NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2020
NOTE
1 – ORGANIZATION AND BUSINESS OPERATIONS
Transportation
and Logistics Systems, Inc. (“TLSS” or the “Company”), formerly PetroTerra Corp., was incorporated
under the laws of the State of Nevada, on July 25, 2008. The Company operates through its subsidiaries as a leading logistics
and transportation company specializing in ecommerce fulfillment, last mile deliveries, two-person home delivery and line haul
services for predominantly online retailers.
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. This transaction was
treated as a reverse merger and recapitalization of Save On for financial reporting purposes because 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 Reverse Merger were replaced with the
historical financial statements of Save On before the Reverse Merger. The balance sheets at their historical cost basis of both
entities were combined at the Closing Date and the results of operations from the Closing Date forward include the historical
results of Save On and results of TLSS from the Closing Date forward. 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 April 16, 2019, Mr. Yariv ceased to be an officer or director of
the Company.
On
June 18, 2018 (the “Acquisition Date”), the Company completed the acquisition of 100% of the issued and outstanding
membership interests of Prime EFS, LLC, a New Jersey limited liability company (“Prime EFS”), from its members
pursuant to the terms and conditions of a Stock Purchase Agreement entered into among the Company and the Prime EFS members on
the Acquisition Date (the “SPA”). Prime EFS 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.
On June 19, 2020, Amazon Logistics, Inc.
(“Amazon”) notified Prime EFS in writing that Amazon does not intend to renew its Delivery Service Partner (DSP) Agreement
with Prime EFS when that agreement expires (see Note 13 – Subsequent Events).
TLSS
and its wholly-owned subsidiaries, Prime EFS and Shypdirect are hereafter referred to as the “Company”.
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 (“U.S. GAAP”) 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, 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, 2019, and notes thereto included in the Company’s annual report on Form 10-K, filed on May
29, 2020.
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 EFS and Shypdirect. All intercompany accounts and transactions have been eliminated in
consolidation.
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2020
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 three months ended March 31, 2020, the Company had a net loss of $3,453,338 and net
cash used in operations was $110,074. Additionally, the Company had an accumulated deficit, shareholders’ deficit, and a
working capital deficit of $82,765,210, $26,839,561 and $27,678,817, respectively, at March 31, 2020. Furthermore, the Company
failed to make required payments of principal and interest on certain of its convertible debt instruments and notes payable (see
Note 6). On June 19, 2020, Amazon Logistics, Inc. (“Amazon”) notified Prime EFS in writing that Amazon does not
intend to renew its Delivery Service Partner (DSP) Agreement with Prime EFS when that agreement expires (see Note 13 – 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. In April 2020, the Company’s
subsidiaries, Prime EFS and Shypdirect, entered into Paycheck Protection Program promissory notes with M&T Bank
in the aggregate amount of $3,446,152 (see Note 13). 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
and notes payable, 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 assets and related liabilities, assumptions used in assessing impairment
of long-lived assets, estimates of current and deferred income taxes and deferred tax valuation allowances, the fair value of
non-cash equity transactions, the valuation of derivative liabilities, and the value of claims against the Company.
Fair
value of financial instruments
The
Financial Accounting Standards Board (“FASB”) issued ASC 820 — Fair Value Measurements and Disclosures,
which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. ASC 820 requires disclosures about the fair value of all financial instruments,
whether or not recognized, for financial statement purposes. Disclosures about the fair value of financial instruments are based
on pertinent information available to the Company on March 31, 2020. 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 CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2020
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 March 31, 2020 and December 31, 2019:
|
|
At March 31, 2020
|
|
|
At December 31, 2019
|
|
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative liabilities
|
|
|
—
|
|
|
|
—
|
|
|
$
|
13,978,061
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
2,135,939
|
|
A
roll forward of the level 3 valuation financial instruments is as follows:
|
|
For the Three Months ended
March 31, 2020
|
|
|
For the Three Months ended
March 31, 2019
|
|
Balance at beginning of period
|
|
$
|
2,135,939
|
|
|
$
|
7,888,684
|
|
Initial valuation of derivative liabilities included in debt discount
|
|
|
1,267,474
|
|
|
|
-
|
|
Initial valuation of derivative liabilities included in derivative expense
|
|
|
13,336,234
|
|
|
|
-
|
|
Gain on extinguishment of debt related to repayment/conversion of debt
|
|
|
(662,398
|
)
|
|
|
(246,111
|
)
|
Reclassification of warrants from equity to derivative liabilities
|
|
|
11,381,885
|
|
|
|
-
|
|
Cumulative effect adjustment for change in derivative accounting
|
|
|
-
|
|
|
|
(838,471
|
)
|
Change in fair value included in derivative (gain) expense
|
|
|
(13,481,073
|
)
|
|
|
13,384,260
|
|
Balance at end of period
|
|
$
|
13,978,061
|
|
|
$
|
20,188,362
|
|
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 condensed consolidated 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.
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2020
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 March 31, 2020 and December 31,
2019, 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 March 31, 2020 and December 31, 2019. The Company has not experienced
any losses in such accounts through March 31, 2020.
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.
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 it obtains the right to
substantially all the economic benefit from the use of the asset throughout the period, and (3) whether it has the right to direct
the use of the asset. The Company will allocate the consideration in the contract to each lease component based on its relative
stand-alone price to determine the lease payments. The Company has elected not to recognize right-of-use assets and lease liabilities
for short-term leases that have a term of 12 months or less.
Operating
lease ROU assets represents the right to use the leased asset for the lease term and operating lease liabilities are recognized
based on the present value of the future minimum lease payments over the lease term at commencement date. As most leases do not
provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at the adoption date
in determining the present value of future payments. Lease expense for minimum lease payments is amortized on a straight-line
basis over the lease term and is included in general and administrative expenses in the condensed consolidated statements of operations.
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2020
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. 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 three months ended March
31, 2020 and 2019, the Company believes that it operates in one operating segment related to deliveries for on-line retailers
in New York, New Jersey, Pennsylvania and other areas, and tractor trailer and box truck deliveries of product on the east coast
of the United States from one distributor’s warehouse to another warehouse or from a distributor’s warehouse to the
post office.
Derivative
financial instruments
The
Company has certain financial instruments that are embedded derivatives associated with capital raises. The Company evaluates
all of its financial instruments to determine if those contracts or any potential embedded components of those contracts qualify
as derivatives to be separately accounted for in accordance with ASC 815-10-05-4, Derivatives and Hedging and 815-40, Contracts
in Entity’s Own Equity. This accounting treatment requires that the carrying amount of any embedded derivatives be recorded
at fair value at issuance and marked-to-market at each balance sheet date. In the event that the fair value is recorded as a liability,
as is the case with the Company, the change in the fair value during the period is recorded as either other income or expense.
Upon conversion, exercise or repayment, the respective derivative liability is marked to fair value at the conversion, repayment
or exercise date and then the related fair value amount is reclassified to other income or expense as part of gain or loss on
extinguishment.
In
July 2017, FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic
480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features.
These amendments simplify the accounting for certain financial instruments with down-round features. The amendments require companies
to disregard the down-round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining
liability or equity classification. 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
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.
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2020
For
the Company’s Prime EFS 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 EFS and Shypdirect customers, however,
if the Company did, because all of Prime EFS 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.
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 included carrier fees and dispatch costs as of the date the freight
was delivered by the carrier which was when the performance obligation is satisfied. Customer payments received
prior to delivery were recorded as a deferred revenue liability and related carrier fees if paid prior to delivery were
recorded as a deferred expense asset. In accordance with ASC Topic 606, the Company recognized revenue on a gross basis. Our payment
terms for corporate customers were net 30 days from acceptance of delivery and individual customers generally were required
to pay in advance. The Company did not incur incremental costs obtaining service orders from its Save On customers, however,
if the Company did, because all of the Save On customer’s contracts were less than a year in duration, any contract costs
incurred were expensed rather than capitalized. The revenue that the Company recognized arose from service orders it received
from its Save On customers. The Company’s performance obligations under these service orders corresponded to each delivery
of a vehicle that the Company made for its customer under the service orders; as a result, each service order generally contained
only one performance obligation based on the delivery to be completed.
Management
has reviewed the revenue disaggregation disclosure requirements pursuant to ASC 606 and determined that no further disaggregation
disclosure is required to be presented.
Basic
and diluted loss per share
Pursuant
to ASC 260-10-45, basic loss per common share is computed by dividing net loss attributable to common shareholders by the weighted
average number of shares of common stock outstanding for the periods presented. Diluted loss per share is computed by dividing
net loss attributable to common shareholders by the weighted average number of shares of common stock, common stock equivalents
and potentially dilutive securities outstanding during the period. Potentially dilutive common shares consist of common stock
issuable for stock 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:
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
Stock warrants
|
|
|
181,563,164
|
|
|
|
1,442,434
|
|
Stock options
|
|
|
80,000
|
|
|
|
-
|
|
Convertible debt
|
|
|
324,772,402
|
|
|
|
4,415,776
|
|
Series A convertible preferred stock
|
|
|
-
|
|
|
|
8,333,333
|
|
Series B convertible preferred stock
|
|
|
1,700,000
|
|
|
|
-
|
|
Stock-based
compensation
Stock-based
compensation is accounted for based on the requirements of ASC 718 – “Compensation – Stock Compensation”,
which requires recognition in the financial statements of the cost of employee, director, and non-employee services received in
exchange for an award of equity instruments over the period the employee, director, or non-employee is required to perform the
services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee,
director, and non-employee services received in exchange for an award based on the grant-date fair value of the award. The Company
has elected to recognize forfeitures as they occur as permitted under ASU 2016-09 Improvements to Employee Share-Based Payment.
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2020
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 adoption of this standard did not 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 on April 16, 2019.
Pursuant to 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 reflects Save On as 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. As of March 31, 2020 and December
31, 2019, the Company did not have any remaining assets and liabilities classified as discontinued operations in the Company’s
condensed consolidated financial statements as of March 31, 2020 and December 31, 2019. The summarized operating result of discontinued
operations included in the Company’s condensed consolidated statements of operations is as follows:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
1,131,525
|
|
Cost of revenues
|
|
|
-
|
|
|
|
851,196
|
|
Gross profit
|
|
|
-
|
|
|
|
280,329
|
|
Operating expenses
|
|
|
-
|
|
|
|
266,668
|
|
Income from discontinued operations
|
|
|
-
|
|
|
|
13,661
|
|
Loss on disposal of discontinued operations
|
|
|
-
|
|
|
|
-
|
|
Income from discontinued operations, net of income taxes
|
|
$
|
-
|
|
|
$
|
13,661
|
|
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2020
NOTE
4 – ACCOUNTS RECEIVABLE
At
March 31, 2020 and December 31, 2019, accounts receivable, net consisted of the following:
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Accounts receivable
|
|
$
|
1,083,225
|
|
|
$
|
983,771
|
|
Allowance for doubtful accounts
|
|
|
(20,000
|
)
|
|
|
(20,000
|
)
|
Accounts receivable, net
|
|
$
|
1,063,225
|
|
|
$
|
963,771
|
|
NOTE
5 - PROPERTY AND EQUIPMENT
At
March 31, 2020 and December 31, 2019, property and equipment consisted of the following:
|
|
Useful Life
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Delivery trucks and vehicles
|
|
5 - 6 years
|
|
$
|
761,652
|
|
|
$
|
301,142
|
|
Equipment
|
|
5 years
|
|
|
3,470
|
|
|
|
3,470
|
|
Subtotal
|
|
|
|
|
765,122
|
|
|
|
304,612
|
|
Less: accumulated depreciation
|
|
|
|
|
(78,394
|
)
|
|
|
(64,206
|
)
|
Property and equipment, net
|
|
|
|
$
|
686,728
|
|
|
$
|
240,406
|
|
For
the three months ended March 31, 2020 and 2019, depreciation expense is included in general and administrative expenses and amounted
to $14,188 and $47,040, respectively. During the three months ended March 31, 2019, the Company traded in, sold or disposed of
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 – 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 (the “RedDiamond 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, during 2017, the Company entered into three RedDiamond Notes in the aggregate
principal amount of $270,000 and the Company received $265,000 after giving effect to the original issue discount of $5,000. The
RedDiamond Notes matured during 2018. RedDiamond is not required to fund any additional tranches under the securities
purchase agreement. 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 (as defined in the RedDiamond
Notes) 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 the RedDiamond 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. The RedDiamond 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. 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 is 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.
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2020
In
connection with the issuance of these convertible promissory notes to RedDiamond and RDW Capital, LLC, 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.
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 was not afforded the exemption for conventional convertible instruments
due to their respective variable conversion rate and price protection provisions. 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 consolidated balance sheet as of the beginning of 2019, the period which the
amendment is effective (See Note 2 - Derivative liabilities and summary of derivative liabilities below).
On
April 9, 2019, the Company entered into agreements (the “RedDiamond Amendments”) with RedDiamond and
RDW Capital, LLC, the holders of these convertible notes representing an aggregate principal amount of $510,000, and agreed with
such holders to:
|
●
|
extend
the maturity date of the notes to December 31, 2020;
|
|
●
|
remove
all convertibility features of the notes; and
|
|
●
|
repay
not less than half of the obligations then outstanding pursuant to the notes
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,
using a portion of the proceeds thereof.
|
In
connection with this debt modification, on April 9, 2019, 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 $47,204 related to the reversal
of default interest payable.
Pursuant
to the RedDiamond Amendments, the conversion provisions contained
in the convertible promissory notes held by RedDiamond and RDW Capital, LLC were suspended and ceased to be exercisable beginning
as of April 9, 2019. However, under the RedDiamond Amendments, the conversion provisions contained in the convertible promissory
notes held by Red Diamond and RDW Capital, LLC were subject to reinstatement upon the occurrence of an event of default.
