PROSPECTUS
SUMMARY
This
summary highlights certain selected information about us, this offering and the securities offered hereby. This summary is not
complete and does not contain all of the information that you should consider before deciding whether to invest in our common
stock. For a more complete understanding of our company and this offering, we encourage you to read the entire prospectus, including
the information presented under the section entitled “Risk Factors” and the financial data and related notes. Unless
we specify otherwise, all references in this prospectus to “TLSI,” “we,” “our,” “us,”
and “our company,” refer to Transportation and Logistics Systems, Inc. and its wholly-owned subsidiaries, Prime EFS,
LLC and Shypdirect LLC.
Unless
otherwise indicated, the information in this prospectus reflects a one-for-250 reverse stock split of our common
stock effected on July 18, 2018. All share and per share data has been adjusted for the one-for-250 reverse stock split for
all periods presented.
Our
Company
Overview
We
are a provider of a wide range of transportation and logistics services involving the movement of goods and e-commerce fulfillment.
Fast, dependable order fulfillment and shipping is critical to the success of an online business. We focus primarily on the transportation
of packages that are ultimately to be delivered to the business or retail consumer. Our transportation services typically involve
the transport of goods from the manufacturer or fulfillment center to the delivery station, from the fulfillment center to the
post office or from the delivery station to the end user or retail customer (known as the “last mile” deliveries).
We also offer an increasing number of logistics services, including the management and transportation of retail returns, the removal,
transportation and disposition of shipping pallets and storage solutions for manufacturers with limited storage facilities, to
help our business customers manage their goods efficiently through their supply chain.
We
currently operate through our two subsidiaries, Prime EFS, LLC, a New Jersey-based transportation company with a focus on deliveries
to the retail consumer for on-line retailers in New York, New Jersey and Pennsylvania (“Prime”), and Shypdirect LLC,
a transportation company with a focus on tractor trailer and box truck deliveries of product on the east coast of the United States
from one distributor’s warehouse to another warehouse or from a distributor’s warehouse to the post office (“Shypdirect”),
which are known as line-haul and “mid-mile” deliveries.
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, own or leases its own transportation equipment and employs its own drivers. At June 30, 2019, we owned or leased
an aggregate of 277 trucks or delivery vehicles and employed 428 drivers who worked in shifts that allowed us to utilize most
of our transportation equipment on a 24/7 basis. We also utilize the services of independent contractors to provide our delivery
services. At June 30, 2019, two independent contractors provided services to us on a full-time basis. The independent contractors
are responsible for paying for their own vehicles, equipment, fuel and operating expenses. Point-to-point delivery refers to a
transportation system in which passengers or goods travel directly to a destination, rather than going through a central hub.
This differs from the spoke-hub distribution paradigm in which the passengers or goods go to a central location in order to reach
their ultimate destination. Our business is referred to as “point-to-point” delivery because our drivers and independent
contractors are dispatched directly to the warehouse or retailer, as the case may be, and they then travel directly to the delivery
point, rather than returning to a central corporate office.
Our
E-Commerce Fulfillment Solutions
The
rapid growth of e-commerce and the online retailing segment of e-commerce is well documented. According to a recent internet retailer
report of Digital Commence 360, a publisher of research in digital commerce, and U.S. Department of Commerce figures, consumers
spent $517.36 billion online with U.S. merchants in 2018, up 15.0% from $449.88 billion spent the year prior. Total retail sales,
not including the sale of items not normally bought online, such as fuel, automobiles and food at restaurants, increased to $3.628
trillion in 2018, up 3.9% year over year, from $3.490 trillion in 2017. The U.S. Department of Commerce estimates consumers spent
$513.61 billion online in 2018, up 14.2% from 2017, and that total retail sales increased 4.1% to $3.63 trillion. E-commerce represented
a growing share of the retail market in 2018, taking a 14.3% share of total retail sales in 2018, up from 12.9% in 2017 and 11.6%
in 2016. Our largest customer, Amazon.com Inc., accounted for approximately 40.0% of overall U.S. online retail sales in 2018,
and accounted for 43.3% of all 2018 e-commence year-over-year gains in the United States. We believe our technology platform positions
us to provide transportation services and to grow at or faster than the rapidly-growing and evolving e-commerce marketplace.
E-commerce
retail brands have logistics needs that differ from those of traditional businesses. Unlike traditional inventory management,
e-commerce companies need to ship items directly to customers, who expect their orders to arrive on time and as described. We
have built our delivery services to perform effectively in the “on demand” shipping environment that is part of the
e-commerce fulfillment solutions system.
Our
e-commerce fulfillment solutions are primarily the transportation of goods between destination points along the way from the manufacturer
to the customer. We provide delivery services to the end user ( “last mile” delivery), principally retail consumers,
including deliveries which require two persons to complete the delivery of heavy or bulky items, as well as “mid-mile”
delivery services between distribution centers and fulfillment centers and line-haul delivery services from the manufacturer to
the distribution center. Our revenues are generated from the fixed price charged for each specific route between a delivery station
to a fulfillment center or from the fulfillment center to the final destination with a fixed price per route.
In
most instances we are paid a fixed fee for transporting products from one designated site to a specified delivery point without
regard to the number of packages being transported. With the ongoing growth of e-commerce the specific routes between designated
sites is regularly changing (primarily increasing) as the volume of the online retailing segment of e-commerce activity expands.
An integral part of our strategy is to regularly be in contact with our customers to assure that we are anticipating and planning
for the expansion of current routes and the addition of new routes to our service base.
Our
scheduled route system allows us to adjust to the regular changes in which packages are received, sorted, stored, picked, packed,
shipped and housed in fulfillment centers and distribution centers. We are structured to meet the demands of “last-mile”
deliveries and home grocery shopping deliveries. In addition to delivering goods in full truckloads from distribution centers
to fulfillment centers, based on customer requests, we perform unscheduled pickups and deliveries of bulk products. When delivering
packages to a home, we adhere to certain time slots and sometimes make “live deliveries” to ensure the customer is
aware that their package has been delivered. This entails a constantly refreshed and technologically modern transportation management
system (TMS).
We
have built a network operations center (“NOC”) in Jersey City, New Jersey that allows us to track the location of
each of our vehicles and address any on road disruptions. Our NOC is designed to grow with our business as we add more vehicles
for additional routes and expand geographically. Presently, we utilize our NOC solely for our own business. We anticipate that
as our revenues grow and the reach and scope of our transportation activities expand (both geographically and within the tristate
area in which we currently operate) that we will generate revenues from services provided via our NOC to other logistics providers.
Our
infrastructure is built to support the e-commerce unique fulfillment requirements of distributing products to millions of homes
instead of hundreds of stores, managing millions of stock keeping units (SKUs) instead of thousands, shipping to homes in parcels
instead of truckloads to stores and transporting between fulfillment centers in addition to distribution centers. Our infrastructure
is aligned with the requirements of the online retailer: Online retailers differ from traditional brick and mortar where customers
visit the premises and the retailer maintains goods on the premises. Online retailers have goods located in multiple locations
(3rd party warehouse, etc.) and ships items directly to the customer; customers expect their order to arrive on time
and be the correct quantity and product ordered.
With
our focus on on-time performance, customer satisfaction and challenging growth management opportunities for our employees, we
believe we are one of the fastest growing e-commerce fulfillment services providers in the country. As an early stage company,
we have experienced and anticipate that we will continue to experience the challenges that come from rapid growth in revenues
such as identifying and hiring employees that are aligned with our expectations, securing assets and expanding our administrative
support services for our rapidly growing operations. We believe that our ability to manage our company through this high growth
is a key part of our success, as evidenced by the high performance ratings we have regularly achieved in our customers’
scoring systems. We expect to expand our revenue base as the traditional brick and mortar retailers develop omni-channel strategies
of generating revenues through a combination of physical and online sales.
Our
Competitive Strengths and Strategy
Our
strategy is to be a leader in the transportation industry in providing on-time, high-quality pick-up, transportation and delivery
services. We attribute our growth and success to date to the following competitive strengths.
Market
Knowledge and Understanding. While we have been operating our current business for only a few years, our senior management
collectively have over 40 years of experience in the transportation industry and has broad knowledge in providing transportation
services over the “last mile” as part of the e-commerce fulfillment solutions. These solutions are in high demand
and are expected to continue to grow at a rapid pace. Many of our management employees have e-commerce experience with e-commerce
retailers and understand the dynamics of e-commerce growth, demands and logistics since all or the vast majority of their career
has been in e-commerce businesses. We believe we understand the various segments of the end-to-end solutions required to rapidly
and accurately deliver goods between the various pick-up and delivery points in the e-commerce delivery chain.
Unwavering
Focus on Relationships and Superior Service. We aim to be the premier platform and partner of choice for our customers.
We believe we offer superior services and solutions due to our company-wide commitment to customer service. On behalf of our
customers, we deliver goods from the manufacturer or fulfillment center to the delivery station, and from the delivery
station to the U.S. post office or retail customer (known as the “last mile” deliveries) in a precise, safe and
timely manner with complementary support from our dedicated sales and service teams. Our focus on customer relationships has
allowed us to increase our sales to our largest customer, Amazon.com, which, on an unaudited pro forma basis, assuming our
acquisition of Prime had occurred on January 1, 2017, increased from approximately $5.6 million in 2017 to
approximately $17.7 million in 2018 and from approximately $4.8 million in the first six months of 2018 to
approximately $13.9 million in the first six months of 2019.
Experienced
and Proven Management Team. We believe our management team is among the most experienced in the industry. Our senior management
team brings experience in transportation and logistics, mergers and acquisitions, information technology, e-commerce retailing
and fulfillment, and has an understanding of the cultural nuances of the e-commerce sectors we serve.
We
intend to leverage our competitive strengths to increase shareholder value through the following core strategies.
Build
Upon Strong Customer Relationships to Expand Organically. We have built a strong relationship with Amazon.com that has allowed
us to expand the size of our service area and add higher margin services to our service offerings. For example, due to our focus
on consistent and timely deliveries and our superior safety record, we have increased the number of “last mile” local
routes we serve for Amazon from five routes at December 31, 2017 to over 200 routes at December 31, 2018. In addition, we have
been able to expand the type of transportation services we render to Amazon.com to include “mid-mile” and line-haul
transportation services in which we deliver packages from one distribution center to another or from the distribution
center to the U.S. post office. We intend to continue to build on our relationship with Amazon.com and we are working to build
similar relationships with other e-commerce retailers to increase the type and scope of the transportation and logistics
services we offer.
Expand
Our Operations to Other Regions of the U.S. Our e-commerce “last mile” delivery services to retail consumers are
currently provided primarily in New York, New Jersey and Pennsylvania and our e-commerce “mid-mile” delivery services
between customer distribution centers or between such distribution centers and the U.S. post office are currently provided primarily
in the northeastern region of the U.S. As we continue to expand our marketing and customer relationships, we anticipate expanding
our geographic footprint to provide such services, and to capture market share, in other regions of the U.S. by opening our own
operations centers and warehouses, acquiring existing regional transportation and logistics companies in operating in other areas
and partnering with local operators in other regions. We believe the expansion of our business in other regions of the U.S. will
also allow us to expand our relationships with existing customers who operate in those regions.
Pursue
Value-Enhancing Strategic Acquisitions. We intend to pursue strategic acquisitions as a means of adding new markets in the
United States, expanding our transportation and logistics service offerings, adding talented management and operational employees,
expanding and upgrading our technology platform and developing operational best practices. We are currently at various stages
of reviewing several potential acquisition targets and believe we have significant opportunities to grow our business through
our knowledge of our industry and possible acquisition targets.
Enhance
Our Operating Margins. We expect to enhance our operating margins as our business expands through a combination of increased
operational efficiencies, leveraging our existing assets and distribution facilities and increase usage of technology to help
us better plan, execute and monitor the performance of our services and transportation assets. Many of our transportation assets
were initially utilized for a single route per day. As we expand, we have been able to increase utilization through use of assets
on multiple routes or the addition of a second shift per day. In addition, we expect that our operating margins will increase
as we expand our Shypdirect line-haul and “mid mile” business-to-business transportation and logistics
operations, which generally have higher margins than our direct to consumer delivery business.
General
Our
business address is 3 Riverway, Suite 1430, Houston, Texas 77056 and our telephone number is (713) 481-3340. We
maintain a website at www.translogsys.com. We have not incorporated by reference into this prospectus the information
on our website, and you should not consider it to be a part of this prospectus.
Background
of the Offering
Convertible
Notes Transactions
On
August 30, 2019, we entered into a securities purchase agreement with seven investors pursuant to which we sold for an aggregate
purchase price of $2,222,854 (i) $2,469,840 aggregate principal amount of our original issue discount senior secured convertible
notes (the “Notes”) and (ii) five-year warrants (the “Debt Warrants”) to purchase up to an aggregate of
987,940 shares of our common stock for a purchase price of $3.50 per share, subject to adjustment. The Notes mature on November
30, 2020 and bear interest at the rate of 10% per annum or 18% per annum during the continuance of an event of default (as defined).
Commencing on December 30, 2019, we are obligated to make monthly payments of principal and interest on the Notes based upon a
12-month amortization schedule, provided that the final payment shall be made on the maturity date. Monthly payments of principal
and interest shall be made in cash unless a noteholder requests its payment to be made in shares of our common stock, in which
event the payment to such noteholder will be made in shares of our common stock valued at 80% of the lowest volume weighted average
price per share of our common stock during the five-trading-day period preceding the date of the scheduled payment. The Notes
also are convertible into shares of our common stock at any time at the option of the holder at a conversion price of $2.50 per
share, subject to adjustment, or, during the continuation of any event of default (as defined), at a conversion price equal to
the lower of (i) $2.50 per share or (ii) 70% of the second lowest closing price of our common stock during the 20-consecutive-trading-day
period ending on the day prior to delivery of the applicable notice of conversion. The Notes are secured by a pledge of substantially
all of our assets, including the shares of capital stock of our subsidiaries.
In
connection with the sale of the Notes and the Debt Warrants, we entered into a registration rights agreement, pursuant to which
we agreed to file a registration statement under the Securities Act of 1933, as amended (the “Securities Act”) to
register the resale of the shares of our common stock issuable to the holders of the Notes and the Debt Warrants in connection
with the payment, conversion or exercise of such securities. This prospectus forms a part of such registration statement and covers
such shares of common stock.
Equity
Transactions
On
August 30, 2019, we entered into a securities purchase agreement with 22 investors pursuant to which we sold for an aggregate
purchase price of $1,462,500 a total of 585,000 units, each unit comprised of one share of our common stock and a five-year
warrant (an “Equity Warrant”) to purchase one share of common stock for a purchase price of $2.50 per share, subject
to adjustment. An aggregate of 585,000 shares of our common stock and Equity Warrants to purchase an aggregate of 585,000 additional
shares of our common stock were issued in this transaction.
In
connection with the sale of such shares of common stock and the Equity Warrants, we entered into a registration rights agreement,
pursuant to which we agreed to file a registration statement under the Securities Act to register the resale of such shares of
common stock and the shares of common stock issuable upon exercise of the Equity Warrants. This prospectus forms a part of such
registration statement and covers such shares of common stock.
The
Offering
Common Stock being offered
by the selling stockholders(1)
|
|
3,269,373 shares including
(i) 585,000 shares currently outstanding, (ii) 1,111,433 shares issuable upon conversion of, and the payment of interest from
time to time on, the outstanding Notes, (iii) 987,940 shares issuable upon exercise of the Debt Warrants, which have an exercise price of $3.50 per share, subject to adjustment, and (iv) 585,000 shares issuable upon the exercise of the Equity
Warrants, which have an exercise price of $2.50 per share, subject to adjustment.
|
|
|
|
Common Stock outstanding prior to the Offering
|
|
11,745,236
shares as of October 3, 2019(2)
|
|
|
|
Common Stock outstanding after the Offering
|
|
14,429,609(3)
|
|
|
|
Terms of Offering
|
|
The Selling Stockholders will determine when
and how they will sell the shares of our common stock offered hereby, as described in “Plan of Distribution”
beginning on page 59.
|
|
|
|
Use of proceeds
|
|
The Selling Stockholders will receive all of
the proceeds from the sale of the shares offered under this prospectus. We will not receive proceeds from the sale of the
shares by the Selling Stockholders. However, to the extent the Debt Warrants and the Equity Warrants are exercised for cash,
we will receive up to an aggregate of $4,920,290 in gross proceeds. We expect to use the proceeds from the exercise of such
warrants, if any, for working capital and general corporate purposes.
|
|
|
|
OTC Pink Symbol
|
|
TLSS
|
|
|
|
Risk Factors
|
|
Investing in our common stock involves a high
degree of risk. You should carefully review and consider the “Risk Factors” section of this prospectus
for a discussion of factors to consider before deciding to invest in shares of our common stock.
|
(1)
|
Assumes conversion of the
Notes in full at their respective maturity dates at the fixed conversion price per share, and assumes that interest paid through
maturity will be paid in shares of our common stock at an average price per share of $2.25.
|
|
|
(2)
|
This amount does not include:
|
|
●
|
an aggregate of 1,700,000
shares of common stock issuable upon conversion of outstanding shares of our Series B Preferred Stock;
|
|
|
|
|
●
|
an aggregate of 80,000 shares of common stock
issuable upon the exercise of outstanding stock purchase options that are exercisable for a purchase price of $8.85 per share,
subject to adjustment, and expire in April 2024;
|
|
|
|
|
●
|
an aggregate of 114,000 shares of common stock
issuable upon the exercise of outstanding stock purchase warrants that are exercisable for a purchase price of $1.00 per share,
subject to adjustment, and expire in June 2024;
|
|
|
|
|
●
|
an aggregate of 585,000 shares of common stock
issuable upon the exercise of outstanding Equity Warrants for a purchase price of $2.50 per share, subject to adjustment,
and expire in January 2025, which shares may be offered by certain Selling Stockholders pursuant to this prospectus;
|
|
|
|
|
●
|
an aggregate of 987,940 shares of common stock
issuable upon the exercise of outstanding Debt Warrants for a purchase price of $3.50 per share, subject to adjustment, and
expire in August 2024, which shares may be offered by certain Selling Stockholders pursuant to this prospectus; and
|
|
|
|
|
●
|
an aggregate of 1,111,433 shares of common stock
issuable upon the conversion of, and the payment of interest from time to time on, the Notes at a conversion price of 2.50
per share, subject to adjustment, which shares may be offered by certain Selling Stockholders pursuant to this prospectus.
|
(3)
|
This amount includes the
estimated 1,111,433 shares issuable upon conversion of, and for the payment of interest from time to time on, the Notes and
all 1,572,940 shares issuable upon exercise of the Equity Warrants and the Debt Warrants.
|
RISK
FACTORS
Some
of the following risks relate principally to us, the industry in which we operate and our business in general. Other risks relate
principally to the securities market and ownership of our common shares. The occurrence of any of the events described in this
section could significantly and negatively affect our business, financial condition, operating results or cash available for dividends,
if any, or the trading price of our common shares.
We
lack an established operating history on which to evaluate our business and determine if we will be able to execute our business
plan, and can give no assurance that operations will result in profits.
We
have been engaged in our current continuing and proposed business operations since only June 2018. As a result, we have
a limited operating history upon which you may evaluate our proposed business and prospects. Our proposed business operations
are subject to numerous risks, uncertainties, expenses and difficulties associated with early stage enterprises. You should consider
an investment in our company in light of these risks, uncertainties, expenses and difficulties. Such risks include:
|
●
|
the
absence of an operating history in our current business and at our current scale;
|
|
|
|
|
●
|
our ability to
raise capital to develop our business and fund our operations;
|
|
|
|
|
●
|
expected continual
losses for the foreseeable future;
|
|
|
|
|
●
|
our ability to
anticipate and adapt to a developing market(s);
|
|
|
|
|
●
|
acceptance by customers;
|
|
|
|
|
●
|
limited marketing
experience;
|
|
|
|
|
●
|
competition from
internet-based logistics and freight companies;
|
|
|
|
|
●
|
competitors with
substantially greater financial resources and assets;
|
|
|
|
|
●
|
the ability to
identify, attract and retain qualified personnel;
|
|
|
|
|
●
|
our ability to
provide superior customer service; and
|
|
|
|
|
●
|
reliance on key
personnel.
|
Because
we are subject to these risks, and the other risks discussed below, you may have a difficult time evaluating our business and
your investment in our company. We may be unable to successfully overcome these risks, any one or more of which could harm our
business.
Our
business strategy may be unsuccessful and we may be unable to address the risks we face in a cost-effective manner, if at all.
If we are unable to successfully address these risks our business will be harmed.
We
may not successfully manage our growth.
We
have grown rapidly and substantially since our acquisition of Prime in June 2018, including by expanding our internal resources
and entering into new markets, and we intend to continue to focus on rapid growth, including organic growth and additional acquisitions.
We may experience difficulties and higher-than-expected expenses in executing this strategy as a result of unfamiliarity with
new markets, changes in revenue and business models, entering into new geographic areas and increased pressure on our existing
infrastructure and information technology systems.
Our
growth will place a significant strain on our management, operational, financial and information technology resources. We will
need to continually improve existing procedures and controls, as well as implement new transaction processing, operational and
financial systems, and procedures and controls to expand, train and manage our employee base. Our working capital needs will continue
to increase as our operations grow. Failure to manage our growth effectively, or obtain necessary working capital, could have
a material adverse effect on our business, results of operations, cash flows, stock price and financial condition.
Changes
in our relationships with our significant customers, including the loss or reduction in business from one or more of them, could
have an adverse impact on us.
For
the six-month period ended June 30, 2019 and the year ended December 31, 2018, one customer, Amazon.com, Inc., represented 99.1%
and 98.7%, respectively, of our total net revenues from continuing operations. Until such time, if ever, that we are
able to diversify our customer base and add additional significant customers, the loss of Amazon as a customer would materially
impair our overall consolidated financial condition and our consolidated results of operations. Our contractual relationships
with customers, including Amazon, generally are terminable at will by the customers on short notice and do not require the customer
to provide any minimum commitment. Our customers could choose to divert all or a portion of their business with us to one of our
competitors, demand rate reductions for our services, require us to assume greater liability that increases our costs, or develop
their own logistics capabilities. Failure to retain our existing customers or enter into relationships with new customers could
materially impact the growth in our business and the ability to meet our current and long-term financial forecasts.
We
have insufficient funds to develop our business, which may adversely affect our future growth.
Until
we can generate a sufficient amount of revenue, if ever, we
expect to finance our anticipated future growth and possibly future strategic acquisitions through public or private equity offerings
or debt financings. Additional funds may not be available when we need them on terms that are acceptable to us, or at all. If
adequate funds are not available, we may be required to delay, reduce the scope of, our plans to grow our revenues or to consummate
one or more strategic acquisitions or otherwise to scale back our business plans. In addition, we could be forced to reduce or
forego attractive business opportunities. To the extent that we raise additional funds by issuing equity securities, our stockholders
may experience significant dilution. In addition, debt financing, if available, may involve restrictive covenants. We may seek
to access the public or private capital markets whenever conditions are favorable, even if we do not have an immediate need for
additional capital at that time. Our access to the financial markets and the pricing and terms we receive in the financial markets
could be adversely impacted by various factors, including changes in financial markets and interest rates.
Our
forecasts regarding the sufficiency of our financial resources to support our current and planned operations are forward-looking
statements and involve significant risks and uncertainties, and actual results could vary as a result of a number of factors,
including the factors discussed elsewhere in this “Risk Factors” section. We have based this estimate on assumptions
that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Our future capital
requirements may be substantial and will depend on many factors including:
|
●
|
marketing
and developing expenses;
|
|
|
|
|
●
|
revenue received
from sales and operations, if any, in the future;
|
|
|
|
|
●
|
the expenses needed
to attract and retain skilled personnel; and
|
|
|
|
|
●
|
the costs associated
with being a public company.
|
Raising
capital in the future could cause dilution to our existing shareholders, and may restrict our operations or require us to relinquish
rights.
In
the future, we may seek additional capital through a combination of private and public equity offerings, debt financings and collaborations
and strategic and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible
debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely
affect your rights as a shareholder. Debt financing, if available, would result in increased fixed payment obligations and may
involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring debt,
making capital expenditures or declaring dividends. If we raise additional funds through collaboration or strategic alliance arrangements
with third parties, we may have to relinquish valuable rights to our future revenue streams or product candidates on terms that
are not favorable to us.
Economic
recessions and other factors that reduce freight volumes could have a material adverse impact on our business.
The
transportation industry historically has experienced cyclical fluctuations in financial results due to economic recession, downturns
in business cycles of our customers, increases in prices charged by third-party carriers, interest rate fluctuations and other
U.S. and global economic factors beyond our control. During economic downturns, reduced overall demand for transportation services
will likely reduce demand for our services and exert downward pressures on rates and margins. In periods of strong economic growth,
demand for limited transportation resources can result in increased network congestion and resulting operating inefficiencies.
In addition, deterioration in the economic environment subjects our business to various risks that may have a material impact
on our operating results and cause us to not reach our long-term growth goals. These risks may include the following:
|
●
|
A reduction
in overall freight volumes in the marketplace reduces our opportunities for growth.
|
|
|
|
|
●
|
A downturn in our
customers’ business cycles causes a reduction in the volume of freight shipped by those customers.
|
|
|
|
|
●
|
Some of our customers
may face economic difficulties and may not be able to pay us, and some may go out of business.
|
|
|
|
|
●
|
Some of our customers
may not pay us as quickly as they have in the past, causing our working capital needs to increase.
|
|
|
|
|
●
|
A significant number
of our transportation providers may go out of business and we may be unable to secure sufficient equipment or other transportation
services to meet our commitments to our customers.
|
|
|
|
|
●
|
We may not be able
to appropriately adjust our expenses to changing market demands.
|
We
have ongoing capital requirements that necessitate sufficient cash flow from operations and/or obtaining financing on favorable
terms.
We
have depended primarily on short term borrowings and cash from operations to expand the size of our operations and upgrade and
expand the size of our delivery fleet. In the future, we may be unable to generate sufficient cash from operations to support
or grow our operations or to obtain sufficient financing on favorable terms for such purposes. If any of these events occur, then
we may face liquidity constraints or be forced to enter into less than favorable financing arrangements. Additionally, such events
could adversely impact our ability to provide services to our customers.
Our
operating results may fluctuate due to factors that are difficult to forecast and not within our control.
Our
past operating results may not be accurate indicators of future performance, and you should not rely on such results to predict
our future performance. Our operating results have fluctuated significantly in the past, and could fluctuate in the future. Factors
that may contribute to fluctuations include:
|
●
|
changes
in aggregate capital spending, cyclicality and other economic conditions, or domestic and international demand for the products
we deliver;
|
|
|
|
|
●
|
our ability to
effectively manage our working capital;
|
|
|
|
|
●
|
our ability to
satisfy consumer demands in a timely and cost-effective manner;
|
|
|
|
|
●
|
pricing and availability
of labor and delivery equipment;
|
|
|
|
|
●
|
our inability to
adjust certain fixed costs and expenses for changes in demand;
|
|
|
|
|
●
|
shifts in geographic
concentration of customers, supplies and labor pools; and
|
|
|
|
|
●
|
seasonal fluctuations
in demand and our revenue.
|
If
we are unable to attract and retain qualified executive officers and managers, we will be unable to operate efficiently, which
could adversely affect our business, financial condition, results of operations and prospects.
We
depend on the continued efforts and abilities of our executive officers, particularly John Mercadante, our Chief Executive Officer,
and Doug Cerny, our Chief Development Officer, as well as the senior management of our subsidiaries to establish and maintain
our customer relationships and identify strategic opportunities. The loss of any one of them could negatively affect our ability
to execute our business strategy and adversely affect our business, financial condition, results of operations and prospects.
Competition for managerial talent with significant industry experience is high and we may lose access to executive officers for
a variety of reasons, including more attractive compensation packages offered by our competitors. Although we have entered into
employment agreements with certain of our executive officers and certain other key employees, we cannot guarantee that any of
them or other key management personnel will remain employed by us for any length of time. Our inability to adequately fill vacancies
in our senior executive positions on a timely basis could negatively affect our ability to implement our business strategy, which
could adversely impact our results of operations and prospects.
Risks
Related to Our Financial Results and Financing Plans
We
have a history of losses and may continue to incur losses in the future, raising substantial doubts about our ability to continue
as a going concern.
We
have a history of losses and may continue to incur losses in the future, which could negatively impact the trading value of our
common stock. We incurred losses from continuing operations of $25.9 million, $14.5 million, $14.6
million and $0.8 million in the six-month periods ended June 30, 2019 and 2018 and the years ended December 31, 2018 and
2017, respectively. We incurred a net loss of $26.6 million, $14.4 million, $14.5 million and $0.7 million in the six-month periods
ended June 30, 2019 and 2018 and the years ended December 31, 2018 and 2017, respectively. We may continue to incur losses in
future periods. These losses may increase and we may never achieve profitability for a variety of reasons, including increased
competition, decreased growth in the e-commerce and the transportation and logistics industries and other factors described elsewhere
in this “Risk Factors” section. These factors raise substantial doubt that we will be able to continue operations
as a going concern, and our independent registered public accountants included an explanatory paragraph regarding this uncertainty
in their reports on our consolidated financial statements for the years ended December 31, 2018 and 2017. Our ability to
continue as a going concern is dependent upon our generating cash flow sufficient to fund operations and reducing operating expenses.
We
may never achieve profitability, and if we do, we may not be able to sustain such profitability. Further, we may incur significant
losses in the future due to the other risks described in this prospectus, and we may encounter unforeseen expenses, difficulties,
complications and delays and other unknown events. If we cannot continue as a going concern, our stockholders may lose their entire
investment.
We
have identified material weaknesses in our internal control over financial reporting, and we cannot assure you that additional
material weaknesses or significant deficiencies will not occur in the future. If our internal control over financial reporting
or our disclosure controls and procedures are not effective, we may not be able to accurately report our financial results or
prevent fraud, which may cause investors to lose confidence in our reported financial information and may lead to a decline in
our stock price.
We
have historically had a small internal accounting and finance staff with limited experience in public reporting. This lack of
adequate accounting resources has resulted in the identification of material weaknesses in our internal controls over financial
reporting. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial
reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented
or detected on a timely basis. In connection with the preparation of our unaudited financial statements for the six-month period
ended June 30, 2019 and the audit of our financial statements for the year ended December 31, 2018, our management team identified
material weaknesses relating to, among other matters:
|
●
|
Our
lack of a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside
directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal
controls and procedures;
|
|
|
|
|
●
|
Our
overall lack of segregation of duties among our management team and our lack of segregation of duties and monitoring
controls regarding our accounting staff because we have a limited staff of accountants maintaining our books and records;
|
|
|
|
|
●
|
Our Chief Executive
Officer does not have significant financial experience resulting in our use of outside consultants to assist in financial
matters;
|
|
|
|
|
●
|
We do not have
adequate controls over pre-closing legal and accounting review of loan transactions;
|
|
|
|
|
●
|
We did not have
adequate controls over accounting systems that would prohibit unauthorized changes to historical accounting records. Recently,
the Company implemented controls to address this situation;
|
|
|
|
|
●
|
We lacked supervision
of outside consultants who may negotiate transactions on behalf of our company;
|
|
|
|
|
●
|
We have not yet
implemented any internal controls over financial reporting at our recently-acquired Prime subsidiary; and
|
|
|
|
|
●
|
We lacked control
over who was granted authorization to bind our company or its subsidiaries to legal contracts.
|
We
have taken steps, including implementing a plan to improve the segregation of the duties of our accounting staff, 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. If we do not successfully
remediate the material weaknesses described above, or if other material weaknesses or other deficiencies arise in the future,
we may be unable to accurately report our financial results on a timely basis, which could cause our reported financial results
to be materially misstated and require restatement which could result in the loss of investor confidence, delisting and/or cause
the market price of our common stock to decline.
Our
substantial indebtedness could adversely affect our business, financial condition and results of operations and our ability to
meet our payment obligations.
As
of June 30, 2019, we had total indebtedness of approximately $10.8 million, consisting of $10.2 million of notes
payable and $0.6 million of lease liabilities relating to our office lease. Our substantial indebtedness could have
important consequences to our stockholders. For example, it could:
|
●
|
require
us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund acquisitions, working capital, capital expenditures, research and development efforts
and other general corporate purposes;
|
|
|
|
|
●
|
increase our vulnerability
to and limit our flexibility in planning for, or reacting to, changes in our business;
|
|
|
|
|
●
|
place us at a competitive
disadvantage compared to our competitors that have less debt;
|
|
|
|
|
●
|
limit our ability
to borrow additional funds, dispose of assets, pay dividends and make certain investments; and
|
|
|
|
|
●
|
make us more vulnerable
to a general economic downturn than a company that is less leveraged.
|
A
high level of indebtedness would increase the risk that we may default on our debt obligations. Our ability to meet our debt obligations
and to reduce our level of indebtedness will depend on our future performance. General economic conditions and financial, business
and other factors affect our operations and our future performance. Many of these factors are beyond our control. We may not be
able to generate sufficient cash flows to pay the interest on our debt and future working capital, borrowings or equity financing
may not be available to pay or refinance such debt. Factors that will affect our ability to raise cash through an offering of
our capital stock or a refinancing of our debt include financial market conditions, the value of our assets and our performance
at the time we need capital.
Our
loan agreements impose restrictions on us that may prevent us from engaging in beneficial transactions.
We
have a term loan pursuant to an Original Issue Discount Senior Secured Convertible Promissory Note dated June 18, 2018
and amended on April 9, 2019 (the “Bellridge Note”) from our company to Bellridge Capital, L.P. The Bellridge Note
matures on August 31, 2020. At June 30, 2019, $1.8 million was outstanding under the Bellridge Note.
In
addition, on August 30, 2019, we issued $2,469,840 aggregate principal amount of the Notes, which mature on November 30, 2020.
The
terms of each of the Bellridge Note and the Notes contain covenants that restrict our ability to, among other things:
|
●
|
make
certain payments, including the payment of dividends;
|
|
|
|
|
●
|
redeem or repurchase
our capital stock;
|
|
|
|
|
●
|
incur additional
indebtedness and issue preferred stock;
|
|
|
|
|
●
|
make investments
or create liens;
|
|
|
|
|
●
|
merge or consolidate
with another entity;
|
|
|
|
|
●
|
sell certain assets;
and
|
|
|
|
|
●
|
enter into transactions
with affiliates.
|
We
have in the past breached certain covenants under the Bellridge Note that have resulted in various events of default under such
note, which events of default have either been cured or waived by the lender thereunder. As of the date of this prospectus, we
were not in default of any of the covenants. Any additional breach of any of these covenants could result in new defaults or events
of default under the Bellridge Note, in which case, depending on the actions taken by the lender thereunder or its successor or
assignee, such lender could elect to declare all amounts borrowed, together with accrued interest, to be due and payable. An event
of default under the Bellridge Note will also create an event of default under the Notes. If following an event of default we
are unable to repay the borrowings or interest then due under our outstanding promissory notes, the lenders could proceed against
their collateral. Further, if the indebtedness under any or all of our promissory notes were to be accelerated, our assets may
not be sufficient to repay such indebtedness in full.
Actual
results could differ from the estimates and assumptions that we use to prepare our consolidated financial statements.
To
prepare consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions
as of the date of the consolidated financial statements that affect the reported values of assets and liabilities, revenues
and expenses, and disclosures of contingent assets and liabilities. Areas requiring significant estimates by our management include:
|
●
|
the
valuation of accounts receivable;
|
|
|
|
|
●
|
the
useful life of property and equipment; the valuation of intangible assets;
|
|
|
|
|
●
|
the
valuation of right of use asset and related liability;
|
|
|
|
|
●
|
assumptions
used in assessing impairment of long-lived assets;
|
|
|
|
|
●
|
estimates
of current and deferred income taxes and deferred tax valuation allowances;
|
|
|
|
|
●
|
the
fair value of non-cash equity transactions;
|
|
|
|
|
●
|
the
valuation of derivative liabilities; and
|
|
|
|
|
●
|
the
fair value of assets acquired and liabilities assumed in business acquisitions.
|
At
the time the estimates and assumptions are made, we believe they are accurate based on the information available. However, our
actual results could differ from, and could require adjustments to, those estimates.
Risks
Related To Our Industry
The
transportation industry in which we compete is affected by general economic and business risks that are largely beyond our control.
The
point-to-point transportation industry is highly cyclical, and our business is dependent on a number of factors, many of which
are beyond our control. We believe that some of the most significant of these factors are economic changes that affect supply
and demand in transportation markets in general, such as:
|
●
|
downturns
in customers’ business cycles;
|
|
|
|
|
●
|
recessionary economic
cycles;
|
|
|
|
|
●
|
changes in customers’
inventory levels and in the availability of funding for their working capital;
|
|
|
|
|
●
|
commercial driver
shortages and increases in driver compensation;
|
|
|
|
|
●
|
industry compliance
with a constantly changing regulatory environment;
|
|
|
|
|
●
|
excess delivery
vehicle capacity in comparison with shipping demand; and
|
|
|
|
|
●
|
changes in government
policies, tariffs and taxes.
|
The
risks associated with these factors are heightened when the United States and/or global economy is weakened. Some of the principal
risks during such times are as follows:
|
●
|
we
may experience low overall freight levels, which may impair our asset utilization, because our customers’ demand for
our services generally correlate with the strength of the United States and, to a lesser extent, global economy;
|
|
|
|
|
●
|
certain of our
customers may face credit issues and cash flow problems, particularly if they encounter increased financing costs or decreased
access to the capital markets, and such issues and problems may affect their ability to pay for our services;
|
|
|
|
|
●
|
freight patterns
may change as supply chains are redesigned, resulting in an imbalance between our capacity and our customers’ demands;
and
|
|
|
|
|
●
|
customers may bid
out freight or select competitors that offer lower rates from among existing choices in an attempt to lower their costs, and
we might be forced to lower our rates or lose freight.
|
We
also are subject to cost increases outside of our control that could materially reduce our profitability if we are unable to increase
our rates sufficiently. Such cost increases include, but are not limited to, increases in fuel prices, driver wages, owner-operator
contracted rates, interest rates, taxes, tolls, license and registration fees, insurance, trucks and other transportation equipment
and healthcare for our employees.
Our
suppliers’ business levels also may be negatively affected by adverse economic conditions or financial constraints, which
could lead to disruptions in the supply and availability of equipment, parts and services critical to our operations. A significant
interruption in our normal supply chain could disrupt our operations, increase our costs and negatively impact our ability to
serve our customers.
In
addition, events outside our control, such as strikes or other work stoppages at our facilities or at customer, port, border or
other shipping locations, or actual or threatened armed conflicts or terrorist attacks, efforts to combat terrorism, military
action against a foreign state or group located in a foreign state, or heightened security requirements could lead to reduced
economic demand, reduced availability of credit or temporary closing of the shipping locations or United States borders. Such
events or enhanced security measures in connection with such events could impair our operating efficiency and productivity and
result in higher operating costs.
Our
industry is highly competitive and fragmented, and our business and results of operations may suffer if we are unable to adequately
address downward pricing and other competitive pressures.
We
compete with many carriers of varying sizes, including some that may have greater access to equipment, a wider range of services,
greater capital resources, less indebtedness or other competitive advantages and including smaller, regional service providers
that cover specific shipping lanes with specific customers or that offer niche services. We also compete, to a lesser extent,
with some less-than-truckload carriers, railroads, and third-party logistics, brokerage, freight forwarding and other transportation
companies. Numerous competitive factors could impair our ability to maintain or improve our profitability. These factors include
the following:
|
●
|
many
of our competitors periodically reduce their freight rates to gain business, especially during times of reduced growth or
a downturn in the economy, which may limit our ability to maintain or increase freight rates, may require us to reduce our
freight rates or may limit our ability to maintain or expand our business;
|
|
|
|
|
●
|
some shippers have
reduced or may reduce the number of carriers they use by selecting core carriers as approved service providers and in some
instances we may not be selected;
|
|
|
|
|
●
|
many customers
periodically solicit bids from multiple carriers for their shipping needs, which may depress freight rates or result in a
loss of business to competitors;
|
|
|
|
|
●
|
the continuing
trend toward consolidation in the trucking industry may result in more large carriers with greater financial resources and
other competitive advantages, and we may have difficulty competing with them;
|
|
|
|
|
●
|
advances in technology
may require us to increase investments in order to remain competitive, and our customers may not be willing to accept higher
freight rates to cover the cost of these investments;
|
|
|
|
|
●
|
higher fuel prices
and, in turn, higher fuel surcharges to our customers may cause some of our customers to consider freight transportation alternatives,
including rail transportation;
|
|
|
|
|
●
|
competition from
freight logistics and brokerage companies may negatively impact our customer relationships and freight rates;
|
|
|
|
|
●
|
we may have higher
exposure to litigation risks as compared to other carriers; and
|
|
|
|
|
●
|
smaller carriers
may build economies of scale with procurement aggregation providers, which may improve the smaller carriers’ abilities
to compete with us.
|
Driver
shortages and increases in driver compensation or owner-operator contracted rates could adversely affect our profitability and
ability to maintain or grow our business.
Driver
shortages in our industry have required, and could continue to require, us to spend more money to locate and retain company
and owner-operator drivers. Our challenge with attracting and retaining qualified drivers primarily stems from intense market
competition, which may subject us to increased payments for driver compensation and owner-operator contracted rates. Also, because
of the intense competition for drivers, we may face difficulty maintaining or increasing our number of company and owner-operator
drivers. Compliance and enforcement with initiatives included in the CSA program implemented by the FMCSA and regulations adopted
by the DOT relating to driver time and safety and fitness could also reduce the availability of qualified drivers. In addition,
like most in our industry, we suffer from a high turnover rate of drivers, especially, with respect to company drivers, in the
first 180 days of employment. The high turnover rate requires us to continually recruit a substantial number of drivers in order
to operate existing delivery vehicles. Further, with respect to owner-operator drivers, shortages can result from contractual
terms or company policies that make contracting with us less desirable to certain owner-operator drivers. Due to the absence of
long-term personal services contracts, owner-operators can quickly terminate their business relationships with us. If we are unable
to continue to attract and retain a sufficient number of company and owner-operator drivers, we could be required to operate with
fewer trucks and face difficulty meeting shipper demands or be forced to forego business that would otherwise be available to
us, which developments could adversely affect our profitability and ability to maintain or grow our business.
Seasonality
and the impact of weather and other catastrophic events adversely affect our operations and profitability.
Our
operations are affected by the winter season because inclement weather impedes operations and some shippers reduce their shipments
during winter. At the same time, operating expenses increase due to, among other things, a decline in fuel efficiency because
of engine idling and harsh weather that creates higher accident frequency, increased claims and higher equipment repair expenditures.
We also may suffer from weather-related or other events, such as tornadoes, hurricanes, blizzards, ice storms, floods, fires,
earthquakes and explosions, which may disrupt fuel supplies, increase fuel costs, disrupt freight shipments or routes, affect
regional economies, destroy our assets or the assets of our customers or otherwise adversely affect the business or financial
condition of our customers, any of which developments could adversely affect our results or make our results more volatile.
We
may be adversely affected by fluctuations in the price or availability of diesel fuel.
Fuel
is one of our largest operating expenses. Diesel fuel prices fluctuate greatly due to factors beyond our control, such as political
events, price and supply decisions by oil producing countries and cartels, terrorist activities, environmental laws and regulations,
armed conflicts, depreciation of the dollar against other currencies, world supply and demand imbalances or imposition of tariffs,
and hurricanes and other natural or man-made disasters, each of which may lead to an increase in the cost of fuel. Such events
may lead not only to increases in fuel prices, but also to fuel shortages and disruptions in the fuel supply chain. Because our
operations are dependent upon diesel fuel, significant diesel fuel cost increases, shortages or supply disruptions could materially
and adversely affect our results of operations and financial condition. We have not used derivatives as a hedge against higher
fuel costs in the past but continue to evaluate this possibility.
Increases
in fuel costs, to the extent not offset by rate per mile increases or fuel surcharges, have an adverse effect on our operations
and profitability. We incur certain fuel costs that cannot be recovered even with respect to customers with which we maintain
fuel surcharge programs, such as those associated with empty miles or the time when our engines are idling. Because our fuel surcharge
recovery lags behind changes in fuel prices, our fuel surcharge recovery may not capture in any particular period the increased
costs we pay for fuel, especially when prices are rising. Further, during periods of low freight volumes, shippers can use their
negotiating leverage to impose less compensatory fuel surcharge policies. There can be no assurance that our fuel surcharge program
will be maintained indefinitely or will be sufficiently effective.
Increased
prices for, or decreases in the availability of, new trucks and delivery vehicles and decreases in the value of used trucks and
delivery vehicles could adversely affect our results of operations and cash flows.
Investment
in new equipment is a significant part of our annual capital expenditures, and we require an available supply of trucks and other
delivery vehicles from equipment manufacturers to operate and grow our business. In recent years, manufacturers have raised the
prices of new trucks and other vehicles and equipment significantly due to increased costs of materials and, in part, to offset
their costs of compliance with new tractor engine and emission system design requirements mandated by the EPA and various state
agencies, which are intended to reduce emissions. For example, more restrictive EPA engine and emissions system design requirements
became effective for engines built on or after January 1, 2010. In 2011, the EPA and the NHTSA established Phase 1 of a national
program to reduce greenhouse gas emissions and establish new fuel efficiency standards for medium- and heavy-duty vehicles beginning
for model year 2014 and extending through model year 2018. In October 2016, the EPA and NHTSA jointly published final Phase 2
standards for improving fuel efficiency and reducing greenhouse gas emissions from new on-road medium- and heavy-duty vehicles
beginning for model year 2019 and extending to model year 2027. The Phase 2 standards build upon the Phase 1 standards, encouraging
wider application of currently available technologies and the development of new and advanced cost-effective technologies through
model year 2027. In addition, greenhouse gas emissions limits and fuel efficiency standards will be imposed on new trailers. Greenhouse
gas emissions regulations are likely to affect equipment design and cost. More recently, in November 2018, the EPA announced the
Cleaner Trucks Initiative (CTI), pursuant to which it plans to propose and finalize a rulemaking updating standards for nitrogen
oxide emissions from highway heavy-duty trucks and engines. The EPA is expected to issue a proposed rulemaking to implement the
CTI program in early 2020. Notwithstanding the federal standards, a number of states have mandated, and states may continue to
individually mandate, additional emission-control requirements for equipment that could increase equipment or other costs for
entire fleets. Further equipment price increases may result from these federal and state requirements. If new equipment prices
increase more than anticipated, we could incur higher depreciation and rental expenses than anticipated. If we are unable to fully
offset any such increases in expenses with freight rate increases and/or improved fuel economy, our results of operations and
cash flows could be adversely affected.
