NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 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. 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 (the “Prime EFS Termination
Notice”), that Amazon does not intend to renew its Delivery Service Partner (DSP) Agreement with Prime EFS when that
agreement (the “In-Force Agreement”) expires. In the Prime EFS Termination Notice, Amazon stated that the In-Force
Agreement expires on September 30, 2020.
Additionally,
on July 17, 2020, Amazon notified Shypdirect that Amazon had elected to terminate the Amazon Relay Carrier Terms of Service (the
“Program Agreement”) between Amazon and Shypdirect effective as of November 14, 2020 (the “Shypdirect
Termination Notice”). On August 3, 2020, Amazon offered to withdraw the Shypdirect Termination Notice and extend the
term of the Program Agreement to and including May 14, 2021, conditioned on Prime EFS executing, for nominal consideration, a
separation agreement with Amazon under which Prime EFS agrees to cooperate in an orderly transition of its Amazon last-mile delivery
business to other service providers, Prime EFS releases any and all claims it may have against Amazon, and Prime EFS covenants
not to sue Amazon (the “Aug. 3 Proposal”). On August 4, 2020, the Company, Prime EFS and Shypdirect accepted
the Aug. 3 Proposal.
Approximately
59.3% and 39.4% (for a total of 98.7%) of the Company’s revenue of $17,193,875 for the six months ended June 30,
2020 was attributable to Prime EFS’s last-mile DSP business and Shypdirect’s mid-mile and long-haul business with
Amazon, respectively. The termination of the Amazon last-mile business will have a material adverse impact on the Company’s
business in the 4th fiscal quarter of 2020 and thereafter. If the Amazon mid-mile and long-haul business is discontinued
after May 14, 2021 it would have a material adverse impact on the Company’s business in 2nd fiscal quarter of
2021 and thereafter.
While
the Company will seek to replace its last-mile DSP Amazon business and supplement its mid-mile and long-haul Amazon
business, such initiatives are consistent with its already existing business plan to: (i) seek new last-mile, mid-mile and long-haul
business with other, non-Amazon, customers; (ii) explore other strategic relationships; and (iii) identify potential acquisition
opportunities, while continuing to execute our restructuring plan, commenced in February 2020.
TLSS
and its wholly-owned subsidiaries, Prime EFS and Shypdirect are hereafter referred to as the “Company”.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
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.
On
May 1, 2019, the Company entered into a Share Exchange Agreement with Save On and Steven Yariv, whereby the Company returned all
of the stock of Save On to Steven Yariv in exchange for Mr. Yariv conveying 1,000,000 shares of common stock of the Company back
to the Company. Pursuant to Accounting Standard Codification (“ASC”) 205-20-45, the financial statement in
which net income or loss of a business entity is reported shall report the results of operations of the discontinued operation
in the period in which a discontinued operation either has been disposed of or is classified as held for sale. Accordingly, beginning
in the second quarter of 2019, the period that Save On was disposed of, the Company reflects Save On as a discontinued operation
and such presentation is retroactively applied to all periods presented in the accompanying condensed consolidated financial statements.
Going
concern
The
accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and satisfaction of liabilities and commitments in the normal course of business. As reflected in the accompanying condensed
consolidated financial statements, for the six months ended June 30, 2020, the Company had a net loss of $71,108,670 and net cash
used in operations was $1,391,782. Additionally, the Company had an accumulated deficit, shareholders’ deficit, and a working
capital deficit of $150,420,542, $73,952,791 and $74,643,157, respectively, at June 30, 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 notified Prime EFS by the Prime EFS Termination Notice that it does not intend to renew the In-Force Agreement
when that agreement expires. In the Prime EFS Termination Notice, Amazon stated that the In-Force Agreement expires on September
30, 2020. Additionally, on July 17, 2020, pursuant to the ShypdDirect Termination Notice, Amazon notified Shypdirect that Amazon
had elected to terminate the Program Agreement between Amazon and Shypdirect effective as of November 14, 2020 (see Note
1). However, on August 3, 2020, Amazon offered pursuant to the Aug. 3 Proposal to withdraw the Shypdirect Termination Notice and
extend the term of the Program Agreement to and including May 14, 2021, conditioned on Prime EFS executing, for nominal consideration,
a separation agreement with Amazon under which Prime EFS agrees to cooperate in an orderly transition of its Amazon last-mile
delivery business to other service providers, Prime EFS releases any and all claims it may have against Amazon, and Prime EFS
covenants not to sue Amazon. On August 4, 2020, the Company, Prime EFS and Shypdirect accepted the Aug. 3 Proposal. 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 7).
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 will continue to: (i) seek to replace its last-mile DSP Amazon business and supplement its mid-mile and
long-haul Amazon business with other, non-Amazon, customers; (ii) explore other strategic relationships; and (iii) identify
potential acquisition opportunities, while continuing to execute our restructuring plan, commenced in February 2020. 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 replace its Amazon
business, 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.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
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 June 30, 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).
The
three levels of the fair value hierarchy are as follows:
|
|
●
|
Level
1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
|
|
|
|
|
|
|
●
|
Level
2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or
similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs
derived from or corroborated by observable market data.
|
|
|
|
|
|
|
●
|
Level
3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market
participants would use in pricing the asset or liability based on the best available information.
|
The
Company measures certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value
on a recurring basis are as follows at June 30, 2020 and December 31, 2019:
|
|
|
At
June 30, 2020
|
|
|
At December
31, 2019
|
|
|
Description
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Derivative liabilities
|
|
|
—
|
|
|
|
—
|
|
|
$
|
62,813,098
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
2,135,939
|
|
A
roll-forward of the level 3 valuation financial instruments is as follows:
|
|
|
For
the Six Months ended
June 30, 2020
|
|
|
For
the Six Months ended
June 30, 2019
|
|
|
Balance at beginning
of period
|
|
$
|
2,135,939
|
|
|
$
|
7,888,684
|
|
|
Initial valuation of derivative liabilities
included in debt discount
|
|
|
1,702,474
|
|
|
|
-
|
|
|
Initial valuation of derivative liabilities
included in derivative expense
|
|
|
14,892,068
|
|
|
|
-
|
|
|
Gain on extinguishment of debt related
to April 9, 2019 modifications
|
|
|
-
|
|
|
|
(61,841,708
|
)
|
|
Gain on extinguishment of debt related
to repayment/conversion of debt
|
|
|
(22,068,971
|
)
|
|
|
(246,110
|
)
|
|
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
|
|
|
54,769,703
|
|
|
|
55,037,605
|
|
|
Balance at
end of period
|
|
$
|
62,813,098
|
|
|
$
|
-
|
|
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
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.
Cash
and cash equivalents
For
purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of
three months or less at the purchase date and money market accounts to be cash equivalents. At June 30, 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. At June
30, 2020, cash balances in excess of FDIC insured levels amounted to approximately $1,014,000. There were no balances in excess
of FDIC insured levels as December 31, 2019. The Company has not experienced any losses in such accounts through June 30, 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.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
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.
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 June
30, 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.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
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.
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:
|
|
|
June
30, 2020
|
|
|
June
30, 2019
|
|
|
Stock warrants
|
|
|
561,568,464
|
|
|
|
1,442,434
|
|
|
Stock options
|
|
|
80,000
|
|
|
|
-
|
|
|
Convertible debt
|
|
|
698,058,084
|
|
|
|
4,415,776
|
|
|
Series A convertible preferred stock
|
|
|
-
|
|
|
|
8,333,333
|
|
|
Series B convertible preferred stock
|
|
|
1,700,000
|
|
|
|
-
|
|
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
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.