The parties agreed that it would be considered an event of default under the convertible promissory notes if the Company consummated
any new offering of equity or equity linked securities containing a conversion or exercise price which is variable based upon
the market trading price of the Company’s securities. On August 30, 2019, the Company entered into a new offering of equity
or equity linked securities containing a conversion or exercise price which is variable based upon the market trading price of
the Company’s securities. Accordingly, since the Company entered into a new offering of equity or equity linked securities
containing a conversion or exercise price which is variable based upon the market trading price of the Company’s securities,
in 2019, the conversion terms were reinstated and the Company recorded a put premium of $385,385 and recorded interest expense
of $385,385.
During
the three months ended March 31, 2020, the Company issued 1,703,717 shares of its common stock upon the conversion of debt of
$73,725. Upon conversion, the Company reclassified put premium of $73,725 to paid-in capital.
The
aggregate principal amounts due as of March 31. 2020 and December 31, 2019 amounted to $747,935 and $895,385, which included a
put premium of $311,660 and $385,385, and principal balance of $436,275 and $510,000, and was included in convertible notes payable,
a current liability, on the accompanying consolidated balance sheet, respectively.
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2020
Bellridge
Capital, LLC
On June 18, 2018, the Company entered into
a securities purchase agreement (the “Bellridge Purchase Agreement”), whereby it issued to Bellridge Capital,
LLC (“Bellridge”) a senior secured convertible note in the aggregate principal amount of $2,497,503 (the
“Bellridge 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 term of the Bellridge Note. The principal due under the Bellridge Note initially accrued
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 Bellridge Note in cash or common stock of the Company, at Bellridge’s discretion.
In
connection with the Bellridge Purchase Agreement, Bellridge 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 “First
Bellridge Warrant”). Additionally, the placement agent for the Bellridge Note 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 “Bellridge Note PA Warrant”).
In
August 2018, the Company defaulted on the Bellridge Note due to (i) default on the payment of monthly interest payments due, (ii)
default caused by the late filing of the Company’s reports 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 Bellridge at 125% of such amounts.
On December 27, 2018, Bellridge waived any
and all defaults in existence on the Bellridge 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 (the “Second Bellridge Warrant” and together with the First Bellridge Warrant
and the Bellridge Note PA Warrant, the “Bellridge Warrants”). Pursuant to the Second Bellridge 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 (as defined in the Second Bellridge Warrant), and on or prior to the close of business on the early
of the first year anniversary of the issuance of December 27, 2018, 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 Bellridge 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 Bellridge 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 the Bellridge Note and cancelled these
warrants (see below).
Through
April 9, 2019, all principal and accrued interest under the Bellridge 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 Bellridge Note included 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 Bellridge Note and cross
default provisions on other Company obligations or contracts. Upon an event of default, all obligations under the Bellridge Note
become immediately due and payable and the Company is required to make certain payments to Bellridge.
Bellridge
was granted a right of first refusal on future financing transactions of the Company while the Bellridge Note remains
outstanding, plus an additional three months thereafter. In connection with the issuance of the Bellridge Note, the Company
entered into a security agreement with Bellridge pursuant to which the Company agreed that obligations under the Bellridge
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 Bellridge pursuant to the Bellridge Note and have granted a
similar security interest over substantially all of their assets. A portion of the proceeds of the Bellridge Note were used
to acquire 100% of the membership interests of Prime EFS.
During the term of the Bellridge 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 “Bellridge Note 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 of the Bellridge
Note, but subject to the Bellridge Note holder’s conversion rights set forth in the Bellridge Purchase Agreement, then the
Company must use 20% of the gross proceeds of the Bellridge Note Subsequent Offering and must make payment
to the Bellridge Note holder of an amount in cash equal to the product of (i) the sum of (x) the then outstanding principal amount
of the Bellridge Note and (y) all accrued but unpaid interest, multiplied by (ii) (x) 110%, if the Prepayment Date (as defined
in the Bellridge Note) 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 must add
all other amounts owed pursuant to the Bellridge Note, including, but not limited to, all late fees and liquidated damages.
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2020
In
connection with the Bellridge 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 under the Bellridge Purchase Agreement or under applicable law, on the default date and on each monthly
anniversary of each such default date (if the applicable event is not cured by such date) until the ninetieth day from
such default date, the Company will 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 Bellridge Purchase Agreement. Subsequent to the ninetieth day from such default date, the one percent (1%) penalty will
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, Bellridge waived any and all defaults.
In connection with the Bellridge 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 the Bellridge Note PA 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 April 9, 2019, the Company
entered into an agreement with this placement agent that cancelled the Bellridge Note PA Warrant.
In connection with the issuance of the Bellridge
Note and the Bellridge Warrants, the Company determined that the Bellridge Note and the Bellridge 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 Bellridge
Note and the Bellridge Warrants 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 Bellridge
Warrants were determined using the Binomial valuation model and Monte-Carlo simulation model, respectively.
Convertible
debt modifications and warrant cancellations
On
April 9, 2019 (the “Bellridge Modification Date”), the Company entered into an agreement with Bellridge (the
“Bellridge Modification Agreement”) that modified its existing obligations to Bellridge as follows:
|
●
|
the overall principal amount of the Bellridge 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, to 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 are to 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” is 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 the Bellridge Modification Agreement. In connection with these shares, the Company recorded a
loss on debt extinguishment of $10,248,000 in April 2019. As of August 19, 2019, 100,000 of these shares have been issued
and on August 16, 2019, the Company issued 700,000 shares of Series B Preferred shares upon settlement of 700,000 shares of
issuable common stock;
|
|
|
|
|
●
|
the maturity date of the Bellridge 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 will use a portion of the proceeds
thereof to repay not less than half of the obligations then outstanding pursuant to the Bellridge 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 will use a portion of the proceeds thereof to
repay any remaining obligations then outstanding pursuant to the Bellridge Note;
|
|
|
|
|
●
|
the convertibility of the Bellridge Note was amended
such that the Bellridge Note is only 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 were eliminated; and
|
|
|
|
|
●
|
The First Bellridge Warrant and the Second Bellridge Warrant
were cancelled and of no further force or effect as of the Bellridge Modification
Date. In exchange, the Company issued Bellridge 360,000 shares of restricted common stock.
|
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2020
In
addition, on the Bellridge 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.
At
March 31, 2020 and December 31, 2019, convertible notes payable related to this convertible debt amounted to $1,813,402, which
consists of $1,813,402 of principal balance due and is net of unamortized debt discount of $0.
August
30, 2019 convertible debt and related warrants
On
August 30, 2019, the Company closed Securities Purchase Agreements (the “August 2019 Purchase Agreement”) with
accredited investors. Pursuant to the terms of the August 2019 Purchase Agreement, the Company issued and sold to investors convertible
promissory notes in the aggregate principal amount of $2,469,840 (the “August 2019 Notes”), and warrants to
purchase up to 987,940 shares of the Company’s common stock (the “August 2019 Warrants”). The Company
received net proceeds of $295,534, which is net of a 10% original issue discount of $246,984 and origination fees of $61,101,
and is net of $1,643,367 for the repayment of notes payable, and net of $222,854 related to the conversion of existing notes payable
already outstanding to these lenders into the August 2019 Notes.
The
August 2019 Notes bear interest at 10% per annum and become due and payable on November 30, 2020. During the existence of an Event
of Default (as defined in the August 2019 Notes), interest accrues at the lesser of (i) the rate of 18% per annum, or (ii)
the maximum amount permitted by law. Commencing on the four month anniversary of the August 2019 Notes, monthly payments of interest
and monthly principal payments, based on a 12 month amortization schedule (each, an “August 2019 Notes Amortization Payment”),
are due and payable, until November 30, 2020 at which time all outstanding principal, accrued and unpaid interest
and all other amounts due and payable under the August 2019 Notes will be immediately due and payable. The Company’s
August 2019 Note Amortization Payments due on December 30, 2019 were paid on January 6, 2020 and the Company did not receive any
default notice for this late payment. The August 2019 Note Amortization Payments are made in cash unless the investor requests
it to be issued in the Company’s common stock in lieu of a cash payment (an “August 2019 Note Stock Payment”).
If the investor requests an August 2019 Note Stock Payment, the number of shares of common stock issued is based on the
amount of the applicable August 2019 Amortization Payment divided by 80% of the lowest VWAP (as defined in the August 2019
Notes) during the five Trading Day (as defined in the August 2019 Notes) period prior to the due date of the August 2019 Amortization
Payment.
The
August 2019 Notes may be prepaid, provided that Equity Conditions, as defined in the August 2019 Notes, have been met (or any
such failure to meet the Equity Conditions has been waived): (i) from August 30, 2019 until and through November
30, 2019 at an amount equal to 105% of the aggregate of the outstanding principal balance of the August 2019 Notes
and accrued and unpaid interest, and (ii) after August 30, 2019 at an amount equal to 115% of the aggregate of the outstanding
principal balance of the August 2019 Notes and accrued and unpaid interest. In the event that the Company closes a registered
public offering of securities for its own account (a “Public Offering”), the holders may elect to: (x)
have their principal and accrued interest prepaid directly from the proceeds of the Public Offering at the prices
set forth above, or (y) exchange their August 2019 Notes at the closing of the Public Offering for the securities
being issued in the Public Offering at the Public Offering prices based upon the outstanding principal, accrued interest and other
charges, or (z) continue to hold their August 2019 Notes. Except for a Public Offering and August 2019 Amortization
Payments, in order to prepay the August 2019 Notes, the Company must provide at least 20 days’ prior written notice
to the holders, during which time the holders may convert their August 2019 Notes in whole or in part
at the then-applicable conversion price. For avoidance of doubt, the August 2019 Amortization Payments are prepayments
and are subject to prepayment penalties equal to 115% of the August 2019 Amortization Payment. In the event the Company consummates
a Public Offering while the August 2019 Notes are outstanding, then 25% of the net proceeds of such offering will, within
two business days of the closing of such Public Offering, be applied to reduce the outstanding obligations pursuant to
the August 2019 Notes.
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2020
In
connection with the August 2019 Purchase Agreement, the Company entered into a registration rights agreement, pursuant
to which the Company agreed to file a registration statement on Form S-1 to register the resale of the shares issuable to the
investors pursuant to the August 2019 Purchase Agreement.
From
the original issue date until the August 2019 Notes are no longer
outstanding, the August 2019 Notes are convertible, in whole or in part, at any time, and from time to time, into shares of common
stock at the option of the investor. The initial conversion price of the August 2019 Notes was the lower of: (i) $3.50 per
share and (ii) the price per share paid by investors in the contemplated equity offering of up to $1,000,000. If an Event of Default
(as defined in the August 2019 Notes) has occurred, regardless of whether it has been cured or remains ongoing, the August
2019 Notes were initially convertible at the lower of: (i) $3.50 and (ii) 70% of the second lowest closing price of the common
stock as reported on the Trading Market (as defined in the August 2019 Notes) during the 20 consecutive Trading Day (as defined
in the August 2019 Notes) period ending and including the Trading Day (as defined in the August 2019 Notes) immediately preceding
the delivery or deemed delivery of the applicable notice of conversion. All such Conversion Price determinations are to
be appropriately adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction that
proportionately decreases or increases the common stock.
The
August 2019 Notes and related August 2019 Warrants include down-round provisions under which the August 2019 Note conversion
price and August 2019 Warrant exercise price could be affected, on a full-ratchet basis, by future equity offerings undertaken
by the Company. On September 6, 2019, the Company sold shares of its common stock at $2.50 per share and accordingly,
the conversion price and warrant down-round provisions were triggered. As a result, the conversion price of the August 2019
Notes was reduced to $2.50 per share and the number of warrants was increased to 1,383,116 warrants and the exercise price
was lowered to $2.50. On January 7, 2020, the Company issued new convertible debt with an initial conversion price of $0.40 per
share and warrants exercisable at $0.40 per share and accordingly, the conversion price and warrant down-round provisions were
triggered. As a result, the conversion price of August 2019 Notes was reduced to $0.40 per share, and the number of warrants
was increased to 8,644,474 warrants and the exercise price was lowered to $0.40. As a result of the January 7, 2020 trigger of
the down-round provisions, on January 7, 2020, the Company recorded a deemed dividend of $17,836,244 which represents the fair
value transferred to the warrant holders from the down round feature being triggered. The Company calculated the difference
between the warrants fair value on January 7, 2020, the date the down- round feature was triggered using the current exercise
price and the new exercise price and the new number of warrants. The deemed dividend was recorded as an increase in accumulated
deficit and increase in paid-in capital and increased the net loss to common shareholders by the same amount.
In
connection with the issuance of the August 2019 Notes, the Company determined that various terms of the August 2019 Notes, including
the August 2019 Note Stock Payment terms discussed above, caused derivative treatment of the embedded conversion options. On August
30, 2019, the initial measurement date, the fair values of the embedded conversion option derivative of $1,953,968 was recorded
as derivative liabilities and was allocated as a debt discount up to the net proceeds of the August 2019 Notes of $936,645, with
the remainder of $1,017,323 charged to current period operations as initial derivative expense.
On
January 30, 2020, due to the default of the January 2020 August 2019 Notes Amortization Payment, the August 2019 Notes
were deemed in default. Accordingly, the outstanding principal balance on date of default increased by 30% which amounted to $723,985,
default interest accrues at 18%, and the default conversion terms apply.
During
the three months ended March 31, 2020, the Company repaid principal of $159,988, and the Company issued 3,586,689 shares its common
stock upon the conversion of principal and default interest of $237,169 and accrued interest of $30,625. Additionally, accrued
interest payable of $75,309 was reclassified to principal balance.