We
may face difficulty in purchasing or leasing new equipment due to decreased supply. From time to time, some original equipment
manufacturers (OEM) of tractors, trailers and other delivery vehicles may reduce their manufacturing output due to lower demand
for their products in economic downturns or a shortage of component parts. Uncertainty as to future federal emission standards
or possible future inconsistencies between federal and state emission standards may also serve to decrease such manufacturing
output. Component suppliers may either reduce production or be unable to increase production to meet OEM demand, creating periodic
difficulty for OEMs to react in a timely manner to increased demand for new equipment and/or increased demand for replacement
components as economic conditions change. At times, market forces may create market situations in which demand outstrips supply.
In those situations, we may face reduced supply levels and/or increased acquisition or lease costs. An inability to continue to
obtain an adequate supply of new tractors or trailers for our operations could have a material adverse effect on our business,
results of operations and financial condition.
During
prolonged periods of decreased tonnage levels, we and other trucking companies may make strategic fleet reductions, which could
result in an increase in the supply of used equipment. When the supply exceeds the demand for used trucks or other delivery vehicles,
the general market value of such used equipment decreases. Used equipment prices are also subject to substantial fluctuations
based on availability of financing and commodity prices for scrap metal. A depressed market for used equipment could require us
to trade our truck or other delivery vehicles at depressed values or to record losses on disposal or an impairment of the carrying
values of our equipment that is not protected by residual value arrangements. Trades at depressed values and decreases in proceeds
under equipment disposals and impairment of the carrying values of our equipment could adversely affect our results of operations
and financial condition.
We
operate in a highly-regulated industry, and changes in existing laws or regulations, or liability under existing or future laws
or regulations, could have a material adverse effect on our results of operations and profitability.
We
operate in the United States pursuant to operating authority granted by the DOT. We, as well as our company and owner-operator
drivers, must also comply with governmental regulations regarding safety, equipment, environmental protection and operating methods.
Examples include regulation of equipment weight, equipment dimensions, fuel emissions, driver hours-of-service, driver eligibility
requirements, on-board reporting of operations and ergonomics. We may become subject to new, or amendment of existing, laws and
regulations, reinterpretation of legal requirements or increased governmental enforcement that may impose more restrictive regulations
relating to such matters that may require changes in our operating practices, influence the demand for transportation services
or require us to incur significant additional costs. Possible changes to laws and regulations include:
|
●
|
increasingly
stringent environmental laws and regulations, including changes intended to address NOx emissions as well as fuel efficiency
and greenhouse gas emissions that are attributed to climate change;
|
|
|
|
|
●
|
restrictions, taxes
or other controls on emissions;
|
|
|
|
|
●
|
regulation specific
to the energy market and logistics providers to the industry;
|
|
|
|
|
●
|
changes in the
hours-of-service regulations, which govern the amount of time a driver may drive in any specific period;
|
|
|
|
|
●
|
driver and vehicle
ELD requirements;
|
|
|
|
|
●
|
requirements leading
to accelerated purchases of new trailers;
|
|
|
|
|
●
|
mandatory limits
on vehicle weight and size;
|
|
|
|
|
●
|
driver hiring or
retention restrictions;
|
|
|
|
|
●
|
increased bonding
or insurance requirements; and
|
|
|
|
|
●
|
security requirements
imposed by the DHS.
|
From
time to time, various legislative proposals are introduced, including proposals to increase federal, state or local taxes, including
taxes on motor fuels and emissions, which may increase our or our independent affiliates’ operating costs, require capital
expenditures or adversely impact the recruitment of drivers.
Restrictions
on greenhouse gas emissions or climate change laws or regulations could also affect our customers that use significant amounts
of energy or burn fossil fuels in producing or delivering the products we carry, which, in turn, could adversely impact the demand
for our services as well as our operations. Additionally, recent activism directed at shifting funding away from companies with
energy-related assets could result in limitations or restrictions on certain sources of funding for the energy sector, which also
could adversely impact the demand for our services and our operations. We also could lose revenue if our customers divert business
from us because we have not complied with customer sustainability requirements. See “Item 1. Business - Regulation”
for information regarding several governmental regulations that could significantly impact our business and operations.
Safety-related
evaluations and rankings under the CSA program could adversely impact our relationships with our customers and our ability to
maintain or grow our fleet, each of which could have a material adverse effect on our results of operations and profitability.
The
CSA includes compliance and enforcement initiatives designed to monitor and improve commercial motor vehicle safety by measuring
the safety record of both the motor carrier and the driver. These measurements are scored and used by the FMCSA to identify potential
safety risks and to direct enforcement action. Certain measurements and scores collected by the CSA from transportation companies
are available to the general public on the FMCSA’s website.
Our
CSA scores are dependent upon our safety and compliance experience, which could change at any time. In addition, the safety standards
prescribed in the CSA program or the underlying methodology used by the FMCSA to determine a carrier’s safety rating could
change and, as a result, our ability to maintain an acceptable score could be adversely impacted. For example, pursuant to a 2015
federal statutory mandate, the FMCSA commissioned the National Academy of Sciences (NAS) to conduct a study and report upon the
CSA program and its underlying Safety Measurement System (SMS), which is the FMCSA’s process for identifying patterns of
non-compliance and issuing safety-fitness determinations for motor carriers. In June 2017, the NAS published a report on the subject
providing specific recommendations and concluding, among other things, that the FMCSA should explore a more formal statistical
model to replace the current SMS process. In June 2018, the FMCSA posted its response to the NAS study in a report to Congress,
concluding, among other things, that it would develop and test a new model, the Item Response Theory (IRT), which would replace
the SMS process currently used. The FMCSA was expected to commence small scale testing of the IRT model as early as September
2018, with full-scale testing expected to occur in April 2019 and possible program roll-out expected to occur in late 2019 but
the testing schedule has been delayed. The FMCSA’s June 2018 response is under audit by the DOT Inspector General to assess
consistency with the NAS recommendations, and the audit findings will guide the agency’s actions and timing with respect
to testing of the IRT model as a potential replacement for the SMS. In the event and to the extent that the FMCSA adopts the IRT
model in replacement of the SMS or otherwise pursues rulemakings in the future that revise the methodology used to determine a
carrier’s safety rating in a manner that incorporates more stringent standards, then it is possible that we and other motor
carriers could be adversely affected, as compared to consideration of the current standards. If we receive an unacceptable CSA
score, whether under the current SMS process, the IRT model, should it be finalized and adopted, or as a result of some other
safety-fitness determination, our relationships with customers could be damaged, which could result in a loss of business.
Additionally,
the requirements of CSA could shrink the industry’s pool of drivers as those with unfavorable scores could leave the industry.
As a result, the costs to attract, train and retain qualified drivers could increase. In addition, a shortage of qualified drivers
could increase driver turnover, decrease asset utilization, limit growth and adversely impact our results of operations and profitability.
We
are subject to environmental and worker health and safety laws and regulations that may expose us to significant costs and liabilities
and have a material adverse effect on our results of operations, competitive position and financial condition.
We
are subject to stringent and comprehensive federal, state and local environmental and worker health and safety laws and regulations
governing, among other matters, the operation of fuel storage tanks, release of emissions from our vehicles (including engine
idling) and facilities, the health and safety of our workers in conducting operations, and adverse impacts to the environment.
Under certain environmental laws, we could be subject to strict joint and several liability, without regard to fault or legality
of conduct, for costs relating to contamination at facilities we own or operate or previously owned or operated and at third-party
sites where we disposed of waste, as well as costs associated with the clean-up of releases arising from accidents involving our
vehicles. We often operate in industrial areas, where truck terminals and other industrial activities are located, and where
soil, groundwater or other forms of environmental contamination have occurred from historical or recent releases and for which
we have incurred and may, in the future, incur remedial or other environmental liabilities. We also maintain above-ground and
underground bulk fuel storage tanks and fueling islands at some of our facilities and vehicle maintenance operations at certain
of our facilities. Our operations involve the risks of fuel spillage or seepage into the environment, environmental damage and
unauthorized hazardous material spills, releases or disposal actions, among others.
Increasing
efforts to control air emissions, including greenhouse gases, may have an adverse effect on us. Federal and state lawmakers have
implemented, and are considering, a variety of new climate-change initiatives and greenhouse gas regulations that could increase
the cost of new tractors, impair productivity and increase our operating expenses. For example, in 2011, the NHTSA and the EPA
adopted final Phase 1 rules that established the first-ever fuel economy and greenhouse gas standards for medium- and heavy-duty
vehicles, including certain combination tractors’ model years 2014 to 2018 and, in October 2016, the EPA and NHTSA jointly
published final Phase 2 standards for improving fuel efficiency and reducing greenhouse gas emissions from new on-road medium-
and heavy-duty vehicles beginning for model year 2019 through model year 2027. In addition, greenhouse gas emissions limits and
fuel efficiency standards will be imposed on new trailers. More recently, in November 2018, the EPA announced the CTI, pursuant
to which it plans to propose and finalize a rulemaking updating standards for nitrogen oxide emissions from highway heavy-duty
trucks and engines. The EPA is expected to issue a proposed rulemaking to implement the CTI program in early 2020.
Compliance
with environmental laws and regulations may also increase the price of our delivery equipment and otherwise affect the economics
of our industry by requiring changes in operating practices or by influencing the demand for, or the costs of providing, transportation
services. For example, regulations issued by the EPA and various state agencies that require progressive reductions in exhaust
emissions from diesel engines have resulted in higher prices for tractors and diesel engines and increased operating and maintenance
costs. Also, in order to reduce exhaust emissions, some states and municipalities have begun to restrict the locations and amount
of time where diesel-powered tractors, such as ours, may idle. These restrictions could force us to alter our drivers’ behavior,
purchase on-board power units that do not require the engine to idle or face a decrease in productivity. We are also subject to
potentially stringent rulemaking related to sustainability practices, including conservation of resources by decreasing fuel consumption.
This increased focus on sustainability practices may result in new regulations and/or customer requirements that could adversely
impact our business.
If
we have operational spills or accidents or if we are found to be in violation of, or otherwise liable under, environmental or
worker health or safety laws or regulations, we could incur significant costs and liabilities. Those costs and liabilities may
include the assessment of sanctions, including administrative, civil and criminal penalties, the imposition of investigatory,
remedial or corrective action obligations, the occurrence of delays in permitting or performance of projects, and the issuance
of orders enjoining performance of some or all of our operations in a particular area. The occurrence of any one or more of these
developments could have a material adverse effect on our results of operations, competitive position and financial condition.
Environmental and worker health and safety laws are becoming increasingly more stringent and there can be no assurances that compliance
with, or liabilities under, existing or future environmental and worker health or safety laws or regulations will not have a material
adverse effect on our business, financial condition, results of operations, cash flows or prospects. See “Item 1. Business
- Regulation” for information regarding several governmental regulations that could significantly affect our business and
operations.
Our
contractual agreements with our owner-operators expose us to risks that we do not face with our company drivers.
From
time to time we have relied upon independent contractor owner-operators to perform the services for which we contract with customers.
While our use of independent contractors has to date been limited, we may increase our usage of independent contractor owner-operators
if we are unable to meet demand for our transportation services with our own delivery vehicles and drivers. Our reliance on independent
contractor owner-operators creates numerous risks for our business. For example, if our independent contractor owner-operators
fail to meet our contractual obligations or otherwise fail to perform in a manner consistent with our requirements, we may be
required to utilize alternative service providers at potentially higher prices or with some degree of disruption of the services
that we provide to customers. If we fail to deliver on time, if our contractual obligations are not otherwise met, or if the costs
of our services increase, then our profitability and customer relationships could be harmed.
The
financial condition and operating costs of our independent contractor owner-operators are affected by conditions and events that
are beyond our control and may also be beyond their control. Adverse changes in the financial condition of our independent contractor
owner-operators or increases in their equipment or operating costs could cause them to seek higher revenues or to cease their
business relationships with our company. The prices we charge our customers could be impacted by such issues, which may in turn
limit pricing flexibility with customers, resulting in fewer customer contracts and decreasing our revenues.
Independent
contractor owner-operators may use tractors, trailers and other equipment bearing our trade names and trademarks. If one of our
independent contractor owner-operators is subject to negative publicity, it could reflect on us and have a material adverse effect
on our business, brand and financial performance. Under certain laws, we could also be subject to allegations of liability for
the activities of our independent contractor owner-operators.
Owner-operators
are third-party service providers, as compared to company drivers who are employed by us. As independent business owners, our
owner-operators may make business or personal decisions that conflict with our best interests. For example, if a load is unprofitable,
route distance is too far from home or personal scheduling conflicts arise, an owner-operator may deny loads of freight from time
to time. In these circumstances, we must be able to timely deliver the freight in order to maintain relationships with customers.
If
our owner-operators are deemed by regulators or judicial process to be employees, our business and results of operations could
be adversely affected.
Tax
and other regulatory authorities have in the past sought to assert that owner-operators in the trucking industry are employees
rather than independent contractors. Taxing and other regulatory authorities and courts apply a variety of standards in their
determination of independent contractor status. If our owner-operators are determined to be its employees, we would incur additional
exposure under federal and state tax, workers’ compensation, unemployment benefits, labor, employment, and tort laws, including
for prior periods, as well as potential liability for employee benefits and tax withholdings.
We
depend on third parties in our brokerage business, and service instability from these providers could increase our operating costs
or reduce our ability to offer brokerage services, which could adversely affect our revenue, results of operations and customer
relationships.
Our
brokerage business is dependent upon the services of third-party capacity providers, including other truckload carriers. These
third-party providers may seek other freight opportunities and may require increased compensation during times of improved freight
demand or tight trucking capacity. Our inability to maintain positive relationships with, and secure the services of, these third
parties, or increases in the prices we must pay to secure such services, could have an adverse effect on our revenue, results
of operations and customer relationships. Our ability to secure the services of these third-party providers on competitive terms
is subject to a number of risks, including the following, many of which are beyond our control:
|
●
|
equipment
shortages in the transportation industry, particularly among contracted truckload carriers and railroads;
|
|
|
|
|
●
|
interruptions in
service or stoppages in transportation as a result of labor disputes, seaport strikes, network congestion, weather-related
issues, acts of God or acts of terrorism;
|
|
|
|
|
●
|
changes in regulations
impacting transportation;
|
|
|
|
|
●
|
increases in operating
expenses for carriers, such as fuel costs, insurance premiums and licensing expenses, that result in a reduction in available
carriers; and
|
|
|
|
|
●
|
changes in transportation
rates.
|
We
are dependent on computer and communications systems, and a systems failure or data breach could cause a significant disruption
to our business.
Our
business depends on the efficient and uninterrupted operation of our computer and communications hardware systems and infrastructure,
including operating and financial reporting systems. Our computer and communications system is critical in meeting customer expectations,
effectively tracking, maintaining and operating our trucks and other delivery vehicles, directing and compensating our employees,
and interfacing with our financial reporting system. Our financial reporting system receives, processes, controls and reports
information for operating our business and for tabulation into our financial statements. We currently maintain our computer systems
at multiple locations, including several of our offices and terminals and third-party data centers, along with computer equipment
at each of our terminals. Our operations and those of our technology and communications service providers are vulnerable to interruption
by fire, earthquake, power loss, telecommunications failure, terrorist attacks, Internet failures, computer viruses, data breaches
(including cyber-attacks or cyber intrusions over the Internet, malware and the like) and other events generally beyond our control.
Although we believe that we have robust information security procedures and other safeguards in place, as cyber threats continue
to evolve, we may be required to expend additional resources to continue to enhance our information security measures and investigate
and remediate any information security vulnerabilities. A significant natural disaster or cyber-attack incident, including system
failure, security breach, disruption by malware or other damage, could interrupt or delay our operations, damage our reputation,
cause a loss of customers, agents or third-party capacity providers, expose us to a risk of loss or litigation, or cause us to
incur significant time and expense to remedy such an event, any of which could have a material adverse impact on our results of
operations and financial position.
Our
business may be harmed by terrorist attacks, future wars or anti-terrorism measures.
In
the aftermath of the terrorist attacks of September 11, 2001, federal, state and municipal authorities have implemented and are
implementing various security measures, including checkpoints and travel restrictions on large trucks and fingerprinting of drivers
in connection with new hazardous materials endorsements on their licenses. Such existing measures and future measures may have
significant costs associated with them which a motor carrier is forced to bear. Moreover, large trucks carrying large freight
are potential terrorist targets, and we may be obligated to take measures, including possible capital expenditures, intended to
protect our trucks. In addition, the insurance premiums charged for some or all of the coverage currently maintained by us could
continue to increase dramatically or such coverage could be unavailable in the future.
If
our employees were to unionize, our operating costs could increase and our ability to compete could be impaired.
None
of our employees are currently represented under a collective bargaining agreement; however, we always face the risk that our
employees will try to unionize, and if our owner-operators were ever re-classified as employees, the magnitude of this risk would
increase. Further, Congress or one or more states could approve legislation and/or the National Labor Relations Board (the NLRB)
could render decisions or implement rule changes that could significantly affect our business and our relationship with employees,
including actions that could substantially liberalize the procedures for union organization. For example, in December 2014, the
NLRB implemented a final rule amending the agency’s representation-case proceedings that govern the procedures for union
representation. Pursuant to this amendment, union elections can now be held within 10 to 21 days after the union requests a vote,
which makes it easier for unions to successfully organize all employers, in all industries. In addition, we can offer no assurance
that the Department of Labor will not adopt new regulations or interpret existing regulations in a manner that would favor the
agenda of unions.
Any
attempt to organize by our employees could result in increased legal and other associated costs and divert management attention,
and if we entered into a collective bargaining agreement, the terms could negatively affect our costs, efficiency and ability
to generate acceptable returns on the affected operations. In particular, the unionization of our employees could have a material
adverse effect on our business, financial condition, results of operations, cash flows and prospects because:
|
●
|
restrictive
work rules could hamper our efforts to improve and sustain operating efficiency and could impair our service reputation and
limit our ability to provide same-day or next-day services;
|
|
|
|
|
●
|
a strike or work
stoppage could negatively impact our profitability and could damage customer and employee relationships, and some shippers
may limit their use of unionized trucking companies because of the threat of strikes and other work stoppages; and
|
|
|
|
|
●
|
an election and
bargaining process could divert management’s time and attention from our overall objectives and impose significant expenses.
|
Risks
Related to Ownership of Our Common Stock
Our
shares of common stock are quoted on the OTC Pink Open Market and there is no active trading market for our common stock.
Our
shares of common stock are traded on the OTC Pink Open Market. There is currently no active trading market for our common stock
and our common stock has traded in recent years only on a limited basis. There can be no assurance that an active trading market
for our common stock will develop or if one develops, it will be sustained. Furthermore, because our shares of common stock are
traded on the OTC Pink Open Market, the shares of our common stock covered by this prospectus will only be offered and sold by
Selling Stockholders at a fixed price of $8.50 per share until our shares are quoted on the OTCQX or OTCQB marketplace
of the OTC Link, and, thereafter, at prevailing market prices or privately negotiated prices.
If
a public market for our common stock develops, it may be volatile. This may affect the ability of our investors to sell their
shares as well as the price at which they sell their shares.
The
market price for shares of our common stock may be significantly affected by factors such as variations in quarterly and yearly
operating results, general trends in the transportation and logistics industry, and changes in state or federal regulations
affecting us and our industry. Furthermore, in recent years the stock market has experienced extreme price and volume fluctuations
that are unrelated or disproportionate to the operating performance of the affected companies. Such broad market fluctuations
may adversely affect the market price of our common stock, if a market for it develops.
Our
common stock price has fluctuated in recent years, and the trading price of our common stock is likely to continue reflect changes,
which could result in losses to investors and litigation.
In
addition to changes to market prices based on our results of operations and the factors discussed elsewhere in this “Risk
Factors” section, the market price of and trading volume for our common stock may change for a variety of other reasons,
not necessarily related to our actual operating performance. The capital markets have experienced extreme volatility that has
often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect
the trading price of our common stock. In addition, the average daily trading volume of the securities of small companies can
be very low, which may contribute to future volatility. Factors that could cause the market price of our common stock to fluctuate
significantly include:
|
●
|
the
results of operating and financial performance and prospects of other companies in our industry;
|
|
|
|
|
●
|
strategic actions
by us or our competitors, such as acquisitions or restructurings;
|
|
|
|
|
●
|
announcements of
innovations, increased service capabilities, new or terminated customers or new, amended or terminated contracts by our competitors;
|
|
|
|
|
●
|
the public’s
reaction to our press releases, media coverage and other public announcements, and filings with the SEC;
|
|
|
|
|
●
|
lack of securities
analyst coverage or speculation in the press or investment community about us or opportunities in the markets in which we
compete;
|
|
|
|
|
●
|
changes in government
policies in the United States and, as our international business increases, in other foreign countries;
|
|
|
|
|
●
|
changes in earnings
estimates or recommendations by securities or research analysts who track our common stock or failure of our actual results
of operations to meet those expectations;
|
|
|
|
|
●
|
dilution caused
by the conversion into common stock of convertible debt securities;
|
|
|
|
|
●
|
market and industry
perception of our success, or lack thereof, in pursuing our growth strategy;
|
|
|
|
|
●
|
changes in accounting
standards, policies, guidance, interpretations or principles;
|
|
|
|
|
●
|
any lawsuit involving
us, our services or our products;
|
|
|
|
|
●
|
arrival and departure
of key personnel;
|
|
|
|
|
●
|
sales of common
stock by us, our investors or members of our management team; and
|
|
|
|
|
●
|
changes in general
market, economic and political conditions in the United States and global economies or financial markets, including those
resulting from natural or man-made disasters.
|
Any
of these factors, as well as broader market and industry factors, may result in large and sudden changes in the trading volume
of our common stock and could seriously harm the market price of our common stock, regardless of our operating performance. This
may prevent stockholders from being able to sell their shares at or above the price they paid for shares of our common stock,
if at all. In addition, following periods of volatility in the market price of a company’s securities, stockholders often
institute securities class action litigation against that company. Our involvement in any class action suit or other legal proceeding,
including the existing lawsuits filed against us and described elsewhere in this report, could divert our senior management’s
attention and could adversely affect our business, financial condition, results of operations and prospects.
If
we do not meet the listing standards of a national securities exchange, our investors’ ability to make transactions in our
securities will be limited and we will be subject to additional trading restrictions.
Our
common stock currently is traded over-the-counter on the OTC Pink market and is not qualified to be listed on a national securities
exchange, such as NASDAQ. Accordingly, we face significant material adverse consequences, including:
|
●
|
a limited
availability of market quotations for our securities;
|
|
|
|
|
●
|
reduced liquidity
with respect to our securities;
|
|
|
|
|
●
|
our shares of common
stock are currently classified as “penny stock” which requires brokers trading in our shares of common stock to
adhere to more stringent rules, resulting in a reduced level of trading activity in the secondary trading market for our shares
of common stock;
|
|
|
|
|
●
|
a limited amount
of news and analyst coverage for our company; and
|
|
|
|
|
●
|
a decreased ability
to issue additional securities or obtain additional financing in the future.
|
Our
shares of common stock are subject to penny stock regulations. Because our common stock is a penny stock, holders of our common
stock may find it difficult or may be unable to sell their shares.
The
SEC has adopted rules that regulate broker/dealer practices in connection with transactions in penny stocks. Penny stocks generally
are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges
or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities
is provided by the exchange system). The penny stock rules require a broker/dealer, prior to a transaction in a penny stock not
otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the SEC that provides information
about penny stocks and the nature and level of risks in the penny stock market. The broker/dealer also must provide the customer
with bid and offer quotations for the penny stock, the compensation of the broker/dealer, and its salesperson in the transaction,
and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition,
the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from such rules, the broker/dealer
must make a special written determination that a penny stock is a suitable investment for the purchaser and receive the purchaser’s
written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity
in any secondary market for a stock that becomes subject to the penny stock rules, and accordingly, holders of our common stock
may find it difficult or may be unable to sell their shares.
FINRA
sales practice requirements may also limit a stockholder’s ability to buy and sell our common stock.
In
addition to the “penny stock” rules described above, the Financial Industry Regulatory Authority (known as “FINRA”)
has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds
for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities
to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s
financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes
that there is a high probability that speculative low-priced securities will not be suitable for at least some customers.
FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may
limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
We
do not intend to pay cash dividends in the foreseeable future.
We
have never paid dividends on our common stock and do not presently intend to pay any dividends in the foreseeable future. We anticipate
that any funds available for payment of dividends will be re-invested into our company to further its business strategy. Because
we do not anticipate paying dividends in the future, the only opportunity for our stockholders to realize value in our common
stock will likely be through a sale of those shares.
Future
sales of our securities could adversely affect the market price of our common stock and our future capital-raising activities
could involve the issuance of equity securities, which would dilute your investment and could result in a decline in the trading
price of our common stock.
We
may sell securities in the public or private equity markets if and when conditions are favorable, or at prices per share below
the current market price of our common stock, even if we do not have an immediate need for additional capital at that time. Sales
of substantial amounts of shares of our common stock, or the perception that such sales could occur, could adversely affect the
prevailing market price of our shares and our ability to raise capital. We may issue additional shares of common stock in future
financing transactions or as incentive compensation for our executive management and other key personnel, consultants and advisors.
Issuing any equity securities would be dilutive to the equity interests represented by our then-outstanding shares of common stock.
Moreover, sales of substantial amounts of shares in the public market, or the perception that such sales could occur, may adversely
affect the prevailing market price of our common stock and make it more difficult for us to raise additional capital. See “Description
of Securities – Warrants.”
If
the Selling Stockholders sell a large number of shares all at once or in blocks, the market price of our shares would most likely
decline.
A
significant number of shares of our common stock may be resold by the Selling Stockholders through this prospectus and
as a result of any other registration statement we may file in the future. Should the Selling Stockholders decide to sell their
shares at a price below the market price as quoted by the OTC Markets Group, Inc., or any other exchange or market on which
our common stock might be listed or trade in the future, the price may continue to decline. A steep decline in the price of our
common stock would adversely affect our ability to raise additional equity capital, and even if we were successful in raising
such capital, the terms of such raise may be substantially dilutive to current stockholders
Our
certificate of incorporation allows for our board of directors to create new series of preferred stock without further approval
by our stockholders, which could adversely affect the rights of the holders of our common stock.
Our
board of directors has the authority to fix and determine the relative rights and preferences of our preferred stock. Currently
our board of directors has the authority to designate and issue up to 8,300,000 shares of our “blank check”
preferred stock without further stockholder approval. As a result, our board of directors could authorize the issuance of a series
of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend
payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together
with a premium, prior to the redemption of our common stock. In addition, our board of directors could authorize the issuance
of a series of preferred stock that has greater voting power than our common stock or that is convertible into our common stock,
which could decrease the relative voting power of our common stock or result in dilution to our existing stockholders. See “Description
of Securities – Preferred Stock.”
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus contains forward-looking statements. Such statements include statements regarding our expectations, hopes, beliefs
or intentions regarding the future, including but not limited to statements regarding our market, strategy, competition, development
plans (including acquisitions and expansion), financing, revenues, operations, and compliance with applicable laws. Forward-looking
statements involve certain risks and uncertainties, and actual results may differ materially from those discussed in any such
statement. Factors that could cause actual results to differ materially from such forward-looking statements include the risks
described in greater detail in the following paragraphs. All forward-looking statements in this document are made as of the date
hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking
statement. Market data used throughout this prospectus is based on published third party reports or the good faith estimates of
management, which estimates are based upon their review of internal surveys, independent industry publications and other publicly
available information.
In
some cases, you can identify forward-looking statements by terminology, such as “expects”, “anticipates”,
“intends”, “estimates”, “plans”, “potential”, “possible”, “probable”,
“believes”, “seeks”, “may”, “will”, “should”, “could”
or the negative of such terms or other similar expressions. Accordingly, these statements involve estimates, assumptions and uncertainties
that could cause actual results to differ materially from those expressed in them. Any forward-looking statements are qualified
in their entirety by reference to the factors discussed throughout this prospectus.
You
should review carefully the section entitled “Risk Factors” beginning on page 6 of this prospectus for a
discussion of these and other risks that relate to our business and investing in shares of our common stock.
USE
OF PROCEEDS
The
Selling Stockholders will receive all of the proceeds from the sale of the shares offered by them under this prospectus. We will
not receive any proceeds from the sale of the shares by the Selling Stockholders covered by this prospectus, but we would receive
any proceeds from the exercise of the Debt Warrants and the Equity Warrants. If all of such warrants are exercised
for cash, we would receive $4,920,290 in proceeds. We will use all proceeds, if any, from any such exercise for working
capital purposes.
PRICE
RANGE OF COMMON STOCK
Our
common stock has been quoted on OTC Pink under the symbol “PTRA” through August 13, 2018 and “TLSS” beginning
on August 14, 2018. Trading in OTC Pink stocks can be volatile, sporadic and risky, as thinly traded stocks tend to move more
rapidly in price than more liquid securities. Such trading may also depress the market price of our common stock and make it difficult
for our stockholders to resell their common stock. Our common stock does not have an established public trading market. The following
table reflects the high and low bid price for our common stock for the period indicated. The bid information was obtained from
the OTC Markets Group, Inc. and reflects inter-dealer prices, without retail mark-up, markdown or commission, and may not necessarily
represent actual transactions.
|
|
Quarter
|
|
|
High
|
|
|
|
Low
|
|
Fiscal
year ended December 31, 2017
|
|
First
|
|
$
|
8.75
|
|
|
$
|
4.00
|
|
|
|
Second
|
|
$
|
27.50
|
|
|
$
|
5.27
|
|
|
|
Third
|
|
$
|
6.67
|
|
|
$
|
2.75
|
|
|
|
Fourth
|
|
$
|
4.97
|
|
|
$
|
2.50
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
year ended December 31, 2018
|
|
First
|
|
$
|
9.97
|
|
|
$
|
1.80
|
|
|
|
Second
|
|
$
|
6.25
|
|
|
$
|
1.50
|
|
|
|
Third
|
|
$
|
10.00
|
|
|
$
|
0.60
|
|
|
|
Fourth
|
|
$
|
2.75
|
|
|
$
|
1.50
|
|
|
|
|
|
|
|
|
|
|
Fiscal
year ended December 31, 2019
|
|
First
|
|
$
|
4.00
|
|
|
$
|
0.93
|
|
|
|
Second
|
|
$
|
16.25
|
|
|
$
|
4.25
|
|
|
|
Third*
|
|
$
|
13.00
|
|
|
$
|
8.58
|
|
*
|
Through October 3, 2019.
|
Our
common stock is considered to be penny stock under rules promulgated by the Securities and Exchange Commission. Under these rules,
broker-dealers participating in transactions in these securities must first deliver a risk disclosure document which describes
risks associated with these stocks, broker-dealers’ duties, customers’ rights and remedies, market and other information,
and make suitability determinations approving the customers for these stock transactions based on financial situation, investment
experience and objectives. Broker-dealers must also disclose these restrictions in writing, provide monthly account statements
to customers, and obtain specific written consent of each customer. With these restrictions, the likely effect of designation
as a penny stock is to decrease the willingness of broker- dealers to make a market for the stock, to decrease the liquidity of
the stock and increase the transaction cost of sales and purchases of these stocks compared to other securities.
Holders
As
of October 3, 2019, there were 48 record holders of our common stock, and there were 11,745,236 shares of
our common stock outstanding.
DIVIDEND
POLICY
We
have never declared or paid any cash dividends on shares of our capital stock. We currently intend to retain all available funds
to support operations and to finance the growth and development of our business. The terms of the Notes currently prohibit our
payment of cash dividends. Any future determination related to payments of dividends will be at the discretion of our board of
directors after taking into account various factors that our board of directors deems relevant, including our financial condition,
operating results, current and anticipated cash needs, plans for expansion and debt restrictions, if any.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis of financial condition and results of operations should be read together with our financial
statements and accompanying notes appearing elsewhere in this Prospectus. This Management’s Discussion and Analysis contains
forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” set forth
in the beginning of this Prospectus, and see “Risk Factors” beginning on page 6 for a discussion of certain risk
factors applicable to our business, financial condition, and results of operations. Operating results are not necessarily indicative
of results that may occur in future periods.
Readers
are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with
the Securities and Exchange Commission. Important factors currently known to management could cause actual results to differ materially
from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect
changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that
our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made
that actual results of operations or the results of our future activities will not differ materially from our assumptions. Factors
that could cause differences include, but are not limited to, expected market demand for our products, fluctuations in pricing
for our products, and competition.
The
following discussion provides information that management believes is relevant to an assessment and understanding of our past
financial condition and plan of operations. The discussion below should be read in conjunction with the financial statements and
accompanying notes contained elsewhere in this prospectus.
Overview
We
were incorporated under the laws of the State of Nevada on July 25, 2008 and prior to the reverse merger discussed below, we were
inactive.
On
March 30, 2017, we entered into a share exchange agreement, dated as of March 30, 2017 with Save on Transport pursuant to which
Save on Transport became a wholly-owned subsidiary or our company. Save on Transport was incorporated in the State of Florida
and commenced business operations on July 12, 2016. Save on Transport is a provider of integrated transportation management solutions
consisting of brokerage and logistics services such as transportation scheduling, routing and other value-added services related
to the transportation of automobiles and other freight. As an early stage company, TLSI’s current operations are subject
to all risks inherent in the establishment of a new business enterprise.
Our
acquisition of Save on Transport was treated as a reverse merger and recapitalization of Save on Transport for financial reporting
purposes because the shareholders of Save on Transport retained an approximate 80% controlling interest in the post-acquisition
consolidated entity. Save on Transport was considered the acquirer for accounting purposes, and our historical financial statements
before the acquisition were replaced with the historical financial statements of Save on Transport before the acquisition. The
balance sheets at their historical cost basis of both entities were combined at the acquisition date and the results of operations
from the acquisition date forward include the historical results of Save on Transport and results of our company from the acquisition
date forward. The acquisition was intended to be treated as a tax-free reorganization under Section 368(a) of the Internal Revenue
Code of 1986, as amended.
On
June 18, 2018, we completed the acquisition of 100% of the issued and outstanding membership interests of Prime EFS, LLC, a New
Jersey limited liability company (“Prime”), from its members pursuant to the terms and conditions of a stock purchase
agreement entered into among the Prime members and us on such date. Prime is a New Jersey-based transportation company with a
focus on deliveries for on-line retailers to customers in New York, New Jersey and Pennsylvania.
On
July 16, 2018, we filed with the Secretary of State of the State of Nevada a certificate of amendment to our amended and
restated articles of incorporation to (i) change the name of our company from PetroTerra Corp. to Transportation and
Logistics Systems, Inc., (ii) authorize an increase of the number of our authorized shares of preferred stock, par
value $0.001 per share, to 10,000,000 shares and (iii) effect a 1-for-250 reverse stock split of our outstanding shares of
common stock. The certificate of amendment became effective on July 17, 2018. The corporate name change, increase of
authorized shares of preferred stock and reverse stock split were previously approved by the sole director and the holders of
a majority of the outstanding shares of our common stock. The corporate name change and the Reverse stock split were deemed
effective at the open of business on July 18, 2018. All share and per share data in our consolidated financial statements
included in this prospectus have been retroactively restated to reflect the effect of the recapitalization.
On
July 24, 2018, we formed Shypdirect LLC (“Shypdirect”), a company organized under the laws of New Jersey. Shypdirect
is a transportation company with a focus on tractor trailer and box truck deliveries of product on the east coast of the United
States from one distributor’s warehouse to another warehouse or from a distributor’s warehouse to the post office.
On
May 1, 2019, we entered into a share exchange agreement with Save on Transport and Steven Yariv, our former Chief Executive Officer
and director and the Chief Executive Officer of Save on Transport at such time, pursuant to which we sold all of the capital stock
of Save on Transport to Mr. Yariv in exchange for Mr. Yariv conveying 1,000,000 shares of our common stock to our company, and
granted to certain employees of Save on Transport an aggregate of 80,000 stock purchase options . Mr. Yariv ceased to be an officer
or director of our company on April 16, 2019, effective with the filing with the SEC of our Annual Report on Form 10-K for the
fiscal year ended December 31, 2018. Pursuant to Accounting Standard Codification (“ASC”) 205-20-45, the financial
statement in which net income or loss of a business entity is reported shall report the results of operations of the discontinued
operation in the period in which a discontinued operation either has been disposed of or is classified as held for sale. Accordingly,
we reflect the operations of Save on Transport as a discontinued operations beginning in the second quarter of 2019, the period
in which we disposed of Save on Transport, and retroactively for all prior periods presented.
The
following discussion highlights the results of our operations and the principal factors that have affected our consolidated financial
condition, as well as our liquidity and capital resources, for the periods described, and provides information that management
believes is relevant for an assessment and understanding of our consolidated financial condition and results of operations at
the dates and for the periods presented herein. The following discussion and analysis is based on the consolidated financial statements
contained elsewhere in this prospectus, 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.
Basis
of Presentation
The
consolidated financial statements for the years ended December 31, 2018 and 2017 include a summary of our significant accounting
policies and should be read in conjunction with the discussion below.
Results
of Operations
Our
consolidated financial statements have been prepared assuming that we will continue as a going concern and, accordingly, do not
include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary
should we be unable to continue our operation.
We
expect we will require additional capital to meet our long-term operating requirements. We expect to raise additional capital
through, among other things, the sale of equity or debt securities.
For
the six months ended June 30, 2019 compared with the six months ended June 30, 2018
The
following table sets forth our revenues, expenses and net loss for the six-month periods ended June 30, 2019 and 2018. The financial
information set forth below is derived from our condensed consolidated financial statements included elsewhere in this prospectus.
|
|
For
the Six Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Revenues
|
|
$
|
13,904,619
|
|
|
$
|
626,820
|
|
Cost of revenues
|
|
|
13,072,675
|
|
|
|
535,945
|
|
Gross Profit
|
|
|
831,944
|
|
|
|
90,875
|
|
Operating expenses
|
|
|
12,293,659
|
|
|
|
4,727,558
|
|
Loss from operations
|
|
|
(11,461,715
|
)
|
|
|
(4,636,683
|
)
|
Other (expenses) income
|
|
|
(14,466,040
|
)
|
|
|
(9,896,907
|
)
|
(loss) income from discontinued operations
|
|
|
(681,426
|
)
|
|
|
83,601
|
|
Net loss
|
|
$
|
(26,609,181
|
)
|
|
$
|
(14,449,989
|
)
|
Revenues.
For the six months ended June 30, 2019, our revenues from continuing operations were $13,904,619 as compared to $626,820 for the
six months ended June 30, 2018, an increase of $13,277,799. This increase was a result of our acquisition of Prime on June 18,
2018. Revenue of $12,909,864 was attributable to the business of Prime, which focuses on deliveries for on-line retailers in New
York, New Jersey and Pennsylvania. Additionally, during the six months ended June 30, 2019, revenue related to our newly-formed
subsidiary, Shypdirect, amounted to $994,755.
On
May 1, 2019, we entered into a Share Exchange Agreement with Save on Transport and our former Chief Executive Officer and director,
Steven Yariv, whereby we returned all of the capital stock of Save on Transport to Steven Yariv in exchange for Mr. Yariv conveying
1,000,000 shares of our common stock back to us. Accordingly, for all periods presented, all revenues from Save on Transport have
been reflected as part of discontinued operations and we will not reflect any revenues from Save on Transport in future periods.
Cost
of Revenue. For the six months ended June 30, 2019, our cost of revenues from continuing operations were $13,072,675 compared
to $535,945 for the six months ended June 30, 2018, an increase of $12,536,730. This increase was a direct result of our acquisition
of Prime on June 18, 2018. Cost of revenue of $11,798,743 was attributable to the business of Prime. During the six months ended
June 30, 2019, cost of revenue related to our newly-formed subsidiary, Shypdirect, amounted to $1,273,932. Cost of revenues relating
to our Prime and Shypdirect segments consists of truck and van rental fees, insurance, gas, maintenance, and compensation and
related benefits.
Gross
Profit. For the six months ended June 30, 2019, our gross profit was $831,944, or 6.0% of revenue, as compared to $90,875,
or 14.5% of revenue, for the six months ended June 30, 2018, an increase of $741,069. The increase in gross profit primarily resulted
from the acquisition of Prime on June 18, 2018. The gross profit for the six months ended June 30, 2019 represented six months
of operating activity for Prime whereas the gross profit for the six months ended June 30, 2018 only represented only 12 days
of operating activity of Prime. For the six months ended June 30, 2019, gross profit and gross profit percentage for Prime amounted
to $1,111,121, or 8.6%. For the six months ended June 30, 2019, gross loss and gross loss percentage for Shypdirect amounted to
$(279,177), or (28.1)%, which was primarily attributable to higher payroll, vehicle rental, insurance and other costs incurred
in ramping up the Shypdirect business.
Operating
Expenses. For the six months ended June 30, 2019, total operating expenses amounted to $12,293,659 as compared to $4,727,558
for the six months ended June 30, 2018, an increase of $7,566,101. For the six months ended June 30, 2019 and 2018, operating
expenses consisted of the following:
|
|
For
the Six Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Compensation and related benefits
|
|
$
|
7,717,214
|
|
|
$
|
3,149,776
|
|
Legal and professional Fees
|
|
|
1,071,082
|
|
|
|
1,373,993
|
|
Rent
|
|
|
185,237
|
|
|
|
—
|
|
General and administrative expenses
|
|
|
1,595,535
|
|
|
|
203,789
|
|
Impairment loss
|
|
|
1,724,591
|
|
|
|
—
|
|
Total Operating Expense
|
|
$
|
12,293,659
|
|
|
$
|
4,727,558
|
|
Compensation
and related benefits. For the six months ended June 30, 2019, compensation and related benefits amounted to $7,717,214 compared
to $3,149,776 for the six months ended June 30, 2018, an increase of $4,567,438. Compensation and related benefits for the six
months ended June 30, 2019 and 2018 included stock-based compensation of $4,950,808 and $3,090,000, respectively, from the granting
of shares of our common stock to employees, our former chief executive officer, and our new chief executive officer for services
rendered. Additionally, during the six months ended June 30, 2019, compensation and related benefits attributed to the business
of Prime, which was acquired on June 18, 2018, were $2,026,718 and compensation and related benefits attributed to the business
of Shypdirect was $681,527.
Legal
and professional fees. For the six months ended June 30, 2019, legal and professional fees were $1,071,082 as compared to
$1,373,993 for the six months ended June 30, 2018, a decrease of $302,911. During the six months ended June 30, 2019, we incurred
stock-based consulting fees of $265,500 from the issuance of our common shares to consultants for business development services
rendered. During the six months ended June 30, 2018, we incurred stock-based consulting fees of $1,236,000 from the issuance of
our common shares to consultants for business development services rendered.
Rent
expense. For the six months ended June 30, 2019, rent expense was $185,237 compared $-0- for the six months ended June 30,
2018. This increase was attributable to an expansion in office, warehouse and parking spaces pursuant to short and long-term operating
leases related to our Prime and Shypdirect subsidiaries.
General
and administrative expenses. General and administrative expenses include office expenses and supplies, travel and entertainment,
depreciation and amortization, and other expenses.
For
the six months ended June 30, 2019, general and administrative expenses were $1,595,535 as compared to $203,789 for the six months
ended June 30, 2018, an increase of $1,391,746. The increase in operating expenses compared to the prior year period is due to
the acquisition of Prime, which was acquired on June 18, 2018. For the six months ended June 30, 2019, general and administrative
expenses included a full six months of operating activities. For the six months ended June 30, 2018, general and administrative
expenses included only 12 days of operating activity. General and administrative expenses attributed to the business of Prime
and Shypdirect were $1,474,342 and $111,980, respectively, which includes depreciation and amortization expense of $617,632 and
$0, respectively.
Impairment
expense. During the six months ended June 30, 2019, management tested the intangible asset for impairment. Based on our analysis,
we recorded intangible asset impairment expense of $1,724,591 in the unaudited consolidated statement of operations for the six
months ended June 30, 2019. No impairment expense was recorded during the six months ended June 30, 2018.
Loss
from Operations. For the six months ended June 30, 2019, loss from operations amounted to $11,461,715 as compared to $4,636,683
for the six months ended June 30, 2018. This represented an increase in loss from operations of $6,825,032 for the six months
ended June 30, 2019 compared to the same period of 2018.
Other
(Expenses) Income. Total other (expenses) income include interest expense, derivative (expense) income, loan fees, and
a gain on debt extinguishment. For the six months ended June 30, 2019 and 2018, other expenses (income) consisted of the following:
|
|
For
the Six Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Interest expense
|
|
$
|
(2,597,443
|
)
|
|
$
|
(391,555
|
)
|
Interest expense – related party
|
|
|
(147,639
|
)
|
|
|
-
|
|
Loan fees
|
|
|
(601,121
|
)
|
|
|
-
|
|
Gain on extinguishment of debt
|
|
|
43,917,768
|
)
|
|
|
-
|
|
Derivative (expense) income
|
|
|
(55,037,605
|
)
|
|
|
(9,505,352
|
)
|
Total Other (Expenses) Income
|
|
$
|
(14,466,040
|
)
|
|
$
|
(9,896,907
|
)
|
For
the six months ended June 30, 2019 and 2018, aggregate interest expense was $2,745,082 and $243,302, respectively. The increase
in interest expense for both periods resulted from an increase in interest-bearing loans and an increase in the amortization in
debt discount.
For
the six months ended June 30, 2019 and 2018, derivative expense was $55,037,605 and $9,505,352, respectively, an increase of $45,532,253.
For the six months ended June 30, 2019, we adjusted our derivative liabilities to fair value and recorded derivative expense.
This significant change was attributable to a higher stock price and having more financials instruments treated as derivatives,
including embedded conversion options and warrants, as compared to the comparable previous period.
For
the six months ended June 30, 2019 and 2018, loan fees were $601,121 and $-0-, respectively. In connection with previous promissory
notes payable, on June 11, 2019, we issued 55,000 warrants to purchase 55,000 shares of common at an exercise price of $1.00 per
share. On June 11, 2019, we calculated the fair value of these warrants of $601,121, which was expensed and included in loan fees
on our condensed consolidated statement of operations.
For
the six months ended June 30, 2019, gain on extinguishment of debt was $43,917,768. On April 9, 2019, in connections with certain
debt modifications, debt repayments, share issuances and warrants cancellations, we recorded a gain on debt extinguishment. During
the six months ended June 30,2018, we did not record any gain on debt extinguishment.
Discontinued
Operations. On May 1, 2019, we entered into a share exchange agreement with Save on Transport and Steven Yariv, whereby
we returned all of the capital stock of Save on Transport to Steven Yariv in exchange for Mr. Yariv conveying 1,000,000 shares
of our common stock back to our company. In addition, we granted an aggregate of 80,000 options to certain employees of Save on
Transport. Accordingly, we reflected Save on Transport as a discontinued operations beginning in the second quarter of 2019, the
period that Save on Transport was disposed of and retroactively for all periods presented in our condensed consolidated financial
statements included in this prospectus. The business of Save on Transport was considered discontinued operations because: (a)
the operations and cash flows of Save on Transport were eliminated from our operations; and (b) we had no interest in the divested
operations. For the six months ended June 30, 2019 and 2018, (loss) income from discontinued operations amounted to $(681,426)
and $83,601, respectively. During the six months ended June 30, 2019, we recorded stock-based option expense related to the 80,000
options granted to Save on Transport employees of $700,816.
