NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2019
NOTE
1 – ORGANIZATION AND BUSINESS OPERATIONS
Transportation
and Logistics Systems, Inc. (“TLSS”), formerly PetroTerra Corp., was incorporated under the laws of the State of Nevada,
on July 25, 2008.
On
March 30, 2017 (the “Closing Date”), TLSS and Save On Transport Inc. (“Save On”) entered into a Share
Exchange Agreement, dated as of the same date (the “Share Exchange Agreement”). Pursuant to the terms of the Share
Exchange Agreement, on the Closing Date, Save On became a wholly-owned subsidiary of TLSS (the “Reverse Merger”).
Save On was incorporated in the state of Florida and started business on July 12, 2016. Save On is a provider of integrated transportation
management solutions consisting of brokerage and logistic services such as transportation scheduling, routing and other value-added
services related to the transportation of automobiles and other freight.
The
Share Exchange was treated as a reverse merger and recapitalization of Save On for financial reporting purposes since the Save
On shareholders retained an approximate 80% controlling interest in the post-merger consolidated entity. Save On was considered
the acquirer for accounting purposes, and the Company’s historical financial statements before the Merger was replaced with
the historical financial statements of Save On before the Merger. The balance sheets at their historical cost basis of both entities
were combined at the merger date and the results of operations from the merger date forward include the historical results of
Save On and results of TLSS from the merger date forward. The Merger was intended to be treated as a tax-free reorganization under
Section 368(a) of the Internal Revenue Code of 1986, as amended. On May 1, 2019, the Company entered into a Share Exchange Agreement
with Save On and Steven Yariv, whereby the Company returned all of the stock of Save On to Steven Yariv in exchange for Mr. Yariv
conveying 1,000,000 shares of common stock of the Company back to the Company. In addition, the Company granted an aggregate of
80,000 options to certain employees of Save On. Mr. Yariv ceased to be an officer or director of the Company effective with the
filing of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 as filed with the Securities
and Exchange Commission of April 16, 2019.
On
June 18, 2018 (the “Acquisition Date”), the Company completed the acquisition of 100% of the issued and outstanding
membership interests of Prime EFS, LLC, a New Jersey limited liability company (“Prime”), from its members pursuant
to the terms and conditions of a Stock Purchase Agreement entered into among the Company and the Prime members on the Closing
Date (the “SPA”). Prime is a New Jersey based transportation company with a focus on deliveries for on-line retailers
in New York, New Jersey and Pennsylvania.
On
July 24, 2018, the Company formed Shypdirect LLC (“Shypdirect”), a company organized under the laws of New Jersey.
Shypdirect is a transportation company with a focus on tractor trailer and box truck deliveries of product on the east coast of
the United States from one distributor’s warehouse to another warehouse or from a distributor’s warehouse to the post
office.
TLSS
and its wholly-owned subsidiaries, Prime and Shypdirect are hereafter referred to as the “Company”.
On
July 16, 2018, the Company filed a Certificate of Amendment to the Amended and Restated Articles of Incorporation (the “Certificate
of Amendment”) with the Secretary of State of the State of Nevada to (1) change the name of the Company from PetroTerra
Corp. to Transportation and Logistics Systems, Inc., (2) authorize an increase of the shares of the preferred stock to 10,000,000
shares, par value $0.001 per share and (3) effect a 1-for-250 reverse stock split (the “Reverse Stock Split”) with
respect to the outstanding shares of the Company’s common stock. The Certificate of Amendment became effective on July 17,
2018. The corporate name change, increase of authorized shares of preferred stock and Reverse Stock Split were previously approved
by the sole director and the majority of stockholders of the Company. The corporate name change and the Reverse Stock Split were
deemed effective at the open of business on July 18, 2018. All share and per share data in the accompanying consolidated financial
statements have been retroactively restated to reflect the effect of the recapitalization.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis
of presentation and principles of consolidation
The
condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting
principles in the United States of America and the rules and regulations of the United States Securities and Exchange Commission
for interim financial information. Accordingly, they do not include all the information and disclosures necessary for comprehensive
presentation of financial position, results of operations or cash flow. However, these unaudited condensed consolidated financial
statements reflect all adjustments, consisting of normal recurring adjustments and a non-recurring adjustment for the impairment
of intangible assets, which, in the opinion of management, are necessary for fair presentation of the information contained therein.
It is suggested that these unaudited interim condensed consolidated financial statements be read in conjunction with the financial
statements of the Company for the year ended December 31, 2018, and notes thereto included in the Company’s annual report
on Form 10-K, filed on April 16, 2019.
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.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2019
The
unaudited condensed consolidated financial statements of the Company include the accounts of TLSS and its wholly owned subsidiaries,
Save On (through April 30, 2019), Prime and Shypdirect. All intercompany accounts and transactions have been eliminated in consolidation.
On
May 1, 2019, the Company entered into a Share Exchange Agreement with Save On and Steven Yariv, whereby the Company returned all
of the stock of Save On to Steven Yariv in exchange for Mr. Yariv conveying 1,000,000 shares of common stock of the Company back
to the Company. Pursuant to Accounting Standard Codification (“ASC”) 205-20-45, the financial statement in which net
income or loss of a business entity is reported shall report the results of operations of the discontinued operation in the period
in which a discontinued operation either has been disposed of or is classified as held for sale. Accordingly, beginning in the
second quarter of 2019, the period that Save On was disposed of, the Company reflects Save On as a discontinued operation and
such presentation is retroactively applied to all periods presented in the accompany 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 nine months ended September 30, 2019, the Company had a net loss of $37,970,095 and
net cash used in operations was $4,231,915, respectively. Additionally, the Company had an accumulated deficit, shareholders’
deficit, and a working capital deficit of $53,721,493, $7,081,963 and $8,918,852, respectively, at September 30, 2019. Furthermore,
the Company failed to make required payments of principal and interest on certain of its convertible debt instruments and defaulted
on other provisions in these Notes. On April 9, 2019, the Company entered into agreements with these lenders that modified these
Notes (See Note 7). It is management’s opinion that these factors raise substantial doubt about the Company’s ability
to continue as a going concern for a period of twelve months from the issuance date of this report. Management cannot provide
assurance that the Company will ultimately achieve profitable operations, become cash flow positive, or raise additional debt
and/or equity capital. The Company is seeking to raise capital through additional debt and/or equity financings to fund its operations
in the future. Although the Company has historically raised capital from sales of common shares and from the issuance of convertible
promissory notes and notes payable, there is no assurance that it will be able to continue to do so.
If
the Company is unable to raise additional capital or secure additional lending in the near future, management expects that the
Company will need to curtail its operations. These consolidated financial statements do not include any adjustments related to
the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern.
Use
of estimates
The
preparation of the condensed consolidated financial statements, in accordance with U.S. GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates. Significant estimates included in the accompanying unaudited condensed consolidated
financial statements and footnotes include the valuation of accounts receivable, the useful life of property and equipment, the
valuation of intangible assets, the valuation of right of use assets and related liabilities, assumptions used in assessing impairment
of long-lived assets, estimates of current and deferred income taxes and deferred tax valuation allowances, the fair value of
non-cash equity transactions, the valuation of derivative liabilities, the value of claims against the Company, and the fair value
of assets acquired and liabilities assumed in business acquisitions.
