Transportation & Logistics Systems, Inc. - Quarter Report: 2023 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, 2023
| ☐ | 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, 2023 | |
| Common Stock, $0.001 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC.
FORM 10-Q
September 30, 2023
INDEX
| 2 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 98,636 | $ | 1,470,807 | ||||
| Accounts receivable, net | 2,037,298 | 2,059,326 | ||||||
| Prepaid expenses and other current assets | 499,948 | 613,035 | ||||||
| Total Current Assets | 2,635,882 | 4,143,168 | ||||||
| OTHER ASSETS: | ||||||||
| Security deposits | 473,278 | 377,107 | ||||||
| Property and equipment, net | 3,096,590 | 1,607,212 | ||||||
| Right of use assets, net | 10,490,399 | 8,457,083 | ||||||
| Goodwill | 2,105,879 | 2,105,879 | ||||||
| Intangible assets, net | 4,225,717 | 4,601,677 | ||||||
| Total Other Assets | 20,391,863 | 17,148,958 | ||||||
| TOTAL ASSETS | $ | 23,027,745 | $ | 21,292,126 | ||||
| LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Notes payable, current portion | $ | 1,578,651 | $ | 408,407 | ||||
| Notes payable - related parties, current portion | 5,144,671 | 4,544,671 | ||||||
| Accounts payable (including accounts payable - related party of $348,396 and $115,117 on September 30, 2023 and December 31, 2022, respectively) | 2,650,736 | 472,701 | ||||||
| Accrued expenses | 1,083,147 | 837,170 | ||||||
| Insurance payable | 418,770 | 137,477 | ||||||
| Lease liabilities, current portion | 3,265,828 | 2,081,099 | ||||||
| Accrued compensation and related benefits | 174,954 | 65,103 | ||||||
| Total Current Liabilities | 14,316,757 | 8,546,628 | ||||||
| LONG-TERM LIABILITIES: | ||||||||
| Notes payable, net of current portion | 1,724,712 | 831,499 | ||||||
| Lease liabilities, net of current portion | 7,505,093 | 6,413,937 | ||||||
| Total Long-term Liabilities | 9,229,805 | 7,245,436 | ||||||
| Total Liabilities | 23,546,562 | 15,792,064 | ||||||
| Commitments and Contingencies (See Note 11) | ||||||||
| SHAREHOLDERS’ (DEFICIT) EQUITY: | ||||||||
| Preferred stock, par value $; authorized shares: | ||||||||
| Series B convertible preferred stock, par value $ per share; shares designated; shares issued and outstanding at September 30, 2023 and December 31, 2022 (Liquidation value $0) | ||||||||
| Series D convertible preferred stock, par value $ per share; shares designated; shares issued and outstanding at September 30, 2023 and December 31, 2022 ($6.00 per share liquidation value) | ||||||||
| Series E convertible preferred stock, par value $ per share; shares designated; shares issued and outstanding at September 30, 2023 and December 31, 2022 ($13.34 per share liquidation value) | 21 | 21 | ||||||
| Series G convertible preferred stock, par value $ per share; shares designated; and shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively ($10.00 per share liquidation value) | 476 | 575 | ||||||
| Series H convertible preferred stock, par value $ per share; shares designated; shares issued and outstanding at September 30, 2023 and December 31, 2022 (No per share liquidation value) | 32 | 32 | ||||||
| Series I preferred stock, par value $ per share; share designated; and share issued and outstanding at September 30, 2023 and December 31, 2022 (No per share liquidation value) | ||||||||
| Common stock, par value $ per share; shares authorized; and shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively | 4,481,102 | 3,636,692 | ||||||
| Additional paid-in capital | 129,775,399 | 129,372,841 | ||||||
| Accumulated deficit | (134,775,847 | ) | (127,510,099 | ) | ||||
| Total Shareholders’ (Deficit) Equity | (518,817 | ) | 5,500,062 | |||||
| Total Liabilities and Shareholders’ (Deficit) Equity | $ | 23,027,745 | $ | 21,292,126 | ||||
See accompanying notes to unaudited consolidated financial statements.
| 3 |
TRANSPORTATION AND LOGISTICS SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| REVENUES | $ | 4,947,684 | $ | 1,700,854 | $ | 15,604,451 | $ | 4,364,747 | ||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Cost of revenues - third parties (exclusive of depreciation and amortization shown separately below) | 3,361,812 | 1,236,630 | 9,506,063 | 3,221,182 | ||||||||||||
| Cost of revenues - related parties | 407,744 | 1,649,120 | ||||||||||||||
| Compensation and related benefits | 1,247,795 | 720,339 | 3,825,384 | 2,770,092 | ||||||||||||
| Legal and professional fees | 370,105 | 259,597 | 1,349,469 | 948,094 | ||||||||||||
| Rent | 1,132,618 | 217,717 | 3,308,317 | 430,011 | ||||||||||||
| Depreciation and amortization | 407,310 | 155,050 | 1,182,810 | 532,550 | ||||||||||||
| General and administrative expenses | 347,520 | 127,800 | 872,915 | 284,410 | ||||||||||||
| Total Operating Expenses | 7,274,904 | 2,717,133 | 21,694,078 | 8,186,339 | ||||||||||||
| LOSS FROM OPERATIONS | (2,327,220 | ) | (1,016,279 | ) | (6,089,627 | ) | (3,821,592 | ) | ||||||||
| OTHER INCOME (EXPENSES): | ||||||||||||||||
| Interest income | 992 | |||||||||||||||
| Interest expense | (205,599 | ) | (14,635 | ) | (352,415 | ) | (24,397 | ) | ||||||||
| Interest expense - related parties | (135,076 | ) | (341,424 | ) | ||||||||||||
| (Loss) gain on sale of subsidiary’s assets | (2,714 | ) | (720 | ) | 293,975 | |||||||||||
| Settlement income (expense) | (100 | ) | (10,150 | ) | (9,508 | ) | (237,961 | ) | ||||||||
| Total Other Income (Expenses) | (340,775 | ) | (27,499 | ) | (703,075 | ) | 31,617 | |||||||||
| LOSS BEFORE INCOME TAXES | (2,667,995 | ) | (1,043,778 | ) | (6,792,702 | ) | (3,789,975 | ) | ||||||||
| Provision for income taxes | ||||||||||||||||
| NET LOSS | (2,667,995 | ) | (1,043,778 | ) | (6,792,702 | ) | (3,789,975 | ) | ||||||||
| Deemed and accrued dividends | (62,660 | ) | (101,386 | ) | (473,046 | ) | (317,271 | ) | ||||||||
| NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | (2,730,655 | ) | $ | (1,145,164 | ) | $ | (7,265,748 | ) | $ | (4,107,246 | ) | ||||
| NET LOSS PER COMMON SHARE - BASIC AND DILUTED | ||||||||||||||||
| Basic and diluted | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||||||||||
| Basic and diluted | ||||||||||||||||
See accompanying notes to unaudited consolidated financial statements.
| 4 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
(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’ Equity | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | 21,418 | $ | 21 | 575,000 | $ | 575 | 32,374 | $ | 32 | 3,636,691,682 | $ | 3,636,692 | $ | 129,372,841 | $ | (127,510,099 | ) | $ | 5,500,062 | ||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series G preferred shares | - | - | (29,000 | ) | (29 | ) | - | 43,684,680 | 43,685 | (23,600 | ) | 20,056 | ||||||||||||||||||||||||||||||||||||||||
| Common stock issued for services and future services | - | - | - | - | 21,634,615 | 21,634 | (21,634 | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Accretion of stock-based compensation | - | - | - | - | - | 117,292 | 117,292 | |||||||||||||||||||||||||||||||||||||||||||||
| Accrued dividends | - | - | - | - | - | (100,410 | ) | (100,410 | ) | |||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (1,645,916 | ) | (1,645,916 | ) | |||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2023 | 21,418 | 21 | 546,000 | 546 | 32,374 | 32 | 3,702,010,977 | 3,702,011 | 129,444,899 | (129,256,425 | ) | 3,891,084 | ||||||||||||||||||||||||||||||||||||||||
| Common stock issued for services and future services | - | - | - | - | 12,535,439 | 12,535 | (12,535 | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Accretion of stock-based compensation | - | - | - | - | - | 145,172 | 145,172 | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for warrant exercises | - | - | - | - | 181,634,858 | 181,635 | 181,635 | 363,270 | ||||||||||||||||||||||||||||||||||||||||||||
| Deemed and accrued dividends | - | - | - | - | - | 218,084 | (309,976 | ) | (91,892 | ) | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (2,478,791 | ) | (2,478,791 | ) | |||||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2023 | 21,418 | 21 | 546,000 | 546 | 32,374 | 32 | 3,896,181,274 | 3,896,181 | 129,977,255 | (132,045,192 | ) | 1,828,843 | ||||||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series G preferred shares | - | - | (70,500 | ) | (70 | ) | - | 458,238,595 | 458,239 | (403,258 | ) | 54,911 | ||||||||||||||||||||||||||||||||||||||||
| Cancellation of common stock issued for services due to non-vesting | - | - | - | - | (1,238,095 | ) | (1,238 | ) | 1,238 | |||||||||||||||||||||||||||||||||||||||||||
| Accretion of stock-based compensation | - | - | - | - | - | 86,850 | 86,850 | |||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for warrant exercises | - | - | - | - | 127,920,572 | 127,920 | 127,921 | 255,841 | ||||||||||||||||||||||||||||||||||||||||||||
| Deemed and accrued dividends | - | - | - | - | - | (14,607 | ) | (62,660 | ) | (77,267 | ) | |||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (2,667,995 | ) | (2,667,995 | ) | |||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2023 | $ | 21,418 | $ | 21 | 475,500 | $ | 476 | 32,374 | $ | 32 | 4,481,102,346 | $ | 4,481,102 | $ | 129,775,399 | $ | (134,775,847 | ) | $ | (518,817 | ) | |||||||||||||||||||||||||||||||
| 5 |
| Preferred Stock Series B | Preferred Stock Series E | Preferred Stock Series G | Preferred Stock Series H | Common Stock | Additional Paid-in | Accumulated | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||||||||||||||||||||||||
| 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 | (10,420 | ) | (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 | 21,238 | 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 | $ | 21,238 | $ | 21 | 575,000 | $ | 575 | 32,374 | $ | 32 | 3,636,691,682 | $ | 3,636,692 | $ | 129,207,348 | $ | (123,123,733 | ) | $ | 9,720,935 | ||||||||||||||||||||||||||||||||
See accompanying notes to unaudited consolidated financial statements.
| 6 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (6,792,702 | ) | $ | (3,789,975 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization expense | 1,182,810 | 532,550 | ||||||
| Stock-based compensation | 349,314 | 1,221,077 | ||||||
| Stock-based professional fees | 10,000 | |||||||
| Gain from sale of subsidiary’s assets | (296,689 | ) | ||||||
| Non-cash portion of gain on settlement | (700 | ) | ||||||
| Lease costs | 242,569 | 4,591 | ||||||
| Bad debt expense | 81,872 | |||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | 777,042 | 1,173 | ||||||
| Prepaid expenses and other current assets | (123,459 | ) | (193,392 | ) | ||||
| Security deposits | (89,171 | ) | (3,552 | ) | ||||
| Accounts payable and accrued expenses | 2,005,406 | (295,981 | ) | |||||
| Insurance payable | 281,293 | 61,735 | ||||||
| Accrued compensation and related benefits | (42,780 | ) | (90,514 | ) | ||||
| NET CASH USED IN OPERATING ACTIVITIES | (2,127,806 | ) | (2,839,677 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of property and equipment | (679,879 | ) | (118,617 | ) | ||||
| Proceeds from repayment of note receivable | 255,000 | |||||||
| Cash proceeds from sale of subsidiary’s assets | 748,500 | |||||||
| Cash acquired in acquisitions | 207,471 | 138,336 | ||||||
| Cash used for acquisitions | (713,586 | ) | (1,930,712 | ) | ||||
| NET CASH USED IN INVESTING ACTIVITIES | (930,994 | ) | (1,162,493 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| 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 | 619,111 | 245,714 | ||||||
| Proceeds from notes payable - related parties | 600,000 | |||||||
| Proceeds from notes payable | 662,092 | 108,395 | ||||||
| Repayment of notes payable | (194,574 | ) | (809,905 | ) | ||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | 1,686,629 | 375,204 | ||||||
| NET DECREASE IN CASH | (1,372,171 | ) | (3,626,966 | ) | ||||
| CASH, beginning of period | 1,470,807 | 6,067,692 | ||||||
| CASH, end of period | $ | 98,636 | $ | 2,440,726 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | 248,739 | $ | 24,397 | ||||
| Income taxes | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Conversion of Series E preferred stock to common stock | $ | $ | 31 | |||||
| Conversion of Series G preferred stock and accrued dividends to common stock | $ | 74,967 | $ | 39,917 | ||||
| Accrual of preferrerd stock dividends | $ | 473,046 | $ | 317,271 | ||||
| Issuance of common stock for future services | $ | $ | 5,000 | |||||
| Increase in right of use assets and lease liabilities | $ | 3,958,260 | $ | |||||
| ACQUISITIONS: | ||||||||
| Assets acquired: | ||||||||
| Accounts receivable | $ | 836,886 | $ | 2,270,890 | ||||
| Prepaid expenses | 18,455 | 271,305 | ||||||
| Property and equipment | 1,186,198 | 1,466,167 | ||||||
| Right of use assets | 457,239 | 8,825,892 | ||||||
| Security deposits | 7,000 | 318,302 | ||||||
| Intangible assets | 430,151 | 5,779,487 | ||||||
| Total assets acquired | 2,935,929 | 18,932,043 | ||||||
| Less: liabilities assumed: | ||||||||
| Accounts payable | 211,303 | 355,185 | ||||||
| Accrued expenses | 12,702 | 190,798 | ||||||
| Insurance payable | 169,812 | |||||||
| Accrued compensation and related benefits | 152,631 | 69,122 | ||||||
| Notes payable | 1,595,939 | 6,355,588 | ||||||
| Lease liabilities | 457,239 | 8,825,892 | ||||||
| Total liabilities assumed | 2,429,814 | 15,966,397 | ||||||
| Net assets acquired | $ | 506,115 | $ | |||||
| Fair value of shares for acquisitions | $ | $ | 2,965,646 | |||||
See accompanying notes to unaudited consolidated financial statements.
| 7 |
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(Unaudited)
NOTE 1 – ORGANIZATION AND BUSINESS OPERATIONS
Transportation and Logistics Systems, Inc. (“TLSS” or the “Company”) is a holding company incorporated under the laws of the State of Nevada, on July 25, 2008. Its active wholly-owned operating subsidiaries, Cougar Express, Inc., Freight Connections, Inc., JFK Cartage, Inc., and Severance Trucking Co., Inc. (acquired in 2023), along with Severance Warehousing, Inc. and McGrath Trailer Leasing, Inc., and hereafter referred to as “Severance Trucking”, together provide a full suite of logistics and transportation services, specializing in ecommerce fulfillment, last mile deliveries, two-person home delivery, mid-mile, and long-haul services. Such entities operate several warehouse locations located in New York, New Jersey, Connecticut and Massachusetts. Inactive subsidiaries include: TLSS Acquisition, Inc. (“TLSSA”), Shyp CX, Inc. (“Shyp CX”), Shyp FX, Inc. (“Shyp FX”), TLSS-FC, Inc. (“TLSS-FC”) and TLSS-STI, Inc. (“TLSS-STI”), TLSS Operations Holding Company, Inc. (“TLSS Operations Holding”), and TLSS-CE, Inc. (“TLSS-CE”).
On June 18, 2018, 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. Prime EFS was a New Jersey based transportation company that generated substantially all its revenues from Amazon Logistics, Inc. (“Amazon”) 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. 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 August 19, 2021, the Company’s former 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. (See Note 10).
Since exiting the Amazon business, the Company has pursued a growth by acquisitions strategy as set forth below and as such, continues to pursue 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. 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.
On November 16, 2020, the Company formed a wholly-owned subsidiary, TLSSA, a company incorporated under the laws of the State of Delaware. On March 24, 2021, TLSS 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.
On February 21, 2021, the Company formed a wholly-owned subsidiary, Shyp CX, a company incorporated under the laws of the State of New York. 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).
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AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(Unaudited)
Effective September 16, 2022, the Company’s newly formed wholly-owned subsidiary, TLSS-FC, 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. 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).
Effective February 3, 2023, the Company’s newly formed wholly-owned subsidiary, TLSS-STI, closed on an acquisition of all outstanding stock of Severance Trucking, which together, offer LTL trucking services throughout New England, with an effective date as of the close of business on January 31, 2023. The sellers of the stock of each entity were Kathryn Boyd, Clyde Severance, and Robert Severance, all individuals (the “Sellers”). None of the Sellers are affiliated with the Company or its affiliates. Severance Trucking is a privately-owned full-service transportation carrier and logistics business that has been in operation for over 100 years specializing in LTL trucking that provides next day service to major cities in New England and New York, with cartage and interline agreements with respected carriers that ensure reliable deliveries anywhere in the United States and Canada. Severance Trucking currently operates with over 60 power units and trailers and has two locations, comprised of approximately 18,000 square feet of warehouse and cross dock space, 9,000 square feet of office and 5,750 square feet of repair facilities located in Dracut, Massachusetts and approximately 16,000 square feet of warehouse space in North Haven, Connecticut (See Note 3).
On May 31, 2023, the Company formed TLSS Operations Holding and TLSS-CE, companies organized under the laws of Delaware.