Net
Loss. Due to the factors discussed above, for six months ended June 30, 2019 and 2018, net loss amounted to $26,609,181,
or $(3.51) per basic and diluted common share, and $14,449,989, or $(17.87) per basic and diluted common share, respectively.
For
the year ended December 31, 2018 compared with the year ended December 31, 2017
The
following table sets forth our revenues, expenses and net income (loss) for the year ended December 31, 2018 and 2017. The financial
information below is derived from our consolidated financial statements included in this prospectus.
|
|
For
the Year Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
$
|
13,620,160
|
|
|
$
|
-
|
|
Cost of revenues
|
|
|
12,785,425
|
|
|
|
-
|
|
Gross profit
|
|
|
834,735
|
|
|
|
-
|
|
Operating expenses
|
|
|
7,903,885
|
|
|
|
200,600
|
|
Loss from operations
|
|
|
(7,069,150
|
)
|
|
|
(200,600
|
)
|
Other expenses
|
|
|
(7,509,386
|
)
|
|
|
(611,768
|
)
|
Loss from continuing operations
|
|
|
(14,578,536
|
)
|
|
|
(812,368
|
)
|
Income from discontinued operations
|
|
|
100,379
|
|
|
|
67,563
|
|
Net loss
|
|
$
|
(14,478,157
|
)
|
|
$
|
(744,805
|
)
|
Revenues.
For the year ended December 31, 2018, our revenues were $13,620,160 as compared to $0 for the year ended December
31, 2017, an increase of $13,620,160. This increase was a result of our acquisition of Prime on June 18, 2018. Revenue
was attributable to the business of Prime which focuses on deliveries for on-line retailers in New York, New Jersey and Pennsylvania.
In future periods, we expect the revenue generated by Prime to be a material part of our total revenues. During the year
ended December 31, 2018, revenue related to our newly formed subsidiary, Shypdirect amounted to $208,950.
Cost of Revenue.
For the year ended December 31, 2018, our cost of revenues were $12,785,425 compared to $0 for the year ended December
31, 2017, an increase of $12,785,425. This increase was a direct result of our acquisition of Prime on June 18, 2018. Cost
of revenue of $12,456,635 was attributable to the business of Prime. In future periods, we expect the cost of revenue generated
by Prime to be a material part of our total cost of revenues. Cost of revenues relating to our Prime segment consists of truck
and van rental fees, insurance, gas, maintenance, and compensation and related benefits. During the year ended December
31, 2018, cost of revenue related to our newly formed subsidiary, Shypdirect amounted to $328,790.
Gross Profit.
For the year ended December 31, 2018, our gross profit was $834,735, or 6.1% of revenue, as compared to $0,
for the year ended December 31, 2017, an increase of $834,735. This increase in gross profit percentage related
to the effect of the acquisition of Prime on June 18, 2018. For the period from June 19, 2018 to December 31, 2018, gross
profit and gross profit percentage for Prime amounted to $954,575, or 7.1% compared to gross loss and gross loss
percentage for Shypdirect of $(119,840), or (57.4)%.
Operating Expenses.
For the year ended December 31, 2018, total operating expenses amounted to $7,903,885 as compared to $200,600 for
the year ended December 31, 2017, an increase of $7,703,285. For the year ended December 31, 2018 and 2017, operating expenses
consisted of the following:
|
|
For
the Year Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Compensation and related benefits
|
|
$
|
4,531,798
|
|
|
$
|
-
|
|
Legal and professional Fees
|
|
|
1,993,130
|
|
|
|
200,600
|
|
Rent
|
|
|
23,100
|
|
|
|
-
|
|
General and administrative expenses
|
|
|
1,355,857
|
|
|
|
-
|
|
Total Operating Expense
|
|
$
|
7,903,885
|
|
|
$
|
200,600
|
|
Compensation and related
benefits. For the year ended December 31, 2018, compensation and related benefits amounted to $4,531,798 compared to
$0 for the year ended December 31, 2017. Compensation and related benefits for 2018 included stock-based compensation of
$3,090,000 from the granting of 1,500,000 shares of our common stock to our chief executive officer for services rendered. Additionally,
compensation and related benefits attributed to the business of Prime, which was acquired on June 18, 2018, were $1,385,620, and
compensation and related benefits attributed to the business of Shypdirect was $56,178.
Legal
and professional fees. For the year ended December 31, 2018, legal and professional fees amounted to $1,993,130 as compared
to $200,600 for the year ended December 31, 2017, an increase of $1,792,530. During the year ended December 31, 2018, we incurred
stock-based consulting fees of $1,236,000 from issuance of our shares to consultants for business development services rendered.
Additionally, legal and professional fees attributed to the business of Prime, which was acquired on June 18, 2018, were $478,589.
General and administrative
expenses. General and administrative expenses include office expenses and supplies, travel and entertainment, depreciation
and amortization, and other expenses. For the year ended December 31, 2018, general and administrative expenses amounted to $1,355,857
as compared to $0 for the year ended December 31, 2017, an increase of $1,355,857. The increase in operating
expenses compared to the prior year period is due to the Company’s organic growth and growth through the acquisition of
Prime, including the expansion of office space. Additionally, general and administrative expenses attributed to the business of
Prime, which was acquired on June 18, 2018, were $1,340,029, which includes depreciation and amortization expense of $664,350.
Loss from Operations. For the year
ended December 31, 2018, loss from operations amounted to $7,069,150 as compared to $200,600 for the year ended
December 31, 2017, an increase of $6,868,550.
Other
Expenses. Total other expenses include interest expense, derivative expense, and a bargain purchase gain. For the year
ended December 31, 2018 and 2017, other expenses consisted of the following:
|
|
For
the Year Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Interest expense
|
|
$
|
1,720,075
|
|
|
$
|
312,416
|
|
Interest expense – related party
|
|
|
193,617
|
|
|
|
-
|
|
Gain on extinguishment of debt
|
|
|
-
|
|
|
|
(10,169
|
)
|
Bargain purchase gain
|
|
|
(203,588
|
)
|
|
|
-
|
|
Derivative expense
|
|
|
5,799,282
|
|
|
|
309,521
|
|
Total Other Expense
|
|
$
|
7,509,386
|
|
|
$
|
611,768
|
|
For
the years ended December 31, 2018 and 2017, interest expense was $1,720,075 and $312,416, respectively. The increase in interest
expense resulted from an increase in interest-bearing loans and an increase in the amortization in debt discount.
For
the years ended December 31, 2018 and 2017, derivative expense was $5,799,282 and $309,521, respectively, an increase of $5,489,761.
In connection with the issuance of a certain note, warrant and placement warrant, during 2018, the initial measurement
date, the fair values of the embedded conversion option derivative and warrant derivatives of $8,326,852 was recorded as derivative
liabilities and was allocated as a debt discount of $1,487,787, with the remainder of $6,839,065 charged to current period operations
as initial derivative expense. Additionally, for the year ended December 31, 2018, we adjusted our derivative liabilities to fair
value and recorded a derivative gain of $1,039,783.
In
connection with the acquisition of Prime, for the year ended December 31, 2018, we recognized $203,588 of bargain purchase gain,
which represented the amount by which the acquisition-date fair value of the net assets acquired exceeded the fair
value of the consideration paid.
Loss From
Continuing Operations. Due to factors discussed above, for the years ended December 31, 2018 and 2017, loss from
continuing operations amounted to $14,578,536, or $(5.79) per basic and diluted common share, and $812,368, or $(1.50) per
basic and diluted common share, respectively.
Income
From Discontinued Operations. On May 1,
2019, we entered into a Share Exchange Agreement with Save on Transport and Steven Yariv, whereby we returned all of the
stock of Save on Transport to Steven Yariv in exchange for Mr. Yariv conveying 1,000,000 shares of our common stock back to
our company. In addition, we granted an aggregate of 80,000 options to certain employees of Save on Transport. Accordingly,
we reflected Save on Transport as a discontinued operations beginning in the second quarter of 2019, the period that Save on
Transport was disposed of and retroactively for all periods presented in the accompanying condensed consolidated financial
statements. The business of Save on Transport are considered discontinued operations because: (a) the operations and cash
flows of Save on Transport were eliminated from our operations; and (b) we have no interest in the divested operations. For
the years ended December 31, 2018 and 2017, income from discontinued operations amounted to $100,379 and $67,563,
respectively.
Net
Loss. Due to factors discussed above, for the years ended December 31, 2018 and 2017, net loss amounted to $14,478,157,
or $(5.75) per basic and diluted common share, and $744,805, or $(1.37) per basic and diluted common share, respectively.
Liquidity
and Capital Resources
Liquidity
is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise
operate on an ongoing basis. At June 30, 2019 and December 31, 2018, we had a cash balance of $120,269 and $296,196, respectively,
and our working capital deficit was $11,697,417 and $12,923,440, respectively.
We
reported a net decrease in cash for the six months ended June 30, 2019 of $175,927 and a net increase in cash for the year ended
December 31, 2018 of $189,620.
Indebtedness
At
June 30, 2019, we had outstanding indebtedness in the aggregate amount of $10.8 million, consisting of convertible
notes and notes payable in the aggregate principal amount of $7.2 million, convertible notes and loans from
related parties in the aggregate principal amount of $3.0 million and office lease liabilities of $0.6 million. Descriptions
of the terms of our outstanding indebtedness at June 30, 2019 are set forth in Notes 7 and 8 to our
unaudited consolidated financial statements for the six-month period ended June 30, 2019 included elsewhere in
this prospectus.
On
August 30, 2019, we entered into a securities purchase agreement with seven investors pursuant to which we sold for an aggregate
purchase price of $2,222,854 (i) $2,469,840 aggregate principal amount of our original issue discount senior secured convertible
notes and (ii) five-year warrants to purchase up to an aggregate of 987,940 shares of our common stock for a purchase price of
$3.50 per share, subject to adjustment. The notes mature on November 30, 2020 and bear interest at the rate of 10% per annum or
18% per annum during the continuance of an event of default (as defined). Commencing on December 30, 2019, we are obligated to
make monthly payments of principal and interest based upon a 12-month amortization schedule, provided that the final payment shall
be made on the maturity date. Monthly payments of principal and interest shall be made in cash unless a noteholder requests its
payment to be made in shares of our common stock, in which event the payment to such noteholder will be made in shares valued
at 80% of the lowest volume weighted average price per share of our common stock during the five-trading-day period preceding
the date of the scheduled payment. The notes also are convertible into shares of our common stock at any time at the option of
the holder at a conversion price of $2.50 per share, subject to adjustment, or, during the continuation of any event of default
(as defined), at a conversion price equal to the lower of (i) $2.50 per share or (ii) 70% of the second lowest closing price of
our common stock during the 20-consecutive-trading-day period ending on the day prior to delivery of the applicable notice of
conversion. The notes are secured by a pledge of substantially all of our assets, including the shares of capital stock of our
subsidiaries.
The
securities purchase agreement contains generally customary affirmative and negative covenants, including, but not limited to,
our obligations to register for resale the shares of our common stock issuable upon payment or conversion of the notes or exercise
of the warrants, a right of refusal for the investors to participate in our future debt or equity offerings, restrictions on future
stock splits or combinations of our common stock, subject to certain exceptions, mandatory prepayments with a portion of the proceeds
of any public offerings of our common stock, and restrictions on our ability to register shares of our common stock.
Of
the $2.2 million of net proceeds we received from the sale of securities under the securities purchase agreement, approximately
$1.6 million was applied to the repayment of notes payable.
Proceeds
from Equity Issuances
On
August 30, 2019, we entered into a securities purchase agreement with certain investors pursuant to which we sold for an aggregate
purchase price of $1,462,500 a total of 585,000 units, each unit comprised of one share of our common stock and
a five-year warrant to purchase one share of common stock for a purchase price of $2.50 per share, subject to adjustment.
Cash
Flows
The
following summary of our cash flows for the periods indicated has been derived from our historical consolidated financial statements
included elsewhere in this prospectus.
|
|
Six months
ended June 30,
|
|
|
Year ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2018
|
|
|
2017
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Net cash used in operations
|
|
$
|
(3,115,838
|
)
|
|
$
|
(315,066
|
)
|
|
$
|
(283,678
|
)
|
|
$
|
(152,185
|
)
|
Net cash provided by (used in) investing activities
|
|
|
24,119
|
|
|
|
(450,976
|
)
|
|
|
(932,802
|
)
|
|
|
(26,500
|
)
|
Net cash provided by financing activities
|
|
|
2,915,792
|
|
|
|
1,344,055
|
|
|
|
1,406,100
|
|
|
|
273,536
|
|
Operating
activities. Net cash flows used in operating activities for the six months ended June 30, 2019 amounted to $3,115,838.
During the six months ended June 30, 2019, net cash used in operating activities was primarily attributable to a net loss of $26,609,181
adjusted for the add back (reduction) of non-cash items such as depreciation and amortization expense of $617,632, derivative
expense of $55,037,605, amortization of debt discount of $2,336,963, stock-based compensation of $5,917,124, a gain on debt extinguishment
of $(44,031,110), impairment expense of $1,724,591, non-cash loan fees of $601,121 and changes in operating assets and liabilities
such as an increase in accounts receivable of $486,226, offset by an increase in accounts payable and accrued expenses of $1,420,925.
Net
cash flows used in operating activities for the six months ended June 30, 2018 amounted to $315,066. During the six months ended
June 30, 2018, the net cash used in operations was primarily attributable to net loss of $14,449,989 adjusted for the add back
(reduction) of non-cash items such as depreciation and amortization expense of $173,629, derivative expense of $9,505,352, amortization
of debt discount of $332,364, stock-based compensation of $4,326,000 and changes in operating assets and liabilities such as an
increase in accounts receivable of $325,551 and a decrease in in accounts payable and accrued expenses of $130,902.
Net
cash flows used in operating activities for the year ended December 31, 2018 amounted to $283,678. During the year ended December
31, 2018, net cash used in operating activities was primarily attributable to a net loss of $14,478,157 adjusted for the add back
(reduction) of non-cash items such as depreciation and amortization expense of $664,350, derivative expense of $5,799,282, amortization
of debt discount of $1,566,847, loss of disposal of property and equipment of $14,816, stock-based compensation of $4,326,000,
and a bargain purchase gain of $(203,588), and changes in operating assets and liabilities such as a decrease in accounts receivable
of $789,904, an increase in accounts payable and accrued expenses of $668,416, an increase in liabilities of discontinued
operations of $250,169, an increase in insurance payable of $587,945, and an increase in accrued compensation and related
benefits of $182,229, offset by an increase in prepaid expenses and other current assets of $365,810 and an increase
in assets of discontinued operations of $81,081. Net cash flows used in operating activities for the year ended December 31,
2017 amounted to $152,185. During the year ended December 31, 2017, net cash used in operating activities was primarily attributable
to a net loss of $744,805 adjusted for the add back of non-cash items such as derivative expense of $309,521 and amortization
of debt discount of $277,951, and changes in operating assets and liabilities such as an increase in assets of discontinued
operations of $253,487 and an increase in liabilities of discontinued operations of $231,004.
Investing
activities. Net cash provided by investing activities for the six months ended June 30, 2019 amounted to $24,119 and consisted
of cash received from the disposal of trucks and van of $81,000 offset by cash paid for the purchase of property and equipment
of $51,256 and a reduction of cash related to the disposal of Save on Transport of $5,625. Net cash used in investing activities
for the six months ended June 30, 2018 amounted to $450,976 and consisted of cash received in acquisition of $38,198 offset by
cash paid for the acquisition of Prime of $489,174.
Net
cash used in investing activities for the year ended December 31, 2018 amounted to $932,802 and consisted of cash received in
the acquisition of $38,198 offset by cash paid for the acquisition of $489,174 and the purchase of property and equipment of $481,826.
Net cash flows used in investing activities for the year ended December 31, 2017 amounted to $26,500 and was comprised of a $10,000
cash escrow acquired on March 30, 2017 in connection with the reverse merger, to be held for a six month period to pay unpaid
liabilities in conjunction with the Reverse Merger offset by an investment in a license– discontinued operations
of $36,500.
Financing
activities. For the six months ended June 30, 2019, net cash provided by financing activities totaled $2,915,792. For
the six months ended June 30, 2019, we received proceeds from related party convertible notes of $2,500,000, proceeds from notes
payable of $6,631,020 and proceeds from related party notes of $255,000 offset by the repayment of convertible notes of $273,579,
the repayment of related party notes of $495,000, and the repayment of notes payable of $5,697,856.
For
the six months ended June 30, 2018, net cash provided by financing activities totaled $1,344,055. For the six months ended June
30, 2018, we received proceeds from related party convertible notes of $2,497,503 and proceeds from related party notes of $467,672
offset by the repayment of notes payable of $611,406 and debt issue costs of $1,009,714.
For
the year ended December 31, 2018 and 2017, net cash provided by financing activities totaled $1,406,100 and $273,536, respectively.
For the year ended December 31, 2018, we received gross proceeds from convertible notes of $2,497,503, proceeds from notes payable
of $2,409,898, proceeds from related party notes if $1,050,000, and net cash proceeds from related party advances of $265,768
offset by the repayment of related party notes of $930,000, the payment of debt issue costs of $1,009,714 and the repayment of
notes payable of $2,877,355. For the year ended December 31, 2017, we received net proceeds from convertible notes of $280,000
and we repaid notes of $6,464.
Going
Concern Consideration
Our
accompanying unaudited condensed consolidated financial statements for the six months ended June 30, 2019 have been prepared
on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities and commitments in the
normal course of business. As reflected in the accompanying unaudited condensed consolidated financial statements, we had a net
loss of $26,609,181 for the six months ended June 30, 2019. The net cash used in operations was $3,115,838 for the six months
ended June 30, 2019. Additionally, we had an accumulated deficit, shareholders’ deficit, and a working capital deficit of
$41,379,031, $9,248,833 and $11,697,417, respectively, at June 30, 2019. Furthermore, as of June 30, 2019, we failed to make required
payments of principal and interest on certain of our convertible debt instruments and defaulted on other provisions in these notes.
On April 9, 2019, we entered into agreements with these lenders that modified these notes. It is management’s opinion that
these factors raise substantial doubt about our ability to continue as a going concern for a period of 12 months from June 30,
2019. Management cannot provide assurance that we will ultimately achieve profitable operations or become cash flow positive or
raise additional debt and/or equity capital. We are seeking to raise capital through additional debt and/or equity financings
to fund our operations in the future. Although we have historically raised capital from sales of common shares and from the issuance
of convertible promissory notes, there is no assurance that we will be able to continue to do so.
If
we are unable to raise additional capital or secure additional lending in the near future, management expects that we will need
to curtail our operations. Our consolidated financial statements included elsewhere in this prospectus 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 we be unable to continue as a going concern.
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.
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, assumptions used in assessing impairment of long-lived
assets, estimates of current and deferred income taxes and deferred tax valuation allowances, the fair value of non-cash equity
transactions, the valuation of derivative liabilities, and the fair value of assets acquired and liabilities assumed in the business
acquisition.
We
have identified the accounting policies below as critical to our business operation:
Accounts
receivable. Accounts receivable are presented net of an allowance for doubtful accounts. We maintain allowances for doubtful
accounts for estimated losses. We review the accounts receivable on a periodic basis and make general and specific allowances
when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable
balances, we consider 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.
Derivative
Financial Instruments. We have certain financial instruments that are embedded derivatives associated with capital raises.
We evaluate all our financial instruments to determine if those contracts or any potential embedded components of those contracts
qualify as derivatives to be separately accounted for in accordance with ASC 810-10-05-4 and 815-40. This accounting treatment
requires that the carrying amount of any embedded derivatives be recorded at fair value at issuance and marked-to-market at each
balance sheet date. In the event that the fair value is recorded as a liability, as is the case with our company, the change in
the fair value during the period is recorded as either other income or expense. Upon conversion, exercise or repayment, the respective
derivative liability is marked to fair value at the conversion, repayment or exercise date and then the related fair value amount
is reclassified to other income or expense as part of gain or loss on extinguishment.
In
July 2017, FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic
480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features. These amendments simplify the accounting for certain financial instruments with down-round features. The amendments require
companies to disregard the down-round feature when assessing whether the instrument is indexed to its own stock, for purposes
of determining liability or equity classification. The guidance was adopted as of January 1, 2019 and we elected to record the
effect of this adoption retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect
adjustment to the condensed consolidated balance sheet as of the beginning of 2019, the period which the amendment is effective.
In accordance with the guidance presented in ASU 2017-11, the fair value of derivative liabilities associated with certain convertible
notes as of December 31, 2018 of $838,471 and the offsetting effect of reclassifying such debt to stock-settled debt for which
we recorded a put premium liability of $385,385 was reclassified by means of a cumulative-effect adjustment to opening accumulated
deficit as of January 1, 2019 in the amount of $453,086.
Leases.
In February 2016, the FASB issued ASU 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 updated guidance was
effective for interim and annual periods beginning after December 15, 2018.
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 we 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 we assessed whether the contract is, or contains, a lease. Our 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 right-of-use 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, 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 condensed consolidated statements of operations.
Revenue
recognition and cost of revenue. On January 1, 2018, we adopted ASC 606, Revenue from Contracts with Customers (Topic
606), which supersedes the revenue recognition requirements in Accounting Standards Codification (ASC) Topic 605, Revenue
Recognition. This ASC is based on the principle that revenue is recognized to depict the transfer of goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services. This ASC also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash
flows arising from customer service orders, including significant judgments.
We
recognize revenues for continuing operations and the related direct costs of such revenue, which generally include compensation
and related benefits, gas costs, insurance, parking and tolls, truck rental fees, and maintenance fees, as of the date the freight
is delivered, which is when the performance obligation is satisfied. In accordance with ASC Topic 606, we recognize revenue on
a gross basis. Our payment terms are net seven days from acceptance of delivery. We do not incur incremental costs obtaining service
orders from our customers; however, if we did, because all 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 packages on
behalf of our customers. Primarily, our performance obligations under these service orders correspond to each delivery of packages
that we make under the service agreements. Control of the delivery transfers to the recipient upon delivery. Once this occurs,
we have satisfied our performance obligation and we recognize revenue.
Stock-based
compensation. Stock-based compensation is accounted for based on the requirements of the Share-Based Payment Topic of
ASC 718, which requires recognition in the consolidated financial statements of the cost of employee and director services received
in exchange for an award of equity instruments over the period the employee or director 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 and director
services received in exchange for an award based on the grant-date fair value of the award.
Through
the current reporting period, pursuant to ASC 505-50 – “Equity-Based Payments to Non-Employees”, all
share-based payments to non-employees, including grants of stock options, were recognized in the consolidated financial statements
as compensation expense over the service period of the consulting arrangement or until performance conditions are expected to
be met. Using a Black-Scholes valuation model, we periodically reassessed the fair value of non-employee options until service
conditions are met, which generally aligns with the vesting period of the options, and we adjust the expense recognized in the
consolidated financial statements accordingly. In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based
Payment Accounting, which simplifies several aspects of the accounting for nonemployee share-based payment transactions by
expanding the scope of the stock-based compensation guidance in ASC 718 to include share-based payment transactions for acquiring
goods and services from non-employees. ASU No. 2018-07 became effective for annual periods beginning after December 15, 2018,
including interim periods within those annual periods. Early adoption was permitted, but entities could not adopt prior to adopting
the new revenue recognition guidance in ASC 606. We early adopted ASU No. 2018-07 in the second quarter of 2018 and there was
no cumulative effect of adoption.
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 our unaudited
consolidated financial statements for the six-month periods ended June 30, 2019 and 2018 included elsewhere in this prospectus.
BUSINESS
Overview
We
are a provider of a wide range of transportation and logistics services involving the movement of goods and e-commerce fulfillment.
Fast, dependable order fulfillment and shipping is critical to the success of an online business. We focus primarily on the transportation
of packages that are ultimately to be delivered to the business or retail consumer. Our transportation services typically involve
the transport of goods from the manufacturer or fulfillment center to the delivery station, from the fulfillment center to the
post office or from the delivery station to the end user or retail customer (known as the “last mile” deliveries).
We also offer an increasing number of logistics services, including the management and transportation of retail returns, the removal,
transportation and disposition of shipping pallets and storage solutions for manufacturers with limited storage facilities, to
help our business customers manage their goods efficiently through their supply chain.
We
currently operate through our two subsidiaries, Prime EFS, LLC, a New Jersey-based transportation company with a focus on deliveries
to the retail consumer for on-line retailers in New York, New Jersey and Pennsylvania (“Prime”), and Shypdirect LLC,
a transportation company with a focus on tractor trailer and box truck deliveries of product on the east coast of the United States
from one distributor’s warehouse to another warehouse or from a distributor’s warehouse to the post office (“Shypdirect”),
which are known as line-haul and “mid-mile” deliveries.
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, own or leases its own transportation equipment and employs its own drivers. At June 30, 2019, we owned or leased
an aggregate of 277 trucks or delivery vehicles and employed 428 drivers who worked in shifts that allowed us to utilize most
of our transportation equipment on a 24/7 basis. We also utilize the services of independent contractors to provide our delivery
services. At June 30, 2019, two independent contractors provided services to us on a full-time basis. The independent contractors
are responsible for paying for their own vehicles, equipment, fuel and operating expenses. Point-to-point delivery refers to a
transportation system in which passengers or goods travel directly to a destination, rather than going through a central hub.
This differs from the spoke-hub distribution paradigm in which the passengers or goods go to a central location in order to reach
their ultimate destination. Our business is referred to as “point-to-point” delivery because our drivers and independent
contractors are dispatched directly to the warehouse or retailer, as the case may be, and they then travel directly to the delivery
point, rather than returning to a central corporate office.
Corporate
History
We
were incorporated under the name “PetroTerra Corp.” in the State of Nevada on July 25, 2008. Prior to March 2017,
we were an independent oil or gas exploration and development company focused on the acquisition or lease of properties that potentially
contained extractable oil or gas. However, at that time, we had not generated any revenues and, due to a decline of the oil and
gas markets, elected to seek other business opportunities.
On
March 30, 2017, we entered into a Share Exchange Agreement, dated as of the same date, with Save on Transport Inc., a Florida-based
non-asset provider of integrated transportation management solutions, including brokerage and logistics services related to the
transportation of automobiles and other freight (“Save on Transport”), pursuant to we acquired Save on Transport as
a wholly-owned subsidiary.
Our
acquisition of Save on Transport was treated as a reverse merger and recapitalization of Save on Transport for financial reporting
purposes because the Save on Transport shareholders retained an approximate 80% controlling interest in our consolidated company.
Save on Transport was considered the acquirer for accounting purposes, and our historical financial statements before the acquisition
transaction was replaced with the historical financial statements of Save on Transport before such acquisition. The balance sheets
at their historical cost basis of both entities were combined at the acquisition date and the results of operations from the acquisition
date forward included the historical results of Save on Transport and our combined results of operations from the acquisition
date forward.
On
June 18, 2018, we completed the acquisition of 100% of the issued and outstanding membership interests of Prime from its members,
and on July 24, 2019, we formed Shypdirect. Prime was organized in, and has been engaged in its current line of business since,
July 2016.
On
May 1, 2019, we entered into a Share Exchange Agreement with Save on Transport and Steven Yariv, our former Chief Executive Officer
and director and the Chief Executive Officer of Save on Transport at such time, pursuant to which, among other matters, we sold
all of the capital stock of Save on Transport to Mr. Yariv in exchange for Mr. Yariv conveying 1,000,000 shares of our common
stock back to our company, and granted to certain employees of Save on Transport, other than Mr. Yariv, stock options to purchase
an aggregate of 80,000 shares of our common stock.
Our
E-Commerce Fulfillment Solutions
The
rapid growth of e-commerce and the online retailing segment of e-commerce is well documented. According to a recent internet retailer
report of Digital Commence 360, a publisher of research in digital commerce, and U.S. Department of Commerce figures, consumers
spent $517.36 billion online with U.S. merchants in 2018, up 15.0% from $449.88 billion spent the year prior. Total retail sales,
not including the sale of items not normally bought online, such as fuel, automobiles and food at restaurants, increased to $3.628
trillion in 2018, up 3.9% year over year, from $3.490 trillion in 2017. The U.S. Department of Commerce estimates consumers spent
$513.61 billion online in 2018, up 14.2% from 2017, and that total retail sales increased 4.1% to $3.63 trillion. E-commerce represented
a growing share of the retail market in 2018, taking a 14.3% share of total retail sales in 2018, up from 12.9% in 2017 and 11.6%
in 2016. Our largest customer, Amazon.com Inc., accounted for approximately 40.0% of overall U.S. online retail sales in 2018,
and accounted for 43.3% of all 2018 e-commence year-over-year gains in the United States. We believe our technology platform positions
us to provide transportation services and to grow at or faster than the rapidly-growing and evolving e-commerce marketplace.
E-commerce
retail brands have logistics needs that differ from those of traditional businesses. Unlike traditional inventory management,
e-commerce companies need to ship items directly to customers, who expect their orders to arrive on time and as described. We
have built our delivery services to perform effectively in the “on demand” shipping environment that is part of the
e-commerce fulfillment solutions system.
Our
e-commerce fulfillment solutions are primarily the transportation of goods between destination points along the way from the manufacturer
to the customer. We provide delivery services to the end user ( “Last Mile” delivery), principally retail consumers,
including deliveries which require two persons to complete the delivery of heavy or bulky items, as well as “mid-mile”
delivery services between distribution centers and fulfillment centers and line-haul delivery services from the manufacturer to
the distribution center. Our revenues are generated from the fixed price charged for each specific route between a delivery station
to a fulfillment center or from the fulfillment center to the final destination with a fixed price per route.
In
most instances we are paid a fixed fee for transporting products from one designated site to a specified delivery point without
regard to the number of packages being transported. With the ongoing growth of e-commerce, the specific routes between
designated sites is regularly changing (primarily increasing) as the volume of the online retailing segment of e-commerce activity
expands. An integral part of our strategy is to regularly be in contact with our customers to assure that we are anticipating
and planning for the expansion of current routes and the addition of new routes to our service base.
Our
scheduled route system allows us to adjust to the regular changes in which packages are received, sorted, stored, picked, packed,
shipped and housed in fulfillment centers and distribution centers. We are structured to meet the demands of “last-mile”
deliveries and home grocery shopping deliveries. In addition to delivering goods in full truckloads from distribution centers
to fulfillment centers, based on customer requests, we perform unscheduled pickups and deliveries of bulk products. When delivering
packages to a home, we adhere to certain time slots and sometimes make “live deliveries” to ensure the customer is
aware that their package has been delivered. This entails a constantly-refreshed and technologically-modern transportation
management system (TMS).
We
have built a network operations center (“NOC”) in Jersey City, New Jersey that allows us to track the location of
each of our vehicles and address any on road disruptions. Our NOC is designed to grow with our business as we add more vehicles
for additional routes and expand geographically. Presently, we utilize our NOC solely for our own business. We anticipate that
as our revenues grow and the reach and scope of our transportation activities expand (both geographically and within the tristate
area in which we currently operate) that we will generate revenues from services provided via our NOC to other logistics providers.
Our
infrastructure is built to support the e-commerce unique fulfillment requirements of distributing products to millions of homes
instead of hundreds of stores, managing millions of stock keeping units (SKUs) instead of thousands, shipping to homes in parcels
instead of truckloads to stores and transporting between fulfillment centers in addition to distribution centers. Our infrastructure
is aligned with the requirements of the online retailer: Online retailers differ from traditional brick and mortar where customers
visit the premises and the retailer maintains goods on the premises. Online retailers have goods located in multiple locations
(e.g., third party warehouses) and ship items directly to the customer; customers expect their order to arrive on
time and to be the correct quantity and product ordered.
With
our focus on on-time performance, customer satisfaction and challenging growth management opportunities for our employees, we
believe we are one of the fastest growing e-commerce fulfillment services providers in the country. As an early stage company,
we have experienced and anticipate that we will continue to experience the challenges that come from rapid growth in revenues
such as identifying and hiring employees that are aligned with our expectations, securing assets and expanding our administrative
support services for our rapidly growing operations. We believe that our ability to manage our company through this high growth
is a key part of our success, as evidenced by the high-performance ratings we have regularly achieved in our customers’
scoring systems. We expect to expand our revenue base as the traditional brick-and-mortar retailers develop omni-channel
strategies of generating revenues through a combination of physical and online sales.
Our
Competitive Strengths and Strategy
Our
strategy is to be a leader in the transportation industry in providing on-time, high-quality pick-up, transportation and delivery
services. We attribute our growth and success to date to the following competitive strengths.
Market
Knowledge and Understanding. While we have been operating our current business for only a few years, our senior management
has over 40 years of experience in the transportation industry and has broad knowledge in providing transportation services over
the “last mile” as part of the e-commerce fulfillment solutions. These solutions are in high demand and are expected
to continue to grow at a rapid pace. Many of our management employees have e-commerce experience with e-commerce retailers and
understand the dynamics of e-commerce growth, demands and logistics since all or the vast majority of their career has been in
e-commerce businesses. We believe we understand the various segments of the end-to-end solutions required to rapidly and accurately
deliver goods between the various pick-up and delivery points in the e-commerce delivery chain.
Unwavering
Focus on Relationships and Superior Service. We aim to be the premier platform and partner of choice for our customers. We
believe we offer superior services and solutions due to our company-wide commitment to customer service. On behalf of our customers,
we deliver goods from the manufacturer or fulfillment center to the delivery station, and from the delivery station to the U.S.
post office or retail customer (known as the “last mile” deliveries) in a precise, safe and timely manner with complementary
support from our dedicated sales and service teams. Our focus on customer relationships has allowed us to increase our sales to
our largest customer, Amazon.com, which, on an unaudited pro forma basis, assuming our acquisition of Prime had occurred on
January 1, 2017, increased from approximately 5.6 million in 2017 to approximately $17.7 million in 2018 and
from approximately $4.8 million in the first six months of 2018 to approximately $13.9 million in the first six
months of 2019.
Experienced
and Proven Management Team. We believe our management team is among the most experienced in the industry. Our senior management
team brings experience in transportation and logistics, mergers and acquisitions, information technology, e-commerce retailing
and fulfillment, and has an understanding of the cultural nuances of the e-commerce sectors we serve.
We
intend to leverage our competitive strengths to increase shareholder value through the following core strategies.
Build
Upon Strong Customer Relationships to Expand Organically. We have built a strong relationship with Amazon.com that has allowed
us to expand the size of our service area and add higher margin services to our service offerings. For example, due to our focus
on consistent and timely deliveries and our superior safety record, we have increased the number of “last mile” local
routes we serve for Amazon from five routes at December 31, 2017 to over 200 routes at December 31, 2018. In addition, we have
been able to expand the type of transportation services we render to Amaznon.com to include “mid-mile” and line-haul
transportation services in which our recently-formed Shypdirect subsidiary delivers packages from one distribution center
to another or from the distribution center to the U.S. post office. We intend to continue to build on our relationship with Amazon.com
and we are working to build similar relationships with other e-commerce retailers to increase the type and scope of
the transportation and logistics services we offer.
Expand
Our Operations to Other Regions of the U.S. Our e-commerce “last mile” delivery services to retail consumers are
currently provided primarily in New York, New Jersey and Pennsylvania and our e-commerce “mid-mile” delivery services
between customer distribution centers or between such distribution centers and the U.S. post office are currently provided primarily
in the northeastern region of the U.S. As we continue to expand our marketing and customer relationships, we anticipate expanding
our geographic footprint to provide such services, and to capture market share, in other regions of the U.S. by opening our own
operations centers and warehouses, acquiring existing regional transportation and logistics companies in operating in other areas
and partnering with local operators in other regions. We believe the expansion of our business in other regions of the U.S. will
also allow us to expand our relationships with existing customers who operate in those regions.
Pursue
Value-Enhancing Strategic Acquisitions. We intend to pursue strategic acquisitions as a means of adding new markets in the
United States, expanding our transportation and logistics service offerings, adding talented management and operational employees,
expanding and upgrading our technology platform and developing operational best practices. We are currently at various stages
of reviewing several potential acquisition targets and believe we have significant opportunities to grow our business through
our knowledge of our industry and possible acquisition targets.
Enhance
Our Operating Margins. We expect to enhance our operating margins as our business expands through a combination of increased
operational efficiencies, leveraging our existing assets and distribution facilities and increase usage of technology to help
us better plan, execute and monitor the performance of our services and transportation assets. Many of our transportation assets
were initially utilized for a single route per day. As we expand, we have been able to increase utilization through use of assets
on multiple routes or the addition of a second shift per day. In addition, we expect that our operating margins will increase
as we expand our Shypdirect “mid mile” business to business transportation and logistics operations, which generally
have higher margins than our direct to consumer delivery business.
Customers
and Markets
Our
e-commerce retailer delivery services are currently provided primarily in New York, New Jersey and Pennsylvania principally for
one customer, Amazon.com Inc. During the six-month period ended June 30, 2019 and the year ended December 31, 2018, Amazon accounted
for approximately 99.0% and 98.7% of our total sales. As discussed above, we intend to address this concentration risk by expanding
our organic growth through the addition of new customers and through the acquisition of businesses that provide transportation
services for new customer bases.
We
anticipate our customer base will expand and diversify as the business-to-business segment of e-commerce expands, and the traditional
retailers implement e-commerce strategies that expand their sales channels. We anticipate our fulfillment solutions will become
available to other retailers that utilize our principal customers’ expanding transportation and delivery services in which
our system is an integral part.
Delivery
Fleet
As
of June 30, 2019, we operated a vehicle fleet consisting of 15 tractors and 42 26-foot box trucks that were primarily used by
our Shypdirect subsidiary for warehouse to warehouse deliveries and deliveries from the warehouse to the U.S. post office, and
220 vans that were primarily used by our Prime subsidiary for deliveries from the warehouse to the local retail consumer. Substantially
all of such vehicles were rented or leased; however, we expect to commence purchasing additional vehicles shortly as
our financing alternatives for such purchases improve. In leasing or purchasing new vehicles, we consider a number
of factors, including economy, price, the economic environment, technology, warranty terms, manufacturer support, driver comfort
and resale value. We maintain strong relationships with a number of equipment vendors and will lease or purchase additional vehicles
as market conditions dictate. We expect that future acquisitions will also provide a significant increase in our truck and van
fleets.
Information
Technology and Systems
We
continue to invest in information systems and technology to drive our business decisions, enhance customer experience, improve
sales opportunities and create operating efficiencies. We utilize third-party software for financial reporting, equipment management,
customer databases and customer campaign management, including “cloud” back-up. We also utilize leading e-commerce
platforms hosted by third-party providers and an internally-developed proprietary database to accumulate business information.
In addition, we utilize best-in-class integrated systems for payroll and to manage dispatching of vehicles, employees, Department
of Transportation and other regulatory compliance, vehicle maintenance, scheduling, and state and local taxes. We continue to
innovate and optimize our technology systems and expect to continue to make significant investments in our technology and infrastructure.
An
integral part of our operating philosophy is the utilization of technology to support our transportation services and provide
our employees with real time information on the status of our operations. We believe our focus on technology as a support to our
operations allows our employees to focus on performing at high levels for the benefit of our customers.
Each
of our vehicles contain mobile communications devices. By being “always-connected”, we are able to monitor the real
time location, performance and effectiveness of our drivers as well as the operating condition of the vehicle. The advancements
in what is referred to as the telematic space allow us to develop more detailed and actionable solutions in the performance of
our pick-up, transport and deliver operations – all an integral part of our e-commerce fulfilment solutions.
We
regularly collect data, generate automatic reporting and measure that information against key performance indicators such as routes
taken, travel time, destination arrival and departure time. Just as the e-commerce retailer instantaneously and continuously tracks
what has been sold, our vehicles are tracked in parallel with the packages being tracked by our customer. Our NOC is designed
to be scalable and will be expanded in reach and performance capability as our revenues grow and our assets increase in number.
Competition
Transportation
services is highly competitive and composed of fragmented marketplaces, with dozens of companies competing in the geographic region
in which we provide services. We compete on service, reliability, scope and scale of operations, technological capabilities and
price. Our competitors include local, regional and national companies that offer the same services we provide, some of which
with larger customer bases, significantly more resources and more experience than we have. The point-to-point delivery industry
in particular is highly fragmented with a low entry barrier and therefore there are a large number of competitors that range from
international to local in size. Additionally, some of our customers have internal resources that can perform some or all of the
services we offer. Due in part to the fragmented nature of the industry, we must strive daily to retain existing business relationships
and forge new relationships.
The
health of the transportation industry will continue to be a function of domestic economic growth, particularly in the e-commerce
marketplace. We believe that we have positioned the Company to grow with and benefit from the e-commerce expansion. Together with
our scale, technology and company-specific initiatives, we believe that our positioning should keep us growing faster than the
macro environment.
Seasonality
Our
business is affected by seasonality, which historically has resulted in higher sales volumes during July, when our largest customer,
Amazon.com, annually offers its Amazon Prime “sale days”, which have ranged from one or two days to a whole week,
exclusively to its Prime subscribers, and during our calendar year fourth quarter, which ends December 31st. Our gross revenue
was 29% higher in July 2019 than our average monthly gross revenue for the first six months of 2019, and was 69% higher
during the fourth quarter of 2018 compared to the third quarter of 2018. Fourth quarter 2018 results included revenue attributable
to Shypdirect, which we founded on July 24, 2018.
Regulation
Our
operations are regulated and licensed by various governmental agencies. These regulations impact us directly and indirectly by
regulating third-party transportation providers we use to transport freight for our customers.
Regulation
Affecting Motor Carriers, Owner-Operators and Transportation Brokers. In the United States, our subsidiaries that
operate as motor carriers have motor carrier licenses issued by the Federal Motor Carrier Safety Administration (“FMCSA”)
of the U.S. Department of Transportation (“DOT”). In addition, our subsidiaries acting as property brokers have property
broker licenses issued by the FMCSA. Our motor carrier subsidiaries and the third-party motor carriers must comply with the safety
and fitness regulations of the DOT, including those related to drug-testing, alcohol-testing, hours-of-service, records retention,
vehicle inspection, driver qualification and minimum insurance requirements. Weight and equipment dimensions also are subject
to government regulations. We also may become subject to new or more restrictive regulations relating to emissions, drivers’
hours-of-service, independent contractor eligibility requirements, onboard reporting of operations, air cargo security and other
matters affecting safety or operating methods. Other agencies, such as the U.S. Environmental Protection Agency (“EPA”),
the Food and Drug Administration (“FDA”), and the U.S. Department of Homeland Security (“DHS”), also regulate
our equipment, operations and independent contractor drivers. Like our third-party support carriers, we are subject to a variety
of vehicle registration and licensing requirements in certain states and local jurisdictions where we operate. In foreign jurisdictions
where we operate, our operations are regulated by the appropriate governmental authorities.
In
2010, the FMCSA introduced the Compliance Safety Accountability program (“CSA”), which uses a Safety Management System
(“SMS”) to rank motor carriers on seven categories of safety-related data, known as Behavioral Analysis and Safety
Improvement Categories, or “BASICs.”
Although
the CSA scores are not currently publicly available, this development is likely to be temporary. As a result, our fleet could
be ranked worse or better than our competitors, and the safety ratings of our motor carrier operations could be impacted. Our
network of third-party transportation providers may experience a similar result. A reduction in safety and fitness ratings may
result in difficulty attracting and retaining qualified independent contractors and could cause our customers to direct their
business away from the Company and to carriers with more favorable CSA scores, which would adversely affect our results of operations.
In
addition, nearly all carriers and drivers that are required to maintain records of duty status have been required to install and
use electronic logging devices (“ELDs”). ELD installation and use may increase costs for independent contractors and
other third-party support carriers who provide services to XPO and may impact driver recruitment.
Classification
of Independent Contractors. Tax and other federal and state regulatory authorities, as well as private litigants,
continue to assert that independent contractor drivers in the trucking industry are employees rather than independent contractors.
Federal legislators have introduced legislation in the past to make it easier for tax and other authorities to reclassify independent
contractors as employees, including legislation to increase the recordkeeping requirements and heighten the penalties for companies
who misclassify workers and are found to have violated overtime and/or wage requirements. Additionally, federal legislators have
sought to abolish the current safe harbor allowing taxpayers that meet certain criteria to treat individuals as independent contractors
if they are following a longstanding, recognized practice. Federal legislators also sought to expand the Fair Labor Standards
Act to cover “non-employees” who perform labor or services for businesses, even if said non-employees are properly
classified as independent contractors; require taxpayers to provide written notice to workers based upon their classification
as either an employee or a non-employee; and impose penalties and fines for violations of the notice requirement and/or for misclassifications.
Some states have launched initiatives to increase revenues from items such as unemployment, workers’ compensation and income
taxes, and the reclassification of independent contractors as employees could help states with those initiatives. Taxing and other
regulatory authorities and courts apply a variety of standards in their determinations of independent contractor status. If our
independent contractor drivers are determined to be employees, we would incur additional exposure under some or all of the following:
federal and state tax, workers’ compensation, unemployment benefits, and labor, employment and tort laws, including for
prior periods, as well as potential liability for employee benefits and tax withholdings.
Environmental
Regulations. Our facilities and operations and our independent contractors are subject to various environmental
laws and regulations dealing with the hauling, handling and disposal of hazardous materials, emissions from vehicles, engine-idling,
fuel tanks and related fuel spillage and seepage, discharge and retention of storm water, and other environmental matters that
involve inherent environmental risks. Similar laws and regulations may apply in many of the foreign jurisdictions in which we
operate. We have instituted programs to monitor and control environmental risks and maintain compliance with applicable environmental
laws and regulations. We may be responsible for the cleanup of any spill or other incident involving hazardous materials caused
by our operations or business. In the past, we have been responsible for the costs of cleanup of diesel fuel spills caused by
traffic accidents or other events, and none of these incidents materially affected our business or operations. We generally transport
only hazardous materials rated as low-to-medium-risk, and a small percentage of our total shipments contains hazardous materials.
We believe that our operations are in substantial compliance with current laws and regulations and we do not know of any existing
environmental condition that reasonably would be expected to have a material adverse effect on our business or operating results.
Future changes in environmental regulations or liabilities from newly discovered environmental conditions or violations (and any
associated fines and penalties) could have a material adverse effect on our business, competitive position, results of operations,
financial condition or cash flows. U.S. federal and state governments, as well as governments in certain foreign jurisdictions
where we operate, have also proposed environmental legislation that could, among other things, potentially limit carbon, exhaust
and greenhouse gas emissions. If enacted, such legislation could result in higher costs for new tractors and trailers, reduced
productivity and efficiency, and increased operating expenses, all of which could adversely affect our results of operations.
