. as Defendants. On October 22, 2021, Acrisure stipulated to consolidate the Suffolk County Action into and with the Bergen County action. On November 22, 2021, all Defendants filed their Answer to the First Amended Complaint. On November 3, 2021, Prime EFS and Shypdirect refiled their Third-Party Complaint against Acrisure in the Bergen County action. On December 23, 2021, Acrisure filed its Answer to the Third-Party Complaint, denying its material allegations.
Under the currently operative pre-trial order, all depositions of fact witnesses in the case must be completed by January 31, 2023. All Defendants in this action intend to vigorously defend themselves and to pursue the third-party actions against both County Hall and Acrisure. However, owing to the early stage of this action, we cannot evaluate the likelihood of an adverse outcome or estimate the Company’s liability, if any, in connection with this claim.
Holdover Proceeding
On February 16, 2022, the landlord for the leased premises from which Cougar Express previously conducted its Valley Stream New York business, Airport Park LLC (“Airport”), filed an action to evict and for unpaid holdover rent against Cougar Express and TLSS. The case was No. LT-000550-22/NA, filed in Landlord Tenant Court in Nassau County District Court.
In the case, Airport sought to evict Cougar Express forthwith and to collect $51,079.78 for each month of holdover occupancy starting January 1, 2022 through the month of any eviction, plus statutory interest, costs and attorneys’ fees. $51,079.78 is twice the monthly rent collected in the last year of the expired lease and is computed correctly under the holdover provision in the expired lease.
By stipulation filed with the Court on May 19, 2022, this matter was settled and terminated. Pursuant to the settlement, Cougar agreed to pay, and paid, certain unpaid common charges of $8,016.25 and monthly rent at a rate of $33,275 per month until Cougar vacated the premises. Cougar also agreed to vacate the Valley Stream premises by September 30, 2022. Following Cougar’s acquisition of JFK Cartage, Cougar was able to vacate, and vacated the Valley Stream location by September 30, 2022.
COR Holdings, LLC
In the second quarter of 2022, COR Holdings LLC, a lender to the Company’s former Prime EFS subsidiary, made an informal (email) demand that it be issued shares of Company common stock in exchange for an alleged $97,062 balance due. The Company had, pursuant to a debt conversion rights agreement dated August 28, 2020, granted COR a one-year option to exchange the debt at $0.025 per share of Company common stock; however, COR never exercised that option prior to its expiration on August 28, 2021. The Company believes, on advice of counsel, that COR’s sole remedy for the unpaid debt is through Prime EFS’s Assignment for Benefit of Creditors proceeding in New Jersey. Therefore, if COR choses to pursue this claim against the Company, the Company intends to oppose it vigorously. However, because no formal claim has been filed, we cannot evaluate the likelihood of an adverse outcome or estimate the Company’s liability, if any, in connection with this claim.
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TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
Ryder Truck Rental, Inc.
In the first quarter of 2022, an attorney representing Ryder Truck Rental issued a letter to certain former officers and employees of the Company’s former Shypdirect subsidiary, demand payment of $308,240.65 under certain open invoices for trucks leased by Shypdirect, $1,141,211.55 in certain additional charges under a 2018 contract, and $434,835.66 in attorney’s fees. Solely to avoid the expense and distraction of litigation, including without limitation, certain alter ego and derivative liability claims alleged by Ryder, on August 5, 2022, the Company, pursuant to a Settlement Agreement and Mutual General Releases dated August 2, 2022, paid Ryder $6,500 in full and final settlement. The release of claims executed by Ryder covers, among others, the Company and all its former and current subsidiaries, directors, officers and employees as well as all former members and managers of Shypdirect.
Other than discussed above, as of September 30, 2022, and as of the date of this filing, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on results of our operations.
Employment agreements
On January 3, 2022, the Company and Mr. Sebastian Giordano entered into an employment agreement with a term extending through December 31, 2025, which provides for annual compensation of $400,000 as well as annual discretionary bonuses based on the Company’s achievement of performance targets, grants of options, restricted stock or other equity, potentially constituting (with prior grants made to Ascentaur), at the discretion of the Company’s Board of Directors, up to 5% of the outstanding common stock of the Company, vesting over the term of the employment agreement, business expense reimbursement and benefits as generally made available to the Company’s executives. Pursuant to this employment agreement, on March 11, 2022, the Company’s Board of Directors granted the chief executive officer shares of its common stock (see Note 9).
On January, 3, 2022, the Company retained the services of Mr. James Giordano (no relation to Mr. Sebastian Giordano) as Chief Financial Officer. In addition, Mr. James Giordano is appointed the Company’s Treasurer. Previously, Mr. James Giordano served as Chief Financial Officer and consultant to Freight Connections, Inc., a LTL/line haul transportation services and warehousing provider. Prior to that, he served as Chief Financial Officer for Farren International, a global supplier of transportation and rigging services. Mr. James Giordano’s employment with the Company is at will. He will receive annual compensation of $250,000 as well as annual discretionary bonuses and equity grants, business expense reimbursement and benefits as generally made available to the Company’s executives. On March 11, 2022 and effective January 4, 2022, the Company agreed to grant restricted stock awards to the Company’s chief financial officer for common shares of the Company which were valued at $125,000, or $ per common share, based on the quoted closing price of the Company’s common stock on the measurement date. These shares will vest in equal quarterly installments with the first installment of shares vesting on March 31, 2022, and common shares vesting each quarter through December 31, 2022. In connection with these shares, the Company valued these common shares at a fair value of $125,000 and will record stock-based compensation expense over the vesting period (See Note 9).
On July 6, 2022, the Company entered into a definitive Employment Agreement with James Giordano for Mr. Giordano to serve as the Company’s Chief Financial Officer. The term of such Employment agreement is for a period of two and one-half years through December 31, 2025, which term may not be terminated early by the Company except for “cause” as defined in such agreement. Annual base compensation is $250,000, with an annual bonus for 2022 in total up to a maximum of $125,000 per year conditioned on the achievement of specified milestones, and future annual bonuses to be conditioned on achievement of milestones to be negotiated based on the circumstances of the Company at such time.
On September 16, 2022, in connection with the acquisition of Freight Connections, Freight Connection and Mr. Joseph Corbisiero entered into an employment agreement to act as Freight Connections chief executive officer with a term extending through September 16, 2025, which provides for initial annual compensation of $165,000. Base salary shall increase to $175,000 in year two and $200,000 in year three. In addition, Mr. Corbisiero shall be entitled to annual discretionary bonuses based on Freight Connection’s achievement of certain performance results for earnings before interest, taxes, and depreciation and amortization. Furthermore, Mr. Corbisiero shall have the opportunity to earn annual discretionary bonuses in the form of grants of stock options, restricted stock or other equity, at the discretion of the Company’s Board of Directors, up to 25% of the annual base salary and such grant would vest over a three-year period. Mr. Corbisiero shall be entitled to business expense reimbursement and benefits as generally made available to the Company’s executives and shall receive an $800 per month auto allowance.
NOTE 12– RELATED PARTY TRANSACTIONS AND BALANCES
Due to related parties
On December 22, 2020, the Company’s former chief executive officer advanced the Company $30,000. The advance is non-interest bearing and payable on demand. On January 29, 2021, the Company repaid this advance.
Notes payable – related party
On July 3, 2019, the Company entered into a note agreement with an entity that is controlled by the Company’s former chief executive officer’s significant other, in the amount of $500,000. Commencing on September 3, 2019 and continuing on the third day of each month thereafter, payments of interest only on the outstanding principal balance of this note was due and payable. Commencing on January 3, 2020 and continuing on the third day of each month thereafter through January 3, 2021, equal payments of principal and interest should have been made. The principal amount of this note and all accrued, but unpaid interest under this note was due and payable on the earlier to occur of (i) January 3, 2021 (the “CEO Note Maturity Date”), or (ii) an Event of Default (as defined in the note agreement). Interest accrued with respect to the unpaid principal sum identified above until such principal was paid at a rate equal to 18% per annum. On March 17, 2021, the Company and the noteholder entered into a forbearance agreement whereby the Holder agreed to forbear from prosecuting any enforcement efforts in respect of the Note and extended the payment of the note until December 31, 2021. On October 31, 2021, the Company and this related party note holder entered into a confidential settlement agreement and mutual release. The Parties adjusted, settled and compromised the principal balance of the Note of $500,000 and unpaid accrued interest thereon of $240,822, for a discounted amount of $600,000, in full settlement of any and all amounts outstanding. The settlement amount was paid in November 2021.
During the nine months ended September 30, 2021, interest expense associated with advances from related parties and related party notes payable amounted to $67,315 and is included in interest expense – related parties on the accompanying unaudited condensed consolidated statement of operations.
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TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
NOTE 13 – CONCENTRATIONS
For the nine months ended September 30, 2022, three customers represented 48.2% of the Company’s total net revenues (12.1%, 17.5% and 18.6%, respectively). For the nine months ended September 30, 2021, four customers represented 77.9% of the Company’s total net revenues (36.7%, 19.6%, 11.3% and 10.3%, respectively).
On September 30, 2022, one customer represented 12.00% of the Company’s net accounts receivable balance. On December 31 2021, three customers, represented 48.4 of the Company’s accounts receivable balance (22.7%, 13.0% and 12.7%, respectively).
All revenues are derived from customers in the United States.
NOTE 14 – OPERATING LEASE RIGHT-OF-USE (“ROU”) ASSETS AND OPERATING LEASE LIABILITIES
As a result of the acquisition of JFK Cartage and Freight Connection, the Company assumed several non-cancelable operating leases for the lease of office, warehouse spaces, and parking spaces.
In adopting ASC Topic 842, Leases (Topic 842) on January 1, 2019, the Company had elected the ‘package of practical expedients’, which permitted it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs (see Note 2). In addition, the Company elected not to apply ASC Topic 842 to arrangements with lease terms of 12 month or less. Upon signing of new leases or the assumption of leases for property, the Company analyzed the new or assumed leases and determined it is required to record a lease liability and a right of use asset on its consolidated balance sheets, at fair value.
During the nine months ended September 30, 2022 and 2021, in connection with its property operating leases, the Company recorded rent expense of $430,011 and $521,688, respectively, which is expensed during the period and included in operating expenses on the accompanying condensed consolidated statements of operations.
The significant assumption used to determine the present value of the lease liabilities was discount rates of 9% which was based on the Company’s estimated average incremental borrowing rate.