Unless the context otherwise requires, TLSS and its wholly-owned subsidiaries, TLSSA, TLSS-FC, Cougar Express, Shyp FX, Shyp CX, JFK Cartage, Freight Connections, TLSS-STI, Severance Trucking, TLSS Operations Holding and TLSS-CE 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 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 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 consolidated financial statements be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2022 and notes thereto included in the Company’s annual report on SEC Form 10-K, filed on March 31, 2023. The results of operations for the interim periods are not necessarily an indication of operating results to be expected for the full year.
The consolidated financial statements of the Company include the accounts of TLSS and its wholly owned subsidiaries, TLSSA, TLSS-FC, Cougar Express, Shyp FX, Shyp CX, TLSS-STI, TLSS Operations Holding, TLSS-CE, JFK Cartage since its acquisition on July 31, 2022, Freight Connection since its acquisition on September 16, 2022, and Severance Trucking since its acquisition on January 31, 2023. 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.
Going concern
These unaudited consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying unaudited consolidated financial statements, the Company had a net loss of $6,792,702 and $3,789,975 for the nine months ended September 30, 2023 and 2022, respectively. The net cash used in operations was $2,127,806 and $2,839,677 for the nine months ended September 30, 2023 and 2022, respectively. Additionally, the Company had an accumulated deficit and working capital deficit of $134,775,847 and $11,680,875, respectively, on September 30, 2023. These factors raise substantial doubt about the Company’s ability to continue as a going concern for a period of twelve months from the issuance date of this report. Management cannot provide assurance that the Company will ultimately achieve profitable operations or become cash flow positive or raise additional debt and/or equity capital. The Company is seeking to raise capital through additional debt and/or equity financings to fund its operations in the future. Although the Company has historically raised capital from sales of preferred shares, from the issuance of promissory notes and convertible promissory notes, and from the exercise of warrants, there is no assurance that it will be able to continue to do so. If the Company is unable to raise additional capital or secure additional lending in the near future, management expects that the Company will need to curtail its operations. These unaudited consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
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AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(Unaudited)
Risks and uncertainties
The Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. On September 30, 2023, the Company had no cash in the bank in excess of FDIC insured levels. On March 12, 2023, Signature Bank, the Company’s financial institution, was closed by its state chartering authority, the New York State Department of Financial Services. On that same date the FDIC was appointed as receiver and transferred all the deposits and substantially all of the assets of Signature Bank to Signature Bridge Bank, N.A., a full-service bank that is operated by the FDIC. At the time of closing, the Company had all of its cash at Signature Bank. The Company did not lose access to its accounts or experience interruptions in banking services, and it suffered no losses with respect to its deposits at Signature Bank as a result of the bank’s closure. Normal banking activities resumed on Monday, March 13, 2023. On March 19, 2023 Signature Bridge Bank N.A. was acquired by New York Community Bancorp Inc., which is the parent of Flagship Bank, N.A. The Company continually reviews its banking options to ensure that its exposure is limited or reduced to the FDIC protection limits.
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 2023, 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 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 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 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 in a business combination, 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, 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, 2023. Accordingly, the estimates presented in these consolidated 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. |
The Company measures certain financial instruments at fair value on a recurring basis. As of September 30, 2023 and December 31, 2022, the Company had no assets and liabilities measured at fair value on a recurring basis.
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 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.
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AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(Unaudited)
Business acquisitions
The Company accounted for business acquisitions 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.
Cash and cash equivalents
For purposes of the 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, 2023, the Company did not have any cash equivalents.
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 along with general reserves for current accounts receivable that are projected to become uncollectable. 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 twenty years. Leasehold improvements are depreciated over the shorter of the useful life or lease term including scheduled renewal terms. Revenue equipment acquired through acquisitions is generally revalued to current market values as of the acquisition date. Assets obtained more than a year prior to the acquisition by the acquired company are depreciated on a straight-line basis aligned with the remaining period of expected use, whereas those obtained less than a year prior are depreciated consistent with newly purchased assets. In addition to purchasing new revenue equipment, the Company may rebuild the engines of its tractors. Because rebuilding an engine increases its useful life, the Company capitalizes these costs and depreciates the cost over the remaining useful life of the unit. 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.
Goodwill and other 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.
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. Goodwill is subject to impairment tests at least annually. The Company reviews the carrying amounts of goodwill by reporting unit at least annually, or when indicators of impairment are present, to determine if goodwill may be impaired. The Company includes assumptions about the expected future operating performance as part of a discounted cash flow analysis to estimate fair value. If the carrying value of these assets is not recoverable, based on the discounted cash flow analysis, management compares the fair value of the assets to the carrying value. Goodwill is considered impaired if the recorded value exceeds the fair value. The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of goodwill is less than its carrying value. The Company would not be required to quantitatively determine the fair value of goodwill unless it determines, based on the qualitative assessment, that it is more likely than not that its fair value is less than the carrying value. Future cash flows of the individual indefinite-lived intangible assets are used to measure their fair value after consideration of certain assumptions, such as forecasted growth rates and cost of capital, which are derived from internal projection and operating plans. The Company performs its annual testing for goodwill during the fourth quarter of each fiscal year or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit or the fair value of an indefinite-lived intangible asset below its carrying value.
Other intangibles, net consists of covenants not to compete and customer relationships. All intangible assets determined to have finite lives are amortized over their estimated useful lives. The useful life of an intangible asset is the period over which the asset is expected to contribute directly or indirectly to future cash flows. The Company periodically evaluates both finite and indefinite lived intangible assets for impairment upon occurrence of events or changes in circumstances that indicate the carrying amount of intangible assets may not be recoverable.
See Note 6 for additional information regarding intangible assets and goodwill.
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AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(Unaudited)
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.
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, 2023 and 2022, the Company believes that it operates in one operating segment related to its full suite of logistics and transportation services, specializing in last mile deliveries, two-person home and commercial deliveries, mid-mile, and long-haul services.
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 30 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 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 freight on behalf of the Company’s customers. Primarily, the Company’s performance obligations under these service orders correspond to each delivery of freight that the Company makes under the service agreements. Control of the freight transfers to the recipient upon delivery. Once this occurs, the Company has satisfied its performance obligation and the Company recognizes revenue.
The Company covers a 100-mile radius around each of its terminals and each individual shipment accepted by the Company is considered a separate contract with the performance obligation being the delivery of the freight. Our average length of haul for each load of freight generally equals less than one week of continuous transit time.
The Company’s revenues are primarily derived from the transportation services we provide through the delivery of goods over the duration of a shipment. The bill of lading is a legally enforceable agreement between two parties, and where collectability is probable this document serves as the contract as our basis to recognized revenue under ASC 606- Revenue Recognition. The Company has elected to expense initial direct costs as incurred because the average shipment cycle is less than five days. The Company recognizes revenue and substantially all the purchased transportation expenses on a gross basis. Direct costs of such revenue generally include compensation and related benefits, gas costs, insurance, parking and tolls, truck rental fees, and maintenance fees. The Company directs the use of the transportation service provided and remains responsible for the complete and proper shipment. The Company recognizes revenue for its performance obligations under its customer contracts over time, as its customers receive the benefits of the services in accordance with ASC 606- Revenue Recognition.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(Unaudited)
Inherent within the Company’s revenue recognition practices are estimates for revenue associated with shipments in transit. For shipments in transit, the Company records revenue based on the percentage of service completed as of the period end and recognizes delivery costs as incurred. The percentage of service completed for each shipment is based on how far along in the shipment cycle each shipment is in relation to standard transit days. The estimated portion of revenue for all shipments in transit is accumulated at period end and recognized as operating revenue. The significance of in transit shipments to the consolidated financial statements is limited due to the short duration, generally less than five days, of the average shipment cycle. On September 30, 2023 and 2022, any reductions to operating revenue and accounts receivable to reflect in transit shipments were insignificant.
Revenue generated from warehousing services is generally recognized as the service is performed, based upon a monthly or weekly rate.
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 per common share is computed by dividing net loss attributable to common shareholders by the weighted average number of shares of common stock outstanding for the periods presented. Diluted loss per share is computed by dividing net loss 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 Series E, G and H preferred shares (using the as-if converted method). These common stock equivalents may be dilutive in the future.
| September 30, 2023 | September 30, 2022 | |||||||
| Stock warrants | 948,452,679 | 1,258,008,109 | ||||||
| Stock options | 80,000 | 80,000 | ||||||
| Series E convertible preferred stock | 95,238,667 | 28,571,600 | ||||||
| Series G convertible preferred stock | 2,377,500,000 | 575,000,000 | ||||||
| Series H convertible preferred stock | 323,740,000 | 323,740,000 | ||||||
| 3,745,011,346 | 2,185,399,709 | |||||||
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 consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which significantly changes how entities will measure credit losses for most financial assets, including accounts receivable. ASU No. 2016-13 will replace today’s “incurred loss” approach with an “expected loss” model, under which companies will recognize allowances based on expected rather than incurred losses. On November 15, 2019, the FASB delayed the effective date of Topic 326 for certain small public companies and other private companies until fiscal years beginning after December 15, 2022 for SEC filers that are eligible to be smaller reporting companies under the SEC’s definition, as well as private companies and not-for-profit entities. The January 1, 2023 adoption of this new guidance did not have a material impact on the Company’s unaudited consolidated financial statements.
In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The guidance was issued as improvements to ASU No. 2016-13 described above. The vintage disclosure changes require an entity to disclose current-period gross write-offs by year of origination for financing receivables. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The amendments should be applied prospectively. Early adoption of the amendments is permitted, including adoption in an interim period. The January 1, 2023 adoption of this new guidance did not have a material impact on the Company’s unaudited 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 consolidated financial position, results of operations or cash flows upon adoption.
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AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(Unaudited)
Reclassification
Certain reclassifications have been made in the consolidated financial statements to conform to the current period presentation. Such reclassifications had no impact on the Company’ previously reported consolidated financial position or results of operations. Specifically, on the consolidated balance sheets, a note payable was reclassified from notes payable to the notes payable – related parties, and on the consolidated statements of operations, certain interest expense was reclassified from interest expense to interest expense – related parties. Additionally, on the consolidated statements of operations, depreciation and amortization expenses have been reclassified from general and administrative expenses and are shown separately as part of operating expenses, and the line item, gross profit, has been eliminated.
NOTE 3 – ACQUISITIONS AND DISPOSITION
Acquisitions
2023
Effective February 3, 2023, the Company’s newly formed wholly-owned subsidiary, TLSS-STI, closed on an acquisition of all outstanding stock of Severance Trucking, which together, offer LTL trucking services throughout New England, with an effective date as of the close of business on January 31, 2023. The sellers of the stock of each entity were Kathryn Boyd, Clyde Severance, and Robert Severance, all individuals (the “Sellers”). None of the Sellers are affiliated with the Company or its affiliates.
Prior to the acquisition, Severance Trucking was a privately-owned full-service transportation carrier and logistics business that had been in operation for over 100 years specializing in LTL trucking that provided next day service to major cities in New England and New York, with cartage and interline agreements with respected carriers that ensure reliable deliveries anywhere in the United States and Canada. With annual revenues of over $13.0 million in 2022, Severance Trucking currently operates with over 120 power units and trailers and has two locations, comprised of approximately 18,000 square feet of warehouse and cross dock space, 9,000 square feet of office and 5,750 square feet of repair facilities located in Dracut, Massachusetts and approximately 16,000 square feet of warehouse space in North Haven, Connecticut.
The total purchase price was $2,250,000 plus closing expenses of $36,525, as adjusted. TLSS-STI: (i) paid $713,586 in cash, and (ii) entered into a $1,572,939 secured promissory note with the Seller, with interest accruing at the rate of 12% per annum (See Note 7). The entire unpaid principal under the note, was due and payable in three equal payments on August 1, 2023, February 1, 2024, and August 1, 2024, respectively, together with all accrued and unpaid interest thereunder, unless paid sooner. On November 8, 2023, the Company and the Sellers entered into a Post Closing Agreement and a First Amending to Secured Promissory Note, which amends certain terms of the Stock Purchase Agreement, dated January 4, 2023 (the “SPA”), and provided for an accounting of certain post-closing obligations and accounts. Among other things, the Post-Closing Agreement provided for a reduction of $171,887 in the principal amount payable under the purchase price promissory note due to a post-closing adjustment of closing date working capital; an extension of the maturity date of the purchase price promissory note from August 1, 2024 to February 1, 2025, with adjustment to its payment schedule (See Note 15 – Subsequent Events). The promissory note is secured solely by the assets of Severance Trucking and a corporate guaranty from TLSS. The purchase price is subject to a post-closing adjustment, up or down, determined by the amount by which Severance Trucking working capital as of the close of business on January 31, 2023, exceeds or falls short of the target working capital, as of September 30, 2022, on which the purchase price was calculated, which has not been calculated as of the date of this report.
One of the Sellers also entered into a consulting agreement, including non-competition and non-solicitation provisions, to continue with Severance Trucking after the acquisition for a period of no less than three (3) months and no more than one (1) year.
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. Based upon the preliminary purchase price allocation, the following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of the acquisition:
| Severance Trucking | ||||
| Assets acquired: | ||||
| Cash | $ | 207,471 | ||
| Accounts receivable | 836,886 | |||
| Prepaid expenses and other assets | 25,454 | |||
| Property and equipment, net | 1,186,198 | |||
| Financing lease right of use assets | 457,239 | |||
| Intangible assets | 430,152 | |||
| Total assets acquired at fair value | 3,143,400 | |||
| Liabilities assumed: | ||||
| Notes payable | 23,000 | |||
| Accounts payable and accrued expenses | 376,636 | |||
| Lease liabilities | 457,239 | |||
| Total liabilities assumed | 856,875 | |||
| Net assets acquired | $ | 2,286,525 | ||
| Purchase consideration paid: | ||||
| Cash paid | $ | 713,586 | ||
| Promissory note | 1,572,939 | |||
| Total purchase consideration paid | $ | 2,286,525 | ||
| 14 |
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(Unaudited)
2022
On August 4, 2022, the Company’s wholly-owned subsidiary, Cougar Express, closed on its acquisition of all outstanding stock of JFK Cartage, a New York-based full-service logistics provider specializing in pickup, warehousing and delivery services in the tri-state area. 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. 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 (See Note 7), $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. On August 28, 2023 and effective on July 31, 2023, the Company and the JFK Cartage Seller entered into a First Amendment to Secured Promissory Note (the “Amended Note”) to extend the first annual installment due on July 31, 2023 which was treated as a note modification (see Note 7). 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, TLSS-FC, 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”). 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, TLSSA 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 TLSSA assigned its interest in the Amended SPA to TLSS-FC. Pursuant to the Amended SPA, the total purchase price was $9,365,000, subject to certain adjustment. TLSS-FC: (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 (See Note 8). 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. TLSS-FC 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.
Pursuant to the Amended SPA, the purchase price shall be adjusted up or down by comparing Freight Connection’s target working capital as of March 31, 2022, as defined in the Stock Purchase and Sale Agreement, dated as of May 23, 2022, and the closing working capital, as well as the actual trailing twelve-month EBITDA from the Closing Date. The Company and the Freight Connections Seller are in the process of finalizing the post-closing adjustments and the Company expects that there will be a reduction in the purchase price based on this calculation.
The Freight Connections Seller also entered into an employment agreement, including non-competition provisions, to continue with Freight Connections after the acquisition.
| 15 |
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(Unaudited)
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 adjusted 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 | $ | 167,247 | $ | 196,527 | ||||||
| Accounts receivable, net | 280,815 | 1,909,892 | 2,190,707 | |||||||||
| Other assets | 206,591 | 428,666 | 635,257 | |||||||||
| Property and equipment | 44,839 | 1,296,974 | 1,341,813 | |||||||||
| Right of use assets | 1,172,972 | 7,911,622 | 9,084,594 | |||||||||
| Other intangible assets | 752,025 | 4,892,931 | 5,644,956 | |||||||||
| Goodwill | 502,642 | 1,603,237 | 2,105,879 | |||||||||
| Total assets acquired at fair value | 2,989,164 | 18,210,569 | 21,199,733 | |||||||||
| Liabilities assumed: | ||||||||||||
| Notes payable | (515,096 | ) | (598,886 | ) | (1,113,982 | ) | ||||||
| Accounts payable | (10,559 | ) | (422,902 | ) | (433,461 | ) | ||||||
| Accrued expenses | (187,890 | ) | (241,842 | ) | (429,732 | ) | ||||||
| Lease liabilities | (1,172,972 | ) | (7,911,622 | ) | (9,084,594 | ) | ||||||
| Total liabilities assumed | (1,886,517 | ) | (9,175,252 | ) | (11,061,769 | ) | ||||||
| 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 | ||||||
The following unaudited pro forma consolidated results of operations have been prepared as if the acquisition of JFK Cartage, Freight Connections and Severance Trucking had occurred as of the beginning of the following periods:
| For the Nine Months Ended September 30, 2023 | For the Nine Months Ended September 30, 2022 | |||||||
| Net Revenues | $ | 16,366,511 | $ | 23,616,402 | ||||
| Net Loss | $ | (7,118,009 | ) | $ | (2,583,829 | ) | ||
| Net Loss Attributable to Common Shareholders | $ | (7,528,395 | ) | $ | (2,901,100 | ) | ||
| Net Loss 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 was 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. The Company received the escrowed funds during the fourth quarter of 2022. 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. A loss on the sale of $720 was recorded during the nine months ended September 30, 2023.
| 16 |
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(Unaudited)
NOTE 4 – ACCOUNTS RECEIVABLE AND NOTE RECEIVABLE
Accounts receivable
On September 30, 2023 and December 31, 2022, accounts receivable, net consisted of the following:
| September 30, 2023 | December 31, 2022 | |||||||
| Accounts receivable | $ | 2,856,725 | $ | 2,523,778 | ||||
| Allowance for doubtful accounts for estimated losses | (819,427 | ) | (464,452 | ) | ||||
| Accounts receivable, net | $ | 2,037,298 | $ | 2,059,326 | ||||
During the nine months ended September 30, 2023 and 2022, the Company recorded bad debt expense of $81,872 and $, respectively, which is included in general and administrative expenses on the accompanying unaudited consolidated statements of operations.