Fair
value of financial instruments
The
Financial Accounting Standards Board (“FASB”) issued ASC 820 — Fair Value Measurements and Disclosures,
which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. ASC 820 requires disclosures about the fair value of all financial instruments,
whether or not recognized, for financial statement purposes. Disclosures about the fair value of financial instruments are based
on pertinent information available to the Company on September 30, 2019. Accordingly, the estimates presented in these financial
statements are not necessarily indicative of the amounts that could be realized on disposition of the financial instruments. ASC
820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or
unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market
assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2019
The
three levels of the fair value hierarchy are as follows:
|
|
●
|
Level
1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
|
|
|
|
|
|
|
●
|
Level
2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or
similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs
derived from or corroborated by observable market data.
|
|
|
|
|
|
|
●
|
Level
3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market
participants would use in pricing the asset or liability based on the best available information.
|
The
Company measures certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value
on a recurring basis are as follows at September 30, 2019 and December 31, 2018:
|
|
|
At
September 30, 2019
|
|
|
At
December 31, 2018
|
|
|
Description
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Derivative
liabilities
|
|
|
—
|
|
|
|
—
|
|
|
$
|
1,917,888
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
7,888,684
|
|
A
roll forward of the level 3 valuation financial instruments is as follows:
|
|
|
For
the Nine
Months Ended
September 30, 2019
|
|
|
Balance
at beginning of period
|
|
$
|
7,888,684
|
|
|
Initial
valuation of derivative liabilities included in debt discount
|
|
|
936,644
|
|
|
Initial
valuation of derivative liabilities included in derivative expense
|
|
|
1,017,323
|
|
|
Gain
on extinguishment of debt related to repayment of debt
|
|
|
(246,110
|
)
|
|
Gain
on extinguishment of debt related to April 9, 2019 modifications
|
|
|
(61,841,708
|
)
|
|
Cumulative
effect adjustment for change in derivative accounting
|
|
|
(838,471
|
)
|
|
Change
in fair value included in derivative expense
|
|
|
55,001,526
|
|
|
Balance
at end of period
|
|
$
|
1,917,888
|
|
The
Company accounts for its derivative financial instruments, consisting of certain conversion options embedded in our convertible
instruments and warrants, at fair value using level 3 inputs. The Company determined the fair value of these derivative liabilities
using the Black-Scholes option pricing model, binomial lattice models, or other accepted valuation practices. When determining
the fair value of its financial assets and liabilities using these methods, the Company is required to use various estimates and
unobservable inputs, including, among other things, expected terms of the instruments, expected volatility of its stock price,
expected dividends, and the risk-free interest rate. Changes in any of the assumptions related to the unobservable inputs identified
above may change the fair value of the instrument. Increases in expected term, anticipated volatility and expected dividends generally
result in increases in fair value, while decreases in the unobservable inputs generally result in decreases in fair value.
ASC
825-10 “Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and
liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is
irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses
for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair
value option to any outstanding instruments.
The
carrying amounts reported in the balance sheets for cash, accounts receivable, accounts payable and accrued expenses approximate
their fair values based on the short-term maturity of these instruments. The carrying amount of the Company’s convertible
notes payable and promissory note obligations approximate fair value, as the terms of these instruments are consistent with terms
available in the market for instruments with similar risk.
Cash
and cash equivalents
For
purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of
three months or less at the purchase date and money market accounts to be cash equivalents. At September 30, 2019 and December
31, 2018, the Company did not have any cash equivalents.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2019
The
Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. There
were no balances in excess of FDIC insured levels as of September 30, 2019 and December 31, 2018. The Company has not experienced
any losses in such accounts through September 30, 2019.
Accounts
receivable
Accounts
receivable are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for
estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when
there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances,
the Company considers many factors, including the age of the balance, a customer’s historical payment history, its current
credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection.
Property
and equipment
Property
are stated at cost and are depreciated using the straight-line method over their estimated useful lives of five to six years.
Leasehold improvements are depreciated over the shorter of the useful life or lease term including scheduled renewal terms. Maintenance
and repairs are charged to expense as incurred. When assets are retired or disposed of, the cost and accumulated depreciation
are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company
examines the possibility of decreases in the value of these assets when events or changes in circumstances reflect the fact that
their recorded value may not be recoverable.
Intangible
asset
Intangible
assets are carried at cost less accumulated amortization, computed using the straight-line method over the estimated useful life,
less any impairment charges. At September 30, 2019 and December 31, 2018, intangible asset consists of a customer relationship
acquired on June 18, 2018 which is being amortized over a period of five years.
Leases
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The updated guidance requires lessees to recognize lease assets
and lease liabilities for most operating leases. In addition, the updated guidance requires that lessors separate lease and non-lease
components in a contract in accordance with the new revenue guidance in ASC 606. The updated guidance is effective for interim
and annual periods beginning after December 15, 2018.
On
January 1, 2019, the Company adopted ASU No. 2016-02, applying the package of practical expedients to leases that commenced before
the effective date whereby the Company elected to not reassess the following: (i) whether any expired or existing contracts contain
leases and; (ii) initial direct costs for any existing leases. For contracts entered into on or after the effective date, at the
inception of a contract the Company assessed whether the contract is, or contains, a lease. The Company’s assessment is
based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially
all the economic benefit from the use of the asset throughout the period, and (3) whether it has the right to direct the use of
the asset. The Company will allocate the consideration in the contract to each lease component based on its relative stand-alone
price to determine the lease payments. The Company has elected not to recognize right-of-use assets and lease liabilities for
short-term leases that have a term of 12 months or less.
Operating
lease ROU assets represents the right to use the leased asset for the lease term and operating lease liabilities are recognized
based on the present value of the future minimum lease payments over the lease term at commencement date. As most leases do not
provide an implicit rate, the Company use an incremental borrowing rate based on the information available at the adoption date
in determining the present value of future payments. Lease expense for minimum lease payments is amortized on a straight-line
basis over the lease term and is included in general and administrative expenses in the condensed consolidated statements of operations.
Impairment
of long-lived assets
In
accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an
impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount
of impairment is measured as the difference between the asset’s estimated fair value and its book value.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2019
Segment
reporting
The
Company uses “the management approach” in determining reportable operating segments. The management approach considers
the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions
and assessing performance as the source for determining the Company’s reportable segments. The Company’s chief operating
decision maker is the chief executive officer of the Company, who reviews operating results to make decisions about allocating
resources and assessing performance for the entire Company. On May 1, 2019, the Company disposed of its Save On business segment
and the results of operations of Save On are included in discontinued operations. Accordingly, during the nine months ended September
30, 2019 and 2018, the Company believes that it operates in one operating segment related to deliveries for on-line retailers
in New York, New Jersey and Pennsylvania and tractor trailer and box truck deliveries of product on the east coast of the United
States from one distributor’s warehouse to another warehouse or from a distributor’s warehouse to the post office.