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 June 30, 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 June 30, 2020 and December 31, 2019.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
The
summarized operating result of discontinued operations included in the Company’s condensed consolidated statements of operations
is as follows:
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
359,728
|
|
|
$
|
-
|
|
|
$
|
1,491,253
|
|
|
Cost of revenues
|
|
|
-
|
|
|
|
263,073
|
|
|
|
-
|
|
|
|
1,114,269
|
|
|
Gross profit
|
|
|
-
|
|
|
|
96,655
|
|
|
|
-
|
|
|
|
376,984
|
|
|
Operating expenses
|
|
|
-
|
|
|
|
791,742
|
|
|
|
-
|
|
|
|
1,058,410
|
|
|
Loss from discontinued operations
|
|
|
-
|
|
|
|
(695,087
|
)
|
|
|
-
|
|
|
|
(681,426
|
)
|
|
Loss on disposal
of discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Loss from discontinued
operations, net of income taxes
|
|
$
|
-
|
|
|
$
|
(695,087
|
)
|
|
$
|
-
|
|
|
$
|
(681,426
|
)
|
NOTE
4 – ACCOUNTS RECEIVABLE
At
June 30, 2020 and December 31, 2019, accounts receivable, net consisted of the following:
|
|
|
June
30, 2020
|
|
|
December
31, 2019
|
|
|
Accounts receivable
|
|
$
|
943,535
|
|
|
$
|
983,771
|
|
|
Allowance for
doubtful accounts
|
|
|
(20,000
|
)
|
|
|
(20,000
|
)
|
|
Accounts receivable,
net
|
|
$
|
923,535
|
|
|
$
|
963,771
|
|
NOTE
5 - PROPERTY AND EQUIPMENT
At
June 30, 2020 and December 31, 2019, property and equipment consisted of the following:
|
|
|
Useful
Life
|
|
June
30, 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
|
|
|
|
|
(92,350
|
)
|
|
|
(64,206
|
)
|
|
Property and
equipment, net
|
|
|
|
$
|
672,772
|
|
|
$
|
240,406
|
|
For
the six months ended June 30, 2020 and 2019, depreciation expense is included in general and administrative expenses and amounted
to $28,144 and $94,080, respectively. During the six months ended June 30, 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 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 causes a default in all the notes, however, this provision is only effective
if there is a formal notice of default by the lender.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
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
was 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 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 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.
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 financial instruments 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, the conversion terms were
reinstated and the Company recorded a put premium of $385,385 and recorded interest expense of $385,385.
During
the six months ended June 30, 2020, the Company issued 96,661,102 shares of its common stock upon the conversion of debt of $510,000
and accrued interest of $158,141. Upon conversion, the Company reclassified put premium of $385,385 to paid-in capital.
The
aggregate principal amounts due as of June 30, 2020 and December 31, 2019 amounted to $0 and $895,385, which included a put premium
of $0 and $385,385, and principal balance of $0 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
June
30, 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 due to failure to file a registration statement. Upon an event of default, all principal, accrued interest,
and liquidated 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 at 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 interest 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 Bellridge 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
June
30, 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 increases 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 would 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 notes) 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. On August 3, 2020, the parties agreed to a fixed conversion price
of $0.02 per share, although final documents are pending.
|
|
|
|
|
|
|
●
|
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
June
30, 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
June 30, 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 initially 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
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 payment 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 certain 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, (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.
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.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
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 shares issuable upon exercise of the warrants was increased to 1,383,116 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 shares
issuable upon exercise of the warrants was increased to 8,644,474 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 shares issuable upon exercise of the 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. As discussed in summary of derivative liabilities below, as of January 30, 2020, the August 2019
Warrants are treated as derivative liabilities. Subsequent to January 7, 2020, additional down-round protection was triggered.
As of June 30, 2020, the conversion price on the August 2019 Notes was lowered to $0.006 per share, the exercise price of the
August 2019 Warrants was lowered to $0.006 per share, and the number shares issuable upon exercise of the August 2019 Warrants
was increased.
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 six months ended June 30, 2020, the Company repaid principal of $257,139, settled $128,674 of debt, and the Company issued
293,677,788 shares of its common stock upon the conversion of principal and default interest of $2,118,311, accrued interest of
$48,685 and fees of $1,000. Additionally, accrued interest payable of $84,416 was reclassified to principal balance.
At
June 30, 2020, convertible notes payable related to August 30, 2019 convertible debt amounted to $464,948, which consists of $806,497
of principal balance and default interest due and is net of unamortized debt discount of $341,549. 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.
October
3, 2019 convertible debt and related warrants
On
October 3, 2019, 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 payment 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.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
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.
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 shares issuable upon exercise of the warrants was increased to 66,667. 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 shares issuable upon exercise of the warrants was
increased to 416,669 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 shares issuable upon exercise of the 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. As discussed in summary of derivative liabilities below, as of January 30, 2020, the October 3 Warrant is
treated as derivative liabilities. Subsequent to January 7, 2020, additional down-round protection was triggered. As of
June 30, 2020, the conversion price on the October 3 Note was lowered to $0.006 per share, the exercise price of the October 3
Warrant was lowered to $0.006 per share, and the number of shares issuable upon exercise of the October 3 Warrant was increased.
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.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
During
the six months ended June 30, 2020, the Company issued 27,525,109 shares of its common stock upon the conversion of principal
and default interest of $216,667, accrued interest of $11,774 and fees of $5,000.
At
June 30, 2020, convertible notes payable related to the October 3, 2019 convertible debt amounted to $0. 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.
Fall
2019 notes
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 initially
bore 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
dates, 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 accrues 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.
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
June 30, 2020, convertible notes payable related to the Fall 2019 Notes amounted to $365,055, which consists of $500,000 of principal
balance due and is net of unamortized debt discount of $134,945. 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.
Q1/Q2
convertible debt and related warrants
During
the six months ended June 30, 2020, the Company issued and sold to investors convertible promissory notes in the aggregate principal
amount of $2,068,000 (the “Q1/Q2 2020 Notes”), and warrants to purchase up to 827,200 shares of the Company’s
common stock (the “Q1/Q2 2020 Warrants”). The Company received net proceeds of $1,880,000, which is net of
a 10% original issue discounts of $188,000. The Q1/Q2 2020 Notes initially bore interest at 6% per annum and become due and payable
on the date that is the 24-month anniversary of the original issue date of the respective Q1/Q2 2020 Note. During the existence
of an Event of Default (as defined in the applicable Q1/Q2 2020 Note), which includes, amongst other events, any default in the
payment of principal and interest payments (including Q1/Q2 2020 Note Amortization Payments) under any Q1/Q2 2020 Note
or any other indebtedness, 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/Q2 2020 Note, monthly payments of interest and monthly principal
payments, based on a 12 month amortization schedule (each, a “Q1/Q2 2020 Note Amortization Payment”), will
be due and payable, until the Maturity Date (as defined in the applicable Q1/Q2 2020 Note), at which time all outstanding principal,
accrued and unpaid interest and all other amounts due and payable on such Q1/Q2 2020 Note will be immediately due and payable.
The Q1/Q2 2020 Note Amortization Payments will be made in cash unless the investor requests payment in the Company’s
common stock in lieu of a cash payment (each, a “Q1/Q2 2020 Note Stock Payment”). If a holder of a Q1/Q2 2020
Note requests a Q1/Q2 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/Q2 2020 Note)
during the five Trading Day (as defined in the applicable Q1/Q2 2020 Note) period prior to the due date of such Q1/Q2 2020 Note
Amortization Payment.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
The
Q1/Q2 2020 Notes may be prepaid, provided that certain Equity Conditions, as defined in the Q1/Q2 2020 Notes, have been
met (or any such failure to meet the Equity Conditions has been waived): (i) from each Q1/Q2 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/Q2
2020 Note 3 Month Anniversary”) at an amount equal to 105% of the aggregate of the outstanding principal balance of
the Q1/Q2 2020 Note and accrued and unpaid interest, and (ii) after the applicable Q1/Q2 2020 Note 3 Month Anniversary at an amount
equal to 115% of the aggregate of the outstanding principal balance of the Q1/Q2 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, (y) exchange its Q1/Q2 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/Q2 2020 Note(s). Except for a Public Offering and
Q1/Q2 2020 Note Amortization Payments, in order to prepay a Q1/Q2 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/Q2 2020 Note in whole or in part at
the applicable conversion price. The Q1/Q2 2020 Note Amortization Payments are prepayments and are subject to prepayment penalties
equal to 115% of the Q1/Q2 2020 Note Amortization Payment. In the event the Company consummates a Public Offering while the Q1/Q2
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 the Q1/Q2 2020 Notes.