On September 30, 2022 and December 31, 2021, right-of-use asset (“ROU”) is summarized as follows:
| September
30, 2022 | December
31, 2021 | |||||||
| Office leases and office equipment right of use assets | $ | 8,825,892 | $ | |||||
| Less: accumulated amortization | (83,912 | ) | ||||||
| Balance of ROU assets | $ | 8,741,980 | $ | |||||
On September 30, 2022 and December 31, 2021, operating lease liabilities related to the ROU assets are summarized as follows:
September 30, 2022 | December
31, 2021 | |||||||
| Lease liabilities related to office leases right of use assets | $ | 8,746,571 | $ | |||||
| Less: current portion of lease liabilities | (2,000,393 | ) | ||||||
| Lease liabilities – long-term | $ | 6,746,178 | $ | |||||
On September 30, 2022, future minimum base lease payments due under non-cancelable operating leases are as follows:
| Twelve months ended September 30, | Amount | |||
| 2023 | $ | 2,676,602 | ||
| 2024 | 2,762,362 | |||
| 2025 | 2,344,088 | |||
| 2026 | 2,001,138 | |||
| 2027 | 639,176 | |||
| Total minimum non-cancelable operating lease payments | 10,423,366 | |||
| Less: discount to fair value | (1,676,795 | ) | ||
| Total lease liability on September 30, 2022 | $ | 8,746,571 | ||
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
Statements made in this Form 10-Q that are not historical or current facts are “forward-looking statements” made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements often can be identified using terms such as “may,” “will,” “expect,” “believe,” “anticipate,” “estimate,” “approximate” or “continue,” or the negative thereof. We intend that such forward-looking statements be subject to the safe harbors for such statements. We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Any forward-looking statements represent management’s best judgment as to what may occur in the future. However, forward-looking statements are subject to risks, uncertainties and important factors beyond our control that could cause actual results and events to differ materially from historical results of operations and events and those presently anticipated or projected. Factors that may affect the results of our operations include, among others: our ability to successfully execute our business strategies, including integration of acquisitions and the future acquisition of other businesses to grow our Company; customers’ cancellation on short notice of master service agreements from which we derive a significant portion of our revenue or our failure to renew such master service agreements on favorable terms or at all; our ability to attract and retain key personnel and skilled labor to meet the requirements of our labor-intensive business or labor difficulties which could have an effect on our ability to bid for and successfully complete contracts; the ultimate geographic spread, duration and severity of the coronavirus outbreak and the effectiveness of actions taken, or actions that may be taken, by governmental authorities to contain the outbreak or ameliorate its effects; our failure to compete effectively in our highly competitive industry, which could reduce the number of new contracts awarded to us or adversely affect our market share and harm our financial performance; our ability to adopt and master new technologies and adjust certain fixed costs and expenses to adapt to our industry’s and customers’ evolving demands; our history of losses, deficiency in working capital and a stockholders’ deficit and our inability to achieve sustained profitability; material weaknesses in our internal control over financial reporting and our ability to maintain effective controls over financial reporting in the future; our substantial indebtedness, which could adversely affect our business, financial condition and results of operations and our ability to meet our payment obligations; the impact of new or changed laws, regulations or other industry standards that could adversely affect our ability to conduct our business; and changes in general market, economic, social and political conditions in the United States and global economies or financial markets, including those resulting from natural or man-made disasters.
Other important factors which could cause our actual results to differ materially from the forward-looking statements in this document include, but are not limited to, those discussed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as those discussed elsewhere in this report and as set forth from time to time in our other public filings and public statements. You should read this report in its entirety and with the understanding that our actual future results may be materially different from what we expect. We may not update these forward-looking statements, even in the event that our situation changes in the future, except as required by law. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.
Effects of COVID-19
The COVID-19 pandemic and resulting global disruptions have affected our businesses, as well as those of our customers and their third-party suppliers and sellers. To serve our customers while also providing for the safety of our employees and service providers, we have adapted numerous aspects of our logistics and transportation processes. We continue to monitor the rapidly evolving situation and expect to continue to adapt our operations to address federal, state, and local standards as well as to implement standards or processes that we determine to be in the best interests of our employees, customers, and communities.
The impact of the pandemic and actions taken in response to it had some effects on our results of operations. Effects of the pandemic have included increased fulfillment costs, primarily due to investments in employee hiring, pay, and benefits, as well as costs to maintain safe workplaces, and higher shipping costs. We expect to continue to be affected by possible procurement and shipping delays, supply chain interruptions, higher product demand in certain categories, lower product demand in other categories, and increased fulfillment costs and cost of sales as a percentage of net sales and it is not possible to determine the duration and spread of the pandemic or such actions, the ultimate impact on our results of operations during 2022, or whether other currently unanticipated consequences of the pandemic are reasonably likely to materially affect our results of operations.
Overview
Transportation and Logistics Systems, Inc. (“TLSS” or the “Company”) was incorporated under the laws of the State of Nevada, on July 25, 2008. The Company operates through its active subsidiaries as a logistics and transportation company specializing in ecommerce fulfillment, last mile deliveries, two-person home delivery, mid-mile, and long-haul services for predominantly online retailers.
We are primarily an asset-based point-to-point delivery company. An asset-based delivery company, as compared to a non-asset-based delivery company, owns its own transportation equipment. We employ our own drivers and use the services of independent contractors who may use their own vehicles.
Between June 18, 2018 and September 30, 2020, we operated through two New Jersey-based subsidiaries. Those subsidiaries were Prime EFS, LLC, which conducted a last-mile business focused on deliveries to retail consumers for our primary customer in New York, New Jersey and Pennsylvania (“Prime EFS”), and Shypdirect, LLC (“Shypdirect”), which formed in July 2018 and focused on, and conducted, our long-haul and mid-mile delivery businesses.
The great bulk of Prime EFS’s business prior to September 30, 2020 was conducted pursuant to the Delivery Service Provider program (the “Prime EFS DSP Program”) of Amazon Logistics, Inc., a subsidiary of Amazon.com, Inc. (“Amazon”). In June 2020, Amazon gave notice to Prime EFS that Amazon would not be renewing the Prime EFS DSP Program agreement when that agreement terminated effective September 30, 2020. Amazon made clear to Prime EFS that Amazon’s decision not to renew the DSP agreement was part of a well-publicized initiative by Amazon to restructure how it would be delivering its last-mile services and did not reflect the quality of the services provided by Prime EFS. Prime EFS ceased operations on September 30, 2020 due to Amazon’s non-renewal of the Prime EFS DSP Program.
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Shypdirect conducted its business as a carrier under a relay program service agreement with Amazon Logistics, Inc., last amended on August 24, 2020 (the “Program Agreement”). Under that agreement, Shypdirect provided transportation services, including receiving, loading, storing, transporting, delivering, unloading and related services for Amazon and its customers. On July 17, 2020, Amazon notified Shypdirect that Amazon had elected to terminate the Program Agreement between Amazon and Shypdirect effective as of November 14, 2020 (the “Shypdirect Termination Notice”). On August 3, 2020, Amazon offered to withdraw the Shypdirect Termination Notice and extend the term of the Program Agreement to and including May 14, 2021, conditioned on Prime EFS executing, for nominal consideration, a separation agreement with Amazon under which Prime EFS would agree to cooperate in an orderly transition of its Amazon last-mile delivery business to other service providers, Prime EFS would release any and all claims it may have against Amazon, and Prime EFS would covenant not to sue Amazon (the “Aug. 3 Proposal”). On August 4, 2020, the Company, Prime EFS and Shypdirect accepted the Aug. 3 Proposal. The Program Agreement expired on May 14, 2021. In June 2021, Shypdirect ceased its tractor trailer and box truck delivery services to Amazon, and in July 2021, Shypdirect ceased all operations.
For the nine months ended September 30, 2022, three customers represented 48.2% of the Company’s total net revenues (12.1%, 17.5% and 18.6%, respectively). For the nine months ended September 30, 2021, four customers represented 77.9% of the Company’s total net revenues (36.7%, 19.6%, 11.3% and 10.3%, respectively). During the years ended December 31, 2021 and 2020, one customer, Amazon, represented 28.5% and 96.7% of our total net revenues. Approximately 28.5% of our revenue of $5,495,146 for the year ended December 31, 2021 was attributable to Shypdirect’s now terminated mid-mile and long-haul business with Amazon. The termination of the Prime EFS last-mile business with Amazon on September 30, 2020 had a material adverse impact on the operations of Prime EFS beginning in the 4th fiscal quarter of 2020 and the termination of Shypdirect’s Amazon mid-mile and long-haul business, which was effective on or about May 14, 2021, had a material adverse impact on operations of Shypdirect beginning in the 2nd fiscal quarter of 2021. This impact caused Prime EFS and Shypdirect to become insolvent and to cease operations.
On August 16, 2021, Prime EFS and Shypdirect, executed Deeds of Assignment for the Benefit of Creditors in the State of New Jersey pursuant to N.J.S.A. §2A:19-1, et seq. (the “ABC Statute”), assigning all Prime EFS and Shypdirect assets to Terri Jane Freedman as Assignee for the Benefit of Creditors (the “Assignee”) and filing for dissolution. An “Assignment for the Benefit of Creditors,” “general assignment” or “ABC” in New Jersey is a state-law, voluntary, judicially-supervised corporate liquidation and unwinding similar to the Chapter 7 bankruptcy process found in the United States Bankruptcy Code. In an ABC, debtor companies, here Prime EFS and Shypdirect, together referred to as the “Assignors,” execute Deeds of Assignment, assigning all of their assets to the Assignee chosen by the Company, who acts as a fiduciary similar to a Chapter 7 trustee in bankruptcy. On September 7, 2021, the ABCs were filed with the Bergen County Clerk in Bergen County, New Jersey and filed with the Surrogate Court in the appropriate county, initiating a judicial proceeding. The Assignee has been charged with liquidating the assets for the benefit of the Prime EFS and Shypdirect creditors pursuant to the provisions of the ABC Statute.
As a result of Prime EFS and Shypdirect’s filing of the executed Deeds of Assignment for the Benefit of Creditors on September 7, 2021, the Assignee assumed all authority to manage Prime EFS or Shypdirect. Additionally, Prime EFS and Shypdirect no longer conduct any business and are not permitted by the Assignee and ABC Statute to conduct any business. For these reasons, effective September 7, 2021, we relinquished control of Prime EFS and Shypdirect. Therefore, we deconsolidated Prime EFS and Shypdirect effective with the filing of executed Deeds of Assignment for the Benefit of Creditors in September 2021. Further, on October 13, 2021, Prime EFS and Shypdirect filed for dissolution with the Secretary of State of New Jersey. Our results of operations for the years ended December 31, 2021 and 2020 include the results of Prime EFS and Shypdirect prior to the September 7, 2021 filing of the executed Deeds of Assignment for the Benefit of Creditors with the State of New Jersey.