Derivative
financial instruments
The
Company has certain financial instruments that are embedded derivatives associated with capital raises. The Company evaluates
all its financial instruments to determine if those contracts or any potential embedded components of those contracts qualify
as derivatives to be separately accounted for in accordance with ASC 815-10-05-4, Derivatives and Hedging and 815-40, Contracts
in Entity’s Own Equity. This accounting treatment requires that the carrying amount of any embedded derivatives be recorded
at fair value at issuance and marked-to-market at each balance sheet date. In the event that the fair value is recorded as a liability,
as is the case with the Company, the change in the fair value during the period is recorded as either other income or expense.
Upon conversion, exercise or repayment, the respective derivative liability is marked to fair value at the conversion, repayment
or exercise date and then the related fair value amount is reclassified to other income or expense as part of gain or loss on
extinguishment.
In
July 2017, FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic
480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features.
These amendments simplify the accounting for certain financial instruments with down-round features. The amendments require companies
to disregard the down-round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining
liability or equity classification. The guidance was adopted as of January 1, 2019 and the Company elected to record the effect
of this adoption retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect
adjustment to the condensed consolidated balance sheet as of the beginning of 2019, the period which the amendment is effective.
In accordance with the guidance presented in the ASU 2017-11, the fair value of derivative liabilities associated with certain
convertible notes as of December 31, 2018 of $838,471 and the offsetting effect of reclassifying such debt to stock-settled debt
for which the Company recorded a put premium liability of $385,385 was reclassified by means of a cumulative-effect adjustment
to opening accumulated deficit as of January 1, 2019 in the amount of $453,086.
Revenue
recognition and cost of revenue
On
January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue
recognition requirements in Accounting Standards Codification (ASC) Topic 605, Revenue Recognition. This ASC is based on the principle
that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. This ASC also requires additional disclosure
about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer service orders, including significant
judgments.
For
the Company’s Prime and Shypdirect business activities, the Company recognizes revenues and the related direct costs of
such revenue which generally include compensation and related benefits, gas costs, insurance, parking and tolls, truck rental
fees, and maintenance fees as of the date the freight is delivered which is when the performance obligation is satisfied. In accordance
with ASC Topic 606, the Company recognizes revenue on a gross basis. Our payment terms are net seven days from acceptance of delivery.
The Company does not incur incremental costs obtaining service orders from its Prime customers, however, if the Company did, because
all of Prime and Shypdirect customer contracts are less than a year in duration, any contract costs incurred would be expensed
rather than capitalized. The revenue that the Company recognizes arises from deliveries of packages on behalf of the Company’s
customers. Primarily, the Company’s performance obligations under these service orders correspond to each delivery of packages
that the Company makes under the service agreements. Control of the package transfers to the recipient upon delivery. Once this
occurs, the Company has satisfied its performance obligation and the Company recognizes revenue.
For
the Company’s Save On business activities, through the date of disposition on May 1, 2019, the Company recognized revenues
and the related direct costs of such revenue which includes carrier fees and dispatch costs as of the date the freight is delivered
by the carrier which is when the performance obligation is satisfied. Customer payments received prior to delivery are recorded
as a deferred revenue liability and related carrier fees if paid prior to delivery are recorded as a deferred expense asset. In
accordance with ASC Topic 606, the Company recognizes revenue on a gross basis. Our payment terms for corporate customers are
net 30 days from acceptance of delivery and individual customers generally must pay in advance. The Company does not incur incremental
costs obtaining service orders from our Save On customers, however, if the Company did, because all of the Save On customer’s
contracts are less than a year in duration, any contract costs incurred would be expensed rather than capitalized. The Company’s
adoption of this ASC, resulted in no cumulative effect at January 1, 2018 and no change prospectively to the Company’s results
of operations or financial condition. The revenue that the Company recognizes arises from service orders it receives from its
Save On customers. The Company’s performance obligations under these service orders correspond to each delivery of a vehicle
that the Company makes for its customer under the service orders; as a result, each service order generally contains only one
performance obligation based on the delivery to be completed.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2019
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:
|
|
|
September
30, 2019
|
|
|
September
30, 2018
|
|
|
Stock
warrants
|
|
|
3,520,827
|
|
|
|
1,442,434
|
|
|
Stock
options
|
|
|
80,000
|
|
|
|
-
|
|
|
Convertible
debt
|
|
|
987,936
|
|
|
|
7,912,857
|
|
|
Series
A convertible preferred stock
|
|
|
-
|
|
|
|
7,912,857
|
|
|
Series
B convertible preferred stock
|
|
|
1,700,000
|
|
|
|
-
|
|
Stock-based
compensation
Stock-based
compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition
in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments
over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting
period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based
on the grant-date fair value of the award.
Through
March 31, 2018, pursuant to ASC 505-50 – “Equity-Based Payments to Non-Employees”, all share-based payments
to non-employees, including grants of stock options, were recognized in the consolidated financial statements as compensation
expense over the service period of the consulting arrangement or until performance conditions are expected to be met. Using a
Black-Scholes valuation model, the Company periodically reassessed the fair value of non-employee options until service conditions
are met, which generally aligns with the vesting period of the options, and the Company adjusts the expense recognized in the
consolidated financial statements accordingly. In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based
Payment Accounting, which simplifies several aspects of the accounting for nonemployee share-based payment transactions by expanding
the scope of the stock-based compensation guidance in ASC 718 to include share-based payment transactions for acquiring goods
and services from non-employees. ASU No. 2018-07 is effective for annual periods beginning after December 15, 2018, including
interim periods within those annual periods. Early adoption is permitted, but entities may not adopt prior to adopting the new
revenue recognition guidance in ASC 606. The Company early adopted ASU No. 2018-07 in the second quarter of 2018 and there was
no cumulative effect of adoption.
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.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2019
In
August 2018, the FASB issued ASU 2018-13 to modify the disclosure requirements on fair value measurements. The amendments are
effective for years beginning after December 15, 2019. An entity is permitted to early adopt any removed or modified disclosures
and delay adoption of the additional disclosures until the effective date. Most amendments should be applied retrospectively,
but certain amendments will be applied prospectively. The Company is in the process of assessing the impact of the standard on
the Company’s fair value disclosures. However, the standard is not expected to have an impact on the Company’s consolidated
financial position, results of operations and cash flows.
There
are currently no other accounting standards that have been issued but not yet adopted that we believe will have a significant
impact on our consolidated financial position, results of operations or cash flows upon adoption.
NOTE
3 – DISCONTINUED OPERATIONS
On
May 1, 2019, the Company entered into a Share Exchange Agreement with Save On and Steven Yariv, whereby the Company returned all
of the stock of Save On to Steven Yariv in exchange for Mr. Yariv conveying 1,000,000 shares of common stock of the Company back
to the Company. In addition, the Company granted an aggregate of 80,000 options to certain employees of Save On. Mr. Yariv ceased
to be an officer or director of the Company effective with the filing of the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2018 as filed with the Securities and Exchange Commission of April 16, 2019.