From
the original issue date of a Q1/Q2 2020 Note until such Q1/Q2 2020 Note is no longer outstanding, such Q1/Q2 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/Q2 2020 Note) means, as of any date of determination,
$0.40 per share, subject to adjustment as provided therein and summarized below. If an Event of Default (as defined in the applicable
Q1/Q2 2020 Note) has occurred, regardless of whether it has been cured or remains ongoing, the Q1/Q2 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/Q2 2020 Note) during the 20 consecutive Trading Day (as defined in the applicable Q1/Q2 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 decreases or increases the common stock.
The
Q1/Q2 2020 Warrants are exercisable at any time on or after the date of the issuance and entitle the investors to purchase shares
of the Company’s common stock for a period of five years from the initial date the Q1/Q2 2020 Warrants become exercisable.
Under the terms of the Q1/Q2 2020 Warrants, the investors are entitled to exercise the Q1/Q2 2020 Warrants to purchase up to 827,200
shares of the Company’s common stock at an initial exercise price of $0.40, subject to adjustment as detailed in the respective
Q1/Q2 2020 Warrants.
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/Q2
2020 Notes. In connection with the issuance of the notes in January, February, March and April 2020 and the issuance of the warrants
in February, March and April 2020, the Company determined that various terms of these Q1/Q2 2020 Notes and Q1/Q2 2020 Warrants,
including the default provisions in the Q1/Q2 2020 Notes discussed above, caused derivative treatment of the embedded conversion
options and warrants. During the six months ended June 30, 2020, on the initial measurement dates, the fair values of the embedded
conversion option and warrant derivatives of $8,817,568 was recorded as derivative liabilities and was allocated as a debt discount
up to the net proceeds of the Q1/Q2 2020 Notes of $1,287,474, with the remainder of $7,530,095 charged to current period operations
as initial derivative expense.
The
Q1/Q2 2020 Notes include a down-round provision under which the Q1/Q2 2020 Note conversion price could be affected, by future
equity offerings undertaken by the Company. During the six months ended June 30, 2020, down-provisions were triggered. As of June
30, 2020, the conversion price of the Q1/Q2 Notes was lowered to $0.006 per share.
Due
to the default of amortization payments due on our August 2019 Notes and other notes as discussed above, the Q1/Q2 2020 Notes
were deemed in default. Accordingly, the outstanding principal balance on date of default increased by 30% which amounted to approximately
$620,400, default interest accrues at 18%, and the default conversion terms apply.
At
June 30, 2020, convertible notes payable related to the Q1/Q2 2020 Notes amounted to $1,301,323, which consists of $2,688,400
of principal balance due and is net of unamortized debt discount of $1,387,076.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
April
20, 2020 convertible debt
On
April 20, 2020, the Company issued and sold to an investor a convertible promissory note in the principal amount of $456,500 (the
“April 20 Note”). The April 20 Note contained a 10% original issue discount amounting to $41,500 for a purchase
price of $415,000. The Company did not receive any proceeds from the April 20 Note because the investor converted previous notes
and accrued interest due to him in the amount of $195,000 into the April 20 Note. In connection with the conversion of notes payable
to the April 20 Note, the Company recorded a loss from debt extinguishment of $220,000. The April 20 Note initially bore interest
at 6% per annum and becomes due and payable on April 20, 2022 (the “April 20 Note Maturity Date”). During the
existence of an Event of Default (as defined in the April 20 Note), which includes, amongst other events, any default in the payment
of principal and interest payment (including any April 20 Note Amortization Payments) under any note or any other indebtedness,
interest accrues at the lesser of (i) the rate of 18% per annum, or (ii) the maximum amount permitted by law. 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 payment 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 certain 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, (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.
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
decreases or increases the common stock.
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. On the initial measurement dates, the fair values of the embedded conversion option
derivative of $1,436,725 was recorded as derivative liabilities and was allocated as a debt discount up to the net proceeds of
the April 20 Note of $415,000, with the remainder of $1,021,725 charged to current period operations as initial derivative expense.
Due to the default of August 2019 Note Amortization Payments due on our August 2019 Notes and other notes, the April 20 Note was
deemed in default. Accordingly, 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.
The
April 20 Note includes a down-round provision under which the April 20 Note conversion price could be affected, by future equity
offerings undertaken by the Company. During the six months ended June 30, 2020, down-provisions were triggered. As of June 30,
2020, the conversion price of the April 20 Note was lowered to $0.006 per share.
At
June 30, 2020, convertible notes payable related to the April 20 Note amounted to $181,350, which consists of $593,450 of principal
balance due and is net of unamortized debt discount of $412,100.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
Summary
of derivative liabilities for the six months ended June 30, 2020
During
the six months ended June 30, 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 $1,531,335. This default amount due of $1,531,335 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 six months ended June 30, 2020, on the initial
measurement date, the fair values of the embedded conversion option derivatives related to default principal due of $6,340,248
was recorded as derivative liabilities and charged to current period operations as initial derivative expense.
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
are 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 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/Q2 2020 Notes and the warrants issued in February, March and April 2020, the Company determined
that various terms of the Q1/Q2 2020 Notes and Q1/Q2 2020 Warrants, including the default provisions in the Q1/Q2 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/Q2 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/Q2 2020 Notes are converted
into common shares, the Company revalues the embedded conversion option derivative liabilities. During the six months ended June
30, 2020, on the initial measurement dates, the fair values of the embedded conversion option and warrant derivatives of $8,817,568
was recorded as derivative liabilities and was allocated as a debt discount up to the net proceeds of the Q1/Q2 2020 Notes of
$1,287,473, with the remainder of $7,530,095 charged to current period operations as initial derivative expense.
In
connection with the issuance of the April 20 Note, the Company determined that various terms of the April 20 Note, including the
default provisions in the April 20 Note 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 April 20 Note 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
derivative was determined using the Binomial valuation model. At the end of each period and on the date that the April 20 Note
are converted into common shares, the Company revalues the embedded conversion option derivative liabilities. During the six months
ended June 30, 2020, on the initial measurement dates, the fair values of the embedded conversion option of $1,436,725 was recorded
as derivative liability and was allocated as a debt discount up to the net proceeds of the April 20 Note of $415,000, with the
remainder of $1,021,725 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
expense of $69,661,771 and $55,037,605 for the six months ended June 30, 2020 and 2019, respectively.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
During
the six months ended June 30, 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 0.75
|
|
|
Volatility
|
|
|
154.2%
to 362.0
|
%
|
|
|
228.1
|
%
|
|
Risk-free interest rate
|
|
|
0.15%
to 1.62
|
%
|
|
|
2.23%
to 2.40
|
%
|
At
June 30, 2020 and December 31, 2019, convertible promissory notes are as follows:
|
|
|
June
30, 2020
|
|
|
December
31, 2019
|
|
|
Principal amount
|
|
$
|
6,401,749
|
|
|
$
|
5,459,909
|
|
|
Add: put premium
|
|
|
-
|
|
|
|
385,385
|
|
|
Less: unamortized
debt discount
|
|
|
(2,275,670
|
)
|
|
|
(2,210,950
|
)
|
|
Convertible notes payable, net
|
|
|
4,126,079
|
|
|
|
3,634,344
|
|
|
Less: current
portion of convertible notes payable
|
|
|
(4,126,079
|
)
|
|
|
(3,634,344
|
)
|
|
Convertible
notes payable, net – long-term
|
|
$
|
-
|
|
|
$
|
-
|
|
For
the six months ended June 30, 2020 and 2019, amortization of debt discounts related to convertible notes amounted to $2,162,507
and $430,268, respectively, which has been included in interest expense on the accompanying consolidated statements of operations.