On November 13, 2020, we formed a wholly owned subsidiary, Shyp FX, Inc., a company incorporated under the laws of the State of New Jersey (“Shyp FX”). On January 15, 2021, through Shyp FX, we executed an asset purchase agreement (“APA”) and closed a transaction to acquire substantially all of the assets and certain liabilities of Double D Trucking, Inc., a northern New Jersey-based logistics provider specializing in servicing Federal Express over the past 25 years (“DDTI”), including last-mile delivery services using vans and box trucks. The purchase price was $100,000 of cash and a promissory note of $400,000. The principal assets involved in the acquisition were vehicles for cargo transport, system equipment for vehicle tracking and navigation of vehicles, and delivery route rights together with assumption of associated customer relationships. We concluded that the operations of Shyp FX, which is exclusively dedicated to servicing Federal Express routes in northern New Jersey, no longer fit into our long-term growth plans. Shyp FX sold substantially all its asset and specific liabilities in a transaction that closed in June 2022.
On November 16, 2020, we formed a wholly owned subsidiary, TLSS Acquisition, Inc., a company incorporated under the laws of the State of Delaware (“TLSS Acquisition”). On March 24, 2021, TLSS Acquisition acquired all the issued and outstanding shares of capital stock of Cougar Express, Inc., a New York-based full-service logistics provider specializing in pickup, warehousing, and delivery services in the tri-state area (“Cougar Express”). The purchase price was $2,000,000 of cash plus cash for the acquisition of security deposits, a cash payment equal to 50% of the difference between cash and accounts receivable acquired and accounts payable assumed, less the assumption of truck loans and leases, and a promissory note of $350,000. The previous owner of Cougar Express is barred from competing with the Cougar Express business for five years. Cougar Express was a family-owned full-service transportation business that has been in operation for more than 30 years providing one-to-four person deliveries and offering white glove services. It utilizes its own fleet of trucks, warehouse/driver/office personnel and on-call subcontractors from its convenient and secure New York JFK airport area location, allowing it to pick-up and deliver throughout the New York tri-state area. Cougar Express serves a diverse base of approximately 50 commercial accounts, which are freight forwarders that work with some of the most notable retail businesses in the country. We believe that the acquisition of Cougar Express fits our current business plan, given Cougar Express’s demographic location, services offered, and diversified customer base, and given that it would provide us with a long-standing, well-run profitable operation as a step to begin replacing the revenue it lost as a result of Amazon terminating its delivery service provider business. Furthermore, we believe that, because Cougar Express is strategically based in New York and serves the tri-state area, organic growth opportunities will be available for expanding its footprint into our primary base of operations in New Jersey, as well as efficiencies that could be derived by leveraging Shypdirect’s operational capabilities.
On February 21, 2021, the Company formed a wholly owned subsidiary, Shyp CX, Inc., a company incorporated under the laws of the State of New York (“Shyp CX”). Shyp CX does not engage in any revenue-generating operations.
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On August 4, 2022, the Company’s wholly-owned subsidiary, Cougar Express, closed on its acquisition of all outstanding stock of JFK Cartage, Inc., a New York-based full-service logistics provider specializing in pickup, warehousing and delivery services in the tri-state area (“JFK Cartage”). Joan Ton, the sole shareholder of JFK Cartage, from whom the shares were acquired, is an unrelated party (the “JFK Cartage Seller”). The effective date of the acquisition was July 31, 2022. With annual revenues of $3.6 million in 2021 and approximately $2.0 million for the first six months of 2022, JFK Cartage operates from a 30,000 square foot warehouse with ten drive-in doors and is strategically located approximately six miles from JFK International Airport. JFK Cartage has been in business since 2008 and has been providing warehousing, cross-dock services, pickup and deliveries, and general trucking, handling airfreight, trade show freight, expedited and hotshot demand work, LTL/cartage as well as FTL, reverse logistics, white glove and residential delivery services to a broad base of over 95 commercial accounts and residential customers. JFK Cartage operates a wide-ranging fleet of specialty vehicles, from its Sprinter vans to full 53-ft. tractor trailers. JFK Cartage, with its assets, fleet and warehouse is believed to be one of the largest leading cartage agents serving the New York Tri-State area. Pursuant to the Stock Purchase and Sale Agreement with Cougar Express and JFK Cartage dated May 24, 2022, the purchase price was $1,700,000, subject to certain adjustments. The Company: (i) paid $405,712 in cash at closing; and (ii) JFK Cartage entered into a $696,935 promissory note with the JFK Cartage Seller, $98,448 of which is payable weekly, in the amount of 25% of accounts receivable collected, but in any event, no later than October 4, 2022, with the remaining balance of $598,487, payable in three annual installments of $199,496, with interest at 5.0% percent per annum on July 31, 2023, July 31, 2024 and July 31, 2025, respectively. As of the date of this report, the $98,448 has not been paid. Additionally, Cougar Express agreed to pay the $503,065 Small Business Administration (“SBA”) loan that existed on the books of JFK Cartage, which was paid in August 2022; and (iv) agreed to pay certain accrued liabilities and other notes payable that exists on the books of JFK Cartage. For accounting purposes, the total purchase consideration paid, after closing adjustments, was deemed to be $1,102,647, which includes cash of $405,712 plus the $696,935 promissory note that is in the name of JFK Cartage. The purchase consideration amount did not include the SBA loan of $503,065 and accrued liabilities and other notes payable which were treated as assumed liabilities in the purchase price allocation.
Effective September 16, 2022, the Company’s newly formed wholly-owned subsidiary, TLSSFC, closed on an acquisition of all outstanding stock of Freight Connections, a company offering an array of transportation, warehousing, consolidating, distribution, and local cartage services throughout the New York tri-state area. Joseph Corbisiero, the sole shareholder of Freight Connections, from whom the shares were acquired (the “Freight Connections Seller”), is an unrelated party. Freight Connections was founded in 2016 and is a transportation and logistics carrier headquartered in Ridgefield Park, New Jersey. Freight Connections currently operates with 30 power units and 50 trailers, including dry vans, pups, flatbeds, step decks, and double drop trailers out of three buildings in the area with 200,000 square feet of warehouse and cross dock space, strategically located within one mile of each other. Freight Connections offers customers an array of services including truckload, LTL, and consolidating of cartage, construction-trade, air, and rail freight, as well as warehousing and distribution services. Prior to the closing, the Company, TLSS Acquisition, Inc. (“TLSS Acquisition”) and Freight Connections Seller entered into an amendment to their Stock Purchase and Sale Agreement, dated as of May 23, 2022 (the “Amended SPA”), and TLSS Acquisition assigned its interest in the Amended SPA to TLSSFC. Pursuant to the Amended SPA, the total purchase price was $9,365,000, subject to certain adjustments. TLSSFC: (i) paid $1,525,000 in cash at closing, (ii) Freight Connections entered into a $4,544,671 secured promissory note with the Freight Connections Seller, with interest accruing at the rate of 5% per annum and then 10% per annum as of March 1, 2023 (The entire unpaid principal under the note, together with all accrued and unpaid interest thereon and all other amounts payable thereunder, shall be due and payable in one balloon payment on December 31, 2023, unless paid sooner. The promissory note is secured solely by the assets of Freight Connections), and (iii) assumed certain debt. The Company issued to the Freight Connections Seller 178,911,844 shares of the Company’s common stock and 32,374 shares of the Company’s Series H preferred stock which is convertible into an aggregate of 323,740,000 shares of the Company’s common stock based on a conversion of 10,000 shares of common stock for each share of Series H preferred stock outstanding. The common stock and the as if converted number of Series H preferred stock were valued at $0.0059 per share based on the quoted closing price of the Company’s common stock on the measurement date, for an aggregate fair value of $2,965,646. The number of shares was calculated as follows: (a) shares of common stock of the Company equal to no more than 4.99% of the number of shares of common stock outstanding immediately after such issuance, and (b) the balance of the shares in Series H Convertible Preferred Stock, a new series of non-voting, convertible preferred stock issuable to sellers in connection with acquisitions or strategic transactions approved by a majority of the directors of the Company. TLSSFC agreed to pay certain accrued liabilities and other notes payable that exists on the books of Freight Connections and agreed to pay the $4,544,671 secured promissory note which is in the name of Freight Connections. For accounting purposes, the total purchase consideration paid, after closing adjustments, was deemed to be $9,035,317 which includes (i) cash paid of $1,525,000, (ii) the aggregate fair value of common shares and Series H preferred shares issued to Freight Connections Seller of $2,965,646, and (iii) the $4,544,671 secured promissory note in the name of Freight Connections. The purchase consideration amount does not include accrued liabilities and other notes payable which were treated as assumed liabilities in the purchase price allocation.
The following discussion highlights the results of our operations and the principal factors that have affected the Company’s consolidated financial condition as well as its liquidity and capital resources for the periods described and provides information that management believes is relevant for an assessment and understanding of the consolidated financial condition and results of operations presented herein. The following discussion and analysis are based on the unaudited condensed consolidated financial statements contained in this Quarterly Report, which have been prepared in accordance with generally accepted accounting principles in the United States. You should read the discussion and analysis together with such unaudited condensed consolidated financial statements and the related notes thereto.
Critical Accounting Policies and Significant Accounting Estimates
The methods, estimates, and judgments that we use in applying our accounting policies have a significant impact on the results that we report in our unaudited condensed consolidated financial statements. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. Significant estimates included in the accompanying unaudited condensed consolidated financial statements and footnotes include the valuation of accounts receivable, the useful life of property and equipment, the valuation of intangible assets, the valuation of assets acquired and liabilities assumed, the valuation of right of use assets and related liabilities, assumptions used in assessing impairment of long-lived assets, estimates of current and deferred income taxes and deferred tax valuation allowances, the fair value of non-cash equity transactions, the valuation of derivative liabilities, the valuation of beneficial conversion features, and the value of claims against the Company.
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We have identified the accounting policies below as critical to our business operation:
Accounts receivable
Accounts receivable are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, a customer’s historical payment history, its current credit worthiness, and current economic trends. Accounts are written off after exhaustive efforts at collection.
Intangible assets
Intangible assets are carried at cost less accumulated amortization, computed using the straight-line method over the estimated useful life, less any impairment charges.
Business acquisitions
We account for the acquisition of Cougar Express, JFK Cartage, and Freight Connections using the acquisition method of accounting where the assets acquired and liabilities assumed are recognized based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Determining the fair value of certain acquired assets and liabilities is subjective in nature and often involves the use of significant estimates and assumptions, including, but not limited to, the selection of appropriate valuation methodology, projected revenue, expenses, and cash flows, weighted average cost of capital, discount rates, and estimates of terminal values. Business acquisitions are included in our consolidated financial statements as of the date of the acquisition.