At
March 31, 2020, convertible notes payable related to August 30, 2019 convertible debt amounted to $1,554,729, which consists of
$2,871,977 of principal balance and default interest due and is net of unamortized debt discount of $1,317,248. At December 31,
2019, convertible notes payable related to August 30, 2019 convertible debt amounted to $658,623, which consists of $2,469,840
of principal balance due and is net of unamortized debt discount of $1,811,217.
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2020
October
3, 2019 convertible debt and related warrants
On
October 3, 2019, the Company closed on a securities purchase agreement (the “October 3 Purchase Agreement”)
with an accredited investor. Pursuant to the terms of the October 3, 2019 Purchase Agreement, the Company issued and sold to an
investor a convertible promissory note in the principal amount of $166,667 (the “October 3 Note”), and warrants
to purchase up to 66,401 shares of the Company’s common stock (the “October 3 Warrant”). The Company
received net proceeds of $150,000, which is net of a 10% original issue discount of $16,667. The October 3 Note initially bore
interest at 10% per annum and becomes due and payable on January 3, 2021. During the existence of an Event of Default, interest
accrues at the lesser of (i) the rate of 18% per annum, or (ii) the maximum amount permitted by law. Commencing on the
four month anniversary of the October 3 Note, monthly payments of interest and monthly principal payments, based on a 12 month
amortization schedule (each, an “October 3 Note Amortization Payment”), are due and payable, until the
Maturity Date, at which time all outstanding principal, accrued and unpaid interest and all other amounts due and payable under
the October 3 Notes will be immediately due and payable. The October 3 Note Amortization Payments are made in cash
unless the investor requests it to be issued in the Company’s common stock in lieu of a cash payment (each, an “October
3 Note Stock Payment”). If the investor requests a October 3 Note Stock Payment, the number of shares of common stock
issued is based on the amount of the applicable October 3 Note Amortization Payment divided by 80% of the lowest VWAP (as
defined in the October 3 Note) during the five Trading Day (as defined in the October 3 Note) period prior to the due date
of the October 3 Note Amortization Payment.
The
October 3 Note may be prepaid, provided that certain Equity Conditions, as defined in the October 3 Note, have been met
(or any such failure to meet the Equity Conditions has been waived): (i) from October 3, 2019 until and through January
3, 2020, at an amount equal to 105% of the aggregate of the outstanding principal balance of the October 3 Note and accrued and
unpaid interest, and (ii) after January 3, 2020, at an amount equal to 115% of the aggregate of the outstanding principal balance
of the October 3 Note and accrued and unpaid interest. In the event that the Company closes a Public Offering, the holder may
elect to: (x) have its principal and accrued interest prepaid directly from the proceeds of the Public Offering at the
prices set forth above, or (y) exchange its October 3 Note at the closing of the Public Offering for the securities being issued
in the Public Offering at the Public Offering prices based upon the outstanding principal, accrued interest and other charges,
or (z) continue to hold the October 3 Note. Except for a Public Offering and October 3 Note Amortization Payments, in order to
prepay the October 3 Note, the Company must provide at least 20 days’ prior written notice to the holder, during
which time the holder may convert the October 3 Note in whole or in part at the conversion price. For avoidance of doubt, the
October 3 Note Amortization Payments are prepayments and are subject to prepayment penalties equal to 115% of the October
3 Note Amortization Payment. In the event the Company consummates a Public Offering while the October 3 Note is outstanding, then
25% of the net proceeds of such offering will, within two business days of the closing of such Public Offering,
be applied to reduce the outstanding obligations pursuant to the October 3 Note.
On
the original issue date until the October 3 Note is no longer outstanding, the October 3 Note is convertible, in whole or in part,
at any time, and from time to time, into shares of common stock at the option of the investor. The “Conversion Price”
in effect on any Conversion Date means, as of any Conversion Date (as defined in the October 3 Note) or other date of determination,
the lower of: (i) $2.51 per share and (ii) the price per share paid by investors in the contemplated equity offering of up to
$1,000,000. If an Event of Default (as defined in the October 3 Note) has occurred, regardless of whether such Event of Default
(as defined in the October 3 Note) has been cured or remains ongoing, the October 3 Note are convertible at the lower of:
(i) $2.51 and (ii) 70% of the second lowest closing price of the common stock as reported on the Trading Market (as defined
in the October 3 Note) during the 20 consecutive Trading Day (as defined in the October 3 Note) period ending and including the
Trading Day (as defined in the October 3 Note) immediately preceding the delivery or deemed delivery of the applicable Notice
of Conversion. All such Conversion Price determinations are to be appropriately adjusted for any stock dividend, stock split,
stock combination, reclassification or similar transaction that proportionately decreases or increases the common stock.
The
October 3 Warrant is exercisable at any time on or after the date of the issuance and entitles the investor to purchase
shares of the Company’s common stock for a period of five years from the initial date the October 3 Warrant became
exercisable. Under the terms of the October 3 Warrant, the investor is entitled to exercise the October 3 Warrant to purchase
up to 66,401 shares of the Company’s common stock at an initial exercise price of $3.51, subject to adjustment as detailed
in the October 3 Warrant. In October 2019 the Company calculated the relative fair value of the October 3 Warrant in the
amount of $82,771 which was added to debt discount and is being amortized over the term of the notes.
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2020
The
October 3 Note and related October 3 Warrant include a down-round provision under which the October 3 Note conversion price and
warrant exercise price could be affected, on a full-ratchet basis, by future equity offerings undertaken by the Company. Subsequent
to October 3, 2019, the Company issued convertible debt with a conversion price of $2.50 per share and accordingly, the convertible
debt and warrant down-round provisions were triggered. As a result, the conversion price and the exercise price were lowered
to $2.50 and the number of warrants was increased to 66,667 warrants. On January 7, 2020, the Company issued new convertible debt
with an initial conversion price of $0.40 per share and warrants exercisable at $0.40 per share and accordingly, the conversion
price and warrant down-round provisions were triggered. As a result, the conversion price of the October 3 Note was reduced
to $0.40 per share, and the number of warrants was increased to 416,669 warrants and the exercise price was lowered to $0.40.
As a result of the January 7, 2020 trigger of the down-round provisions, on January 7, 2020, the Company recorded a deemed
dividend of $859,768 which represents the fair value transferred to the October 3 Warrant holder from the down-round feature
being triggered. The Company calculated the difference between the October 3 Warrant’s fair value on January 7, 2020, the
date the down-round feature was triggered using the current exercise price and the new exercise price and the new number of warrants.
The deemed dividend was recorded as an increase in accumulated deficit and increase in paid-in capital and increased the net loss
to common shareholders by the same amount.
In
connection with the issuance of the October 3 Note, the Company determined that various terms of the October 3 Note, including
the October 3 Note Stock Payment terms discussed above, caused derivative treatment of the embedded conversion options. On October
3, 2019, the initial measurement date, the fair values of the embedded conversion option derivative of $123,795 was recorded as
derivative liabilities and was allocated as a debt discount up to the net proceeds of the October 3 Note of $67,229, with the
remainder of $56,566 charged to current period operations as initial derivative expense.
In
February 2020, due to the default of the February 2020 October 3 Note Amortization Payment, the October 3 Note was deemed in default.
Accordingly, the outstanding principal balance on date of default increased by 30% which amounted to $50,000, default interest
accrues at 18%, and the default conversion terms apply.
At
March 31, 2020, convertible notes payable related to the October 3, 2019 convertible debt amounted to $116,667, which consists
of $216,667 of principal balance and default interest due and is net of unamortized debt discount of $100,000. At December 31,
2019, convertible notes payable related to the October 3, 2019 convertible debt amounted to $33,334, which consists of $166,667
of principal balance due and is net of unamortized debt discount of $133,333.
Other
convertible debt
On
October 14, 2019 and November 7, 2019, we entered into convertible note agreements with an accredited investor. Pursuant to the
terms of these convertible note agreements, we issued and sold to an investor convertible promissory notes in the aggregate principal
amount of $500,000 (the “Fall 2019 Notes”) and we received cash proceeds of $500,000. The Fall 2019 Notes bear
interest at 10% per annum. The October 14, 2019 convertible promissory note of $300,000 becomes due and payable on October
14, 2020 and the November 7, 2019 convertible promissory note of $200,000 becomes due and payable on November 7, 2020.
Commencing on the respective seven-month anniversaries of issuance, and continuing each month thereafter through
the respective maturity date, payments of principal and interest will be made in accordance with the respective
amortization schedule. During the existence of an Event of Default (as defined in the Fall 2019 Notes), interest will accrue
at the lesser of (i) the rate of 18% per annum, or (ii) the maximum amount permitted by law. Commencing on the seventh month anniversary
of each respective note, monthly payments of interest and monthly principal payments are due and payable, until the respective
maturity dates, at which time all outstanding principal, accrued and unpaid interest and all other amounts due and payable
under such Fall 2019 Note will be immediately due and payable.
The
Company has the right to prepay in cash all or a portion of the outstanding principal due under the Fall 2019 Notes. The Company
must provide the holders with written notice at least twenty business days prior to the date on which the Company will
deliver payment of accrued interest and all or a portion, in $100,000 increments, of the principal.
Each
Fall 2019 Note is convertible, in whole or in part, at any time, and from time to time, into shares of common stock at the option
of the investor. The “Conversion Price” in effect on any Conversion Date means, as of any date of determination, the
lower of: (i) $2.50 per share and (ii) the twenty day per share closing trading price of the Company’s common stock during
the twenty trading days that close with the last previous trading day ended three days prior to the date of exercise. The Fall
2019 Notes do not contain anti-dilutive provisions. In May 2020 and June 2020, due to the default of a May 2020 and
June 2020 Fall 2019 Note Amortization Payments, the Fall 2019 Notes were deemed in default. Accordingly, default
interest accrues at 18% and the Fall 2019 Notes became due on the respective dates of default.
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2020
In
connection with the issuance of these convertible notes, the Company determined that various terms of the Fall 2019 Notes caused
derivative treatment of the embedded conversion options. On the date of each respective Fall 2019 Note, the initial measurement
date, the aggregate fair values of the embedded conversion option derivative of $328,638 was recorded as derivative liabilities
and was allocated as a debt discount up to the net proceeds of the Fall 2019 Notes of $328,638.
At
March 31, 2020, convertible notes payable related to the Fall 2019 Notes amounted to $299,327, which consists of $500,000 of principal
balance due and is net of unamortized debt discount of $200,673. At December 31, 2019, convertible notes payable related to the
Fall 2019 Notes amounted to $233,600, which consists of $500,000 of principal balance due and is net of unamortized debt discount
of $266,400.
During
the three months ended March 31, 2020, the Company closed on securities purchase agreements with accredited investors
(the “Q1 2020 Purchase Agreements”). Pursuant to the terms of the Q1 2020 Purchase Agreements, the Company
issued and sold to investors convertible promissory notes in the aggregate principal amount of $2,046,000 (the “Q1 2020
Notes”), and warrants to purchase up to 818,400 shares of the Company’s common stock (the “Q1 2020 Warrants”).
The Company received net proceeds of $1,860,000, which is net of a 10% original issue discounts of $186,000. The Q1 2020 Notes
bear interest at 6% per annum and becomes due and payable on the date that is the 24-month anniversary of the original issue date
of the respective Q1 2020 Note. During the existence of an Event of Default (as defined in the applicable Q1 2020 Note), which
includes, amongst other events, any default in the payment of principal and interest payment (including Q1 2020 Note Amortization
Payments) under any Q1 2020 Note or any other indebtedness, interest accrues at the lesser of (i) the rate of 18% per annum,
or (ii) the maximum amount permitted by law. Commencing on the thirteenth month anniversary of each Q1 2020 Note, monthly
payments of interest and monthly principal payments, based on a 12 month amortization schedule (each, a “Q1 2020 Note
Amortization Payment”), will be due and payable, until the Maturity Date (as defined in the applicable Q1
2020 Note), at which time all outstanding principal, accrued and unpaid interest and all other amounts due and payable the
Q1 2020 Notes will be immediately due and payable. The Q1 2020 Note Amortization Payments will be made in cash unless
the investor requests it to be issued in the Company’s common stock in lieu of a cash payment (each, a “Q1 2020
Note Stock Payment”). If a holder of a Q1 2020 Note requests a Q1 2020 Note Stock Payment, the number of shares
of common stock issued will be based on the amount of the applicable Q1 2020 Note Amortization Payment divided by
80% of the lowest VWAP (as defined in the applicable Q1 2020 Note) during the five Trading Day (as defined in the applicable Q1
2020 Note) period prior to the due date of such Q1 2020 Note Amortization Payment.
The
Q1 2020 Notes may be prepaid, provided that Equity Conditions, as defined in the Q1 2020 Notes, have been met (or any such
failure to meet the Equity Conditions has been waived): (i) from each Q1 2020 Note’s respective original issuance
date until and through the day that falls on the third month anniversary of such original issue date (each a “Q1 2020
Note 3 Month Anniversary”) at an amount equal to 105% of the aggregate of the outstanding principal balance of the Q1
2020 Note and accrued and unpaid interest, and (ii) after the applicable Q1 2020 Note 3 Month Anniversary at an amount equal
to 115% of the aggregate of the outstanding principal balance of the Q1 2020 Note and accrued and unpaid interest. In the
event that the Company closes a Public Offering, each holder may elect to: (x) have its principal and accrued interest prepaid
directly from the proceeds of the Public Offering at the prices set forth above, or (y) exchange its Q1 2020 Note at the
closing of the Public Offering for the securities being issued in the Public Offering at the Public Offering prices based upon
the outstanding principal, accrued interest and other charges, or (z) continue to hold its Q1 2020 Note(s). Except for a Public
Offering and Q1 2020 Note Amortization Payments, in order to prepay a Q1 2020 Note, the Company must provide at least 30 days’
prior written notice to the holder thereof, during which time the holder may convert its Q1 2020 Note in whole or in part at the
applicable conversion price. The Q1 2020 Note Amortization Payments are prepayments and are subject to prepayment penalties equal
to 115% of the Q1 2020 Note Amortization Payment. In the event the Company consummates a Public Offering while the Q1 2020 Notes
are outstanding, then 25% of the net proceeds of such offering will, within two business days of the closing of such Public
Offering, be applied to reduce the outstanding obligations pursuant to theQ1 2020 Notes.