Employees
and Independent Contractors
As
of June 30, 2019, we employed 491 employees, of whom 35 were employed in administration and corporate management positions, three
were employed in accounting, finance and compliance positions, three were employed in marketing and sales positions, four were
employed in vehicle maintenance positions, and 446 were employed as drivers. None of our employees is covered by a collective
bargaining agreement and we consider our employee relations to be good.
We
also contract with owner-operator drivers to provide and operate tractors, which provide additional delivery fleet capacity. Independent
contractors own their own tractors and are responsible for all associated expenses, including financing costs, fuel, maintenance,
insurance and highway use taxes. As of June 30, 2019, we had engaged two independent contractors on a full-time basis; however,
the number of independent contractors we engage fluctuates throughout the year depending on several factors, including seasonality,
the availability of company drivers, the availability of delivery vehicles to rent, lease or purchase, and the number of routes
our customers have hired us to cover.
Our
strategy for both company and owner-operator drivers is to (i) hire safe and experienced drivers (the majority of driver positions
hired require twelve months of over-the-road experience); (ii) promote retention with a competitive compensation package in the
case of company drivers and contracted rates in the case of owner-operator drivers and positive working conditions; and (iii)
minimize safety problems through careful screening, mandatory drug testing, continuous training, electronic logging system and
rewards for accident-free driving. We also seek to minimize turnover of company drivers by providing highly-attractive vehicles,
flexible schedules and competitive compensation packages. As a result, we have achieved driver retention rates that we believe
is superior to the trucking industry average.
Properties
We
do not own any real property. Our executive office is located at 3 Riverway, Suite 1430, Houston, Texas 77056, in the office
of Doug Cerny, a director of our company and our Chief Development Officer. We are not charged rent for the use of this space.
We believe that our existing facilities are sufficient for our current operations.
On
November 30, 2018, we entered into a commercial lease agreement for the lease of 60 parking spaces in Carlstadt, New Jersey
through November 2023 for a monthly rental fee of $6,000. Either we or the landlord can cancel this lease on the annual anniversary
date of the lease provided that the party who wishes to terminate provides the other party with at least 30-day prior written
notice of such termination.
In
December 2018, we entered into a lease for office and warehouse space and parking spaces in Carlstadt, New Jersey through December
2023. From the lease commencement date until the last day of the second lease year, monthly rent is $14,000. At the beginning
of the 30th month following the commencement date and through the end of the term, minimum rent will be $14,420 per
month. We are also obligated to pay all taxes and utilities related to this facility. We shall have an option to renew
the term of this lease for an additional five years. On August 29, 2019, we entered into a one-year sublease of this
space to sublease this space commencing on September 1, 2019 for $14,000 per month.
In
July 2019, we entered into a 4.5-year lease for office and warehouse space and parking spaces in Carlstadt, New Jersey
through December 2023. From the lease commencement date until the last day of the second lease year, monthly rent is $10,000.
At the beginning of the 25th month following the commencement date and through the end of the term, minimum rent will be
$10,500 per month. We are also obligated to pay all taxes and utilities related to this facility. We have an option
to renew the term of this lease for an additional five years.
In
July 2019, we entered into a five-year lease for office and warehouse space and parking spaces in Carlstadt, New Jersey
through July 2024. Base rent is payable monthly at the rate of $18,000 per month for the first year, $18,540 per month for
the second year, $19,096 per month for the third year, $19,669 per month for the fourth year and $20,259 per month for the fifth
year. We are also obligated to pay all taxes and utilities related to this facility. We have an option to renew the term of
this lease for an additional five or ten years at our option.
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.
We are not currently a party to any legal proceeding that we believe would have a material adverse effect on our business, financial
condition, or operating results.
MANAGEMENT
Directors
and Executive Officers
The
following table sets forth the names and ages of our current directors and executive officers, the principal offices and positions
held by each person. The directors serve one-year terms until their successors are elected. The executive officers serve terms
of one year or until their death, resignation or removal by the Board of Directors. Unless described below, there are no family
relationships among any of the directors and officers.
Name
and Address
|
|
Age
|
|
Date
First Elected or Appointed
|
|
Position(s)
|
|
|
|
|
|
|
|
John
Mercadante
|
|
74
|
|
April
16, 2019
|
|
Chief
Executive Officer, Chief Financial Officer and Director
|
|
|
|
|
|
|
|
Doug
Cerny
|
|
60
|
|
April
16, 2019
|
|
Chief
Development Officer and Director
|
Biographical
Information
The
principal occupation and business experience during at least the past five years for our executive officers and directors is as
follows:
John
Mercadante - Chairman of the Board, President and Chief Executive Officer. John Mercadante has been the President, Chief
Executive Officer and a director of our company since April 16, 2019. For more than the past five years, John has been a consultant
and a manager of his personal investments. John co-founded Leisure Line, Inc., a motor coach company serving New York City and
Atlantic City, New Jersey, in 1970 and served as its Chief Executive Officer for a ten-year period through the sale of the company
to Golden Nugget in 1980. At the time of the sale, Leisure Line was generating approximately $11 million in annual revenues. In
1988, John cofounded Cape Transit, Inc., a motor coach company servicing Atlantic City, Philadelphia and South New Jersey. Under
John Mercadante’s leadership as CEO, annual revenues at Cape Transit grew from $2 million to more than $11 million. In May
1996, Cape Transit became one of the founding companies of Coach USA, Inc. and John Mercadante became Coach USA’s president
and Chief Operating Officer. John was an integral part of growing Coach’s annual revenues from $100 million to over $1 billion
in revenues in just three years.
Doug
Cerny - Director, Chief Development Officer. Doug Cerny has been the Chief Development Officer and a director of our company
since April 16, 2019. For more than the past five years, Doug has been engaged in the practice of law with the Law Offices of
Douglas M. Cerny located in Houston, Texas. Doug was the Senior Vice President and General Counsel of Coach USA, Inc. A major
portion of the acquisitions completed by Coach USA were through the teamwork of Doug and John Mercadante in conjunction with personnel
experienced in financial, integration and human capital management. Doug has extensive experience in mergers and acquisitions
and business transactions. Doug earned a Bachelor’s of Science Civil Engineering from Valparaiso University, and his law
degree and his Masters of Business Administration from the University of Houston, Houston, Texas.
Family
Relationships
There
are no family relationships among our directors and executive officers.
Involvement
in Certain Legal Proceedings
None
of our directors or executive officers has been involved in any of the following events during the past ten years:
|
●
|
any
bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either
at the time of the bankruptcy or within two years prior to that time;
|
|
|
|
|
●
|
any
conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other
minor offences);
|
|
|
|
|
●
|
being
subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting his or her involvement in any type of business,
securities or banking activities; or
|
|
|
|
|
●
|
being
found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission
to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
|
Other
Directorships
None
of our officers and directors are directors of any company with a class of securities registered pursuant to Section 12 of the
Exchange Act or subject to the requirements of section 15(d) of such Act or any company registered as an investment company under
the Investment Company Act of 1940.
Director
Independence
We
are not currently subject to the listing requirements of any national securities exchange or inter-dealer quotation system which
has requirements that a majority of the Board of Directors be “independent” and, as a result, we are not at this time
required to have our Board of Directors comprised of a majority of “independent directors.” We do not have an independent
director under the applicable standards of the SEC and the Nasdaq stock market.
Board
Leadership Structure and Role in Risk Oversight
Although
we have not adopted a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or combined,
we have traditionally determined that it is in the best interests of our company and its stockholders to partially combine these
roles. Due to the small size of our company, we believe it is currently most effective to have the Chairman and Chief Executive
Officer positions partially combined.
John
Mercadante, our Chairman, also serves as our Chief Executive Officer. We are seeking other qualified individuals to serve on
our board of directors. At this time, we do not have directors and officers liability insurance which has been a deterring
factor in seeking other qualified directors. Mr. Mercadante is actively involved in oversight of our day-to-day
activities.
Our
board of directors is primarily responsible for overseeing our risk management processes. Our board of directors receives and
reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding our company’s
assessment of risks. Our board of directors focuses on the most significant risks facing our company and our general risk management
strategy, and also ensures that risks undertaken by our company are consistent with our board’s appetite for risk. While
the board of directors oversees our company, our company’s management is responsible for day-to-day risk management processes.
We believe this division of responsibilities is the most effective approach for addressing the risks facing our company and that
our board leadership structure supports this approach.
Board
Diversity
While
we do not have a formal policy on diversity, our board of directors considers diversity to include the skill set, background,
reputation, type and length of business experience of our board members as well as a particular nominee’s contributions
to that mix. Although there are many other factors, the board seeks individuals with experience on public company boards as well
as experience with advertising, marketing, legal and accounting skills.
Board
Assessment of Risk
Our
risk management function is overseen by our board of directors. Our management keeps our board of directors apprised of material
risks and provides our directors access to all information necessary for them to understand and evaluate how these risks interrelate,
how they affect our company, and how management addresses those risks. Once material risks are identified, John Mercadante, our
Chairman and Chief Executive Officer, determines how to best address such risk. If the identified risk poses an actual or potential
conflict with management, our independent directors, if any, may conduct the assessment. Our board of directors focuses on these
key risks and interfaces with management on seeking solutions. Currently, we have three members on the board of directors of our
company.
Committees
of the Board of Directors
We
currently do not maintain any committees of our board of directors. Given our size and the development of our business to date,
we believe that our board of directors through its meetings can perform all of the duties and responsibilities which might be
contemplated by a committee.
Except
as may be provided in our bylaws, we do not currently have specified procedures in place pursuant to which security holders may
recommend nominees to our board of directors.
Compliance
with Section 16(a) of the Securities Exchange Act of 1934, as Amended
Section
16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers and persons who own more than ten percent
of a registered class of our equity securities to file with the SEC initial reports of ownership and reports of changes in ownership
of Common Stock and other equity securities of our company. Officers, directors and greater than ten percent stockholders are
required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. To the best of our knowledge, our
officers, directors and greater than 10% stockholders have been in compliance with Section 16(a) of the Securities Exchange Act
of 1934 for the year ended December 31, 2018.
Code
of Ethics and Business Conduct
We
have not yet adopted a Code of Ethics although we expect to do so as we develop our infrastructure and business.
EXECUTIVE
COMPENSATION
Summary
Compensation Table
The
following table sets forth information concerning the total compensation paid or accrued by us during our last two fiscal years
to Steven Yariv, the only individual who served as our principal executive officer or acted in a similar capacity for us at any
time during our two most recent fiscal years. No other executive officer of our company received annual compensation during such
fiscal years in excess of $100,000.
Name &
Principal
Position
|
|
Fiscal
Year
ended
Dec. 31,
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards (2) ($)
|
|
|
Option
Awards ($)
|
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
|
Non-Qualified
Deferred
Compensation
Earnings ($)
|
|
|
All Other
Compensation
($)
|
|
|
Total ($)
|
|
Steven Yariv,
|
|
|
2018
|
|
|
$
|
441,000
|
|
|
|
-
|
|
|
$
|
3,090,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
3,531,000
|
|
Former Chief Executive Officer(1)
|
|
|
2017
|
|
|
|
42,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
2
|
|
|
|
42,500
|
|
(1)
|
Mr.
Yariv resigned as an officer and employee of our company on April 16, 2019. Mr. Yariv resigned as a director of our company
on May 1, 2019 in connection with our disposition of our former Save on Transport subsidiary.
|
|
|
(2)
|
On
June 18, 2018, we issued 1,500,000 shares of our common stock to Mr. Yariv as additional compensation. The amount shown reflects
the grant date fair value of such stock award computed in accordance with FASB ASC Topic 718. See Note 10 of notes to consolidated
financial statements for the years ended December 31, 2018 and 2017 included elsewhere in this prospectus.
|
Employment
Agreements
We
have no employment agreements in place with our executive officers.
We
have no pension or retirement plan in place and have never maintained any plan that provides for the payment of retirement benefits
or benefits that will be paid primarily following retirement, including, but not limited to, tax qualified deferred benefit plans,
supplemental executive retirement plans, tax-qualified deferred contribution plans and nonqualified deferred contribution plans.
We also do not currently offer or have any benefits, such as health or life insurance, available to our employees.
Outstanding
Equity Awards at Fiscal Year-End
At
December 31, 2018, we did not have any outstanding equity awards to our executive officers.
Director
Compensation
No
director compensation was paid during the years ended December 31, 2018 and 2017 in the form of cash expenses, stock awards, option
awards, non-equity incentive plan compensation, pension value and nonqualified deferred compensation earnings or any other type
of compensation. We do not currently pay any cash fees to our directors, nor do we pay directors’ expenses in attending
board meetings.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Other
than compensation arrangements for our named executive officers and directors, we describe below each transaction or series of
similar transactions, since January 1, 2017, to which we were a party or will be a party, in which:
|
●
|
the
amounts involved exceeded or will exceed $120,000; and
|
|
|
|
|
●
|
any
of our directors, executive officers or holders of more than 5% of our capital stock, or any member of the immediate family
of the foregoing persons, had or will have a direct or indirect material interest.
|
Borrowings
From Affiliates
Since
January 1, 2018, we have from time to time borrowed funds from various executive officers or directors of our company, or persons
or entities related to or affiliated with such persons, as follows:
|
●
|
In
connection with our acquisition of Prime on June 18, 2018, we paid $489,174 in cash to Rosemary Mazzola, the former majority
owner of Prime and now the owner of more than 5% of our common stock, who then loaned $489,174 back to Prime. This loan is
non-interest bearing and is due on demand. During the period from our acquisition of Prime (June 18, 2018) to December 31,
2018, we repaid $216,155 of this loan. During the six months ended June 30, 2019, we repaid $50,000 of this loan. At June
30, 2019 and December 31, 2018, the outstanding principal amount of this loan was $209,000 and $259,000, respectively.
|
|
|
|
|
●
|
From
July 25, 2018 through December 31, 2018, we borrowed an aggregate of $1,150,000 from Steven Yariv, our chief executive officer
at such time, or his spouse, and received net proceeds of $1,050,000, net of original issue discounts of $100,000. These loans
were evidenced by promissory notes that were payable within 90 days of the loan date. From July 25, 2018 through December
31, 2018, $930,000 of these loans were repaid and during January 2019, we repaid the remaining outstanding principal of $220,000.
During February 2019, we borrowed an additional $220,000 from Mr. Yariv’s spouse, net of an original issue discount
of $20,000. In April 2019, we repaid this loan in full. During the six months ended June 30, 2019, amortization of debt discount
related to these loans amounted to $26,383.
|
|
|
|
|
●
|
On
March 13, 2019, we borrowed $500,000 from an individual who was affiliated with our Chief Executive Officer, John Mercadante,
that was evidenced by a promissory note that requires interest payments in the amount of $7,500, commencing on April 11,
2019 and continuing on the eleventh day of each month thereafter, and payments of principal and interest in the amount of
$31,902 commencing on October 11, 2019 and continuing on the eleventh day of each month thereafter through April 11, 2021.
Interest accrues with respect to the unpaid principal until such principal is paid or converted as provided below at a rate
equal to 18% per annum compounded annually. All past due principal and interest on this note bears interest from maturity
of such principal or interest until paid at the lesser of (i) 20% per annum, or (ii) the highest non-usurious rate allowed
by applicable law. This note may be converted by the holder at any time in principal amounts of $100,000 into a number of
shares of common stock equal to the amount obtained by dividing the portion of the aggregate principal amount of this note
that is being converted by $1.37. During the six months ended June 30, 2019, interest expense related to these notes amounted
to $27,616.
|
|
|
|
|
●
|
On
April 11, 2019, we borrowed $2,000,000 from an entity that was affiliated with Mr. Mercadante that was evidenced
by a promissory note that requires interest payments in the amount of $30,000, commencing on May11, 2019 and continuing on
the eleventh day of each month thereafter, and payments of principal and interest in the amount of $117,611 commencing on
November 11, 2019 and continuing on the eleventh day of each month thereafter through April 11, 2021. Interest accrues with
respect to the unpaid principal until such principal is paid or converted as provided below at a rate equal to 18% per annum
compounded annually. All past due principal and interest on this note bears interest from maturity of such principal or interest
until paid at the lesser of (i) 20% per annum, or (ii) the highest non-usurious rate allowed by applicable law. This note
may be converted by the holder at any time in principal amounts of $100,000 into a number of shares of common stock equal
to the amount obtained by dividing the portion of the aggregate principal amount of this note that is being converted by $11.81.
During the six months ended June 30, 2019, interest expense related to these notes amounted to $79,890.
|
Conflicts
of Interest
There
are not currently any conflicts of interest by or among our current officers, directors, key employees or advisors. We have not
yet formulated a policy for handling conflicts of interest; however, we intend to do so prior to adding additional directors
to our board of directors.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth information with respect to the beneficial ownership of our common stock as of October 3,
2019, by (i) each stockholder known by us to be the beneficial owner of more than 5% of our common stock (our only class of
voting securities), (ii) each of our directors and executive officers, and (iii) all of our directors and executive officers as
a group. To the best of our knowledge, except as otherwise indicated, each of the persons named in the table has sole voting and
investment power with respect to the shares of our common stock beneficially owned by such person, except to the extent such power
may be shared with a spouse. To our knowledge, none of the shares listed below are held under a voting trust or similar agreement,
except as noted. To our knowledge, there is no arrangement, including any pledge, by any person of securities of our company,
the operation of which may at a subsequent date result in a change of control of our company.
Beneficial
ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. In accordance with Securities and Exchange Commission rules, shares of our common
stock which may be acquired upon exercise of stock options or warrants which are currently exercisable or which become exercisable
within 60 days of the date of the applicable table below are deemed beneficially owned by the holders of such options and warrants
and are deemed outstanding for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding
for the purpose of computing the percentage of ownership of any other person. Subject to community property laws, where applicable,
the persons or entities named in the tables below have sole voting and investment power with respect to all shares of our common
stock indicated as beneficially owned by them.
In
the table below, percentage ownership of our common stock prior to the offering is based upon 11,745,326 shares of common
stock outstanding as of October 3, 2019. Percentage ownership of our common stock after this offering assumes the sale
of all shares in this offering. Unless otherwise indicated in the following table, the address for each person named in the table
is c/o Transportation and Logistics Systems, Inc., 3 Riverway, Suite 1430, Houston, Texas 77056.
Name and Address of Beneficial Owner
|
|
Amount and
Nature of
Beneficial
Ownership
|
|
|
Percent
of Class
|
|
Directors and Executive Officers
|
|
|
|
|
|
|
|
|
John Mercadante
|
|
|
1,400,000
|
|
|
|
11.9
|
%
|
Douglas Cerny
|
|
|
1,000,000
|
|
|
|
8.5
|
|
|
|
|
|
|
|
|
|
|
All directors and executive officers as a group (two persons)
|
|
|
2,400,000
|
|
|
|
20.4
|
|
|
|
|
|
|
|
|
|
|
5% or More Stockholders
|
|
|
|
|
|
|
|
|
SCS, LLC(1)
|
|
|
1,583,750
|
|
|
|
13.5
|
|
RedDiamond Partners, LLC(2)
|
|
|
1,583,750
|
|
|
|
13.5
|
|
Rosemary Mazzola(3)
|
|
|
1,000,000
|
|
|
|
8.5
|
|
Steven Yariv(4)
|
|
|
1,050,000
|
|
|
|
8.9
|
|
(1)
|
We
have been advised by SCS, LLC that Lawrence Sands is the managing members of SCS, LLC. The address of SCS, LLC is 980
N. Federal Highway, Suite 304, Boca Raton, FL 33432
|
|
|
(2)
|
Does
not include 111,112 shares issuable upon the conversion of a Note or 111,112 shares issuable upon the exercise of Debt Warrants.
The Notes and Debt Warrants contain a 4.99% beneficial ownership blocker.
Pursuant to a Schedule 13G filed by RedDiamond Partners, LLC with the SEC on May 29, 2019, John DeNobile is the managing
member of RedDiamond Partners, LLC. The address of RedDiamond Partners, LLC is 156 West Saddle River Road, Saddle River, NJ
07458.
|
|
|
(3)
|
Does
not include 1,000,000 shares of common stock issuable upon the conversion of 1,000,000 shares of our Series B Preferred Stock,
which shares may not be issued to the extent such shares would cause Ms. Mazzola to beneficially own more than 4.99% of the
outstanding shares of our common stock. The address of Ms. Mazzola is 27 Dogwood Hill Road, Upper Saddle River, NJ 07458.
|
|
|
(4)
|
Includes
50,000 shares of common stock owned by Mr. Yariv’s spouse. The address of Mr. Yariv is 1634 Trotter Court, Wellington,
FL 33414.
|
SELLING
STOCKHOLDERS
This
prospectus covers the resale, from time to time by the Selling Stockholders identified below, of up to 3,269,373 shares
of our common stock, which includes 585,000 outstanding shares of common stock, 1,111,433 shares of common stock issuable
upon the conversion of, and the payment of interest from time to time on, the outstanding Notes and 1,572,940 shares of
common stock issuable upon the exercise of the outstanding Warrants. All of these shares of our common stock are being offered
for resale by the Selling Stockholders.
We
are registering the shares hereby pursuant to the terms of our agreements with certain stockholders, in order to permit the Selling
Stockholders identified in the table below to offer the shares for resale from time to time.
The
table below sets forth certain information regarding the Selling Stockholders and the shares of our common stock offered by them
in this prospectus. The Selling Stockholders have not had a material relationship with us within the past three years other than
as described in the footnotes to the table below or as a result of acquisition of our shares or other securities. To the best
of our knowledge, none of the Selling Stockholders is a broker dealer or an affiliate of a broker dealer other than as described
in the footnotes to the table below. Unless otherwise indicated, the mailing address of all listed Selling Stockholders is c/o
Transportation and Logistics Systems, Inc., 3 Riverway, Suite 1430, Houston, Texas 77056.
Under
the terms of the Notes, a Selling Stockholder may not convert the Notes to the extent such conversion would cause such Selling
Stockholder, together with its affiliates and attribution parties, to beneficially own a number of shares of our common stock
which would exceed 4.99% of our then outstanding shares of common stock following such conversion, excluding for purposes of such
determination shares of common stock issuable upon conversion of the Notes have not been converted. Under the terms of the Warrants,
a Selling Stockholder may not exercise the Warrants to the extent such exercise would cause such Selling Stockholder, together
with its affiliates and attribution parties, to beneficially own a number of shares of our common stock which would exceed 4.99%
of our then outstanding shares of common stock following such exercise, excluding for purposes of such determination shares of
common stock issuable upon exercise of the Warrants which have not been exercised. The number of shares in the table below does
not reflect these limitations. The Selling Stockholders may sell all, some or none of their shares in this offering. See “Plan
of Distribution.”
|
|
Number of Shares
|
|
|
Number of
|
|
|
Number of Shares
|
|
|
|
Beneficially Owned
|
|
|
Shares
|
|
|
Beneficially Owned
|
|
|
|
Prior to this Offering
|
|
|
Being Sold
|
|
|
After this Offering**
|
|
Selling Stockholder
|
|
Number
|
|
|
Percent
|
|
|
Offered
|
|
|
Number
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barnard & Fifth Capital Group LLC(1)
|
|
|
117,494
|
|
|
|
1.0
|
%
|
|
|
117,494
|
|
|
|
-
|
|
|
|
-
|
%
|
BMF Capital LLC(2)
|
|
|
80,600
|
|
|
|
*
|
|
|
|
80,600
|
|
|
|
-
|
|
|
|
-
|
|
Cavalry Fund I LP(3)
|
|
|
666,668
|
|
|
|
5.52
|
|
|
|
666,668
|
|
|
|
-
|
|
|
|
-
|
|
GS Capital Partners, LLC(4)
|
|
|
222,224
|
|
|
|
1.86
|
|
|
|
222,224
|
|
|
|
-
|
|
|
|
-
|
|
Puritan Partners LLC (5)
|
|
|
444,446
|
|
|
|
3.71
|
|
|
|
444,446
|
|
|
|
-
|
|
|
|
-
|
|
RedDiamond Partners LLC(6)
|
|
|
1,805,974
|
|
|
|
15.09
|
|
|
|
222,224
|
|
|
|
1,583,750
|
|
|
|
13.48
|
|
SBI Investments LLC, 2014-1(7)
|
|
|
222,224
|
|
|
|
1.86
|
|
|
|
222,224
|
|
|
|
-
|
|
|
|
-
|
|
Joseph Morello(8)
|
|
|
100,000
|
|
|
|
*
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
-
|
|
James Leto(9)
|
|
|
10,000
|
|
|
|
*
|
|
|
|
10,000
|
|
|
|
-
|
|
|
|
-
|
|
Michael Anderson(10)
|
|
|
80,000
|
|
|
|
*
|
|
|
|
80,000
|
|
|
|
-
|
|
|
|
-
|
|
Michael Joseph de Castro(11)
|
|
|
200,000
|
|
|
|
1.69
|
|
|
|
200,000
|
|
|
|
-
|
|
|
|
-
|
|
Benjamin Rae(12)
|
|
|
12,000
|
|
|
|
*
|
|
|
|
12,000
|
|
|
|
-
|
|
|
|
-
|
|
Kurt Ralston(13)
|
|
|
16,000
|
|
|
|
*
|
|
|
|
16,000
|
|
|
|
-
|
|
|
|
-
|
|
Luann Wowkanech(14)
|
|
|
12,000
|
|
|
|
*
|
|
|
|
12,000
|
|
|
|
-
|
|
|
|
-
|
|
June Nedick(15)
|
|
|
12,000
|
|
|
|
*
|
|
|
|
12,000
|
|
|
|
-
|
|
|
|
-
|
|
Eric Koeppel(16)
|
|
|
120,000
|
|
|
|
1.02
|
|
|
|
120,000
|
|
|
|
-
|
|
|
|
-
|
|
GPS Securities, LLC(17)
|
|
|
120,000
|
|
|
|
1.02
|
|
|
|
120,000
|
|
|
|
-
|
|
|
|
-
|
|
Richard Cohen(18)
|
|
|
40,000
|
|
|
|
*
|
|
|
|
40,000
|
|
|
|
-
|
|
|
|
-
|
|
Patricia Peters(19)
|
|
|
24,000
|
|
|
|
*
|
|
|
|
24,000
|
|
|
|
-
|
|
|
|
-
|
|
Daniel Mercadante(20)
|
|
|
20,000
|
|
|
|
*
|
|
|
|
20,000
|
|
|
|
-
|
|
|
|
-
|
|
Kathleen Osterkamp(21)
|
|
|
48,000
|
|
|
|
*
|
|
|
|
48,000
|
|
|
|
-
|
|
|
|
-
|
|
Mary Martire(22)
|
|
|
40,000
|
|
|
|
*
|
|
|
|
40,000
|
|
|
|
-
|
|
|
|
-
|
|
Green 2014 Family Trust(23) Lyle green trustee
|
|
|
20,000
|
|
|
|
*
|
|
|
|
20,000
|
|
|
|
-
|
|
|
|
-
|
|
Heath Korenstein(24)
|
|
|
60,000
|
|
|
|
*
|
|
|
|
60,000
|
|
|
|
-
|
|
|
|
-
|
|
Paul & Cara Pluta(25)
|
|
|
88,000
|
|
|
|
*
|
|
|
|
88,000
|
|
|
|
-
|
|
|
|
-
|
|
Karthik Annadorai (Cumin) (26)
|
|
|
28,000
|
|
|
|
*
|
|
|
|
28,000
|
|
|
|
-
|
|
|
|
-
|
|
Anthony Catapano(27)
|
|
|
80,000
|
|
|
|
*
|
|
|
|
80,000
|
|
|
|
-
|
|
|
|
-
|
|
Stanley Germain(28)
|
|
|
40,000
|
|
|
|
*
|
|
|
|
40,000
|
|
|
|
-
|
|
|
|
-
|
|
*
|
Denotes
less than 1%.
|
|
|
**
|
Assumes
that all the shares are sold
|
|
|
(1)
|
Includes
(i) 58,747 shares issuable upon conversion of a Note, and (ii) 58,747 shares of common stock issuable upon exercise
of a Debt Warrant. Mr. Samuel Burger has voting and dispositive powers over the shares held by Barnard & Fifth
Capital Group LLC. Mr. Burger disclaims beneficial ownership over the shares held by Barnard & Fifth Capital Group LLC.
The address of Barnard & Fifth Capital Group LLC is 1573 Broadway, Hewlett, NY 11557.
|
|
|
(2)
|
Includes
(i) 40,300 shares issuable upon conversion of a Note, and (ii) 40,300 shares of common stock issuable upon exercise
of a Debt Warrant. Mr. Gavriel Yitzchakov has voting and dispositive powers over the shares held by BMF Capital LLC.
Mr. Yitzchakov disclaims beneficial ownership over the shares held by BMF Capital LLC. The address of BMF Capital LLC is 1829
Avenue M Suite 125, Brooklyn, NY 11230.
|
|
|
(3)
|
Includes
(i) 333,334 shares issuable upon conversion of a Note, and (ii) 333,334 shares of common stock issuable upon exercise
of a Debt Warrant. The Notes and the Debt Warrants contain a 4.99% beneficial ownership blocker. Mr. Thomas
Walsh has voting and dispositive powers over the shares held by Cavalry Fund I LP. Mr. Walsh disclaims beneficial ownership
over the shares held by Cavalry Fund I LP. The address of Cavalry Fund I LP is 61 Kinderkamack Road, Woodcliff Lake, NJ 07677.
|
|
|
(4)
|
Includes
(i) 111,112 shares issuable upon conversion of a Note, and (ii) 111,112 shares of common stock issuable upon exercise
of a Debt Warrant. Mr. Gabriel Sayegh has voting and dispositive powers over the shares held by GS Capital Partners,
LLC. Mr. Sayegh disclaims beneficial ownership over the shares held by GS Capital Partners, LLC. The address of GS Capital
Partners, LLC is 110 Wall Street, New York, New York 10005.
|
|
|
(5)
|
Includes
(i) 222,223 shares issuable upon conversion of a Note, and (ii) 222,223 shares of common stock issuable upon exercise
of a Debt Warrant. Mr. Richard Smithline has voting and dispositive powers over the shares held by Puritan Partners
LLC. Mr. Smithline disclaims beneficial ownership over the shares held by Puritan Partners LLC. The address of Puritan Partners
LLC is c/o Centrecourt Asset Management LLC, 369 Lexington Avenue, 25th Floor New York, NY 10017.
|
|
|
(6)
|
Includes
(i) 1,583,750 shares of common stock, (ii) 111,112 shares issuable upon conversion of a Note, and (iii) 111,112 shares
of common stock issuable upon exercise of a Debt Warrant. Mr. John DeNobile has voting and dispositive powers over
the shares held by RedDiamond Partners LLC. Mr. DeNobile disclaims beneficial ownership over the shares held by RedDiamond
Partners LLC. The address of RedDiamond Partners LLC is 156 West Saddle River Road, Saddle River, NJ 07458.
|
|
|
(7)
|
Includes
(i) 111,112 shares issuable upon conversion of a Note, and (ii) 111,112 shares of common stock issuable upon exercise
of a Debt Warrant. Mr. Jonathan Juchno has voting and dispositive powers over the shares held by SBI Investments LLC,
2014-1. Mr. Juchno disclaims beneficial ownership over the shares held by SBI Investments LLC, 2014-1. The address of SBI
Investments LLC, 2014-1 is 107 Grand Street, 7th Floor, New York, NY 10013.
|
(8)
|
Includes
(i) 50,000 shares of common stock, and (ii) 50,000 shares of common stock issuable upon exercise of an Equity Warrant.
The address of Joseph Morello is 8164 Lakeview Dr., West Palm Beach, FL 33412.
|
|
|
(9)
|
Includes
(i) 5,000 shares of common stock, and (ii) 5,000 shares of common stock issuable upon exercise of an Equity Warrant.
The address of James Leto is 208 Honeysuckle Dr., Jupiter, FL 33458.
|
|
|
(10)
|
Includes
(i) 40,000 shares of common stock, and (ii) 40,000 shares of common stock issuable upon exercise of an Equity Warrant.
The address of Michael Anderson is 3092 Flint Hill Rd., Coopersburg, PA 18036.
|
|
|
(11)
|
Includes
(i) 100,000 shares of common stock, and (ii) 100,000 shares of common stock issuable upon exercise of an Equity Warrant.
The address of Michael Joseph de Castro is 5572 Northwood Drive, Center Valley, PA 18034.
|
|
|
(12)
|
Includes
(i) 6,000 shares of common stock, and (ii) 6,000 shares of common stock issuable upon exercise of an Equity Warrant.
The address of Benjamin Rae is 618 Louisiana Dr., Bayfield, CO 81122.
|
|
|
(13)
|
Includes
(i) 8,000 shares of common stock, and (ii) 8,000 shares of common stock issuable upon exercise of an Equity Warrant.
The address of Kurt Ralston is 106 Sycamore Ridge Dr., Simpsonville, SC 29681.
|
|
|
(14)
|
Includes
(i) 6,000 shares of common stock, and (ii) 6,000 shares of common stock issuable upon exercise of an Equity Warrant.
The address of Luann Wowkanech is 18 Gilbert Lane, Ocean City, NJ 08226.
|
|
|
(15)
|
Includes
(i) 6,000 shares of common stock, and (ii) 6,000 shares of common stock issuable upon exercise of an Equity Warrant.
The address of June Nedick is 8 Wingate Court, Allentown, NJ 08501.
|
|
|
(16)
|
Includes
(i) 60,000 shares of common stock, and (ii) 60,000 shares of common stock issuable upon exercise of an Equity Warrant.
The address of Eric Koeppel is 11284 Boca Woods Lane, Boca Raton, FL 33428.
|
|
|
(17)
|
Includes
(i) 60,000 shares of common stock, and (ii) 60,000 shares of common stock issuable upon exercise of an Equity Warrant.
Mr. Michael Shindle has voting and dispositive powers over the shares held by GPS Securities LLC. Mr. Shindle disclaims
beneficial ownership over the shares held by GPS Securities LLC. The address of GPS Securities LLC is 256 Columbia Turnpike,
Florham Park, NJ 07932.
|
|
|
(18)
|
Includes
(i) 20,000 shares of common stock, and (ii) 20,000 shares of common stock issuable upon exercise of an Equity Warrant.
The address of Richard Cohen is 8009 Lagoon Drive, Margate, NJ 08402.
|
|
|
(19)
|
Includes
(i) 12,000 shares of common stock, and (ii) 12,000 shares of common stock issuable upon exercise of an Equity Warrant.
The address of Patricia Peters is 19 Roy Drive, Hudson, NH 03051.
|
|
|
(20)
|
Includes
(i) 10,000 shares of common stock, and (ii) 10,000 shares of common stock issuable upon exercise of an Equity Warrant.
The address of Daniel Mercadante is 264 Harmony Lane, Titusville, FL 32780. Daniel Mercadante is the brother of our Chief
Executive Officer, John Mercandante.
|
|
|
(21)
|
Includes
(i) 24,000 shares of common stock, and (ii) 24,000 shares of common stock issuable upon exercise of an Equity Warrant.
The address of Kathleen Osterkamp is 23 Hideaway Lane, Hollis, NH 03049.
|
|
|
(22)
|
Includes
(i) 20,000 shares of common stock, and (ii) 20,000 shares of common stock issuable upon exercise of an Equity Warrant.
The address of Mary Martire is 136 Rotunda Drive, Jupiter, FL 33477.
|
|
|
(23)
|
Includes
(i) 10,000 shares of common stock, and (ii) 10,000 shares of common stock issuable upon exercise of an Equity Warrant.
Mr. Lyle Green has voting and dispositive powers over the shares held by the Green Family Trust. Mr. Green disclaims beneficial
ownership over the shares held by the Green Family Trust. The address of the Green Family Trust is 734 Jason Way, Pacific
Palisades, CA 90272.
|
|
|
(24)
|
Includes (i)
30,000 shares of common stock, and (ii) 30,000 shares of common stock issuable upon exercise of an Equity Warrant. The address
of Heath Korenstein is 16 Willowbrook Drive North Caldwell, NJ 07006.
|
|
|
(25)
|
Includes (i)
44,000 shares of common stock, and (ii) 44,000 shares of common stock issuable upon exercise of an Equity Warrant. The address
of Paul and Cara Pluta is 80-67 222 Street Hollis Hills, NY 11427.
|
|
|
(26)
|
Includes (i)
14,000 shares of common stock, and (ii) 14,000 shares of common stock issuable upon exercise of an Equity Warrant. Mr. Karthik
Annadorai has voting and dispositive powers over the shares held Cumin Ventures, LLC. Mr. Annadorai disclaims beneficial ownership
over the shares held by Cumin Ventures, LLC. The address of Cumin Ventures, LLC is 14122 River Forest Dr., Houston, TX 77079.
|
|
|
(27)
|
Includes (i)
40,000 shares of common stock, and (ii) 40,000 shares of common stock issuable upon exercise of an Equity Warrant. The address
of Anthony Catapano is 19870 Meadowside Lane, Boca Raton, FL 33498.
|
|
|
(28)
|
Includes (i)
20,000 shares of common stock, and (ii) 20,000 shares of common stock issuable upon exercise of an Equity Warrant. The address
of Stanley Germain is 15800 88th Trail North, West Palm Beach, FL 33418.
|
DESCRIPTION
OF SECURITIES
The
following description of our capital stock summarizes the material terms and provisions of our Common Stock and preferred stock.
Authorized
Capital Stock
Our
authorized capital stock consists of 500,000,000 shares of common stock, par value $0.001 per share, of which 11,745,236
shares are currently issued and outstanding, and 10,000,000 shares of preferred stock, par value $0.001 per share, of which 1,700,000
shares have been designated as Series B Preferred Stock, all of which shares are issued and outstanding.
Common
Stock
The
holders of our common stock have equal ratable rights to dividends from funds legally available therefore, when, as and if declared
by our board of directors and are entitled to share ratably in all of our assets available for distribution to holders of common
stock upon the liquidation, dissolution or winding up of our affairs. Holders of shares of common stock do not have preemptive,
subscription or conversion rights.
Holders
of shares of common stock are entitled to one vote per share on all matters which stockholders are entitled to vote upon at all
meetings of stockholders. The holders of shares of common stock do not have cumulative voting rights, which means that the holders
of more than 50% of our outstanding voting securities can elect all of our directors.
The
payment of dividends, if any, in the future rests within the discretion of our board of directors and will depend, among other
things, upon our earnings, capital requirements and financial condition, as well as other relevant factors. We have not paid any
dividends since our inception and do not intend to pay any cash dividends in the foreseeable future, but intend to retain all
earnings, if any, for use in our business.
Preferred
Stock
Our
board of directors has been authorized, subject to any limitations prescribed by law, without further vote or action by our stockholders,
to issue from time to time up to 10,000,000 shares of preferred stock in one or more series. Each series of preferred stock will
have the number of shares, designations, preferences, voting powers, qualifications and special or relative rights or privileges
as shall be determined by our board of directors, which may include, among other things, dividend rights, voting rights, liquidation
preferences, conversion rights and preemptive rights.
Series
B Preferred Stock
In
July 2019, our board of directors designated 1,700,000 shares of our authorized shares of preferred stock as Series B Preferred
Stock, which has the following preferences, voting powers, qualifications and special or relative rights or privileges.
Conversion.
On the second business day following the date upon which an increment of at least 100,000 shares of Series B Preferred Stock
can be converted by the holder thereof into shares of common stock on a one-for-one basis without exceeding the Beneficial Ownership
Limitation (as defined below), such shares of the Series B Preferred Stock shall automatically convert into the maximum number
of shares of common stock that can be issued without such holder exceeding the Beneficial Ownership Limitation. We may not convert
any shares of Series B Preferred Stock, and the holders of Series B Preferred Stock do not have the right to convert shares of
Series B Preferred Stock, to common stock if, after giving effect to such conversion, the holder thereof, together with such holder’s
affiliates, or any persons acting as a group with such holder, would beneficially own (determined in accordance with Section 13(d)
of the Exchange Act, shares of common stock in excess of the Beneficial Ownership Percentage. The “Beneficial Ownership
Percentage” has been defined, with respect to any holder of Series B Preferred Stock, as 4.99% of the number of shares of
our common stock outstanding immediately after giving effect to the conversion of shares of Series B Preferred Stock by such holder.
Dividends.
Holders of Series B Convertible Stock are not entitled to receive dividends in respect of such shares.
Voting
Rights. Except as otherwise provided required by law, the Series B Preferred Stock has no voting rights.
Liquidation
Preference. Upon our liquidation, dissolution or winding-up, whether voluntary or involuntary, holders of Series B
Convertible Stock will first be entitled to receive out of our assets, whether capital or surplus, an amount equal to $0.001 for
each share of Series B Preferred Stock before any distribution or payment shall be made to the holders of any junior securities,
and thereafter, such holders shall be entitled to receive the same amount that a holder of common stock would receive if the Series
B Preferred Stock were fully converted (disregarding for such purpose any conversion limitations under the certificate of designation)
to common stock, which amounts shall be paid pari passu with all holders of common stock.
Redemption
Rights. We are not obligated to redeem or repurchase any shares of Series B Preferred Stock. Shares of Series B Preferred
Stock are not otherwise entitled to any redemption rights, or mandatory sinking fund or analogous provisions.
Warrants
At
June 30, 2019, we had outstanding the following warrants to purchase shares of our common stock:
|
●
|
Warrants
to purchase 114,000 shares of common stock at an initial exercise price of $1.00 per share. Pursuant to the terms of such
warrants, the exercise price of such warrants is subject to adjustment in the event of stock splits, stock combinations or
the like of our common stock. These warrants expire on June 30, 2024.
|
In
addition, on August 30, 2019, in connection with our sale of shares of our common stock and the Notes, we issued the following
additional warrants:
|
●
|
Warrants
to purchase 585,000 shares of common stock at an initial exercise price of $2.50 per share. Pursuant to the terms of such
warrants, the exercise price of such warrants is subject to adjustment in the event of stock splits, stock combinations or
the like of our common stock. These warrants expire on January 30, 2025.
|
|
|
|
|
●
|
Warrants
to purchase 987,940 shares of common stock at an initial exercise price of $3.50 per share. Pursuant to the terms of such
warrants, the exercise price of such warrants is subject to adjustment in the event of stock splits, stock combinations or
the like of our common stock or if we issue 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 in effect at such time, in which event the
exercise price shall be reduced to the price per share at which we issued, or may be required to issue, shares of common stock.
These warrants expire on August 30, 2024. However, pursuant to the terms of these warrants, commencing on the six-month anniversary
of the date of issuance of these warrants, we have the option to cause the exercise of these warrants on a cashless basis
pursuant to the terms of these warrants, subject to certain limitations, if (i) no breach shall have occurred under the documents
pursuant to which the Notes were issued, (ii) the last closing price of the common stock was equal or greater than $6.125
per share (subject to adjustment) for the 20 trading-day-period preceding the date of our election to cause the exercise of
these warrants, (iii) on each trading day during such 20 trading-day-period, the total trading volume of our common stock
was at least $900,000, and (iv) during such period and on the date of exercise of our election to cause the exercise of these
warrants, there must be an effective registration statement under the Securities Act covering the shares of common stock to
be issued upon such mandatory exercise of these warrants. If the holder of any warrant fails to meet its obligations following
our exercise of the mandatory exercise of these warrants, we have the option to purchase any unexercised warrants for cash
at a price per warrant equal to the Purchase Option Black Scholes Value (as defined).
|
Anti-Takeover
Effects of Nevada Law
Business
Combinations
The
“business combination” provisions of Sections 78.411 to 78.444, inclusive, of the Nevada Revised Statutes, or NRS,
generally prohibit a Nevada corporation with at least 200 stockholders from engaging in various “combination” transactions
with any interested stockholder for a period of two years after the date of the transaction in which the person became an interested
stockholder, unless the transaction is approved by the Board of Directors prior to the date the interested stockholder obtained
such status or the combination is approved by the Board of Directors and thereafter is approved at a meeting of the stockholders
by the affirmative vote of stockholders representing at least 60% of the outstanding voting power held by disinterested stockholders,
and extends beyond the expiration of the two-year period, unless:
|
●
|
the
combination was approved by the Board of Directors prior to the person becoming an interested stockholder or the transaction
by which the person first became an interested stockholder was approved by the Board of Directors before the person became
an interested stockholder or the combination is later approved by a majority of the voting power held by disinterested stockholders;
or
|
|
|
|
|
●
|
if
the consideration to be paid by the interested stockholder is at least equal to the highest of: (a) the highest price per
share paid by the interested stockholder within the two years immediately preceding the date of the announcement of the combination
or in the transaction in which it became an interested stockholder, whichever is higher, (b) the market value per share of
common stock on the date of announcement of the combination and the date the interested stockholder acquired the shares, whichever
is higher, or (c) for holders of preferred stock, the highest liquidation value of the preferred stock, if it is higher.
|
A
“combination” is generally defined to include mergers or consolidations or any sale, lease exchange, mortgage, pledge,
transfer, or other disposition, in one transaction or a series of transactions, with an “interested stockholder” having:
(a) an aggregate market value equal to 5% or more of the aggregate market value of the assets of the corporation, (b) an aggregate
market value equal to 5% or more of the aggregate market value of all outstanding shares of the corporation, (c) 10% or more of
the earning power or net income of the corporation, and (d) certain other transactions with an interested stockholder or an affiliate
or associate of an interested stockholder.
In
general, an “interested stockholder” is a person who, together with affiliates and associates, owns (or within two
years, did own) 10% or more of a corporation’s voting stock. The statute could prohibit or delay mergers or other takeover
or change in control attempts and, accordingly, may discourage attempts to acquire our Company even though such a transaction
may offer our stockholders the opportunity to sell their stock at a price above the prevailing market price.
Control
Share Acquisitions
The
“control share” provisions of Sections 78.378 to 78.3793, inclusive, of the NRS apply to “issuing corporations”
that are Nevada corporations with at least 200 stockholders, including at least 100 stockholders of record who are Nevada residents,
and that conduct business directly or indirectly in Nevada. The control share statute prohibits an acquirer, under certain circumstances,
from voting its shares of a target corporation’s stock after crossing certain ownership threshold percentages, unless the
acquirer obtains approval of the target corporation’s disinterested stockholders. The statute specifies three thresholds:
one-fifth or more but less than one-third, one-third but less than a majority, and a majority or more, of the outstanding voting
power. Generally, once an acquirer crosses one of the above thresholds, those shares in an offer or acquisition and acquired within
90 days thereof become “control shares” and such control shares are deprived of the right to vote until disinterested
stockholders restore the right. These provisions also provide that if control shares are accorded full voting rights and the acquiring
person has acquired a majority or more of all voting power, all other stockholders who do not vote in favor of authorizing voting
rights to the control shares are entitled to demand payment for the fair value of their shares in accordance with statutory procedures
established for dissenters’ rights.
A
corporation may elect to not be governed by, or “opt out” of, the control share provisions by making an election in
its articles of incorporation or bylaws, provided that the opt-out election must be in place on the 10th day following the date
an acquiring person has acquired a controlling interest, that is, crossing any of the three thresholds described above. We have
not opted out of the control share statutes and will be subject to these statutes if we are an “issuing corporation”
as defined in such statutes.