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 six months ended June 30, 2020, the Company repaid
an aggregate of $1,954,930 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 six months ended June 30,
2020, the Company paid $233,434 of this settlement.
|
|
|
|
|
|
|
●
|
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 $275,000 during the six months ended June 30, 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 $76,777 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 $596,390 and accrued interest payable of $9,190.
At
June 30, 2020, there were no secured merchant loans due and outstanding. 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.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
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”). In May 2020, the
Company settled one of these notes with a balance of $18,102 for a payment of $15,000 and, accordingly, the Company recorded a
gain on debt extinguishment of $3,102. At June 30, 2020 and December 31, 2019, notes payable related to Assumed Secured Merchant
Loans and promissory notes amounted to $80,490 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 six months ended June 30, 2020, the Company repaid
$108,418 of this note. At June 30, 2020 and December 31, 2019, notes payable related to the new note amounted to $67,921 and $176,339.
On
August 28, 2019, secured merchant loan balances of $261,630 were converted into new notes payable. During the three months ended
June 30, 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 six months
ended June 30, 2020, the Company repaid $179,022 of these notes. During the six months ended June 30, 2020, $4,846 of accrued
interest payable was reclassified to the principal balance. At June 30, 2020 and December 31, 2019, notes payable related to these
notes amounted to $70,682 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 June 30, 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 six months ended June 30, 2020, the Company repaid $149,228 of the Fall 2018 Promissory Notes. At June 30, 2020 and December
31, 2019, notes payable to this entity amounted to $0 and $149,228, respectively. The remaining Fall 2018 Promissory Notes were
payable on demand. The Fall 2018 Promissory Notes were 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 six months ended June 30, 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, the Company repaid $298,000 of these funds,
and a note with a principal balance of $195,000 was transferred into the April 20 convertible note discussed above. Furthermore,
on June 30, 2020, one of these notes with a principal balance due of $150,000 and accrued interest payable of $82,274 was settled
and a new note was entered into with a principal balance of $200,000. This new note bears no interest and is payable in monthly
payments of $7,500 commencing on July 1, 2020 until paid in full. At June 30, 2020 and December 31, 2019, notes payable to these
individuals amounted to $420,000 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 June 30, 2020 and December 31, 2019, equipment notes payable to these entities amounted to $50,284 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. At June 30, 2020 and December 31, 2019, auto notes payable to these entities amounted to $165,640 and $181,911,
respectively.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
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 June 30, 2020, the Company repaid $38,376 of this note. At June 30, 2020,
equipment note payable to this entity amounted to $422,134.
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.
At
June 30, 2020 and December 31, 2019, notes payable consisted of the following:
|
|
|
June
30, 2020
|
|
|
December
31, 2019
|
|
|
Principal amounts
|
|
$
|
4,763,304
|
|
|
$
|
3,187,125
|
|
|
Less: unamortized
debt discount
|
|
|
-
|
|
|
|
(762,122
|
)
|
|
Principal amounts, net
|
|
|
4,763,304
|
|
|
|
2,425,003
|
|
|
Less: current
portion of notes payable
|
|
|
(4,252,538
|
)
|
|
|
(2,425,003
|
)
|
|
Notes payable
– long-term
|
|
$
|
510,766
|
|
|
$
|
-
|
|
For
the six months ended June 30, 2020 and 2019, amortization of debt discounts related to notes payable amounted to $605,763 and
$1,880,312, 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 Convertible Preferred Stock became undesignated
upon their return to the Company. In July 2020, the Company filed a Certificate of Withdrawal of the Series A designation.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
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, 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 was automatically cancelled. The Series C Preferred
Stock was not entitled to vote on any other matter, was not entitled to dividends, was not convertible into any other security
of the Company and was not entitled to any distributions upon liquidation of the Company.
Common
stock
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 to 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 “Authorized Share Increase Amendment”).
The
Company filed a preliminary information statement on Schedule 14C regarding the stockholders’ consent to the Authorized
Share Increase Amendment with the SEC on June 8, 2020. The Company filed a definitive information statement on Schedule 14C on
June 30, 2020 and first mailed that information statement to stockholders on June 30, 2020. The Authorized Share Increase Amendment
became effective on July 20, 2020.
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.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
On
May 1, 2019, the Company granted an aggregate of 30,000 shares of its common stock to consultants for business development and
investor relations services rendered. The shares were valued at $265,500, or $8.85 per share, based on the quoted trading price
on the date of grant. In connection with these shares, the Company recorded stock-based professional fees of $265,500.
On
June 14, 2019, the Company granted 200,000 shares of its common stock to an employee of the Company for services rendered. The
shares were valued at $2,200,000, or $11.00 per share, based on the quoted trading price on the date of grant. In connection with
these shares, the Company recorded stock-based compensation of $2,200,000.
Shares
issued in connection with debt modification
On
April 9, 2019, the Company entered into an agreement with Bellridge that modifies its existing obligations to Bellridge. In connection
with this modification, principal balance of the Bellridge Note was reduced to $1,800,000, in exchange for the issuance to Bellridge
of 800,000 shares of restricted common stock, which shall be delivered to Bellridge, either in whole or in part, at such time
or times as when the beneficial ownership of such shares by Bellridge will not result in Bellridge’s beneficial ownership
of more than the Beneficial Ownership Limitation and such shares will be issued within three business days of the date the Bellridge
has represented to the Company that it is below the Beneficial Ownership Limitation. Such issuances will occur in increments of
no fewer than the lesser of (i) 50,000 shares and (ii) the balance of the 800,000 shares owed. The “Beneficial Ownership
Limitation” shall be 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving
effect to the issuance of shares of common stock issuable pursuant to this Agreement. As of the date of this report, 100,000 of
these shares have been issued and 700,000 shares were issuable at June 30, 2019. These 800,000 shares issued and issuable were
valued at $10,248,000, or $12.81 per share, based on the quoted trading price on the date of grant. In connection with these shares,
the Company recorded a loss on debt extinguishment of $10,248,000. On August 16, 2019, the 700,000 shares issuable were converted
into 700,000 shares of Series B preferred shares.
On
April 9, 2019, the Company entered into an agreement with Bellridge and the Placement Agent that cancelled certain warrants in
exchange for an aggregate of 600,000 common shares of the Company (360,000 shares to Bellridge and 240,000 shares to Placement
Agent). These shares were valued at $7,686,000, or $12.81 per share, based on the quoted trading price on the date of grant. In
connection with these shares, the Company recorded a loss on debt extinguishment of $7,686,000.
Cancellation
of common shares
On
May 1, 2019, the Company entered into a Share Exchange Agreement with Save On and Steven Yariv, whereby the Company returned all
of the stock of Save On to Steven Yariv in exchange for Mr. Yariv conveying 1,000,000 shares of common stock of the Company back
to the Company and the shares were cancelled. In connection with the disposal of Save On, the Company recorded an increase in
equity of $56,987 related to the amount of net liabilities disposed of in a transaction with the former chief executive officer
of the Company since the CEO is still a related party after this transaction as he remained a principal shareholder (see Note
3).
Shares
issued in connection with conversion of convertible debt
During
the six months ended June 30, 2020, the Company issued 417,863,999 shares of its common stock upon the partial conversion of a
convertible note which had bifurcated embedded conversion option derivatives including the conversion of principal and default
interest balances due of $2,844,979, accrued interest payable due of $218,600, and fees of $8,180, 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 $15,704,425 which is associated with the difference between the fair market value of the shares issued
upon conversion and the amount of principal balances converted at the conversion price.