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2020
From
the original issue date of a Q1 2020 Note until such Q1 2020
Note is no longer outstanding, such Q1 2020 Note is convertible, in whole or in part, at any time, and from time to time, into
shares of common stock at the option of the holder. The “Conversion Price” in effect on any Conversion Date (as defined
in the applicable Q1 2020 Note) means, as of any date of determination, $0.40 per share, subject to adjustment as provided herein.
If an Event of Default (as defined in the applicable Q1 2020 Note) has occurred, regardless of whether it has been cured
or remains ongoing, the Q1 2020 Notes are convertible at the lower of: (i) $0.40 and (ii) 70% of the second lowest closing price
of the common stock as reported on the Trading Market (as defined in the applicable Q1 2020 Note) during the 20 consecutive Trading
Day (as defined in the applicable Q1 2020 Note) period ending and including the Trading Day immediately preceding the delivery
or deemed delivery of the applicable notice of conversion. All such Conversion Price determinations are to be appropriately adjusted
for any stock dividend, stock split, stock combination, reclassification or similar transaction that proportionately.
The
Q1 2020 Warrants are exercisable at any time on or after the date of the issuance and entitles the investors to purchase shares
of the Company’s common stock for a period of five years from the initial date the Q1 2020 Warrants become exercisable.
Under the terms of the Q1 2020 Warrants, the investors are entitled to exercise the Q1 2020 Warrants to purchase up to 838,200
shares of the Company’s common stock at an initial exercise price of $0.40, subject to adjustment as detailed in the respective
Q1 2020 Warrants.
In
connection with the issuance of the January 2020 warrants, the Company calculated the relative fair value of these warrants
in the amount of $262,872 which was added to debt discount and paid-in capital, and shall be amortized over the term of the Q1
2020 Notes. In connection with the issuance of the January, February and March 2020 Notes and February and March 2020 Warrants,
the Company determined that various terms of these Q1 2020 Notes and Q1 2020 Warrants, including the default provisions in the
Q1 2020 Notes discussed above, caused derivative treatment of the embedded conversion options and warrants. During the three months
ended March 31, 2020, on the initial measurement dates, the fair values of the embedded conversion option and warrant derivatives
of $8,722,831 was recorded as derivative liabilities and was allocated as a debt discount up to the net proceeds of the Q1 2020
Notes of $1,267,473, with the remainder of $7,455,358 charged to current period operations as initial derivative expense.
The
Q1 2020 Notes include a down-round provision under which the Q1 2020 Note conversion price could be affected, by future equity
offerings undertaken by the Company.
Due
to the default of amortization payments due on our August 2019 Notes and other notes as discussed above, the Q1
2020 Notes were deemed in default. Accordingly, the outstanding principal balance on date of default increased by 30% which
amounted to approximately $613,800, default interest accrues at 18%, and the default conversion terms apply.
At
March 31, 2020, convertible notes payable related to the Q1 2020 Notes amounted to $1,115,369, which consists of $2,659,800 of
principal balance due and is net of unamortized debt discount of $1,544,431.
Summary
of derivative liabilities for the three months ended March 31, 2020
During
the three months ended March 31, 2020, due to the non-payment of amortization payments due, substantially all convertible notes
were deemed in default. Accordingly, for substantially all of the loans in default, the aggregate outstanding principal
balance on date of default increased by 30% which amounted to an aggregate amount of $1,387,785. This default amount due of $1,387,785
was recorded as interest expense on the accompanying condensed consolidated statement of operations. Since the default principal
due is convertible at the same default terms contained in the related convertible notes, the Company determined that various
terms of the convertible notes discussed above caused derivative treatment of the embedded conversion options related to the default
principal due. Accordingly, under the provisions of ASC 815-40 - Derivatives and Hedging – Contracts in an Entity’s
Own Stock, the embedded conversion option related to the default principal due 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 related to the default principal due was determined using the Binomial valuation model. At
the end of each period and on the date that debt is converted into common shares, the Company revalues the embedded conversion
option derivative liabilities. In connection with the default principal due, during the three months ended March 31, 2020,
on the initial measurement date, the fair values of the embedded conversion option derivatives related to default principal
due of $5,880,876 was recorded as derivative liabilities and charged to current period operations as initial derivative expense.
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2020
As
discussed above, the Company issued debt that consists of the issuance of convertible notes with variable conversion provisions.
The conversion terms of the convertible notes are variable based on certain factors, such as the future price of the Company’s
common stock, default provisions and payment of amortization payments in stock. The number of shares of common stock to be issued
is based on the future price of the Company’s common stock. The number of shares of common stock issuable upon conversion
of each promissory note is indeterminate. Due to the fact that the number of shares of common stock issuable may exceed
the Company’s authorized share limit, effective January 30, 2020, the equity environment is tainted and all convertible
debentures and warrants shall be included in the value of the derivative. Pursuant to ASC 815-15 Embedded Derivatives, the fair
values of the variable conversion option and warrants and shares to be issued were recorded as derivative liabilities on the issuance
date. On January 30, 2020, the Company evaluated all outstanding warrants to determine whether these instruments are tainted and,
due to reasons discussed above, all warrants outstanding were considered tainted. Accordingly, the Company recorded a reclassification
from paid-in capital to derivative liabilities of $11,381,885 for warrants becoming tainted. On January 30, 2020, the fair value
of the warrants to be reclassified to derivative liabilities was determined using the Binomial valuation model.
In
connection with the issuance of the Q1 2020 Notes and February and March 2020 Warrants, the Company determined that various
terms of the Q1 2020 Notes and Q1 2020 Warrants, including the default provisions in the Q1 2020 Notes discussed above, caused
derivative treatment of the embedded conversion options and warrants. Accordingly, under the provisions of ASC 815-40 - Derivatives
and Hedging – Contracts in an Entity’s Own Stock, the embedded conversion option contained in the Q1 2020 Notes
and certain warrants 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 and warrants was determined
using the Binomial valuation model. At the end of each period and on the date that the Q1 2020 Notes are converted into
common shares, the Company revalues the embedded conversion option derivative liabilities. During the three months ended March
31, 2020, on the initial measurement dates, the fair values of the embedded conversion option and warrant derivatives of $8,722,831
was recorded as derivative liabilities and was allocated as a debt discount up to the net proceeds of the Q1 2020 Notes of $1,267,473,
with the remainder of $7,455,358 charged to current period operations as initial derivative expense.
In
connection with the period end revaluations and the initial derivative expense recorded, the Company recorded aggregate derivative
income (expense) of $144,839 and $(13,384,260) for the three months ended March 31, 2020 and 2019, respectively.
During
the three months ended March 31, 2020 and 2019, the fair value of the derivative liabilities, warrants and conversion option was
estimated using the Binomial valuation model and the Monte-Carlo simulation model with the following assumptions:
|
|
|
2020
|
|
|
|
2019
|
|
Expected
dividend rate
|
|
|
-
|
|
|
|
-
|
|
Expected
term (in years)
|
|
|
1.00
to 5.00
|
|
|
|
0.05
to 0.25
|
|
Volatility
|
|
|
154.2%
to 257.0
|
%
|
|
|
228.1
|
%
|
Risk-free
interest rate
|
|
|
0.14%
to 1.62
|
%
|
|
|
2.40
|
%
|
At
March 31, 2020 and December 31, 2019, convertible promissory notes are as follows:
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Principal amount
|
|
$
|
8,498,121
|
|
|
$
|
5,459,909
|
|
Add: put premium
|
|
|
311,660
|
|
|
|
385,385
|
|
Less: unamortized debt discount
|
|
|
(3,162,352
|
)
|
|
|
(2,210,950
|
)
|
Convertible notes payable, net
|
|
|
5,647,429
|
|
|
|
3,634,344
|
|
Less: current portion of convertible notes payable
|
|
|
(5,647,429
|
)
|
|
|
(3,634,344
|
)
|
Convertible notes payable, net – long-term
|
|
$
|
-
|
|
|
$
|
-
|
|
For
the three months ended March 31, 2020 and 2019, amortization of debt discounts related to convertible notes amounted to $764,943
and $545,443, respectively, which has been included in interest expense on the accompanying consolidated statements of operations.
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2020
NOTE
7 – NOTES PAYABLE
Secured
merchant loans
From
November 22, 2019 to December 31, 2019, the Company entered into several secured merchant loans in the aggregate amount of $2,283,540.
The Company received net proceeds of $1,355,986, net of original issue discounts and origination fees of $927,554. Pursuant to
these several secured merchant loans, the Company was required to pay the noteholders by making daily and/or weekly payments on
each business day or week until the loan amounts were paid in full. Each payment was deducted from the Company’s bank account.
During the year ended December 31, 2019, the Company repaid an aggregate of $464,344 of the loans. During the three months ended
March 31, 2020, the Company entered into a new secured merchant loan in the aggregate amount of $1,274,150, which consisted of
$670,700 of principal transferred to this new loan by two of these secured merchants. The Company received net proceeds of $150,000,
net of original issue discounts and origination fees of $453,450. During the three months ended March 31, 2020, the Company repaid
an aggregate of $1,549,639 of these loans, which includes payments pursuant to settlement agreements as discussed below.
|
●
|
In
connection with a settlement agreement dated March 4, 2020, the Company paid off a merchant loan with a principal balance
of $936,410 for a payment of $600,000 which was made by the Company in March 2020.
|
|
|
|
|
●
|
In
connection with a settlement agreement dated March 9, 2020, the Company agreed to pay $233,434 in full settlement for a merchant
loan of with a principal balance of $364,740. The payment was due on March 11, 2020. During the three months ended March 31,
2020, the Company paid $48,344 of this settlement and the remaining payment due of $185,090 was paid in May 2020.
|
|
|
|
|
●
|
In
connection with a settlement agreement dated March 9, 2020, the Company agreed to pay $275,000 in full settlement for a merchant
loan with a principal balance of $272,700 and a senior secured convertible debt in the amount of $95,874 and cancellation
of 40,300 warrants held by the same creditor. The settlement payment was due, in full, on March 12, 2020; however, due to
cash constraints at the time, the Company paid the $275,000 in weekly installments, which the creditor accepted, with its
final payment on May 12, 2020. The Company paid $52,500 during the three months ended March 31, 2020 and the remainder of
$222,500 was paid in May 2020. While the Company never received a default or demand letter, the creditor verbally told the
Company on May 12, 2020, that the original full amount should be paid, although the creditor has not made any formal demand
or commenced any action. The Company believes any such claim, if made, would be without merit.
|
In
connection with these settlement agreements, the Company recorded a loss on debt extinguishment of $214,641 which consisted of
the payment of cash of $67,548 and the write off of debt of remaining debt discount of $614,809, offset by the reduction of principal
balance of $467,716.
At
March 31, 2020, notes payable related to these secured merchant loans amounted to $393,972, which consists of $405,290 of principal
balance due and is net of unamortized debt discount of $11,318. At December 31, 2019, notes payable related to these secured merchant
loans amounted to $1,057,074, which consists of $1,819,196 of principal balance due and is net of unamortized debt discount of
$762,122.
Promissory
notes
In
connection with the acquisition of Prime EFS on June 18, 2018, the Company assumed several notes payable liabilities amounting
to $944,281 pursuant to secured merchant agreements (the “Assumed Secured Merchant Loans”). At March 31, 2020
and December 31, 2019, notes payable related to Assumed Secured Merchant Loans and a new promissory note amounted to $98,592 and
$98,592, respectively.
On
August 28, 2019, a remaining secured merchant loan balance of $184,750 was converted into a new note. Pursuant to this
new note, the Company will pay the lender in twelve monthly installments of $17,705 beginning on November 25, 2019 to the
maturity date of November 25, 2020. This new note bears interest at 15% per annum. This note is secured by the Company’s
assets and is personally guaranteed by the former majority member of Prime EFS. During the three months ended March 31, 2020,
the Company repaid $60,388 of this note. At March 31, 2020 and December 31, 2019, notes payable related to the new note amounted
to $115,951 and $176,339.
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2020
On
August 28, 2019, secured merchant loan balances of $261,630 were converted into new notes payable. During the three months ended
March 31, 2020, the Company repaid $135,742 of these notes. Pursuant to these new notes, the Company will pay the
lenders in twelve monthly installments of $25,073 beginning on November 25, 2019 to the maturity date of November 25, 2020. During
the three months ended March 31, 2020, the Company repaid $135,742 of these notes. During the three months ended March 31, 2020,
$4,846 of accrued interest payable was reclassified to the principal balance. At March 31, 2020 and December 31, 2019, notes payable
related to these notes amounted to $113,962 and $244,858, respectively.
In
connection with the acquisition of Prime EFS, the Company assumed several notes payable liabilities due to entities or individuals.
These notes have effective interest rates ranging from 7% to 10%, and are unsecured. At March 31, 2020 and December 31, 2019,
remaining notes payable to an entity amounted to $40,000 and $40,000, respectively.