Note receivable
On October 31, 2022, the Company entered into a promissory note receivable with Recommerce Group, Inc (“Recommerce”), a third party, in the amount of $283,333. In connection with the note receivable, the Company disbursed $255,000 to Recommerce, which is net of an original issue discount of $28,333. The promissory note bears interest at the rate of 6% per annum and matured on December 31, 2022 (the “Maturity Date”). On December 31, 2022, the note receivable amounted to $283,333 and accrued interest receivable amounted to $2,833, which is included in prepaid expenses and other current assets on the accompanying unaudited consolidated balance sheet. During the year ended December 31, 2022, in connection with this note receivable, the Company recorded interest income of $31,166. In January 2023, Recommerce repaid this note receivable plus all interest due.
NOTE 5 - PROPERTY AND EQUIPMENT
On September 30, 2023 and December 31, 2022, property and equipment consisted of the following:
| Useful Life | September 30, 2023 | December 31, 2022 | ||||||||
| Revenue equipment | 3 - 20 years | $ | 3,003,653 | $ | 1,316,518 | |||||
| Machinery and equipment | 1 - 10 years | 568,136 | 440,863 | |||||||
| Office equipment and furniture | 1 - 3 years | 116,460 | 106,172 | |||||||
| Leasehold improvements | 1 - 3 years | 63,710 | 22,329 | |||||||
| Subtotal | 3,751,959 | 1,885,882 | ||||||||
| Less: accumulated depreciation | (655,369 | ) | (278,670 | ) | ||||||
| Property and equipment, net | $ | 3,096,590 | $ | 1,607,212 | ||||||
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, 2023 and 2022, depreciation expenses amounted to $376,699 and $123,503, respectively, and are included in general and administrative expenses.
NOTE 6 – INTANGIBLE ASSETS AND GOODWILL
As a result of the acquisition of Severance Trucking, during the nine months ended September 30, 2023, there was a $430,152 increase in the gross intangible assets made up of $430,152 of finite lived intangible assets (See Note 3). The increase in gross finite lived intangible assets is associated with customer relationships that have finite lives.
As a result of the acquisitions of JFK Cartage and Freight Connections, during the year ended December 31, 2022, there was a $7,750,835 increase in the gross intangible assets made up of $5,644,956 of finite lived intangible assets and $2,105,879 of goodwill (See Note 3). The increase in gross finite lived intangible assets is associated with customer relationships and covenants not to compete and have finite lives.
On September 30, 2023, intangible assets subject to amortization consisted of the following:
| 2023 | ||||||||||||||
| Amortization period (years) | Gross Amount | Accumulated Amortization | Net finite intangible assets | |||||||||||
| Customer relationships | 3-5 | $ | 3,794,595 | $ | 759,139 | $ | 3,035,456 | |||||||
| Covenants not to compete | 3-5 | 1,503,487 | 313,226 | 1,190,261 | ||||||||||
| Other intangible assets | 1 | 25,000 | 25,000 | |||||||||||
| $ | 5,323,082 | $ | 1,097,365 | $ | 4,225,717 | |||||||||
| 17 |
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(Unaudited)
On December 31, 2022, intangible assets subject to amortization consisted of the following:
| 2022 | ||||||||||||||
| Amortization period (years) | Gross Amount | Accumulated Amortization | Net finite intangible assets | |||||||||||
| Customer relationships | 3-5 | $ | 3,364,444 | $ | 196,259 | $ | 3,168,185 | |||||||
| Covenants not to compete | 3-5 | 1,503,487 | 87,703 | 1,415,784 | ||||||||||
| Other intangible assets | 1 | 25,000 | 7,292 | 17,708 | ||||||||||
| $ | 4,892,931 | $ | 291,254 | $ | 4,601,677 | |||||||||
On September 30, 2023 and December 31, 2022, goodwill consisted of the following:
| Useful life | September 30, 2023 | December 31, 2022 | ||||||||
| Goodwill (1) | $ | 2,105,879 | $ | 2,105,879 | ||||||
| $ | 2,105,879 | $ | 2,105,879 | |||||||
| (1) | $502,642 of goodwill is related to a subsidiary that has negative equity as of September 30, 2023 and December 31, 2022. |
For the nine months ended September 30, 2023 and 2022, amortization of intangible assets amounted to $806,111 and $409,047, respectively.
Amortization of intangible assets attributable to future periods is as follows:
| Year ending September 30: | Amount | |||
| 2024 | $ | 1,054,461 | ||
| 2025 | 1,054,461 | |||
| 2026 | 1,054,461 | |||
| 2027 | 1,013,895 | |||
| 2028 | 48,439 | |||
| Total | $ | 4,225,717 | ||
NOTE 7 – NOTES PAYABLE
Promissory notes
On July 31, 2022, in connection with the acquisition of JFK Cartage, JFK Cartage issued a promissory note in the amount of $696,935 (See Note 3). The principal amount of $98,448 was payable weekly, in the amount of 25% of accounts receivable collected, but in any event, no later than October 4, 2022. This amount was paid prior to December 31, 2022. 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 August 28, 2023 and effective on July 31, 2023, the Company and the JFK Cartage Seller entered into a First Amendment to Secured Promissory Note (the “Amended Note”) to extend the first annual installment due on July 31, 2023 which was treated as a note modification. Pursuant to the Amended Note, the Company shall pay:
| (i) | An interest payment in the amount of $6,501 which was paid no later than July 28, 2023: | |
| (ii) | 23 equal weekly payments of interest only, each in the amount of $ (each a “Weekly Interest Payment”) payable commencing on July 28, 2023, with the last Weekly Interest Payment due on or before December 29, 2023; | |
| (iii) | $199,495.67 shall. be payable on December 31, 2023; | |
| (iv) | $199,495.67 shall be payable on July 31, 2024, plus interest at 5% per annum for the 7 months of January 2024 through July 2024, in the total amount of $11,637.25 and, | |
| (v) | $l99,499.68 payable on July 31, 2025. plus interest at 5% per annum for the 12 months from August 2024 through July 2025 in the total amount of $9,975. |
On September 30, 2023 and December 31, 2022, the principal amount related to the Amended Note was $598,487.
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 January 31, 2023, in connection with the acquisition of Severance Trucking, Severance Trucking issued a promissory note in the amount of $1,572,939 to the Severance Trucking Sellers. The secured promissory accrues interest at the rate of 12% per annum. The entire unpaid principal under the note, was due and payable in three equal payments on August 1, 2023, February 1, 2024, and August 1, 2024, respectively, together with all accrued and unpaid interest thereunder, unless paid sooner. The promissory note is secured solely by the assets of Severance Trucking and a corporate guaranty from TLSS. On September 30, 2023, the principal amount related to this note was $1,572,939. On November 8, 2023, the Company and the Sellers entered into a Post Closing Agreement and a First Amending to Secured Promissory Note, which amends certain terms of the Stock Purchase Agreement, dated January 4, 2023 (the “SPA”), and provided for an accounting of certain post-closing obligations and accounts. Among other things, the Post-Closing Agreement provided for a reduction of $171,887 in the principal amount payable under the purchase price promissory note due to a post-closing adjustment of closing date working capital; an extension of the maturity date of the purchase price promissory note from August 1, 2024 to February 1, 2025, with adjustment to its payment schedule (See Note 15 – Subsequent Events).
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. This merchant was repaid and on December 31, 2022, the merchant loan amount due to Paypal was $0.
| 18 |
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(Unaudited)
Equipment and auto notes payable
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, 2023 and December 31, 2022, equipment notes payable to these entities amounted to $2,846 and $9,605, respectively.
On July 7, 2022, Cougar Express 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. On September 30, 2023 and December 31, 2022, the equipment note payable to this entity amounted to $36,827 and $42,424, respectively.
In connection with the acquisition of Freight Connections, on September 16, 2022, the Company assumed several equipment notes payable due to entities amounting to $583,274. On September 30, 2023 and December 31, 2022, equipment notes payable to these entities amounted to $404,445 and $533,669, respectively.
On September 22, 2022, JFK Cartage 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. On September 30, 2023 and December 31, 2022, the equipment note payable to this entity amounted to $46,183 and $55,720, respectively.
On January 17, 2023, Cougar Express entered into a promissory note for the purchase of two trucks in the amount of $196,700. The note is due in sixty monthly installments of $4,059 which began in August 2022. The note was secured by the trucks. On September 30, 2023, the equipment note payable to this entity amounted to $175,156.
In connection with the acquisition of Severance Trucking, on January 31, 2023, the Company assumed an equipment note payable due to an entity amounting to $23,000. On September 30, 2023, equipment note payable to this entity amounted to $18,325.
On April 1, 2023, Severance Trucking entered into a promissory note for the purchase of a yard truck in the amount of $50,634. The note is due in 48 monthly installments of $1,254 which began in April 2023. The note was secured by the truck. On September 30, 2023, the equipment note payable to this entity amounted to $45,227.
On April 14, 2023, Severance Trucking entered into a promissory note for the purchase of a truck in the amount of $53,275. The note is due in 48 monthly installments of $1,379 which began in April 2023. The note was secured by the truck. On September 30, 2023, the equipment note payable to this entity amounted to $48,863.
On July 13, 2023, Severance Trucking entered into a promissory note for the purchase of three trucks in the amount of $278,085. The note is due in 60 monthly installments of $5,762 which began in August 2023. The note is secured by the trucks. On September 30, 2023, the equipment note payable to this entity amounted to $270,667.
On September 8, 2023, Severance Trucking entered into a promissory note for the purchase of two trucks in the amount of $83,398. The note is due in 48 monthly installments of $2,107 which began in October 2023. The note is secured by the trucks. On September 30, 2023, the equipment note payable to this entity amounted to $83,398.
On September 30, 2023 and December 31, 2022, notes payable consisted of the following:
| September 30, 2023 | December 31, 2022 | |||||||
| Principal amounts | $ | 3,303,363 | $ | 1,239,906 | ||||
| Less: current portion of notes payable | (1,578,651 | ) | (408,407 | ) | ||||
| Notes payable – long-term | $ | 1,724,712 | $ | 831,499 | ||||
As of September 30, 2023, future maturities of notes payable are as follows:
| Year ending September 30: | Amount | |||
| 2024 | $ | 1,578,651 | ||
| 2025 | 1,036,541 | |||
| 2026 | 451,351 | |||
| 2027 | 165,542 | |||
| 2028 | 71,278 | |||
| $ | 3,303,363 | |||
| 19 |
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(Unaudited)
NOTE 8– NOTES PAYABLE – RELATED PARTIES
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 to the Freight Connections Seller, who is considered a related party (See Note 3). 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. During the nine months ended September 30, 2023, interest expense related to this promissory note amounted to $307,397. On September 30, 2023 and December 31, 2022, the principal amount related to this note was $4,544,671.
On April 14, 2023, the Company’s Board of Directors approved a credit facility (the “Credit Facility”) under which the Company would obtain unsecured senior debt financing of up to $1,000,000. The terms of the Credit Facility provide for interest at 12% per annum. The maturity date of the financing will be December 31, 2023, provided, however, the Company may prepay a loan at any time without premium or penalty. Each loan under the Credit Facility will be made on promissory notes. During April 2023, the Company received initial loans under the Credit Facility, in the following amounts: (a) $500,000 from John Mercadante on April 17, 2023; Mr. Mercadante is a Director of the Company; and (b) $100,000 from Sebastian Giordano on April 21, 2023; Mr. Giordano is the Company’s Chief Executive Officer, President, and Chairman of the Board of Directors. During the nine months ended September 30, 2023, interest expense related to this promissory note amounted to $34,027. On September 30, 2023, the aggregate principal amount related to these notes was $600,000 and accrued interest payable amounted to $34,027, which has been included in accrued expenses on the accompanying unaudited consolidated balance sheet.
NOTE 9– SHAREHOLDERS’ EQUITY (DEFICIT)
Preferred stock
The Company has authorized 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.
Series B preferred shares
In August 2019, the Company designated Series B Preferred Shares consisting of shares with a par value of $0.001 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. In April 2022, the Company and Bellridge entered into a settlement agreement pursuant to which shares of Series B preferred shares were cancelled and the Company recorded settlement income of $700. On September 30, 2023 and December 31, 2022, there were Series B preferred stock issued and outstanding.
Series D preferred shares
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 preferred stock (“Series D Preferred”) does not have the right to vote. The Series D Preferred has a stated value of $ per share (the “Stated Value”). Subject only to the liquidation rights of the holders of Series B Preferred 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 Preferred holders are 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 Preferred 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 Preferred may not convert any shares of Series D Preferred 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.
Approval of at least a majority of the outstanding Series D Preferred 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 Preferred 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 Preferred; (c) issue any Series D Preferred, other than to the Investors; or (d) without limiting any provision hereunder, whether or not prohibited by the terms of the Series D Preferred, circumvent a right of the Series D Preferred.
As of September 30, 2023 and December 31, 2022, shares of Series D Preferred were outstanding.
| 20 |
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(Unaudited)
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.
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 was $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.
On June 22, 2023, the Company offered holders of certain Series E and Series G warrants to purchase an aggregate of 977,912,576 shares of the Company’s common stock at $ per share issued in connection with the Company’s Series E and Series G preferred shares offering (the “Eligible Warrants”) the opportunity to exercise the Eligible Warrants at $0.002 per share (the “Offer”). The Offer was contingent upon the Offer being exercised with regard to Eligible Warrants aggregating minimum proceeds to the Company of $500,000 prior to July 11, 2023.
The Company agreed with the holder of the Company’s remaining outstanding Series E Convertible Preferred Stock (“Series E Stock”) that, contingent on the Offer being exercised with regard to Eligible Warrants aggregating the minimum proceeds, the Company would reduce the conversion price of the Series E Stock and exercise price of Series E warrants to $0.003 per share. As a result of the Company’s receipt of the minimum proceeds, the conversion price for all remaining outstanding Series E Stock and the exercise price of the Series E warrants shall henceforth be $0.003 per share. (See Warrants discussion below)
| 21 |
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(Unaudited)
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, 2023 and December 31, 2022, the Company has accrued dividends of $173,914 and $161,092, respectively, which has been included in accrued expenses on the accompanying unaudited 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.
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.
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 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.
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.
| 22 |
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(Unaudited)
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 (“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.
On June 22, 2023, the Company offered holders of certain Series E and Series G warrants to purchase an aggregate of 977,912,576 shares of the Company’s common stock at $ per shares issued in connection with the Company’s Series E and Series G preferred shares offering (the “Eligible Warrants”) the opportunity to exercise the Eligible Warrants at $0.002 per share (the “Offer”). The Offer was contingent upon the Offer being exercised with regard to Eligible Warrants aggregating minimum proceeds to the Company of $500,000 prior to July 11, 2023.
Through September 30, 2023, the Company received proceeds of $619,111 for the exercise of warrants to purchase 309,555,430. The proceeds are being used by the Company to meet general capital requirements. (See Warrants discussion below)
Under the terms of the Eligible Warrants, if, other than upon conversion of existing convertible preferred stock, the Company issues shares of common stock, or securities exercisable to purchase or convertible into, shares of common stock, for a purchase price that is less than the exercise price of Eligible Warrants in effect at such time, then the exercise price of all Eligible Warrants will be reduced to the price per share of such dilutive issuance. As a result of the issuance of common stock on the exercise of certain Eligible Warrants at an exercise price of $0.002 per share, the exercise price for all remaining Eligible Warrants shall henceforth be $0.002 per share.
Under the terms of the Company’s Series G, if the Company issues or sells (or is deemed to have issued or sold) additional shares of common stock for a price-per-share that is less than the price equal to the conversion price of the Series G held by the holders of the Series G immediately prior to such issuance, then the conversion price of the Series G will be reduced to the price per share of such dilutive issuance. As a result of the issuance of common stock on the exercise of certain Eligible Warrants at an exercise price of $0.002 per share, the conversion price for all 475,500 remaining outstanding Series G shall henceforth be $0.002 per share.
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, 2023 and December 31, 2022, the Company has accrued dividends of $539,788 and $385,009, respectively, which has been included in accrued expenses on the accompanying unaudited 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.
| 23 |
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(Unaudited)
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 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 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.
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 on 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 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.
| 24 |
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(Unaudited)
In connection with issuance of the Series G, during the three months ended March 31, 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 E 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.
During the three months ended March 31, 2023, the Company issued shares of its common stock in connection with the conversion of shares of Series G and accrued dividends payable of $20,056. The conversion ratio was based on the Series G certificate of designation, as amended.
During the three months ended September 30, 2023, the Company issued shares of its common stock in connection with the conversion of shares of Series G and accrued dividends payable of $54,911. The conversion ratio was based on the Series G certificate of designation, as amended.
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 35,000 shares of preferred stock as Series H (“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, on September 16, 2022, the Company issued shares of Series H preferred stock. These shares were valued in the amount of $1,910,066 based on the as if converted fair value of the underlying common shares, or $ per common share, based on the quoted closing price of the Company’s common stock on the measurement date.
Series I Preferred Stock
On July 17, 2023, received notice of acknowledgement from the Secretary of State of the State of Nevada of filing of a Certificate of Designation of Preferences, Rights and Limitations of the Series I Preferred Stock (the “Series I Preferred Stock”), effective as of its filing date, July 14, 2023.