Shares
issued upon 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
June
30, 2020
Stock
options
Stock
option activities for the six months ended June 30, 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 June 30, 2020
|
|
|
|
80,000
|
|
|
$
|
8.84
|
|
|
|
3.83
|
|
|
$
|
-
|
|
|
Exercisable,
June 30, 2020
|
|
|
|
20,000
|
|
|
$
|
8.84
|
|
|
|
3.83
|
|
|
$
|
-
|
|
Warrants
Warrants
issued in connection with convertible debt
During
the six months ended June 30, 2020, the Company issued Q1/Q2 2020 Warrants to purchase up to 827,200 shares of the Company’s
common stock (See Note 6). The Q1/Q2 2020 Warrants are exercisable at any time on or after the date of the issuance and entitle
the investors to purchase shares of the Company’s common stock for a period of five years from the initial date the Q1/Q2
2020 Warrants become exercisable. Under the terms of the Q1/Q2 2020 Warrants, the investors are entitled to exercise the Q1/Q2
2020 Warrants to purchase up to 827,200 shares of the Company’s common stock at an initial exercise price of $0.40, subject
to adjustment as detailed in the respective Q1/Q2 2020 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 453,200 warrants issued in February, March 2020
and April 2020, the Company determined that various terms of these Q1/Q2 2020 Notes and Q1/Q2 2020 Warrants, including the default
provisions in the Q1/Q2 2020 Notes discussed in Note 6, caused derivative treatment of the warrants. During the six months ended
June 30, 2020, on the initial measurement dates, the fair value of the warrant derivatives of $456,858 was recorded as derivative
liabilities and was allocated as a debt discount up to the net proceeds of the Q1/Q2 2020 Notes of $456,858. 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 entitle 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 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 shares issuable upon exercise of the warrants was increased by 395,176
to 1,383,116 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 number of shares issuable upon exercise of the warrants
was increased to 8,644,474 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 shares issuable upon exercise of the 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. Subsequent to January 7, 2020, additional down-round protection was triggered. As of June 30, 2020,
the exercise price of the August 2019 Warrants was lowered to $0.006 per share, and the number of shares issuable upon exercise
of the warrants was increased.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
In
August 2019, in connection with the sale of common stock, the Company issued 585,000 five-year warrants to purchase common shares
for an exercise price of $2.50 per common share to investors. These warrants include down-round provisions under which the warrant
exercise price could be affected by future equity offerings undertaken by the Company. During the six months ended June 30, 2020,
down-round provisions were triggered. As of June 30, 2020, the exercise price of these warrants was lowered to $0.006 per share.
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 shares issuable upon exercise of warrants was increased
to 66,667. 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 number of shares issuable upon exercise of the warrants was increased to 416,669 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
shares issuable upon exercise of the 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. Subsequent to January 7, 2020,
additional down-round protection was triggered. As of June 30, 2020, the exercise price of the October 3 Warrant was lowered
to $0.006 per share, and the number of shares issuable upon exercise of the October 3 Warrant was increased.
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 stock upon conversion of debt at price lower than $0.40. Accordingly,
the exercise prices of the August 2019 Warrants and October 3 Warrant discussed above were lowered to $0.006 and
the aggregate number of shares issuable upon exercise of the warrants was increased from 9,061,143 shares to 604,076,186
shares. Since these warrants were treated as derivative liabilities, no additional deemed dividend was recorded.
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 73,635,000 warrants. The exercise price was based on contractual terms of the related debt.
On
June 16, 2020, the Company issued an aggregate of 28,100,000 five-year warrants to purchase 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. On June 16, 2020, the Company calculated the fair value of these warrants of $1,963,291 which was calculated
using the Binomial valuation model with the following assumptions: expected dividend rate, 0%; expected term of 5 years; volatility
of 298.8% and risk-free interest rate of 0.33%. During the six months ended June 30, 2020, the Company recorded stock-based professional
fees of $1,963,291 related to these warrants which has been included in professional fees on the accompanying condensed
consolidated statement of operations.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
Warrant
activities for the six months ended June 30, 2020 are summarized as follows:
|
|
|
Number
of Shares Issuable Upon Exercise of Warrants
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term (Years)
|
|
|
Aggregate
Intrinsic Value
|
|
|
Balance Outstanding December
31, 2019
|
|
|
3,649,861
|
|
|
$
|
2.410
|
|
|
|
4.66
|
|
|
$
|
311,070
|
|
|
Granted
|
|
|
28,927,200
|
|
|
|
0.070
|
|
|
|
|
|
|
|
|
|
|
Increase in warrants related to price
protection
|
|
|
602,626,403
|
|
|
|
0.006
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(73,635,000
|
)
|
|
|
0.006
|
|
|
|
|
|
|
|
|
|
|
Balance Outstanding
June 30, 2020
|
|
|
561,568,464
|
|
|
$
|
0.016
|
|
|
|
4.21
|
|
|
$
|
24,161,691
|
|
|
Exercisable,
June 30, 2020
|
|
|
561,568,464
|
|
|
$
|
0.016
|
|
|
|
4.21
|
|
|
$
|
24,161,691
|
|
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.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
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.
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.
On
July 24, 2020, Prime EFS terminated the employment of Mr. Mazzola effective that day. Prime EFS and the Company have learned that
on July 27, 2020, Mr. Mazzola filed a Complaint and Jury Demand in the United States District Court for the Southern District
of New York in which he named as defendants Prime EFS, the Company, John Mercadante and Douglas Cerny. Mr. Mazzola alleges in
the Complaint that he had an employment agreement with Prime EFS and that Prime EFS breached the alleged employment agreement
through two alleged pay reductions and by terminating his employment. The Complaint contains eight counts: (1) breach of contract
against Prime EFS; (2) breach of the covenant of good faith and fair dealing against Prime EFS; (3) intentional misrepresentation
against Prime EFS, the Company and Mr. Mercadante; (4) negligent misrepresentation against Prime EFS, the Company and Mr. Mercadante;
(5) tortious interference with contract against the Company, Mr. Mercadante and Mr. Cerny; (6) tortious interference with prospective
economic advantage against the Company, Mr. Mercadante and Mr. Cerny; (7) conversion against all defendants; and (8) unjust enrichment
against all defendants. He seeks specific performance of the alleged employment agreement and damages of not less than $3 million.
The Company intends to mount a vigorous defense to the action, as Company management believes the action to be entirely bereft
of merit.
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
As
previously reported, 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. 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.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
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 June 30, 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.
To
date, neither Elrac nor Enterprise PA has filed a counterclaim in this proceeding.
BMF
Capital v. Prime EFS LLC et al.
As
previously reported, in a settlement agreement entered into as of March 6, 2020, the Company’s wholly-owned subsidiary Prime
EFS 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). 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. As more than four months have now passed, and BMF has not
again contacted Prime EFS concerning this matter, Prime EFS believes this matter to now be closed.
Bellridge
Capital, L.P. and SCS, LLC v. TLSS
As
previously disclosed, in the first and second fiscal quarters of 2020, the Company received claims letters from Bellridge and
SCS, LLC (“SCS”). Among other things, Bellridge claimed that the Company was in breach of 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 contended that TLSS owed Bellridge $1,978,557.76 as of that date. In a subsequent document,
Bellridge claimed TLSS owes it $2,271,099.83, a figure which allegedly includes default rate interest. Bellridge also claimed
that a subordination agreement it signed with the Company on August 30, 2019, was void ab initio. Bellridge also demanded
the conversion of approximately $20,000 in indebtedness into the common stock of the Company, a conversion which the Company did
not effectuate 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
alleged it was induced by fraud to exchange two million shares of Company preferred stock for Company common stock and was damaged
thereby.
In
an agreement dated August 3, 2020, Bellridge and the Company resolved many of the disputes between them. Among other things, Bellridge
and the Company agreed upon the balance of all indebtedness owed to Bellridge as of August 3, 2020 ($2,150,000), a new maturity
date on the indebtedness (April 30, 2021), and a price of $0.02 for the conversion of all Bellridge indebtedness into shares of
Company common stock. In the agreement, Bellridge also agrees to release its claims against the Company and its senior management
in a definitive settlement agreement. However, the August 3, 2020 agreement does not contain releases and the agreement
does not extend to SCS.
SCS,
LLC v. Transport and Logistics Systems, Inc.