From
October 31, 2018 to December 31, 2018, the Company entered into Original Discount Senior Secured Demand Promissory Notes with
an investor (the “Fall 2018 Promissory Notes”). Pursuant to the Fall 2018 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 the Fall 2018 Promissory Notes. During the year ended December 31, 2019, the Company
repaid $437,532 of the Fall 2018 Promissory Notes and interest due of $36,760 was reclassified to principal amount due. During
the three months ended March 31, 2020, the Company repaid $50,000 of the Fall 2018 Promissory Notes. At March 31, 2020 and December
31, 2019, notes payable to this entity amounted to $99,228 and $149,228, respectively. The remaining Fall 2018 Promissory Notes
are payable on demand. The Fall 2018 Promissory Notes are secured by the Company’s assets.
During
the year ended December 31, 2019, the Company entered into separate promissory notes with several individuals totaling $2,517,150,
including $40,000 of a previous note rolled into these new notes, and received net proceeds of $2,238,900, net of original issue
discounts of $238,250. These notes were due between 45 and 273 days from the respective note issuance date. In connection with
these promissory notes, in 2019, 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. During the year ended December
31, 2019, the Company repaid $1,118,400 of these notes. Additionally, during the year ended December 31, 2019, the Company issued
439,623 shares of its common stock and 439,623 five year warrants exercisable at $2.50 per share upon conversion of notes payable
of $978,750 and accrued interest of $120,307 at a conversion price of $2.50 per share. Since the conversion price of $2.50 was
equal to the fair value of the shares as determined by recent sales of the Company’s common shares, no beneficial feature
conversion was recorded. During the three months ended March 31, 2020, the Company borrowed additional fund from individuals of
$443,000, and received net proceeds of $423,000, net of original issue discount of $20,000, and the Company repaid $298,000 of
these funds. At March 31, 2020 and December 31, 2019, notes payable to these individuals amounted to $565,000 and $420,000, respectively.
Equipment
and auto notes payable
In
connection with the acquisition of Prime EFS, the Company assumed several equipment notes payable liabilities due to entities.
At March 31, 2020 and December 31, 2019, equipment notes payable to these entities amounted to $53,668 and $57,001, respectively.
During
the years ended December 31, 2019 and 2018, the Company entered into auto financing agreements in the amount of $44,905 and $162,868,
respectively. During the years ended December 31, 2019 and 2018, the Company repaid $24,030 and $1,832 of these notes, respectively.
At March 31, 2020 and December 31, 2019, auto notes payable to these entities amounted to $173,239 and $181,911, respectively.
In
November 2019, the Company entered into a promissory note for the purchase of five trucks in the amount of $460,510. The note
is due in sixty monthly installments of $9,304. The first payment was paid in December 2019 and the remaining fifty-nine payments
are due monthly commencing on January 27, 2020. The note is secured by the trucks and is personally guaranteed by the Company’s
chief executive officer. During the three months ended March 31, 2020, the Company repaid $19,002 of this note. At March 31, 2020,
equipment note payable to this entity amounted to $441,508.
At
March 31, 2020 and December 31, 2019, notes payable consisted of the following:
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Principal amounts
|
|
$
|
2,106,438
|
|
|
$
|
3,187,125
|
|
Less: unamortized debt discount
|
|
|
(11,318
|
)
|
|
|
(762,122
|
)
|
Principal amounts, net
|
|
|
2,095,120
|
|
|
|
2,425,003
|
|
Less: current portion of notes payable
|
|
|
(1,733,440
|
)
|
|
|
(2,425,003
|
)
|
Notes payable – long-term
|
|
$
|
361,680
|
|
|
$
|
-
|
|
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2020
For
the three months ended March 31, 2020 and 2019, amortization of debt discounts related to notes payable amounted to $594,445 and
$525,829, respectively, which has been included in interest expense on the accompanying condensed consolidated statements of operations.
NOTE
8– STOCKHOLDERS’ DEFICIT
Preferred
stock
Series
A preferred stock
The
Company increased its authorized preferred shares to 10,000,000 shares in July 2018.
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. Upon conversion,
pursuant to Section 9(i) of the Certificate of Designation, the Series A preferred stock became undesignated upon their return
to the Company.
Series
B preferred shares
In
August 2019, the Company designated Series B Preferred Shares consisting of 1,700,000 shares with a par value of $0.001 and a
stated value of $0.001. The Series B preferred shares have no voting rights and are not redeemable. Each share of Series B Preferred
stock is convertible into one share of common stock at the option of the holder subject to beneficial ownership limitation.
On
August 16, 2019, the Company issued 1,000,000 Series B preferred shares for services rendered to the former member of Prime EFS
who is considered a related party. The shares were valued at $2.50 per shares on an as if converted basis to common shares based
on recent sales of the Company’s common stock of $2.50 per share. In connection with the issuance of these Series B Preferred
shares, the Company recorded stock-based compensation of $2,500,000.
On
August 16, 2019, the Company issued 700,000 shares of Series B Preferred shares upon settlement of 700,000 shares of issuable
common shares (see Note 6).
Series C preferred shares
Pursuant to the August 2019 Purchase Agreement
(see Note 6), by and among the Company and the investors named therein (the “August 2019 Investors”), the Company
is required to keep reserved for issuance to the August 2019 Investors three times the number of shares of common stock issuable
to the August 2019 Investors upon conversion or exercise, as applicable, of convertible notes and warrants held by the August
2019 Investors (the “August 2019 Reserve Requirement”). If the Company fails to meet the August 2019 Reserve
Requirement within 45 days after written notice from an August 2019 Investor, the Company must, inter alia, sell to the
Lead Investor (as defined in the August 2019 Purchase Agreement) for $100 a series of preferred stock which holds voting power
equal to 51% of the number of votes eligible to vote at any special or annual meeting of the Company’s stockholders (with
the power to take action by written consent in lieu of a stockholders meeting) for the sole purpose of amending the Company’s
Amended and Restated Articles of Incorporation to increase the number of shares of common stock that the Company is authorized
to issue, which such preferred stock will be automatically cancelled upon the effectiveness of the resulting increase in the Company’s
authorized stock. By letter agreement dated, June 4, 2020, the Lead Investor assigned this contract right to John Mercadante,
the chief executive officer of the Company.
On June 5, 2020, the Company sold to John
Mercadante, for $100.00, one share of Series C Preferred Stock which has voting power equal to 51% of the number of votes eligible
to vote at any special or annual meeting of the Company’s stockholders (with the power to take action by written consent
in lieu of a stockholders meeting) for the sole purpose of amending the Company’s Amended and Restated Articles of Incorporation
to increase the number of shares of common stock that the Company is authorized to issue. Upon the effectiveness of the amendment,
the Series C Preferred Stock will be automatically cancelled. The Series C Preferred Stock is not entitled to vote on any other
matter, is not entitled to dividends, is not convertible into any other security of the Company and is not entitled to any distributions
upon liquidation of the Company (See Note 13 – Subsequent Events).
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.
Shares
issued in connection with conversion of debt
During
the three months ended March 31, 2020, the Company issued 5,290,406 shares of its common stock upon the partial conversion of
a convertible note principal and default interest balances due of $310,894, and accrued interest payable of due of $30,625 at
the contractual conversion price. The Company accounted for the partial conversion of these convertible notes pursuant to the
guidance of ASC 470-20, Debt with Conversion and Other Options. Under ASC 470-20, the Company recognized an aggregate loss
on debt extinguishment upon conversion in the amount of $172,720 which is associated with the difference between the fair
market value of the shares issued upon conversion and the conversion price and is equal to the fair value of the shares
of common stock transferred upon conversion.
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2020
Stock
options
Stock
option activities for the three months ended March 31, 2020 are summarized as follows:
|
|
Number of Options
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted Average Remaining
Contractual Term (Years)
|
|
|
Aggregate
Intrinsic Value
|
|
Balance Outstanding December 31, 2019
|
|
|
80,000
|
|
|
$
|
8.84
|
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Balance Outstanding March 31, 2020
|
|
|
80,000
|
|
|
$
|
8.84
|
|
|
|
4.08
|
|
|
$
|
-
|
|
Exercisable, March 31, 2020
|
|
|
20,000
|
|
|
$
|
8.84
|
|
|
|
4.08
|
|
|
$
|
-
|
|
Warrants
Warrants
issued in connection with convertible debt
During the three months ended March 31, 2020,
the Company closed the Q1 2020 Purchase Agreements with accredited investors. Pursuant to the terms of the Q1 2020
Purchase Agreements, the Company issued Q1 2020 Warrants to purchase up to 818,400 shares of the Company’s common
stock (See Note 6). The Q1 2020 Warrants are exercisable at any time on or after the date of the issuance and entitle the
investors to purchase shares of the Company’s common stock for a period of five years from the initial date the Q1 2020
Warrants become exercisable. Under the terms of the Q1 2020 Warrants, the investors are entitled to exercise the Q1 2020 Warrants
to purchase up to 818,400 shares of the Company’s common stock at an initial exercise price of $0.40, subject to adjustment
as detailed in the respective Q1 2020 Warrant. In connection with the 374,000 warrants issued in January 2020, the Company calculated
the relative fair value of these warrants in the amount of $262,872 which was added to debt discount and will be amortized over
the term of the notes (see Note 6). In connection with the 444,400 warrants issued in February and March 2020, the Company determined
that various terms of these Q1 2020 Notes and Q1 2020 Warrants, including the default provisions in the Q1 2020 Notes discussed
in Note 6, caused derivative treatment of the warrants. During the three months ended March 31, 2020, on the initial measurement
dates, the fair value of the warrant derivatives of $456,631 was recorded as derivative liabilities and was allocated as a debt
discount up to the net proceeds of the Q1 2020 Notes of $456,631. The fair value of these warrants was estimated using the Binomial
valuation model with the assumptions as outlined in Note 6.
Warrant
price protection
On
August 30, 2019, pursuant to the terms of the August 2019 Purchase Agreements with accredited investors, the Company issued
August 2019 Warrants to purchase up to 987,940 shares of the Company’s common stock (See Note 6). The August 2019
Warrants are exercisable at any time on or after the date of the issuance and entitles the investors to purchase shares of the
Company’s common stock for a period of five years from the initial date the August 2019 Warrants become exercisable.
Under the terms of the August 2019 Warrants, the investors were entitled to exercise the August 2019 Warrants to purchase up to
987,940 shares of the Company’s common stock at an initial exercise price of $3.50, subject to adjustment as detailed in
the respective August 2019 Warrants. On September 6, 2019, the Company sold its common shares at $2.50 per share and accordingly,
the August 2019 Warrant down-round provisions were triggered. As a result, the number of warrants was increased by 395,176
to 1,383,116 warrants and the exercise price was lowered to $2.50. On January 7, 2020, the Company issued new convertible debt
with an initial conversion price of $0.40 per share and warrants exercisable at $0.40 per share and accordingly, the conversion
price and warrant down-round provisions were triggered. As a result, the conversion price of this debt was reduced to $0.40 per
share, and the number of warrants was increased to 8,644,474 warrants and the exercise price was lowered to $0.40. As a result
of the January 7, 2020 trigger of the down-round provisions, on January 7, 2020, the Company recorded a deemed dividend of $17,836,244
which represents the fair value transferred to the warrant holders from the down-round feature being triggered. The Company
calculated the difference between the August 2019 Warrants’ fair value on January 7, 2020, the date the down-round
feature was triggered using the current exercise price and the new exercise price and the new number of warrants. The deemed
dividend was recorded as an increase in accumulated deficit and increase in paid-in capital and increased the net loss to common
shareholders by the same amount.
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2020
In
October 2019, pursuant to the terms of the October 3 Purchase Agreement with an accredited investor, the Company
issued the October 3 Warrant to purchase up to 66,401 shares of the Company’s common stock (See Note 6). The October
3 Warrant is exercisable at any time on or after the date of the issuance and entitles the investor to purchase shares
of the Company’s common stock for a period of five years from the initial date the October 3 Warrant becomes exercisable.
Under the terms of the October 3 Warrant, the investor is entitled to exercise the October 3 Warrant to purchase up to
66,401 shares of the Company’s common stock at an initial exercise price of $3.51, subject to adjustment as detailed in
the October 3 Warrant. The October 3 Warrant includes a down-round provision under which the October 3 Warrant exercise
price could be affected, on a full-ratchet basis, by future equity offerings undertaken by the Company. Subsequent to October
3, 2019, the Company issued convertible debt with a conversion price of $2.50 per share and accordingly, the October 3 Warrant
down-round provisions were triggered. As a result, the October 3 Warrant exercise price was lowered to $2.50 and the
number of warrants was increased to 66,667 warrants. On January 7, 2020, the Company issued new convertible debt with an initial
conversion price of $0.40 per share and warrants exercisable at $0.40 per share and accordingly, the conversion price and warrant
down-round provisions were triggered. As a result, the conversion price of this debt was reduced to $0.40 per share, and the number
of warrants was increased to 416,669 warrants and the exercise price was lowered to $0.40. As a result of the January 7, 2020
trigger of the down-round provisions, on January 7, 2020, the Company recorded a deemed dividend of $859,768 which represents
the fair value transferred to the warrant holders from the down-round feature being triggered. The Company calculated the
difference between October 3 Warrant’s fair value on January 7, 2020, the date the down-round feature was
triggered using the current exercise price and the new exercise price and the new number of warrants. The deemed dividend was
recorded as an increase in accumulated deficit and increase in paid-in capital and increased the net loss to common shareholders
by the same amount.