Since a substantial portion of the unissued shares of Common Stock are held in reserve in connection with rights of conversion of convertible preferred stock and/or debt and/or exercise of warrants and/or options, the Company will not be able to issue shares in connection with additional equity investments (including any requirements by investors to place shares of Common Stock in reserve for conversion of convertible preferred stock and/or debt and/or exercise of warrants and/or options), unless the Company amends its Articles of Incorporation to authorize the issuance of additional Common Stock. Senior management believes it is in the interest of the Company that the Articles of Incorporation of the Company be amended to authorize the issuance of shares of Common Stock (the “Authorized Share Increase Proposal”).
In connection with obtaining expeditious stockholder approval of the amendment to its Articles of Incorporation for the Authorized Share Increase Proposal, the Company has issued a new series of preferred stock (“Series I Preferred Stock”) having the right to vote and/or consent solely on the Authorized Share Increase Proposal. Solely with respect to the Authorized Share Increase Proposal, the Series I Preferred Stock shall have 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). The Series I Preferred Stock shall not have the right to vote and/or consent on any matter other than an Authorized Share Increase Proposal. The Series I Preferred Stock shall not be entitled to participate in any distribution of assets or rights upon any liquidation, dissolution or winding up of the Company, shall not be convertible into Common Stock or any other security of the Company, and shall not be entitled to any dividends or distributions. Any Series I Preferred Stock issued and outstanding shall be automatically surrendered to the Company and cancelled for no consideration upon the effectiveness of the amendment to the Company’s Articles of Incorporation that is authorized by stockholder approval of such Authorized Share Increase Proposal. Upon such surrender and cancellation, all rights of the Series I Preferred Stock shall cease and terminate, and the Series I Preferred Stock shall be retired and shall not be reissued.
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TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(Unaudited)
John Mercadante, a member of the Board of Directors of the Company, is the holder of 100% of one issued and outstanding share of Series I Preferred Stock. The Series I Preferred Stock was determined to have no value.
On July 27, 2023, the stockholders holding at least 51% of the voting power of the stock of the Company entitled to vote thereon (the “Consenting Stockholders”) 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 (“2023 Amendment”). This consent was sufficient to approve the 2023 Amendment under Nevada law, which authorized an increase of the number of shares of common stock that the Company may issue to shares, par value $. The increase was not yet effective at the time of this quarterly filing.
Common stock
Shares issued in connection with conversion of Series E preferred shares
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.
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.
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 E 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.
During the three months ended March 31, 2023, the Company issued shares of its common stock in connection with the conversion of shares of Series G and accrued dividends payable of $20,056. The conversion ratio was based on the Series G certificate of designation, as amended.
During the three months ended September 30, 2023, the Company issued shares of its common stock in connection with the conversion of shares of Series G and accrued dividends payable of $54,911. 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 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.
During the three months ended June 30, 2023, 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, 2023, the Company issued shares of its common stock and received proceeds of $ from the exercise of warrants at $ per share.
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.
| 26 |
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(Unaudited)
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 vest in equal annual installments with the first installment of shares vesting on January 3, 2022, and common shares vesting each year 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 vested 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 recorded 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 former 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 vested 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 recorded stock-based compensation expense over the vesting period which is included in the aggregate accretion of stock-based compensation reflected below.
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 $10,000.
On January 3, 2023, the Company’s Board of Directors granted the chief operating 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 quarterly installments with the first installment of shares vesting on March 31, 2023, and common shares vesting each quarter through December 31, 2023. 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 one-year vesting period.
On January 23, 2023, 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 $28,909, or $ per common share, based on the quoted closing price of the Company’s common stock on the measurement date. These shares vest in equal quarterly installments with the first installment of shares vesting on March 31, 2023, and common shares vesting each quarter through December 31, 2023. In connection with these shares, the Company valued these common shares at a fair value of $28,909 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 three months ended June 30, 2023, the Company’s Board of Directors granted certain employees an aggregate of 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 quarterly installments from the gate of grant. 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 one-year vesting period. On July 31, 2023, non-vested shares were cancelled due to the departure of an employee.
During the nine months ended September 30, 2023 and 2022, aggregate accretion of stock-based compensation expense on the above granted shares, which is net of the reversal of previously recognized stock-based expense due to forfeiture, amounted to $ and $, respectively. Total unrecognized compensation expense related to these vested and unvested common shares on September 30, 2023 amounted to $ which will be amortized over the remaining vesting period of approximately .
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 $.
| 27 |
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(Unaudited)
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, 2022 | 91,594,824 | $ | 0.011 | |||||
| Granted | 34,170,054 | 0.004 | ||||||
| Forfeited | (1,238,095 | ) | (0.005 | ) | ||||
| Shares vested | (55,540,101 | ) | (0.008 | ) | ||||
| Non-vested, September 30, 2023 | 68,986,682 | $ | 0.010 | |||||
Warrants
Warrants issued and exercised in connection with Series E preferred shares
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.
Warrants issued and exercised in connection with Series G preferred shares
In connection with the sale of Series G preferred shares, during the three months ended March 31, 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.
On June 22, 2023, the Company offered holders of certain warrants to purchase 977,912,576 shares of the Company’s common stock at $ per shares issued in connection with the Company’s Series G preferred shares offering (the “Eligible Warrants”) the opportunity to exercise the Eligible Warrants at $0.002 per share (the “Offer”). The Offer was contingent upon the Offer being exercised with regard to Eligible Warrants aggregating minimum proceeds to the Company of $500,000 prior to July 11, 2023.
Under the terms of the Eligible Warrants, if, other than upon conversion of existing convertible preferred stock, the Company issues shares of common stock, or securities exercisable to purchase or convertible into, shares of common stock, for a purchase price that is less than the exercise price of Eligible Warrants in effect at such time, then the exercise price of all Eligible Warrants will be reduced to the price per share of such dilutive issuance. As a result of the issuance of common stock on the exercise of certain Eligible Warrants at an exercise price of $0.002 per share on June 29, 2023, the exercise price for all remaining Eligible Warrants shall henceforth be $0.002 per share.
On June 29, 2023, the Company calculated the fair value of the Eligible Warrants prior to the ratchet provision and the fair value of the Eligible warrants after the ratchet provision using a Binomial pricing model. Based on this calculation, the incremental value received by the warrant holders was calculated and amounted to $255,986. This incremental value was allocated as follows: $52,508 was allocated to additional paid-in capital as offering cost associated with the exercise of warrants, and the Company recorded a deemed dividend of $203,478 related to Eligible Warrants that were not exercised pursuant to the offer.
During the three months ended June 30, 2023, the Company issued shares of its common stock and received proceeds of $ from the exercise of warrants at $ per share. The proceeds are being used by the Company to meet general capital requirements.
During the three months ended September 30, 2023, the Company issued shares of its common stock and received proceeds of $ from the exercise of warrants at $ per share.
Warrant activities for the nine months ended September 30, 2023 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, 2022 | 1,258,008,109 | $ | 0.014 | $ | 0 | |||||||||||
| Exercised | (309,555,430 | ) | (0.002 | ) | - | - | ||||||||||
| Balance Outstanding September 30, 2023 | 948,452,679 | $ | 0.008 | $ | 0 | |||||||||||
| Exercisable, September 30, 2023 | 948,452,679 | $ | 0.008 | $ | 0 | |||||||||||
| 28 |
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(Unaudited)
Stock options
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Balance Outstanding December 31, 2022 | 80,000 | $ | 8.85 | $ | ||||||||||||
| Granted/Cancelled | - | - | ||||||||||||||
| Balance Outstanding September 30, 2023 | 80,000 | $ | 8.85 | $ | ||||||||||||
| Exercisable, September 30, 2023 | 80,000 | $ | 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 year ended December 31, 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.
In connection with the finalization of the ABC, the Assignee has demanded a one-time payment of $200,000 to close out the estates of Prime EFS and Shypdirect. Accordingly, during the year ended December 31, 2022, the Company recorded a contingency loss of $200,000 and as of September 30, 2023 and December 31, 2022, the Company accrued the potential settlement amount of $200,000 which is included in accrued expenses on the accompanying unaudited consolidated balance sheets. On October 3, 2023, the Assignee filed with the Court a Notice of Motion for Entry of an Order Approving Stipulation of Settlement Resolving Potential Avoidance Claims Against the Company, Prime EFS and Shypdirect, whereby the Company shall make a payment to the Assignee in the amount of $50,000 on or before December 31, 2023 in full settlement of all claims. On October 27, 2023, the Court approved this settlement.
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Legal matters
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, during the period from September 30, 2021 to September 30, 2023, whether material or not.
Bellridge Capital, L.P. v. TLSS and Mercadante
On September 11, 2020, a prior lender to the Company, Bellridge Capital, L.P., filed a civil action against TLSS and others in the United States District Court for the Southern District of New York. The case was assigned Case No. 20-cv-7485. After discontinuing the foregoing federal action voluntarily and without prejudice, on April 23, 2021, Bellridge filed a substantially similar civil action in New York Supreme Court, New York County, which was assigned index number 652728/2021.
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 year ended December 31, 2022, the Company recorded settlement expense of $227,811 and as of December 31, 2022, the Company has no further obligations to Bellridge.
| 29 |
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(Unaudited)
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.
On July 20, 2023, SCS moved for summary judgment in this action. On July 27, 2023, the Company filed papers opposing the motion. On August 21, 2023, the court conferenced SCS’s motion for summary judgment and SCS’s motion to strike counterclaims and dismiss the counterclaims. The court indicated it would deny the first motion and grant the second motion. On September 5, 2023, the Company filed Amended Affirmative Defenses and an Amended Counterclaim. On October 2, 2023, DCS filed a motion to Dismiss the Amended Counterclaim but it did not file a motion to strike the Amended Affirmative Defenses. On October 3, 2023, the Company filed a motion to strike SCS’s Motion to Dismiss the Amended Counterclaim on the grounds that SCS’s motion was not filed within ten (10) days as required under Florida law.
The Company believes it has substantial defenses to all claims alleged in SCS’s complaint, as well as valid affirmative defenses and counterclaims. 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 at $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.
By order dated and issued September 15, 2022, the Circuit Judge assigned to this case dismissed the original Complaint in the matter, finding (a) that SCS had failed to adequately allege it has standing and (b) that the complaint fails to adequately allege a cognizable claim. The dismissal was without prejudice, meaning SCS could attempt to replead its claims.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(Unaudited)
On October 5, 2022, SCS filed an Amended Complaint in this action. By order dated and issued December 19, 2022, the Circuit Judge assigned to this case once again dismissed the case, finding (a) that SCS still failed to adequately allege it has standing and (b) that the complaint still fails to adequately allege a cognizable claim. Once again, however, the dismissal was without prejudice.
On January 18, 2023, SCS filed a Second Amended Complaint in this action. All defendants once again moved to dismiss the pleading or in the alternative for summary judgment on it in their favor. The Court heard argument on that motion on March 9, 2023. On May 15, 2023, the Court issued a summary order denying the defendants’ motion to dismiss. On June 1, 2023, all defendants moved for reconsideration of the May 15 order. To date, SCS has not filed papers opposing the motion for reconsideration. Argument on the application to reconsider has been set for November 29, 2023.
The Company believes the action to be frivolous and intend to mount a vigorous defense to this action.
Owing to the fact that no discovery has occurred in the case, however, 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. In a derivative case, any recovery is to be paid to the corporation; however, the individual defendants in this case are fully indemnified by the Company unless a final judgment is entered against them for deliberate or intentional misconduct.
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 subleased to Shypdirect 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 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 an action in the Supreme Court, State of New York, Suffolk County (the “Suffolk County Action”), seeking defense and indemnity for this claim from the insurance brokerage, TCE/Acrisure LLC, which sold the County Hall insurance policy to Shypdirect.
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. In the claim against TLSS, Plaintiff seeks to “pierce the corporate veil” and hold TLSS responsible for the alleged liabilities of Prime and/or Shypdirect as the supposed alter ego of these subsidiaries. In the claims against Shyp CX, Inc., Shyp FX, Inc. and Cougar Express, Inc., Plaintiff seeks to hold these entities responsible for the alleged liabilities of Prime and/or Shypdirect on a successor liability theory.
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, 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 TCI/Acrisure in the Bergen County action. On December 23, 2021, Acrisure filed its Answer to the Third-Party Complaint, denying its material allegations.
On March 2, 2022, Plaintiff sought and was granted leave to file a Second Amended Complaint, bringing claims against Prime and Shypdirect’s vehicle liability carrier, County Hall (for discovery) as well as the producing broker, TCE/Acrisure. Plaintiff also asserted additional alter ego allegations against TLSS.
On February 15, 2023, Plaintiff filed a motion for leave to file a Third Amended Complaint in this action, seeking to assert claims against TLSS’s former CEO, John Mercadante, also on a “pierce the corporate veil” theory. On March 9, 2023, TLSS, Prime and Shypdirect opposed the motion for leave to add Mercadante, arguing that any claim against Mercadante would be both futile and time-barred. On March 31, 2023, the Court denied Plaintiff’s motion to add Mr. Mercadante as a party.
In January and February 2023, numerous depositions were taken in the case, including those of Messrs. Giordano and Mercadante. Under the currently operative pre-trial order, all discovery in this case must be concluded by later this year.
Under New Jersey law, it is well established that a corporation is a separate entity from its shareholder(s) and a primary reason for incorporation is the insulation of shareholders from the liabilities of the corporate enterprise.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(Unaudited)
The New Jersey Supreme Court in Richard A. Pulaski Const. Co. v. Air Frame Hangars, Inc., 195 N.J. 457, 472–73 (2008) held that, in light of the fundamental propositions that a corporation is a separate entity from its shareholders, and “that a primary reason for incorporation is the insulation of shareholders from the liabilities of the corporate enterprise,” courts will not pierce a corporate veil “[e]xcept in cases of fraud, injustice, or the like...’” (citations omitted). The New Jersey Supreme Court further held that:
The limitations placed on a claimant’s ability to reach behind a corporate structure are intentional, as “[t]he purpose of the doctrine of piercing the corporate veil is to prevent an independent corporation from being used to defeat the ends of justice, to perpetrate fraud, to accomplish a crime, or otherwise to evade the law[.]” (citations omitted). Hence, to invoke that form of relief, “the party seeking an exception to the fundamental principle that a corporation is a separate entity from its principal bears the burden of proving that the court should disregard the corporate entity.”.
The purpose of piercing the corporate veil is thus to prevent an independent corporation from being used to defeat the ends of justice, perpetrate fraud, to accomplish a crime, or otherwise to evade the law.
To pierce the corporate veil and impute alter ego liability on TLSS for the alleged torts of Prime, Shypdirect and/or their agents, employees and servants, the Plaintiff herein would have to establish: (1) that Prime and Shypdirect were “utterly dominated” by TLSS and (2) that respecting the separate corporate existences of the subsidiaries would perpetrate a fraud or injustice, or otherwise circumvent the law. FDASmart, Inc. v. Dishman Pharmaceuticals and Chemicals, Ltd., et al., 448 N.J. Super. 195, 204 (App. Div. 2016). A plaintiff must satisfy this burden by clear and convincing evidence.
To determine whether the first element has been satisfied, courts consider whether the parent company so dominated the subsidiary that the latter had no separate existence but was merely a conduit for the parent. In considering the level of dominance exercised by the parent over the subsidiary, the court will consider factors such as common ownership, financial dependency, interference with a subsidiary’s selection of personnel, disregard of corporate formalities, and control over a subsidiary’s marketing and operational policies.
To date, to the best of the undersigned’s knowledge, information and belief, no discovery has been taken in this action which would permit the imposition of alter ego liability on TLSS for the subject accident.
To date, to the best of the undersigned’s knowledge, information and belief, no discovery has been taken in this action which would permit the imposition of successor liability on Shyp CX, Inc., Shyp FX, Inc. and/or Cougar Express, Inc. for the subject accident.
Under a so-called MCS-90 reimbursement endorsement to the County Hall policy, TLSS believes that Prime and Shypdirect may have up to $750,000 in coverage under a 1980 federal law under which County Hall is “require[d] to pay damages for certain claims or ‘suits’ that are not covered by the policy.” (See Endorsement CHI – 290 (02/19) to County Hall policy effective May 31, 2019.)
TLSS intends to vigorously defend itself in this action and to pursue the third-party actions, in the name and right of Prime and Shypdirect, against both County Hall and TCE/ Acrisure.
In an order entered October 25, 2023, the Court ordered that all fact discovery must be completed by January 2, 2024, and that all expert discovery must be completed by March 30, 2024. The Court indicated that it would not entertain any further applications to extend the discovery period even if filed on consent.
Owing to the early stage of this heavily litigated action, we cannot evaluate the likelihood of an adverse outcome or estimate the Company’s liability, if any, in connection with this claim.
Maria Lugo v. JFK Cartage
The Company’s JFK Cartage, Inc. subsidiary is one of three (3) defendants in an action captioned Maria Lugo v. JFK Cartage, Inc. d/b/a Fifth Dimension Logistix, Joan Ton, individually, and Chris Bartley, individually. The case is pending in Supreme Court, State of New York, Queens County, Index No. 704862/2022.
In this action, which was filed March 4, 2022, a former employee of JFK Cartage alleges that she suffered discrimination and retaliation in violation of the New York City Human Rights Law and the New York State Human Rights Law. The former employee alleges that on December 28, 2021, she had Covid-19 symptoms, advised the defendants she was feeling ill and went home early to take a home test. She further alleges that on December 30, 2021, she tested positive for Covid-19 and informed defendants she had to isolate for ten (10) days. Plaintiff alleges that she returned to work on January 7, 2022, but that her employment was terminated later that day by defendant Bartley who “questioned the authenticity of the at-home test, accusing her of fraud.” Plaintiff claims her employment “was terminated due to her disability (a Covid-19 infection) and in retaliation for her requesting reasonable accommodation for the illness she suffered.” She seeks unspecified compensatory damages, including lost pay and benefits, punitive damages and attorneys’ fees.