Pursuant
to Accounting Standard Codification (“ASC”) 205-20-45, the financial statement in which net income or loss of a business
entity is reported shall report the results of operations of the discontinued operation in the period in which a discontinued
operation either has been disposed of or is classified as held for sale. Accordingly, the Company shall reflect Save On as a discontinued
operations beginning in the second quarter of 2019, the period that Save On was disposed of and retroactively for all periods
presented in the accompanying condensed consolidated financial statements. The business of Save On are considered discontinued
operations because: (a) the operations and cash flows of Save On were eliminated from the Company’s operations; and (b)
the Company has no interest in the divested operations.
The
assets and liabilities classified as discontinued operations in the Company’s condensed consolidated financial statements
as of September 30, 2019 and December 31, 2018, and for the three and nine months ended September 30, 2019 and 2018 is set forth
below.
|
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
$
|
-
|
|
|
$
|
334,275
|
|
|
Prepaid
expenses and other
|
|
|
-
|
|
|
|
1,619
|
|
|
Total
current assets
|
|
|
-
|
|
|
|
335,894
|
|
|
Total
assets
|
|
$
|
-
|
|
|
$
|
335,894
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
-
|
|
|
$
|
409,053
|
|
|
Accounts
payable – related party
|
|
|
-
|
|
|
|
3,700
|
|
|
Accrued
expenses and other liabilities
|
|
|
-
|
|
|
|
27,992
|
|
|
Total
current liabilities
|
|
|
-
|
|
|
|
440,745
|
|
|
Total
liabilities
|
|
$
|
-
|
|
|
$
|
440,745
|
|
The
summarized operating result of discontinued operations included in the Company’s condensed consolidated statements of operations
is as follows:
|
|
|
Three
Months Ended
|
|
|
Nine
months Ended
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
1,063,208
|
|
|
$
|
1,491,253
|
|
|
$
|
3,372,979
|
|
|
Cost
of revenues
|
|
|
-
|
|
|
|
836,990
|
|
|
|
1,114,269
|
|
|
|
2,593,624
|
|
|
Gross
profit
|
|
|
-
|
|
|
|
226,218
|
|
|
|
376,984
|
|
|
|
779,355
|
|
|
Operating
expenses
|
|
|
-
|
|
|
|
212,968
|
|
|
|
1,058,410
|
|
|
|
682,504
|
|
|
Loss
from discontinued operations
|
|
|
-
|
|
|
|
13,250
|
|
|
|
(681,426
|
)
|
|
|
96,851
|
|
|
Loss
on disposal of discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Loss
from discontinued operations, net of income taxes
|
|
$
|
-
|
|
|
$
|
13,250
|
|
|
$
|
(681,426
|
)
|
|
$
|
96,851
|
|
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2019
NOTE
4 – ACCOUNTS RECEIVABLE
At
September 30, 2019 and December 31, 2018, accounts receivable, net consisted of the following:
|
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
|
Accounts
receivable
|
|
$
|
589,193
|
|
|
$
|
441,497
|
|
|
Allowance
for doubtful accounts
|
|
|
-
|
|
|
|
-
|
|
|
Accounts
receivable, net
|
|
$
|
589,193
|
|
|
$
|
441,497
|
|
NOTE
5 - PROPERTY AND EQUIPMENT
At
September 30, 2019 and December 31, 2018, property and equipment consisted of the following:
|
|
|
Useful
Life
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
|
Delivery
trucks and vehicles
|
|
5
- 6 years
|
|
$
|
301,142
|
|
|
$
|
1,033,397
|
|
|
Equipment
|
|
|
|
|
8,000
|
|
|
|
-
|
|
|
Subtotal
|
|
|
|
|
309,142
|
|
|
|
1,033,397
|
|
|
Less:
accumulated depreciation
|
|
|
|
|
(50,423
|
)
|
|
|
(96,566
|
)
|
|
Property
and equipment, net
|
|
|
|
$
|
258,719
|
|
|
$
|
936,831
|
|
For
the nine months ended September 30, 2019 and 2018, depreciation expense is included in general and administrative expenses and
amounted to $130,035 and $48,485, respectively. During the nine months ended September 30, 2019, the Company traded in, sold or
disposed of delivery trucks and vehicles of $783,511 with related accumulated depreciation of $176,178, and received cash of $81,000
and reduced notes payable of $330,709, resulting in a loss of $195,624 which is included in general and administrative expenses
on the accompanying condensed consolidated statement of operations.
NOTE
6 – INTANGIBLE ASSET
At
September 30, 2019 and December 31, 2018, intangible asset consisted of the following:
|
|
|
Useful
life
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
|
Customer
relationship
|
|
5
year
|
|
$
|
2,420,191
|
|
|
$
|
5,235,515
|
|
|
Less:
accumulated amortization
|
|
|
|
|
(219,433
|
)
|
|
|
(567,181
|
)
|
|
|
|
|
|
$
|
2,200,758
|
|
|
$
|
4,668,334
|
|
For
the nine months ended September 30, 2019 and 2018, amortization of intangible assets amounted to $742,985 and $1,449,197, respectively.
At
June 30, 2019, the Company conducted an impairment assessment on intangible assets based on the guidelines established in ASC
Topic 360 to determine the estimated fair market value of intangible assets as of June 30, 2019. Such analysis considered future
cash flows and other industry factors. Upon completion of this impairment analysis, the Company determined that the carrying value
exceeded the fair market value of intangible assets. Accordingly, in connection with the impairment of such intangible assets,
the Company recorded an impairment charge of $1,724,591 for the six months ended September 30, 2019, which was included in operating
expenses on the accompanying condensed consolidated statements of operations. The analysis was updated as of September 30, 2019
and no additional impairment was recognized.
Amortization
of intangible assets attributable to future periods is as follows:
|
Year
ending September 30:
|
|
Amount
|
|
|
2020
|
|
$
|
611,417
|
|
|
2021
|
|
|
611,417
|
|
|
2022
|
|
|
611,417
|
|
|
2023
|
|
|
366,507
|
|
|
|
|
$
|
2,200,758
|
|
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2019
NOTE
7 – CONVERTIBLE PROMISSORY NOTES PAYABLE AND NOTES PAYABLE
Red
Diamond Partners LLC and RDW Capital, LLC
On
April 25, 2017, the Company entered into a Securities Purchase Agreement with RedDiamond Partners LLC (“RedDiamond”)
pursuant to which the Company would issue to RedDiamond Convertible Promissory Notes in an aggregate principal amount of up to
$355,000, which includes a purchase price of $350,000 and transaction costs of $5,000. Pursuant to this securities purchase agreement,
on April 25, 2017, the Company entered into a convertible promissory note in the aggregate principal amount of $100,000 and the
Company received $95,000 after giving effect to the original issue discount of $5,000. This note matured on April 25, 2018 and
each tranche matured one year after the date of such funding. The second Tranche was received on June 2, 2017 for $85,000 and
the third Tranche for $85,000 was received on August 8, 2017 upon filing of the Registration Statement. The fourth Tranche was
to be for $85,000, however, as of the date of this filing, the fourth tranche has not yet been received. The Purchaser is not
required to fund any Tranche subsequent to the first Tranche if there is an event of default as described in the promissory notes.