Other
As
discussed in Note 6 above, the Company issued debt that consists of the issuance of convertible notes with variable conversion
provisions. The conversion terms of the convertible notes are variable based on certain factors, such as the future price of the
Company’s common stock, default provisions and payment of amortization Payments in stock. The number of shares of common
stock to be issued is based on the future price of the Company’s common stock. The number of shares of common stock issuable
upon conversion of the promissory note is indeterminate. Due to the fact that the number of shares of common stock issuable exceed
the Company’s authorized share limit, effective January 30, 2020, the equity environment is tainted and all convertible
debentures and warrants shall be included in the value of the derivative. Pursuant to ASC 815-15 Embedded Derivatives, the fair
values of the warrants were recorded as derivative liabilities on the issuance date. On January 30, 2020, the Company evaluated
all outstanding warrants to determine whether these instruments are tainted and, due to reasons discussed above, all warrants
outstanding were considered tainted. Accordingly, the Company recorded a reclassification from paid-in capital to derivative liabilities
of $11,381,885 for warrants becoming tainted. On January 30, 2020, the fair value of the warrants to be reclassified to derivative
liabilities was determined using the Binomial valuation model.
Subsequent
to January 30, 2020, the Company issued shares of its common upon conversion of debt at price lower than $0.40. Accordingly, the
exercise price of the August 2019 Warrants and October 3 Warrant discussed above was lowered to $0.0203 and the
aggregate number of warrants was increased from 9,061,143 warrants to 178,607,053 warrants. Since these warrants were treated
as derivative liabilities, no additional deemed dividend was recorded.
Warrant
activities for the three months ended March 31, 2020 are summarized as follows:
|
|
Number of Warrants
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Term (Years)
|
|
|
Aggregate
Intrinsic Value
|
|
Balance Outstanding December 31, 2019
|
|
|
3,649,861
|
|
|
$
|
2.41
|
|
|
|
4.66
|
|
|
$
|
311,070
|
|
Granted
|
|
|
818,400
|
|
|
|
0.40
|
|
|
|
|
|
|
|
|
|
Increase in warrants related to price protection
|
|
|
177,094,903
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
Balance Outstanding March 31, 2020
|
|
|
181,563,164
|
|
|
$
|
0.05
|
|
|
|
4.22
|
|
|
$
|
1,731,883
|
|
Exercisable, March 31, 2020
|
|
|
181,563,164
|
|
|
$
|
0.05
|
|
|
|
4.22
|
|
|
$
|
1,731,883
|
|
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2020
NOTE
9 – COMMITMENTS AND CONTINGENCIES
Employment
agreement
Simultaneously
with the acquisition of Prime EFS, Prime EFS agreed to certain terms and conditions by which Prime EFS would continue to employ
Frank Mazzola as its chief operating officer. Mr. Mazzola is related to the majority selling member of Prime EFS in the June 18,
2018 transaction.
Although
Mr. Mazzola proposed a form of written agreement intended to memorialize all material terms of the employment relationship, Prime
EFS did not sign the draft proposed by Mr. Mazzola in June 2018 or approve of all terms he was asking for because Prime EFS found
some of those terms unfair and unreasonable.
Among
other things, the draft proposed by Mr. Mazzola called for Prime EFS to make a 5-year commitment and to pay Mr. Mazzola a base
salary of $520,000 per year, payable in accordance with Prime EFS’s usual pay practices. The draft proposed by Mr. Mazzola
also called for his base salary to increase by $260,000 per year upon (i) Prime EFS achieving revenue of $20 million on an annualized
basis (the “Initial Target Goal”) for four consecutive weeks; and (ii) each time Prime EFS 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. Prime EFS never agreed to any of these terms, orally or in writing.
The
draft proposed by Mr. Mazzola also called for his base salary to be subject to review annually by the Manager of Prime EFS and
that his salary could be increased (but not decreased). Prime EFS agreed to this term.
The
draft proposed by Mr. Mazzola also provided that he would be entitled to participate in any bonus plan that the Manager of Prime
EFS or its designee may approve for the senior executives of Prime EFS and shall be entitled to participate in benefits under
the Prime EFS’s benefit plans, profit sharing and arrangements, including, without limitation, any employee benefit plan
or arrangement made available in the future by Prime EFS 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. Prime EFS agreed to these terms.
The
draft proposed by Mr. Mazzola also provided that, notwithstanding the foregoing, during the term of his employment, Prime EFS
would provide, at Prime EFS’s expense, health and major medical insurance benefits to Mr. Mazzola and his family members
which were at least equal to the benefits provided to Mr. Mazzola and his family members by Prime EFS immediately prior to the
June 18, 2018 acquisition. Prime EFS agreed to these terms.
The
draft proposed by Mr. Mazzola also provided that the contract would begin on June 18, 2018 and end on May 31, 2023. Prime
EFS did not agree to this term. The draft proposed by Mr. Mazzola also provided that the term of the employment would automatically
be extended for additional one-year periods unless, at least sixty (60) days prior to the end of the expiration of the term of
employment, one party gives notice to the other of an intent not to extend. Prime EFS did not agree to this provision.
The
draft proposed by Mr. Mazzola also provided that his employment could not be terminated, even for cause, without the concurrence
of two of the three “independent” directors of TLSS. Prime EFS did not agree to that provision and could not have
done so, since TLSS did not have any independent directors at the time and nothing in the SPA, the stock purchase agreement
between TLSS and the selling members of Prime EFS, dated June 18, 2018, obligated TLSS to appoint three or more independent directors.
The prior owners of Prime EFS (the “Prior
Owners”) consummated the June 2018 SPA without insisting on the delivery, by TLSS, of a fully executed, integrated
document memorializing all terms of the employment relationship between Prime EFS and Mr. Mazzola (an express condition of closing
under the June 2018 SPA).
In
addition, since June 18, 2018, the Prior Owners have never demanded that Prime EFS deliver a fully executed, integrated document
memorializing all terms of the employment relationship between Prime EFS and Mr. Mazzola. On the basis of these facts, Prime EFS
has obtained an opinion of counsel that Prime EFS has a strong argument that the Prior Owners waived the condition in the
June 2018 SPA requiring TLSS to deliver a fully-executed, integrated document memorializing all terms of an employment relationship
between Prime EFS and Mr. Mazzola.
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2020
Current
management of TLSS first became aware, only recently, that the prior chief executive officer of TLSS, Steven Yariv, had material
disagreements with the form of employment agreement proposed by Mr. Mazzola and therefore never signed it.
In
addition, on February 24, 2019, all officers of TLSS and Prime EFS, including Mr. Mazzola, orally agreed that, owing to the dire
financial circumstances of the consolidated Company, no officer of TLSS or Prime EFS would be paid at a rate in excess of $350,000
per year unless and until the board of TLSS unanimously approved a different rate in writing. To date, the board of TLSS has
not approved a different rate in writing. Mr. Mazzola now denies that he agreed to a permanent reduction in his salary, claiming
instead that he agreed to a mere deferral.
Legal
matters
From
time to time, we may be involved in litigation relating to claims arising out of our operation in the normal course of business.
Elrac
LLC v. Prime EFS
On
or about January 10, 2020, the Company was named as sole defendant in a civil action captioned Elrac LLC v. Prime EFS, filed
in the United States District Court for the Eastern District of New York, assigned Case No. 1 :20-cv-00211 (the “Elrac
Action”). The complaint in the Elrac Action alleged that Prime EFS failed to pay in full for repairs allegedly required
by reason of property damage to delivery vehicles leased by Prime EFS from Elrac LLC (“Elrac”) to conduct
its business. The complaint sought damages of not less than $382,000 plus $58,000 in insurance claims that Elrac believes were
collected by the Company and not reimbursed to Elrac. Elrac subsequently moved for a default judgment against Prime EFS. By letter
to the court dated March 9, 2020, Prime EFS opposed entry of a default judgment and contended that all claims in the Elrac Action
were subject to mandatory arbitration clauses found in the individual lease agreements. On March 19, 2020, Elrac filed a stipulation
dismissing the Elrac Action without prejudice and advised Prime EFS that it intends to file an arbitration at the American Arbitration
Association alleging essentially identical claims. During the period it was leasing vans and trucks from Elrac and its affiliate,
Enterprise Leasing Company of Philadelphia, LLC (“Enterprise PA” and, with Elrac, “Enterprise”), Prime
EFS transferred $387,392 in deposits required by Enterprise as security for the payment of deductibles and uninsured damage to
Enterprise’s fleet. Despite due demand, Enterprise never accounted to Prime EFS’s satisfaction regarding the application
of these deposits. On June 10, 2020, Prime EFS therefore initiated an arbitration (the “Prime EFS Arbitration”) against
Enterprise at the American Arbitration Association seeking the return of not less than $327,000 of these deposits. Therefore,
if, as expected, Elrac and Enterprise PA continue to claim Prime EFS owes it money, allegedly because the deposits together with
insurance recoveries were insufficient to cover their alleged damages, Enterprise would have to interpose that contention not
in its own arbitration but rather as a counterclaim in the Prime EFS Arbitration.
In the event that Enterprise files such
a counterclaim, Prime EFS will contest it vigorously and pursue its own claim for the repayment of a large portion of the escrow
deposits plus interest. Nevertheless, given the documentation which Elrac submitted to court in the Elrac Action, including an
affidavit from its controller, as of March 31, 2020 and December 31, 2019, the Company has reflected a liability of $440,000,
the amount originally claimed as damages by Elrac in the Elrac Action, which has been included in contingency liability on the
accompanying condensed consolidated balance sheet.
BMF
Capital v. Prime EFS LLC et al.
The
Company is aware of a settlement agreement made and entered into as of March 6, 2020, under which Prime EFS and certain related
entities agreed to pay BMF Capital (“BMF”) $275,000 on or by March 11, 2020, inter alia to discharge
a convertible note, to cancel certain warrants on 40,300 shares of TLSS common stock, and to settle certain claims made
by BMF Capital under certain merchant cash advance agreements (MCAs) whereby BMF purchased specified percentages of Prime EFS’s
total future accounts receivable up to certain agreed upon amounts in exchange for an upfront purchase price. Prime EFS did not
pay a portion of the agreed $275,000 settlement amount by March 11, 2020 but the Company has subsequently paid the $275,000 in
full. Under the March 6, 2020 settlement agreement, BMF could make claim for additional amounts and/or for recognition of the
common stock warrants but to date it has not done so. In the event BMF pursues such a claim against Prime EFS, Prime EFS will
contest the case vigorously. Since no such claim has in fact been filed in court, but merely threatened, it is not possible to
evaluate the likelihood of a favorable or unfavorable outcome, nor is it possible to estimate the amount or range of any potential
loss in the matter. However, it appears that the value of any such claim is under $10,000.
Bellridge
Capital, L.P. and SCS, LLC v. TLSS
Currently,
the Company is in an ongoing dispute between the Company and two investors in the Company, namely Bellridge and SCS, LLC (“SCS”).
Among other things, Bellridge claims that the Company is in breach of its obligations under an August 29, 2019 letter agreement
to issue a confession of judgment and to pay Bellridge $150,000 per month against the amounts due under, inter alia, an
April 2019 promissory note. In an April 28, 2020 letter, Bellridge contends that TLSS owed Bellridge $1,978,557.76 as of that
date. In a purported standstill agreement subsequently proposed by Bellridge, Bellridge claims TLSS owes it $2,271,099.83, a figure
which allegedly includes default rate interest. Bellridge also claims that a subordination agreement it signed with the Company
on August 30, 2019, was void ab initio. Bellridge has also demanded the conversion of approximately $20,000 in indebtedness
into the common stock of the Company, a conversion which the Company has not effectuated because the parties did not come to agreement
on a conversion price. Such agreement is required for Bellridge to exercise its conversion rights under an agreement dated April
9, 2019 between Bellridge and the Company. SCS alleges it was induced by fraud to exchange two million shares of Company preferred
stock for Company common stock and was damaged thereby. The Company is currently in discussions with Bellridge, SCS and the Company’s
senior secured lenders to see whether this dispute can be amicably resolved. In the event Bellridge and/or SCS pursues the above
claims against the Company, the Company will contest the case vigorously. Since no such claims have in fact been filed in court,
but merely threatened, it is not possible to evaluate the likelihood of a favorable or unfavorable outcome, nor is it possible
to estimate the amount or range of any potential loss in the matter.
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2020
SCS,
LLC v. Transport and Logistics Systems, Inc.
On
or about June 7, 2020, the Company was notified of the filing of civil action in the Supreme Court of the State of New York, New
York County, captioned SCS, LLC v. Transportation and Logistics Systems, Inc.
The
action was filed on May 26, 2020 and assigned Index No. 154433/2020.
The
plaintiff in this action alleges it is a limited liability company that entered into a renewable six-month consulting agreement
with the Company dated September 5, 2019 and that the Company failed to make certain monthly payments due thereunder for the months
of October 2019 through March 2020, summing to $42,000. The complaint alleges claims for breach of contract, quantum meruit,
unjust enrichment and account stated.
Although
the Company has not yet filed an answer in this action, because the time period within which it must file an answer has not expired,
the Company will deny that it owes any sum to SCS, LLC, under the consulting agreement or otherwise. In addition, the Company
expects to file counterclaims against SCS, LLC for an amount in excess of $42,000, on the grounds that SCS, LLC, breached its
express obligations under the consulting agreement to hold Company confidential information “in strictest confidence”
and to use that information, if at all, “for the sole and exclusive benefit” of the Company. Accordingly, the Company
intends to mount a vigorous defense to the action, as Company management believes the action to be entirely bereft of merit.
Shareholder
Derivative Action
On
June 25, 2020, the Company was served with a purported shareholder derivative action filed in the Circuit Court of the 15th
Judicial Circuit in and for Palm Beach County, Florida (the “Court”) captioned SCS, LLC, derivatively on
behalf of Transportation and Logistics Systems, Inc. v. John Mercadante, Jr., Douglas Cerny, Sebastian Giordano, Ascentaur LLC
and Transportation and Logistics Systems, Inc.