On December 16, 2022, all defendants filed an answer and affirmative defenses, denying all claims for statutory violations. The case is currently in discovery. The conduct alleged in the complaint occurred prior to the Company’s July 31, 2022, acquisition of JFK Cartage, Inc. The Company believes that, in relation to this action, it has a right to full indemnification from the selling stockholder (including attorneys’ fees) as well as set-off rights against notes payable to the selling stockholder.
Owing to (among other things) the fact that discovery in this action has just begun, 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.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(Unaudited)
Elaine Pryor v. Rocio Perez, et al.
The Company’s Freight Connections, Inc. subsidiary (“FCI”) was one of three (3) named defendants in an action captioned Elaine Pryor v. Rocio Perez, North Trucking & Logistics, LLC and Freight Connections, Inc. The case is pending in Superior Court of New Jersey, Essex County, Docket No. ESX-L-5147-18.
In this action, which was filed in 2018, plaintiff alleges that on February 1, 2017, she suffered personal injuries in a collision between her motor vehicle and a truck operated by a then employee of FCI. Plaintiff alleges that the truck was owned by FCI and leased to North Trucking & Logistics at the time.
On May 8, 2023, the Court in the Elaine Pryor action entered an order, on the consent of counsel for all parties, directing that the name of defendant FCI be changed to Freight Connections LLC and that this change be reflected in the caption of the case (the “May 8, 2023 Order”). Freight Connections LLC is not a corporate affiliate of FCI but is rather an independent trucking company that is wholly-owned by the individual who sold the stock of FCI to TLSS-FC effective September 16, 2022. (See Note 1 above.)
Owing to the May 8, 2023 Order, the Company does not believe that it can be adjudged liable for any verdict or settlement in the Elaine Pryor action.
Mode Transportation, LLC v. Freight Connections, Inc.
The Company’s Freight Connections, Inc. (FC) subsidiary is a defendant in an action captioned Mode Transportation, LLC v. Freight Connections, Inc., Case No. 16-2023-CA-008531, filed on 4/26/2023 in the Circuit Court of the Fourth Judicial Circuit in and for Duval County, Florida.
In this action, plaintiff Mode asserted three (3) causes of actions against FC for $51,650. Mode asserted this sum was owed on certain invoices issued from September 21, 2021, through April 6, 2022. On July 23, 2023, a default judgment was entered against FC for $52,328 plus costs.
FC was not aware of the lawsuit until late July 2023, whereupon it filed a (i) motion to vacate the judgment and an associated writ of garnishment served on a commercial bank; (b) a motion for sanctions against Mode’s prior counsel; and (c) a motion for a rehearing. After a two-day evidentiary hearing, FC’s motion to vacate was denied by the court.
FC has advised the Company that certain of the invoices comprising the $52,328 demand were paid and that FC may have defenses to certain other invoices.
Given that a court has issued a default judgment which has not yet been vacated and may never be, the Company accrued a reserve of $52,328 on its balance sheet as of September 30, 2023.
Josh Perez v. Cougar Express, Inc.
An attorney for a former Cougar Express (CE) employee, Josh Perez (“Perez”), has advised CE that he has filed a charge of discrimination against CE with the U.S. Equal Employment Opportunity Commission (EEOC).
Perez has previously asserted claims against CE for: gender discrimination under Title VII and the New York State Human Rights Law (“NYSHRL”); pregnancy/childbirth discrimination under Title VII of the federal Civil Rights Act of 1964, as amended; retaliation under Title VII and NYSHRL; and familial status discrimination under NYSHRL.
However, FC has not received a copy, nor any notification, of the filing.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(Unaudited)
Perez was employed by CE as a dock worker beginning on 3/8/2022 and last worked 9/27/2022. He alleges that in or around July 2022, he informed CE that he was expecting a child. Perez has not provided any details regarding the individual(s) with CE he allegedly informed. On 9/27/22, Perez requested that CE complete the employer section of his New York Paid Family Leave (“PFL”) paperwork, which CE did. Thereafter, Perez ceased communicating with CE. Further, CE did not receive any confirmation that Perez had in fact filed for PFL or that his PFL was approved.
Because CE did not hear from Perez or receive any confirmation concerning his application for or approval of PFL, CE concluded that Perez had resigned. Another worker was hired to fill Perez’s former position. Then, on or about 12/27/22, Perez contacted CE attempting to return to work and was informed that there was no position for him.
Cougar Express categorically denies Perez’s allegations and any purported wrongdoing. However, essentially all litigation involves defense costs and inherent uncertainties. Therefore, at present, Cougar Express is seeking to resolve this claim for nuisance value in the $10-15,000 range. However, the Company expresses no view as to whether it will, in fact, he able to resolve the claim in this range. If the claim cannot be resolved soon, Cougar express intends to vigorously defend itself on this claim (whether the EEOC acts on it or in court). Owing to the early stage of the matter, however, we cannot evaluate the likelihood of an adverse outcome or estimate the Company’s liability, if any, in connection with it.
Joseph Corbisiero v. Freight Connections, Inc., TLSS and TLSS-FC
On October 19, 2023, Joseph Corbisiero (“Corbisiero”) filed an action in the Superior Court of the State of New Jersey, Bergen County, against the Company’s subsidiary, Freight Connections, Inc. (“FC”), the Company, and the Company’s TLSS-FC, Inc. subsidiary. The case has been assigned # BER-L-005669-23. Corbisiero, who was then the sole stockholder of FC, sold all outstanding shares of FC capital stock to TLSS-FC effective September 16, 2022 (the “FC Closing Date”) and has acted as the CEO of FC since then.
The complaint in this action contains two counts, one for the alleged breach of a $4,544.671.23 secured promissory note executed by FC in Corbisiero’s favor as of the FC Closing Date (the “FC Promissory Note”), and the other for enforcement of a security agreement, also dated as of the FC Closing Date, pursuant to which FC granted Corbiserio a lien and security interest “on all” of FC’s property, assets and rights of every kind (the “FC Security Agreement”). Neither the Company, nor TLSS-FC, is a party to the FC Promissory Note or the FC Security Agreement. In the lawsuit, the Company and TLSS-FC are each denominated a “Nominal Defendant” and the complaint does not seek relief from either entity.
In the complaint, Corbisiero alleges that FC defaulted on the FC Promissory Note by failing to pay monthly interest beginning in or around August 1, 2023. Plaintiff also alleges that, by reason of its default, FC is also liable for default interest of 18% per annum plus late charges of 5% each delinquent payment, plus costs of collection. The complaint further alleges that by reason of FC’s default, FC became liable for the full repayment of principal prior to the December 31, 2023, maturity date set forth in the note.
The complaint also contains a single paragraph in which it is alleged that “TLSS and TLSS-FC are necessary and indispensable parties to the instant action by virtue of each entity’s express covenant and agreement to indemnify, defend, protect and hold harmless Plaintiff from and against all losses incurred by Plaintiff in connection with, among other things, any breach or nonfulfillment of any covenant or agreement on the part of TLSS-FC and TLSS under [the stock purchase and sale agreement pursuant to which, as amended, TLSS-FC (the “FC SPSA”) acquired the then-outstanding capital stock of FC].”
TLSS and TLSS-FC believe they have a good-faith argument that they are not amenable to personal jurisdiction in the courts of New Jersey. In addition, TLSS is not a party of the FC SPSA and, while TLCC-FC is an assignee of the purchaser under the FC SPSA, the purchaser’s indemnification obligation thereunder (see § 7.3) is limited to alleged breaches of representations, warranties and covenants in the FC SPSA and therefore does not encompass alleged violations of the FC Promissory Note. In addition, while FC has not, in fact, paid interest on the FC Promissory Note since July 2023, FC contends that, effective August 2023 it was relieved of its obligation to pay such interest because, starting in August 2023, Corbisiero refused to engage in the purchase-price adjustment procedure mandated by Section 1.4 of the FC SPSA, pursuant to which Corbisiero was obligated, among other things, to supply accounting and other workpapers sufficient to document that the figure for FC’s March 31, 2022 working capital was calculated “using the same methodologies, principles and procedures” used in the preparation of FC’s December 31, 2020 and December 31, 2021 financial statements (SPSA § 3.5) and that all such financial statements, including the unaudited FC balance sheet as of March 31, 2022, and the related unaudited statements of operations, of shareholder’s equity and of cash flows for each of one-year periods ended December 31, 2020 and December 31, 2021, together with the related notes and schedules, “present fairly, in all material respects, the financial position and results of operations of [FC] as of the dates of such statements and for the periods covered thereby on a cash basis.”
Owing to (among other things) the fact that this action has just begun, it is not possible to evaluate the likelihood of a favorable or unfavorable outcome, for FC, TLSS or TLSS-FC, nor is it possible to estimate the amount or range of any potential loss in the matter.
Other than discussed above, as of September 30, 2023, 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 the Company’s results of our operations.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(Unaudited)
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 was appointed the Company’s Treasurer. Mr. James Giordano’s employment with the Company was at will. He received annual compensation of $250,000 and was entitled to an 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 Mr. James Giordano 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 vested 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 $ and recorded 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 was 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 was $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. Effective October 13, 2023, Mr. James Giordano terminated his employment with the Company and was entitled to two weeks of severance pay and payment of health insurance through December 31, 2023. Mr. James Giordano acknowledged that due to his resignation decision, he is not entitled to any other severance or termination payments that may have been provided for pursuant to his employment agreement.
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
Freight Connections incurred outside trucking costs with companies owned by the Freight Connections Seller, who is currently Freight Connection’s chief executive officer. In connection with the outside trucking services, During the three and nine months ended September 30, 2023, Freight Connections recorded aggregate outside trucking expense of $407,744 and $1,649,120, which is included in costs of sales on the unaudited accompanying consolidated statement of operations, respectively. As of September 30, 2023 and December 31, 2022, the aggregate amount due to these companies amounted to $348,396 and $115,117, respectively, which is included in accounts payable on the accompanying unaudited consolidated balance sheets.
Notes payable – related parties
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 to the Freight Connections Seller, who is considered a related party. 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. During the nine months ended September 30, 2023, interest expense related to this promissory note amounted to $307,397. On September 30, 2023 and December 31, 2022, the principal amount related to this note was $4,544,671.
On April 14, 2023, the Company’s Board of Directors approved a credit facility (the “Credit Facility”) under which the Company would obtain unsecured senior debt financing of up to $1,000,000. The terms of the Credit Facility provide for interest at 12% per annum. The maturity date of the financing will be December 31, 2023, provided, however, the Company may prepay a loan at any time without premium or penalty. Each loan under the Credit Facility will be made on promissory notes. During April 2023, the Company received initial loans under the Credit Facility, in the following amounts: (a) $500,000 from John Mercadante on April 17, 2023; Mr. Mercadante is a Director of the Company; and (b) $100,000 from Sebastian Giordano on April 21, 2023; Mr. Giordano is the Company’s Chief Executive Officer, President, and Chairman of the Board of Directors. During the nine months ended September 30, 2023, interest expense related to this promissory note amounted to $34,027. On September 30, 2023, the aggregate principal amount related to these notes was $600,000 and accrued interest payable amounted to $34,027, which has been included in accrued expenses on the accompanying unaudited consolidated balance sheet.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(Unaudited)
NOTE 13 – CONCENTRATIONS
For the nine months ended September 30, 2023, no customer represented over 10% of the Company’s total net revenues. 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). On September 30, 2023, one customer represented approximately 15.0% of the Company’s net accounts receivable balance. On December 31, 2022, three customers represented 46.7% (18.2%, 17.9% and 10.6%, respectively) of the Company’s net accounts receivable balance.
All revenues are derived from customers in the United States.
NOTE 14 – OPERATING AND FINANCING LEASE RIGHT-OF-USE (“ROU”) ASSETS AND OPERATING AND FINANCING LEASE LIABILITIES
As a result of the acquisition of JFK Cartage and Freight Connections, the Company assumed several non-cancelable operating leases for the lease of office, warehouse spaces, and parking spaces. Additionally, as a result of the acquisition of Severance Trucking, the Company assumed several non-cancelable financing leases for revenue equipment.
Effective January 1, 2023, Freight Connections entered into a lease agreement for warehouse space in Ridgefield, NJ. The lease is for a period of 60 months, commencing on January 1, 2023 and expiring on December 31, 2027. Pursuant to the lease agreement, the lease requires Freight Connections to pay a monthly base rent of; (i) $41,071 in the first year; (ii) $42,303 in the second year; (iii) $43,572 in the third year; (iv) $44,880 in the fourth year and; (v) $46,226 in the fifth year, plus a pro rata share of operating expenses beginning January 2023. In connection with this lease, on January 1, 2023, the Company increased right of use assets and lease liabilities by $2,180,356.
Effective February 1, 2023, Severance Trucking entered into a lease agreement for warehouse space in North Haven, CT. The lease is for a period of 24 months, commencing on February 1, 2023 and expiring on January 31, 2025. Pursuant to this lease agreement, the lease requires Severance Trucking to pay a monthly base rent of $8,500. Additionally, effective February 1, 2023, Severance Trucking entered into a lease agreement for warehouse space in Dracut, MA. The lease is for a period of 60 months, commencing on February 1, 2023 and expiring on January 31, 2028. Pursuant to this lease agreement, the lease requires Severance Trucking to pay a monthly base rent of $32,000. In connection with these leases, on February 1, 2023, the Company increased right of use assets and lease liabilities by $2,180,356.
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 months 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, 2023 and 2022, in connection with its property operating leases, the Company recorded rent expense of $3,308,317 and $430,011, respectively, which is expensed during the period and included in operating expenses on the accompanying unaudited consolidated statements of operations.
The significant assumption used to determine the present value of the lease liabilities was discount rates ranging from 8% to 9% which was based on the Company’s estimated average incremental borrowing rate.
On September 30, 2023 and December 31, 2022, right-of-use asset (“ROU”) is summarized as follows:
| September 30, 2023 | December 31, 2022 | |||||||
| Office leases and equipment right of use assets | $ | 13,500,093 | $ | 9,084,594 | ||||
| Less: accumulated amortization | (3,009,694 | ) | (627,511 | ) | ||||
| Balance of ROU assets | $ | 10,490,399 | $ | 8,457,083 | ||||
On September 30, 2023 and December 31, 2022, operating and financing lease liabilities related to the ROU assets are summarized as follows:
| September 30, 2023 | December 31, 2022 | |||||||
| Lease liabilities related to office leases and revenue equipment right of use assets | $ | 10,770,921 | $ | 8,495,036 | ||||
| Less: current portion of lease liabilities | (3,265,828 | ) | (2,081,099 | ) | ||||
| Lease liabilities – long-term | $ | 7,505,093 | $ | 6,413,937 | ||||
On September 30, 2023, future minimum base lease payments due under non-cancelable operating and financing leases are as follows:
| Twelve months ended September 30, | Amount | |||
| 2024 | $ | 4,054,375 | ||
| 2025 | 3,396,170 | |||
| 2026 | 3,017,824 | |||
| 2027 | 1,655,699 | |||
| 2028 | 295,262 | |||
| Thereafter | 40,493 | |||
| Total minimum non-cancelable operating lease payments | 12,459,823 | |||
| Less: discount to fair value | (1,688,902 | ) | ||
| Total lease liability on September 30, 2023 | $ | 10,770,921 | ||
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TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023
(Unaudited)
NOTE 15 – SUBSEQUENT EVENTS
Assignment for the benefit of creditors
On October 3, 2023, the Assignee filed with the Court a Notice of Motion for Entry of an Order Approving Stipulation of Settlement Resolving Potential Avoidance Claims Against the Company, Prime EFS and Shypdirect, whereby the Company shall make a payment to the Assignee in the amount of $50,000 on or before December 31, 2023 in full settlement of all claims. On October 27, 2023, the Court approved this settlement (See Note 10).
Note payable – related party
On April 14, 2023, the Company’s Board of Directors approved a credit facility (the “Credit Facility”) under which the Company would obtain unsecured senior debt financing of up to $1,000,000. The terms of the Credit Facility provide for interest at 12% per annum. The maturity date of the financing will be December 31, 2023, provided, however, the Company may prepay a loan at any time without premium or penalty. Each loan under the Credit Facility will be made on promissory notes. During October 2023, the Company received a loan under the Credit Facility in the amount of $500,000 from John Mercadante. Mr. Mercadante is a Director of the Company;
Post Closing Agreement and First Amendment to Secured Promissory Note with Severance Trucking Sellers
On November 8, 2023, the Company and the Severance Trucking Sellers entered into a Post Closing Agreement and a First Amendment to Secured Promissory Note, which reflects certain posting closing adjustments to the purchase price and modifies and extends the repayment terms of the Secured Promissory Note (See Note 3 and 7). The Post Closing Agreement amends certain terms of the Stock Purchase Agreement, dated January 4, 2023 (the “SPA”), and provided for an accounting of certain post-closing obligations and accounts. Among other things, the Post-Closing Agreement provided for a reduction of $171,887 in the principal amount payable under the purchase price promissory note due to a post-closing adjustment of closing date working capital; an extension of the maturity date of the purchase price promissory note from August 1, 2024 to February 1, 2025, with adjustment to its payment schedule. Pursuant to the First Amendment to the Secured Promissory Note, the following payment shall be made:
| Payment Due Date | Outstanding Interest Due (2/1/23 – 1/31/24) | Regular Interest Due (2/1/24 – 2/1/25) | Principal Payment Due | Less: Working Capital Deficit Applied | Total Payment Due | |||||||||||||||
| December 1, 2023 | $ | 47,717 | $ | $ | 5,283 | $ | $ | 53,000 | ||||||||||||
| January 1, 2024 | 53,000 | 53,000 | ||||||||||||||||||
| February 1, 2024 | 498 | 504,885 | 505,383 | |||||||||||||||||
| August 1, 2024 | 60,088 | 504,885 | 564,973 | |||||||||||||||||
| February 1, 2024 | 30,708 | 504,886 | (171,887 | ) | 363,707 | |||||||||||||||
| Total | $ | 47,717 | $ | 91,294 | $ | 1,572,939 | $ | (171,887 | ) | $ | 1,540,063 | |||||||||
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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.