Goodwill and Other Indefinite-Lived Intangible Assets
Our business acquisitions typically result in the recording of goodwill and other intangible assets, which affect the amount of amortization expense and possibly impairment write-downs that we may incur in future periods. Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired in business acquisitions. We annually review goodwill at the reporting unit level and intangible assets that have indefinite lives for impairment in its fiscal fourth quarter and when events or changes in circumstances indicate the carrying values of these assets might exceed their current fair values.
Impairment of long-lived assets
In accordance with ASC Topic 360, we review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. We recognize an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value.
Leases
On January 1, 2019, we adopted ASU No. 2016-02, applying the package of practical expedients to leases that commenced before the effective date whereby the Company elected to not reassess the following: (i) whether any expired or existing contracts contain leases and (ii) initial direct costs for any existing leases. For contracts entered into on or after the effective date, at the inception of a contract the Company assessed whether the contract is, or contains, a lease. The Company’s assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether it has the right to direct the use of the asset. We will allocate the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments. We have elected not to recognize right-of-use assets and lease liabilities for short-term leases that have a term of 12 months or less.
Operating lease ROU assets represents the right to use the leased asset for the lease term and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. As most leases do not provide an implicit rate, we use an incremental borrowing rate based on the information available at the adoption date in determining the present value of future payments. Lease expense for minimum lease payments is amortized on a straight-line basis over the lease term and is included in general and administrative expenses in the unaudited condensed consolidated statements of operations.
Revenue recognition and cost of revenue
We adopted ASC 606, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition. This ASC is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASC also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer service orders, including significant judgments.
We recognize revenues and the related direct costs of such revenue which generally include compensation and related benefits, gas costs, insurance, parking and tolls, truck rental fees, and maintenance fees as of the date the freight is delivered which is when the performance obligation is satisfied. In accordance with ASC Topic 606, we recognize revenue on a gross basis. Our payment terms are net seven days from acceptance of delivery. We do not incur incremental costs obtaining service orders from our customers, however, if we did, because all our customer contracts are less than a year in duration, any contract costs incurred would be expensed rather than capitalized. The revenue that we recognize arises from deliveries of packages on behalf of the Company’s customers. Primarily, our performance obligations under these service orders correspond to each delivery of packages that we make under the service agreements. Control of the delivery transfers to the recipient upon delivery. Once this occurs, we have satisfied our performance obligation and we recognize revenue.
Management has reviewed the revenue disaggregation disclosure requirements pursuant to ASC 606 and determined that no further disaggregation disclosure is required to be presented.
Stock-based compensation
Stock-based compensation is accounted for based on the requirements of ASC 718 – “Compensation –Stock Compensation”, which requires recognition in the financial statements of the cost of employee, director, and non-employee services received in exchange for an award of equity instruments over the period the employee, director, or non-employee is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee, director, and non-employee services received in exchange for an award based on the grant-date fair value of the award. We have elected to recognize forfeitures as they occur as permitted under ASU 2016-09 Improvements to Employee Share-Based Payment.
Deconsolidation of subsidiaries
The Company accounts for a gain or loss on deconsolidation of a subsidiary or derecognition of a group of assets in accordance with ASC 810-10-40-5. The Company measures the gain or loss as the difference between (a) the aggregate of fair value of any consideration received, the fair value of any retained noncontrolling investment and the carrying amount of any noncontrolling interest in the former subsidiary at the date the subsidiary is deconsolidated and (b) the carrying amount of the former subsidiary’s assets and liabilities or the carrying amount of the group of assets.
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RESULTS OF OPERATIONS
Our unaudited condensed consolidated financial statements have been prepared assuming that we will continue as a going concern and, accordingly, do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should we be unable to continue our operation.
We expect we will require additional capital to meet our long-term operating requirements. We expect to raise additional capital through, among other things, the sale of equity or debt securities.
For the three and nine months ended September 30, 2022 compared with the three and nine months ended September 30, 2021
The following table sets forth our revenues, expenses and net loss for the three and nine months ended September 30, 2022 and 2021. The financial information below is derived from our unaudited condensed consolidated financial statements included in this Quarterly Report.
| Three
Months ended September 30, | Nine
Months ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues | $ | 1,700,854 | $ | 1,207,305 | $ | 4,364,747 | $ | 4,273,498 | ||||||||
| Cost of revenues | 1,236,630 | 1,178,113 | 3,221,182 | 4,422,429 | ||||||||||||
| Gross profit (loss) | 464,224 | 29,192 | 1,143,565 | (148,931 | ) | |||||||||||
| Operating expenses | 1,480,503 | 1,924,725 | 4,965,157 | 5,102,405 | ||||||||||||
| Loss from operations | (1,016,279 | ) | (1,895,533 | ) | (3,821,592 | ) | (5,251,336 | ) | ||||||||
| Other (expense) income, net | (27,499 | ) | 8,150,463 | 31,617 | 12,919,943 | |||||||||||
| Net (loss) income | (1,043,778 | ) | 6,254,930 | (3,789,975 | ) | 7,668,607 | ||||||||||
| Deemed dividend related to beneficial conversion features, and accrued dividends | (101,386 | ) | (21,386 | ) | (317,271 | ) | (1,007,319 | ) | ||||||||
| Net (loss) income attributable to common shareholders | $ | (1,145,164 | ) | $ | 6,233,544 | $ | (4,107,246 | ) | $ | 6,661,288 | ||||||
Revenues
For the three months ended September 30, 2022, our revenues were $1,700,854 as compared to $1,207,305 for the three months ended September 30, 2021, an increase of $493,549, or 40.9%. This increase was primarily a result of the acquisition of JFK Cartage and Freight Connection. During the period from the respective acquisition date to September 30, 2022, JFK Cartage and Freight Connection generated revenues of $480,314 and $343,509, respectively. These increases were offset by a decrease in revenues generated from our Shyp FX business of $292,884 and a decrease in revenues in Cougar Express of $37,390. On June 21, 2022, we sold substantially all of the assets of Shyp FX in an all-cash transaction and Shyp FX became inactive.
For the nine months ended September 30, 2022, our revenues were $4,364,747 as compared to $4,273,498 for the nine months ended September 30, 2021, an increase of $91,249, or 2.1%. This increase was primarily a result of the acquisition of JFK Cartage and Freight Connection. During the period from the respective acquisition date to September 30, 2022, JFK Cartage and Freight Connection generated revenues of $480,314 and $343,509, respectively, and an increase in revenues generated by Cougar Express of $1,228,736 which was acquired in March 2021. These increases were offset by a decrease in revenue attributable to Shypdirect’s mid-mile and long-haul business with Amazon of $1,567,927, a decrease in revenues generated from our Shyp FX business of $307,940 and a decrease in revenue from other Shypdirect’s customers of $85,443. On June 21, 2022, we sold substantially all of the assets of Shyp FX in an all-cash transaction and Shyp FX became inactive.
During the nine months ended September 30, 2021, one customer, Amazon, represented 36.7% of the Company’s total net revenues which was attributable to Shypdirect’s now terminated mid-mile and long-haul business with Amazon.
On June 21, 2022, we sold substantially all the assets of Shyp FX in an all-cash transaction. For the nine months ended September 30, 2022 and 2021, we generated revenues from our Shyp FX operation of $528,488 and $836,428, respectively. Subsequent to June 21, 2022 we will no longer being generating this revenue.
We continue to: (i) seek to replace the lost Amazon business with other, non-Amazon, customers; (ii) explore other strategic relationships; and (iii) identify potential acquisition opportunities, while continuing to execute our restructuring plan.
Cost of Revenues
For the three months ended September 30, 2022, our cost of revenues was $1,236,630 compared to $1,178,113 for the three months ended September 30, 2021, an increase of $58,517, or 5.0%. For the nine months ended September 30, 2022, our cost of revenues was $3,221,182 compared to $4,422,429 for the nine months ended September 30, 2021, a decrease of $1,201,247, or 27.2%, primarily related to a decrease in cost of revenues attributable to Prime EFS and Shypdirect’s now terminated business with Amazon of $2,456,739 and a decrease in cost of revenues related to sale of Shyp FX of $162,340, offset by an increase in costs of revenue from Cougar Express of $895,642 and increases in costs of revenues of $522,190 resulting from the acquisition of JFK Cartage and Freight Connection. Cost of revenues consists of truck and van rental fees, insurance, gas, maintenance, parking and tolls, and compensation and related benefits. In the first quarter of 2021, Prime EFS received a bill for approximately $304,000 for excess wear and tear on trucks that were rented for its last-mile DSP business that terminated in September 2020, which is included in cost of sales.
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Gross Profit
For the three months ended September 30, 2022, we had a gross profit of $464,224, or 27.3% of revenues, as compared to gross profit of $29,192, or 2.4% of revenues, for the three months ended September 30, 2021, an increase of $435,032, or 1,490%. For the nine months ended September 30, 2022, we had a gross profit of $1,143,565, or 26.2% of revenues, as compared to a gross loss of $(148,931), or (3.5)% of revenues, for the nine months ended September 30, 2021, an increase of $1,292,496, or 867.8%.
As discussed above, during the three months ended March 31, 2021, Prime EFS received a bill for approximately $304,000 for excess wear and tear on trucks that were rented for its last-mile DSP business that terminated in September 2020. Additionally, during the three and nine months ended September 30, 2021, the gross profit (loss) primarily resulted from a decrease in revenues and a decrease in operational efficiencies in Prime EFS and Shypdirect due to the termination of the Amazon last-mile business and decrease in revenues from our mid-mile and long-haul business.
Operating Expenses
For the three months ended September 30, 2022, total operating expenses amounted to $1,480,503 as compared to $1,924,725 for the three months ended September 30, 2021, a decrease of $444,222, or 23.1%. For the nine months ended September 30, 2022, total operating expenses amounted to $4,965,157 as compared to $5,102,405 for the nine months ended September 30, 2021, a decrease of $137,248, or 2.7%. For the three and nine months ended September 30, 2022 and 2021, operating expenses consisted of the following:
| Three
Months ended September 30, | Nine
Months ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Compensation and related benefits | $ | 720,339 | $ | 351,908 | $ | 2,770,092 | $ | 1,064,570 | ||||||||
| Legal and professional Fees | 259,597 | 487,473 | 948,094 | 1,470,926 | ||||||||||||
| Rent | 217,717 | 154,132 | 430,011 | 521,688 | ||||||||||||
| General and administrative expenses | 282,850 | 323,658 | 816,960 | 821,593 | ||||||||||||
| Loss on lease abandonment | - | 607,554 | - | 1,223,628 | ||||||||||||
| Total Operating Expenses | $ | 1,480,503 | $ | 1,924,725 | $ | 4,965,157 | $ | 5,102,405 | ||||||||
Compensation and related benefits
For the three months ended September 30, 2022, compensation and related benefits amounted to $720,339 as compared to $351,908 for the three months ended September 30, 2021, an increase of $368,431, or 104.7%. During the three months ended September 30, 2022, in connection with the issuance of common shares to executive officers and directors, we recorded stock-based compensation of $180,910. Additionally, as a result of the acquisition of JFK Cartage and Freight Connection, during the period from the respective acquisition date to September 30, 2022, JFK Cartage and Freight Connection incurred compensation and related benefits expense of $103,099 and $38,069, respectively. Furthermore, compensation and related benefits increased by $46,353 which as primarily attributable to the hiring of our chief executive officer and chief financial officer in January 2022 offset by an overall decrease in staff.