The
action was filed on June 18, 2020 with filing number 109085636.
The
plaintiff in this action alleges it is a limited liability company formed by a former chief executive officer and director of
the Company, Lawrence Sands. The complaint alleges that between April 2019 and June 2020, the current chairman and chief executive
officer of the Company, the current chief development officer of the Company and, since February 2020, the Company’s restructuring
consultant, breached fiduciary duties owed to the Company. The Company’s restructuring consultant, defendant Sebastian
Giordano, renders his services through defendant Ascentaur LLC. In the Company’s understanding, the full text of the complaint
is, or soon will be, available on-line at the Court’s website.
Briefly,
the complaint alleges that the Company’s chief executive officer breached duties to the Company by, among other things,
requesting, in mid-2019, that certain preferred equity holders, including SCS, convert their preferred shares into Company common
stock in order to facilitate an equity offering by the Company and then not consummating an equity offering. The complaint also
alleges that current management caused the Company to engage in wasteful and unnecessary transactions such as taking merchant
cash advances (MCA) on disadvantageous terms. The complaint also alleges that current management “issued themselves over
two million shares of common stock without consideration.” The complaint seeks unspecified compensatory and punitive damages
for breach of fiduciary duty, negligent breach of fiduciary duty, constructive fraud, and civil conspiracy and the appointment
of a receiver or custodian for the Company.
The Company’s current management has tendered the complaint
to its directors’ and officers’ liability carrier for defense and indemnity purposes. Company management, Mr. Giordano
and Ascentaur LLC each advise that they deny each and every allegation of wrongdoing alleged in the complaint. Among other things,
current management asserts that it made every effort to consummate an equity offering in late 2019 and early 2020 and could not
do so solely because of the Company’s precarious financial condition. Current management also asserts it made clear to SCS
and other preferred equity holders, before they converted their shares into common stock, that there was no guarantee the Company
would be able to consummate an equity offering in late 2019 or early 2020. In addition, current management asserts that it received
equity in the Company on terms that were entirely fair to the Company and entered into MCA transactions solely because there was
no other financing available to the Company. Accordingly, current Company management, Mr. Giordano and Ascentaur LLC intend to
mount a vigorous defense to the action, as they believe the action to be entirely bereft of merit.
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2020
Other
than discussed above, as of March 31, 2020, there were no pending or threatened lawsuits that could reasonably be expected to
have a material effect on results of our operations.
Amazon
On June 19, 2020, Amazon Logistics, Inc.
(“Amazon”) notified Prime EFS in writing that Amazon does not intend to renew its Delivery Service Partner (DSP) Agreement
with Prime EFS when that agreement (expires see Note 13 – Subsequent Events).
Leases
See
Note 11.
NOTE
10– RELATED PARTY TRANSACTIONS AND BALANCES
Due
to related parties
In
connection with the acquisition of Prime EFS, the Company acquired a balance of $14,019 that was due from the former majority
owner of Prime EFS. Pursuant to the terms of the SPA, the Company agreed to pay $489,174 in cash to the former majority owner
of Prime EFS who then advanced back the $489,174 to Prime EFS. During the period from Acquisition Date of Prime EFS (June
18, 2018) to December 31, 2018, the Company repaid $216,155 of this advance. During the year ended December 31, 2019, the Company
repaid $130,000 of this advance. During the three months ended March 31, 2020, the Company repaid $35,000 of this advance. This
advance is non-interest bearing and is due on demand. At March 31, 2020 and December 31, 2019, amount due to this related party
amounted to $94,000 and $129,000, respectively, and have been included in due to related parties on the accompanying condensed
consolidated balance sheets.
During
the year ended December 31, 2019, an employee of Prime EFS who exerts significant influence over the business of Prime EFS, advanced
the Company $88,000. Additionally, during the three months ended March 31, 2020, this employee advanced the Company $75,000 and
was repaid $93,000. During the three months ended March 31, 2020, the Company paid this employee interest of $57,200 related to
these working capital advances. At March 31, 2020 and December 31, 2019, amounts due to this related party amounted to $70,000
and $88,000, respectively, and have been included in due to related parties on the accompanying condensed consolidated balance
sheets.
During
the year ended December 31, 2019, an entity which is controlled by an employee of Prime EFS who exerts significant influence over
the business of Prime EFS advanced the Company $25,000. In January 2020, this advance was repaid. During the three months ended
March 31, 2020, the Company paid this entity interest expense of $27,500 related to 2019 working capital advances made. At March
31, 2020 and December 31, 2019, amounts due to this related party entity amounted to $0 and $25,000, and has been included in
due to related parties on the accompanying condensed consolidated balance sheets, respectively.
Notes
payable – related parties
On
July 3, 2019, the Company entered into a note agreement with an entity that is affiliated with the Company’s
chief executive officer, in the amount of $500,000. Commencing on September 3, 2019, and continuing on the third day of each month
thereafter, payments of interest only on the outstanding principal balance of this note is due and payable. Commencing
on January 3, 2020 and continuing on the third day of each month thereafter through January 3, 2021, equal payments of principal
and interest will be made. The principal amount of this note and all accrued, but unpaid interest under this
note will be due and payable on the earlier to occur of (i) January 3, 2021 (the “CEO Note Maturity
Date”), or (ii) an Event of Default (as defined in the note agreement). The payment of all or any portion of
the principal and accrued interest may be paid prior to the CEO Note Maturity Date. Interest accrues with respect
to the unpaid principal sum identified above until such principal is paid at a rate equal to 18% per annum. All past due principal
and interest on this Note will bear interest from maturity of such principal or interest until paid at the lesser of (i)
20% per annum, or (ii) the highest rate allowed by applicable law. To date, no repayments have been made on this related party
note. At March 31, 2020 and December 31, 2019, interest payable to related parties amounted to $105,884 and $83,445 and is included
in due to related parties on the accompanying condensed consolidated balance sheets, respectively.
At
March 31, 2020 and December 31, 2019, notes payable – related party amounted to $500,000 and $500,000, respectively.
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2020
NOTE
11 – OPERATING LEASE RIGHT-OF-USE (“ROU”) ASSETS AND OPERATING LEASE LIABILITIES
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 will be $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. The Company will 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
July 2019, the Company entered into a 4.5-year lease agreement for the lease of office and warehouse space and parking spaces
under a non-cancelable operating lease through February 2024. From the lease commencement date until the last day of the second
lease year, monthly rent will be $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. The Company will have one option to renew
the term of this lease for an additional five years. In July 2019, the Company paid a security deposit of $20,000.
In
July 2019, the Company entered into a five-year lease agreement for the lease of office and warehouse space and parking spaces
under a non-cancelable operating lease through August 2024. During the first year on the lease term, the base monthly rent will
be $18,000 and will increase by 3% each lease year. Additionally, the Company will pay its portion of operating
expenses. The Company will have one option to renew the term of this lease for an additional five years. As of December
31, 2019, the Company paid a security deposit of $18,000.
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. Additionally,
during the year ended December 31, 2019, the Company entered into new operating lease agreements as discussed above, that require
the Company to record a lease liability and a right of use asset on its consolidated balance sheet, at fair value. Accordingly,
the Company recorded right-of-use assets and lease liabilities of $1,352,597.
During
the three months ended March 31, 2020 and 2019, in connection with these operating leases, other miscellaneous rental payments
and common area maintenance costs, the Company recorded rent expense of $164,350 and $98,831, 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 10% to 12% which was
based on the Company’s estimated incremental borrowing rate.
At
March 31, 2020 and December 31, 2019, right-of-use asset (“ROU”) is summarized as follows:
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Office leases right of use assets
|
|
$
|
1,984,320
|
|
|
$
|
1,984,320
|
|
Less: accumulated amortization into rent expense
|
|
|
(278,324
|
)
|
|
|
(233,890
|
)
|
Balance of ROU assets as of end of period
|
|
$
|
1,705,996
|
|
|
$
|
1,750,430
|
|
At
March 31, 2020 and December 31, 2019, operating lease liabilities related to the ROU assets are summarized as follows:
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Lease liabilities related to office leases right of use assets
|
|
$
|
1,734,521
|
|
|
$
|
1,773,384
|
|
Less: current portion of lease liabilities
|
|
|
(341,483
|
)
|
|
|
(333,126
|
)
|
Lease liabilities – long-term
|
|
$
|
1,393,038
|
|
|
$
|
1,440,258
|
|
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2020
At
March 31, 2020, future minimum base lease payments due under non-cancelable operating leases are as follows:
Year ended March 31,
|
|
Amount
|
|
2021
|
|
$
|
509,040
|
|
2022
|
|
|
522,913
|
|
2023
|
|
|
532,205
|
|
2024
|
|
|
485,440
|
|
2025
|
|
|
101,296
|
|
Total minimum non-cancelable operating lease payments
|
|
|
2,150,894
|
|
Less: discount to fair value
|
|
|
(416,373
|
)
|
Total lease liability at March 31, 2020
|
|
$
|
1,734,521
|
|
NOTE
12 – CONCENTRATIONS
For the three months ended March 31, 2020
and 2019, one customer, Amazon, represented 97.9% and 99.0% of the Company’s total net revenues. At March 31, 2020,
this one customer represented 93.9% of the Company’s accounts receivable balance. On June 19, 2020, Amazon Logistics,
Inc. (“Amazon”) notified Prime EFS in writing that Amazon does not intend to renew its Delivery Service Partner (DSP)
Agreement with Prime EFS when that agreement expires (see Note 13 – Subsequent Events).
During
the three months ended March 31, 2020 and 2019, the Company rented delivery vans and trucks from a limited number of vendors.
Any shortage of supply of vans and trucks 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
13 – SUBSEQUENT EVENTS
Convertible
debt and related warrants
On April 1, 2020, the Company closed on a
securities purchase agreement with an accredited investor (the “April 1 Purchase Agreement”).
Pursuant to the terms of the April 1 Purchase Agreement, the Company issued and sold to an investor a convertible promissory
note in the principal amount of $22,000 (the “April 1 Note”), and warrants to purchase up to 8,800 shares
of the Company’s common stock (the “April 1 Warrant”). The Company received net proceeds of $20,000,
which is net of a 10% original issue discounts of $2,000. The April 1 Note bears interest at 6% per annum and becomes due
and payable on the date that is the 24-month anniversary of the original issue date of the April Note (the “April
1 Maturity Date”). During the existence of an Event of Default (as defined in the April 1 Note), which
includes, amongst other events, any default in the payment of principal and interest payment (including April 1 Note Amortization
Payments) under any note or any other indebtedness, interest accrues at the lesser of (i) the rate of 18% per annum, or
(ii) the maximum amount permitted by law. Commencing on the thirteenth month anniversary of the April 1 Note, monthly payments
of interest and monthly principal payments, based on a 12 month amortization schedule (each, an “April 1 Note
Amortization Payment”), will be due and payable, until the April 1 Maturity Date, at which time all outstanding
principal, accrued and unpaid interest and all other amounts due and payable under the April 1 Note will be immediately
due and payable. The April 1 Note Amortization Payments will be made in cash unless the investor requests it to
be issued in the Company’s common stock in lieu of a cash payment (each, an “April 1 Note Stock Payment”).
If the investor requests an April 1 Note Stock Payment, the number of shares of common stock issued will be based
on the amount of the applicable April Note 1 Amortization Payment divided by 80% of the lowest VWAP (as defined in the
April 1 Note) during the five Trading Day (as defined in the April 1 Note) period prior to the due date of the April
1 Note Amortization Payment.
The April 1 Note may be prepaid, provided
that certain Equity Conditions, as defined in the April 1 Note, have been met (or any such failure to meet the Equity
Conditions has been waived): (i) from April 1, 2020 until and through July 1, 2020 at an amount equal to 105% of the aggregate
of the outstanding principal balance of the April 1 Note and accrued and unpaid interest, and (ii) after July 1, 2020 at
an amount equal to 115% of the aggregate of the outstanding principal balance of the April 1 Note and accrued and unpaid
interest. In the event that the Company closes a Public Offering, the holder may elect to: (x) have its principal and accrued
interest prepaid directly from the proceeds of the Public Offering at the prices set forth above, or (y) exchange its April
1 Note at the closing of the Public Offering for the securities being issued in the Public Offering at the Public Offering
prices based upon the outstanding principal, accrued interest and other charges, or (z) continue to hold the April 1 Note. Except
for a Public Offering and April 1 Note Amortization Payments, in order to prepay the April 1 Note, the Company must
provide at least 30 days’ prior written notice to the holder, during which time the holder may convert the April 1
Note in whole or in part at the then-applicable conversion price. For avoidance of doubt, the April 1 Note Amortization
Payments will be prepayments and are subject to prepayment penalties equal to 115% of the April 1 Note Amortization
Payment. In the event the Company consummates a Public Offering while the April 1 Note is outstanding, then 25% of the
net proceeds of such offering will, within two business days of the closing of such Public Offering, be applied
to reduce the outstanding obligations pursuant to the April 1 Note.
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2020
Until the April 1 Note is no longer
outstanding, it is convertible, in whole or in part, at any time, and from time to time, into shares of common stock
at the option of the investor. The “Conversion Price” in effect on any Conversion Date (as defined in the April
1 Note) means, as of any Conversion Date (as defined in the April 1 Note) or other date of determination, $0.40 per share,
subject to adjustment as provided herein. If an Event of Default (as defined in the April 1 Note) has occurred, regardless
of whether it has been cured or remains ongoing, the April 1 Note is convertible at the lower of: (i) $0.40
and (ii) 70% of the second lowest closing price of the common stock as reported on the Trading Market (as defined in the April
1 Note) during the 20 consecutive Trading Day (as defined in the April 1 Note) period ending and including the Trading
Day immediately preceding the delivery or deemed delivery of the applicable notice of conversion. All such conversion price
determinations are to be appropriately adjusted for any stock dividend, stock split, stock combination, reclassification or
similar transaction that proportionately.