Through date of default, the RedDiamond Notes bore interest at a rate of 12% per annum and were convertible into shares of the
Company’s common stock at RedDiamond’s option at 65% of the lowest VWAP for the previous ten trading days preceding
the conversion. During 2018, the Company failed to make its required maturity date payments of principal and interest on Convertible
Promissory Notes of $270,000. In accordance with these notes, the Company entered into default in 2018, which increased the interest
rate to 18.0% per annum. These convertible promissory notes contain cross default provisions whereby a default in any one note
greater than $25,000 will cause a default in all the notes, however, this provision is only effective if there is a formal notice
of default by the lender.
On
June 30, 2017, the Company issued RDW Capital, LLC a senior convertible note in the aggregate principal amount of $240,000, for
an aggregate purchase price of $30,000 of which $15,000 had been recorded as advance from lender as of March 31, 2017 and the
remaining $15,000 received on June 30, 2017. Through date of default, the principal due under the Note accrued interest at a rate
of 12% per annum. All principal and accrued interest under the Note was due six months following the issue date of the Note, and
is convertible into shares of the Company’s common stock, at a conversion price equal to fifty (50%) of the lowest volume-weighted
average price for the previous ten trading days immediately preceding the conversion. The Note includes anti-dilution protection,
including a down-round provision under which the conversion price could be affected by future equity offerings undertaken by the
Company, as well as customary events of default, including non-payment of the principal or accrued interest due on the Note. Upon
an event of default, all obligations under the Note will become immediately due and payable and the Company will be required to
make certain payments to the Lender. On December 31, 2017 the Company failed to make its required maturity date payment of principal
and interest. In accordance with the note, the Company entered into default on January 3, 2018, which increased the interest rate
to 24% per annum.
In
connection with the issuance of these Convertible Promissory Notes above, the Company determined that the terms of these Convertible
Promissory Notes included a down-round provision under which the conversion price could be affected by future equity offerings
undertaken by the Company.
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 provision.
Accordingly, through December 31, 2018, under the provisions of FASB ASC Topic No. 815-40, “Derivatives and Hedging –
Contracts in an Entity’s Own Stock”, the embedded conversion option contained in the convertible instruments were
accounted for as derivative liabilities at the date of issuance and shall be adjusted to fair value through earnings at each reporting
date. On January 1, 2019, the Company adopted ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities
from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments
with Down Round Features, and the Company elected to record the effect of this adoption retrospectively to outstanding financial
instruments with a down round feature by means of a cumulative-effect adjustment to the condensed consolidated balance sheet as
of the beginning of 2019, the period which the amendment is effective (See Note 2 - Derivative liabilities).
On
April 9, 2019, the Company entered into agreements with RedDiamond, holding these convertible notes representing an aggregate
principal amount of $510,000, and agreed with such holder to:
|
|
●
|
extend
the maturity date of the notes to December 31, 2020;
|
|
|
●
|
remove
all convertibility features of the notes; and
|
|
|
●
|
if
the Company completes an offering of equity or equity linked securities (including warrants, convertible preferred stock,
convertible debentures or convertible promissory note) which results in gross proceeds to the Company of at least $4,000,000,
then the Company shall use a portion of the proceeds thereof to repay not less than half of the obligations then outstanding
pursuant to the notes.
|
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2019
The
aggregate principal amounts due as of September 30, 2019 and December 31, 2018 amounted to $510,000 and $510,000, respectively.
At December 31, 2018, the principal balance of $510,000 was included in convertible notes payable, a current liability, on the
accompanying consolidated balance sheet. At September 30, 2019, the principal balance of $510,000 was included in notes payable
– related party, a long-term liability, on the accompanying consolidated balance sheet since on April 9, 2019, the conversion
features on the notes were removed and RedDiamond became a principal shareholder of the Company when they converted their preferred
shares to common stock (See Note 9). In connection with this debt modification, the Company recorded a gain on debt extinguishment
of $432,589, which consists of the removal of debt put premium of $385,385 since the debt is no longer convertible, and $47,205
related to the reversal of default interest payable.
Bellridge
Capital, LLC
On
June 18, 2018, the Company entered into a securities purchase agreement (the “Purchase Agreement”), whereby it issued
to an institutional investor (the “Lender”) a senior secured convertible note in the aggregate principal amount of
$2,497,503 (the “Note”), for an aggregate purchase price of $1,665,000, net of an original issue discount of $832,503.
In addition, the Company paid issue costs of $177,212. The original issue discount and issue costs were recorded as a debt discount
to be amortized over the Note term. The principal due under the Note accrues interest at a rate of 10% per annum. Principal and
interest payments of $232,940 were payable monthly beginning on December 18, 2018 and were due monthly over the term of the Note
in cash or common stock of the Company, at the Lender’s discretion.
In
connection with the Purchase Agreement, the Lender was issued a warrant, with a term of two years, to purchase up to 4.75% of
the fully-diluted outstanding Common Stock of the Company, for an aggregate purchase price of $100. Additionally, the placement
agent was issued a warrant, with a term of two years, to purchase up to 4.75% of the fully-diluted outstanding Common Stock of
the Company, for an aggregate purchase price of $100.
In
August 2018, the Company defaulted on its convertible note payable with Bellridge due to (i) default on the payment of monthly
interest payments due, (ii) default caused by the late filing of the Company’s report on Form 10-Q for the periods ended
June 30, 2018 and September 30, 2018 and (iii) default of filing of a registration statement. Upon an event of default, all principal,
accrued interest, and liquating damages and penalties were due upon request of the lender at 125% of such amounts.
On
December 27, 2018, the lender waived any and all defaults in existence on the Note and the Company agreed to issue a warrant that
is convertible into 2% of the issued and outstanding shares existing as the time the Company files a registration statement or
makes an application to up list to a national stock exchange. Pursuant to this warrant, at any time on or before the date that
the Company files a registration statement on form S-l or applies for up-listing to a National Exchange, and on or prior to the
close of business on the early of the first year anniversary of the issuance of December 27, 2018 (the “Termination Date”),
Bellridge could have chosen to subscribe for and purchase from the Company up to 2% in shares of common stock for an aggregate
exercise price of $100. Additionally, the principal interest amount due under the Note was modified with a monthly payment of
principal and interests due beginning on January 18, 2019 of $156,219 with all remaining principal and interest amounts on the
Note due on December 18, 2019. This modification was not considered a debt extinguishment.
On
April 9, 2019, the Company entered into a new agreement with this lender that modified these Notes and cancelled these warrants
(see below).
Through
April 9, 2019, all principal and accrued interest under the Note was convertible into shares of the Company’s common stock,
at a conversion price equal to the lower of $1.50 and 65% of the lowest traded price during the fifteen trading days immediately
prior to the conversion date. The Note includes anti-dilution protection, as well as customary events of default, including, but
not limited to, non-payment of the principal or accrued interest due on the Note and cross default provisions on other Company
obligations or contracts. Upon an event of default, all obligations under the Note will become immediately due and payable and
the Company will be required to make certain payments to the Lender.