For the nine months ended September 30, 2022, compensation and related benefits amounted to $2,770,092 as compared to $1,064,570 for the nine months ended September 30, 2021, an increase of $1,705,522, or 160.2%. During the nine months ended September 30, 2022, in connection with the issuance of common shares to executive officers and directors, we recorded stock-based compensation of $1,221,077. Additionally, as a result of the acquisition of JFK Cartage and Freight Connection, during the period from the respective acquisition date to September 30, 2022, JFK Cartage and Freight Connection incurred compensation and related benefits expense of $103,099 and $38,069, respectively. Furthermore, compensation and related benefits increased by $343,277 which as primarily attributable to the hiring of our chief executive officer and chief financial officer in January 2022 offset by an overall decrease in staff.
Legal and professional fees
For the three months ended September 30, 2022, legal and professional fees were $259,597 as compared to $487,473 for the three months ended September 30, 2021, a decrease of $227,876, or 46.7%. During the three months ended September 30, 2022, we had a decrease in accounting fees of $96,375 related to accounting fees incurred in 2021 in connection an abandoned acquisition target, a decrease in consulting fees of $77,653 due the hiring of our chief executive office in January 2022 who was paid consulting fees during the 2021 period, and a decrease in legal fees of $98,481 due a decrease in litigation activities, offset by an increase in other professional fees of $44,633.
For the nine months ended September 30, 2022, legal and professional fees were $948,094 as compared to $1,470,926 for the nine months ended September 30, 2021, a decrease of $522,832, or 35.5%. During the nine months ended September 30, 2022, we had a decrease in accounting fees of $103,609 related to accounting fees incurred in 2021 in connection an abandoned acquisition target, a decrease in consulting fees of $213,106 due the hiring of our chief executive office in January 2022 who was paid consulting fees during the 2021 period, a decrease in other professional fees of $92,741, and a decrease in legal fees of $113,376 due to a decrease in litigation activities.
Rent expense
For the three months ended September 30, 2022, rent expense was $217,717 as compared to $154,132 for the three months ended September 30, 2021, an increase of $63,585, or 41.2%. For the nine months ended September 30, 2022, rent expense was $430,011 as compared to $521,688 for the nine months ended September 30, 2021, a decrease of $91,677, or 17.6%. The decrease during the nine-month period was attributable to the abandonment of our leased properties which were vacated due to the cessation of the operations of Prime EFS and Shypdirect. As of December 31, 2021, we abandoned all of our leased properties, except for the Cougar Express premises. The lease of our subsidiary, Cougar Express, expired on December 31, 2021. Cougar Express is holding over in the facility while it attempts to negotiate a lease renewal with its landlord. In May 2022, we signed a stipulation of Settlement with the landlord and we paid monthly rent of $33,275 plus common area maintenance and insurance through September 2022 at which time we vacated the premises and moved all Cougar operations to the JFK Cartage facilities. As a result of the acquisition of JFK Cartage and Freight Connection, during the period from the respective acquisition date to September 30, 2022, JFK Cartage and Freight Connection incurred rent expense of $108,406 and $2,957, respectively.
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General and administrative expenses
For the three months ended September 30, 2022, general and administrative expenses were $282,850 as compared to $323,658 for the three months ended September 30, 2021, a decrease of $40,808, or 12.6%. For the nine months ended September 30, 2022, general and administrative expenses were $816,960 as compared to $821,593 for the nine months ended September 30, 2021, a decrease of $4,633, or 0.6%. These decreases attributable to cost-cutting measures taken, These decreases were offset by an increase in general and administrative expense resulting from the acquisition of JFK Cartage and Freight Connections. As a result of the acquisition of JFK Cartage and Freight Connection, during the period from the respective acquisition date to September 30, 2022, JFK Cartage and Freight Connection incurred general and administrative expenses of $7,767 and $31,285, respectively.
Loss from lease abandonment
Due to a reduction in our revenues and the loss of its Amazon revenues, during the second and third quarter of 2021, we abandoned all our leased premises. Accordingly, during the three and nine months ended September 30, 2021, we wrote the remaining balance of this right of use asset and recorded a loss on lease abandonment of $607,554 and $1,223,628, respectively. We did not have a loss from lease abandonment in the 2022 periods.
Loss from Operations
For the three months ended September 30, 2022, loss from operations amounted to $1,016,279 as compared to $1,895,533 for the three months ended September 30, 2021, a decrease of $879,254, or 46.4%. For the nine months ended September 30, 2022, loss from operations amounted to $3,821,592 as compared to $5,251,336 for the nine months ended September 30, 2021, a decrease of $1,429,744, or 27.2%.
Other Income (Expenses)
Total other income (expenses) includes interest expense, derivative income, warrant exercise inducement expense, gain on debt extinguishment, gain (loss) on sale of assets of subsidiary, settlement expense, and other income. For the three and nine months ended September 30, 2022 and 2021, other income (expenses) consisted of the following:
| Three
Months ended September 30, | Nine
Months ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Interest expense | $ | (14,635 | ) | $ | (71,939 | ) | $ | (24,397 | ) | $ | (290,898 | ) | ||||
| Interest expense – related party | - | (22,685 | ) | - | (67,315 | ) | ||||||||||
| Warrant exercise inducement expense | - | (4,193,134 | ) | - | (4,193,134 | ) | ||||||||||
| Gain on debt extinguishment | - | - | - | 1,564,941 | ||||||||||||
| Gain (loss) from sale of assets of subsidiary | (2,714 | ) | - | 293,975 | - | |||||||||||
| Gain from deconsolidation of subsidiaries | - | 12,427,220 | - | 12,427,220 | ||||||||||||
| Settlement expense | (10,150 | ) | - | (237,961 | ) | - | ||||||||||
| Other income | - | 11,001 | - | 194,823 | ||||||||||||
| Derivative income | - | - | - | 3,284,306 | ||||||||||||
| Total Other Income (Expenses) | $ | (27,499 | ) | $ | 8,150,463 | $ | 31,617 | $ | 12,919,943 | |||||||
For the three months ended September 30, 2022 and 2021, aggregate interest expense was $14,635 and $94,624, respectively, a decrease of $79,989, or 84.5%. For the nine months ended September 30, 2022 and 2021, aggregate interest expense was $24,397 and $358,213, respectively, a decrease of $333,816, or 93.2. The decrease in interest expense was attributable to a decrease in interest-bearing loans due to the conversion of debt to equity and repayment of debt, and a decrease in the amortization of original issue discount.
During the nine months ended September 30, 2021, we entered into Securities Purchase Agreements with certain of the holders of its existing Series E preferred warrants (“Exercising Warrants Holders”). Pursuant to the Securities Purchase Agreements, the Exercising Warrants Holders and we agreed that the Exercising Warrants Holders would cash exercise their existing warrants, into shares of common stock underlying such existing warrants Shares. In order to induce the Exercising Warrant Holders to cash exercise their existing Warrants, the Securities Purchase Agreements provided for the issuance of new warrants (“New Warrants”) with such New Warrants to be issued in an amount equal to 50% of the number of shares acquired by the Existing Warrant Holder through the exercise of existing warrants for cash. The New Warrants are exercisable upon issuance and terminate five years following the initial exercise date. The New Warrants have an exercise price per share of $0.01. In connection with the exercise of these existing warrants for cash, the Company issued an aggregate of 191,341,147 New Warrants. The New Warrants issued in connection with the Securities Purchase Agreements were considered inducement warrants and are classified in equity. During the three and nine months ended September 30, 2021 and 2020, the fair value of the New Warrants issued was $4,193,134 and was expensed as warrant exercise inducement expense on the accompanying condensed consolidated statement of operations.
For the three and nine months ended September 30, 2021, the aggregate net gain on extinguishment of debt was $0 and $1,564,941. We did have any gain from debt extinguishment in the 2022 periods. The gains on debt extinguishment in 2021 were attributable to the settlement of convertible debt and warrants, the conversion of convertible debt, and the settlement of other payables.
During the three and nine months ended September 30, 2022, we recorded a gain (loss) from the sale of assets of our subsidiary, Shyp FX, of $(2,714) and $293,975, respectively.
During the three and nine months ended September 30, 2022, we recorded settlement expense of $10,150 and $237,961 in connection with the settlement of a lawsuits and claims, respectively.
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During the three and nine months ended September 30, 2021, we recorded other income of $11,001 and $194,823, respectively, compared to $0 in the 2022 periods. Other income was primarily related to the collection of rental income from the sublease of excess office, warehouse, and parking spaces. We no longer receive sublease income.
For the three and nine months ended September 30, 2021, derivative income was $0 and $3,284,306, respectively. During the three and nine months ended September 30, 2021, we recorded a derivative expense related to the adjustment to derivative liabilities to fair value.
For the three and nine months ended September 30, 2021, we recognized a gain on deconsolidation of subsidiaries of $12,427,220. We did not recognize this gain during the 2022 periods.
Net (Loss) Income
Due to factors discussed above, for the three months ended September 30, 2022 and 2021, net (loss) income amounted to $(1,043,778) and $6,254,930, respectively. For the three months ended September 30, 2022 and 2021, net (loss) income attributable to common shareholders, which included a deemed dividend related to beneficial conversion features on preferred stock and the dividends accrued on Series E and Series G preferred stock of $101,386 and $21,386, amounted to $(1,145,164), or $(0.00) per basic and diluted common share, and $6,233,544, or $0.00 per basic and diluted common share, respectively.
For the nine months ended September 30, 2022 and 2021, net (loss) income amounted to $(3,789,975) and $7,668,607, respectively. Additionally, for the nine months ended September 30, 2022 and 2021, net (loss) income attributable to common shareholders, which included a deemed dividend related to beneficial conversion features on preferred stock and the dividends accrued on Series E and Series G preferred stock of $317,271 and $1,007,319, amounted to $(4,107,246), or $(0.00) per basic and diluted common share, and $6,661,288, or $0.00 per basic and diluted common share, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. On September 30, 2022 and December 31, 2021, we had a cash balance of $2,440,726 and $6,067,692, respectively. Our working capital was $1,875,904 on September 30, 2022. We reported a net decrease in cash for the nine months ended September 30, 2022 as compared to December 31, 2021 of $3,626,966 primarily as a result of the use of cash used for the repayment of notes payable of $809,905, cash used to purchase property and equipment of $118,617, cash used in operations of $2,839,677, and cash used for acquisitions of $1,930,712, offset by net cash proceeds received from the sale of Series G preferred stock units of $855,000, cash proceeds from the exercise of warrants of $245,714, proceeds from notes payable of $108,395, cash acquired in acquisitions of $138,336, and net cash proceeds received from the sale of the assets of Shyp FX of $748,500.