As
previously disclosed, on May 26, 2020, a civil action was filed against the Company in the Supreme Court of the State of New York,
New York County, captioned SCS, LLC v. Transportation and Logistics Systems, Inc. The case was 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.
On
July 22, 2020, the Company filed its answer, defenses and counterclaims in this action. Among other things, the Company avers
in its answer that SCS’s claims are barred by its unclean hands and other inequitable conduct, including breach of its duties
(i) to maintain the confidentiality of information provided to SCS on a confidential basis and (ii) to work only in furtherance
of the Company’s interests, not in furtherance of SCS’s own, and conflicting, interests. The Company also avers that
SCS’s alleged damages must be reduced by the compensation and other benefits received by Lawrence Sands, founder of SCS,
as a W-2 employee of the Company. The Company also avers that the New York Supreme Court lacks subject matter jurisdiction
of the action because SCS concedes it is a Florida LLC based in Florida and that the Company is a Nevada corporation based in
Florida.
On
July 31, 2020, SCS moved for summary judgment in this action. The Company’s opposition papers are due on August 18, 2020.
The Company intends to oppose SCS’s summary judgment application and also to cross-move to dismiss for lack of subject matter
jurisdiction. If the court grants the Company’s cross motion, SCS would be free to refile this action in Florida. Wherever
the case is ultimately lodged, the Company intends to mount a vigorous defense to it, as Company management believes the action
to be entirely bereft of merit.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
Shareholder
Derivative Action
As
previously disclosed, on June 25, 2020, the Company was served with a putative shareholder derivative action filed in the
Circuit Court of the 15th Judicial Circuit in and for Palm Beach County, Florida (the “Court”) captioned
SCS, LLC, derivatively on behalf of Transportation and Logistics Systems, Inc. v. John Mercadante, Jr., Douglas Cerny, Sebastian
Giordano, Ascentaur LLC and Transportation and Logistics Systems, Inc. The action has been assigned Case No.
2020-CA-006581.
The
plaintiff in this action, SCS, alleges it is a limited liability company formed by a former chief executive officer and director
of the Company, Lawrence Sands. The complaint alleges that between April 2019 and June 2020, the 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 another defendant in the action, Ascentaur LLC.
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 purportedly wasteful and unnecessary
transactions such as taking merchant cash advances (MCA) on disadvantageous terms. The complaint further alleges that
current management “issued themselves over two million shares of common stock without consideration.” The
complaint seeks unspecified compensatory and punitive damages on behalf of the Company for breach of fiduciary duty,
negligent breach of fiduciary duty, constructive fraud, and civil conspiracy and the appointment of a receiver or custodian
for the Company.
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.
On August 5, 2020, all defendants in this action moved to dismiss the complaint for failure to state a claim upon which
relief can be granted. Among other things, all defendants allege in their motion that, through this lawsuit, SCS is improperly
attempting to second-guess business decisions made by the Company’s Board of Directors, based solely on hindsight (as opposed
to any well-pleaded facts demonstrating a lack of care or good faith). All defendants also assert that the majority of the claims
are governed by Nevada law because they concern the internal affairs of the Company. Defendants further assert that, under Nevada
law, each of the business decisions challenged by SCS is protected by the business judgment rule. Defendants further assert that,
even if SCS could rebut the presumption that the business judgment rule applies to all such transactions, SCS has failed to allege
facts demonstrating that intentional misconduct, fraud, or a knowing violation of the law occurred—a requirement under Nevada
law in order for director or officer liability to arise. Defendants further assert that, because SCS’s constructive fraud
claim simply repackages Plaintiff’s claims for breach of fiduciary duty, it too must fail. Defendants also contend that
in the absence of an adequately-alleged independent cause of action—let alone an unlawful agreement between the defendants
entered into for the purpose of harming the Company, SCS’s claim for civil conspiracy must also be dismissed. Finally,
defendants contend that SCS’s extraordinary request that a receiver or custodian be appointed to manage and supervise the
Company’s activities and affairs throughout the duration of this unfounded action is without merit because SCS does not
allege the Company is subject to loss so serious and significant that the appointment of a receiver or custodian is “absolutely
necessary to do complete justice.”
SCS
has a right to file court papers opposing the above motion and thereafter the defendants have a right to file reply papers in
further support of the motion. While they hope to prevail on the motion, win or lose, current Company management, Mr. Giordano
and Ascentaur LLC intend to mount a vigorous defense to this action, as they believe the action to be entirely bereft of merit.
Frank
Mazzola v. Prime EFS, et al.
As
previously disclosed, on July 24, 2020, Prime EFS terminated the employment of Frank Mazzola effective that day. On July 27, 2020,
Mr. Mazzola filed a Complaint and Jury Demand in the United States District Court for the Southern District of New York in which
he named as defendants Prime EFS, the Company, John Mercadante and Douglas Cerny. The case has been assigned # 1:20-CV-5788-VM.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
In
this action, Mr. Mazzola alleges that he had an employment agreement with Prime EFS and that Prime EFS breached the alleged employment
agreement through two alleged pay reductions and by terminating his employment. The Complaint contains eight counts: (1) breach
of contract against Prime EFS; (2) breach of the covenant of good faith and fair dealing against Prime EFS; (3) intentional misrepresentation
against Prime EFS, the Company and Mr. Mercadante; (4) negligent misrepresentation against Prime EFS, the Company and Mr. Mercadante;
(5) tortious interference with contract against the Company, Mr. Mercadante and Mr. Cerny; (6) tortious interference with prospective
economic advantage against the Company, Mr. Mercadante and Mr. Cerny; (7) conversion against all defendants; and (8) unjust enrichment
against all defendants. Mr. Mazzola seeks specific performance of the alleged employment agreement and damages of not less than
$3 million.
To
date, no defendant has been served with legal process in this action.
All
defendants intend to mount a vigorous defense to the action and, at an appropriate time, Prime EFS intends to sue or file counterclaims
against Mr. Mazzola as they believe Mr. Mazzola’s claims to be entirely bereft of merit and because they believe that, while
he was employed by Prime EFS, Mr. Mazzola engaged in ultra vires transaction and engaged in other conduct inimical to Prime EFS,
damaging Prime EFS and thereby damaging the Company.
Demand
by Rosemary Mazzola
By
letter dated August 6, 2020, Frank Mazzola’s mother, Rosemary Mazzola, demanded that Prime EFS pay her $94,000 allegedly
due and owing on the sale of membership interests in Prime EFS to the Company. The letter further states that Ms. Mazzola will
sue Prime EFS, for $94,000 plus costs of collection, if she is not paid $94,000 by August 11, 2020. As of June 30, 2020, this
$94,000 liability is included in due to related parties on the accompanying condensed consolidated balance sheet.
Prime
EFS v. Amazon Logistics, Inc.
As
previously reported, on June 19, 2020, Amazon notified Prime EFS that Amazon does not intend to renew the In-Force Agreement when
it expires. In the Prime EFS Termination Notice, Amazon stated that the In-Force Agreement expires on September 30, 2020. Prime
EFS believed on advice of counsel that Amazon’s position misconstrued the expiration date under the In-Force Agreement.
Prime EFS therefore filed an arbitration at the American Arbitration Association (the “AAA”) seeking temporary,
preliminary, and permanent injunctive relief prohibiting Amazon from terminating the In-Force Agreement prior to March 31, 2021
(the “Amazon Arbitration”).
In
a ruling issued July 30, 2020, the arbitrator appointed by the AAA on an emergency basis affirmed the validity of Amazon’s
construction of the In-Force Agreement and notice terminating that agreement effective September 30, 2020. The Company concluded,
on advice of counsel, that no court would suspend, vacate or modify the July 30, 2020, ruling.
Also
as previously disclosed, on July 17, 2020, Amazon notified Shypdirect by the Shypdirect Termination Notice that Amazon had elected
to terminate the Program Agreement between Amazon and Shypdirect effective as of November 14, 2020.