The April 1 Warrant is exercisable
at any time on or after the date of the issuance and entitles the investor to purchase shares of the Company’s common
stock for a period of five years from the initial date the April 1 Warrant becomes exercisable. Under the terms of the
April 1 Warrant, the investor is entitled to exercise the April 1 Warrant to purchase up to 8,800 shares of the
Company’s common stock at an initial exercise price of $0.40, subject to adjustment as detailed in the April 1 Warrant.
In connection with the issuance of the April
1 Note, the Company determined that various terms of the April 1 Note and April 1 Warrant, including the
April 1 Note Stock Payment terms discussed above and in Note 6, caused derivative treatment of the embedded conversion
option and warrant. On the initial measurement dates, the fair values of the embedded conversion option derivative and warrant
of $1,334 was recorded as derivative liabilities and was allocated as a debt discount up to the net proceeds of the April 1
Note of $1,334. Due to the default of August 2019 Note Amortization Payments due on our August 2019 Notes and other notes
as discussed in Note 6, the April 1 Note was deemed in default. Accordingly, the outstanding principal balance on date
of default increased by 30% which amounted to approximately $6,600, default interest accrues at 18%, and the default conversion
terms apply.
On April 20, 2020, the Company issued and
sold to an investor a convertible promissory note in the principal amount of $456,500 (the “April 20 Note”).
The April 20 Note contained a 10% original issue discount amounting to $41,500 for a purchase price of $415,000. The Company
did not receive any proceeds from the April 20 Note because the investor converted previous notes and accrued interest
due to him into the April 20 Note. The April 20 Note bears interest at 6% per annum and becomes due and payable
on April 20, 2022 (the “April 20 Note Maturity Date”). During the existence of an Event of Default
(as defined in the April 20 Note), which includes, amongst other events, any default in the payment of principal and interest
payment (including any April 20 Note Amortization Payments) under any note or any other indebtedness, interest accrues
at the lesser of (i) the rate of 18% per annum, or (ii) the maximum amount permitted by law. Commencing on the thirteenth
month anniversary of the April 20 Note, monthly payments of interest and monthly principal payments, based on a 12 month
amortization schedule, will be due and payable(each, an “April 20 Note Amortization Payment”),
until the April 20 Note Maturity Date, at which time all outstanding principal, accrued and unpaid interest and all other
amounts due and payable under the April 20 Note will be immediately due and payable. The April 20 Note Amortization
Payments will be made in cash unless the investor requests it to be issued in the Company’s common stock in lieu
of a cash payment (each, an “April 20 Note Stock Payment”). If the investor requests an April 20
Note Stock Payment, the number of shares of common stock issued will be based on the amount of the applicable April
20 Note Amortization Payment divided by 80% of the lowest VWAP (as defined in the April 20 Note) during the five
Trading Day (as defined in the April 20 Note) period prior to the due date of the April 20 Note Amortization Payment.
The April 20 Note may be prepaid, provided
that Equity Conditions, as defined in the April 20 Note, have been met (or any such failure to meet the Equity Conditions
has been waived): (i) from April 20, 2020 until and through July 20, 2020 at an amount equal to 105% of the aggregate of
the outstanding principal balance of the April 20 Note and accrued and unpaid interest, and (ii) after July 20, 2020 at
an amount equal to 115% of the aggregate of the outstanding principal balance of the April 20 Note and accrued and unpaid
interest. In the event that the Company closes a Public Offering, the holder may elect to: (x) have its principal and accrued
interest prepaid directly from the proceeds of the Public Offering at the prices set forth above, or (y) exchange its April
20 Note at the closing of the Public Offering for the securities being issued in the Public Offering at the Public Offering
prices based upon the outstanding principal, accrued interest and other charges, or (z) continue to hold the April 20 Note.
Except for a Public Offering and April 20 Note Amortization Payments, in order to prepay the April 20 Note, the Company
must provide at least 30 days’ prior written notice to the holder, during which time the holder may convert the April
20 Note in whole or in part at the then=applicable conversion price. For avoidance of doubt, the April 20 Note
Amortization Payments will be prepayments and are subject to prepayment penalties equal to 115% of the April 20
Note Amortization Payment. In the event the Company consummates a Public Offering while the April 20 Note is outstanding,
then 25% of the net proceeds of such offering will, within two business days of the closing of such Public Offering,
be applied to reduce the outstanding obligations pursuant to the April 20 Note.
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2020
Until the April 20 Note is no longer
outstanding, it is convertible, in whole or in part, at any time, and from time to time, into shares of common stock
at the option of the investor. The “Conversion Price” in effect on any Conversion Date (as defined in the April
20 Note) means, as of any Conversion Date or other date of determination, the lower of: (i) $0.40 and (ii) 70% of the second
lowest closing price of the common stock as reported on the Trading Market (as defined in the April 20 Note) during
the 20 consecutive Trading Day (as defined in the April 20 Note) period ending and including the Trading Day immediately
preceding the delivery or deemed delivery of the applicable notice of conversion. All such Conversion Price determinations
are to be appropriately adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction
that proportionately.
In connection with the issuance of the
April 20 Note, the Company determined that various terms of the April 20 Note caused derivative treatment of the embedded
conversion option and warrant. On the initial measurement dates, the fair values of the embedded conversion option derivative
of $400,365 was recorded as derivative liabilities and was allocated as a debt discount of $400,365. Due
to the default of August 2019 Note Amortization Payments due on our August 2019 Notes and other notes as discussed in Note 6,
the April 20 Note was deemed in default. Accordingly, the outstanding principal balance on date of default increased by
30% which amounted to approximately $136,950, default interest accrues at 18%, and the default conversion terms apply.
Paycheck
Protection Program Promissory Notes
On April 2, 2020, the Company’s subsidiary,
Shypdirect, entered into a Paycheck Protection Program promissory note (the “Shypdirect PPP Loan”)
with M&T Bank in the amount of $504,940 under the Small Business Administration (the “SBA”) Paycheck
Protection Program (the “Paycheck Protection Program”) of the Coronavirus Aid, Relief and Economic Security
Act of 2020 (the “CARES Act”). On April 28, 2020, the Shypdirect PPP Loan was approved and Shypdirect received
the loan proceeds on May 1, 2020. Shypdirect plans to use the proceeds for covered payroll costs, rent and utilities in
accordance with the relevant terms and conditions of the CARES Act. The Shypdirect PPP Loan has a two-year term, matures on April
28, 2022, and bears interest at a rate of 1.00% per annum. Monthly principal and interest payments, less the amount of any potential
forgiveness (discussed below), will commence on November 28, 2020.
On
April 15, 2020, the Company’s subsidiary, Prime EFS, entered into a Paycheck Protection promissory note (the “Prime
EFS PPP Loan” and together with the Shypdirect PPP Loan, the “PPP Loans”) with M&T Bank in the
amount of $2,941,212 under the SBA Paycheck Protection Program of the CARES Act. On April 15, 2020, the Prime EFS PPP Loan was
approved and Prime EFS received the loan proceeds on April 22, 2020. Prime EFS plans to use the proceeds for covered payroll costs,
rent and utilities in accordance with the relevant terms and conditions of the CARES Act. The Prime EFS PPP Loan has a two-year
term, matures on April 16, 2022, and bears interest at a rate of 1.00% per annum. Monthly principal and interest payments, less
the amount of any potential forgiveness (discussed below), will commence on November 16, 2020.
Neither
Prime EFS nor Shypdirect provided any collateral or guarantees for these PPP Loans, nor did they pay any facility charge to obtain
the PPP Loans. These promissory notes provide for customary events of default, including, among others, those relating to failure
to make payment, bankruptcy, breaches of representations and material adverse effects. Prime EFS and Shypdirect may prepay the
principal of the PPP Loans at any time without incurring any prepayment charges. These PPP Loans may be forgiven partially or
fully if the loan proceeds are used for covered payroll costs, rent and utilities, provided that such amounts are incurred during
the twenty- four week period that commenced on May 1, 2020 and at least 60% of any forgiven amount has been used for covered payroll
costs. Any forgiveness of these PPP Loans will be subject to approval by the SBA and M&T Bank and will require Prime EFS and
Shypdirect to apply for such treatment in the future. The Company expects to exhaust such funds in the third quarter and file
for forgiveness in the third quarter, although there is no guarantee that such forgiveness will be granted.
Common
shares issued for conversion of convertible debt and interest
During the period from April 1, 2020 to June
29, 2020, the Company issued 123,279,793 shares of its common stock in connection with the conversion of convertible notes
payable of $803,827 and accrued interest of $68,933, and fees of $500. The conversion price was based on contractual
terms of the related debt.
Common
shares issued in connection cashless exercise of warrants
During
the period from June 1, 2020 to June 29, 2020, the Company issued 70,203,889 shares of its common stock in connection with the
cashless exercise of warrants. The exercise price was based on contractual terms of the related debt.
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
March 31, 2020
Warrants
On
June 16, 2020, the Company issued an aggregate of 28,100,000 five-year warrants for the purchase of 28,100,000 shares of the Company’s
common stock at an exercise price of $0.06 per share, subject to adjustment as defined in the respective warrant to two
consultants for services rendered.
Series
C preferred share
Pursuant to the August 2019 Purchase
Agreement (see Note 6), by and among the Company and the investors named therein (the “August 2019 Investors”),
the Company is required to keep reserved for issuance to the August 2019 Investors three times the number of shares of
common stock issuable to the August 2019 Investors upon conversion or exercise, as applicable, of convertible notes and
warrants held by the August 2019 Investors (the “August 2019 Reserve Requirement”). If
the Company fails to meet the August 2019 Reserve Requirement within 45 days after written notice from an August 2019
Investor, the Company must, inter alia, sell to the Lead Investor (as defined in the August 2019 Purchase Agreement)
for $100 a series of preferred stock which holds voting power equal to 51% of the number of votes eligible to vote at any special
or annual meeting of the Company’s stockholders (with the power to take action by written consent in lieu of a stockholders
meeting) for the sole purpose of amending the Company’s Amended and Restated Articles of Incorporation to increase the number
of shares of common stock that the Company is authorized to issue, which such preferred stock will be automatically cancelled
upon the effectiveness of the resulting increase in the Company’s authorized stock. By letter agreement dated, June 4, 2020,
the Lead Investor assigned this contract right to John Mercadante, the chief executive officer of the Company.
The Company was unable to comply with the
August 2019 Reserve Requirement within 45 days after written notice from an August 2019 Investor. Accordingly, on
June 5, 2020, the Company sold to John Mercadante, for $100.00, 1 share of Series C Preferred Stock which has voting power equal
to 51% of the number of votes eligible to vote at any special or annual meeting of the Company’s stockholders (with the
power to take action by written consent in lieu of a stockholders meeting) for the sole purpose of amending the Company’s
Amended and Restated Articles of Incorporation to increase the number of shares of common stock that the Company is authorized
to issue. Upon the effectiveness of the amendment, the Series C Preferred Stock will be automatically cancelled. The Series C
Preferred Stock is not entitled to vote on any other matter, is not entitled to dividends, is not convertible into any other security
of the Company and is not entitled to any distributions upon liquidation of the Company.
Authorized shares
On June 26, 2020, stockholders holding
at least 51% of the voting power of the stock of the Company entitled to vote thereon consented, in writing, to amend the Company’s
Amended and Restated Articles of Incorporation, by adoption of the Certificate of Amendment to the Amended and Restated Articles
of Incorporation of the Company, which will authorize an increase of the number of shares of common stock that the Company may
issue to 4,000,000,000 shares, par value $0.001 (the “Certificate of Amendment”).
The Company filed a preliminary
information statement on Schedule 14C regarding the stockholders’ consent to the Certificate of Amendment with the SEC
on June 8, 2020. The Company plans to file a definitive information statement on Schedule 14C on or before June 30, 2020 and
to first mail that information statement to stockholders on or before June 30, 2020. The Certificate of Amendment is expected
to take effect on July 20, 2020.
Amazon Logistics Delivery Service Partner
Agreement
On June 19, 2020, Amazon Logistics, Inc.
(“Amazon”) notified Prime EFS in writing, that Amazon does not intend to renew its Delivery Service Partner (DSP)
Agreement with Prime EFS when that agreement (the “In-Force Agreement”) expires. Amazon stated that it believes
the In-Force Agreement expires on September 30, 2020. Prime EFS, however, strongly disagrees with Amazon’s position in this
regard and believes it has a strong argument that the In-Force Agreement does not expire, by its specific terms, until March 31,
2021, at the earliest. If Amazon disagrees with the forgoing, Prime EFS intends to arbitrate this issue through the American Arbitration
Association; however, the Company cannot make give any assurances as to the success of its position.
Approximately 74% of the Company’s
approximately $32 million of revenue reported in its recent Form 10-K Annual Report for the calendar year ended December 31, 2019
was attributable to Prime EFS’s last-mile DSP business with Amazon. Even if it lost the Amazon last-mile business, the Company
intends to generate significant revenues from its mid-mile and long-haul business. While a termination of the Amazon last-mile
business will have a material adverse impact on the Company’s business, the Company will continue to: (i) seek to expand
its last-mile business with other non-Amazon customers, which includes having recently begun making deliveries for one of the
largest carriers in the world; (ii) explore other strategic relationships; and (iii) identify potential acquisition opportunities,
while continuing to execute our restructuring plan, commenced in February 2020.