We believe that our existing working capital and our future cash flows from operating activities will provide sufficient cash to enable us to meet our operating needs and debt requirements for the next twelve months from the issuance date of the report.
Additionally, we are seeking to raise capital through additional debt and/or equity financings to fund our operations in the future. Although we have historically raised capital from sales of shares of common stock, the sale of Series E and Series G preferred stock, and from the issuance of convertible promissory notes and notes payable, there is no assurance that we will be able to continue to do so. If we are unable to raise additional capital or secure additional lending in the future, management expects that we will need to curtail our operations.
Recent Financing Activities
Sale of Series G Preferred Stock
On December 31, 2021, the Company entered into Securities Purchase Agreements with investors pursuant to which the Investors agreed to purchase units, severally and not jointly, which consisted of an aggregate of (i) 615,000 shares of Series G and (ii) Warrants to purchase 615,000,000 shares of the Company’s common stock which are equal to 1,000 warrants for each for each share of Series G purchased (the “December 2021 Series G Offering”). The gross proceeds to the Company were $6,150,000, or $10.00 per unit. The Company paid fees of $615,507, paid cash of $54,933 for the settlement of disputed penalties related the Series E, and received net proceeds of $5,479,560 The initial exercise price of the Warrants related to the December 2021 Series G Offering is $0.01 per share, subject to adjustment. Additionally, the Company issued 123,000,000 warrants to the placement agent at an initial exercise price of $0.01 per share.
On January 25, 2022, the Company entered into Securities Purchase Agreements with investors pursuant to which the Investors agreed to purchase units, severally and not jointly, which consisted of an aggregate of (i) 70,000 shares of Series G and (ii) Warrants to purchase 70,000,000 shares of the Company’s common stock which are equal to 1,000 warrants for each share of Series G purchased (the “January 2022 Series G Offering”). The gross proceeds to the Company were $700,000, or $10.00 per unit. The Company paid placement agent fees of $70,000 and received net proceeds of $630,000. On March 4, 2022, the Company entered into a Securities Purchase Agreement with an investor pursuant to which the Investor agreed to purchase units, severally and not jointly, which consisted of an aggregate of (i) 25,000 shares of Series G and (ii) Warrants to purchase 25,000,000 shares of the Company’s common stock which are equal to 1,000 warrants for each for each share of Series G purchased (the “March 2022 Series G Offering”). The gross proceeds to the Company were $250,000, or $10.00 per unit. The Company paid placement agent fees of $25,000 and received net proceeds of $225,000. The initial exercise price of the Warrants related to the January 2022 and March 2022 Series G Offerings is $0.01 per share, subject to adjustment. Additionally, the Company issued 19,000,000 warrants to the placement agent at an initial exercise price of $0.01 per share. The aggregate cash fees of $95,000 was charged against the proceeds of the offering in additional paid-in capital and there is no effect on equity for the placement agent warrants.
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Cash Flows
Operating activities
Net cash flows used in operating activities for the nine months ended September 30, 2022 amounted to $2,839,677. During the nine months ended September 30, 2022, net cash used in operating activities was primarily attributable to net loss of $3,789,975, adjusted for the add back (reduction) of non-cash items such as depreciation and amortization expense of $532,550, stock-based compensation of $1,221,077, stock-based professional fees of $10,000, and a non-cash gain from the sale of the assets of Shyp FX of $296,689, and changes in operating assets and liabilities such as a decrease in accounts receivable of $1,173, an increase in prepaid expenses and other current assets of $193,392, an increase in security deposit of $3,552, a decrease in accounts payable and accrued expenses of $295,981, an increase in insurance payable of $61,735, and a decrease in accrued compensation and related benefits of $90,514.
Net cash flows used in operating activities for the nine months ended September 30, 2021 amounted to $2,863,483. During the nine months ended September 30, 2021, net cash used in operating activities was primarily attributable to net income of $7,668,607, adjusted for the add back (reduction) of non-cash items such as depreciation and amortization expense of $498,876, derivative income of $3,284,306, amortization of debt discount of $83,548, gain on debt extinguishment of $1,564,941, warrant exercise inducement expense of $4,193,134, a non-cash gain from the deconsolidation of subsidiaries of $12,448,899 and loss on lease abandonment of $1,223,628, and changes in operating assets and liabilities such as a decrease in accounts receivable of $173,941, a decrease in prepaid expenses and other current assets of $159,142, a decrease in security deposit of $94,000, an increase in accounts payable and accrued expenses of $500,908, a decrease in insurance payable of $123,445, and a decrease in accrued compensation and related benefits of $16,310.
Investing activities
Net cash used in investing activities for the nine months ended September 30, 2022 amounted to $1,162,493, which consisted of cash used for acquisitions of $1,930,712 and cash used for the purchase of property and equipment of $118,617, offset by net proceeds received from the sale of the assets of Shyp FX of $748,500 and cash acquired in acquisitions of $138,336.
Net cash used in investing activities for the nine months ended September 30, 2021 amounted to $2,119,664 and consisted of net cash used for the acquisition of DDTI and Cougar Express offset by cash proceeds from sale of property and equipment of $3,451.
Financing activities
For the nine months ended September 30, 2022, net cash provided by financing activities totaled $375,204. During the nine months ended September 30, 2022, we received proceeds from the sale of Series G preferred shares of $855,000, cash proceeds of $245,714 from the exercise of warrants, and cash from notes payable of $108,395, offset by the repayment of notes payable of $809,905 and the payment of liquidating damages of $24,000.
For the nine months ended September 30, 2021, net cash provided by financing activities totaled $7,072,193. During the nine months ended September 30, 2021, we received proceeds from the sale of Series E preferred shares of $3,590,500, cash proceeds of $3,940,669 from the exercise of warrants and an increase in amounts due to related party of $37,315, offset by the repayment of notes payable of $496,291.
Risks and Uncertainties
The accompanying unaudited condensed consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the ordinary course of business.
Historically, we have primarily funded our operations with proceeds from sales of convertible debt and convertible preferred stock. Since our inception, we have incurred recurring losses, including a loss from operations of $3,821,592 and $5,251,336 for the nine months ended September 30, 2022 and 2021, respectively. Until such time that we implement our growth through acquisition strategy, we expect to continue to generate operating losses in the foreseeable future, mostly due to corporate overhead and costs of being a public company.
During the year ended December 31, 2021, we issued an aggregate of 343,118 shares of our Series E preferred stock for net proceeds of $3,590,500 and issued an aggregate of 615,000 shares of our Series G preferred stock for net proceeds of $5,479,560. The proceeds were used for the acquisition of Cougar Express and DDTI, the repayment of debt, and for working capital purposes. Additionally, during the year ended December 31, 2021, we received proceeds of $4,226,383 from the exercise of stock warrants. Additionally, during the nine months ended September 30, 2022, we issued an aggregate of 95,000 shares of our Series G preferred stock for net proceeds of $855,000 and received proceeds of $245,714 from the exercise of stock warrants. As such, we expect that our cash as of September 30, 2022 will be sufficient to fund the Company’s operations for at least the next twelve months from the date of the issuance of the financial statements.
The COVID-19 pandemic and resulting global disruptions have affected the Company’s businesses, as well as those of the Company’s customers and their third-party suppliers and sellers. To serve the Company’s customers while also providing for the safety of the Company’s employees and service providers, the Company has adapted numerous aspects of its logistics and transportation processes. The Company continues to monitor the rapidly evolving situation and expect to continue to adapt its operations to address federal, state, and local standards as well as to implement standards or processes that the Company determines to be in the best interests of its employees, customers, and communities. The impact of the pandemic and actions taken in response to it had some effects on the Company’s results of operations. Effects include increased fulfilment costs and cost of sales, primarily due to investments in employee hiring, pay, and benefits, as well as costs to maintain safe workplaces, and higher shipping costs. The Company continues to be affected by possible procurement and shipping delays, supply chain interruptions, and increased fulfilment costs and cost of sales as a percentage of net sales and it is not possible to determine the duration and spread of the pandemic or such actions, the ultimate impact on the Company’s results of operations during 2022, or whether other currently unanticipated consequences of the pandemic are reasonably likely to materially affect the Company’s results of operations.
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We believe that our existing working capital and future cash flow from operating activities will provide sufficient cash to enable us to meet our operating needs and debt requirements for the next twelve months from the issuance date of this report. We are seeking to raise capital through additional debt and/or equity financings to fund our operations in the future. Although we have historically raised capital from sales of common and preferred shares and from the issuance of convertible promissory notes and notes payable, there is no assurance that we will be able to continue to do so. If we are unable to raise additional capital or secure additional lending in the near future, management expects that we will need to curtail our operations.
Contractual Obligations
We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Effects of Inflation
We do not believe that inflation has had a material impact on our business, revenues, or operating results during the periods presented.
Recently Enacted Accounting Standards
For a description of accounting changes and recent accounting standards, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see “Note 2: Recent Accounting Pronouncements” in the unaudited condensed consolidated financial statements filed with this Quarterly Report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are not required to provide quantitative and qualitative disclosures about market risk because we are a smaller reporting company.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including Sebastian Giordano, our Chief Executive Officer (“CEO”) and James Giordano, we carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of September 30, 2022. Management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our management has assessed the effectiveness of our disclosure controls and procedures and, based upon that evaluation, management concluded that our disclosure controls and procedures were not effective as of September 30. 2022.
As reported in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2021, our management concluded that our internal control over financial reporting was not effective as of that date because of material weaknesses in our internal controls over financial reporting. The ineffectiveness of our disclosure controls and procedures was due to the following material weaknesses in our internal control over financial reporting:
| 1) | The Company lacks segregation of duties; | |
| 2) | There is a lack of segregation of duties and monitoring controls regarding accounting because there are only a few accountants maintaining the books and records; |
We do not believe the material weaknesses described above caused any meaningful or significant misreporting of our consolidated financial condition and results of operations for the quarter ended September 30, 2022.