Amazon
did not state a reason for the Shypdirect Termination Notice. Under the Program Agreement, Amazon can terminate the agreement
without a reason and solely for convenience on 120 days’ notice.
On
August 3, 2020, pursuant to the Aug. 3 Proposal, Amazon offered to withdraw the ShypDirect Termination Notice and extend the term
of the Program Agreement to and including May 14, 2021, conditioned on Prime EFS executing, for nominal consideration, a separation
agreement with Amazon under which Prime EFS agrees to cooperate in an orderly transition of its Amazon last-mile delivery business
to other service providers, Prime EFS releases any and all claims it may have against Amazon, Prime EFS agrees to dismiss the
Amazon Arbitration, and Prime EFS covenants not to sue Amazon. On August 4, 2020, the Company, Prime EFS and Shypdirect accepted
the Aug. 3 Proposal. At present, representatives of Prime EFS and Amazon are negotiating a definitive agreement documenting the
parties’ settlement.
Other
than discussed above, as of June 30, 2020, there were no pending or threatened lawsuits that could reasonably be expected to have
a material effect on results of our operations.
Leases
See
Note 11.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
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 six months ended June 30, 2020, the Company repaid $35,000 of this advance. This advance
is non-interest bearing and is due on demand. At June 30, 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 six months ended June 30, 2020, this employee advanced the Company $75,000 and was
repaid $163,000. During the six months ended June 30, 2020, the Company paid this employee interest of $57,200 related to these
working capital advances. At June 30, 2020 and December 31, 2019, amounts due to this related party amounted to $0 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 six months ended
June 30, 2020, the Company paid this entity interest expense of $27,500 related to 2019 working capital advances made. At June
30, 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 June 30, 2020 and December 31, 2019, interest payable to related parties amounted
to $128,322 and $83,445 and is included in due to related parties on the accompanying condensed consolidated balance sheets, respectively.
At
June 30, 2020 and December 31, 2019, notes payable – related party amounted to $500,000 and $500,000, respectively.
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.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
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 six months ended June 30, 2020 and 2019, in connection with these operating leases, other miscellaneous rental payments and
common area maintenance costs, the Company recorded rent expense of $339,611 and $185,237, 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
June 30, 2020 and December 31, 2019, right-of-use asset (“ROU”) is summarized as follows:
|
|
|
June
30, 2020
|
|
|
December
31, 2019
|
|
|
Office leases right of use
assets
|
|
$
|
1,984,320
|
|
|
$
|
1,984,320
|
|
|
Less: accumulated
amortization into rent expense
|
|
|
(363,030
|
)
|
|
|
(233,890
|
)
|
|
Balance of ROU assets as of end
of period
|
|
$
|
1,621,290
|
|
|
$
|
1,750,430
|
|
At
June 30, 2020 and December 31, 2019, operating lease liabilities related to the ROU assets are summarized as follows:
|
|
|
June
30, 2020
|
|
|
December
31, 2019
|
|
|
Lease liabilities related
to office leases right of use assets
|
|
$
|
1,653,755
|
|
|
$
|
1,773,384
|
|
|
Less: current
portion of lease liabilities
|
|
|
(353,575
|
)
|
|
|
(333,126
|
)
|
|
Lease liabilities
– long-term
|
|
$
|
1,300,180
|
|
|
$
|
1,440,258
|
|
At
June 30, 2020, future minimum base lease payments due under non-cancelable operating leases are as follows:
|
Year ended June 30,
|
|
|
Amount
|
|
|
2021
|
|
|
$
|
511,920
|
|
|
2022
|
|
|
|
526,082
|
|
|
2023
|
|
|
|
533,923
|
|
|
2024
|
|
|
|
412,450
|
|
|
2025
|
|
|
|
40,518
|
|
|
Total minimum non-cancelable
operating lease payments
|
|
|
|
2,024,893
|
|
|
Less:
discount to fair value
|
|
|
|
(371,138
|
)
|
|
Total
lease liability at June 30, 2020
|
|
|
$
|
1,653,755
|
|
NOTE
12 – CONCENTRATIONS
For
the six months ended June 30, 2020 and 2019, one customer, Amazon, represented 98.7% and 99.1% of the Company’s total net
revenues. At June 30, 2020, this one customer represented 99.1% of the Company’s accounts receivable balance. On
June 19, 2020, Amazon notified Prime EFS in writing that Amazon does not intend to renew the In-Force Agreement when
that agreement expires. In the Prime EFS Termination Notice, Amazon stated that the In-Force Agreement expires on September
30, 2020. Additionally, on July 17, 2020, Amazon notified Shypdirect that Amazon had elected to terminate the Program Agreement
between Amazon and Shypdirect effective as of November 14, 2020. However, on August 3, 2020, Amazon offered pursuant to the Aug.
3 Proposal to withdraw the Shypdirect Termination Notice and extend the term of the Program Agreement to and including May 14,
2021, conditioned on Prime EFS executing, for nominal consideration, a separation agreement with Amazon under which Prime EFS
agrees to cooperate in an orderly transition of its Amazon last-mile delivery business to other service providers, Prime EFS releases
any and all claims it may have against Amazon, and Prime EFS covenants not to sue Amazon. On August 4, 2020, the Company, Prime
EFS and Shypdirect accepted the Aug. 3 Proposal. Approximately 59.3% and 39.4% of the Company’s revenue of $17,193,875 for
the six months ended June 30, 2020 was attributable to Prime EFS’s last-mile DSP business and Shypdirect’s mid-mile
and long-haul business with Amazon. respectively. The termination of the Amazon last-mile business will have a material adverse
impact on the Company’s business in the 4th fiscal quarter of 2020 and thereafter. If the Amazon mid-mile and long-haul
business is discontinued after May 14, 2021 it would have a material adverse impact on the Company’s business
in 2nd fiscal quarter of 2021 and thereafter.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
During
the six months ended June 30, 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
July 20, 2020, the Company entered an Exchange Agreement (the “Cavalry Exchange Agreement”) with one of the
investors in the August 2019 Notes and August 2019 Warrants, Cavalry Fund I, LP, (“Cavalry”)
to exchange outstanding August 2019 Notes and August 2019 Warrants for a newly created series of preferred stock designated the
Series D Convertible Preferred Stock (the “Series D”). Pursuant to the Cavalry Exchange Agreement, Cavalry
exchanged August 2019 Notes with an aggregate remaining principal amount outstanding of $559,846.31 and August 2019 Warrants to
purchase 228,713,916 shares of common stock for 301,457 shares of Series D (the “Cavalry Exchange”).
On
July 22, 2020, the Company entered an Exchange Agreement (the “Puritan Exchange Agreement”) with another investor,
Puritan Partners LLC (“Puritan”) to exchange outstanding August 2019 Notes and August 2019 Warrants
for Series D. Pursuant to the Puritan Exchange Agreement, Puritan exchanged August 2019 Notes with an aggregate remaining principal
amount outstanding of $265,843.79 and August 2019 Warrants to purchase 194,445,417 shares of common stock for 221,269 shares of
Series D (the “Puritan Exchange” and together with the Cavalry Exchange, the “Series D Exchanges”).
In
connection with Cavalry Exchange, the Company and Cavalry entered into a leak-out agreement, dated as of July 20, 2020 (the “Cavalry
Leak-Out Agreement”), whereby Cavalry agreed that, until the earliest to occur of (a) 120 days from July 20, 2020, (b)
the common stock trading at an average reported volume of at least 100,000,001 shares for three consecutive trading days, (c)
the price per share of the common stock exceeding $0.10 in a transaction, (d) the time of release (whether by termination of an
applicable leak-out agreement or otherwise), in whole or in part, of any leak-out agreement with any other holder of securities,
or (e) any breach by the Company of any term of the Cavalry Leak-Out Agreement that is not cured within five trading days following
delivery of written notice of such breach by Cavalry to the Company, neither Cavalry, nor any of its Affiliates (as defined in
the Cavalry Leak-Out Agreement), collectively, shall sell, on any trading day, more than 10% of the common stock sold on such
trading day.