The
Lender was granted a right of first refusal on future financing transactions of the Company while the Note remains outstanding,
plus an additional three months thereafter. In connection with the issuance of the Note, the Company entered into a security agreement
with the Lender (the “Security Agreement”) pursuant to which the Company agreed that obligations under the Note and
related documents will be secured by all of the assets of the Company. In addition, all of the Company’s subsidiaries are
guarantors of the Company’s obligations to the Lender pursuant to the Note and have granted a similar security interest
over substantially all of their assets. A portion of the proceeds of the Note were used to acquire 100% of the membership interests
of Prime.
During
the term of this Note, in the event that the Company consummates any public or private offering or other financing or capital
raising transaction of any kind (each a “Subsequent Offering”), in which the Company receives, in one or more contemporaneous
transactions, gross proceeds of at least $5,000,000, at any time upon ten (10) days written notice to the Holder, but subject
to the Holder’s conversion rights set forth in the Purchase Agreement, then the Company shall use 20% of the gross proceeds
of the Subsequent Offering and shall make payment to the Holder of an amount in cash equal to the product of (i) the sum of (x)
the then outstanding principal amount of this Note and (y) all accrued but unpaid interest, multiplied by (ii) (x) 110%, if the
Prepayment Date is within 90 days of the date hereof the Closing Date (as defined in the Purchase Agreement), or (y) 125%, if
the Prepayment Date is after the 90th day following the Closing Date, to which calculated amount the Company shall add all other
amounts owed pursuant to this Note, including, but not limited to, all Late Fees and liquidated damages.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2019
In
connection with the Purchase agreement, the Company entered into a registration rights agreement which, among other things, required
the Company to file a registration statement with the Securities and Exchange Commission no later than 120 days after June 18,
2018. The Company failed to file such registration statement. Accordingly, in addition to any other rights the Holders may have
hereunder or under applicable law, on the default date and on each monthly anniversary of each such default date (if the applicable
event shall not have been cured by such date) until the ninetieth day from such Event Date, the Company shall pay to each Holder
an amount in cash, as partial liquidated damages and not as a penalty, equal to the product of one percent (1%) multiplied by
the aggregate subscription amount paid by the Holder pursuant to the Purchase Agreement. Subsequent to the ninetieth day from
such default date, the one percent (1%) penalty shall increase to two percent (2%), with an aggregate cap of twenty percent (20%)
per annum. If the Company fails to pay any of these partial liquidated damages in full within seven days after the date payable,
the Company will pay interest thereon at a rate of 18% per annum to the Holder, accruing daily from the date such partial liquidated
damages are due until such amounts, plus all such interest thereon, are paid in full. On December 27, 2018, the lender waived
any and all defaults.
In
connection with this Purchase Agreement, the Company paid a placement agent $120,000 in cash which is included in issue costs
previously discussed above and this placement agent was issued a warrant, with a term of two years, to purchase up to 4.75% of
the fully-diluted outstanding Common Stock of the Company, for an aggregate purchase price of $100 (the “Placement Warrant”).
On April 9, 2019, the Company entered into an agreement with this placement agent that cancelled the Placement Warrant.
In
connection with the issuance of this Note, Warrants, and Placement Warrant, the Company determined that this Note and the Warrants
contains terms that are not fixed monetary amounts at inception. Accordingly, under the provisions of ASC Topic No. 815-40, “Derivatives
and Hedging – Contracts in an Entity’s Own Stock”, the embedded conversion option contained in the convertible
instrument and the Warrant and Placement Warrant were accounted for as derivative liabilities at the date of issuance and shall
be adjusted to fair value through earnings at each reporting date. The fair value of this embedded conversion option derivative,
and the Warrant and Placement Warrant were determined using the Binomial valuation model and Monte-Carlo simulation model, respectively.
Convertible
debt modifications and warrant cancellations
On
April 9, 2019 (the “Modification Date”), the Company entered into an agreement with Bellridge Capital, L.P. (“Bellridge”)
that modifies its existing obligations to Bellridge as follows:
|
|
●
|
the
overall principal amount of that certain Convertible Promissory Note, dated June 18, 2018, issued by the Company in favor
of Bellridge (the “Note”) was reduced from the original principal amount of $2,497,502 (principal amount was $2,223,918
at April 9, 2019) to $1,800,000, in exchange for the issuance to Bellridge of 800,000 shares of restricted common stock, which
shall be delivered to Bellridge, either in whole or in part, at such time or times as when the beneficial ownership of such
shares by Bellridge will not result in Bellridge’s beneficial ownership of more than the Beneficial Ownership Limitation
and such shares will be issued within three business days of the date the Bellridge has represented to the Company that it
is below the Beneficial Ownership Limitation. Such issuances will occur in increments of no fewer than the lesser of (i) 50,000
shares and (ii) the balance of the 800,000 shares owed. The “Beneficial Ownership Limitation” shall be 4.99% of
the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance of shares
of common stock issuable pursuant to this Agreement. As of August 19, 2019, 100,000 of these shares have been issued 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 shares as discussed in Note 9.
|
|
|
|
|
|
|
●
|
the
maturity date of the Note was extended to August 31, 2020;
|
|
|
|
|
|
|
●
|
the
interest rate was reduced from 10% to 5% per annum;
|
|
|
|
|
|
|
●
|
if
the Company completes an offering of equity or equity linked securities (including warrants, convertible preferred stock,
convertible debentures or convertible promissory note) which results in gross proceeds to the Company of at least $4,000,000,
then the Company shall use a portion of the proceeds thereof to repay not less than half of the obligations then outstanding
pursuant to the Note;
|
|
|
|
|
|
|
●
|
if
the Company completes an offering of debt which results in gross proceeds to the Company of at least $3,000,000, then the
Company shall use a portion of the proceeds thereof to repay any remaining obligations then outstanding pursuant to the Note;
|
|
|
|
|
|
|
●
|
the
convertibility of the Note will now be amended such that the Note shall only be convertible at a conversion price to be mutually
agreed upon between the Company and the Holder. As of the date of this report, the Company and Holder have not mutually agreed
on a conversion price, Since the conversion terms are unknown, the Company will account for this conversion feature when the
contingency is resolved;
|
|
|
|
|
|
|
●
|
the
registration rights previously granted to Bellridge have now been eliminated; and
|
|
|
|
|
|
|
●
|
those
certain Warrants, dated June 18, 2018 and December 27, 2018, respectively, issued by the Company in favor of Bellridge shall
be cancelled and of no further force or effect. In exchange, the Company issued Bellridge 360,000 shares of restricted common
stock.
|
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2019
In
addition, on the Modification Date, warrant holders holding warrants exercisable into an aggregate of 4.75% of the outstanding
common stock of the Company all agreed to exercise such warrants for an aggregate of 240,000 shares of common stock of the Company.