Management Plan to Remediate Material Weaknesses
Management has already begun the implementation of corrective measures to address the material weaknesses described above. In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, we have initiated, or plan to initiate, the following series of measures:
As we started the new year in 2022, Sebastian Giordano, who was an outside consultant that was responsible for the Company’s financial turnaround the last two years, transitioned to take the formal role of CEO. His first action was to hire a new CFO and bring in three new independent and outside board members to strengthen the management controls of the organization. We currently outsource our financial reporting and other accounting functions to an experienced outsourced accounting and consulting firm who has been engaged by the Company for the past 4 years. The short-term plan is to keep the financial reporting and accounting functions outsourced with this outsourced accounting and consulting firm until the Company is large enough to insource it. In the meantime, the new CFO of the Company is in the process of reviewing and making changes to the current accounting processes and methodologies as discussed below.
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Segregation of duty issues are a common area of weakness for smaller companies with back-office operations with less than 5 people. We have made significant steps to mitigating this material weakness. We started with the hiring of a new, operational experienced CFO to provide oversight and drive immediate improvement in this area. To address this issue, we have begun implementation or implemented the following policies or processes:
| ◌ | Implementation of cash management and banking policy which includes increasing the controls related to individuals banking capabilities, utilization of a daily cash model and forecast, and policy to move cash receipts from customers to ACH. | |
| ◌ | Implementation of formalized payment and accounting transaction review and sign-off by the CFO. | |
| ◌ | Centralization of accounts payable and cash control at the corporate level including the receipt of invoices to a newly created email address and process to get authorized approval for invoices prior to input into system. | |
| ◌ | Implementation and completion of a formal and detailed 2022 budget and forecast for the consolidated Company. | |
| ◌ | Implemented a formal monthly business review process to discuss budget vs actual variances, and other operational issues to be presented to the Company’s CEO and Board of Directors. |
As discussed above, we have taken steps and plan to continue to take additional steps, to seek to remediate these material weaknesses and to improve our financial reporting systems and implement new policies, procedures, and controls. We plan on implementing other policies and procedures to address and mitigate all remaining or new material weaknesses.
We believe the remediation measures described above will remediate the material weaknesses we had previously identified and disclosed, and will strengthen our internal control over financial reporting. We are committed to continuing to improve our internal control processes and will continue to review our financial reporting controls and procedures diligently and vigorously. As we continue to evaluate and work to improve our internal control over financial reporting, we may determine to take additional measures to address control deficiencies or determine to modify, or in appropriate circumstances not to complete, certain of the remediation measures described above.
Changes in Internal Control over Financial Reporting
Other than discussed above, there were no other changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be involved in litigation or receive claims arising out of our operations in the normal course of business. Other than discussed below, we are not currently a party to any other legal proceeding or are aware of claims that we believe would, if decided adversely, have a material adverse effect on our business, financial condition, or operating results. We also disclose any recent settlements and accruals taken in connection therewith, whether material or not.
Disputes Between ELRAC LLC and Enterprise Leasing Company of Philadelphia, LLC on the one hand, and Prime EFS, LLC on the other hand
In 2021 and as of December 31, 2021, the Company’s prior subsidiary, Prime EFS, LLC (“Prime EFS”), was a party to an arbitration with two companies, ELRAC LLC (“ELRAC”), and Enterprise Leasing Company of Philadelphia, LLC (“ELC”).
As previously disclosed, since the Company deconsolidated Prime EFS effective with the filing of executed Deeds of Assignment for the Benefit of Creditors in September 2021, as of December 31, 2021, the Company’s consolidated balance sheet no longer included an accrual for this matter.
Solely to avoid the expense and distraction of the matter, effective March 31, 2022, the Company and Prime EFS, on the one hand, and ERLAC and ELC, on the other hand, settled the above matter for a single payment, by TLSS, to ERLAC and ELC, in an immaterial amount. Pursuant to the settlement, the Company and Prime, on the one hand, and ERLAC and ELC, on the other hand, exchanged mutual general releases, thereby releasing and discharging any and all claims between the Company, Prime EFS and their affiliates, on the one hand, and ERLAC, ELC and their affiliates, on the other hand.
Bellridge Capital, L.P. v. TLSS and Mercadante
On September 11, 2020, a prior lender to the Company, Bellridge Capital, LP. filed a civil action against TLSS, John Mercadante and Douglas Cerny in the U.S. District Court for the Southern District of New York, captioned Bellridge Capital, L.P. v. Transportation and Logistics Systems, Inc., John Mercadante and Douglas Cerny. The case was assigned Case No. 20-cv-7485. The complaint alleged claims, inter alia, for purported violations of section 10(b) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”); for breach of an exchange agreement dated April 13, 2019 (the “Exchange Agreement”); and for the alleged failure to pay certain amounts allegedly due under certain TLSS promissory notes.
After discontinuing the foregoing federal action voluntarily and without prejudice, on April 23, 2021, Bellridge filed a civil action in New York Supreme Court, New York County, against TLSS and Mercadante. This matter, the “Bellridge State Court Action,” was assigned civil action number 652728/2021. The Complaint in the Bellridge State Court Action essentially repeated the claims in the federal action.
On June 4, 2021, TLSS and Mercadante moved to dismiss the Bellridge State Court Action for failure to state a claim and, as to Mercadante, for lack of jurisdiction. On October 20, 2021, the Court decided the MTD, dismissing all claims in the case against both Defendants predicated on fraud and negligent misrepresentation. The Court thereby dismissed the Complaint insofar as alleged against Mercadante. On October 29, 2021, the Company filed its Answer in this case. On November 18, 2021, Bellridge filed an Amended Complaint purporting to revive its claims for fraud and negligent misrepresentation against both Defendants. Both Defendants filed objections to the Amended Complaint as procedurally improper. On December 17, 2021, the Defendants filed a renewed motion to dismiss the Amended Complaint with prejudice. That motion was fully briefed. In February 2022, all proceedings in this action were stayed 60 days to facilitate a March 2022 mediation.
On April 29, 2022, all parties to the Bellridge State Court Action agreed to settle the case and exchange mutual general releases for a cash payment by the Company to Bellridge of $250,000, which amount was paid in May 2022, at which time the releases took effect. In connection with this settlement, during the nine months ended September 30, 2022, the Company recorded settlement expense of $227,811.
In partial consideration for the settlement, TLSS and Bellridge also cancelled the 700,000 shares of Series B Preferred Stock previously held by Bellridge, as reflected on the Company’s balance sheets as of December 31, 2021.
SCS, LLC v. TLSS
On January 14, 2021, a former financial consultant to the Company, SCS, LLC, filed an action against the Company in the Circuit Court of the 15th Judicial Circuit, Palm Beach County, Florida, captioned SCS, LLC v. Transportation and Logistics Systems, Inc. The case was assigned Case No. 50-2020-CA-012684.
In this action, SCS alleges that it entered into a renewable six-month consulting agreement with the Company dated September 5, 2019 and that the Company failed to make certain monthly payments due thereunder for the months of October 2019 through March 2020, summing to $42,000. The complaint alleged claims for breach of contract, quantum meruit, unjust enrichment and account stated.
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On February 9, 2021, the Company filed its answer, defenses and counterclaims in this action. Among other things, the Company avers that SCS’s claims are barred by its unclean hands and other inequitable conduct, including breach of its duties (i) to maintain the confidentiality of information provided to SCS and (ii) to work only in furtherance of the Company’s interests, not in furtherance of SCS’s own, and conflicting, interests. The Company also avers, in its counterclaims, that SLS owes the Company damages in excess of the $42,000 sought in the main action because SLS was at least grossly negligent in any due diligence it undertook before recommending that the Company acquire Prime EFS LLC in June 2018. SCS filed a motion to strike TLSS’s defenses and counterclaims, and TLSS opposed that application. Those motions remain sub judice.
A two-day non-jury trial was held in this action in Palm Beach County, Florida, on April 20-21, 2022. However, at the end of the second day a mistrial was declared because SCS had not withdrawn its motion to strike and answered the counterclaims. Since the mistrial, there have been no further filings or proceedings in this case.
The Company believes it has substantial defenses to all claims alleged in SCS’s complaint. The Company therefore intends to defend this case vigorously.
Because there have been no further filings or proceedings on this case since April 2022, it is not possible to evaluate the likelihood of a favorable or unfavorable outcome, nor is it possible to estimate the amount or range of any potential loss in the matter. However, the demand remains $42,000.
Shareholder Derivative Action
On June 25, 2020, the Company was served with a putative shareholder derivative action filed in the Circuit Court of the 15th Judicial Circuit in and for Palm Beach County, Florida (the “Court”) captioned SCS, LLC, derivatively on behalf of Transportation and Logistics Systems, Inc. v. John Mercadante, Jr., Douglas Cerny, Sebastian Giordano, Ascentaur LLC and Transportation and Logistics Systems, Inc. The action has been assigned Case No. 2020-CA-006581.
The plaintiff in this action, SCS, alleges it is a limited liability company formed by a former chief executive officer and director of the Company, Lawrence Sands. The complaint alleges that between April 2019 and June 2020, the immediately prior chairman and chief executive officer of the Company, Mercadante, the former chief development officer of the Company, Cerny, and, since February 2020, the Company’s then restructuring consultant who is now chairman and chief executive officer of the Company, Giordano, breached fiduciary duties owed to the Company. Prior to becoming CEO, Giordano rendered his services to the Company through the final named defendant in the action, Ascentaur LLC.
Briefly, the complaint alleges that Mercadante breached duties to the Company by, among other things, requesting, in mid-2019, that certain preferred equity holders, including SCS, convert their preferred shares into Company Common Stock in order to facilitate an equity offering by the Company and then not consummating that offering. The complaint also alleges that Mercadante and Cerny caused the Company to engage in purportedly wasteful and unnecessary transactions such as taking merchant cash advances (MCA) on disadvantageous terms. The complaint further alleges that Mercadante and Cerny “issued themselves over two million shares of common stock without consideration.” The complaint seeks unspecified compensatory and punitive damages on behalf of the Company for breach of fiduciary duty, negligent breach of fiduciary duty, constructive fraud, and civil conspiracy and the appointment of a receiver or custodian for the Company.
Company management tendered the complaint to the Company’s directors’ and officers’ liability carrier for defense and indemnity purposes, which coverage is subject to a $250,000 self-insured retention. Each of the individual defendants and Ascentaur LLC has advised that they vigorously deny each and every allegation of wrongdoing alleged in the complaint. Among other things, Mercadante asserts that he made every effort to consummate an equity offering in late 2019 and early 2020 and could not do so solely because of the Company’s precarious financial condition. Mercadante also asserts that he made clear to SCS and other preferred equity holders, before they converted their shares into common stock, that there was no guarantee the Company would be able to consummate an equity offering in late 2019 or early 2020. In addition, Mercadante and Cerny assert that they received equity in the Company on terms that were entirely fair to the Company and entered into MCA transactions solely because no other financing was available to the Company.