The
effect of the Nevada control share statutes is that the acquiring person, and those acting in association with the acquiring person,
will obtain only such voting rights in the control shares as are conferred by a resolution of the stockholders at an annual or
special meeting. The Nevada control share law, if applicable, could have the effect of discouraging takeovers of our company.
Disclosure
of Commission Position on Indemnification for Securities Act Liabilities
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling
persons pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore, unenforceable.
Transfer
Agent and Registrar
The
transfer agent and registrar for our common stock is ClearTrust, LLC. The transfer agent and registrar’s address is 16540
Pointe Village Drive, Suite 205, Lutz, Florida 33558 and its telephone number is (813) 235-4490.
Market
Listing
Our
common stock is listed for quotation on the OTCPK Tier of the OTC Markets Group, Inc. under the symbol “TLSS.”
PLAN
OF DISTRIBUTION
This
prospectus relates to the resale of an aggregate of 3,269,373 shares of our common stock, par value $0.001 per share, which includes
585,000 outstanding shares, 1,111,433 shares issuable upon the conversion of, and the payment of interest from time to time on,
the outstanding Notes and 1,572,940 shares issuable upon the exercise of outstanding warrants.
The
Selling Stockholders may, from time to time, sell any or all of the shares of our common stock covered by this prospectus at a
fixed price of $8.50 per share, representing the average of the high and low prices as reported on the OTC Pink Tier of
the OTC Markets Group, Inc. on November 4, 2019. If and when our common stock is regularly quoted on an over-the-counter
market or on a national securities exchange, the Selling Stockholders may sell their respective shares of Common Stock, from time
to time, at prevailing market prices or in privately negotiated transactions. A selling stockholder may use any one or more of
the following methods when selling securities:
|
●
|
ordinary
brokerage transactions and transactions in which the broker-dealer solicits purchasers;
|
|
|
|
|
●
|
block
trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
|
|
|
|
|
●
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for its account;
|
|
|
|
|
●
|
an
exchange distribution in accordance with the rules of the applicable exchange;
|
|
|
|
|
●
|
privately
negotiated transactions;
|
|
|
|
|
●
|
settlement
of short sales entered into after the effective date of the registration statement of which this prospectus is a part;
|
|
|
|
|
●
|
broker-dealers
may agree with the Selling Stockholders to sell a specified number of such shares at a stipulated price per share;
|
|
|
|
|
●
|
through
the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;
|
|
|
|
|
●
|
a
combination of any such methods of sale; or
|
|
|
|
|
●
|
any
other method permitted pursuant to applicable law.
|
The
Selling Stockholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus.
Broker-dealers
engaged by the Selling Stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling stockholders (or, if any broker-dealer acts as agent for the purchaser of securities,
from the purchaser) in amounts to be negotiated, but, except as may be set forth in a supplement to this prospectus, in the case
of an agency transaction, not in excess of a customary brokerage commission in compliance with FINRA Rule 2440; and in the case
of a principal transaction a markup or markdown in compliance with FINRA IM-2440.
In
connection with the sale of our common stock or interests therein, the Selling Stockholders may enter into hedging transactions
with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course
of hedging the positions they assume. The Selling Stockholders may also sell shares of our common stock short and deliver these
shares to close out such short positions, or loan or pledge the shares of our common stock to broker-dealers that in turn may
sell these shares. The Selling Stockholders may also enter into option or other transactions with broker-dealers or other financial
institutions or create one or more derivative securities that require the delivery to such broker-dealer or other financial institution
of shares of our common stock offered by this prospectus, which shares such broker-dealer or other financial institution may resell
pursuant to this prospectus (however, in such case, we must file a prospectus supplement or an amendment to this registration
statement under applicable provisions of the Securities Act amending it to include such successors in interest as Selling Stockholders
under this prospectus).
The
Selling Stockholders might not sell any, or all, of the shares of our common stock offered pursuant to this prospectus. In addition,
we cannot assure you that the Selling Stockholders will not transfer the shares of our common stock by other means not described
in this prospectus.
The
Selling Stockholders and any brokers, dealers, agents or underwriters that participate with the Selling Stockholders in the distribution
of our common stock pursuant to this prospectus may be deemed to be “underwriters” within the meaning of the Securities
Act in connection with such sales. In this case, any commissions received by these broker-dealers, agents or underwriters and
any profit on the resale of our common stock purchased by them may be deemed to be underwriting commissions or discounts under
the Securities Act. In addition, any profits realized by the Selling Stockholders may be deemed to be underwriting commissions.
If the Selling Stockholders and any brokers, dealers, agents or underwriters that participate with the Selling Stockholders in
the distribution of our common stock pursuant to this prospectus are deemed to be an underwriter, the Selling Stockholders and
such other participants in the distribution may be subject to certain statutory liabilities and would be subject to the prospectus
delivery requirements of the Securities Act in connection with sales of shares of our common stock.
We
are required to pay certain fees and expenses incurred by us incident to the registration of the shares of common stock offered
hereby. We have agreed to indemnify the Selling Stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
The
shares of common stock offered hereby will be sold only through registered or licensed brokers or dealers if required under applicable
state securities laws. In addition, in certain states, the shares of common stock offered hereby may not be sold unless they have
been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement
is available and is complied with.
Under
applicable rules and regulations under the Securities Exchange Act of 1934, any person engaged in the distribution of the resale
securities may not simultaneously engage in market making activities with respect to the common stock for the applicable restricted
period, as defined in Regulation M, prior to the commencement of the distribution. In addition, the selling stockholder will be
subject to applicable provisions of the Securities Exchange Act of 1934 and the rules and regulations thereunder, including Regulation
M, which may limit the timing of purchases and sales of securities of the common stock by the selling stockholders or any other
person. We will make copies of this prospectus available to the selling stockholders and will inform them of the need to deliver
a copy of this prospectus to each purchaser at or prior to the time of the sale (including by compliance with Rule 172 under the
Securities Act).
LEGAL
MATTERS
Holley
Driggs Walch Fine Puzey Stein & Thompson, Ltd., Las Vegas, Nevada,
will pass upon the validity of the shares of common stock sold in this offering.
EXPERTS
Our
consolidated financial statements for the fiscal years ended
December 31, 2018 and 2017 have been audited by Salberg & Company, P.A., an independent registered public accounting firm
as set forth in their report thereto, and are included herein in reliance upon such report given on the authority
of said firm as experts in accounting and auditing.
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
We
filed with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 for the shares of
common stock in this offering. This prospectus does not contain all of the information in the registration statement and the exhibits
that were filed with the registration statement. For further information with respect to us and our common stock, we refer you
to the registration statement and the exhibits that were filed with the registration statement. Statements contained in this prospectus
about the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily
complete, and we refer you to the full text of the contract or other document filed as an exhibit to the registration statement.
The Securities and Exchange Commission maintains a website that contains reports, proxy and information statements, and other
information regarding registrants that file electronically with the Securities and Exchange Commission. The address of the website
is www.sec.gov.
We
file periodic reports under the Securities Exchange Act of 1934, including annual, quarterly and special reports, and other information
with the Securities and Exchange Commission. These periodic reports and other information are available for inspection and copying
at the Commission’s regional offices and public reference facilities, and on the website of the Securities and Exchange
Commission referred to above.
We
make available free of charge on or through our internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the
Securities and Exchange Commission. The information found on our website, www.translogsys.com, other than as specifically
incorporated by reference in this prospectus, is not part of this prospectus.
INDEX
TO FINANCIAL STATEMENTS
Transportation
and Logistics Systems, Inc.
Condensed
Consolidated Interim Financial Statements
For
the Six Months Ended June 30, 2019 and 2018
Consolidated
Financial Statements
For
the Years Ended December 31, 2018 and 2017
TRANSPORTATION
AND LOGISTICS SYSTEMS INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
120,269
|
|
|
$
|
296,196
|
|
Accounts receivable
|
|
|
927,723
|
|
|
|
441,497
|
|
Prepaid expenses and other current assets
|
|
|
590,730
|
|
|
|
509,068
|
|
Assets of discontinued operations
|
|
|
-
|
|
|
|
335,894
|
|
Due from related party
|
|
|
81,489
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
1,720,211
|
|
|
|
1,582,655
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS:
|
|
|
|
|
|
|
|
|
Security deposit
|
|
|
39,350
|
|
|
|
5,000
|
|
Property and equipment, net
|
|
|
728,054
|
|
|
|
936,831
|
|
Right of use asset
|
|
|
578,421
|
|
|
|
-
|
|
Intangible asset, net
|
|
|
2,420,191
|
|
|
|
4,668,334
|
|
|
|
|
|
|
|
|
|
|
Total Other Assets
|
|
|
3,766,016
|
|
|
|
5,610,165
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
5,486,227
|
|
|
$
|
7,192,820
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Convertible notes payable, net of debt discounts of $0 and $1,595,627, respectively
|
|
$
|
1,800,000
|
|
|
$
|
1,411,876
|
|
Convertible notes payable - related parties
|
|
|
2,500,000
|
|
|
|
-
|
|
Notes payable, net of debt discount
|
|
|
4,256,738
|
|
|
|
1,509,804
|
|
Notes payable - related party, net of debt discount
|
|
|
-
|
|
|
|
213,617
|
|
Accounts payable
|
|
|
1,594,189
|
|
|
|
655,183
|
|
Accrued expenses
|
|
|
815,151
|
|
|
|
566,574
|
|
Insurance payable
|
|
|
1,403,070
|
|
|
|
1,108,368
|
|
Lease liability
|
|
|
102,407
|
|
|
|
-
|
|
Liabilities of discontinued operations
|
|
|
-
|
|
|
|
440,745
|
|
Derivative liability
|
|
|
-
|
|
|
|
7,888,684
|
|
Due to related parties
|
|
|
271,507
|
|
|
|
275,300
|
|
Accrued compensation and related benefits
|
|
|
674,566
|
|
|
|
435,944
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
13,417,628
|
|
|
|
14,506,095
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
Lease liability
|
|
|
490,126
|
|
|
|
-
|
|
Notes payable - related party
|
|
|
510,000
|
|
|
|
-
|
|
Notes payable
|
|
|
317,306
|
|
|
|
424,019
|
|
|
|
|
|
|
|
|
|
|
Total Long-term Liabilities
|
|
|
1,317,432
|
|
|
|
424,019
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
14,735,060
|
|
|
|
14,930,114
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (See Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ DEFICIT:
|
|
|
|
|
|
|
|
|
Preferred stock, par value $0.001; authorized 10,000,000 shares: Series A Convertible Preferred stock, par value $0.001 per share; authorized 4,000,000 shares; issued and outstanding 0 and 4,000,000 shares at June 30, 2019 and December 31, 2018, respectively (Liquidation value $0 and $4,000,000, respectively)
|
|
|
-
|
|
|
|
4,000
|
|
Common stock, par value $0.001 per share; authorized 500,000,000 shares; issued and outstanding 9,421,525 and 4,220,837 at June 30, 2019 and December 31, 2018, respectively
|
|
|
9,421
|
|
|
|
4,220
|
|
Common stock issuable, par value $0.001 per share; 700,000 and 0 shares
|
|
|
700
|
|
|
|
-
|
|
Additional paid-in capital
|
|
|
32,120,077
|
|
|
|
7,477,422
|
|
Accumulated deficit
|
|
|
(41,379,031
|
)
|
|
|
(15,222,936
|
)
|
|
|
|
|
|
|
|
|
|
Total Shareholders’ Deficit
|
|
|
(9,248,833
|
)
|
|
|
(7,737,294
|
)
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders’ Deficit
|
|
$
|
5,486,227
|
|
|
$
|
7,192,820
|
|
See
accompanying notes to unaudited condensed consolidated financial statements.
TRANSPORTATION
AND LOGISTICS SYSTEMS INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
13,904,619
|
|
|
$
|
626,820
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES
|
|
|
13,072,675
|
|
|
|
535,945
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
831,944
|
|
|
|
90,875
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
Compensation and related benefits
|
|
|
7,717,214
|
|
|
|
3,149,776
|
|
Legal and professional fees
|
|
|
1,071,082
|
|
|
|
1,373,993
|
|
Rent
|
|
|
185,237
|
|
|
|
-
|
|
General and administrative expenses
|
|
|
1,595,535
|
|
|
|
203,789
|
|
Impairment loss
|
|
|
1,724,591
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
12,293,659
|
|
|
|
4,727,558
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(11,461,715
|
)
|
|
|
(4,636,683
|
)
|
|
|
|
|
|
|
|
|
|
OTHER (EXPENSES) INCOME:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(2,597,443
|
)
|
|
|
(391,555
|
)
|
Interest expense - related parties
|
|
|
(147,639
|
)
|
|
|
-
|
|
Loan fees
|
|
|
(601,121
|
)
|
|
|
-
|
|
Gain on debt extinguishment, net
|
|
|
43,917,768
|
|
|
|
-
|
|
Derivative expense
|
|
|
(55,037,605
|
)
|
|
|
(9,505,352
|
)
|
|
|
|
|
|
|
|
|
|
Total Other (Expenses) Income
|
|
|
(14,466,040
|
)
|
|
|
(9,896,907
|
)
|
|
|
|
|
|
|
|
|
|
LOSS FROM CONTINUING OPERATIONS
|
|
|
(25,927,755
|
)
|
|
|
(14,533,590
|
)
|
|
|
|
|
|
|
|
|
|
(LOSS) INCOME FROM DISCONTINUED OPERATIONS:
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations
|
|
|
(681,426
|
)
|
|
|
83,601
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(26,609,181
|
)
|
|
$
|
(14,449,989
|
)
|
|
|
|
|
|
|
|
|
|
NET LOSS PER COMMON SHARE - BASIC AND DILUTED
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(3.42
|
)
|
|
$
|
(17.97
|
)
|
Net (loss) income from discontinued operations
|
|
|
(0.09
|
)
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share - basic and diluted
|
|
$
|
(3.51
|
)
|
|
$
|
(17.87
|
)
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARE OUTSTANDING:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
7,573,522
|
|
|
|
808,780
|
|
See
accompanying notes to unaudited condensed consolidated financial statements.
TRANSPORTATION
AND LOGISTICS SYSTEMS INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT
FOR
THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Preferred Stock Series A
|
|
|
Common Stock
|
|
|
Common Stock Issuable
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Shareholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2017
|
|
|
4,000,000
|
|
|
$
|
4,000
|
|
|
|
570,106
|
|
|
$
|
570
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
(34,928
|
)
|
|
$
|
(744,779
|
)
|
|
$
|
(775,137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
60,925
|
|
|
|
60,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2018
|
|
|
4,000,000
|
|
|
|
4,000
|
|
|
|
570,106
|
|
|
|
570
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(34,928
|
)
|
|
|
(683,854
|
)
|
|
|
(714,212
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
2,100,000
|
|
|
|
2,100
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,323,900
|
|
|
|
-
|
|
|
|
4,326,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
1,500,000
|
|
|
|
1,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,088,500
|
|
|
|
-
|
|
|
|
3,090,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(14,510,914
|
)
|
|
|
(14,510,914
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2018
|
|
|
4,000,000
|
|
|
$
|
4,000
|
|
|
|
4,170,106
|
|
|
$
|
4,170
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
7,377,472
|
|
|
$
|
(15,194,768
|
)
|
|
$
|
(7,809,126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Preferred Stock Series A
|
|
|
Common
Stock
|
|
|
Common Stock Issuable
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Shareholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2018
|
|
|
4,000,000
|
|
|
$
|
4,000
|
|
|
|
4,220,837
|
|
|
$
|
4,220
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
7,477,422
|
|
|
$
|
(15,222,936
|
)
|
|
$
|
(7,737,294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
2,670,688
|
|
|
|
2,671
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,748,137
|
|
|
|
-
|
|
|
|
2,750,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued in connection with debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
63,581
|
|
|
|
-
|
|
|
|
63,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect adjustment for change in derivative accounting
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
453,086
|
|
|
|
453,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(19,647,723
|
)
|
|
|
(19,647,723
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2019
|
|
|
4,000,000
|
|
|
|
4,000
|
|
|
|
6,891,525
|
|
|
|
6,891
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,289,140
|
|
|
|
(34,417,573
|
)
|
|
|
(24,117,542
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
230,000
|
|
|
|
230
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,465,270
|
|
|
|
-
|
|
|
|
2,465,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for debt and warrant modifications
|
|
|
|
|
|
|
|
|
|
|
700,000
|
|
|
|
700
|
|
|
|
700,000
|
|
|
|
700
|
|
|
|
17,932,600
|
|
|
|
-
|
|
|
|
17,934,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for conversion of preferred shares
|
|
|
(4,000,000
|
)
|
|
|
(4,000
|
)
|
|
|
2,600,000
|
|
|
|
2,600
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,400
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return and cancellation of shares for disposal of Save On
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,000,000
|
)
|
|
|
(1,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
57,987
|
|
|
|
-
|
|
|
|
56,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
700,816
|
|
|
|
-
|
|
|
|
700,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued in connection with debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
672,864
|
|
|
|
-
|
|
|
|
672,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,961,458
|
)
|
|
|
(6,961,458
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
9,421,525
|
|
|
$
|
9,421
|
|
|
|
700,000
|
|
|
$
|
700
|
|
|
$
|
32,120,077
|
|
|
$
|
(41,379,031
|
)
|
|
$
|
(9,248,833
|
)
|
See
accompanying notes to unaudited condensed consolidated financial statements.
TRANSPORTATION
AND LOGISTICS SYSTEMS INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(26,609,181
|
)
|
|
$
|
(14,449,989
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
617,632
|
|
|
|
173,629
|
|
Amortization of debt discount to interest expense
|
|
|
2,310,580
|
|
|
|
332,364
|
|
Amortization of debt discount to interest expense - related party
|
|
|
26,383
|
|
|
|
-
|
|
Stock-based compensation and consulting fees
|
|
|
5,216,308
|
|
|
|
4,326,000
|
|
Stock-based compensation and consulting fees - discontinued operations
|
|
|
700,816
|
|
|
|
-
|
|
Non-cash loan fees
|
|
|
601,121
|
|
|
|
-
|
|
Derivative expense (income)
|
|
|
55,037,605
|
|
|
|
9,505,352
|
|
Non-cash portion of gain on extinguishment of debt
|
|
|
(44,031,110
|
)
|
|
|
-
|
|
Deferred rent
|
|
|
14,112
|
|
|
|
-
|
|
Loss on disposal of property and equipment
|
|
|
47,022
|
|
|
|
-
|
|
Impairment loss
|
|
|
1,724,591
|
|
|
|
-
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(486,226
|
)
|
|
|
(325,551
|
)
|
Prepaid expenses and other current assets
|
|
|
(81,662
|
)
|
|
|
-
|
|
Assets of discontinued operations
|
|
|
(53,193
|
)
|
|
|
(93,073
|
)
|
Due from related party
|
|
|
(81,489
|
)
|
|
|
-
|
|
Security deposit
|
|
|
(34,350
|
)
|
|
|
-
|
|
Accounts payable and accrued expenses
|
|
|
1,420,925
|
|
|
|
(130,902
|
)
|
Insurance payable
|
|
|
294,702
|
|
|
|
(5,108
|
)
|
Liabilities of discontinued operations
|
|
|
10,954
|
|
|
|
155,115
|
|
Accrued compensation and related benefits
|
|
|
238,622
|
|
|
|
197,097
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN OPERATING ACTIVITIES
|
|
|
(3,115,838
|
)
|
|
|
(315,066
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Cash received in acquisition
|
|
|
-
|
|
|
|
38,198
|
|
Cash paid for acquisition
|
|
|
-
|
|
|
|
(489,174
|
)
|
Decrease in cash from disposal of subsidiary
|
|
|
(5,625
|
)
|
|
|
-
|
|
Purchase of property and equipment
|
|
|
(51,256
|
)
|
|
|
-
|
|
Proceeds from sale of property and equipment
|
|
|
81,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
|
|
24,119
|
|
|
|
(450,976
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from convertible notes payable - related party
|
|
|
2,500,000
|
|
|
|
2,497,503
|
|
Debt issue costs paid
|
|
|
-
|
|
|
|
(1,009,714
|
)
|
Repayment of convertible notes payable
|
|
|
(273,579
|
)
|
|
|
-
|
|
Net proceeds from notes payable
|
|
|
6,631,020
|
|
|
|
-
|
|
Repayment of notes payable
|
|
|
(5,697,856
|
)
|
|
|
(611,406
|
)
|
Net proceeds from notes payable - related party
|
|
|
255,000
|
|
|
|
-
|
|
Repayment of notes payable - related party
|
|
|
(495,000
|
)
|
|
|
-
|
|
Net proceeds from related parties
|
|
|
(3,793
|
)
|
|
|
467,672
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
2,915,792
|
|
|
|
1,344,055
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH
|
|
|
(175,927
|
)
|
|
|
578,013
|
|
|
|
|
|
|
|
|
|
|
CASH, beginning of period
|
|
|
296,196
|
|
|
|
106,576
|
|
|
|
|
|
|
|
|
|
|
CASH, end of period
|
|
$
|
120,269
|
|
|
$
|
684,589
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
2,239,463
|
|
|
$
|
-
|
|
Income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Debt discounts recorded
|
|
$
|
1,222,986
|
|
|
$
|
1,487,788
|
|
Increase in right of use asset and lease liability
|
|
$
|
631,723
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed in acquisition
|
|
$
|
-
|
|
|
$
|
3,503,552
|
|
Less: assets acquired in acquisition
|
|
|
-
|
|
|
|
1,959,655
|
|
Net liabilities assumed
|
|
|
-
|
|
|
|
1,543,897
|
|
Fair value of shares for acquisition
|
|
|
-
|
|
|
|
3,090,000
|
|
Increase in intangible assets - non-cash
|
|
$
|
-
|
|
|
$
|
4,633,897
|
|
See
accompanying notes to unaudited condensed consolidated financial statements.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2019
NOTE
1 – ORGANIZATION AND BUSINESS OPERATIONS
Transportation
and Logistics Systems, Inc. (“TLSS”), formerly PetroTerra Corp., was incorporated under the laws of the State of Nevada,
on July 25, 2008.
On
March 30, 2017 (the “Closing Date”), TLSS and Save On Transport Inc. (“Save On”) entered into a Share
Exchange Agreement, dated as of the same date (the “Share Exchange Agreement”). Pursuant to the terms of the Share
Exchange Agreement, on the Closing Date, Save On became a wholly-owned subsidiary of TLSS (the “Reverse Merger”).
Save On was incorporated in the state of Florida and started business on July 12, 2016. Save On is a provider of integrated transportation
management solutions consisting of brokerage and logistic services such as transportation scheduling, routing and other value-added
services related to the transportation of automobiles and other freight. As an early stage company, TLSS’s current operations
are subject to all risks inherent in the establishment of a new business enterprise
The
Share Exchange was treated as a reverse merger and recapitalization of Save On for financial reporting purposes since the Save
On shareholders retained an approximate 80% controlling interest in the post-merger consolidated entity. Save On was considered
the acquirer for accounting purposes, and the Company’s historical financial statements before the Merger was replaced with
the historical financial statements of Save On before the Merger. The balance sheets at their historical cost basis of both entities
were combined at the merger date and the results of operations from the merger date forward include the historical results of
Save On and results of TLSS from the merger date forward. The Merger was intended to be treated as a tax-free reorganization under
Section 368(a) of the Internal Revenue Code of 1986, as amended. On May 1, 2019, the Company entered into a Share Exchange Agreement
with Save On and Steven Yariv, whereby the Company returned all of the stock of Save On to Steven Yariv in exchange for Mr. Yariv
conveying 1,000,000 shares of common stock of the Company back to the Company. In addition, the Company granted an aggregate of
80,000 options to certain employees of Save On. Mr. Yariv ceased to be an officer or director of the Company effective with the
filing of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 as filed with the Securities
and Exchange Commission of April 16, 2019.
On
June 18, 2018 (the “Acquisition Date”), the Company completed the acquisition of 100% of the issued and outstanding
membership interests of Prime EFS, LLC, a New Jersey limited liability company (“Prime”), from its members pursuant
to the terms and conditions of a Stock Purchase Agreement entered into among the Company and the Prime members on the Closing
Date (the “SPA”). Prime is a New Jersey based transportation company with a focus on deliveries for on-line retailers
in New York, New Jersey and Pennsylvania.
On
July 24, 2018, the Company formed Shypdirect LLC (“Shypdirect”), a company organized under the laws of New Jersey.
Shypdirect is a transportation company with a focus on tractor trailer and box truck deliveries of product on the east coast of
the United States from one distributor’s warehouse to another warehouse or from a distributor’s warehouse to the post
office.
TLSS
and its wholly-owned subsidiaries, Prime and Shypdirect are hereafter referred to as the “Company”.
On
July 16, 2018, the Company filed a Certificate of Amendment to the Amended and Restated Articles of Incorporation (the “Certificate
of Amendment”) with the Secretary of State of the State of Nevada to (1) change the name of the Company from PetroTerra
Corp. to Transportation and Logistics Systems, Inc., (2) authorize an increase of the shares of the preferred stock to 10,000,000
shares, par value $0.001 per share and (3) effect a 1-for-250 reverse stock split (the “Reverse Stock Split”) with
respect to the outstanding shares of the Company’s common stock. The Certificate of Amendment became effective on July 17,
2018. The corporate name change, increase of authorized shares of preferred stock and Reverse Stock Split were previously approved
by the sole director and the majority of stockholders of the Company. The corporate name change and the Reverse Stock Split were
deemed effective at the open of business on July 18, 2018. All share and per share data in the accompanying consolidated financial
statements have been retroactively restated to reflect the effect of the recapitalization.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis
of presentation and principles of consolidation
The
condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting
principles in the United States of America and the rules and regulations of the United States Securities and Exchange Commission
for interim financial information. Accordingly, they do not include all the information and disclosures necessary for comprehensive
presentation of financial position, results of operations or cash flow. However, these unaudited condensed consolidated financial
statements reflect all adjustments, consisting of normal recurring adjustments and a non-recurring adjustment for the impairment
of intangible assets, which, in the opinion of management, are necessary for fair presentation of the information contained therein.
It is suggested that these unaudited interim condensed consolidated financial statements be read in conjunction with the financial
statements of the Company for the year ended December 31, 2018, and notes thereto included in the Company’s annual report
on Form 10-K, filed on April 16, 2019.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2019
The
Company follows the same accounting policies in the preparation of its annual and interim reports. The results of operations in
interim periods are not necessarily an indication of operating results to be expected for the full year.
The
unaudited condensed consolidated financial statements of the Company include the accounts of TLSS and its wholly owned subsidiaries,
Save On (through April 30, 2019), Prime and Shypdirect. All intercompany accounts and transactions have been eliminated in consolidation.
On
May 1, 2019, the Company entered into a Share Exchange Agreement with Save On and Steven Yariv, whereby the Company returned all
of the stock of Save On to Steven Yariv in exchange for Mr. Yariv conveying 1,000,000 shares of common stock of the Company back
to the Company. Pursuant to Accounting Standard Codification (“ASC”) 205-20-45, the financial statement in which net
income or loss of a business entity is reported shall report the results of operations of the discontinued operation in the period
in which a discontinued operation either has been disposed of or is classified as held for sale. Accordingly, beginning in the
second quarter of 2019, the period that Save On was disposed of, the Company reflects Save On as a discontinued operation and
such presentation is retroactively applied to all periods presented in the accompanying condensed consolidated financial
statements.
Going
concern
The
accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and satisfaction of liabilities and commitments in the normal course of business. As reflected in the accompanying condensed
consolidated financial statements, for the six months ended June 30, 2019, the Company had a net loss of $26,609,181 and net cash
used in operations was $3,115,838, respectively. Additionally, the Company had an accumulated deficit, shareholders’ deficit,
and a working capital deficit of $41,379,031, $9,248,833 and $11,697,417, respectively, at June 30, 2019. Furthermore,
the Company failed to make required payments of principal and interest on certain of its convertible debt instruments and defaulted
on other provisions in these Notes. On April 9, 2019, the Company entered into agreements with these lenders that modified these
Notes (See Note 7). It is management’s opinion that 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, 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 common shares and from the issuance of 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.
Use
of estimates
The
preparation of the condensed consolidated financial statements, in accordance with U.S. GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates. Significant estimates included in the accompanying unaudited condensed consolidated
financial statements and footnotes include the valuation of accounts receivable, the useful life of property and equipment, the
valuation of intangible assets, the valuation of right of use asset and related liability, assumptions used in assessing impairment
of long-lived assets, estimates of current and deferred income taxes and deferred tax valuation allowances, the fair value of
non-cash equity transactions, the valuation of derivative liabilities, and the fair value of assets acquired and liabilities assumed
in business acquisitions.
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 June 30, 2019. Accordingly, the estimates presented in these financial statements
are not necessarily indicative of the amounts that could be realized on disposition of the financial instruments. ASC 820 specifies
a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions.
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level
1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2019
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. Assets and liabilities measured at fair value
on a recurring basis are as follows at June 30, 2019 and December 31, 2018:
|
|
At June 30, 2019
|
|
|
At December 31, 2018
|
|
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative liabilities
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
7,888,684
|
|
A
roll forward of the level 3 valuation financial instruments is as follows:
|
|
For the Six
Months Ended
June 30, 2019
|
|
Balance at beginning of period
|
|
$
|
7,888,684
|
|
Gain on extinguishment of debt related to repayment of debt
|
|
|
(246,110
|
)
|
Gain on extinguishment of debt related to April 9, 2019 modifications
|
|
|
(61,841,708
|
)
|
Cumulative effect adjustment for change in derivative accounting
|
|
|
(838,471
|
)
|
Change in fair value included in derivative expense
|
|
|
55,037,605
|
|
Balance at end of period
|
|
$
|
-
|
|
The
Company accounts for its derivative financial instruments, consisting of certain conversion options embedded in our convertible
instruments and warrants, at fair value using level 3 inputs. The Company determined the fair value of these derivative liabilities
using the Black-Scholes option pricing model, binomial lattice models, or other accepted valuation practices. When determining
the fair value of its financial assets and liabilities using these methods, the Company is required to use various estimates and
unobservable inputs, including, among other things, expected terms of the instruments, expected volatility of its stock price,
expected dividends, and the risk-free interest rate. Changes in any of the assumptions related to the unobservable inputs identified
above may change the fair value of the instrument. Increases in expected term, anticipated volatility and expected dividends generally
result in increases in fair value, while decreases in the unobservable inputs generally result in decreases in fair value.
ASC
825-10 “Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and
liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is
irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses
for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair
value option to any outstanding instruments.
The
carrying amounts reported in the balance sheets for cash, accounts receivable, accounts payable and accrued expenses approximate
their fair values based on the short-term maturity of these instruments. The carrying amount of the Company’s convertible
notes payable and promissory note obligations approximate fair value, as the terms of these instruments are consistent with terms
available in the market for instruments with similar risk.
Cash
and cash equivalents
For
purposes of the 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. At June 30, 2019 and December 31,
2018, the Company did not have any cash equivalents.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2019
The
Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. There
were no balances in excess of FDIC insured levels as of June 30, 2019 and December 31, 2018. The Company has not experienced any
losses in such accounts through June 30, 2019.
Accounts
receivable
Accounts
receivable are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for
estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when
there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances,
the Company considers many factors, including the age of the balance, a customer’s historical payment history, its current
credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection.
Property
and equipment
Property
are stated at cost and are depreciated using the straight-line method over their estimated useful lives of five to six years.
Leasehold improvements are depreciated over the shorter of the useful life or lease term including scheduled renewal terms. Maintenance
and repairs are charged to expense as incurred. When assets are retired or disposed of, the cost and accumulated depreciation
are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company
examines the possibility of decreases in the value of these assets when events or changes in circumstances reflect the fact that
their recorded value may not be recoverable.
Intangible
asset
Intangible
assets are carried at cost less accumulated amortization, computed using the straight-line method over the estimated useful life,
less any impairment charges. At June 30, 2019 and December 31, 2018, intangible asset consists of a customer relationship acquired
on June 18, 2018 which is being amortized over a period of five years.
Leases
In
February 2016, the FASB issued ASU 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 updated guidance is effective for interim
and annual periods beginning after December 15, 2018.
On
January 1, 2019, the Company 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. 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 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 condensed 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.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2019
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. On May 1, 2019, the Company disposed of its Save On business segment
and the results of operations of Save On are included in discontinued operations. Accordingly, during the six months ended June
30, 2019 and 2018, the Company believes that it operates in one operating segment related to deliveries for on-line retailers
in New York, New Jersey and Pennsylvania and tractor trailer and box truck deliveries of product on the east coast of the United
States from one distributor’s warehouse to another warehouse or from a distributor’s warehouse to the post office.
Derivative
financial instruments
The
Company has certain financial instruments that are embedded derivatives associated with capital raises. The Company evaluates
all its financial instruments to determine if those contracts or any potential embedded components of those contracts qualify
as derivatives to be separately accounted for in accordance with ASC 810-10-05-4 and 815-40. This accounting treatment requires
that the carrying amount of any embedded derivatives be recorded at fair value at issuance and marked-to-market at each balance
sheet date. In the event that the fair value is recorded as a liability, as is the case with the Company, the change in the fair
value during the period is recorded as either other income or expense. Upon conversion, exercise or repayment, the respective
derivative liability is marked to fair value at the conversion, repayment or exercise date and then the related fair value amount
is reclassified to other income or expense as part of gain or loss on extinguishment.
In
July 2017, FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic
480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features.
These amendments simplify the accounting for certain financial instruments with down-round features. The amendments require companies
to disregard the down-round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining
liability or equity classification. The guidance was adopted as of January 1, 2019 and the Company elected to record the effect
of this adoption retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect
adjustment to the condensed consolidated balance sheet as of the beginning of 2019, the period which the amendment is effective.
In accordance with the guidance presented in the ASU 2017-11, the fair value of derivative liabilities associated with certain
convertible notes as of December 31, 2018 of $838,471 and the offsetting effect of reclassifying such debt to stock-settled debt
for which the Company recorded a put premium liability of $385,385 was reclassified by means of a cumulative-effect adjustment
to opening accumulated deficit as of January 1, 2019 in the amount of $453,086.
Revenue
recognition and cost of revenue
On
January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue
recognition requirements in Accounting Standards Codification (ASC) Topic 605, Revenue Recognition. This ASC is based on the principle
that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. This ASC also requires additional disclosure
about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer service orders, including significant
judgments.
For
the Company’s Prime and Shypdirect business activities, 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 net seven days from acceptance of delivery.
The Company does not incur incremental costs obtaining service orders from its Prime customers, however, if the Company did, because
all of Prime and Shypdirect customer contracts are less than a year in duration, any contract costs incurred would be expensed
rather than capitalized. The revenue that the Company recognizes arises from deliveries of packages on behalf of the Company’s
customers. Primarily, the Company’s performance obligations under these service orders correspond to each delivery of packages
that the Company makes under the service agreements. Control of the package transfers to the recipient upon delivery. Once this
occurs, the Company has satisfied its performance obligation and the Company recognizes revenue.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2019
For
the Company’s Save On business activities, through the date of disposition on May 1, 2019, the Company recognized revenues
and the related direct costs of such revenue which includes carrier fees and dispatch costs as of the date the freight is delivered
by the carrier which is when the performance obligation is satisfied. Customer payments received prior to delivery are recorded
as a deferred revenue liability and related carrier fees if paid prior to delivery are recorded as a deferred expense asset. In
accordance with ASC Topic 606, the Company recognizes revenue on a gross basis. Our payment terms for corporate customers are
net 30 days from acceptance of delivery and individual customers generally must pay in advance. The Company does not incur incremental
costs obtaining service orders from our Save On customers, however, if the Company did, because all of the Save On customer’s
contracts are less than a year in duration, any contract costs incurred would be expensed rather than capitalized. The Company’s
adoption of this ASC, resulted in no cumulative effect at January 1, 2018 and no change prospectively to the Company’s results
of operations or financial condition. The revenue that the Company recognizes arises from service orders it receives from its
Save On customers. The Company’s performance obligations under these service orders correspond to each delivery of a vehicle
that the Company makes for its customer under the service orders; as a result, each service order generally contains only one
performance obligation based on the delivery to be completed.
Revenue
disaggregation disclosure required pursuant to ASC 606 are disclosed in Note 13 – Segment Information.
Basic
and diluted loss per share
Pursuant
to ASC 260-10-45, basic loss per common share is computed by dividing net loss 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 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 warrants (using the treasury stock method) and shares issuable
for convertible debt (using the as-if converted method). These common stock equivalents may be dilutive in the future.
Potentially
dilutive common shares were excluded from the computation of diluted shares outstanding as they would have an anti-dilutive impact
on the Company’s net losses and consisted of the following:
|
|
June 30, 2019
|
|
|
June 30, 2018
|
|
Stock warrants
|
|
|
114,000
|
|
|
|
1,329,548
|
|
Stock options
|
|
|
80,000
|
|
|
|
-
|
|
Convertible debt
|
|
|
534,312
|
|
|
|
3,158,465
|
|
Series A convertible preferred stock
|
|
|
-
|
|
|
|
6,666,667
|
|
Stock-based
compensation
Stock-based
compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition
in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments
over the period the employee or director 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 and director services received in exchange for an award based
on the grant-date fair value of the award.
Through
March 31, 2018, pursuant to ASC 505-50 – “Equity-Based Payments to Non-Employees”, all share-based payments
to non-employees, including grants of stock options, were recognized in the consolidated financial statements as compensation
expense over the service period of the consulting arrangement or until performance conditions are expected to be met. Using a
Black-Scholes valuation model, the Company periodically reassessed the fair value of non-employee options until service conditions
are met, which generally aligns with the vesting period of the options, and the Company adjusts the expense recognized in the
consolidated financial statements accordingly. In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based
Payment Accounting, which simplifies several aspects of the accounting for nonemployee share-based payment transactions by expanding
the scope of the stock-based compensation guidance in ASC 718 to include share-based payment transactions for acquiring goods
and services from non-employees. ASU No. 2018-07 is effective for annual periods beginning after December 15, 2018, including
interim periods within those annual periods. Early adoption is permitted, but entities may not adopt prior to adopting the new
revenue recognition guidance in ASC 606. The Company early adopted ASU No. 2018-07 in the second quarter of 2018 and there was
no cumulative effect of adoption.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2019
Recent
Accounting Pronouncements
In
July 2017, FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic
480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features.
These amendments simplify the accounting for certain financial instruments with down-round features. The amendments require companies
to disregard the down-round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining
liability or equity classification. The guidance was adopted as of January 1, 2019 and the Company elected to record the effect
of this adoption retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect
adjustment to the condensed consolidated balance sheet as of the beginning of 2019, the period which the amendment is effective.
In accordance with the guidance presented in the ASU 2017-11, the fair value of derivative liabilities associated with certain
convertible notes as of December 31, 2018 of $838,471 and the offsetting effect of reclassifying such debt to stock-settled debt
for which the Company recorded a put premium liability of $385,385 was reclassified by means of a cumulative-effect adjustment
to opening accumulated deficit as of January 1, 2019 in the amount of $453,086.
In
August 2018, the FASB issued ASU 2018-13 to modify the disclosure requirements on fair value measurements. The amendments are
effective for years beginning after December 15, 2019. An entity is permitted to early adopt any removed or modified disclosures
and delay adoption of the additional disclosures until the effective date. Most amendments should be applied retrospectively,
but certain amendments will be applied prospectively. The Company is in the process of assessing the impact of the standard on
the Company’s fair value disclosures. However, the standard is not expected to have an impact on the Company’s consolidated
financial position, results of operations and cash flows.
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.
NOTE
3 – DISCONTINUED OPERATIONS
On
May 1, 2019, the Company entered into a Share Exchange Agreement with Save On and Steven Yariv, whereby the Company returned all
of the stock of Save On to Steven Yariv in exchange for Mr. Yariv conveying 1,000,000 shares of common stock of the Company back
to the Company. In addition, the Company granted an aggregate of 80,000 options to certain employees of Save On. Mr. Yariv ceased
to be an officer or director of the Company effective with the filing of the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2018 as filed with the Securities and Exchange Commission of April 16, 2019.
Pursuant
to Accounting Standard Codification (“ASC”) 205-20-45, the financial statement in which net income or loss of a business
entity is reported shall report the results of operations of the discontinued operation in the period in which a discontinued
operation either has been disposed of or is classified as held for sale. Accordingly, the Company shall reflect Save On as a discontinued
operations beginning in the second quarter of 2019, the period that Save On was disposed of and retroactively for all periods
presented in the accompanying condensed consolidated financial statements. The business of Save On are considered discontinued
operations because: (a) the operations and cash flows of Save On were eliminated from the Company’s operations; and (b)
the Company has no interest in the divested operations.
The
assets and liabilities classified as discontinued operations in the Company’s condensed consolidated financial statements
as of June 30, 2019 and December 31, 2018, and for the six months ended June 30, 2019 and 2018 is set forth below.
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
Assets:
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
-
|
|
|
$
|
334,275
|
|
Prepaid expenses and other
|
|
|
-
|
|
|
|
1,619
|
|
Total current assets
|
|
|
-
|
|
|
|
335,894
|
|
Total assets
|
|
$
|
-
|
|
|
$
|
335,894
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
-
|
|
|
$
|
409,053
|
|
Accounts payable – related party
|
|
|
-
|
|
|
|
3,700
|
|
Accrued expenses and other liabilities
|
|
|
-
|
|
|
|
27,992
|
|
Total current liabilities
|
|
|
-
|
|
|
|
440,745
|
|
Total liabilities
|
|
$
|
-
|
|
|
$
|
440,745
|
|
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2019
The
summarized operating result of discontinued operations included in the Company’s condensed consolidated statements of operations
is as follows:
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Revenues
|
|
$
|
1,491,253
|
|
|
$
|
2,309,771
|
|
Cost of revenues
|
|
|
1,114,269
|
|
|
|
1,756,634
|
|
Gross profit
|
|
|
376,984
|
|
|
|
553,137
|
|
Operating expenses
|
|
|
1,058,410
|
|
|
|
469,536
|
|
Loss from discontinued operations
|
|
|
(681,426
|
)
|
|
|
83,601
|
|
Loss on disposal of discontinued operations
|
|
|
-
|
|
|
|
-
|
|
Loss from discontinued operations, net of income taxes
|
|
$
|
(681,426
|
)
|
|
$
|
83,601
|
|
NOTE
4 – ACCOUNTS RECEIVABLE
At
June 30, 2019 and December 31, 2018, accounts receivable, net consisted of the following:
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
Accounts receivable
|
|
$
|
927,723
|
|
|
$
|
441,497
|
|
Allowance for doubtful accounts
|
|
|
-
|
|
|
|
-
|
|
Accounts receivable, net
|
|
$
|
927,723
|
|
|
$
|
441,497
|
|
NOTE
5 - PROPERTY AND EQUIPMENT
At
June 30, 2019 and December 31, 2018, property and equipment consisted of the following:
|
|
Useful Life
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
Delivery trucks and vehicles
|
|
5 - 6 years
|
|
$
|
899,139
|
|
|
$
|
1,033,397
|
|
Less: accumulated depreciation
|
|
|
|
|
(171,085
|
)
|
|
|
(96,566
|
)
|
Property and equipment, net
|
|
|
|
$
|
728,054
|
|
|
$
|
936,831
|
|
For
the six months ended June 30, 2019 and 2018, depreciation expense is included in general and administrative expenses and amounted
to $94,080 and $5,199, respectively. During the six months ended June 30, 2019, the Company traded in or sold delivery trucks
and vehicles of $185,514 with related accumulated depreciation of $19,561, and received cash of $81,000 and reduced notes payable
of $37,931, resulting in a loss of $47,022 which is included in general and administrative expenses on the accompanying condensed
consolidated statement of operations.
NOTE
6 – INTANGIBLE ASSET
At
June 30, 2019 and December 31, 2018, intangible asset consisted of the following:
|
|
Useful life
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
Customer relationship
|
|
5 year
|
|
$
|
2,420,191
|
|
|
$
|
5,235,515
|
|
Less: accumulated amortization
|
|
|
|
|
-
|
|
|
|
(567,181
|
)
|
|
|
|
|
$
|
2,420,191
|
|
|
$
|
4,668,334
|
|
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2019
For
the six months ended June 30, 2019 and 2018, amortization of intangible assets amounted to $523,552 and $168,430, respectively.
At
June 30, 2019, the Company conducted an impairment assessment on intangible assets based on the guidelines established in ASC
Topic 360 to determine the estimated fair market value of intangible assets as of June 30, 2019. Such analysis considered future
cash flows and other industry factors. Upon completion of this impairment analysis, the Company determined that the carrying value
exceeded the fair market value of intangible assets. Accordingly, in connection with the impairment of such intangible assets,
the Company recorded an impairment charge of $1,724,591 for the six months ended June 30, 2019, which was included in operating
expenses on the accompanying condensed consolidated statements of operations.
Amortization
of intangible assets attributable to future periods is as follows:
Year ending June 30:
|
|
Amount
|
|
2020
|
|
$
|
611,417
|
|
2021
|
|
|
611,417
|
|
2022
|
|
|
611,417
|
|
2023
|
|
|
585,940
|
|
|
|
$
|
2,420,191
|
|
NOTE
7 – CONVERTIBLE PROMISSORY NOTES PAYABLE AND NOTES PAYABLE
Red
Diamond Partners LLC and RDW Capital, LLC
On
April 25, 2017, the Company entered into a Securities Purchase Agreement with RedDiamond Partners LLC (“RedDiamond”)
pursuant to which the Company would issue to RedDiamond Convertible Promissory Notes in an aggregate principal amount of up to
$355,000, which includes a purchase price of $350,000 and transaction costs of $5,000. Pursuant to this securities purchase agreement,
on April 25, 2017, the Company entered into a convertible promissory note in the aggregate principal amount of $100,000 and the
Company received $95,000 after giving effect to the original issue discount of $5,000. This note matured on April 25, 2018 and
each tranche matured one year after the date of such funding. The second Tranche was received on June 2, 2017 for $85,000 and
the third Tranche for $85,000 was received on August 8, 2017 upon filing of the Registration Statement. The fourth Tranche was
to be for $85,000, however, as of the date of this filing, the fourth tranche has not yet been received. The Purchaser is not
required to fund any Tranche subsequent to the first Tranche if there is an event of default as described in the promissory notes.
Through date of default, the RedDiamond Notes bore interest at a rate of 12% per annum and were convertible into shares of the
Company’s common stock at RedDiamond’s option at 65% of the lowest VWAP for the previous ten trading days preceding
the conversion. During 2018, the Company failed to make its required maturity date payments of principal and interest on Convertible
Promissory Notes of $270,000. In accordance with these notes, the Company entered into default in 2018, which increased the interest
rate to 18.0% per annum. These convertible promissory notes contain cross default provisions whereby a default in any one note
greater than $25,000 will cause a default in all the notes, however, this provision is only effective if there is a formal notice
of default by the lender.