In
connection with the modification of the Bellridge Note and the cancellation of the related warrants, under the provisions of ASC
Topic No. 815-40, “Derivatives and Hedging – Contracts in an Entity’s Own Stock”, the embedded conversion
option contained in the convertible instrument and the Warrant and Placement Warrant were adjusted to fair value through earnings
on the Modification Date. The fair value of this embedded conversion option derivative, and the Warrant and Placement Warrant
were determined using the Binomial valuation model and Monte-Carlo simulation model, respectively. For the period from April 1,
2019 to April 9, 2019, the change of fair value of derivative liabilities associated with these instruments amounted to $41,653,345,
which was recorded as derivative expense on the Modification date. The increase in derivative liabilities was caused by an increase
in the Company’s stock price, as quoted on OTC Markets. Additionally, on the Modification Date, the Company analyzed the
Bellridge Note modification and the cancellation of the warrants and pursuant to ASC 470-50, the modifications were treated as
a debt extinguishment.
August
30, 2019 convertible debt and related warrants
On
August 30, 2019, the Company closed Securities Purchase Agreements (the “Purchase Agreement”) with accredited investors.
Pursuant to the terms of the Purchase Agreements, the Company issued and sold to investors convertible promissory notes in the
aggregate principal amount of $2,469,840 (the “Notes”), and warrants to purchase up to 987,940 shares of the Company’s
common stock (the “Warrant”). The Company received net proceeds of $295,534, which is net of a 10% original issue
discounts of $246,984 and origination fees of $61,101, and is net of $1,643,367 for the repayment of notes payable (See Note 8),
and net of $222,854 related to the conversion of existing notes payable already outstanding to these lenders into these August
30, 2019 convertible notes (see Note 8). The Notes bears interest at 10% per annum and becomes due and payable on November 30,
2020. During the existence of an Event of Default, interest shall accrue 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 these Notes, monthly payments of interest and
monthly principal payments, based on a 12 month amortization schedule (each, an “Amortization Payment”), shall be
due and payable, until the Maturity Date, at which time all outstanding principal, accrued and unpaid interest and all other amounts
due and payable hereunder shall be immediately due and payable. The Amortization Payments shall be made in cash unless the investor
requests it to be issued in the Company’s common stock in lieu of a cash payment (“Stock Payment”). If the investor
requests a Stock Payment, the number of shares of common stock issued shall be based on the amount of the applicable Amortization
Payment divided by 80% of the lowest VWAP during the five Trading Day period prior to the due date of the Amortization Payment.
The
Notes may be prepaid, provided that equity conditions, as defined in the Notes, have been met (or any such failure to meet the
Equity Conditions have been waived): (i) from Original Issuance Date until and through the day that falls on the third month anniversary
of the Original Issue Date (the “3 Month Anniversary”) at an amount equal to 105% of the aggregate of the outstanding
principal balance of the Note and accrued and unpaid interest, and (ii) after the 3 Month Anniversary at an amount equal to 115%
of the aggregate of the outstanding principal balance of the Note 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 Holder may elect
to: (x) have its principal and accrued interest prepaid directly from the Public Offering Proceeds at the prices set forth above,
or (y) exchange its 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 Note. Except
for a Public Offering and Amortization Payments, in order to prepay the Note, the Company shall provide at least 20 days’
prior written notice to the Holder, during which time the Holder may convert the Note in whole or in part at the Conversion Price.
For avoidance of doubt, the Amortization Payments shall be prepayments and are subject to prepayment penalties equal to 115% of
the Amortization payment. In the event the Company consummates a Public Offering while the Notes are outstanding, then 25% of
the net proceeds of such offering shall, within two business days of the closing of such public offering, be applied to reduce
the outstanding obligations pursuant to the Notes.
In
connection with the Debt Offering, 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 Debt Investors in the Debt Offering.
After
the original issue date until the Notes are no longer outstanding, the Notes shall be 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 or other date of determination, the lower of: (i) $2.50 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
has occurred, regardless of whether such Event of Default has been cured or remains ongoing, these Notes shall be convertible
at the lower of: (i) $2.50 and (ii) 70% of the second lowest closing price of the Common Stock as reported on the Trading Market
during the 20 consecutive Trading Day period ending and including the Trading Day immediately preceding the delivery or deemed
delivery of the applicable Notice of Conversion (the “Default Conversion Price”). 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
September
30, 2019
The
Warrants are exercisable at any time on or after the date of the issuance and entitles the investors to purchase shares of the
Company’s common stock for a period of five years from the initial date the warrants become exercisable. Under the terms
of the Warrant, the investors are entitled to exercise the Warrants to purchase up to 987,840 shares of the Company’s common
stock at an initial exercise price of $3.50, subject to adjustment as detailed in the respective Warrant.
These
Notes and related Warrants include a down-round provision under which the Note conversion price and 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 its common shares at $2.50 per share and accordingly, the warrant down-round provisions were triggered. As a result, the
number of warrants was increased to 1,383,116 warrants and the exercise price was lowered to $2.50. As a result, the Company recorded
a deemed dividend of $981,548 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 the date the down round feature was triggered
using the original exercise price and the new exercise price and the new number of warrants. The deemed dividend was recorded
as a reduction of accumulated deficit and increase in paid-in capital and increased the net loss to common shareholders by the
same amount.
Gain
on debt extinguishment
In
connections with the RedDiamond and Bellridge debt modifications and warrants cancellations discussed above and other debt
modifications as discussed below, on the Modification Dates or repayment dates, for the nine months ended September 30,
2019, the Company recorded an aggregate gain on debt extinguishment of $39,203,017 which consists of the following.
|
|
|
Gain
on
Extinguishment
on Modification
Date
|
|
|
Other
|
|
|
Total
gain (loss)
on debt
extinguishment
|
|
|
Gain
from reversal of derivative liabilities on Modification Date or repayment date
|
|
$
|
61,841,708
|
|
|
$
|
246,111
|
|
|
$
|
61,841,708
|
|
|
Fair
value of common shares issued on Modification Date
|
|
|
(17,934,000
|
)
|
|
|
-
|
|
|
|
(17,934,000
|
)
|
|
Fair
value of warrants issued on modification dates
|
|
|
-
|
|
|
|
(3,550,531
|
)
|
|
|
(3,550,531
|
)
|
|
Conversion
inducement expense
|
|
|
-
|
|
|
|
(1,164,220
|
)
|
|
|
(1,164,220
|
)
|
|
Write-off
of remaining debt discount
|
|
|
(1,013,118
|
)
|
|
|
(152,240
|
)
|
|
|
(1,165,359
|
)
|
|
Reversal
of put premium on stock-settled debt related to cancellation of conversion terms
|
|
|
385,385
|
|
|
|
-
|
|
|
|
385,385
|
|
|
Reduction
of principal and interest balances due
|
|
|
543,922
|
|
|
|
-
|
|
|
|
|
|
|
Gain
(loss) of debt extinguishment
|
|
$
|
43,823,897
|
|
|
$
|
(4,620,880
|
)
|
|
$
|
39,203,017
|
|
Summary
of derivative liabilities
Through
April 9, 2019, the Company revalued the embedded conversion option and warrant derivative liabilities related to the RedDiamond
and Bellridge debt. In connection with these revaluations, the Company recorded derivative expense of $55,037,605 and $9,505,352
for the nine months ended September 30, 2019 and 2018, respectively.