In
connection with the Puritan Exchange, the Company and Puritan entered into a Leak-Out Agreement, dated as of July 22, 2020
(the “Puritan Leak-Out Agreement”), whereby Puritan agreed that, until the earliest to occur of (a) 120 days
from July 22, 2020, (b) the common stock trading at an average reported volume of at least 100,000,001 shares for three consecutive
trading days, (c) the price per share of the common stock exceeding $0.10 in a transaction, (d) the time of release (whether by
termination of an applicable leak-out agreement or otherwise), in whole or in part, of any leak-out agreement with any other holder
of securities, or (e) any breach by the Company of any term of the Puritan Leak-Out Agreement that is not cured within five trading
days following delivery of written notice of such breach by Puritan to the Company, neither Puritan, nor any of its Affiliates
(as defined in the Puritan Leak-Out Agreement), collectively, shall sell, on any trading day, more than 10% of the common stock
sold on such trading day.
In
connection with the Series D Exchanges, the Board of Directors (the “Board”) created the Series D pursuant
to the authority vested in the Board by the Company’s Amended and Restated Articles of Incorporation to issue up to 10,000,0000
shares of preferred stock, $0.001 par value per share. The Company’s Amended and Restated Articles of Incorporation explicitly
authorize the Board to issue any or all of such shares of preferred stock in one (1) or more classes or series and to fix the
designations, powers, preferences and rights, the qualifications, limitations or restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any class or series, without further vote or action by the stockholders.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
On
July 20, 2020, the Board filed the Certificate of Designation of Preferences, Rights and Limitations of Series D Preferred Stock
(the “Series D COD”) with the Secretary of State of the State of Nevada designating 1,250,000 shares of preferred
stock as Series D. The Series D does not have the right to vote. The Series D has a stated value of $6.00 per share (the “Stated
Value”). Subject only to the liquidation rights of the holders of Series B Preferred Stock that is currently issued
and outstanding, upon the liquidation, dissolution or winding up of the business of the Company, whether voluntary or involuntary,
the Series D is entitled to receive an amount per share equal to the Stated Value and then receive a pro-rata portion of the remaining
assets available for distribution to the holders of common stock on an as-converted to common stock basis. Until July 20, 2021,
the holders of Series D have the right to participate, pro rata, in each subsequent financing in an amount up to 25% of the total
proceeds of such financing on the same terms, conditions and price otherwise available in such subsequent financing.
Subject
to a beneficial ownership limitation and customary adjustments for stock dividends and stock splits, each share of Series D is
convertible into 1,000 shares of common stock. A holder of Series D may not convert any shares of Series D into common stock if
the holder (together with the holder’s affiliates and any persons acting as a group together with the holder or any of the
holder’s affiliates) would beneficially own in excess of 4.99% of the number of shares of common stock outstanding immediately
after giving effect to the conversion, as such percentage ownership is determined in accordance with the terms of the Series D
COD. However, upon notice from the holder to the Company, the holder may decrease or increase the beneficial ownership limitation,
which may not exceed 9.99% of the number of shares of common stock outstanding immediately after giving effect to the exercise,
as such percentage ownership is determined in accordance with the terms of the Series D COD, provided that any such increase or
decrease in the beneficial ownership limitation will not take effect until 61 days following notice to the Company.
Approval
of at least a majority of the outstanding Series D is required to: (a) amend or repeal any provision of, or add any provision
to, the Company’s Articles of Incorporation or bylaws, or file any Certificate of Designation (however such document is
named) or articles of amendment to create any class or any series of preferred stock, if such action would adversely alter or
change in any respect the preferences, rights, privileges or powers, or restrictions provided for the benefit, of the Series D,
regardless of whether any such action shall be by means of amendment to the Articles of Incorporation or bylaws or by merger,
consolidation or otherwise or filing any Certificate of Designation, it being understood that the creation of a new security having
rights, preferences or privileges senior to or on parity with the Series D in a future financing will not constitute an amendment,
addition, alteration, filing, waiver or repeal for these purposes; (b) increase or decrease (other than by conversion) the authorized
number of Series D; (c) issue any Series D, other than to the Investors; or (d) without limiting any provision hereunder, whether
or not prohibited by the terms of the Series D, circumvent a right of the Series D.
During
the period from July 1, 2020 to August 14, 2020, the Company issued 212,000,000 shares of its common stock in connection with
the conversion of 212,000 shares of Series D. The conversion ratio was 1,000 shares of common stock for each share of Series D
based on the Series D COD.
Common
shares issued for conversion of convertible debt and interest
During
the period from July 1, 2020 to August 14, 2020, the Company issued 454,794,735 shares of its common stock in connection
with the conversion of convertible notes payable of $4,023,373, accrued interest of $82,851, and fees of $900.
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 July 1, 2020 to August 10, 2020, the Company issued 85,710,419 shares of its common stock in connection with the
cashless exercise of 92,001,552 warrants. The exercise price was based on contractual terms of the related debt.
Common
shares issued settlement
On
July 20, 2020, in connection with the parties’ recent settlement, the Company issued 10,281,018 shares to Bellridge to settle
certain claims of Bellridge (see Note 9 under legal matters).
Common
shares issued conversion of Series B preferred shares
On
July 24, 2020, the Company issued 1,000,000 shares to its common stock upon the conversion of 1,000,000 shares of Series B preferred
shares.
Authorized
shares
To
enable the Company to meet certain commitments made to stockholders, convertible note holders and warrant holders in conjunction
with capital raising efforts in the summer and fall of 2019 and during the first quarter of 2020 to issue, or keep available for
issuance, additional shares of its common stock, the Company’s Board unanimously adopted a resolution seeking stockholder
approval to authorize the Board to amend the Amended and Restated Articles of Incorporation with the Authorized Share Increase
Amendment to increase the number of authorized shares of common stock from 500,000,000 shares to 4,000,000,000 shares. Stockholder
approval for the Authorized Share Increase Amendment was obtained on June 26, 2020 from stockholders that held at least 51%
of the voting power of the stock of the Company entitled to vote thereon, as of the record date of June 26, 2020. These consents
constituted a sufficient number of votes to approve the Authorized Share Increase Amendment under the Company’s Amended
and Restated Articles of Incorporation, bylaws and Nevada law. Pursuant to applicable securities laws and Section 78.390 of the
Nevada Revised Statutes, the Company prepared and mailed an information statement to its stockholders of record on the
record date beginning on June 30, 2020. In compliance with Rule 14(c)-2(b) of the Securities Exchange Act of 1934, as amended,
the Authorized Share Increase Amendment became effective on July 20, 2020 which was at least twenty calendar days after the information
statement was first sent to stockholders.
Business
with Amazon
On June 19, 2020, Amazon notified Prime
EFS in writing by the Prime EFS Termination Notice that it does not intend to renew its In-Force Agreement with Prime EFS when
that agreement expires. In the Prime EFS Termination Notice, Amazon stated that the In-Force Agreement expires on September 30,
2020. (See Note 1).
Additionally, on July 17, 2020, pursuant
to the Shypdirect Termination Notice, Amazon notified Shypdirect that Amazon had elected to terminate the Program Agreement between
Amazon and Shypdirect effective as of November 14, 2020. However, on August 3, 2020, Amazon offered pursuant to the Aug. 3 Proposal
to withdraw the Shypdirect Termination Notice and extend the term of the Program Agreement to and including May 14, 2021, conditioned
on Prime EFS executing, for nominal consideration, a separation agreement with Amazon under which Prime EFS agrees to cooperate
in an orderly transition of its Amazon last-mile delivery business to other service providers, Prime EFS releases any and all
claims it may have against Amazon, and Prime EFS covenants not to sue Amazon. On August 4, 2020, the Company, Prime EFS and Shypdirect
accepted the Aug. 3 Proposal. (See Note 1).
Legal
Matters
For
legal matters subsequent to June 30, 2020, see Note 9.