Risks and uncertainties
We maintain our cash in bank and financial institution deposits that at times may exceed federally insured limits. On September 30, 2023, cash in bank in excess of FDIC insured levels amounted to $0. On March 12, 2023, Signature Bank, our financial institution, was closed by its state chartering authority, the New York State Department of Financial Services. On that same date the FDIC was appointed as receiver and transferred all the deposits and substantially all of the assets of Signature Bank to Signature Bridge Bank, N.A., a full-service bank that was operated by the FDIC. At the time of closing, the Company had all of its cash at Signature Bank. Based upon the announcement on March 12, 2023, from the U.S. Department of the Treasury, the U.S. Federal Reserve and the FDIC, the Company expected to have access to all of its deposits at Signature Bank. We did not lose access to our accounts or experience interruptions in banking services, and we suffered no losses with respect to our deposits at Signature Bank as a result of the bank’s closure. Normal banking activities resumed on Monday, March 13, 2023. We are currently looking at additional banking options to ensure that our exposure is limited or reduced to the FDIC protection limits.
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 2023, 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”) is a holding company incorporated under the laws of the State of Nevada, on July 25, 2008. Its active wholly-owned operating subsidiaries, Cougar Express, Inc., Freight Connections, Inc., JFK Cartage, Inc., and Severance Trucking Co., Inc., along with Severance Warehousing, Inc. and McGrath Trailer Leasing, Inc., and hereafter referred to as “Severance Trucking” (acquired in 2023), together provide a full suite of logistics and transportation services, specializing in ecommerce fulfillment, last mile deliveries, two-person home delivery, mid-mile, and long-haul services. Such entities operate several warehouse locations located in New York, New Jersey, Connecticut and Massachusetts. Inactive subsidiaries include: TLSS Acquisition, Inc. (“TLSSA”), Shyp CX, Inc. (“Shyp CX”), Shyp FX, Inc. (“Shyp FX”), TLSS-FC, Inc. (“TLSS-FC”) and TLSS-STI, Inc. (“TLSS-STI”).
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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 and employs its own drivers. As of September 30, 2023, through our active subsidiaries, we owned approximately 85 vehicles consisting of trucks, box trucks and vans, 86 trailers, and 21 forklifts, while employing approximately 65 drivers.
In addition, our operations utilize the services of independent contractors, who generally use their own vehicles, on an as needed basis.
Since exiting the Amazon business, we have pursued a growth by acquisitions strategy as set forth below and as such, continues to pursue potential acquisition opportunities.
On November 13, 2020, we formed a wholly owned subsidiary, Shyp FX, a company incorporated under the laws of the State of New Jersey. On January 15, 2021, through Shyp FX, we executed an APA and closed a transaction to acquire substantially all of the assets and certain liabilities of DDTI, a northern New Jersey-based logistics provider specializing in servicing Federal Express over the past 25 years, 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, TLSSA, a company incorporated under the laws of the State of Delaware. On March 24, 2021, TLSSA acquired all the issued and outstanding shares of capital stock of Cougar Express, a New York-based full-service logistics provider specializing in pickup, warehousing, and delivery services in the tri-state area. 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, a company incorporated under the laws of the State of New York. Shyp CX does not engage in any revenue-generating operations and is currently inactive.
On August 4, 2022, the Company’s wholly-owned subsidiary, Cougar Express, closed on its acquisition of all outstanding stock of JFK Cartage, a New York-based full-service logistics provider specializing in pickup, warehousing and delivery services in the tri-state area. 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. JFK Cartage operates from a 31,000 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. This amount was paid prior to December 31, 2022. The remaining balance of $598,487 was 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. On August 28, 2023 and effective on July 31, 2023, the Company and the JFK Cartage Seller entered into a First Amendment to Secured Promissory Note (the “Amended Note”) to extend the first annual installment due on July 31, 2023, Pursuant to the Amended Note, the Company shall pay:
| (i) | An interest payment in the amount of $6,50I (which was paid) no later than July 28, 2023: | |
| (ii) | 23 equal weekly payments of interest only, each in the amount of $l,571 (each a “Weekly Interest Payment”) payable commencing on July 28, 2023, with the last Weekly Interest Payment due on or before December 29, 2023; | |
| (iii) | $199,495.67 shall. be payable on December 31, 2023; | |
| (iv) | $199,495.67 shall be payable on July 31, 2024, plus interest at 5% per annum for the 7 months of January 2024 through July 2024, in the total amount of $11,637.25 and, | |
| (v) | $l99,499.68 payable on July 31, 2025 plus interest at 5% per annum for the 12 months from August 2024 through July 2025 in the total amount of $9,975. |
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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, TLSS-FC, 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, TLSSA 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 TLSSA assigned its interest in the Amended SPA to TLSS-FC. Pursuant to the Amended SPA, the total purchase price was $9,365,000, subject to certain adjustments. TLSS-FC: (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. TLSS-FC agreed to pay certain accrued liabilities and other notes payable that exist 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.
On February 3, 2023, our newly formed wholly-owned subsidiary, TLSS-STI, closed on an acquisition of all outstanding stock of Severance Trucking Co., Inc., Severance Warehousing, Inc. and McGrath Trailer Leasing, Inc., which together, offer LTL trucking services throughout New England (collectively, “Severance Trucking”), with an effective date as of the close of business on January 31 2023. The sellers of the stock of each entity were Kathryn Boyd, Clyde Severance, and Robert Severance, all individuals (the “Sellers”). None of the Sellers are affiliated with the Company or its affiliates. Severance is a privately-owned full-service transportation carrier and logistics business that has been in operation for over 100 years specializing in LTL trucking that provides next day service to major cities in New England and New York, with cartage and interline agreements with respected carriers that ensure reliable deliveries anywhere in the United States and Canada. With annual revenues of over $13.0 million in 2022, Severance currently operates with over 120 power units and trailers and has two locations, comprised of approximately 18,000 square feet of warehouse and cross dock space, 9,000 square feet of office and 5,750 square feet of repair facilities located in Dracut, Massachusetts and approximately 16,000 square feet of warehouse space in North Haven, Connecticut. The total purchase price was $2,250,000 plus closing expenses of $36,525. TLSS-STI: (i) paid $713,586 in cash, and (ii) entered into a $1,572,939 secured promissory note with the Seller, with interest accruing at the rate of 12% per annum. The entire unpaid principal under the note, was due and payable in three (3) equal payments on August 1, 2023, February 1, 2024, and August 1, 2024, respectively, together with all accrued and unpaid interest thereunder, unless paid sooner. On November 8, 2023, the Company and the Sellers entered into a Post Closing Agreement and a First Amending to Secured Promissory Note, which amends certain terms of the Stock Purchase Agreement, dated January 4, 2023 (the “SPA”), and provided for an accounting of certain post-closing obligations and accounts. Among other things, the Post-Closing Agreement provided for a reduction of $171,887 in the principal amount payable under the purchase price promissory note due to a post-closing adjustment of closing date working capital; an extension of the maturity date of the purchase price promissory note from August 1, 2024 to February 1, 2025, with adjustment to its payment schedule (See Note 15 – Subsequent Events). The promissory note is secured solely by the assets of Severance and a corporate guaranty from TLSS.
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 consolidated financial statements contained in this Annual 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 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 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 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, and the value of claims against the Company.
We have identified the accounting policies below as critical to our business operation:
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Accounts receivable
Accounts receivable is 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.
Business acquisitions
We account for business acquisitions 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.
Property and equipment
Property and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives of one to twenty years. Leasehold improvements are depreciated over the shorter of the useful life or lease term including scheduled renewal terms. Revenue equipment acquired through acquisitions is generally revalued to current market values as of the acquisition date. Assets obtained more than a year prior to the acquisition by the acquired company are depreciated on a straight-line basis aligned with the remaining period of expected use, whereas those obtained less than a year prior are depreciated consistent with newly purchased assets. In addition to purchasing new revenue equipment, the Company may rebuild the engines of its tractors. Because rebuilding an engine increases its useful life, the Company capitalizes these costs and depreciates the cost over the remaining useful life of the unit. 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.
Goodwill and other 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.
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. Goodwill is subject to impairment tests at least annually. The Company reviews the carrying amounts of goodwill by reporting unit at least annually, or when indicators of impairment are present, to determine if goodwill may be impaired. The Company includes assumptions about the expected future operating performance as part of a discounted cash flow analysis to estimate fair value. If the carrying value of these assets is not recoverable, based on the discounted cash flow analysis, management compares the fair value of the assets to the carrying value. Goodwill is considered impaired if the recorded value exceeds the fair value. The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of goodwill is less than its carrying value. The Company would not be required to quantitatively determine the fair value of goodwill unless it determines, based on the qualitative assessment, that it is more likely than not that its fair value is less than the carrying value. Future cash flows of the individual indefinite-lived intangible assets are used to measure their fair value after consideration of certain assumptions, such as forecasted growth rates and cost of capital, which are derived from internal projection and operating plans. The Company performs its annual testing for goodwill during the fourth quarter of each fiscal year.
Other intangibles, net consists of covenants not to compete and customer relationships. All intangible assets determined to have finite lives are amortized over their estimated useful lives. The useful life of an intangible asset is the period over which the asset is expected to contribute directly or indirectly to future cash flows. The Company periodically evaluates both finite and indefinite lived intangible assets for impairment upon occurrence of events or changes in circumstances that indicate the carrying amount of intangible assets may not be recoverable.
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.
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Revenue recognition and cost of revenue
We 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.
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 generally net 30 days from acceptance of delivery. We do not incur incremental costs obtaining service orders from our customers, however, if we did, because all of 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 freight on behalf of the Company’s customers. Primarily, our performance obligations under these service orders correspond to each delivery of freight that we make under the service agreements. Control of the freight transfers to the recipient upon delivery. Once this occurs, we have satisfied its performance obligation and we recognize revenue.
We cover a 100-mile radius around each of our terminals and each individual shipment accepted by the Company is considered a separate contract with the performance obligation being the delivery of the freight. Our average length of haul for each load of freight generally equals less than one week of continuous transit time.
Our revenues are primarily derived from the transportation services we provide through the delivery of goods over the duration of a shipment. The bill of lading is a legally enforceable agreement between two parties, and where collectability is probable this document serves as the contract as our basis to recognized revenue under ASC 606- Revenue Recognition. We have elected to expense initial direct costs as incurred because the average shipment cycle is less five days. We recognize revenue and substantially all the purchased transportation expenses on a gross basis. Direct costs of such revenue generally include compensation and related benefits, gas costs, insurance, parking and tolls, truck rental fees, and maintenance fees. We direct the use of the transportation service provided and remain responsible for the complete and proper shipment. We recognize revenue for our performance obligations under our customer contracts over time, as our customers receive the benefits of the services in accordance with ASC 606- Revenue Recognition.
Inherent within the Company’s revenue recognition practices are estimates for revenue associated with shipments in transit. For shipments in transit, we record revenue based on the percentage of service completed as of the period end and recognize delivery costs as incurred. The percentage of service completed for each shipment is based on how far along in the shipment cycle each shipment is in relation to standard transit days. The estimated portion of revenue for all shipments in transit is accumulated at period end and recognized as operating revenue. The significance of in transit shipments to the consolidated financial statements is limited due to the short duration, generally less than five days, of the average shipment cycle. On September 30, 2023 and December 31, 2022, any reductions to operating revenue and accounts receivable to reflect in transit shipments were insignificant.
Revenue generated from warehousing services is generally recognized as the service is performed, based upon a monthly or weekly rate.
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.
RESULTS OF OPERATIONS
Our unaudited 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 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, 2023 compared with the three and nine months ended September 30, 2022
The following table sets forth our revenues, expenses and net loss for the three and nine months ended September 30, 2023 and 2022. The financial information below is derived from our unaudited consolidated financial statements included in this Quarterly Report.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues | $ | 4,947,684 | $ | 1,700,854 | $ | 15,604,451 | $ | 4,364,747 | ||||||||
| Operating expenses | 7,274,904 | 2,717,133 | 21,694,078 | 8,186,339 | ||||||||||||
| Loss from operations | (2,327,220 | ) | (1,016,279 | ) | (6,089,627 | ) | (3,821,592 | ) | ||||||||
| Other (expenses) income, net | (340,775 | ) | (27,499 | ) | (703,075 | ) | 31,617 | |||||||||
| Net loss | (2,667,995 | ) | (1,043,778 | ) | (6,792,702 | ) | (3,789,975 | ) | ||||||||
| Deemed and accrued dividends | (62,660 | ) | (101,386 | ) | (473,046 | ) | (317,271 | ) | ||||||||
| Net loss attributable to common shareholders | $ | (2,730,655 | ) | $ | (1,145,164 | ) | $ | (7,265,748 | ) | $ | (4,107,246 | ) | ||||
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Results of Operations
Revenues
During the three months ended September 30, 2023, our revenues were $4,947,684 as compared to $1,700,854 during the three months ended September 30, 2022, an increase of $3,246,830, or 190.9%. During the nine months ended September 30, 2023, our revenues were $15,604,451 as compared to $4,364,747 during the nine months ended September 30, 2022, an increase of $11,239,704, or 257.5%. This increase was primarily a result of revenues generated from our acquired companies as follows:
| ● | During the three and nine months ended September 30, 2023, Freight Connections, which was acquired in September 2022, generated revenues of $1,643,449 and $6,157,698, respectively. During the three and nine months ended September 30, 2022, Freight Connections, which was acquired in September 2022, generated revenues of $343,509 and $343,509, respectively. | |
| ● | During the three and nine months ended September 30, 2023, Severance Trucking, which was acquired in January 2023, generated revenues of $2,548,536 and $6,945,156, respectively. |
Beginning in January 2023, the operations of Cougar Express and JFK Cartage have been combined into Cougar Express. During the three months ended September 30, 2023, Cougar Express generated revenues of $755,699 as compared to $1,357,345 during the three months ended September 30, 2022, a decrease of $601,676, or 44.3%. During the nine months ended September 30, 2023, Cougar Express generated revenues of $2,501,597 as compared to $3,492,750 during the nine months ended September 30, 2022, a decrease of $991,154, or 28.4%.
On June 21, 2022, we sold substantially all the assets of Shyp FX in an all-cash transaction. During the three and nine months ended September 30, 2022, we generated revenues from our Shyp FX operation of $0 and $528,488, respectively. Subsequent to June 21, 2022, we no longer generate this revenue.
We continue to explore other strategic relationships and identify potential acquisition opportunities, while continuing to execute our business plan. In 2022, we completed the acquisition of JFK Cartage and Freight Connections and in 2023, we acquired Severance Trucking.
Operating Expenses
During the three months ended September 30, 2023, total operating expenses amounted to $7,274,904 as compared to $2,717,133 during the three months ended September 30, 2022, an increase of $4,557,771, or 167.7%. During the nine months ended September 30, 2023, total operating expenses amounted to $21,694,078 as compared to $8,186,339 during the nine months ended September 30, 2022, an increase of $13,507,739, or 165.0%. During the three and nine months ended September 30, 2023 and 2022, operating expenses consisted of the following:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Cost of revenues (exclusive of depreciation and amortization) | $ | 3,361,812 | $ | 1,236,630 | $ | 9,506,063 | $ | 3,221,182 | ||||||||
| Cost of revenues – related parties | 407,744 | - | 1,649,120 | - | ||||||||||||
| Compensation and related benefits | 1,247,795 | 720,339 | 3,825,384 | 2,770,092 | ||||||||||||
| Legal and professional Fees | 370,105 | 259,597 | 1,349,469 | 948,094 | ||||||||||||
| Rent | 1,132,618 | 217,717 | 3,308,317 | 430,011 | ||||||||||||
| Depreciation and amortization | 407,310 | 155,050 | 1,182,810 | 532,550 | ||||||||||||
| General and administrative expenses | 347,520 | 127,800 | 872,915 | 284,410 | ||||||||||||
| Total Operating Expenses | $ | 7,274,904 | $ | 2,717,133 | $ | 21,694,078 | $ | 8,186,339 | ||||||||
Cost of revenues (exclusive of depreciation and amortization)
During the three months ended September 30, 2023, our aggregate cost of revenues (exclusive of depreciation and amortization) was $3,769,556 as compared to $1,236,630 during the three months ended September 30, 2022, an increase of $2,532,926, or 204.8%. During the nine months ended September 30, 2023, our aggregate cost of revenues (exclusive of depreciation and amortization) was $11,155,183 as compared to $3,221,182 during the nine months ended September 30, 2022, an increase of $7,934,001, or 246.3%. Cost of revenues consists of truck and van rental fees, insurance, gas, maintenance, parking and tolls, and compensation and related benefits. The increase in cost of revenues for the three and nine months ended September 30, 2023 as compared to the three and nine months ended September 30, 2022 primarily resulted from the acquisitions of Freight Connections and Severance Trucking in September 2022 and January 2023, respectively, which generated aggregate increases in cost of revenues of $3,019,171 and $9,310,314, respectively. Subsequent to the acquisition of JFK Cartage on July 31, 2022, we began consolidating the operations of Cougar and JFK which has lowered our cost of revenues and our cost of revenues related to Cougar and JFK decreased due to a decrease in revenues.