On
June 30, 2017, the Company issued RDW Capital, LLC a senior convertible note in the aggregate principal amount of $240,000, for
an aggregate purchase price of $30,000 of which $15,000 had been recorded as advance from lender as of March 31, 2017 and the
remaining $15,000 received on June 30, 2017. Through date of default, the principal due under the Note accrued interest at a rate
of 12% per annum. All principal and accrued interest under the Note was due six months following the issue date of the Note, and
is convertible into shares of the Company’s common stock, at a conversion price equal to fifty (50%) of the lowest volume-weighted
average price for the previous ten trading days immediately preceding the conversion. The Note includes anti-dilution protection,
including a down-round provision under which the conversion price could be affected by future equity offerings undertaken by the
Company, as well as customary events of default, including non-payment of the principal or accrued interest due on the Note. Upon
an event of default, all obligations under the Note will become immediately due and payable and the Company will be required to
make certain payments to the Lender. On December 31, 2017 the Company failed to make its required maturity date payment of principal
and interest. In accordance with the note, the Company entered into default on January 3, 2018, which increased the interest rate
to 24% per annum.
In
connection with the issuance of these Convertible Promissory Notes above, the Company determined that the terms of these Convertible
Promissory Notes included a down-round provision under which the conversion price could be affected by future equity offerings
undertaken by the Company.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2019
The
Company evaluated these convertible promissory note transactions in accordance with ASC Topic 815, Derivatives and Hedging. Through
December 31, 2018, the Company determined that the conversion feature of the convertible promissory notes were not afforded the
exemption for conventional convertible instruments due to their respective variable conversion rate and price protection provision.
Accordingly, through December 31, 2018, under the provisions of FASB ASC Topic No. 815-40, “Derivatives and Hedging –
Contracts in an Entity’s Own Stock”, the embedded conversion option contained in the convertible instruments were
accounted for as derivative liabilities at the date of issuance and shall be adjusted to fair value through earnings at each reporting
date. On January 1, 2019, the Company adopted ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities
from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments
with Down Round Features, and the Company elected to record the effect of this adoption retrospectively to outstanding financial
instruments with a down round feature by means of a cumulative-effect adjustment to the condensed consolidated balance sheet as
of the beginning of 2019, the period which the amendment is effective (See Note 2 - Derivative liabilities).
On
April 9, 2019, the Company entered into agreements with RedDiamond, holding these convertible notes representing an aggregate
principal amount of $510,000, and agreed with such holder to:
|
●
|
extend
the maturity date of the notes to December 31, 2020;
|
|
●
|
remove
all convertibility features of the notes; and
|
|
●
|
if
the Company completes an offering of equity or equity linked securities (including warrants, convertible preferred stock,
convertible debentures or convertible promissory note) which results in gross proceeds to the Company of at least $4,000,000,
then the Company shall use a portion of the proceeds thereof to repay not less than half of the obligations then outstanding
pursuant to the notes.
|
The
aggregate principal amounts due as of June 30, 2019 and December 31, 2018 amounted to $510,000 and $510,000, respectively. At
December 31, 2018, the principal balance of $510,000 was included in convertible notes payable, a current liability, on
the accompanying consolidated balance sheet. At June 30, 2019, the principal balance of $510,000 was included in notes payable
– related party, a long-term liability, on the accompanying consolidated balance sheet since on April 9, 2019, the
conversion features on the notes were removed and RedDiamond became a principal shareholder of the Company when
they converted their preferred shares to common stock (See Note 9). In connection with this debt modification, the Company
recorded a gain on debt extinguishment of $432,589, which consists of the removal of debt put premium of $385,385 since the debt
is no longer convertible, and $47,205 related to the reversal of default interest payable.
Bellridge
Capital, LLC
On
June 18, 2018, the Company entered into a securities purchase agreement (the “Purchase Agreement”), whereby it issued
to an institutional investor (the “Lender”) a senior secured convertible note in the aggregate principal amount of
$2,497,503 (the “Note”), for an aggregate purchase price of $1,665,000, net of an original issue discount of $832,503.
In addition, the Company paid issue costs of $177,212. The original issue discount and issue costs were recorded as a debt discount
to be amortized over the Note term. The principal due under the Note accrues interest at a rate of 10% per annum. Principal and
interest payments of $232,940 were payable monthly beginning on December 18, 2018 and were due monthly over the term of the Note
in cash or common stock of the Company, at the Lender’s discretion.
In
connection with the Purchase Agreement, the Lender was issued a warrant, with a term of two years, to purchase up to 4.75% of
the fully-diluted outstanding Common Stock of the Company, for an aggregate purchase price of $100. Additionally, the placement
agent was issued a warrant, with a term of two years, to purchase up to 4.75% of the fully-diluted outstanding Common Stock of
the Company, for an aggregate purchase price of $100.
In
August 2018, the Company defaulted on its convertible note payable with Bellridge due to (i) default on the payment of monthly
interest payments due, (ii) default caused by the late filing of the Company’s report on Form 10-Q for the periods ended
June 30, 2018 and September 30, 2018 and (iii) default of filing of a registration statement. Upon an event of default, all principal,
accrued interest, and liquating damages and penalties were due upon request of the lender at 125% of such amounts.
On
December 27, 2018, the lender waived any and all defaults in existence on the Note and the Company agreed to issue a warrant that
is convertible into 2% of the issued and outstanding shares existing as the time the Company files a registration statement or
makes an application to up list to a national stock exchange. Pursuant to this warrant, at any time on or before the date that
the Company files a registration statement on form S-l or applies for up-listing to a National Exchange, and on or prior to the
close of business on the early of the first year anniversary of the issuance of December 27, 2018 (the “Termination Date”),
Bellridge could have chosen to subscribe for and purchase from the Company up to 2% in shares of common stock for an aggregate
exercise price of $100. Additionally, the principal interest amount due under the Note was modified with a monthly payment of
principal and interests due beginning on January 18, 2019 of $156,219 with all remaining principal and interest amounts on the
Note due on December 18, 2019. This modification was not considered a debt extinguishment.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2019
On
April 9, 2019, the Company entered into a new agreement with this lender that modified these Notes and cancelled these warrants
(see below).
Through
April 9, 2019, all principal and accrued interest under the Note was convertible into shares of the Company’s common stock,
at a conversion price equal to the lower of $1.50 and 65% of the lowest traded price during the fifteen trading days immediately
prior to the conversion date. The Note includes anti-dilution protection, as well as customary events of default, including, but
not limited to, non-payment of the principal or accrued interest due on the Note and cross default provisions on other Company
obligations or contracts. Upon an event of default, all obligations under the Note will become immediately due and payable and
the Company will be required to make certain payments to the Lender.
The
Lender was granted a right of first refusal on future financing transactions of the Company while the Note remains outstanding,
plus an additional three months thereafter. In connection with the issuance of the Note, the Company entered into a security agreement
with the Lender (the “Security Agreement”) pursuant to which the Company agreed that obligations under the Note and
related documents will be secured by all of the assets of the Company. In addition, all of the Company’s subsidiaries are
guarantors of the Company’s obligations to the Lender pursuant to the Note and have granted a similar security interest
over substantially all of their assets. A portion of the proceeds of the Note were used to acquire 100% of the membership interests
of Prime.
During
the term of this Note, in the event that the Company consummates any public or private offering or other financing or capital
raising transaction of any kind ( each a “Subsequent Offering”), in which the Company receives, in one or more contemporaneous
transactions, gross proceeds of at least $5,000,000, at any time upon ten (10) days written notice to the Holder, but subject
to the Holder’s conversion rights set forth in the Purchase Agreement, then the Company shall use 20% of the gross proceeds
of the Subsequent Offering and shall make payment to the Holder of an amount in cash equal to the product of (i) the sum of (x)
the then outstanding principal amount of this Note and (y) all accrued but unpaid interest, multiplied by (ii) (x) 110%, if the
Prepayment Date is within 90 days of the date hereof the Closing Date (as defined in the Purchase Agreement), or (y) 125%, if
the Prepayment Date is after the 90th day following the Closing Date, to which calculated amount the Company shall add all other
amounts owed pursuant to this Note, including, but not limited to, all Late Fees and liquidated damages.
In
connection with the Purchase agreement, the Company entered into a registration rights agreement which, among other things, required
the Company to file a registration statement with the Securities and Exchange Commission no later than 120 days after June 18,
2018. The Company failed to file such registration statement. Accordingly, in addition to any other rights the Holders may have
hereunder or under applicable law, on the default date and on each monthly anniversary of each such default date (if the applicable
event shall not have been cured by such date) until the ninetieth day from such Event Date, the Company shall pay to each Holder
an amount in cash, as partial liquidated damages and not as a penalty, equal to the product of one percent (1%) multiplied by
the aggregate subscription amount paid by the Holder pursuant to the Purchase Agreement. Subsequent to the ninetieth day from
such default date, the one percent (1%) penalty shall increase to two percent (2%), with an aggregate cap of twenty percent (20%)
per annum. If the Company fails to pay any of these partial liquidated damages in full within seven days after the date payable,
the Company will pay interest thereon at a rate of 18% per annum to the Holder, accruing daily from the date such partial liquidated
damages are due until such amounts, plus all such interest thereon, are paid in full. On December 27, 2018, the lender waived
any and all defaults.
In
connection with this Purchase Agreement, the Company paid a placement agent $120,000 in cash which is included in issue costs
previously discussed above and this placement agent was issued a warrant, with a term of two years, to purchase up to 4.75% of
the fully-diluted outstanding Common Stock of the Company, for an aggregate purchase price of $100 (the “Placement Warrant”).
On April 9, 2019, the Company entered into an agreement with this placement agent that cancelled these warrants.
In
connection with the issuance of this Note, Warrants, and Placement Warrant, the Company determined that this Note and these
Warrants contains terms that are not fixed monetary amounts at inception. Accordingly, under the provisions of ASC Topic No.
815-40, “Derivatives and Hedging – Contracts in an Entity’s Own Stock”, the embedded conversion option
contained in the convertible instrument and the Warrant and Placement Warrant were accounted for as derivative liabilities at
the date of issuance and shall be adjusted to fair value through earnings at each reporting date. The fair value of this embedded
conversion option derivative, and the Warrant and Placement Warrant were determined using the Binomial valuation model and Monte-Carlo
simulation model, respectively.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2019
Convertible
debt modifications and warrant cancellations
On
April 9, 2019 (the “Modification Date”), the Company entered into an agreement with Bellridge Capital, L.P. (“Bellridge”)
that modifies its existing obligations to Bellridge as follows:
|
●
|
the
overall principal amount of that certain Convertible Promissory Note, dated June 18, 2018, issued by the Company in favor
of Bellridge (the “Note”) was reduced from the original principal amount of $2,497,502 (principal amount was $2,223,918
at April 9, 2019) to $1,800,000, in exchange for the issuance to Bellridge of 800,000 shares of restricted common stock, which
shall be delivered to Bellridge, either in whole or in part, at such time or times as when the beneficial ownership of such
shares by Bellridge will not result in Bellridge’s beneficial ownership of more than the Beneficial Ownership Limitation
and such shares will be issued within three business days of the date the Bellridge has represented to the Company that it
is below the Beneficial Ownership Limitation. Such issuances will occur in increments of no fewer than the lesser of (i) 50,000
shares and (ii) the balance of the 800,000 shares owed. The “Beneficial Ownership Limitation” shall be 4.99% of
the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance of shares
of common stock issuable pursuant to this Agreement. As of August 19, 2019, 100,000 of these shares have been issued;
|
|
|
|
|
●
|
the
maturity date of the Note was extended to August 31, 2020;
|
|
|
|
|
●
|
the
interest rate was reduced from 10% to 5% per annum;
|
|
|
|
|
●
|
if
the Company completes an offering of equity or equity linked securities (including warrants, convertible preferred stock,
convertible debentures or convertible promissory note) which results in gross proceeds to the Company of at least $4,000,000,
then the Company shall use a portion of the proceeds thereof to repay not less than half of the obligations then outstanding
pursuant to the Note;
|
|
|
|
|
●
|
if
the Company completes an offering of debt which results in gross proceeds to the Company of at least $3,000,000, then the
Company shall use a portion of the proceeds thereof to repay any remaining obligations then outstanding pursuant to the Note;
|
|
|
|
|
●
|
the
convertibility of the Note will now be amended such that the Note shall only be convertible at a conversion price to be mutually
agreed upon between the Company and the Holder. As of the date of this report, the Company and Holder have not mutually agreed
on a conversion price, Since the conversion terms are unknown, the Company will account for this conversion feature when the
contingency is resolved;
|
|
|
|
|
●
|
the
registration rights previously granted to Bellridge have now been eliminated; and
|
|
|
|
|
●
|
those
certain Warrants, dated June 18, 2018 and December 27, 2018, respectively, issued by the Company in favor of Bellridge shall
be cancelled and of no further force or effect. In exchange, the Company will issue Bellridge 360,000 shares of restricted
common stock.
|
In
addition, on the Modification Date, warrant holders holding warrants exercisable into an aggregate of 4.75% of the outstanding
common stock of the Company all agreed to exercise such warrants for an aggregate of 240,000 shares of common stock of the Company.
In
connection with the modification of the Bellridge Note and the cancellation of the related warrants, under the provisions of ASC
Topic No. 815-40, “Derivatives and Hedging – Contracts in an Entity’s Own Stock”, the embedded conversion
option contained in the convertible instrument and the Warrant and Placement Warrant were adjusted to fair value through earnings
on the Modification Date. The fair value of this embedded conversion option derivative, and the Warrant and Placement Warrant
were determined using the Binomial valuation model and Monte-Carlo simulation model, respectively. For the period from April 1,
2019 to April 9, 2019, the change of fair value of derivative liabilities associated with these instruments amounted to $41,653,345,
which was recorded as derivative expense on the Modification date. The increase in derivative liabilities was caused by an increase
in the Company’s stock price, as quoted on OTC Markets. Additionally, on the Modification Date, the Company analyzed the
Bellridge Note modification and the cancellation of the warrants and pursuant to ASC 470-50, the modifications were treated as
a debt extinguishment.
Gain
on debt extinguishment
In
connections with the RedDiamond and Bellridge debt modifications and warrants cancellations discussed above, on the Modification
Date, the Company recorded a gain on debt extinguishment of $43,823,897 which consists of the following.
|
|
Gain on Extinguishment
on Modification Date
|
|
Gain from reversal of derivative liabilities on Modification Date
|
|
$
|
61,841,708
|
|
Fair value of common shares issued on Modification Date
|
|
|
(17,934,000
|
)
|
Write-off of remaining debt discount
|
|
|
(1,013,118
|
)
|
Reversal of put premium on stock-settled debt related to cancellation of conversion terms
|
|
|
385,385
|
|
Reduction of principal and interest balances due
|
|
|
543,922
|
|
Gain of debt extinguishment
|
|
$
|
43,823,897
|
|
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2019
Summary
of derivative liabilities
Through
April 9, 2019, the Company revalued the embedded conversion option and warrant derivative liabilities. In connection with these
revaluations, the Company recorded derivative expense of $55,037,605 and $9,505,352 for the six months ended June 30, 2019 and
2018, respectively
During
the six months ended June 30, 2019 and 2018, the fair value of the derivative liabilities was estimated using the Black-Sholes
valuation model, Binomial valuation model, and the Monte-Carlo simulation model with the following assumptions:
|
|
2019
|
|
|
2018
|
|
Expected dividend rate
|
|
|
-
|
|
|
|
-
|
|
Expected term (in years)
|
|
|
0.05 to 0.75
|
|
|
|
0.01 to 2.00
|
|
Volatility
|
|
|
228.1
|
%
|
|
|
261.2% to 307.75
|
%
|
Risk-free interest rate
|
|
|
2.23% to 2.40
|
%
|
|
|
1.32% to 2.11
|
%
|
Convertible
note payable – related parties
On
March 13, 2019, the Company entered into a convertible note agreement with an individual, who is affiliated to the Company’s
chief executive officer, in the amount of $500,000. Commencing on April 11, 2019, and continuing on the eleventh day of each month
thereafter, payments of interest only on the outstanding principal balance of this Note of $7,500 shall be due and payable. Commencing
on October 11, 2019 and continuing on the eleventh day of each month thereafter through April 11, 2021, payments of principal
and interest of $31,902 shall be made, if not sooner converted as provided in the note agreement. The payment of all or any portion
of the principal and accrued interest may be paid prior to the April 11, 2021. Interest shall accrue with respect to the unpaid
principal sum identified above until such principal is paid or converted as provided below at a rate equal to 18% per annum compounded
annually. All past due principal and interest on this Note shall bear interest from maturity of such principal or interest (in
whatever manner same may be brought about) until paid at the lesser of (i) 20% per annum, or (ii) the highest non-usurious rate
allowed by applicable law. This Note may be converted by Holder at any time in principal amounts of $100,000 in accordance with
the terms by delivery of written notice to the Company, into that number of shares of common stock equal to the amount obtained
by dividing the portion of the aggregate principal amount of this Note that is being converted by $1.37. In connection with the
issuance of this Note, the Company determined that this Note contains terms that are fixed monetary amounts at inception. Since
the conversion price of $1.37 was equal to the quoted closing of the Company’s common shares on the note date, no beneficial
feature conversion was recorded.
On
April 11, 2019, the Company entered into a convertible note agreement with an entity affiliated with the Company’s chief
executive officer in the amount of $2,000,000. Commencing on May 11, 2019, and continuing on the eleventh day of each month thereafter,
payments of interest only on the outstanding principal balance of this Note of $30,000 shall be due and payable. Commencing on
November 11, 2019 and continuing on the eleventh day of each month thereafter through April 11, 2021, payments of principal and
interest of $117,611 are due, if the note is not sooner converted as provided in the note agreement. The payment of all or any
portion of the principal and accrued interest may be prepaid prior to April 11, 2021. Interest shall accrue with respect to the
unpaid principal sum identified above until such principal is paid or converted as provided below at a rate equal to 18% per annum
compounded annually. All past due principal and interest on this Note shall bear interest from maturity of such principal or interest
until paid at the lesser of (i) 20% per annum, or (ii) the highest non-usurious rate allowed by applicable law. This Note may
be converted by Holder at any time in principal amounts of $100,000 in accordance with the terms by delivery of written notice
to the Company, into that number of shares of common stock equal to the amount obtained by dividing the portion of the aggregate
principal amount of this Note that is being converted by $11.81. Since the conversion price of $11.81 was equal to the quoted
closing of the Company’s common shares on the note date, no beneficial feature conversion was recorded.
At
June 30, 2019 and December 31, 2018, convertible promissory notes (third party and related parties) are as follows:
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
Principal amount
|
|
$
|
1,800,000
|
|
|
$
|
3,007,503
|
|
Principal amounts – related parties
|
|
|
2,500,000
|
|
|
|
-
|
|
Total principal amount
|
|
|
4,300,000
|
|
|
|
3,007,503
|
|
Less: unamortized debt discount
|
|
|
-
|
|
|
|
(1,595,627
|
)
|
Convertible notes payable, net
|
|
|
4,300,000
|
|
|
|
1,411,876
|
|
Less: current portion of convertible notes payable
|
|
|
(4,300,000
|
)
|
|
|
(1,411,876
|
)
|
Convertible notes payable, net – long-term
|
|
$
|
-
|
|
|
$
|
-
|
|
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2019
For
the six months ended June 30, 2019 and 2018, amortization of debt discounts related to these convertible notes amounted to $430,268
and $332,364, respectively, which has been included in interest expense on the accompanying unaudited condensed consolidated statements
of operations.
NOTE
8 – NOTES PAYABLE
Secured
merchant loans
In
connection with the acquisition of Prime in 2018, the Company assumed several notes payable liabilities amounting to $944,281
pursuant to secured merchant agreements (the “Assumed Secured Merchant Loans”). Pursuant to the Assumed Secured Merchant
Loans, the Company is required to repay the noteholders by making daily payments on each business day or on demand payments until
the loan amounts are paid in full. Each payment is deducted directly from the Company’s bank accounts. The Assumed Secured
Merchant Loans are secured by the assets of Prime, and are personally guaranteed by the former majority member of Prime.
During
January 2019, the Company entered into a separate promissory note with one of these individuals and borrowed an additional $26,900
at a simple annual interest rate of 15% bringing the total promissory note balance to $77,090 for this individual. During
the six months ended June 30, 2019, the Company repaid $57,355 of these notes. At June 30, 2019 and December 31, 2018, notes payable
related to Assumed Secured Merchant Loans and a new promissory note amounted to $97,496 and $157,951, respectively. In connection
with the January 2019 promissory note, the Company issued 1,000 warrants to purchase 1,000 shares of the Company’s common
stock at an exercise price of $1.00 per share. The warrant is exercisable over a five year period.
On
September 20, 2018, the Company entered into a secured Merchant Loan with a lender in the amount of $521,250 and received net
proceeds of $375,000, net of original issue discount of $146,250. Pursuant to this Secured Merchant Loan, the Company is required
to repay the noteholders by making daily payments of $3,724 on each business day until the loan amounts are paid in full. Each
payment is deducted directly from the Company’s bank accounts. This Secured Merchant Loan is secured by the Company’s
assets and are personally guaranteed by the former majority member of Prime. On January 14, 2019, the Company entered into a new
secured Merchant Loan with this lender in the amount of $764,500. The Company simultaneously repaid the September 20, 2018 loan
which had a remaining principal balance of $223,329, paid an origination fee of $10,034 and received net proceeds of $316,637,
net of original issue discount of $214,500. Pursuant to this Secured Merchant Loan, the Company is required to repay the noteholders
by making daily payments of $6,371 on each business day until the loan amounts are paid in full. Each payment is deducted
directly from the Company’s bank account. On January 24, 2019, the Company entered into another secured Merchant Loan with
this lender in the amount of $417,000. The Company simultaneously paid an origination fee of $7,998 and received net proceeds
of $292,002, net of original issue discount of $117,000. Pursuant to this Secured Merchant Loan, the Company is required to repay
the noteholders by making daily payments of $3,972 on each business day until the loan amounts are paid in full. Each payment
is deducted directly from the Company’s bank account. On May 8, 2019, the Company entered into another secured Merchant
Loan with this merchant in the principal amount of $1,242,000. The Company simultaneously repaid prior loans of $362,961 which
were entered into during January 2019, paid origination fees totaling $9,000 and paid an original issue discount of $342,000,
and received net proceeds of $528,039. Pursuant to this secured Merchant Loan, the Company is required to pay the noteholder by
making daily payments of $10,265 on each business day until the loan amounts are paid in full. Each payment is deducted from the
Company’s bank account. These Secured Merchant Loans are secured by the Company’s assets and are personally guaranteed
by the former majority member of Prime. During the six months ended June 30, 2019, the Company repaid an aggregate of $1,774,274
of the loans. At June 30, 2019 and December 31, 2018, secured merchant notes payable related to these Secured Merchant Loans amounted
to $655,347 and $190,125, which is net of unamortized debt discount of $258,173 and $74,169, respectively.
On
October 1, 2018, the Company entered into a secured Merchant Loan in the amount of $209,850 and received net proceeds of $137,962,
net of original issue discount of $59,850 and net of origination fees of $12,038. Pursuant to this Secured Merchant Loan, the
Company is required to repay the noteholders by making daily payments of $1,749 on each business day until the loan amounts are
paid in full. Each payment is deducted directly from the Company’s bank accounts. Additionally, on October 1, 2018, the
Company entered into a second secured Merchant Loan in the amount of $139,900 and received net proceeds of $92,000, net of original
issue discount of $39,900 and net of origination fees of $8,000. Pursuant to this Secured Merchant Loan, the Company is required
to repay the noteholders by making daily payments of $1,166 on each business day until the loan amounts are paid in full. Each
payment is deducted directly from the Company’s bank accounts. These Secured Merchant Loans are secured by the Company’s
assets and are personally guaranteed by the former majority member of Prime. During the six months ended June 30, 2019, the Company
repaid all of these notes. At June 30, 2019 and December 31, 2018, notes payable related to these Secured Merchant Loans amounted
to $0 and $128,726, which is net of unamortized debt discount of $0 and $51,371, respectively.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2019
On October 12, 2018, the Company entered into a secured Merchant Loan with a lender in the amount of $420,000.
The Company simultaneously repaid a prior loan of $31,634, paid an origination fee of $10,500 and received net proceeds of $254,552,
net of original issue discount of $123,314. Pursuant to this Secured Merchant Loan, the Company is required to repay the noteholder
by making daily payments of $3,000 on each business day until the loan amounts are paid in full. Each payment is deducted directly
from the Company’s bank accounts. This Secured Merchant Loans was secured by the Company’s assets and was personally
guaranteed by the former majority member of Prime. On January 28, 2019, the Company entered into a new secured Merchant Loan with
this lender in the amount of $759,000 and received net cash of $315,097 after paying origination fee of $25,750, an original issue
discount of $209,000, and the repayment of October 12, 2018 remaining loan and interest due to this lender of $209,153. Pursuant
to this Secured Merchant Loan, the Company is required to repay the noteholders by making daily payments of $4,897 on each business
day until the loan amounts are paid in full. Each payment is deducted directly from the Company’s bank account. This Secured
Merchant Loans is secured by the Company’s assets and are personally guaranteed by the former majority member of Prime. At
June 30, 2019 and December 31, 2018, note payable related to these Secured Merchant Loans amounted to $163,435 and $171,752, which
is net of unamortized debt discount of $81,403 and $86,248, respectively.
From
February 25, 2019 to March 6, 2019, the Company entered into four secured Merchant Loans in the aggregate amount of $1,199,200.
The Company simultaneously repaid prior loans of $69,327 which were entered into during October 2018, paid origination fees totaling
$78,286 and received net proceeds of $652,387, net of original issue discounts of $399,200. Pursuant to these four secured Merchant
Loans, the Company was required to pay the noteholders by making daily payments aggregating $11,993 on each business day until
the loan amounts were paid in full. Each payment was deducted from the Company’s bank account. On April 10, 2019, the Company
paid off these secured Merchant Loans in full by paying an aggregate amount of $703,899. As a result of paying off these loans
early, the noteholders reduced the origination fees and debt discounts by $229,195 in the aggregate.
On
April 17, 2019, the Company entered into a secured Merchant Loan in the principal amount of $650,000 and received net proceeds
of $500,000, net of original issue discounts of $150,000. Pursuant to this secured Merchant Loan, the Company is required to pay
the noteholders by making three monthly installments of $216,667 beginning in June 2019 to August 2019. At June 30, 2019, notes
payable related to this Secured Merchant Loan amounted to $333,333, which is net of unamortized debt discount of $100,000.
From
May 21, 2019 to June 30, 2019, the Company entered into three secured Merchant Loans in the aggregate amount of $1,349,400. The
Company received net proceeds of $855,000, net of original issue discounts and origination fees of $494,100. Pursuant to
these three secured Merchant Loans, the Company is required to pay the noteholders by making daily payments aggregating $8,000
on each business day and a weekly payment of $28,500 until the loan amounts were paid in full. Each payment was deducted from
the Company’s bank account. At June 30, 2019, notes payable related to these Secured Merchant Loans amounted to $714,387,
which is net of unamortized debt discount of $403,963.
Promissory
notes
In
connection with the acquisition of Prime, the Company assumed several notes payable liabilities due to entities or individuals
amounting to $297,005 (the “Note”). These notes have effective interest rates ranging from 7% to 10%, and are unsecured.
During the six months ended June 30, 2019, the Company repaid $25,000 of these notes and $40,000 of these notes was rolled into
a new note. At June 30, 2019 and December 31, 2018, notes payable to these entities or individuals amounted to $65,000 and $130,000,
respectively.
From
October 31, 2018 to December 31, 2018, the Company entered into Original Discount Senior Secured Demand Promissory Notes with
an investor (the “Promissory Note”). Pursuant to the Promissory Notes, the Company borrowed an aggregate of $770,000
and received net proceeds of $699,955, net of original issue discount of $70,000 and fees of $45. In December 2018, the Company
repaid $220,000 of these promissory notes. During the six months ended June 30, 2019, the Company repaid $200,000 of these promissory
notes. At June 30, 2019 and December 31, 2018, notes payable to this entity amounted to $350,000 and $505,945, which is net of
unamortized debt discount of $0 and $44,055, respectively. The remaining notes were payable on demand. These promissory notes
are secured by the Company’s assets.
From
January 2019 to June 30, 2019, the Company entered into separate promissory notes with several individuals totaling $2,352,150,
including $40,000 of a previous note rolled into these new notes, and received net proceeds of $2,048,900, net of original issue
discounts of $263,250. These Notes are due between 45 and 273 days from the respective Note date. Other than the original issue
discount, no additional interest is due to the holders. In connection with these promissory notes, the Company issued 58,000 warrants
to purchase 58,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The warrants are exercisable
over a five year period. At June 30, 2019, notes payable to these individuals amounted to $1,638,480, which is net of unamortized
debt discount of $21,365.
During
March 2019, the Company entered into two separate promissory notes with an entity totaling $165,000 and received net proceeds
of $150,000, net of original issue discounts of $15,000. During the six months ended June 30, 2019, the Company repaid $165,000
of these promissory notes. At June 30, 2019, notes payable to this entity amounted to $0.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2019
Equipment
and auto notes payable
In
connection with the acquisition of Prime, the Company assumed several equipment notes payable liabilities due to entities amounting
to $523,207 (the “Equipment Notes”). These Equipment Notes have effective interest rates ranging from 6.0% to 9.4%,
and are secured by the underlying van or trucks. At June 30, 2019 and December 31, 2018, equipment notes payable to these entities
amounted to $358,285 and $488,289, respectively.
During
October and November 2018, the Company entered into several auto financing agreements. At June 30, 2019 and December 31, 2018,
auto notes payable related to auto financing agreements amounted to $198,281 and $161,036, respectively.
At
June 30, 2019 and December 31, 2018, notes payable consisted of the following:
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
Principal amounts
|
|
$
|
5,438,948
|
|
|
$
|
2,189,666
|
|
Less: unamortized debt discount
|
|
|
(864,904
|
)
|
|
|
(255,843
|
)
|
Principal amounts, net
|
|
|
4,574,044
|
|
|
|
1,933,823
|
|
Less: current portion of notes payable
|
|
|
(4,256,738
|
)
|
|
|
(1,509,804
|
)
|
Notes payable – long-term
|
|
$
|
317,306
|
|
|
$
|
424,019
|
|
NOTE
9– STOCKHOLDERS’ DEFICIT
Preferred
stock
The
Company increased its authorized preferred shares to 10,000,000 shares in July 2018.
Preferred
stock of 4,000,000 shares is designated Series A Convertible Preferred Stock. Each share of Series A preferred stock has a par
value of $.001 and a stated value of $1.00. Dividends are payable on Series A preferred shares at the rate per share of 7% per
annum cumulative based on the stated value. The Series A preferred shares have no voting rights, except as required by law. Each
share of preferred stock is convertible based on the stated value at a conversion price of $20.83 at the option of the holder;
provided, however, if a triggering event occurs, as defined in the document, the conversion price shall thereafter be reduced,
and only reduced, to equal forty percent of the lowest VWAP during the thirty consecutive trading day period prior to the conversion
date. As of June 30, 2019, the Company believes a triggering event has occurred. The beneficial ownership limitation attached
to conversion is 4.99%, which can be decreased or increased, upon not less than 61 days’ notice to the Company, but in no
event exceeding 19.99% of the number of shares of common stock outstanding immediately after giving effect to the issuance of
common stock upon conversion of the preferred stock. After 36 months, the Company has the right to redeem all, but not less than
all, of the outstanding preferred shares in cash at a price equal to 130% of the stated value plus any accrued but unpaid dividends
thereon.
On
April 9, 2019, the Company entered into agreements with all holders of its Series A Convertible Preferred Stock to exchange all
4,000,000 outstanding shares of preferred stock for an aggregate of 2,600,000 shares of restricted common stock.
Common
stock issued for services
On
February 25, 2019, the Company granted an aggregate of 2,670,688 shares of its common stock to an executive officer, employees
and consultants of the Company for services rendered. The shares were valued at $2,750,808, or $1.03 per share, based on the quoted
trading price on the date of grant. In connection with these shares, the Company recorded stock-based compensation of $2,750,808.
On
May 1, 2019, the Company granted an aggregate of 30,000 shares of its common stock to consultants for business development and
investor relations services rendered. The shares were valued at $265,500, or $8.85 per share, based on the quoted trading price
on the date of grant. In connection with these shares, the Company recorded stock-based professional fees of $265,500.
On
June 14, 2019, the Company granted 200,000 shares of its common stock to an employee of the Company for services rendered. The
shares were valued at $2,200,000, or $11.00 per share, based on the quoted trading price on the date of grant. In connection with
these shares, the Company recorded stock-based compensation of $2,200,000.
Cancellation
of common shares
On
May 1, 2019, the Company entered into a Share Exchange Agreement with Save On and Steven Yariv, whereby the Company returned all
of the stock of Save On to Steven Yariv in exchange for Mr. Yariv conveying 1,000,000 shares of common stock of the Company back
to the Company and the shares were cancelled. In connection with the disposal of Save On, the Company recorded an increase in
equity of $56,987 related to the amount of net liabilities disposed of in a transaction with the former chief executive officer
of the Company since the CEO is still a related party after this transaction as he remained a principal shareholder (see
Note 3).
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2019
Shares
issued in connection with debt modification
On
April 9, 2019, the Company entered into an agreement with Bellridge that modifies its existing obligations to Bellridge. In connection
with this modification, principal balance of the Bellridge Note was reduced to $1,800,000, in exchange for the issuance to Bellridge
of 800,000 shares of restricted common stock, which shall be delivered to Bellridge, either in whole or in part, at such time
or times as when the beneficial ownership of such shares by Bellridge will not result in Bellridge’s beneficial ownership
of more than the Beneficial Ownership Limitation and such shares will be issued within three business days of the date the Bellridge
has represented to the Company that it is below the Beneficial Ownership Limitation. Such issuances will occur in increments of
no fewer than the lesser of (i) 50,000 shares and (ii) the balance of the 800,000 shares owed. The “Beneficial Ownership
Limitation” shall be 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving
effect to the issuance of shares of common stock issuable pursuant to this Agreement. As of the date of this report, 100,000 of
these shares have been issued and 700,000 shares are issuable. These 800,000 shares issued and issuable were valued at $10,248,000,
or $12.81 per share, based on the quoted trading price on the date of grant. In connection with these shares, the Company recorded
a loss on debt extinguishment of $10,248,000 (See Note 7).
Stock
options
In
connection the disposal of Save On, on May 1, 2019, the Company granted an aggregate of 80,000 options to certain employees of
Save On. The options are exercisable at $8.85 per share for a period of five years. 25% of the options vest on January 1, 2020
and 25% shall vest annually thereafter. On May 1, 2019, the Company calculated the fair value of these options of $700,816 which
was calculated using the Black-Sholes option pricing model with the following assumptions: expected dividend rate, 0%; expected
term (in years), 5 years; volatility of 228.1% and risk-free interest rate of 2.31%. During the six months ended June 30, 2019,
the Company recorded stock-based compensation of $700,816 related to these options which has been included in loss from discontinued
operations on the accompany statement of operations.
Stock
option activities for the six months ended June 30, 2019 are summarized as follows:
|
|
Number of Options
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Term (Years)
|
|
|
Aggregate Intrinsic Value
|
|
Balance Outstanding December 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
80,000
|
|
|
|
8.84
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Balance Outstanding June 30, 2019
|
|
|
80,000
|
|
|
$
|
8.84
|
|
|
|
4.83
|
|
|
$
|
252,000
|
|
Exercisable, June 30, 2019
|
|
|
0
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Warrants
In
connection with the Purchase Agreement in 2018 (See Note 7 under Bellridge), the Lender was issued a warrant, with a term
of two years, to purchase up to 4.75% of the fully-diluted outstanding Common Stock of the Company, for an aggregate purchase
price of $100. Additionally, the placement agent was issued a warrant, with a term of two years, to purchase up to 4.75% of the
fully-diluted outstanding Common Stock of the Company, for an aggregate purchase price of $100. Also, on December 27, 2018, the
lender waived any and all defaults in existence on the Note and the Company agreed to issue a warrant that is convertible into
2% of the issued and outstanding shares existing as the time the Company files a registration statement or makes an application
to up list to a national stock exchange. On April 9, 2019, the Company entered into an agreement with Bellridge and the Placement
Agent that cancelled these warrants in exchange for an aggregate of 600,000 common shares of the Company. These shares were valued
at $7,686,000, or $12.81 per share, based on the quoted trading price on the date of grant. In connection with these shares, the
Company recorded a loss on debt extinguishment of $7,686,000 (See Note 7).
In
connection with several promissory notes payable (see Note 8), during the six months ended June 30, 2019, the Company issued 59,000
warrants to purchase 59,000 shares of common at an exercise price of $1.00 per share. During the six months ended June 30, 2019,
the Company calculated the relative fair value of these warrants of $135,324 which was amortized into interest expense over the
loan terms and was estimated using the Binomial valuation model with the following assumptions: expected dividend rate, 0%; expected
term (in years), 5 years; volatility of 228.1% and risk-free interest rate ranging from 2.28% to 2.40%.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2019
In connection with previous promissory notes payable (see Note 8), on June 11, 2019, the Company issued 55,000
warrants to purchase 55,000 shares of common at an exercise price of $1.00 per share. On June 11, 2019, the Company calculated
the fair value of these warrants of $601,121 which was expensed and included in loan fees on the accompanying condensed consolidated
statement of operations. The fair value of these warrants was estimated using the Binomial valuation model with the following assumptions:
expected dividend rate, 0%; expected term (in years), 5 years; volatility of 228.1% and risk-free interest rate of 1.92%.
Warrant
activities for the six months ended June 30, 2019 are summarized as follows:
|
|
Number of Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Term (Years)
|
|
|
Aggregate Intrinsic Value
|
|
Balance Outstanding December 31, 2018
|
|
|
1,648,570
|
|
|
$
|
0.00
|
|
|
|
1.47
|
|
|
$
|
2,472,655
|
|
Granted
|
|
|
114,000
|
|
|
|
1.00
|
|
|
|
|
|
|
|
|
|
Cancellations
|
|
|
(1,421,059
|
)
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
Change in warrants related to dilutive rights
|
|
|
(227,511
|
)
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
Balance Outstanding June 30, 2019
|
|
|
114,000
|
|
|
$
|
1.00
|
|
|
|
4.82
|
|
|
$
|
1,254,000
|
|
Exercisable, June 30, 2019
|
|
|
114,000
|
|
|
$
|
1.00
|
|
|
|
4.82
|
|
|
$
|
1,254,000
|
|
NOTE
10 – COMMITMENTS AND CONTINGENCIES
Employment
agreement
On
June 18, 2018, the Company entered into an employment agreement with the chief operating officer of Prime. The Company shall pay
to this executive a base salary of $520,000 per year, payable in accordance with the Company’s usual pay practices. The
executive’s base salary will increase by $260,000 per year upon (i) Prime achieving revenue of $20 million on an annualized
basis (the “Initial Target Goal”) for four consecutive weeks; and (ii) each time Prime achieves revenue of an additional
$10 million increment above the Initial Target Goal (i.e., $30 million, $40 million, $50 million, etc.) on an annualized basis
for four consecutive weeks. Executive’s base salary shall be subject to review annually by the Manager and may be increased
(but not decreased). The executive shall be entitled to participate in any bonus plan that the Manager or its designee may approve
for the senior executives of the Company and shall be entitled to participate in benefits under the Company’s benefit plans,
profit sharing and arrangements, including, without limitation, any employee benefit plan or arrangement made available in the
future by the Company to its employees or senior executives, subject to and on a basis consistent with the terms, conditions and
overall administration of such plans and arrangements. Notwithstanding the foregoing, during the Employment, the Company will
provide, at the Company’s expense, health and major medical insurance benefits to the Executive and his family members which
are at least equal to the benefits provided to the Executive and his family members immediately prior to the Effective Date. The
term of this Agreement (as it may be extended by the following sentence or terminated earlier pursuant to terms in the employment
agreement shall begin on the Effective Date and end on the close of business on May 31, 2023. The Employment Term shall be automatically
extended for additional one-year periods unless, at least sixty (60) days prior to the end of the expiration of the Employment
Term.
Other
From
time to time, we may be involved in litigation relating to claims arising out of our operation in the normal course of business.
As of June 30, 2019, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect
on results of our operations.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2019
NOTE
11– RELATED PARTY TRANSACTIONS AND BALANCES
Due
to related parties
In
connection with the acquisition of Prime, the Company acquired a balance of $14,019 that was due from the former majority owner
of Prime. Pursuant to the terms of the SPA, the Company agreed to pay $489,174 in cash to the former majority owner of Prime who
then advanced back the $489,174 to Prime. During the six months ended June 30, 2019, the Company repaid $50,000 of this advance.
This advance is non-interest bearing and is due on demand. At June 30, 2019 and December 31, 2018, amount due to this related
party amounted to $209,000 and $259,000.
During
the period from acquisition date of Prime (June 18, 2018) to June 30, 2019, an employee of Prime who exerts significant influence
over the business of Prime, paid costs and expenses and was reimbursed funds by the Company. These advances are non-interest bearing
and are due on demand. At June 30, 2019 and December 31, 2018, amounts due from (to) this related party amounted to $81,489 and
$(16,300), respectively.
Notes
payable – related parties
From
July 25, 2018 through December 31, 2018, the Company entered into several Promissory Notes with the Company’s former chief
executive officer or the spouse of the Company’s former chief executive officer. Pursuant to these promissory notes, the
Company borrowed an aggregate of $1,150,000 and received net proceeds of $1,050,000, net of original issue discounts of $100,000.
From July 25, 2018 through December 31, 2018, $930,000 of these loans were repaid and during January 2019, the Company repaid
the remaining existing promissory note totaling $220,000 with the spouse of the Company’s chief executive officer. In addition,
during February 2019, the Company entered into another promissory note with the spouse of the chief executive officer totaling
$220,000, net of an original issue discount of $20,000. In April 2019, the Company repaid this promissory note. During the six
months ended June 30, 2019, amortization of debt discount related to these notes amounted to $26,383 and is included in interest
expense – related parties on the accompanying condensed consolidated statement of operations.
On
April 9, 2019, certain noteholders who were not considered related parties became related parties since they became beneficial
owners of the Company’s common stock. Accordingly, notes payable amounting to $510,000 were reclassified from notes payable
to note payable – related party (See Note 7).
At
June 30, 2019 and December 31, 2018, notes payable – related parties amounted to $510,000 (non-current) and $213,617
(current), which is net of unamortized debt discount of $0 and $6,383, respectively.
Convertible
note payable – related parties
On
March 13, 2019, the Company entered into a convertible note agreement with an individual, who is affiliated to the Company’s
chief executive officer, in the amount of $500,000 (See Note 7).
In
April 2019, the Company entered into a convertible note agreement with a company, who is affiliated to the Company’s chief
executive officer, in the amount of $2,000,000 (See Note 7).
During
the six months ended June 30, 2019, interest expense related to these notes amounted to $107,506 and is included in interest expense
– related parties on the accompanying condensed consolidated statement of operations.
NOTE
12 – OPERATING LEASE RIGHT-OF-USE (“ROU”) ASSETS AND OPERATING LEASE LIABILITIES
In
December 2018, the Company entered into a lease agreement for the lease of office and warehouse space and parking spaces under
a non-cancelable operating lease through January 2024. From the lease commencement date until the last day of the second lease
year, monthly rent shall be $14,000. At the beginning of the 25th month following the commencement date and through
the end of the term, minimum rent shall be $14,420 per month. The Company shall have one option to renew the term of this lease
for an additional five years. In January 2019, the Company paid a security deposit of $28,000.
In
adopting ASC Topic 842, Leases (Topic 842), the Company has elected the ‘package of practical expedients’, which permit
it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct
costs (see Note 2). In addition, the Company elected not to apply ASC Topic 842 to arrangements with lease terms of 12 month or
less. On January 1, 2019, upon adoption of ASC Topic 842, the Company recorded right-of-use assets and lease liabilities of $631,723.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2019
During
the six months ended June 30, 2019 and 2018, in connection with this operating lease, the Company recorded rent expense of $84,112
and $0, respectively, which is expensed during the period and included in operating expenses on the accompanying condensed consolidated
statements of operations.
The
significant assumption used to determine the present value of the lease liability was a discount rate of 12% which was based on
the Company’s estimated incremental borrowing rate.
At
June 30, 2019, right-of-use asset (“ROU”) is summarized as follows:
|
|
June 30, 2019
|
|
Office lease right of use asset
|
|
$
|
631,723
|
|
Less: accumulated amortization into rent expense
|
|
|
(53,302
|
)
|
Balance of ROU asset as of June 30, 2019
|
|
$
|
578,421
|
|
At
June 30, 2019, operating lease liability related to the ROU asset is summarized as follows:
|
|
June 30, 2019
|
|
Lease liability related to office lease right of use asset
|
|
$
|
592,533
|
|
Less: current portion of lease liability
|
|
|
(102,407
|
)
|
Lease liability – long-term
|
|
$
|
490,126
|
|
At
June 30, 2019, future minimum base lease payments due under non-cancelable operating leases is as follows:
Year ended June 30,
|
|
Amount
|
|
2020
|
|
$
|
168,000
|
|
2021
|
|
|
170,520
|
|
2022
|
|
|
173,040
|
|
2023
|
|
|
173,040
|
|
2024
|
|
|
86,520
|
|
Total minimum non-cancelable operating lease payments
|
|
$
|
771,120
|
|
Less: discount to fair value
|
|
|
(178,587
|
)
|
Total lease liability at June 30, 2019
|
|
|
592,533
|
|
NOTE
13 – CONCENTRATIONS
For
the six months ended June 30, 2019, one customer represented 99.1% of the Company’s total net revenues. This revenue is
from one Prime customer. For the six months ended June 30, 2018, one customer represented 98.9% of the Company’s total net
revenues. At June 30, 2019, one customer represented 96.9% of the Company’s accounts receivable balance.
During
the six months ended June 30, 2019, the Company rented delivery vans from two vendors. Any shortage of supply of vans available
to rent to the Company could have a material adverse effect on the Company’s business, financial condition and results of
operations.
All
revenues are derived from customers in the United States.
NOTE
14 – SUBSEQUENT EVENTS
Secured
merchant loans
From
July 1, 2019 to August 19, 2019, the Company entered into several secured Merchant Loans in the aggregate amount of $1,762,225.
The Company received net proceeds of $557,500, net of original issue discounts and origination fees of $702,225 and the repayment
of previous secured merchant loans of $502,500. Pursuant to these secured Merchant Loans, the Company is required to pay the noteholders
by making daily payments on each business day until the loan amounts are paid in full. Each payment was deducted from the Company’s
bank account.