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On August 5, 2020, all defendants moved to dismiss the complaint (the “MTD”) for failure to state a claim upon which relief can be granted. Among other things, movants asserted that, through this lawsuit, SCS is improperly attempting to second-guess business decisions made by the Company’s Board of Directors, based solely on hindsight (as opposed to any well-pleaded facts demonstrating a lack of care or good faith). Movants also asserted that the majority of the claims are governed by Nevada law because they concern the internal affairs of the Company. Movants further asserted that, under Nevada law, each of the business decisions challenged by SCS is protected by the business judgment rule. Movants further asserted that, even if SCS could rebut the presumption that the business judgment rule applies to all such transactions, SCS failed to allege facts demonstrating that intentional misconduct, fraud, or a knowing violation of the law occurred, a requirement under Nevada law in order for director or officer liability to arise. Movants further asserted that, because SCS’s constructive fraud claim simply repackages Plaintiff’s claims for breach of fiduciary duty, it too must fail. Movants also contended that in the absence of an adequately-alleged independent cause of action, let alone an unlawful agreement between the defendants entered into for the purpose of harming the Company, SCS’s claim for civil conspiracy must also be dismissed. Finally, movants contended that SCS’s extraordinary request that a receiver or custodian be appointed to manage and supervise the Company’s activities and affairs throughout the duration of this unfounded action is without merit inter alia because SCS does not allege the Company is subject to loss so serious and significant that the appointment of a receiver or custodian is “absolutely necessary to do complete justice.”
On September 9, 2022 the Court heard argument on defendants’ MTD and, in a Decision issued September 15, 2022, the Court dismissed the Complaint, finding (a) that SCS had failed to adequately allege it has standing and (b) that the complaint fails to allege a claim. The dismissal was without prejudice, meaning SCS could attempt to replead its claims. On October 5, 2022, SCS filed an amended complaint (the “AC”) which, on the fact of it, (i) contains no new factual averments supporting standing and (ii) fails to address any of the specific deficiencies which the Court identified in the original, now dismissed, complaint. On October 14, 2022, defendants moved to dismiss the AC with prejudice. Defendants also moved to strike the AC on the ground that it was not filed within the 20-period mandated by the Court. The Court has set arguments on both these motions for December 13, 2022.
While they hope to prevail on the renewed motion to dismiss, win or lose, Company management and Ascentaur LLC advise that they believe the action is frivolous and intend to mount a vigorous defense to this action, as they believe the action to be entirely bereft of merit.
Owing to the fact that no discovery has occurred in the case, it is not possible to evaluate the likelihood of a favorable or unfavorable outcome, nor is it possible to estimate the amount or range of any potential loss in the matter.
Jose R. Mercedes-Mejia v. Shypdirect LLC, Prime EFS LLC et al.
On August 4, 2020, an action was filed against Shypdirect, Prime EFS and others in the Superior Court of New Jersey for Bergen County captioned Jose R. Mercedes-Mejia v. Shypdirect LLC, Prime EFS LLC et al. The case was assigned docket number BER-L-004534-20. In this action, the plaintiff seeks reimbursement of his medical expenses and damages for personal injuries following an accident with a box truck leased by Prime EFS and being driven by a Prime EFS employee, in which the plaintiff’s ankle was injured. Plaintiff has thus far transmitted medical bills exceeding $789,000. Prime EFS and Shypdirect have demanded their vehicle liability carrier assume the defense of this action. To date, the carrier has not done so, allegedly inter alia because the box truck was not on the list of insured vehicles at the time of the accident.
On November 9, 2020, Prime EFS and Shypdirect filed their answer to the complaint in this action and also filed a third-party action against the insurance company in an effort to obtain defense and indemnity for this action.
On May 21, 2021, Prime EFS and Shypdirect also filed in action in the Supreme Court, State of New York, Suffolk County (the “Suffolk County Action”), seeking defense and indemnity for the Mercedes-Mejia action from the insurance brokerage, Acrisure LLC, which sold the County Hall insurance policy to Prime.
On August 19, 2021, the Plaintiff filed a motion for leave to file a first amended complaint to name four (4) additional parties as defendants – TLSS, Shyp CX, Inc., Shyp FX, Inc. and Cougar Express, Inc. On September 16, 2021, each of these entities filed papers in opposition to this motion.
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On September 24, 2021, the Court granted Plaintiff’s motion for leave to amend the complaint herein, thus adding TLSS, Shyp CX, Inc., Shyp FX, Inc. and Cougar Express, Inc. as Defendants. On October 22, 2021, Acrisure stipulated to consolidate the Suffolk County Action into and with the Bergen County action. On November 22, 2021, all Defendants filed their Answer to the First Amended Complaint. On November 3, 2021, Prime EFS and Shypdirect refiled their Third-Party Complaint against Acrisure in the Bergen County action. On December 23, 2021, Acrisure filed its Answer to the Third-Party Complaint, denying its material allegations.
Under the currently operative pre-trial order, all depositions of fact witnesses in the case must be completed by January 31, 2023. All Defendants in this action intend to vigorously defend themselves and to pursue the third-party actions against both County Hall and Acrisure. However, owing to the early stage of this action, we cannot evaluate the likelihood of an adverse outcome or estimate the Company’s liability, if any, in connection with this claim.
Holdover Proceeding
On February 16, 2022, the landlord for the leased premises from which Cougar Express previously conducted its Valley Stream New York business, Airport Park LLC (“Airport”), filed an action to evict and for unpaid holdover rent against Cougar Express and TLSS. The case was No. LT-000550-22/NA, filed in Landlord Tenant Court in Nassau County District Court.
In the case, Airport sought to evict Cougar Express forthwith and to collect $51,079.78 for each month of holdover occupancy starting January 1, 2022 through the month of any eviction, plus statutory interest, costs and attorneys’ fees. $51,079.78 is twice the monthly rent collected in the last year of the expired lease and is computed correctly under the holdover provision in the expired lease.
By stipulation filed with the Court on May 19, 2022, this matter was settled and terminated. Pursuant to the settlement, Cougar agreed to pay, and paid, certain unpaid common charges of $8,016.25 and monthly rent at a rate of $33,275 per month until Cougar vacated the premises. Cougar also agreed to vacate the Valley Stream premises by September 30, 2022. Following Cougar’s acquisition of JFK Cartage, Cougar was able to vacate, and vacated the Valley Stream location by September 30, 2022.
COR Holdings, LLC
In the second quarter of 2022, COR Holdings LLC, a lender to the Company’s former Prime EFS subsidiary, made an informal (email) demand that it be issued 3,882,480 shares of Company common stock in exchange for an alleged $97,062.00 balance due. The Company had, pursuant to a debt conversion rights agreement dated August 28, 2020, granted COR a one-year option to exchange the debt at $0.025 per share of Company common stock; however, COR never exercised that option prior to its expiration on August 28, 2021. The Company believes, on advice of counsel, that COR’s sole remedy for the unpaid debt is through Prime EFS’s Assignment for Benefit of Creditors proceeding in New Jersey. Therefore, if COR choses to pursue this claim against the Company, the Company intends to oppose it vigorously. However, because no formal claim has been filed, we cannot evaluate the likelihood of an adverse outcome or estimate the Company’s liability, if any, in connection with this claim.
Ryder Truck Rental, Inc.
In the first quarter of 2022, an attorney representing Ryder Truck Rental issued a letter to certain former officers and employees of the Company’s former Shypdirect subsidiary, demanding payment of $308,240.65 under certain open invoices for trucks leased by Shypdirect, $1,141,211.55 in certain additional charges under a 2018 contract, and $434,835.66 in attorney’s fees. Solely to avoid the expense and distraction of litigation, including without limitation, certain alter ego and derivative liability claims alleged by Ryder, on August 5, 2022, the Company, pursuant to a Settlement Agreement and Mutual General Releases dated August 2, 2022, paid Ryder $6,500 in full and final settlement. The release of claims executed by Ryder covers, among others, the Company and all its former and current subsidiaries, directors, officers and employees as well as all former members and managers of Shypdirect.
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Other than discussed above, as of September 30, 2022, and as of the date of this filing, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on results of our operations.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In connection with the acquisition of Freight Connections, as part of the purchase price consideration, we issued 178,911,844 shares of our common stock. We valued these common shares at a fair value of $1,055,580, or $0.0059 per common share, based on the quoted closing price of the Company’s common stock on the measurement date.
The above securities were issued in reliance upon the exemptions provided by Sections 3(a)(9) and 4(a)(2) under the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
No report required.
ITEM 5. OTHER INFORMATION
On May 23, 2022, we received notice from OTC Markets Group that as the Company’s bid price has closed below $0.01 for more than 30 consecutive calendar days, it no longer meets the Standards for Continued Eligibility for OTCQB as per the OTCQB Standards, Section 2.3(2), which states that the Company must “maintain proprietary priced quotations published by a Market Maker in OTC Link with a minimum closing bid price of $.01 per share on at least one of the prior thirty consecutive calendar days.”
We were informed further that, as per Section 4.1 of the OTCQB Standards, the Company will be granted a cure period of 90 calendar days during which the minimum closing bid price for the Company’s common stock must be $.01 or greater for ten consecutive trading days in order to continue trading on the OTCQB marketplace. Since this requirement was not met by August 21st, 2022, the Company’s common stock was removed from the OTCQB marketplace. Upon such removal, the Company’s common stock returned to being quoted on the OTC Pink Tier of the OTC Markets Group, Inc. (continuing under the same symbol, “TLSS”) and is subject to only limited quotation on the OTC Pink Tier. In addition, we were informed further that in the event that the Company’s closing bid price of the Company’s common stock falls below $0.001 per share at any time for five (5) consecutive trading days, the Company’s common stock will be immediately removed from OTCQB. The Company plans to consider steps that may avoid such removal from the OTC Pink Tier, but no assurance can be given that such steps will succeed in avoiding such removal.
On August 21, 2022, we were removed from the OTCB Marketplace and our common stock is quoted on the OTC Pink Tier. We chose not to reverse split our common stock and, instead, to await the results of the achievement of our business plan for acquisitions and financings, which, if successful, may result in an increase in the share price of our common stock, enabling us to reapply for re-listing on the OTCQB.
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ITEM 6. EXHIBITS
* Filed Herewith
# The certifications attached as Exhibit 32.1 and 32.2 that accompanies this Form 10-Q are not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Transportation and Logistics Systems, Inc. under the Securities Act or the Exchange Act, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| TRANSPORTATION & LOGISTICS SYSTEMS, INC. | ||
| Dated: November 14, 2022 | By: | /s/ Sebastian Giordano |
| Sebastian Giordano | ||
| Chief Executive Officer (Principal Executive Officer) and Director | ||
| Dated: November 14, 2022 | By: | /s/ James Giordano |
| James Giordano | ||
| Chief Financial Officer (Principal Financial Officer) |
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