Compensation and related benefits
For the three months ended September 30, 2023, compensation and related benefits amounted to $1,247,795 as compared to $720,339 for the three months ended September 30, 2022, an increase of $527,456, or 73.2%, which was primarily attributable to a decrease in stock-based compensation of $94,060 and other compensation of $18,407, offset by an increase in compensation and related benefits in connection with the acquisition of Freight Connections, and Severance Trucking. During the three months ended September 30, 2023, Freight Connections and Severance Trucking incurred aggregate compensation and related benefits of $639,923.
For the nine months ended September 30, 2023, compensation and related benefits amounted to $3,825,384 as compared to $2,770,092 for the nine months ended September 30, 2022, an increase of $1,055,292, or 38.1%, which was primarily attributable to a decrease in stock-based compensation of $871,763, offset by an increase in executive and administrative compensation and related benefits of $63,245 and an increase in compensation and related benefits incurred in connection with the acquisition of Freight Connections, and Severance Trucking. During the nine months ended September 30, 2023, Freight Connections and Severance Trucking incurred aggregate compensation and related benefits of $1,863,810.
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Legal and professional fees
For the three months ended September 30, 2023, legal and professional fees were $370,105 as compared to $259,597 for the three months ended September 30, 2022, an increase of $110,508, or 42.6%. During the three months ended September 30, 2023, we had an increase in accounting fees of $62,473 attributable to an increase in audit and accounting fees incurred as a result of our recent acquisitions, and an increase in legal fees of $66,356, offset by a decrease in other professional fees of $18,321.
For the nine months ended September 30, 2023, legal and professional fees were $1,349,469 as compared to $948,094 for the nine months ended September 30, 2022, an increase of $401,375, or 42.3%. During the nine months ended September 30, 2023, we had an increase in accounting fees of $423,917 attributable to an increase in audit and accounting fees incurred as a result of our recent acquisitions and an increase in legal fees of $55,866, offset by an overall decrease in other professional fees of $78,408.
Rent expense
For the three months ended September 30, 2023, rent expense was $1,132,618 as compared to $217,717 for the three months ended September 30, 2022, an increase of $914,901, or 420.2%. For the nine months ended September 30, 2023, rent expense was $3,308,317 as compared to $430,011 for the nine months ended September 30, 2022, an increase of $2,878,306, or 669.4%. This increase was attributable to the acquisition of Freight Connections and Severance Trucking in September 2022 and January 2023, respectively. Additionally, we incurred rent expense in connection with the acquisition of JFK Cartage in July 2023. The lease of Cougar Express, expired on December 31, 2021 and we occupied the facility on a month-to-month basis through September 30, 2022 at which time we vacated the premises and moved the Cougar Express operations into the JFK Cartage facility.
Depreciation and amortization
For the three months ended September 30, 2023, depreciation and amortization expenses were $407,310 as compared to $155,050 for the three months ended September 30, 2022, an increase of $252,260, or 162.7%. For the nine months ended September 30, 2023, depreciation and amortization expenses were $1,182,810 as compared to $532,550 for the nine months ended September 30, 2022, an increase of $650,260, or 122.1%. These increases were primarily attributable to the acquisition of Freight Connections and Severance Trucking and the acquisition of additional revenue equipment.
General and administrative expenses
General and administrative expenses include office expenses, insurance expense, bad debt expense and other general and administrative expenses.
For the three months ended September 30, 2023, general and administrative expenses were $347,520 as compared to $127,800 for the three months ended September 30, 2022, an increase of $219,720, or 171.9%. These increases were primarily attributable to the acquisition of Freight Connections and Severance Trucking, which incurred aggregate general and administrative expenses of $227,932 (including bad debt expense of $86,367). These increases were offset by decreases in general and administrative expenses due to cost-cutting measures taken.
For the nine months ended September 30, 2023, general and administrative expenses were $872,915 as compared to $284,410 for the nine months ended September 30, 2022, an increase of $588,505, or 206.9%. These increases were primarily attributable to the acquisition of Freight Connections and Severance Trucking, which is attributable to an aggregate increase in general and administrative expenses of $524,851 (including bad debt expense of $63,591), and an increase in other general and administrative expenses of $63,654.
Loss from operations
For the three months ended September 30, 2023, loss from operations amounted to $2,327,220 as compared to $1,016,279 for the three months ended September 30, 2022, an increase of $1,310,941, or 129.0%. For the nine months ended September 30, 2023, loss from operations amounted to $6,089,627 as compared to $3,821,592 for the nine months ended September 30, 2022, an increase of $2,268,035, or 59.4%.
Other (expenses) income
Total other income (expenses) includes interest income, interest expense, gain on sale of subsidiary, and settlement expense. For the three and nine months ended September 30, 2023 and 2022, other (expenses) income consisted of the following:
| Three Months ended September 30, | Nine Months ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Interest income | $ | - | $ | - | $ | 992 | $ | - | ||||||||
| Interest expense | (205,599 | ) | (14,635 | ) | (352,415 | ) | (24,397 | ) | ||||||||
| Interest expense – related party | (135,076 | ) | - | (341,424 | ) | - | ||||||||||
| Gain (loss) from sale of assets of subsidiary | - | (2,714 | ) | (720 | ) | 293,975 | ||||||||||
| Settlement expense | (100 | ) | (10,150 | ) | (9,508 | ) | (237,961 | ) | ||||||||
| Total Other Income (Expenses) | $ | (340,775 | ) | $ | (27,499 | ) | $ | (703,075 | ) | $ | 31,617 | |||||
For the nine months ended September 30, 2023 and 2022, interest income was $992 and $0, respectively, an increase of $992, or 100.0%.
For the three months ended September 30, 2023 and 2022, aggregate interest expense was $340,675 and $14,635, respectively, an increase of $326,040. The increase in interest expense was attributable to an increase in average interest-bearing loans outstanding due to new notes payable incurred in connection with acquisitions, equipment and related party notes payable. In July 2022, September 2022, and January 2023, in connection with the acquisitions of JFK Cartage, Freight Connections, and Severance Trucking, note payable balances increased related to secured promissory notes entered into with the former owners of JFK Cartage, Freight Connections, and Severance trucking, we assumed notes payable primarily consisting of equipment notes assumed, and we entered into new equipment loans. Additionally, in April 2023, we borrowed an aggregate of $600,000 from related parties for working capital purposes. Accordingly, we expect interest expenses to increase in 2023.
For the nine months ended September 30, 2023 and 2022, aggregate interest expense was $693,839 and $24,397, respectively, an increase of $669,442. The increase in interest expense was attributable to an increase in average interest-bearing loans outstanding due to new notes payable incurred in connection with acquisitions. In July 2022, September 2022, and January 2023, in connection with the acquisitions of JFK Cartage, Freight Connections, and Severance Trucking, note payable balances increased related to secured promissory notes entered into with the former owners of JFK Cartage, Freight Connections, and Severance trucking, we assumed notes payable primarily consisting of equipment notes assumed, We also entered into new equipment loans. Additionally, in April 2023, we borrowed an aggregate of $600,000 from related parties for working capital purposes. Accordingly, we expect interest expenses to increase in 2023.
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During the three months ended September 30, 2023, we recorded settlement expense of $100 as compared to settlement expense of $10,150 for the three months ended September 30, 2022. During the nine months ended September 30, 2023, we recorded settlement expense of $9,508 as compared to settlement expense of $237,961 for the nine months ended September 30, 2022.
During the three months ended September 30, 2023, we recorded a loss related to the sale of assets of our subsidiary, Shyp FX, of $0 and $2,714, respectively. During the nine months ended September 30, 2023, we recorded a (loss) gain related to the sale of assets of our subsidiary, Shyp FX, of $(720) and $293,975, respectively.
Net Loss
Due to factors discussed above, for the three months ended September 30, 2023 and 2022, net loss amounted to $2,667,995 and $1,043,778, respectively. For the three months ended September 30, 2023, net loss attributable to common shareholders, which included dividends accrued on Series E and Series G preferred stock of $62,660, amounted to $2,730,655, or $(0.00) per basic and diluted common share. For the three months ended September 30, 2022, net loss attributable to common shareholders, which included dividends accrued on Series E and Series G preferred stock of $101,386, amounted to $1,145,164, or $(0.00) per basic and diluted common share.
Due to factors discussed above, for the nine months ended September 30, 2023 and 2022, net loss amounted to $6,792,702 and $3,789,975, respectively. For the nine months ended September 30, 2023, net loss attributable to common shareholders, which included dividends accrued on Series E and Series G preferred stock of $473,046, amounted to $7,265,748, or $(0.00) per basic and diluted common share. For the nine months ended September 30, 2022, net loss attributable to common shareholders, which included dividends accrued on Series E and Series G preferred stock of $317,271, amounted to $4,107,246, or $(0.00) per basic and diluted common share.
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, 2023 and December 31, 2022, we had a cash balance of $98,636 and $1,470,807, respectively. Our working capital deficit was $11,680,875 on September 30, 2023. We reported a net decrease in cash for the nine months ended September 30, 2023 as compared to December 31, 2022 of $1,372,171 primarily as a result of the use of cash for acquisitions of $713,586, cash used to purchase property and equipment of $679,879, the repayment of notes payable of $194,574, and cash used in operations of $2,127,806, offset by net cash proceeds from notes payable of $662,092 used to purchase revenue equipment, cash acquired in acquisitions of $207,471, net cash proceeds received from the collection of note receivable of $255,000, proceeds from the exercise of warrants of $619,111, and proceeds from notes payable – related parties of $600,000.
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, from the exercise of warrants, 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 and may not be able to meet our debt obligations.
Recent Financing Activities
Credit Facility
On April 14, 2023, our Board of Directors approved a credit facility (the “Credit Facility”) under which we would obtain unsecured senior debt financing of up to $1,000,000. The terms of the Credit Facility provide for interest at 12% per annum. The maturity date of the financing will be December 31, 2023, provided, however, we may prepay a loan at any time without premium or penalty. Each loan under the Credit Facility will be made on promissory notes. During April 2023, we received initial loans under the Credit Facility, in the following amounts: (a) $500,000 from John Mercadante on April 17, 2023; Mr. Mercadante is a Director of the Company; and (b) $100,000 from Sebastian Giordano on April 21, 2023; Mr. Giordano is the Company’s Chief Executive Officer, President, and Chairman of the Board of Directors. Additionally, during October 2023, we received an additional loan under the Credit Facility in the amount of $500,000 from John Mercadante.
Warrants
On June 22, 2023, we offered holders of certain warrants to purchase 977,912,576 shares of the Company’s common stock at $0.01 per shares issued in connection with the Company’s Series G preferred shares offering (the “Eligible Warrants”) the opportunity to exercise the Eligible Warrants at $0.002 per share (the “Offer”). The Offer was contingent upon the Offer being exercised with regard to Eligible Warrants aggregating minimum proceeds to the Company of $500,000 prior to July 11, 2023. Under the terms of the Eligible Warrants, if, other than upon conversion of existing convertible preferred stock, the Company issues shares of common stock, or securities exercisable to purchase or convertible into, shares of common stock, for a purchase price that is less than the exercise price of Eligible Warrants in effect at such time, then the exercise price of all Eligible Warrants will be reduced to the price per share of such dilutive issuance. As a result of the issuance of common stock on the exercise of certain Eligible Warrants at an exercise price of $0.002 per share, the exercise price for all remaining Eligible Warrants shall henceforth be $0.002 per share.
During the three months ended June 30, 2023, the Company issued 181,634,858 shares of its common stock and received proceeds of $363,270 from the exercise of 181,634,858 warrants at $0.002 per share. The proceeds are being used by the Company to meet general capital requirements.
During the three months ended September 30, 2023, the Company issued 127,920,572 shares of its common stock and received proceeds of $255,841 from the exercise of 127,920,572 warrants at $0.002 per share. The proceeds are being used by the Company to meet general capital requirements.
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Cash Flows
Operating activities
Net cash flows used in operating activities for the nine months ended September 30, 2023 amounted to $2,127,806. During the nine months ended September 30, 2023, net cash used in operating activities was primarily attributable to net loss of $6,792,702, adjusted for the add back (reduction) of non-cash items such as depreciation and amortization expense of $1,182,810, stock-based compensation of $349,314, non-cash rent expense of $242,569, and bad debt expense of $81,872, and changes in operating assets and liabilities such as a decrease in accounts receivable of $777,042, an increase in prepaid expenses and other current assets of $123,459, an increase in security deposits of $89,171, a decrease in accrued compensation and related benefits of $42,780, an increase in accounts payable and accrued expenses of $2,005,406, and an increase in insurance payable of $281,293.
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.
Investing activities
Net cash used in investing activities for the nine months ended September 30, 2023 amounted to $930,994, which consisted of cash used for acquisitions of $713,586 and cash used for the purchase of property and equipment of $679,879, offset by cash received from the collection of a note receivable of $255,000 and cash acquired in acquisitions of $207,471.
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.
Financing activities
For the nine months ended September 30, 2023, net cash provided by financing activities totaled $1,686,629. During the nine months ended September 30, 2023, we received proceeds from notes payable of $662,092 used to buy revenue equipment, we received proceeds from notes payable – related parties of $600,000 and we received proceed from the exercise of warrants of $619,111, offset by the repayment of notes payable of $194,574.
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.
Risks and Uncertainties
Out unaudited consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying unaudited consolidated financial statements, we had a net loss of $6,792,702 and $3,789,975 for the nine months ended September 30, 2023 and 2022, respectively. The net cash used in operations was $2,127,806 and $2,839,677 for the nine months ended September 30, 2023 and 2022, respectively. Additionally, we had an accumulated deficit and working capital deficit of $134,775,847 and $11,680,875, respectively, on September 30, 2023. These factors raise substantial doubt about our ability to continue as a going concern for a period of twelve months from the issuance date of this report.
Management cannot provide assurance that the Company will ultimately achieve profitable operations or become cash flow positive or raise additional debt and/or equity capital. The Company is seeking to raise capital through additional debt and/or equity financings to fund its operations in the future. Although the Company has historically raised capital from sales of preferred shares, from the exercise of warrants, and from the issuance of promissory notes and convertible promissory notes, there is no assurance that it will be able to continue to do so. If the Company is unable to raise additional capital or secure additional lending in the near future, management expects that the Company will need to curtail its operations. These consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
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, higher product demand in certain categories, lower product demand in other categories, 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 2023, 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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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 consolidated financial statements filed with this 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, 2023. 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, 2023.
As reported in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2022, 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; | |
| 3) | We lack control over the books and records of our recently acquired subsidiaries due to a lack of accounting staff and lack of existing accounting controls. We have hired additional accounting staff and have begun to institute accounting controls at these subsidiaries |
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, 2023.
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 5 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, we are in the process of reviewing and making changes to the current accounting processes and methodologies as discussed below.
As explained above, we have expanded our Board of Directors by three independent and outside members to a total of four directors. Further, we have established the requisite board committees for audit, compensation, and nominating. The Audit Committee Chairman has current and prior experience in this role with other public companies listed on the OTC and NASDAQ.
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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 2023 and 2022 budgets and forecasts 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 relating to 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 that we believe would have a material adverse effect on our business, financial condition, or operating results.
Bellridge Capital, L.P. v. TLSS et al.
On September 11, 2020, a prior lender to the Company, Bellridge Capital, L.P., filed a civil action against TLSS and others in the United States District Court for the Southern District of New York. The case was assigned Case No. 20-cv-7485. After discontinuing the foregoing federal action voluntarily and without prejudice, on April 23, 2021, Bellridge filed a substantially similar civil action in New York Supreme Court, New York County, which was assigned index number 652728/2021.
In May 2022, all parties to the Bellridge state court action settled the case and exchanged mutual general releases for a cash payment by the Company to Bellridge of $250,000.
In partial consideration for the settlement, the Company and Bellridge also cancelled the 700,000 shares of Series B Preferred Stock previously held by Bellridge, as reflected on the Company’s balance sheet as of December 31, 2021. In connection with this settlement, during the year ended December 31, 2022, the Company recorded settlement expense of $227,811.
As a result of the May 2022 settlement, and since we have not received any further communications concerning this matter, we consider the matter to be closed and terminated.
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.
On July 20, 2023, SCS moved for summary judgment in this action. On July 27, 2023, the Company filed papers opposing the motion. On August 21, 2023, the court conferenced SCS’s motion for summary judgment and SCS’s motion to strike counterclaims and dismiss the counterclaims. The court indicated it would deny the first motion and grant the second motion. On September 5, 2023, the Company filed Amended Affirmative Defenses and an Amended Counterclaim. On October 2, 2023, DCS filed a motion to Dismiss the Amended Counterclaim but it did not file a motion to strike the Amended Affirmative Defenses. On October 3, 2023, the Company filed a motion to strike SCS’s Motion to Dismiss the Amended Counterclaim on the grounds that SCS’s motion was not filed within ten (10) days as required under Florida law.
The Company believes it has substantial defenses to all claims alleged in SCS’s complaint, as well as valid affirmative defenses and counterclaims. 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 at $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.
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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.
By order dated and issued September 15, 2022, the Circuit Judge assigned to this case dismissed the original Complaint in the matter, finding (a) that SCS had failed to adequately allege it has standing and (b) that the complaint fails to adequately allege a cognizable claim. The dismissal was without prejudice, meaning SCS could attempt to replead its claims.