Promissory
notes
In
August 2019, the Company entered into a promissory note with an entity totaling $52,500 and received net proceeds $50,000,
net of original issue discount of $2,500. The note was due in one week and is currently in default. The default interest is
12% per annum.
Promissory
notes – related party
On
July 2. 2019, the Company entered into a note agreement with an entity, who is affiliated to the Company’s chief
executive officer, in the amount of $500,000. The principal amount of this note and all accrued interest shall be due and payable
on October 3, 2019 and is non-interest bearing. If the note is not paid by the due date, interest shall be 20% per annum.
Due
to related party
On
August 1, 2019, the Company’s chief executive officer advanced the Company $50,000 for working capital purposes.
The advance is payable on demand and is non-interest bearing.
Sale
of common stock
In
August 2019, the Company entered into subscription agreements with investors for the sale of 209,000 units at
$2.50 per unit which consists of 209,000 shares of common stock and 209,000 warrants exercisable at $2.50 per
share for cash proceeds of $522,500.
Report
of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of:
Transportation and Logistics Systems, Inc.
(Formerly known as PetroTerra Corp.)
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheets of Transportation and Logistics Systems, Inc. (Formerly known as PetroTerra Corp.) and Subsidiaries (the “Company”)
as of December 31, 2018 and 2017, the related consolidated statements of operations, changes in shareholders’ equity/(deficit)
and cash flows for each of the two years in the period ended December 31, 2018, and the related notes (collectively referred to
as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly,
in all material respects, the consolidated financial position of the Company as of December 31, 2018 and 2017, and the consolidated
results of its operations and its cash flows for each of the two years in the period ended December 31, 2018, in conformity with
accounting principles generally accepted in the United States of America.
Going Concern
The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated
financial statements, the Company has a net loss and cash used in operations of $14,478,157 and $283,678, respectively, in 2018
and has a working capital deficit, shareholders’ deficit and accumulated deficit of $12,923,440, $7,737,294 and $15,222,936,
respectively, at December 31, 2018. Furthermore, the Company has been late on certain loan payments. These matters raise substantial
doubt about the Company’s ability to continue as a going concern. Management’s Plan in regards to these matters is
also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
Basis for Opinion
These consolidated financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required
to have, nor were we engaged to perform, an audit of internal control over financial reporting. As part of our audits we are required
to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures
to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ SALBERG & COMPANY, P.A.
SALBERG & COMPANY, P.A.
We have served as the Company’s auditor
since 2017.
Boca Raton, Florida
April 16, 2019 (except for Note 15 “Discontinued
Operations” as to which the date is October 4, 2019)
2295
NW Corporate Blvd., Suite 240 ● Boca Raton, FL 33431-7328
Phone:
(561) 995-8270 ● Toll Free: (866) CPA-8500 ● Fax: (561) 995-1920
www.salbergco.com
● info@salbergco.com
Member
National Association of Certified Valuation Analysts ● Registered with the PCAOB
Member
CPAConnect with Affiliated Offices Worldwide ● Member AICPA Center for Audit Quality
TRANSPORTATION
AND LOGISTICS SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
296,196
|
|
|
$
|
106,576
|
|
Accounts
receivable
|
|
|
441,497
|
|
|
|
-
|
|
Prepaid
expenses and other current assets
|
|
|
509,068
|
|
|
|
-
|
|
Assets
of discontinued operations
|
|
|
335,894
|
|
|
|
254,813
|
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
1,582,655
|
|
|
|
361,389
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
|
Security
deposit
|
|
|
5,000
|
|
|
|
-
|
|
Property
and equipment, net
|
|
|
936,831
|
|
|
|
-
|
|
Intangible
asset, net
|
|
|
4,668,334
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
Other Assets
|
|
|
5,610,165
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
7,192,820
|
|
|
$
|
361,389
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Convertible
notes payable, net of debt discounts of $1,595,627 and $237,384, respectively
|
|
$
|
1,411,876
|
|
|
$
|
272,616
|
|
Notes
payable, net of debt discount of $255,843
|
|
|
1,509,804
|
|
|
|
-
|
|
Notes
payable - related party, net of debt discount of $6,383
|
|
|
213,617
|
|
|
|
-
|
|
Accounts
payable
|
|
|
655,183
|
|
|
|
-
|
|
Accrued
expenses
|
|
|
566,574
|
|
|
|
48,168
|
|
Insurance
payable
|
|
|
1,108,368
|
|
|
|
-
|
|
Liabilities
of discontinued operations
|
|
|
440,745
|
|
|
|
214,127
|
|
Derivative
liability
|
|
|
7,888,684
|
|
|
|
601,615
|
|
Due
to related parties
|
|
|
275,300
|
|
|
|
-
|
|
Accrued
compensation and related benefits
|
|
|
435,944
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
14,506,095
|
|
|
|
1,136,526
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES:
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
|
424,019
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
Long-term Liabilities
|
|
|
424,019
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
14,930,114
|
|
|
|
1,136,526
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies (See Note 9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
DEFICIT:
|
|
|
|
|
|
|
|
|
Series
A Convertible Preferred stock, par value $0.001 per share; authorized 4,000,000 shares; issued and outstanding
4,000,000 shares (Liquidation value $4,000,000)
|
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
|
|
4,000
|
|
Common
stock, par value $0.001 per share; authorized 500,000,000 shares; issued and outstanding 4,220,837 and 570,106
at December 31, 2018 and 2017, respectively
|
|
|
|
|
|
|
|
|
|
|
|
4,220
|
|
|
|
570
|
|
Additional
paid-in capital
|
|
|
7,477,422
|
|
|
|
(34,928
|
)
|
Accumulated
deficit
|
|
|
(15,222,936
|
)
|
|
|
(744,779
|
)
|
|
|
|
|
|
|
|
|
|
Total
Shareholders’ Deficit
|
|
|
(7,737,294
|
)
|
|
|
(775,137
|
)
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders’ Deficit
|
|
$
|
7,192,820
|
|
|
$
|
361,389
|
|
See
accompanying notes to consolidated financial statements.
TRANSPORTATION
AND LOGISTICS SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
For the Year Ended
|
|
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
13,620,160
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
COST OF REVENUES
|
|
|
12,785,425
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
834,735
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
Compensation and related benefits
|
|
|
4,531,798
|
|
|
|
-
|
|
Legal and professional
|
|
|
1,993,130
|
|
|
|
200,600
|
|
Rent
|
|
|
23,100
|
|
|
|
-
|
|
General
and administrative expenses
|
|
|
1,355,857
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
|
7,903,885
|
|
|
|
200,600
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(7,069,150
|
)
|
|
|
(200,600
|
)
|
|
|
|
|
|
|
|
|
|
OTHER (EXPENSES) INCOME:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,720,075
|
)
|
|
|
(312,416
|
)
|
Interest expense - related party
|
|
|
(193,617
|
)
|
|
|
-
|
|
Gain on extinguishment of debt
|
|
|
-
|
|
|
|
10,169
|
|
Bargain purchase gain
|
|
|
203,588
|
|
|
|
-
|
|
Derivative
expense
|
|
|
(5,799,282
|
)
|
|
|
(309,521
|
)
|
|
|
|
|
|
|
|
|
|
Total
Other Expenses
|
|
|
(7,509,386
|
)
|
|
|
(611,768
|
)
|
|
|
|
|
|
|
|
|
|
LOSS FROM CONTINUING OPERATIONS
|
|
|
(14,578,536
|
)
|
|
|
(812,368
|
)
|
|
|
|
|
|
|
|
|
|
INCOME FROM DISCONTINUED OPERATIONS:
|
|
|
|
|
|
|
|
|
Income
from discontinued operations
|
|
|
100,379
|
|
|
|
67,563
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(14,478,157
|
)
|
|
$
|
(744,805
|
)
|
|
|
|
|
|
|
|
|
|
NET LOSS PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS PER COMMON SHARE - BASIC AND DILUTED
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(5.79
|
)
|
|
$
|
(1.50
|
)
|
Net income
from discontinued operations
|
|
|
0.04
|
|
|
|
0.12
|
|
|
|
|
|
|
|
|
|
|
Net loss
per common share - basic and diluted
|
|
$
|
(5.75
|
)
|
|
$
|
(1.37
|
)
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARE OUTSTANDING:
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
2,516,059
|
|
|
|
542,481
|
|
See
accompanying notes to consolidated financial statements.
TRANSPORTATION
AND LOGISTICS SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)
FOR
THE YEARS ENDED DECEMBER 31, 2018 AND 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Total
|
|
|
|
Preferred
Stock Series A
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Earnings
(Accumulated
|
|
|
Shareholders’
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit)
|
|
|
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
456,812
|
|
|
$
|
457
|
|
|
$
|
7,643
|
|
|
$
|
26
|
|
|
$
|
8,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recapitalization
|
|
|
4,000,000
|
|
|
|
4,000
|
|
|
|
113,294
|
|
|
|
113
|
|
|
|
(42,571
|
)
|
|
|
-
|
|
|
|
(38,458
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(744,805
|
)
|
|
|
(744,805
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2017
|
|
|
4,000,000
|
|
|
|
4,000
|
|
|
|
570,106
|
|
|
|
570
|
|
|
|
(34,928
|
)
|
|
|
(744,779
|
)
|
|
|
(775,137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
2,100,000
|
|
|
|
2,100
|
|
|
|
4,323,900
|
|
|
|
-
|
|
|
|
4,326,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rounding
pursuant to reverse split
|
|
|
-
|
|
|
|
-
|
|
|
|
731
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
1,500,000
|
|
|
|
1,500
|
|
|
|
3,088,500
|
|
|
|
-
|
|
|
|
3,090,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued related to debt - related party
|
|
|
-
|
|
|
|
-
|
|
|
|
50,000
|
|
|
|
50
|
|
|
|
99,950
|
|
|
|
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(14,478,157
|
)
|
|
|
(14,478,157
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2018
|
|
|
4,000,000
|
|
|
$
|
4,000
|
|
|
|
4,220,837
|
|
|
$
|
4,220
|
|
|
$
|
7,477,422
|
|
|
$
|
(15,222,936
|
)
|
|
$
|
(7,737,294
|
)
|
See
accompanying notes to consolidated financial statements.
TRANSPORTATION
AND LOGISTICS SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For the Year Ended
|
|
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(14,478,157
|
)
|
|
$
|
(744,805
|
)
|
Adjustments to reconcile net loss to net cash used
in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
expense
|
|
|
664,350
|
|
|
|
-
|
|
Bad debt expense -
discontinued operations
|
|
|
-
|
|
|
|
1,300
|
|
Amortization of debt discount
to interest expense
|
|
|
1,466,847
|
|
|
|
277,951
|
|
Amortization of debt discount
to interest expense - related party
|
|
|
100,000
|
|
|
|
-
|
|
Stock-based compensation and
consulting fees
|
|
|
4,326,000
|
|
|
|
-
|
|
Derivative expense
|
|
|
5,799,282
|
|
|
|
309,521
|
|
Gain on extinguishment of debt
|
|
|
-
|
|
|
|
(10,169
|
)
|
Impairment loss - discontinued operations
|
|
|
-
|
|
|
|
36,500
|
|
Loss on disposal of property and equipment
|
|
|
14,816
|
|
|
|
-
|
|
Bargain purchase gain
|
|
|
(203,588
|
)
|
|
|
-
|
|
Change in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
789,904
|
|
|
|
-
|
|
Prepaid expenses and other current
assets
|
|
|
(365,810
|
)
|
|
|
-
|
|
Assets of discontinued operations
|
|
|
(81,081
|
)
|
|
|
(253,487
|
)
|
Security deposit
|
|
|
(5,000
|
)
|
|
|
-
|
|
Accounts payable and accrued
expenses
|
|
|
668,416
|
|
|
|
-
|
|
Insurance payable
|
|
|
587,945
|
|
|
|
-
|
|
Liabilities of discontinued
operations
|
|
|
250,169
|
|
|
|
231,004
|
|
Accrued
compensation and related benefits
|
|
|
182,229
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN OPERATING
ACTIVITIES
|
|
|
(283,678
|
)
|
|
|
(152,185
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Restricted cash acquired - discontinued operations
|
|
|
-
|
|
|
|
10,000
|
|
Investment in license - discontinued operations
|
|
|
-
|
|
|
|
(36,500
|
)
|
Purchase of property and equipment
|
|
|
(481,826
|
)
|
|
|
-
|
|
Cash received in acquisition
|
|
|
38,198
|
|
|
|
-
|
|
Cash paid for acquisition
|
|
|
(489,174
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN INVESTING
ACTIVITIES
|
|
|
(932,802
|
)
|
|
|
(26,500
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from convertible notes payable
|
|
|
2,497,503
|
|
|
|
280,000
|
|
Debt issue costs paid
|
|
|
(1,009,714
|
)
|
|
|
-
|
|
Repayment of convertible notes payable
|
|
|
-
|
|
|
|
(6,464
|
)
|
Proceeds from notes payable
|
|
|
2,409,898
|
|
|
|
-
|
|
Repayment of notes payable
|
|
|
(2,877,355
|
)
|
|
|
-
|
|
Proceeds from notes payable - related party
|
|
|
1,050,000
|
|
|
|
-
|
|
Repayment of notes payable - related party
|
|
|
(930,000
|
)
|
|
|
-
|
|
Net proceeds from related
parties
|
|
|
265,768
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY FINANCING
ACTIVITIES
|
|
|
1,406,100
|
|
|
|
273,536
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH
|
|
|
189,620
|
|
|
|
94,851
|
|
|
|
|
|
|
|
|
|
|
CASH, beginning of year
|
|
|
106,576
|
|
|
|
11,725
|
|
|
|
|
|
|
|
|
|
|
CASH, end of year
|
|
$
|
296,196
|
|
|
$
|
106,576
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,962,095
|
|
|
$
|
342
|
|
Income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Debt discounts recorded
|
|
$
|
1,487,787
|
|
|
$
|
510,000
|
|
Transfer of advance from
lender to convertible note
|
|
$
|
-
|
|
|
$
|
15,000
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed in acquisition
|
|
$
|
3,503,552
|
|
|
$
|
38,458
|
|
Less: assets acquired in
acquisition
|
|
|
2,050,799
|
|
|
|
-
|
|
Net liabilities assumed
|
|
|
1,452,753
|
|
|
|
38,458
|
|
Fair value of shares for acquisition
|
|
|
3,090,000
|
|
|
|
-
|
|
Increase in intangible assets
- non-cash
|
|
$
|
4,542,753
|
|
|
$
|
38,458
|
|
See
accompanying notes to consolidated financial statements.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2018 and 2017
NOTE
1 – ORGANIZATION AND BUSINESS OPERATIONS
Transportation
and Logistics Systems, Inc. (“TLSS”), formerly PetroTerra Corp., was incorporated under the laws of the State of Nevada,
on July 25, 2008.
On
March 30, 2017 (the “Closing Date”), TLSS and Save On Transport Inc. (“Save On”) entered into a Share
Exchange Agreement, dated as of the same date (the “Share Exchange Agreement”). Pursuant to the terms of the Share
Exchange Agreement, on the Closing Date, Save On became a wholly-owned subsidiary of TLSS (the “Reverse Merger”).
Save On was incorporated in the state of Florida and started business on July 12, 2016. Save On is a provider of integrated transportation
management solutions consisting of brokerage and logistic services such as transportation scheduling, routing and other value-added
services related to the transportation of automobiles and other freight. As an early stage company, TLSS’s current operations
are subject to all risks inherent in the establishment of a new business enterprise
The
Share Exchange was treated as a reverse merger and recapitalization of Save On for financial reporting purposes since the Save
On shareholders retained an approximate 80% controlling interest in the post-merger consolidated entity. Save On was considered
the acquirer for accounting purposes, and the Company’s historical financial statements before the Merger was replaced with
the historical financial statements of Save On before the Merger. The balance sheets at their historical cost basis of both entities
were combined at the merger date and the results of operations from the merger date forward include the historical results of
Save On and results of TLSS from the merger date forward. The Merger was intended to be treated as a tax-free reorganization under
Section 368(a) of the Internal Revenue Code of 1986, as amended.
On
May 1, 2019, the Company entered into a Share Exchange Agreement with Save On and Steven Yariv, whereby the Company
returned all of the stock of Save On to Steven Yariv in exchange for Mr. Yariv conveying 1,000,000 shares of common stock of
the Company back to the Company (See Note 15 – Subsequent Events). In addition, the Company granted an aggregate of 80,000 options to
certain employees of Save On. Mr. Yariv ceased to be an officer or director of the Company effective with the filing of
the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 as filed with the Securities
and Exchange Commission of April 16, 2019.
On
June 18, 2018 (the “Acquisition Date”), the Company completed the acquisition of 100% of the issued and outstanding
membership interests of Prime EFS, LLC, a New Jersey limited liability company (“Prime”), from its members pursuant
to the terms and conditions of a Stock Purchase Agreement entered into among the Company and the Prime members on the Closing
Date (the “SPA”) (See Note 3). Prime is a New Jersey based transportation company with a focus on deliveries for on-line
retailers in New York, New Jersey and Pennsylvania.
On
July 24, 2018, the Company formed Shypdirect LLC (“Shypdirect”), a company organized under the laws of New Jersey.
Shypdirect is a transportation company with a focus on tractor trailer and box truck deliveries of product on the east coast of
the United States from one distributor’s warehouse to another warehouse or from a distributor’s warehouse to the post
office.
TLSS
and its wholly-owned subsidiaries, Save On, Prime and Shypdirect are hereafter referred to as the “Company”.
On
July 16, 2018, the Company filed a Certificate of Amendment to the Amended and Restated Articles of Incorporation (the “Certificate
of Amendment”) with the Secretary of State of the State of Nevada to (1) change the name of the Company from PetroTerra
Corp. to Transportation and Logistics Systems, Inc., (2) authorize an increase of the shares of the preferred stock to 10,000,000
shares, par value $0.001 per share and (3) effect a 1-for-250 reverse stock split (the “Reverse Stock Split”) with
respect to the outstanding shares of the Company’s common stock. The Certificate of Amendment became effective on July 17,
2018. The corporate name change, increase of authorized shares of preferred stock and Reverse Stock Split were previously approved
by the sole director and the majority of stockholders of the Company. The corporate name change and the Reverse Stock Split were
deemed effective at the open of business on July 18, 2018. All share and per share data in the accompanying consolidated financial
statements have been retroactively restated to reflect the effect of the recapitalization.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis
of presentation and principles of consolidation
The
consolidated financial statements of the Company include the accounts of TLSS and its wholly-owned subsidiaries, Save On, Prime
and Shypdirect. All intercompany accounts and transactions have been eliminated in consolidation.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2018 and 2017
On
May 1, 2019, the Company entered into a Share Exchange Agreement with Save On and Steven Yariv, whereby the Company returned all
of the stock of Save On to Steven Yariv in exchange for Mr. Yariv conveying 1,000,000 shares of common stock of the Company back
to the Company. Pursuant to Accounting Standard Codification (“ASC”) 205-20-45, the financial statement in which net
income or loss of a business entity is reported shall report the results of operations of the discontinued operation in the period
in which a discontinued operation either has been disposed of or is classified as held for sale. Accordingly, beginning in the
second quarter of 2019, the period that Save On was disposed of, the Company reflects Save On as a discontinued operation and
such presentation is retroactively applied to all periods presented in the accompanying consolidated financial statements.
Going
concern
The
accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and satisfaction of liabilities and commitments in the normal course of business. As reflected in the accompanying consolidated
financial statements, for the years ended December 31, 2018 and 2017, the Company had a net loss of $14,478,157 and $744,805 and
net cash used in operations was $283,678 and $152,185, respectively. Additionally, the Company had an accumulated deficit, shareholders’
deficit, and a working capital deficit of $15,222,936, $7,737,294 and $12,923,440, respectively, at December 31, 2018. Furthermore,
the Company failed to make required payments of principal and interest on its convertible debt instruments and defaulted on other
provisions in these Notes. On April 9, 2019, the Company entered into agreements with these lenders that modified these Notes
(See Note 15 – Subsequent Events). It is management’s opinion that 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 common shares and from
the issuance of 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.
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 consolidated financial statements and footnotes
include the valuation of accounts receivable, the useful life of property and equipment, the valuation of intangible assets, assumptions
used in assessing impairment of long-lived assets, estimates of current and deferred income taxes and deferred tax valuation allowances,
the fair value of non-cash equity transactions, the valuation of derivative liabilities, and the fair value of assets acquired
and liabilities assumed in the business acquisition.
Fair
value of financial instruments
FASB
ASC 820 — Fair Value Measurements and Disclosures, 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. FASB 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 December 31, 2018. Accordingly, the estimates presented in these financial statements are not necessarily indicative of the
amounts that could be realized on disposition of the financial instruments. FASB 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).
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2018 and 2017
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. Assets and liabilities measured at fair value
on a recurring basis are as follows at December 31, 2018 and 2017:
|
|
At
December 31, 2018
|
|
|
At
December 31, 2017
|
|
Description
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Derivative
liabilities
|
|
|
—
|
|
|
|
—
|
|
|
$
|
7,888,684
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
601,615
|
|
A
roll forward of the level 3 valuation financial instruments is as follows:
|
|
For
the Year ended
December 31, 2018
|
|
|
For
the Year ended
December 31, 2017
|
|
Balance
at beginning of year
|
|
$
|
601,615
|
|
|
$
|
-
|
|
Fair
value of derivative liabilities assumed in merger
|
|
|
-
|
|
|
|
7,263
|
|
Initial
valuation of derivative liabilities included in debt discount
|
|
|
1,487,787
|
|
|
|
295,000
|
|
Initial
valuation of derivative liabilities included in derivative expense
|
|
|
6,839,065
|
|
|
|
609,318
|
|
Gain
on extinguishment of debt
|
|
|
-
|
|
|
|
(10,169
|
)
|
Change
in fair value included in derivative expense
|
|
|
(1,039,783
|
)
|
|
|
(299,797
|
)
|
Balance
at end of year
|
|
$
|
7,888,684
|
|
|
$
|
601,615
|
|
The
Company accounts for its derivative financial instruments, consisting of certain conversion options embedded in our convertible
instruments and warrants, at fair value using level 3 inputs. The Company determined the fair value of these derivative liabilities
using the Black-Scholes option pricing model, binomial lattice models, or other accepted valuation practices. When determining
the fair value of its financial assets and liabilities using these methods, the Company is required to use various estimates and
unobservable inputs, including, among other things, expected terms of the instruments, expected volatility of its stock price,
expected dividends, and the risk-free interest rate. Changes in any of the assumptions related to the unobservable inputs identified
above may change the fair value of the instrument. Increases in expected term, anticipated volatility and expected dividends generally
result in increases in fair value, while decreases in the unobservable inputs generally result in decreases in fair value.
ASC
825-10 “Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and
liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is
irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses
for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair
value option to any outstanding instruments.
The
carrying amounts reported in the balance sheets for cash, accounts receivable, accounts payable and accrued expenses approximate
their fair values based on the short-term maturity of these instruments. The carrying amount of the Company’s convertible
notes payable and promissory note obligations approximate fair value, as the terms of these instruments are consistent with terms
available in the market for instruments with similar risk.
Cash
and cash equivalents
For
purposes of the 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. At December 31, 2018 and 2017, the
Company did not have any cash equivalents.
The
Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. There
were no balances in excess of FDIC insured levels as of December 31, 2018 and 2017. The Company has not experienced any losses
in such accounts through December 31, 2018.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2018 and 2017
Accounts
receivable
Accounts
receivable are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for
estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when
there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances,
the Company considers many factors, including the age of the balance, a customer’s historical payment history, its current
credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection.
Property
and equipment
Property
are stated at cost and are depreciated using the straight-line method over their estimated useful lives of five years. Leasehold
improvements are depreciated over the shorter of the useful life or lease term including scheduled renewal terms. Maintenance
and repairs are charged to expense as incurred. When assets are retired or disposed of, the cost and accumulated depreciation
are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company
examines the possibility of decreases in the value of these assets when events or changes in circumstances reflect the fact that
their recorded value may not be recoverable.
Intangible
asset
Intangible
assets are carried at cost less accumulated amortization, computed using the straight-line method over the estimated useful life.
In November 2017 the Company acquired a Motor Carrier number (MC) and a Department of Transportation number (DOT) from a third
party for $36,500. The Company reviews its intangible assets for impairment annually and determined that the carrying value was
not recoverable in accordance with ASC 350, Intangibles - Goodwill and Other. During the year ended December 31, 2017, an impairment
loss of $36,500 was recorded for the entire amount, which is recorded in discontinued operations. At December 31,
2018, intangible asset consists of a customer relationship acquired on June 18, 2018 which is being amortized over a period of
five years.
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.
Derivative
financial instruments
The
Company has certain financial instruments that are embedded derivatives associated with capital raises. The Company evaluates
all its financial instruments to determine if those contracts or any potential embedded components of those contracts qualify
as derivatives to be separately accounted for in accordance with ASC 810-10-05-4 and 815-40. This accounting treatment requires
that the carrying amount of any embedded derivatives be recorded at fair value at issuance and marked-to-market at each balance
sheet date. In the event that the fair value is recorded as a liability, as is the case with the Company, the change in the fair
value during the period is recorded as either other income or expense. Upon conversion, exercise or repayment, the respective
derivative liability is marked to fair value at the conversion, repayment or exercise date and then the related fair value amount
is reclassified to other income or expense as part of gain or loss on extinguishment.
Bargain
purchase gain
In
connection with the acquisition of Prime, the Company allocated the purchase price to the acquired assets and intangible asset
and assumed liabilities of Prime based on their estimated fair values as of the acquisition date. The excess of the estimated
fair values of net assets acquired over the acquisition consideration paid was recorded as a bargain purchase gain in other income
in the consolidated statements of operations. The determination of the fair values of the assets acquired and liabilities assumed
requires significant judgment, including valuation estimates relating to the value of the acquired customer relationship.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2018 and 2017
Revenue
recognition and cost of revenue
On
January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue
recognition requirements in Accounting Standards Codification (ASC) Topic 605, Revenue Recognition. This ASC is based on the principle
that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. This ASC also requires additional disclosure
about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer service orders, including significant
judgments.
For
the Company’s Save On business activities, which are presented as discontinued operations, the Company recognizes
revenues and the related direct costs of such revenue which includes carrier fees and dispatch costs as of the date the freight
is delivered by the carrier which is when the performance obligation is satisfied. Customer payments received prior to delivery
are recorded as a deferred revenue liability and related carrier fees if paid prior to delivery are recorded as a deferred expense
asset. In accordance with ASC Topic 606, the Company recognizes revenue on a gross basis. Our payment terms for corporate customers
are net 30 days from acceptance of delivery and individual customers generally must pay in advance. The Company does not incur
incremental costs obtaining service orders from our Save On customers, however, if the Company did, because all of the Save On
customer’s contracts are less than a year in duration, any contract costs incurred would be expensed rather than capitalized.
The Company’s adoption of this ASC, resulted in no cumulative effect at January 1, 2018 and no change prospectively to the
Company’s results of operations or financial condition. The revenue that the Company recognizes arises from service orders
it receives from its Save On customers. The Company’s performance obligations under these service orders correspond to each
delivery of a vehicle that the Company makes for its customer under the service orders; as a result, each service order generally
contains only one performance obligation based on the delivery to be completed.
For
the Company’s Prime and Shypdirect business activities, 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 net seven days from acceptance of delivery.
The Company does not incur incremental costs obtaining service orders from its Prime customers, however, if the Company did, because
all of Prime and Shypdirect customer contracts are less than a year in duration, any contract costs incurred would be expensed
rather than capitalized. The revenue that the Company recognizes arises from deliveries of packages on behalf of the Company’s
customers. Primarily, the Company’s performance obligations under these service orders correspond to each delivery of packages
that the Company makes under the service agreements. Control of the package transfers to the recipient upon delivery. Once this
occurs, the Company has satisfied its performance obligation and the Company recognizes revenue.
Revenue
disaggregation disclosure required pursuant to ASC 606 are disclosed in Note 14– Segment Information.
Stock-based
compensation
Stock-based
compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition
in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments
over the period the employee or director 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 and director services received in exchange for an award based
on the grant-date fair value of the award.
Through
March 31, 2018, pursuant to ASC 505-50 – “Equity-Based Payments to Non-Employees”, all share-based payments
to non-employees, including grants of stock options, were recognized in the consolidated financial statements as compensation
expense over the service period of the consulting arrangement or until performance conditions are expected to be met. Using a
Black-Scholes valuation model, the Company periodically reassessed the fair value of non-employee options until service conditions
are met, which generally aligns with the vesting period of the options, and the Company adjusts the expense recognized in the
consolidated financial statements accordingly. In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based
Payment Accounting, which simplifies several aspects of the accounting for nonemployee share-based payment transactions by expanding
the scope of the stock-based compensation guidance in ASC 718 to include share-based payment transactions for acquiring goods
and services from non-employees. ASU No. 2018-07 is effective for annual periods beginning after December 15, 2018, including
interim periods within those annual periods. Early adoption is permitted, but entities may not adopt prior to adopting the new
revenue recognition guidance in ASC 606. The Company early adopted ASU No. 2018-07 in the second quarter of 2018 and there was
no cumulative effect of adoption.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2018 and 2017
Basic
and diluted loss per share
Pursuant
to ASC 260-10-45, basic loss per common share is computed by dividing net loss 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 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 warrants (using the treasury stock method) and shares issuable
for convertible debt (using the as-if converted method). These common stock equivalents may be dilutive in the future. Potentially
dilutive common shares were excluded from the computation of diluted shares outstanding as they would have an anti-dilutive impact
on the Company’s net losses and consisted of the following:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Stock
warrants
|
|
|
1,648,570
|
|
|
|
0
|
|
Convertible
debt
|
|
|
3,158,465
|
|
|
|
339,340
|
|
Series
A convertible preferred stock
|
|
|
6,666,667
|
|
|
|
205,522
|
|
Recent
Accounting Pronouncements
On
February 25, 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”) to amend the accounting guidance for leases. The
accounting applied by a lessor is largely unchanged under ASU 2016-02. However, the standard requires lessees to recognize lease
assets and lease liabilities for leases classified as operating leases on the balance sheet. Lessees will recognize in the statement
of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying
asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election
by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it will recognize
lease expense for such leases generally on a straight-line basis over the lease term. ASU 2016-02 is effective for fiscal years
beginning after December 15, 2018 and early adoption is permitted. The adoption of ASU 2016-02 is not expected to have a material
impact on the Company’s consolidated financial position, results of operations and cash flows.
In
July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives
and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement
of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Non-controlling Interests with a Scope Exception. For public business entities, the amendments in Part I of this Update
are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other
entities, the amendments in Part I of this Update are effective for fiscal years beginning after December 15, 2019, and interim
periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities, including adoption
in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of
the beginning of the fiscal year that includes that interim period. The amendments in Part II of this Update do not require any
transition guidance because those amendments do not have an accounting effect. The Company is currently in the process of evaluating
the impact of the adoption on its consolidated financial statements.
In
August 2018, the FASB issued ASU 2018-13 to modify the disclosure requirements on fair value measurements. The amendments are
effective beginning after December 15, 2019. An entity is permitted to early adopt any removed or modified disclosures and delay
adoption of the additional disclosures until the effective date. Most amendments should be applied retrospectively, but certain
amendments will be applied prospectively. The Company is in the process of assessing the impact of the standard on the Company’s
fair value disclosures. However, the standard is not expected to have an impact on the Company’s consolidated financial
position, results of operations and cash flows.
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.
NOTE
3 – ACQUISITION
On
June 18, 2018, (the “Closing Date”), the Company completed the acquisition of 100% of the issued and outstanding membership
interests of Prime from its members pursuant to the terms and conditions of a SPA entered into among the Company and the Prime
members on the Closing Date. Prime is a New Jersey based transportation company with a focus on deliveries for on-line retailers
in New York, New Jersey and Pennsylvania. The Company’s acquisition of Prime diversified the Company’s revenue sources
and gives the Company access to the growing market of on line retail deliveries.
Pursuant
to the terms of the SPA, as amended in September 2018 to correct the purchase price error in the original SPA, the Company paid
$489,174 in cash which under the SPA was loaned back to Prime and therefore was included, net of repayments, in due to related
parties at December 31, 2018, and the Company issued 1,500,000 shares of its common stock in exchange for 100% of the issued and
outstanding membership units of Prime. These shares were valued at $3,090,000, or $2.06 per share, the fair value of the Company’s
common stock based on the quoted closing price of the Company’s common stock on the Closing Date.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2018 and 2017
Additionally,
the Company shall issue additional shares of its common stock intended to true-up the Purchase Interests such that the aggregate
value of the Purchase Interests would be equal to the trailing twelve-month gross profit of the Company (the “True-Up Value”),
to be calculated as of December 31, 2018 (the “True-up Stock”). On April 15, 2019, the Company shall issue to the
sellers such aggregate number of True-up Stock equal to (i) the True-Up Value minus $3,750,000 divided by (ii) the lower of (A)
$2.50, (B) the closing price of the Company’s common stock on April 15, 2019 or (C) the lowest price per share (as adjusted
for any stock splits) paid upon conversion of the Company’s series A convertible preferred stock on or prior to April 15,
2019. Based on Prime’s initial estimate of the 2018 gross profit, no contingent consideration was recorded on the acquisition
date. Based on actual 2018 gross profit, no additional True-up stock will be issued and therefore, no additional contingent consideration
was recorded as of December 31, 2018. Prime became a wholly owned subsidiary of the Company as of the Closing Date.
On
June 18, 2018, the Company entered into an employment agreement with a party related to the majority selling member of Prime which
did not represent additional purchase consideration.
The
fair value of the assets acquired and liabilities assumed are based on management’s initial estimates of the fair values
on June 18, 2018 and on subsequent measurement adjustments as of December 31, 2018. Based upon the purchase price allocation,
the following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition:
Assets
acquired:
|
|
|
|
Cash
|
|
$
|
38,198
|
|
Accounts
receivable
|
|
|
1,231,401
|
|
Prepaid
expensed and other current assets
|
|
|
143,258
|
|
Due
from related party
|
|
|
14,019
|
|
Property
and equipment, net
|
|
|
623,923
|
|
Intangible
asset
|
|
|
5,235,515
|
|
Total
assets acquired at fair value
|
|
|
7,286,314
|
|
|
|
|
|
|
Liabilities
assumed:
|
|
|
|
|
Notes
payable
|
|
|
2,224,242
|
|
Accounts
payable and accrued expenses
|
|
|
758,887
|
|
Insurance
payable
|
|
|
520,423
|
|
Total
liabilities assumed
|
|
|
3,503,552
|
|
Net
assets acquired
|
|
|
3,782,762
|
|
|
|
|
|
|
Purchase
consideration paid:
|
|
|
|
|
Cash
|
|
|
489,174
|
|
Common
stock
|
|
|
3,090,000
|
|
Total
purchase consideration paid
|
|
|
3,579,174
|
|
|
|
|
|
|
Gain
on bargain purchase
|
|
$
|
203,588
|
|
In
connection with the acquisition, the Company recognized $203,588 of bargain purchase gain and a $5,235,515 intangible asset related
to the acquisition of a customer relationship. The bargain purchase gain of $203,588 represents the amount by which the acquisition-date
fair value of the net assets acquired exceeded the fair value of the consideration paid. The bargain purchase gain is reported
as other income in the consolidated statements of operations. Prior to recognizing a bargain purchase, management reassessed whether
all assets acquired and liabilities assumed had been correctly identified, and reviewed the key valuation assumptions and business
combination accounting procedures for this acquisition. After careful consideration and review, management concluded that the
recognition of a bargain purchase gain was appropriate for this acquisition.
The
assets acquired and liabilities assumed are recorded at their estimated fair values on the acquisition date as adjusted 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 goodwill or bargain
purchase gain. After the purchase price measurement period, the Company will record adjustments to assets acquired or liabilities
assumed in operating expenses in the period in which the adjustments were determined.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2018 and 2017
The
Company shall record acquisition and transaction related expenses in the period in which they are incurred. During the year ended
December 31, 2018, acquisition and transaction related expenses primarily consisted of legal fees of approximately $24,000 and
$1,236,000 of stock-based professional fees from the granting of 600,000 shares of the Company’s common stock to two consultants
for services rendered in connection with the acquisition. Additionally, debt issue costs were incurred relating to a loan in which
a portion of the proceeds were used to pay the cash portion of the purchase consideration (see Note 7 “Bellridge Capital
LLC”).
In
the event of Buyer’s failure to satisfy the conditions set forth in the SPA, the former majority member, (the “Manager”),
acting in her sole discretion on behalf of the Sellers, shall have the right, for the one year period following the Closing, to
unwind the transactions and return the Purchase Price in exchange for 90% of the Interests of Prime. Conditions include:
|
1)
|
Within
twelve months from the Closing Date, the Company shall apply (the “Application”) to have its common stock listed
and trading on the (i) New York Stock Exchange, (ii) NASDAQ Global Select Market, (iii) NASDAQ Global Market, (iv) NASDAQ
Capital Market, or (v) NYSE American (each, a “Selected Market”). At the time of submitting the Application, the
Company shall meet all of the quantitative initial listing standards and corporate governance standards of such Selected Market.
The Company shall use its best efforts to have its application approved by the Selected Market.
|
|
2)
|
The
Company covenants and agrees that, from and after the Closing Date for a period of twelve months, the Company shall not sell,
transfer, assign and convey its interests in Prime without the prior written consent of the Manager.
|
|
3)
|
The
Sellers shall have the right to appoint one nominee to the Board of Directors of the Company for a period of three years beginning
on the Closing Date.
|
|
4)
|
The
Company shall provide at least $267,000 of cash in additional working capital to the Company within six months from the Closing
Date.
|
The
following unaudited pro forma consolidated results of operations have been prepared as if the acquisition of Prime had occurred
as of the beginning of the following periods:
|
|
Year
Ended
December 31, 2018
|
|
|
Year
Ended
December 31, 2017
|
|
Net
Revenues - Continuing Operations
|
|
$
|
17,885,957
|
|
|
$
|
5,627,314
|
|
Net
Loss
|
|
$
|
(16,705,685
|
)
|
|
$
|
(2,195,035
|
)
|
Net
Loss per Share
|
|
$
|
(6.64
|
)
|
|
$
|
(1.06
|
)
|
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.
NOTE
4 – ACCOUNTS RECEIVABLE
At
December 31, 2018 and 2017, accounts receivable, net consisted of the following:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Accounts
receivable
|
|
$
|
441,497
|
|
|
$
|
-
|
|
Allowance
for doubtful accounts
|
|
|
-
|
|
|
|
-
|
|
Accounts
receivable, net
|
|
$
|
441,497
|
|
|
$
|
-
|
|
NOTE
5 - PROPERTY AND EQUIPMENT
At
December 31, 2018 and 2017, property and equipment consisted of the following:
|
|
Useful
Life
|
|
2018
|
|
|
2017
|
|
Delivery
trucks and vehicles
|
|
5
years
|
|
$
|
1,033,397
|
|
|
$
|
-
|
|
Less:
accumulated depreciation
|
|
|
|
|
(96,566
|
)
|
|
|
-
|
|
Property
and equipment, net
|
|
|
|
$
|
936,831
|
|
|
$
|
-
|
|
For
the years ended December 31, 2018 and 2017, depreciation expense is included in general and administrative expenses and amounted
to $97,169 and $0, respectively. During the year ended December 31, 2018, the Company traded in delivery trucks and vehicles of
$72,342 with related accumulated depreciation of $603 and reduced notes payable of $56,933, resulting in a loss of $14,816 which
is included in general and administrative expenses on the accompanying consolidated statement of operations.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2018 and 2017
NOTE
6 – INTANGIBLE ASSET
At
December 31, 2018 and 2017, intangible asset consisted of the following:
|
|
Useful
life
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Customer
relationship
|
|
5
year
|
|
$
|
5,235,515
|
|
|
$
|
-
|
|
Less:
accumulated amortization
|
|
|
|
|
(567,181
|
)
|
|
|
-
|
|
|
|
|
|
$
|
4,668,334
|
|
|
$
|
-
|
|
For
the years ended December 31, 2018 and 2017, amortization of intangible assets amounted to $567,181 and $0, respectively. Amortization
of intangible assets attributable to future periods is as follows:
Year
ending December 31:
|
|
Amount
|
|
2019
|
|
$
|
1,047,103
|
|
2020
|
|
|
1,047,103
|
|
2021
|
|
|
1,047,103
|
|
2022
|
|
|
1,047,103
|
|
2023
|
|
|
479,922
|
|
|
|
$
|
4,668,334
|
|
NOTE
7 – CONVERTIBLE PROMISSORY NOTES PAYABLE
Red
Diamond Partners LLC
On
April 25, 2017, the Company entered into a Securities Purchase Agreement with RedDiamond Partners LLC (“RedDiamond”)
pursuant to which the Company would issue to RedDiamond Convertible Promissory Notes in an aggregate principal amount of up to
$355,000, which includes a purchase price of $350,000 and transaction costs of $5,000. Pursuant to this securities purchase agreement,
on April 25, 2017, the Company entered into a convertible promissory note in the aggregate principal amount of $100,000 and the
Company received $95,000 after giving effect to the original issue discount of $5,000. This note matured on April 25, 2018 and
each tranche will mature 1 year after the date of such funding. The second Tranche was received on June 2, 2017 for $85,000 and
the third Tranche for $85,000 was received on August 8, 2017 upon filing of the Registration Statement. The fourth Tranche was
to be for $85,000 and was to occur ninety days after the First Closing, however, as of the date of this filing, the fourth tranche
has not yet been received. The Purchaser shall not be required to fund any Tranche subsequent to the first Tranche if there is
an event of default as described in the promissory notes. Through date of default, the RedDiamond Notes bore interest at a rate
of 12% per annum and are convertible into shares of the Company’s common stock at RedDiamond’s option at 65% of the
lowest VWAP for the previous ten trading days preceding the conversion.
During
2018, the Company failed to make its required maturity date payments of principal and interest on a Convertible Promissory Notes
of $270,000. In accordance with these notes, the Company entered into default on April 27, 2018, June 2, 2018 and August 8, 2018,
which increased the interest rate to 18.0% per annum. As of the date of this report the lender has not notified the Company of
default and has not exercised any of its remedies provided for in the note. One of the remedies the lender may request is an immediate
repayment of the loans at 125% of the principal balance, which would result in the recording of penalty expenses of $67,500 and
the related liability.
In
connection with the issuance of the Convertible Promissory Note above, the Company determined that the terms of the Convertible
Promissory Note included a down-round provision under which the conversion price could be affected by future equity offerings
undertaken by the Company.
These
convertible promissory notes contain cross default provisions whereby a default in any one note greater than $25,000 will cause
a default in all the notes, however, this provision is only effective if there is a formal notice of default by the lender.
We
evaluated these convertible promissory note transactions in accordance with ASC Topic 815, Derivatives and Hedging, and determined
that the conversion feature of the convertible promissory notes were not afforded the exemption for conventional convertible instruments
due to their respective variable conversion rate and price protection provision. Accordingly, under the provisions of FASB ASC
Topic No. 815-40, “Derivatives and Hedging – Contracts in an Entity’s Own Stock”, the embedded conversion
option contained in the convertible instruments were accounted for as derivative liabilities at the date of issuance and shall
be adjusted to fair value through earnings at each reporting date.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2018 and 2017
The
fair value of the embedded conversion option derivatives were determined in 2017 using the Black-Scholes valuation model. During
2017, on the initial measurement dates of each tranche received, the fair value of the embedded conversion option derivatives
of $376,841 was recorded as derivative liabilities and was allocated as a debt discount up to the net proceeds of the Convertible
Promissory Notes of $265,000 with the remainder of $111,841 charged as initial derivative expense.
The
balance of the note payable as of December 31, 2018 and 2017 amounted to $270,000 and $151,630, comprised of principal balance
of $270,000 and $270,000, respectively, net of debt discount relating to the bifurcated derivative of $0 and $118,370, respectively.
On April 9, 2019, the Company entered into a new agreement with this lender that modified these Notes (See Note 15 – Subsequent
Events).
RDW
Capital, LLC.
On
June 30, 2017, the Company issued RDW Capital, LLC a senior convertible note in the aggregate principal amount of $240,000, for
an aggregate purchase price of $30,000 of which $15,000 had been recorded as advance from lender as of March 31, 2017 and the
remaining $15,000 received on June 30, 2017. Through date of default, the principal due under the Note accrued interest at a rate
of 12% per annum. All principal and accrued interest under the Note was due six months following the issue date of the Note, and
is convertible into shares of the Company’s common stock, at a conversion price equal to fifty (50%) of the lowest volume-weighted
average price for the previous ten trading days immediately preceding the conversion. The Note includes anti-dilution protection,
including a down-round provision under which the conversion price could be affected by future equity offerings undertaken by the
Company, as well as customary events of default, including non-payment of the principal or accrued interest due on the Note. Upon
an event of default, all obligations under the Note will become immediately due and payable and the Company will be required to
make certain payments to the Lender.
On
December 31, 2017 the Company failed to make its required maturity date payment of principal and interest. In accordance with
the note, the Company entered into default on January 3, 2018, which increased the interest rate to 24% per annum. As of the date
of this report the lender has not notified the Company of default and has not exercised any of its remedies provided for in the
note. One of the remedies the lender may request is an immediate repayment of the loan at 125% of the principal balance, which
would result in the recording of $60,000 penalty expense and the related liability.
Under
the provisions of FASB ASC Topic No. 815-40, “Derivatives and Hedging – Contracts in an Entity’s Own Stock”,
the embedded conversion option contained in these convertible instruments were accounted for as derivative liabilities
at the date of issuance and shall be adjusted to fair value through earnings at each reporting date. The fair value of the embedded
conversion option derivatives were determined in 2017 using the Black-Scholes valuation model. On June 30, 2017, on the initial
measurement date, the fair value of the embedded conversion option derivatives of $527,477 was recorded as derivative liabilities
and was allocated as a debt discount up to the net proceeds of the Convertible Promissory Notes of $30,000 with the remainder
of $497,477 charged as initial derivative expense.
The
balance as of December 31, 2018 and 2017 amounted to $240,000 and $120,986, comprised of principal balance of $240,000 and $240,000,
respectively, net of Original Issue Discount (OID) of $0 and $104,137 and debt discount relating to the bifurcated derivative
of $0 and $14,877, respectively. On April 9, 2019, the Company entered into a new agreement with this lender that modified these
Notes (See Note 15 – Subsequent Events).
Bellridge
Capital, LLC.
On
June 18, 2018, the Company entered into a securities purchase agreement (the “Purchase Agreement”), whereby it issued
to an institutional investor (the “Lender”) a senior secured convertible note in the aggregate principal amount of
$2,497,503 (the “Note”), for an aggregate purchase price of $1,665,000, net of an original issue discount of $832,503.