On October 5, 2022, SCS filed an Amended Complaint in this action. By order dated and issued December 19, 2022, the Circuit Judge assigned to this case once again dismissed the case, finding (a) that SCS still failed to adequately allege it has standing and (b) that the complaint still fails to adequately allege a cognizable claim. Once again, however, the dismissal was without prejudice.
On January 18, 2023, SCS filed a Second Amended Complaint in this action. All defendants once again moved to dismiss the pleading or in the alternative for summary judgment on it in their favor. The Court heard argument on that motion on March 9, 2023. On May 15, 2023, the Court issued a summary order denying the defendants’ motion to dismiss. On June 1, 2023, all defendants moved for reconsideration of the May 15 order. To date, SCS has not filed papers opposing the motion for reconsideration. Argument on the application to reconsider has been set for November 29, 2023.
The Company believes the action to be frivolous and intend to mount a vigorous defense to this action.
Owing to the fact that no discovery has occurred in the case, however, 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. In a derivative case, any recovery is to be paid to the corporation; however, the individual defendants in this case are fully indemnified by the Company unless a final judgment is entered against them for deliberate or intentional misconduct.
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 subleased to Shypdirect 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 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 an action in the Supreme Court, State of New York, Suffolk County (the “Suffolk County Action”), seeking defense and indemnity for this claim from the insurance brokerage, TCE/Acrisure LLC, which sold the County Hall insurance policy to Shypdirect.
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. In the claim against TLSS, Plaintiff seeks to “pierce the corporate veil” and hold TLSS responsible for the alleged liabilities of Prime and/or Shypdirect as the supposed alter ego of these subsidiaries. In the claims against Shyp CX, Inc., Shyp FX, Inc. and Cougar Express, Inc., Plaintiff seeks to hold these entities responsible for the alleged liabilities of Prime and/or Shypdirect on a successor liability theory.
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, 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.
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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 TCI/Acrisure in the Bergen County action. On December 23, 2021, Acrisure filed its Answer to the Third-Party Complaint, denying its material allegations.
On March 2, 2022, Plaintiff sought and was granted leave to file a Second Amended Complaint, bringing claims against Prime and Shypdirect’s vehicle liability carrier, County Hall (for discovery) as well as the producing broker, TCE/Acrisure. Plaintiff also asserted additional alter ego allegations against TLSS.
On February 15, 2023, Plaintiff filed a motion for leave to file a Third Amended Complaint in this action, seeking to assert claims against TLSS’s former CEO, John Mercadante, also on a “pierce the corporate veil” theory. On March 9, 2023, TLSS, Prime and Shypdirect opposed the motion for leave to add Mercadante, arguing that any claim against Mercadante would be both futile and time-barred. On March 31, 2023, the Court denied Plaintiff’s motion to add Mr. Mercadante as a party.
In January and February, 2023, numerous depositions were taken in the case, including those of Messrs. Giordano and Mercadante. Under the currently operative pre-trial order, all discovery in this case must be concluded by later this year.
Under New Jersey law, it is well established that a corporation is a separate entity from its shareholder(s) and a primary reason for incorporation is the insulation of shareholders from the liabilities of the corporate enterprise.
The New Jersey Supreme Court in Richard A. Pulaski Const. Co. v. Air Frame Hangars, Inc., 195 N.J. 457, 472–73 (2008) held that, in light of the fundamental propositions that a corporation is a separate entity from its shareholders, and “that a primary reason for incorporation is the insulation of shareholders from the liabilities of the corporate enterprise,” courts will not pierce a corporate veil “[e]xcept in cases of fraud, injustice, or the like...’” (citations omitted). The New Jersey Supreme Court further held that:
The limitations placed on a claimant’s ability to reach behind a corporate structure are intentional, as “[t]he purpose of the doctrine of piercing the corporate veil is to prevent an independent corporation from being used to defeat the ends of justice, to perpetrate fraud, to accomplish a crime, or otherwise to evade the law[.]” (citations omitted). Hence, to invoke that form of relief, “the party seeking an exception to the fundamental principle that a corporation is a separate entity from its principal bears the burden of proving that the court should disregard the corporate entity.”.
The purpose of piercing the corporate veil is thus to prevent an independent corporation from being used to defeat the ends of justice, perpetrate fraud, to accomplish a crime, or otherwise to evade the law.
To pierce the corporate veil and impute alter ego liability on TLSS for the alleged torts of Prime, Shypdirect and/or their agents, employees and servants, the Plaintiff herein would have to establish: (1) that Prime and Shypdirect were “utterly dominated” by TLSS and (2) that respecting the separate corporate existences of the subsidiaries would perpetrate a fraud or injustice, or otherwise circumvent the law. FDASmart, Inc. v. Dishman Pharmaceuticals and Chemicals, Ltd., et al., 448 N.J. Super. 195, 204 (App. Div. 2016). A plaintiff must satisfy this burden by clear and convincing evidence.
To determine whether the first element has been satisfied, courts consider whether the parent company so dominated the subsidiary that the latter had no separate existence but was merely a conduit for the parent. In considering the level of dominance exercised by the parent over the subsidiary, the court will consider factors such as common ownership, financial dependency, interference with a subsidiary’s selection of personnel, disregard of corporate formalities, and control over a subsidiary’s marketing and operational policies.
To date, to the best of the undersigned’s knowledge, information and belief, no discovery has been taken in this action which would permit the imposition of alter ego liability on TLSS for the subject accident.
To date, to the best of the undersigned’s knowledge, information and belief, no discovery has been taken in this action which would permit the imposition of successor liability on Shyp CX, Inc., Shyp FX, Inc. and/or Cougar Express, Inc. for the subject accident.
Under a so-called MCS-90 reimbursement endorsement to the County Hall policy, TLSS believes that Prime and Shypdirect may have up to $750,000 in coverage under a 1980 federal law under which County Hall is “require[d] to pay damages for certain claims or ‘suits’ that are not covered by the policy.” (See Endorsement CHI – 290 (02/19) to County Hall policy effective May 31, 2019.)
TLSS intends to vigorously defend itself in this action and to pursue the third-party actions, in the name and right of Prime and Shypdirect, against both County Hall and TCE/ Acrisure.
In an order entered October 25, 2023, the Court ordered that all fact discovery must be completed by January 2, 2024, and that all expert discovery must be completed by March 30, 2024. The Court indicated that it would not entertain any further applications to extend the discovery period even if filed on consent.
Owing to the early stage of this heavily litigated action, we cannot evaluate the likelihood of an adverse outcome or estimate the Company’s liability, if any, in connection with this claim.
Maria Lugo v. JFK Cartage
The Company’s JFK Cartage, Inc. subsidiary is one of three (3) defendants in an action captioned Maria Lugo v. JFK Cartage, Inc. d/b/a Fifth Dimension Logistix, Joan Ton, individually, and Chris Bartley, individually. The case is pending in Supreme Court, State of New York, Queens County, Index No. 704862/2022.
In this action, which was filed March 4, 2022, a former employee of JFK Cartage alleges that she suffered discrimination and retaliation in violation of the New York City Human Rights Law and the New York State Human Rights Law. The former employee alleges that on December 28, 2021, she had Covid-19 symptoms, advised the defendants she was feeling ill and went home early to take a home test. She further alleges that on December 30, 2021, she tested positive for Covid-19 and informed defendants she had to isolate for ten (10) days. Plaintiff alleges that she returned to work on January 7, 2022, but that her employment was terminated later that day by defendant Bartley who “questioned the authenticity of the at-home test, accusing her of fraud.” Plaintiff claims her employment “was terminated due to her disability (a Covid-19 infection) and in retaliation for her requesting reasonable accommodation for the illness she suffered.” She seeks unspecified compensatory damages, including lost pay and benefits, punitive damages and attorneys’ fees.
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On December 16, 2022, all defendants filed an answer and affirmative defenses, denying all claims for statutory violations. The case is currently in discovery. The conduct alleged in the complaint occurred prior to the Company’s July 31, 2022, acquisition of JFK Cartage, Inc. The Company believes that, in relation to this action, it has a right to full indemnification from the selling stockholder (including for attorneys’ fees) as well as set-off rights against notes payable to the selling stockholder.
Owing to (among other things) the fact that discovery in this action has just begun, 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.
Elaine Pryor v. Rocio Perez, et al.
The Company’s Freight Connections, Inc. subsidiary (“FCI”) was one of three (3) named defendants in an action captioned Elaine Pryor v. Rocio Perez, North Trucking & Logistics, LLC and Freight Connections, Inc. The case is pending in Superior Court of New Jersey, Essex County, Docket No. ESX-L-5147-18.
In this action, which was filed in 2018, plaintiff alleges that on February 1, 2017, she suffered personal injuries in a collision between her motor vehicle and a truck operated by a then employee of FCI. Plaintiff alleges that the truck was owned by FCI and leased to North Trucking & Logistics at the time.
At present, there are two other actions pending related to insurance coverage for the accident. They are Acceptance Indemnity Insurance Company v. Freight Connections, LLC (Superior Court of New Jersey, Essex County, Docket No. ESX-L-7144-19) and New Jersey Manufacturers Insurance Company, as subrogee of Elaine Pryor v. Acceptance Indemnity Insurance Company (Superior Court of New Jersey, Essex County, Docket No. ESX-L-5120). These two actions involving insurance coverage questions have been consolidated with the Pryor personal injury claim.
In an opinion issued November 16, 2022, the court denied all parties’ motions for summary judgment on the insurance coverage issues.
The conduct alleged in the Pryor complaint occurred prior to the Company’s September 16, 2022, acquisition of FCI. The selling stockholder of FCI has advised the Company that the truck in question was not owned by FCI at the time of the accident and hence that FCI is not a proper party defendant in this action.
On May 8, 2023, the Court in the Elaine Pryor action the entered an order, on the consent of counsel for all parties, directing that the name of defendant FCI be changed to Freight Connections LLC and that this change be reflected in the caption of the case (the “May 8, 2023 Order”). Freight Connections LLC is not a corporate affiliate of FCI but is rather an independent trucking company that is wholly-owned by the individual who sold the stock of FCI to TLSS-FC effective September 16, 2022. (See Note 1 above.)
Owing to the May 8, 2023 Order, the Company does not believe that it can be adjudged liable for any verdict or settlement in the Elaine Pryor action.
Mode Transportation, LLC v. Freight Connections, Inc.
The Company’s Freight Connections, Inc. (FC) subsidiary is a defendant in an action captioned Mode Transportation, LLC v. Freight Connections, Inc., Case No. 16-2023-CA-008531, filed on 4/26/2023 in the Circuit Court of the Fourth Judicial Circuit in and for Duval County, Florida.
In this action, plaintiff Mode asserted three (3) causes of actions against FC for $51,650.00. Mode asserted this sum was owed on certain invoices issued from September 21, 2021, through April 6, 2022. On July 23, 2023, a default judgment was entered against FC for $52,328.30 plus costs.
FC was not aware of the lawsuit until late July 2023, whereupon it filed a (i) motion to vacate the judgment and an associated writ of garnishment served on a commercial bank; (b) a motion for sanctions against Mode’s prior counsel; and (c) a motion for a rehearing. After a two-day evidentiary hearing, FC’s motion to vacate was denied by the court.
FC has advised the Company that certain of the invoices comprising the $52,328 demand were paid and that FC may have defenses to certain other invoices.
Given that a court has issued a default judgment which has not yet been vacated and may never be, the Company accrued a reserve of $52,328 on its balance sheet as of September 30, 2023.
Josh Perez v. Cougar Express, Inc.
An attorney for a former Cougar Express (CE) employee, Josh Perez (“Perez”), has advised CE that he has filed a charge of discrimination against CE with the U.S. Equal Employment Opportunity Commission (EEOC).
Perez has previously asserted claims against CE for: gender discrimination under Title VII and the New York State Human Rights Law (“NYSHRL”); pregnancy/childbirth discrimination under Title VII of the federal Civil Rights Act of 1964, as amended; retaliation under Title VII and NYSHRL; and familial status discrimination under NYSHRL.
However, FC has not received a copy, nor any notification, of the filing.
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Perez was employed by CE as a dock worker beginning on 3/8/2022 and last worked 9/27/2022. He alleges that in or around July 2022, he informed CE that he was expecting a child. Perez has not provided any details regarding the individual(s) with CE he allegedly informed. On 9/27/22, Perez requested that CE complete the employer section of his New York Paid Family Leave (“PFL”) paperwork, which CE did. Thereafter, Perez ceased communicating with CE. Further, CE did not receive any confirmation that Perez had in fact filed for PFL or that his PFL was approved.
Because CE did not hear from Perez or receive any confirmation concerning his application for or approval of PFL, CE concluded that Perez had resigned. Another worker was hired to fill Perez’s former position. Then, on or about 12/27/22, Perez contacted CE attempting to return to work and was informed that there was no position for him.
Cougar Express categorically denies Perez’s allegations and any purported wrongdoing. However, essentially all litigation involves defense costs and inherent uncertainties. Therefore, at present, Cougar Express is seeking to resolve this claim for nuisance value in the $10-15,000 range. However, the Company expresses no view as to whether it will, in fact, he able to resolve the claim within this range. If the claim cannot be resolved soon, Cougar express intends to vigorously defend itself on this claim (whether the EEOC acts on it or in court). Owing to the early stage of the matter, however, we cannot evaluate the likelihood of an adverse outcome or estimate the Company’s liability, if any, in connection with it.
Joseph Corbisiero v. Freight Connections, Inc., TLSS and TLSS-FC
On October 19, 2023, Joseph Corbisiero (“Corbisiero”) filed an action in the Superior Court of the State of New Jersey, Bergen County, against the Company’s subsidiary, Freight Connections, Inc. (“FC”), the Company, and the Company’s TLSS-FC, Inc. subsidiary. The case has been assigned # BER-L-005669-23. Corbisiero, who was then the sole stockholder of FC, sold all outstanding shares of FC capital stock to TLSS-FC effective September 16, 2022 (the “FC Closing Date”) and has acted as the CEO of FC since then.
The complaint in this action contains two counts, one for the alleged breach of a $4,544.671.23 secured promissory note executed by FC in Corbisiero’s favor as of the FC Closing Date (the “FC Promissory Note”), and the other for enforcement of a security agreement, also dated as of the FC Closing Date, pursuant to which FC granted Corbiserio a lien and security interest “on all” of FC’s property, assets and rights of every kind (the “FC Security Agreement”). Neither the Company, nor TLSS-FC, is a party to the FC Promissory Note or the FC Security Agreement. In the lawsuit, the Company and TLSS-FC are each denominated a “Nominal Defendant” and the complaint does not seek relief from either entity.
In the complaint, Corbisiero alleges that FC defaulted on the FC Promissory Note by failing to pay monthly interest beginning in or around August 1, 2023. Plaintiff also alleges that, by reason of its default, FC is also liable for default interest of 18% per annum plus late charges of 5% each delinquent payment, plus costs of collection. The complaint further alleges that by reason of FC’s default, FC became liable for the full repayment of principal prior to the December 31, 2023, maturity date set forth in the note.
The complaint also contains a single paragraph in which it is alleged that “TLSS and TLSS-FC are necessary and indispensable parties to the instant action by virtue of each entity’s express covenant and agreement to indemnify, defend, protect and hold harmless Plaintiff from and against all losses incurred by Plaintiff in connection with, among other things, any breach or nonfulfillment of any covenant or agreement on the part of TLSS-FC and TLSS under [the stock purchase and sale agreement pursuant to which, as amended, TLSS-FC (the “FC SPSA”) acquired the then-outstanding capital stock of FC].”
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TLSS and TLSS-FC believe they have a good-faith argument that they are not amenable to personal jurisdiction in the courts of New Jersey. In addition, TLSS is not a party of the FC SPSA and, while TLCC-FC is an assignee of the purchaser under the FC SPSA, the purchaser’s indemnification obligation thereunder (see § 7.3) is limited to alleged breaches of representations, warranties and covenants in the FC SPSA and therefore does not encompass alleged violations of the FC Promissory Note. In addition, while FC has not, in fact, paid interest on the FC Promissory Note since July 2023, FC contends that, effective August 2023 it was relieved of its obligation to pay such interest because, starting in August 2023, Corbisiero refused to engage in the purchase-price adjustment procedure mandated by Section 1.4 of the FC SPSA, pursuant to which Corbisiero was obligated, among other things, to supply accounting and other workpapers sufficient to document that the figure for FC’s March 31, 2022 working capital was calculated “using the same methodologies, principles and procedures” used in the preparation of FC’s December 31, 2020 and December 31, 2021 financial statements (SPSA § 3.5) and that all such financial statements, including the unaudited FC balance sheet as of March 31, 2022, and the related unaudited statements of operations, of shareholder’s equity and of cash flows for each of one-year periods ended December 31, 2020 and December 31, 2021, together with the related notes and schedules, “present fairly, in all material respects, the financial position and results of operations of [FC] as of the dates of such statements and for the periods covered thereby on a cash basis.”
Owing to (among other things) the fact that this action has just begun, it is not possible to evaluate the likelihood of a favorable or unfavorable outcome, for FC, TLSS or TLSS-FC, nor is it possible to estimate the amount or range of any potential loss in the matter.
Other than discussed above, as of September 30, 2023, 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 the 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, 2022.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
No report required.
ITEM 5. OTHER INFORMATION
None.
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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, 2023 | By: | /s/ Sebastian Giordano |
| Sebastian Giordano | ||
| Chief Executive Officer (Principal Executive Officer) and Director | ||
| Dated: November 14, 2023 | By: | /s/ Sebastian Giordano |
| Sebastian Giordano | ||
| Chief Financial Officer (Principal Financial Officer) | ||
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