In addition, the Company paid issue costs of $177,212. The original issue discount and issue costs were recorded as a debt discount
to be amortized over the Note term. The principal due under the Note accrues interest at a rate of 10% per annum. Principal and
interest payments of $232,940 were payable monthly beginning on December 18, 2018 and were due monthly over the term of the Note
in cash or common stock of the Company, at the Lender’s discretion.
In
August 2018, the Company defaulted on its convertible note payable with Bellridge due to (i) default on the payment of monthly
interest payments due, (ii) default caused by the late filing of the Company’s report on Form 10-Q for the periods ended
June 30, 2018 and September 30, 2018 and (iii) default of filing of a registration statement (See Note 7). Upon an event of default,
all principal, accrued interest, and liquating damages and penalties were due upon request of the lender at 125% of such amounts.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2018 and 2017
On
December 27, 2018, the lender waived any and all defaults in existence on the Note and the Company agreed to issue a warrant that
is convertible into 2% of the issued and outstanding shares existing as the time the Company files a registration statement or
makes an application to up list to a national stock exchange. Additionally, the principal interest amount due under the Note was
modified with a monthly payment of principal and interests due beginning on January 18, 2019 of $156,219 with all remaining principal
and interest amounts on the Note due on December 18, 2019. This modification was not considered a debt extinguishment, On April
9, 2019, the Company entered into a new agreement with this lender that modified these Notes (See Note 15 – Subsequent Events).
Pursuant
to the warrant, at any time on or before the date that the Company files a registration statement on form S-l or applies for up-listing
to a National Exchange, and on or prior to the close of business on the early of the first year anniversary of the issuance of
December 27, 2018 (the “Termination Date”), Bellridge can to subscribe for and purchase from the Company up to 2%
in shares (as subject to adjustment as defined in the warrant (the “Warrant Shares”) of common stock for an aggregate
exercise price of $100. In connection with the issuance of this Warrant, the Company determined that this Warrant contains terms
that are not fixed monetary amounts at inception. Accordingly, under the provisions of ASC Topic No. 815-40, “Derivatives
and Hedging – Contracts in an Entity’s Own Stock”, the embedded conversion option contained in this Warrant
shall be accounted for as derivative liabilities at the date of issuance and shall be adjusted to fair value through earnings
at each reporting date. The fair value of this Warrant shall be determined using the Monte-Carlo simulation model. On April 9,
2019, the Company entered into a new agreement with this lender that cancelled these warrants (See Note 15 – Subsequent
Events).
All
principal and accrued interest under the Note is convertible into shares of the Company’s common stock, at a conversion
price equal to the lower of $1.50 and 65% of the lowest traded price during the fifteen trading days immediately prior to the
conversion date. The Note includes anti-dilution protection, as well as customary events of default, including, but not limited
to, non-payment of the principal or accrued interest due on the Note and cross default provisions on other Company obligations
or contracts. Upon an event of default, all obligations under the Note will become immediately due and payable and the Company
will be required to make certain payments to the Lender. In addition, on June 18, 2018, the Lender was issued a warrant, with
a term of two years, to purchase up to 4.75% of the fully-diluted outstanding Common Stock of the Company, for an aggregate purchase
price of $100 (the “Warrant”). On April 9, 2019, the Company entered into a new agreement with this lender that cancelled
these warrants (See Note 15 – Subsequent Events).
The
Lender was granted a right of first refusal on future financing transactions of the Company while the Note remains outstanding,
plus an additional three months thereafter. In connection with the issuance of the Note, the Company entered into a security agreement
with the Lender (the “Security Agreement”) pursuant to which the Company agreed that obligations under the Note and
related documents will be secured by all of the assets of the Company. In addition, all of the Company’s subsidiaries are
guarantors of the Company’s obligations to the Lender pursuant to the Note and have granted a similar security interest
over substantially all of their assets. A portion of the proceeds of the Note were used to acquire 100% of the membership interests
of Prime (See Note 3).
During
the term of this Note, in the event that the Company consummates any public or private offering or other financing or capital
raising transaction of any kind ( each a “Subsequent Offering”), in which the Company receives, in one or more contemporaneous
transactions, gross proceeds of at least $5,000,000, at any time upon ten (10) days written notice to the Holder, but subject
to the Holder’s conversion rights set forth in the Purchase Agreement, then the Company shall use 20% of the gross proceeds
of the Subsequent Offering and shall make payment to the Holder of an amount in cash equal to the product of (i) the sum of (x)
the then outstanding principal amount of this Note and (y) all accrued but unpaid interest, multiplied by (ii) (x) 110%, if the
Prepayment Date is within 90 days of the date hereof the Closing Date (as defined in the Purchase Agreement), or (y) 125%, if
the Prepayment Date is after the 90th day following the Closing Date, to which calculated amount the Company shall add all other
amounts owed pursuant to this Note, including, but not limited to, all Late Fees and liquidated damages.
In
connection with the Purchase agreement, the Company entered into a registration rights agreement which, among other things, required
the Company to file a registration statement with the Securities and Exchange Commission no later than 120 days after June 18,
2018. The Company failed to file such registration statement. Accordingly, in addition to any other rights the Holders may have
hereunder or under applicable law, on the default date and on each monthly anniversary of each such default date (if the applicable
event shall not have been cured by such date) until the ninetieth day from such Event Date, the Company shall pay to each Holder
an amount in cash, as partial liquidated damages and not as a penalty, equal to the product of one percent (1%) multiplied by
the aggregate subscription amount paid by the Holder pursuant to the Purchase Agreement. Subsequent to the ninetieth day from
such default date, the one percent (1%) penalty described in the foregoing sentence shall increase to two percent (2%), with an
aggregate cap of twenty percent (20%) per annum. If the Company fails to pay any of these partial liquidated damages in full within
seven days after the date payable, the Company will pay interest thereon at a rate of 18% per annum to the Holder, accruing daily
from the date such partial liquidated damages are due until such amounts, plus all such interest thereon, are paid in full. The
partial liquidated damages pursuant to the terms hereof shall apply on a daily pro rata basis for any portion of a month prior
to the cure of an Event. On December 27, 2018, the lender waived any and all defaults.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2018 and 2017
In
connection with this Purchase Agreement, the Company paid a placement agent $120,000 in cash which is included in issue costs
previously discussed above and this placement agent was issued a warrant, with a term of two years, to purchase up to 4.75% of
the fully-diluted outstanding Common Stock of the Company, for an aggregate purchase price of $100 (the “Placement Warrant”).
In
connection with the issuance of this Note, Warrants, and Placement Warrant, the Company determined that this Note and these
Warrants contains terms that are not fixed monetary amounts at inception. Accordingly, under the provisions of FASB ASC Topic
No. 815-40, “Derivatives and Hedging – Contracts in an Entity’s Own Stock”, the embedded conversion option
contained in the convertible instrument and the Warrant and Placement Warrant were accounted for as derivative liabilities at
the date of issuance and shall be adjusted to fair value through earnings at each reporting date. The fair value of this embedded
conversion option derivative, and the Warrant and Placement Warrant were determined using the Binomial valuation model and Monte-Carlo
simulation model, respectively.
In
connection with the issuance of this Note, Initial Warrant and Placement Warrant, on June 18, 2018, the initial measurement date,
the fair values of the embedded conversion option derivative and warrant derivatives of $8,326,853 was recorded as derivative
liabilities and was allocated as a debt discount of $1,487,788, with the remainder of $6,839,065 charged to current period operations
as initial derivative expense.
Summary
of derivative liabilities
At
the end of the period, the Company revalued the embedded conversion option and warrant derivative liabilities. In connection with
these revaluations and the initial derivative expense, the Company recorded derivative expense of $5,799,282 and $309,521 for
the years ended December 31, 2018 and 2017, respectively
During
the years ended December 31, 2018 and 2017, the fair value of the derivative liabilities was estimated using the Black-Sholes
valuation model, Binomial valuation model, and the Monte-Carlo simulation model with the following assumptions:
|
|
2018
|
|
|
2017
|
|
Expected
dividend rate
|
|
|
0
|
|
|
|
0
|
|
Expected
term (in years)
|
|
|
0.01
to 2.00
|
|
|
|
0.38
to 1.00
|
|
Volatility
|
|
|
261.2%
to 307.7
|
%
|
|
|
258.6%
to 526.5
|
%
|
Risk-free
interest rate
|
|
|
1.32%
to 2.63
|
%
|
|
|
0.66%
to 1.76
|
%
|
At
December 31, 2018 and 2017, convertible promissory notes are as follows:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Principal
amounts
|
|
$
|
3,007,503
|
|
|
$
|
510,000
|
|
Less:
unamortized debt discount
|
|
|
(1,595,627
|
)
|
|
|
(237,384
|
)
|
Convertible
notes payable, net
|
|
|
1,411,876
|
|
|
|
272,616
|
|
Less:
current portion of convertible notes payable
|
|
|
(1,411,876
|
)
|
|
|
(272,616
|
)
|
Convertible
notes payable, net – long-term
|
|
$
|
-
|
|
|
$
|
-
|
|
For
the years ended December 31, 2018 and 2017, amortization of debt discounts related to these convertible notes amounted to $1,139,259
and $277,951, respectively, which has been included in interest expense on the accompanying consolidated statements of operations.
The weighted average interest rate during the year ended December 31, 2018 and 2017 was approximately 21.2% and 10.0%, respectively.
NOTE
8 – NOTES PAYABLE
Secured
merchant loans
In
connection with the acquisition of Prime (See Note 3), the Company assumed several notes payable liabilities amounting to $944,281
pursuant to secured merchant agreements (the “Assumed Secured Merchant Loans”). Pursuant to the Assumed Secured Merchant
Loans, the Company is required to repay the noteholders by making daily payments on each business day or on demand payments until
the loan amounts are paid in full. Each payment is deducted directly from the Company’s bank accounts. The Assumed Secured
Merchant Loans are secured by the assets of Prime, and are personally guaranteed by the former majority member of Prime. During
the period from acquisition date of Prime (June 18, 2018) to December 31, 2018, the Company repaid $786,330 of these notes. At
December 31, 2018, notes payable related to Assumed Secured Merchant Loans amounted to $157,951.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2018 and 2017
On
September 20, 2018, the Company entered into a secured Merchant Loan in the amount of $521,250 and received net proceeds of $375,000,
net of original issue discount of $146,250. Pursuant to this Secured Merchant Loan, the Company is required to repay the noteholders
by making daily payments of $3,724 on each business day until the loan amounts are paid in full. Each payment is deducted directly
from the Company’s bank accounts. This Secured Merchant Loan is secured by the Company’s assets and are personally
guaranteed by the former majority member of Prime. During the period from September 20, 2018 to December 31, 2018, the Company
repaid $256,956 of this note. At December 31, 2018, note payable related to this Secured Merchant Loan amounted to $190,125, which
is net of unamortized debt discount of $74,169.
On October 1, 2018, the Company entered into a secured Merchant Loan in the amount of $209,850 and received
net proceeds of $137,962, net of original issue discount of $59,850 and net of origination fees of $12,038. Pursuant to this Secured
Merchant Loan, the Company is required to repay the noteholders by making daily payments of $1,749 on each business day until the
loan amounts are paid in full. Each payment is deducted directly from the Company’s bank accounts. Additionally, on October
1, 2018, the Company entered into a second secured Merchant Loan in the amount of $139,900 and received net proceeds of $92,000,
net of original issue discount of $39,900 and net of origination fees of $8,000. Pursuant to this Secured Merchant Loan, the Company
is required to repay the noteholders by making daily payments of $1,166 on each business day until the loan amounts are paid in
full. Each payment is deducted directly from the Company’s bank accounts. These Secured Merchant Loans are secured by the
Company’s assets and are personally guaranteed by the former majority member of Prime. During the period from October 1,
2018 to December 31, 2018, the Company repaid $169,653 of these notes. At December 31, 2018, notes payable related to these Secured
Merchant Loans amounted to $128,726, which is net of unamortized debt discount of $51,371.
On October 12, 2018, the Company entered into a secured Merchant Loan in the amount of $420,000. The Company
simultaneously repaid a prior loan of $31,634, paid an origination fee of $10,500 and received net proceeds of $254,552, net of
original issue discount of $123,314. Pursuant to this Secured Merchant Loan, the Company is required to repay the noteholder by
making daily payments of $3,000 on each business day until the loan amounts are paid in full. Each payment is deducted directly
from the Company’s bank accounts. This Secured Merchant Loans is secured by the Company’s assets and are personally
guaranteed by the former majority member of Prime. During the period from October 12, 2018 to December 31, 2018, the Company repaid
$162,000 of this note. At December 31, 2018, note payable related to this Secured Merchant Loan amounted to $171,752, which is
net of unamortized debt discount of $86,248.
Promissory
notes
In
connection with the acquisition of Prime (See Note 3), the Company assumed several notes payable liabilities due to former members
of Prime amounting to $459,750 (the “Member Notes”). The Member Notes have effective interest rates ranging from 7%
to 10%, and are unsecured. During the period from acquisition date of Prime (June 18, 2018) to December 31, 2018, the Company
repaid $459,750 of these notes. At December 31, 2018, notes payable related to former Member Notes amounted to $0.
In
connection with the acquisition of Prime (See Note 3), the Company assumed several notes payable liabilities due to entities or
individuals amounting to $297,005 (the “Note”). These notes have effective interest rates ranging from 7% to 10%,
and are unsecured. During the period from acquisition date of Prime (June 18, 2018) to December 31, 2018, the Company borrowed
an addition $50,000 and repaid $217,005 of these notes. At December 31, 2018, notes payable to these entities or individuals amounted
to $130,000.
On
August 1, 2018, the Company entered into a 10% Original Discount Senior Secured Demand Promissory Note with an investor. Pursuant
to this promissory note, the Company borrowed $165,000 and received net proceeds of $150,000. The promissory note is payable on
demand at any time prior to December 31, 2018. The promissory note was secured by the Company’s assets. On August 20, 2018,
the Company repaid this promissory note of $165,000. Additionally, from October 31, 2018 to December 31, 2018, the Company entered
into additional Original Discount Senior Secured Demand Promissory Notes with an investor (the “Promissory Note”).
Pursuant to the Promissory Notes, the Company borrowed an aggregate of $770,000 and received net proceeds of $699,955, net of
original issue discount of $70,000 and fees of $45. In December 2018, the Company repaid $220,000 of these promissory notes. At
December 31, 2018, notes payable to this entity amounted to $505,945, which is net of unamortized debt discount of $44,055. The
remaining notes are payable on demand at any time prior to March 15, 2019. These promissory notes are secured by the Company’s
assets.
In October 2018, the Company entered into a promissory note with an individual totaling $110,000 and received
net proceeds of $100,000, net of original issue discount of $10,000. In December 2018, the Company repaid this note.
From
November 2018 to December 2018, the Company entered into separate promissory notes with two individual totaling $215,000 and received
net proceeds of $200,000, net of original issue discounts of $15,000. In December 2018, the Company repaid these loans.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2018 and 2017
Equipment
and auto notes payable
In
connection with the acquisition of Prime (See Note 3), the Company assumed several equipment notes payable liabilities due to
entities amounting to $523,207 (the “Equipment Notes”). These Equipment Notes have effective interest rates ranging
from 6.0% to 9.4%, and are secured by the underlying van or trucks. During the period from acquisition date of Prime (June 18,
2018) to December 31, 2018, the Company borrowed funds pursuant to Equipment Note agreements of $135,845, repaid $113,830 of these
Equipment Notes, and reduce Equipment Notes by $56,933 related to the trade in of certain vans. At December 31, 2018, equipment
notes payable to these entities amounted to $488,289.
During
October and November 2018, the Company entered into auto financing agreements in the amount of $162,868. During the period from
October 2018 to December 31, 2018, the Company repaid $1,832 of these notes. At December 31, 2018, auto notes payable to these
entities amounted to $161,036.
At
December 31, 2018 and 2017, notes payable consisted of the following:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Principal
amounts
|
|
$
|
2,189,666
|
|
|
$
|
-
|
|
Less:
unamortized debt discount
|
|
|
(255,843
|
)
|
|
|
-
|
|
Principal
amounts, net
|
|
|
1,933,823
|
|
|
|
-
|
|
Less:
current portion of notes payable
|
|
|
(1,509,804
|
)
|
|
|
-
|
|
Notes
payable – long-term
|
|
$
|
424,019
|
|
|
$
|
-
|
|
NOTE
9 – COMMITMENTS AND CONTINGENCIES
Related
party – lease
The
Company executed a sublease agreement with an affiliate for office space for a one-year term. The sublease commenced on August
1, 2016 at a rate of $300 per month. The sublease was extended on August 1, 2017 and terminated on December 14, 2017, at which
point the Company signed a new one-year term lease with the third-party landlord directly for the entire space previously occupied
by the affiliate. The monthly rent under the renewed lease is $1,600 plus maintenance charges and taxes.
Common
stock ownership
As
a result of the Company’s non-effectiveness of the 1 for 30 reverse stock-split, which was previously represented to have
been effective prior to the March 30, 2017 reverse merger, the Company’s Chief Executive Officer’s post reverse merger
common stock ownership percentage has been reduced from approximately 99% to approximately 80%. The Company and the Chief Executive
Officer are exploring remedies, which may include capital stock or other consideration, to correct this situation.
Employment
agreement
On
June 18, 2018, the Company entered into an employment agreement with the chief operating officer of Prime. The Company shall pay
to this executive a base salary of $520,000 per year, payable in accordance with the Company’s usual pay practices. The
executive’s base salary will increase by $260,000 per year upon (i) Prime achieving revenue of $20 million on an annualized
basis (the “Initial Target Goal”) for four consecutive weeks; and (ii) each time Prime achieves revenue of an additional
$10 million increment above the Initial Target Goal (i.e., $30 million, $40 million, $50 million, etc.) on an annualized basis
for four consecutive weeks. Executive’s base salary shall be subject to review annually by the Manager and may be increased
(but not decreased). The executive shall be entitled to participate in any bonus plan that the Manager or its designee may approve
for the senior executives of the Company and shall be entitled to participate in benefits under the Company’s benefit plans,
profit sharing and arrangements, including, without limitation, any employee benefit plan or arrangement made available in the
future by the Company to its employees or senior executives, subject to and on a basis consistent with the terms, conditions and
overall administration of such plans and arrangements. Notwithstanding the foregoing, during the Employment, the Company will
provide, at the Company’s expense, health and major medical insurance benefits to the Executive and his family members which
are at least equal to the benefits provided to the Executive and his family members immediately prior to the Effective Date. The
term of this Agreement (as it may be extended by the following sentence or terminated earlier pursuant to terms in the employment
agreement shall begin on the Effective Date and end on the close of business on May 31, 2023. The Employment Term shall be automatically
extended for additional one-year periods unless, at least sixty (60) days prior to the end of the expiration of the Employment
Term.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2018 and 2017
Operating
lease agreements
On
November 30, 2018, the Company entered into a commercial lease agreement for the lease of sixty parking spaces under an operating
lease through November 2023 for a monthly rental fee of $6,000. Either party can cancel this lease on the annual anniversary date
of the lease provided that the party who wishes to terminate provides the other party with at least 30-day prior written notice
of such termination.
In
December 2018, the Company entered into a lease agreement for the lease of office and warehouse space and parking spaces under
a non-cancelable operating lease through December 2023. From the lease commencement date until the last day of the second lease
year, monthly rent shall be $14,000. At the beginning of the 30th month following the commencement date and through
the end of the term, minimum rent shall be $14,420 per month. The Company shall have one option to renew the term of this lease
for an additional five years. In January 2019, the Company paid a security deposit of $28,000.
At
December 31, 2018, future minimum lease payments due under operating leases is as follows:
Year
|
|
Amount
|
|
2019
|
|
$
|
168,000
|
|
2020
|
|
|
168,000
|
|
2021
|
|
|
173,040
|
|
2022
|
|
|
173,040
|
|
2023
|
|
|
173,040
|
|
Total
|
|
$
|
855,120
|
|
Other
From
time to time, we may be involved in litigation relating to claims arising out of our operation in the normal course of business.
As of December 31, 2018, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect
on results of our operations.
NOTE
10– STOCKHOLDERS’ DEFICIT
Preferred
stock
The
preferred stock is designated Series A Convertible Preferred Stock. Each share of preferred stock has a par value of $.001 and
a stated value of $1.00. Dividends are payable at the rate per share of 7% per annum cumulative based on the stated value. The
Series A preferred shares have no voting rights, except as required by law. Each share of preferred stock is convertible based
on the stated value at a conversion price of $20.83 at the option of the holder; provided, however, if a triggering event occurs,
as defined in the document, the conversion price shall thereafter be reduced, and only reduced, to equal forty percent of the
lowest VWAP during the thirty consecutive trading day period prior to the conversion date. As of December 31, 2018, the Company
believes a triggering event has occurred. The beneficial ownership limitation attached to conversion is 4.99%, which can be decreased
or increased, upon not less than 61 days’ notice to the Company, but in no event exceeding 19.99% of the number of shares
of common stock outstanding immediately after giving effect to the issuance of common stock upon conversion of the preferred stock.
After 36 months, the Company has the right to redeem all, but not less than all, of the outstanding preferred shares in cash at
a price equal to 130% of the stated value plus any accrued but unpaid dividends thereon. Undeclared cumulative preferred stock
dividends were approximately $560,000 as of December 31, 2018.
Recapitalization
On
March 30, 2017, the Company closed the Share Exchange Agreement between Save-On and the Company was deemed to have issued 4,000,000
Series A convertible preferred shares and 113,294 common shares to the original shareholders of the Company. In connection with
the recapitalization, the Company acquired assets of $10,000 and assumed liabilities of $48,458.
Common
stock issued for services
On
June 18, 2018, the Company granted 1,500,000 shares of its common stock to the Company chief executive officer for services rendered.
The shares were valued at $3,090,000, or $2.06 per share, based on the quoted trading price on the date of grant. In connection
with these shares, the Company recorded stock-based compensation of $3,090,000.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2018 and 2017
On
June 18, 2018, the Company granted 600,000 shares of its common stock to two consultants for services rendered. The shares were
valued at $1,236,000, or $2.06 per share, based on the quoted trading price on the date of grant. In connection with these shares,
the Company recorded stock-based professional fees of $1,236,000.
Common
stock issued for acquisition
In
connection with the acquisition (See Note 3), the Company issued 1,500,000 unregistered shares of its common stock valued at $3,090,000,
or $2.06 per share, the fair value of the Company’s common stock based on the quoted closing price of the Company’s
common stock on the Closing Date.
Common
stock issued as loan fee
In
October 2018, the Company issued 50,000 shares of its common stock to the related party lender in connection with loans made between
July and October 2018. The shares were valued at $100,000, or $2.00 per share, based on the quoted trading price on the date of
grant. In connection with these shares, the Company recorded interest expense – related party of $100,000.
Warrants
In
connection with the Purchase Agreement (See Note 7 under Bellridge), the Lender was issued a warrant, with a term of two years,
to purchase up to 4.75% of the fully-diluted outstanding Common Stock of the Company, for an aggregate purchase price of $100.
Additionally, the placement agent was issued a warrant, with a term of two years, to purchase up to 4.75% of the fully-diluted
outstanding Common Stock of the Company, for an aggregate purchase price of $100.
On
December 27, 2018, the lender waived any and all defaults in existence on the Note and the Company agreed to issue a warrant that
is convertible into 2% of the issued and outstanding shares existing as the time the Company files a registration statement or
makes an application to up list to a national stock exchange (See Note 7 under Bellridge).
Warrant
activities for the year ended December 31, 2018 are summarized as follows:
|
|
Number
of Warrants
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term (Years)
|
|
|
Aggregate
Intrinsic Value
|
|
Balance
Outstanding December 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
1,648,570
|
|
|
|
0.00
|
|
|
|
1.47
|
|
|
|
|
|
Balance
Outstanding December 31, 2018
|
|
|
1,648,570
|
|
|
$
|
0.00
|
|
|
|
1.47
|
|
|
$
|
2,472,655
|
|
Exercisable,
December 31, 2018
|
|
|
1,648,570
|
|
|
$
|
0.00
|
|
|
|
1.47
|
|
|
$
|
2,472,655
|
|
NOTE
11– RELATED PARTY TRANSACTIONS AND BALANCES
In
2016, the Company executed a sublease agreement with an affiliate for office space for a one-year term. The sublease commenced
on August 1, 2016 at a rate of $300 per month. The sublease was extended on August 1, 2017 and terminated on December 14, 2017,
at which point the Company signed a new one-year term lease with the third-party landlord directly for the entire space previously
occupied by the affiliate. Rent expense to the affiliate was $0 and $3,300 for the year ended December 31, 2018 and 2017, respectively,
and is included in discontinued operations.
In 2017, the Company utilized various ancillary
services of the affiliate including software and certain technology without any charge by the affiliate. Additionally, in 2017,
the Company utilized certain employees of the affiliate without any charge by the affiliate. As a result, the Company did
not incur any labor charges for the period January 1, 2017 through December 15, 2017, except the salary of the Chief Executive
Officer.
Accounts
payable – related party
In 2018 and 2017, the Company utilized an
affiliate company as one of the carriers, providing auto transportation, in the normal course of business. The carrier fees incurred
to this affiliate were $50,625 and $13,350 for the years ended December 31, 2018 and 2017, respectively. At December 31, 2018,
amount due to this affiliate amounted to $3,700 and is included in liabilities of discontinued operations on the accompanying
consolidated balance sheets.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2018 and 2017
Due
to related parties
During
2018 and 2017, certain revenue and related costs related to discontinued operations initially recorded by the Company were
deemed as affiliate revenue and related costs and were therefore reversed. This was caused by either customers who had not yet
approved the Company as a vendor or remittances which were made to the affiliate directly. Such remittances were then remitted
from the affiliate back to the Company. The outcome resulted in a net due to affiliate of $0 and $23,551 as of December 31, 2018
and 2017, respectively, which is included in liabilities of discontinued operations on the accompanying consolidated balance
sheets.
In
connection with the acquisition of Prime (See Note 3), the Company acquired a balance of $14,019 that was due from the former
majority owner of Prime. Pursuant to the terms of the SPA, the Company agreed to pay $489,174 in cash to the former majority owner
of Prime who then advanced back the $489,174 to Prime. During the period from acquisition date of Prime (June 18, 2018) to December
31, 2018, the Company repaid $216,155 of this advance. This advance is non-interest bearing and is due on demand. At December
31, 2018, amount due to this related party amounted to $259,000.
During
the period from acquisition date of Prime (June 18, 2018) to December 31, 2018, an employee of Prime who exerts significant influence
over the business of Prime, paid costs and expenses of $56,507 on behalf of the Company and was reimbursed $40,207 by the company.
These advances are non-interest bearing and is due on demand. At December 31, 2018, amounts due to this related party amounted
to $16,300.
Notes
payable – related party
From
July 25, 2018 through December 31, 2018, the Company entered into a Promissory Notes with the Company’s chief executive
office or the spouse of the Company’s chief executive officer. Pursuant to these promissory notes, the Company borrowed
an aggregate of $1,150,000 and received net proceeds of $1,050,000, net of original issue discounts of $100,000. From July 25,
2018 through December 31, 2018, $930,000 of these loans were repaid. At December 31, 2018, notes payable – related party
amounted to $213,617, which is net of unamortized debt discount of $6,383.
NOTE
12 – INCOME TAXES
The
Company accounts for income tax using the liability method prescribed by ASC 740, “Income Taxes”. Under this method,
deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets
and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse. The
deferred tax assets at December 31, 2018 and 2017 consist only of net operating loss carryforwards. The net deferred tax asset
has been fully offset by a valuation allowance because of the uncertainty of the attainment of future taxable income.
On
December 22, 2017, the Tax Cuts and Jobs Act (“the Act”) was signed into law, a tax reform bill which, among other
items, reduces the current federal income tax rate to 21% from 34%. The rate reduction is effective January 1, 2018, and is permanent.
The Act has caused the Company’s deferred income taxes to be revalued. As changes in tax laws or rates are enacted, deferred
tax assets and liabilities are adjusted through income tax expense. Pursuant to the guidance within SEC Staff Accounting Bulletin
No. 118 (“SAB 118”), as of December 31, 2017, the Company recognized the provisional effects of the enactment of the
Act for which measurement could be reasonably estimated. Since the Company has provided a full valuation allowance against its
deferred tax assets, the revaluation of the deferred tax assets did not have a material impact on any period presented. The ultimate
impact of the Act may differ from these estimates due to the Company’s continued analysis or further regulatory guidance
that may be issued as a result of the Act.
The
items accounting for the difference between income taxes at the effective statutory rate and the Company’s effective tax
rate for the years ended December 31, 2018 and 2017 were as follows:
|
|
Year
Ended
December 31, 2018
|
|
|
Year
Ended
December 31, 2017
|
|
|
|
|
|
|
|
|
Income
tax benefit at U.S. statutory rate
|
|
|
21.00
|
%
|
|
|
34.00
|
%
|
Income
tax benefit - State
|
|
|
4.18
|
%
|
|
|
3.65
|
%
|
Permanent
items
|
|
|
(18.19
|
)%
|
|
|
(31.55
|
)%
|
Effect
of change in valuation allowance
|
|
|
(6.99
|
)%
|
|
|
(4.11
|
)%
|
Effect
of change in effective rate from the Act
|
|
|
-
|
|
|
|
(1.99
|
)%
|
Effective
income tax rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2018 and 2017
The
Company’s approximate net deferred tax asset as of December 31, 2018 and 2017 was as follows:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Deferred
Tax Asset:
|
|
|
|
|
|
|
|
|
Net
operating loss carryover
|
|
$
|
1,042,542
|
|
|
$
|
30,600
|
|
Less:
valuation allowance
|
|
|
(1,042,542
|
)
|
|
|
(30,600
|
)
|
Net
deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The
net operating loss carryforward was approximately $4,139,807 at December 31, 2018. The Company provided a valuation allowance
equal to the net deferred income tax asset as of December 31, 2018 because it was not known whether future taxable income will
be sufficient to utilize the loss carryforward. During the year ended December 31, 2018, the valuation allowance increased by
$1,011,942. Additionally, the future utilization of the net operating loss carryforward to offset future taxable income is subject
to an annual limitation as a result of ownership changes that may occur in the future. The 2017 estimated loss carry forward of
$120,600 expires on December 31, 2037. The 2018 estimated loss carry forward may be carried forward indefinitely subject to annual
usage limitations.
The
Company does not have any uncertain tax positions or events leading to uncertainty in a tax position. The Company’s 2015
to 2018 Corporate Income Tax Returns are subject to Internal Revenue Service examination.
NOTE
13 – CONCENTRATIONS
For
the year ended December 31, 2018, one customer represented 98.6% of the Company’s total net revenues from continuing
operations. This revenue is from one Prime customer for the period from June 19, 2018 to December 31, 2018. At December 31,
2018, one customer from continuing operations represented 95.7% of the Company’s accounts receivable balance.
During
the period from June 19, 2018 and December 31, 2018, the Company rented delivery vans from one vendor. Any shortage of supply
of vans available to rent to the Company could have a material adverse effect on the Company’s business, financial condition
and results of operations.
All
revenues are derived from customers in the United States.
NOTE
14 – SEGMENT INFORMATION
During
the year ended December 31, 2017, and for the period from January 1, 2018 to June 18, 2018, the Company operated in one reportable
business segment consisting of brokerage and logistic services such as transportation scheduling, routing and other value added
services related to the transportation of automobiles and other freight which is reflected as a discontinued operations.
Since June 18, 2018, the Company operated in two reportable business segments included in continuing operations
- (1) a segment which concentrates on deliveries for on-line retailers in New York, New Jersey and Pennsylvania (the “Prime”
segment), and (2) a segment with a focus on tractor trailer and box truck deliveries of product on the east coast of the
United States from one distributor’s warehouse to another warehouse or from a distributor’s warehouse to the post
office. The Company’s reportable segments were strategic business units that offered different products. They were managed
separately based on the fundamental differences in their operations and locations.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2018 and 2017
Information
with respect to these reportable business segments for the years ended December 31, 2018 and 2017 was as follows:
|
|
For
the Year ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues:
|
|
|
|
|
|
|
Prime
|
|
$
|
13,411,210
|
|
|
$
|
-
|
|
Shypdirect
|
|
|
208,950
|
|
|
|
-
|
|
|
|
|
13,620,160
|
|
|
|
-
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
|
Prime
|
|
|
664,350
|
|
|
|
-
|
|
Shypdirect
|
|
|
-
|
|
|
|
-
|
|
|
|
|
664,350
|
|
|
|
-
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
Prime
|
|
|
413,424
|
|
|
|
-
|
|
Shypdirect
|
|
|
-
|
|
|
|
-
|
|
Other
(a)
|
|
|
1,500,268
|
|
|
|
312,416
|
|
|
|
|
1,913,692
|
|
|
|
312,416
|
|
Net
(loss) income
|
|
|
|
|
|
|
|
|
Save
On – discontinued operations
|
|
|
100,379
|
|
|
|
67,563
|
|
Prime
|
|
|
(2,482,599
|
)
|
|
|
-
|
|
Shypdirect
|
|
|
(197,883
|
)
|
|
|
-
|
|
Other
(a)
|
|
|
(11,898,054
|
)
|
|
|
(812,368
|
)
|
|
|
$
|
(14,478,157
|
)
|
|
$
|
(744,805
|
)
|
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Identifiable
long-lived tangible assets at December 31, 2018 and 2017 by segment
|
|
|
|
|
|
|
|
|
Prime
|
|
$
|
936,831
|
|
|
$
|
-
|
|
Shypdirect
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
936,831
|
|
|
$
|
-
|
|
(a)
|
The
Company does not allocate any general and administrative expense of its holding company activities to its reportable segments,
because these activities are managed at the corporate level.
|
NOTE
15 – SUBSEQUENT EVENTS
Secured
merchant loans
On
January 14, 2019, the Company entered into a secured Merchant Loan in the amount of $764,500. The Company simultaneously repaid
a prior loan of $223,329 which was entered into during September 2018, paid an origination fee of $10,034 and received net proceeds
of $316,637, net of original issue discount of $214,500. Pursuant to this Secured Merchant Loan, the Company is required to repay
the noteholders by making daily payments of $6,371 on each business day until the loan amounts are paid in full. Each payment
is deducted directly from the Company’s bank account. This Secured Merchant Loans is secured by the Company’s assets
and are personally guaranteed by the former majority member of Prime.
On
January 24, 2019, the Company entered into a secured Merchant Loan in the amount of $417,000. The Company simultaneously paid
an origination fee of $7,998 and received net proceeds of $292,002, net of original issue discount of $117,000. Pursuant to this
Secured Merchant Loan, the Company is required to repay the noteholders by making daily payments of $3,972 on each business day
until the loan amounts are paid in full. Each payment is deducted directly from the Company’s bank account. This Secured
Merchant Loans is secured by the Company’s assets and are personally guaranteed by the former majority member of Prime.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2018 and 2017
On
January 28, 2019, the Company entered into a secured Merchant Loan in the amount of $759,000 and received net cash of $315,097
after paying origination fee of $25,750, an original issue discount of $209,000, and the repayment of previous loans and interest
due to this lender of $209,153. Pursuant to this Secured Merchant Loan, the Company is required to repay the noteholders by making
daily payments of $4,897 on each business day until the loan amounts are paid in full. Each payment is deducted directly from
the Company’s bank account. This Secured Merchant Loans is secured by the Company’s assets and are personally guaranteed
by the former majority member of Prime.
From
February 25, 2019 to March 6, 2019, the Company entered into four secured Merchant Loans in the aggregate amount of $1,199,200.
The Company simultaneously repaid prior loans of $69,327 which were entered into during October 2018, paid origination fees totaling
$78,286 and received net proceeds of $652,387, net of original issue discounts of $399,200. Pursuant to these four secured Merchant
Loans, the Company was required to pay the noteholders by make daily payments aggregating $11,993 on each business day until the
loan amounts were paid in full. Each payment was deducted from the Company’s bank account. On April 10, 2019, the Company
paid off these secured Merchant Loans in full by paying an aggregate amount of $703,899. As a result of paying off these loans
early, the noteholders reduced the origination fees and debt discounts by $229,195 in the aggregate.
Promissory
Notes
From
January 2019 to April 2019, the Company entered into separate promissory notes with seven individuals totaling $1,616,250 and
received net proceeds of $1,435,000, net of original issue discounts of $181,250. These Notes are due between 45 and 273 days
from the respective Note date. Other than the original issue discount, no additional interest is due to the holders. In connection
with these promissory notes, the Company issued 53,000 warrants to purchase 53,000 shares of the Company’s common stock
at an exercise price of $1.00 per share. The warrants are exercisable over a five year period.
During
January 2019, the Company entered into a separate promissory note with an individual totaling $26,900 at a simple annual interest
rate of 15% bring the total promissory note balance to $77,090 for this individual. From February 2019 to April 2019, the Company
repaid $60,000 of these promissory notes. In connection with this promissory note, the Company issued warrants to purchase 1,000
shares of the Company’s common stock at an exercise price of $1.00 per share. The warrants are exercisable over a five year
period.
During
March 2019, the Company entered into two separate promissory notes with an entity totaling $165,000 and received net proceeds
of $150,000, net of original issue discounts of $15,000. During March 2019, the Company repaid $55,000 of these promissory notes.
Notes
payable – related parties
During
January 2019, the Company repaid an existing promissory note totaling $220,000 with the spouse of the Company’s chief executive
officer. In addition, during February 2019, the Company entered into another promissory note with the spouse of the chief executive
officer totaling $230,000, net of an original issue discount of $30,000.
Convertible
debt and related warrants
On
April 9, 2019, the Company entered into an agreement with Bellridge Capital, L.P. (“Bellridge”) that modifies its
existing obligations to Bellridge (See Note 7) as follows:
|
●
|
the
overall principal amount of that certain Convertible Promissory Note, dated June 18, 2018, issued by the Company in favor
of Bellridge (the “Note”) was reduced from $2,497,502 to $1,800,000, in exchange for the issuance to Bellridge
of 800,000 shares of restricted common stock, which shall be delivered to Bellridge, either in whole or in part, at such time
or times as when the beneficial ownership of such shares by Bellridge will not result in Bellridge’s beneficial ownership
of more than the Beneficial Ownership Limitation and such shares will be issued within three business days of the date the
Bellridge has represented to the Company that it is below the Beneficial Ownership Limitation. Such issuances will occur in
increments of no fewer than the lesser of (i) 50,000 shares and (ii) the balance of the 800,000 shares owed. The “Beneficial
Ownership Limitation” shall be 4.99% of the number of shares of the Company’s common stock outstanding immediately
after giving effect to the issuance of shares of common stock issuable pursuant to this Agreement. As of April 15, 2019, 100,000
of these shares have been issued;
|
|
|
|
|
●
|
the
maturity date of the Note was extended to August 31, 2020;
|
|
|
|
|
●
|
the
interest rate was reduced from 10% to 5% per annum;
|
|
|
|
|
●
|
if
the Company completes an offering of equity or equity linked securities (including warrants, convertible preferred stock,
convertible debentures or convertible promissory note) which results in gross proceeds to the Company of at least $4,000,000,
then the Company shall use a portion of the proceeds thereof to repay not less than half of the obligations then outstanding
pursuant to the Note;
|
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2018 and 2017
|
●
|
if
the Company completes an offering of debt which results in gross proceeds to the Company of at least $3,000,000, then the
Company shall use a portion of the proceeds thereof to repay any remaining obligations then outstanding pursuant to the Note;
|
|
|
|
|
●
|
the
convertibility of the Note will now be amended such that the Note shall only be convertible at a conversion price to be mutually
agreed upon between the Company and the Holder;
|
|
|
|
|
●
|
the
registration rights previously granted to Bellridge have now been eliminated; and
|
|
|
|
|
●
|
those
certain Warrants, dated June 18, 2018 and December 27, 2018, respectively, issued by the Company in favor of Bellridge shall
be cancelled and of no further force or effect. In exchange, the Company will issue Bellridge 360,000 shares of restricted
common stock.
|
In
addition, on April 9, 2019, warrant holders holding warrants exercisable into an aggregate of 4.75% of the outstanding common
stock of the Company all agreed to exercise such warrants for an aggregate of 240,000 shares of common stock of the Company.
On
April 9, 2019, the Company entered into agreements with another institutional investor, RedDiamond Partners LLC, holding convertible
notes representing an aggregate principal amount of $510,000, and agreed with such holder to:
|
●
|
extend
the maturity date of the notes to December 31, 2020;
|
|
|
|
|
●
|
remove
all convertibility features of the notes; and
|
|
|
|
|
●
|
if
the Company completes an offering of equity or equity linked securities (including warrants, convertible preferred stock,
convertible debentures or convertible promissory note) which results in gross proceeds to the Company of at least $4,000,000,
then the Company shall use a portion of the proceeds thereof to repay not less than half of the obligations then outstanding
pursuant to the notes.
|
On
March 13, 2019, the Company entered into a convertible note agreement with an individual in the amount of $500,000. Commencing
on April 11, 2019, and continuing on the eleventh day of each month thereafter, payments of interest only on the outstanding principal
balance of this Note of $7,500 shall be due and payable. Commencing on October 11, 2019 and continuing on the eleventh day of
each month thereafter through April 11, 2021, payments of principal and interest of $31,902 shall be made, if not sooner converted
as provided in the note agreement. The payment of all or any portion of the principal and accrued interest may be paid prior to
the April 11, 2021. Interest shall accrue with respect to the unpaid principal sum identified above until such principal is paid
or converted as provided below at a rate equal to 18% per annum compounded annually. All past due principal and interest on this
Note shall bear interest from maturity of such principal or interest (in wha1ever manner same may be brought about) until paid
at the lesser of (i) 20% per annum, or (ii) the highest non-usurious rate allowed by applicable law. This Note may be converted
by Holder at any time in principal amounts of $100,000 in accordance with the terms by delivery of written notice to the Company,
into that number of shares of common stock equal to the amount obtained by dividing the portion of the aggregate principal amount
of this Note that is being converted by $1.37.
On
April 11, 2019, the Company entered into a convertible note agreement with an entity in the amount of $2,000,000. Commencing on
May 11, 2019, and continuing on the eleventh day of each month thereafter, payments of interest only on the outstanding principal
balance of this Note of $30,000 shall be due and payable. Commencing on November 11, 2019 and continuing on the eleventh day of
each month thereafter through April 11, 2021, payments of principal and interest of $117,611, if not sooner converted as provided
in the note agreement. The payment of all or any portion of the principal and accrued interest may be paid prior to the April
11, 2021. Interest shall accrue with respect to the unpaid principal sum identified above until such principal is paid or converted
as provided below at a rate equal to 18% per annum compounded annually. All past due principal and interest on this Note shall
bear interest from maturity of such principal or interest (in wha1ever manner same may be brought about) until paid at the lesser
of (i) 20% per annum, or (ii) the highest non-usurious rate allowed by applicable law. This Note may be converted by Holder at
any time in principal amounts of $100,000 in accordance with the terms by delivery of written notice to the Company, into that
number of shares of common stock equal to the amount obtained by dividing the portion of the aggregate principal amount of this
Note that is being converted by $11.81.
Series
A preferred stock
On
April 9, 2019, the Company entered into agreements with all holders of their Series A Convertible Preferred Stock to exchange
all 4,000,000 outstanding shares of preferred stock for an aggregate of 2,600,000 shares of restricted common stock.
Shares
issued for services
On
February 25, 2019, the Company granted an aggregate of 2,670,688 shares of its common stock to an executive officer, employees
and consultants of the Company for services rendered. The shares were valued at $2,750,809, or $1.03 per share, based on the quoted
trading price on the date of grant. In connection with these shares, the Company recorded stock-based compensation of $2,750,809.
Discontinued operations
On
May 1, 2019, the Company entered into a Share Exchange Agreement with Save On and Steven
Yariv, whereby the Company returned all of the stock of Save On to Steven Yariv in exchange
for Mr. Yariv conveying 1,000,000 shares of common stock of the Company back to the Company.
In addition, the Company granted an aggregate of 80,000 options to certain employees
of Save On. Mr. Yariv ceased to be an officer or director of the Company effective with
the filing of the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2018 as filed with the Securities and Exchange Commission of April 16, 2019.
Pursuant
to Accounting Standard Codification (“ASC”) 205-20-45, the financial statement in which net income or loss of a business
entity is reported shall report the results of operations of the discontinued operation in the period in which a discontinued
operation either has been disposed of or is classified as held for sale. Accordingly, the Company shall reflect Save On as a discontinued
operations beginning in the second quarter of 2019, the period that Save On was disposed of and retroactively for all periods
presented in the accompanying consolidated financial statements. The business of Save On is considered discontinued
operations because: (a) the operations and cash flows of Save On were eliminated from the Company’s operations; and (b)
the Company has no interest in the divested operations.
The
assets and liabilities classified as discontinued operations in the Company’s consolidated financial statements
as of December 31, 2018 and 2017, and for the years ended December 31, 2018 and 2017 is set forth below.
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Assets:
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
$
|
334,275
|
|
|
$
|
254,150
|
|
Prepaid
expenses and other
|
|
|
1,619
|
|
|
|
663
|
|
Total
current assets
|
|
|
335,894
|
|
|
|
254,813
|
|
Total
assets
|
|
$
|
335,894
|
|
|
$
|
254,813
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
409,053
|
|
|
$
|
176,026
|
|
Accounts
payable – related party
|
|
|
3,700
|
|
|
|
-
|
|
Due
to affiliate
|
|
|
-
|
|
|
|
23,551
|
|
Accrued
expenses and other liabilities
|
|
|
27,992
|
|
|
|
14,550
|
|
Total
current liabilities
|
|
|
440,745
|
|
|
|
214,127
|
|
Total
liabilities
|
|
$
|
440,745
|
|
|
$
|
214,127
|
|
The
summarized operating result of discontinued operations included in the Company’s condensed consolidated statements of operations
is as follows:
|
|
Year
Ended
|
|
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues
|
|
$
|
4,498,499
|
|
|
$
|
1,301,332
|
|
Cost
of revenues
|
|
|
3,438,556
|
|
|
|
992,514
|
|
Gross
profit
|
|
|
1,059,943
|
|
|
|
308,819
|
|
Operating
expenses
|
|
|
959,564
|
|
|
|
241,255
|
|
Income
from discontinued operations
|
|
|
100,379
|
|
|
|
67,563
|
|
Loss
on disposal of discontinued operations
|
|
|
-
|
|
|
|
-
|
|
Income
from discontinued operations, net of income taxes
|
|
$
|
100,379
|
|
|
$
|
67,563
|
|
3,269,373
Shares
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC.
COMMON
STOCK
PROSPECTUS
November
8, 2019
Transportation and Logis... (CE) (USOTC:TLSS)
Historical Stock Chart
From Aug 2024 to Sep 2024
Transportation and Logis... (CE) (USOTC:TLSS)
Historical Stock Chart
From Sep 2023 to Sep 2024