In
connection with the issuance of the August 30, 2019 Notes, the Company determined that various terms of the Note, including the
Stock Payment terms discussed above, caused derivative treatment of the embedded conversion options. 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 convertible instrument were accounted for as derivative liability 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 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 issuance of this Note, during the nine
months ended September 30, 2019, on 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 Notes
of $936,645, with the remainder of $1,017,323 charged to current period operations as initial derivative expense. At the end of
the period, the Company revalued this embedded conversion option derivative liability and recorded a derivative gain of $36,079.
In connection with the revaluation and the initial derivative expense, the Company recorded an aggregate derivative expense of
$981,244 during the three and nine months ended September 30, 2019.
In
connection with the warrants issued in connection with the August 30, 2019 Notes, the Company determined that the terms of the
warrants contain terms that are fixed monetary amounts at inception and, accordingly, the warrants were not considered derivatives.
The fair value of the warrants was determined using the Binomial valuation model. In connection with the issuance of the warrants,
on the initial measurement date, the relative fair value of the warrants of $1,225,109 was recorded as a debt discount and an
increase in paid-in capital.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2019
During
the nine months ended September 30, 2019 and 2018, the fair value of the derivative liabilities, warrants and conversion option
was estimated using the Black-Sholes valuation model, Binomial valuation model, and the Monte-Carlo simulation model with the
following assumptions:
|
|
|
|
2019
|
|
|
|
2018
|
|
|
Expected
dividend rate
|
|
|
-
|
|
|
|
-
|
|
|
Expected
term (in years)
|
|
|
0.05
to 5.00
|
|
|
|
0.01
to 2.00
|
|
|
Volatility
|
|
|
217.6%
to 228.7
|
%
|
|
|
261.2%
to 307.75
|
%
|
|
Risk-free
interest rate
|
|
|
1.39%
to 2.40
|
%
|
|
|
1.32%
to 2.11
|
%
|
Convertible
note payable – related parties
On
March 13, 2019, the Company entered into a convertible note agreement with an individual, who is affiliated to the Company’s
chief executive officer, in the amount of $500,000. Commencing on April 11, 2019, and continuing on the eleventh day of each month
thereafter, payments of interest only on the outstanding principal balance of this Note of $7,500 shall be due and payable. Commencing
on October 11, 2019 and continuing on the eleventh day of each month thereafter through April 11, 2021, payments of principal
and interest of $31,902 shall be made, if not sooner converted as provided in the note agreement. The payment of all or any portion
of the principal and accrued interest may be paid prior to the April 11, 2021. Interest shall accrue with respect to the unpaid
principal sum identified above until such principal is paid or converted as provided below at a rate equal to 18% per annum compounded
annually. All past due principal and interest on this Note shall bear interest from maturity of such principal or interest (in
whatever manner same may be brought about) until paid at the lesser of (i) 20% per annum, or (ii) the highest non-usurious rate
allowed by applicable law. This Note may be converted by Holder at any time in principal amounts of $100,000 in accordance with
the terms by delivery of written notice to the Company, into that number of shares of common stock equal to the amount obtained
by dividing the portion of the aggregate principal amount of this Note that is being converted by $1.37. In connection with the
issuance of this Note, the Company determined that this Note contains terms that are fixed monetary amounts at inception. Since
the conversion price of $1.37 was equal to the quoted closing of the Company’s common shares on the note date, no beneficial
feature conversion was recorded. On July 12, 2019, the Company entered into a Note Conversion Agreement with this individual.
In connection with this Note Conversion Agreement, the Company issued 203,000 shares of its common stock at $2.50 per share for
the conversion of convertible note payable of $500,000 and accrued interest payable of $7,500. In connection with the conversion
of this convertible notes, the Company issued the entity warrants to purchase 203,000 shares of the Company’s common stock
at an exercise price of $1.81 per share for a period of five years.
On
April 11, 2019, the Company entered into a convertible note agreement with an entity affiliated with the Company’s chief
executive officer in the amount of $2,000,000. Commencing on May 11, 2019, and continuing on the eleventh day of each month thereafter,
payments of interest only on the outstanding principal balance of this Note of $30,000 shall be due and payable. Commencing on
November 11, 2019 and continuing on the eleventh day of each month thereafter through April 11, 2021, payments of principal and
interest of $117,611 are due, if the note is not sooner converted as provided in the note agreement. The payment of all or any
portion of the principal and accrued interest may be prepaid prior to April 11, 2021. Interest shall accrue with respect to the
unpaid principal sum identified above until such principal is paid or converted as provided below at a rate equal to 18% per annum
compounded annually. All past due principal and interest on this Note shall bear interest from maturity of such principal or interest
until paid at the lesser of (i) 20% per annum, or (ii) the highest non-usurious rate allowed by applicable law. This Note may
be converted by Holder at any time in principal amounts of $100,000 in accordance with the terms by delivery of written notice
to the Company, into that number of shares of common stock equal to the amount obtained by dividing the portion of the aggregate
principal amount of this Note that is being converted by $11.81. Since the conversion price of $11.81 was equal to the quoted
closing of the Company’s common shares on the note date, no beneficial feature conversion was recorded. On July 12, 2019,
the Company entered into a Note Conversion Agreement with this entity. In connection with this Note Conversion Agreement, the
Company issued 812,000 shares of its common stock at $2.50 per share for the conversion of convertible note payable of $2,000,000
and accrued interest payable of $30,000. In connection with the conversion of this convertible notes, the Company issued the entity
warrants to purchase 812,000 shares of the Company’s common stock at an exercise price of $2.50 per share for a period of
five years.
In
connection with the modification of the related convertible notes, the Company changed the conversion price of the notes to $2.50
per share and issued an aggregate of 1,015,000 warrants as discussed above. The Company accounted for the full conversion
of these related party convertible notes pursuant to the guidance of ASC 470-20, Debt with Conversion and Other Options. Under
ASC 470-20, the Company recognized a loss on debt extinguishment upon conversion in the amount of $3,669,367 of which $1,164,220
is associated with the change between the debt’s original terms and the induced conversion terms and is equal to the fair
value of the additional shares of common stock transferred in the transaction, and $2,505,147 association with the valuation of
the 1,015,000 warrants. The fair value of the warrants was determined using the Binomial valuation model using assumptions discussed
above.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2019
At
September 30, 2019 and December 31, 2018, convertible promissory notes are as follows:
|
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
|
Principal
amount
|
|
$
|
4,069,840
|
|
|
$
|
3,007,503
|
|
|
Less:
unamortized debt discount
|
|
|
(2,305,184
|
)
|
|
|
(1,595,627
|
)
|
|
Convertible
notes payable, net
|
|
|
1,764,656
|
|
|
|
1,411,876
|
|
|
Less:
current portion of convertible notes payable
|
|
|
(1,321,213
|
)
|
|
|
(1,411,876
|
)
|
|
Convertible
notes payable, net – long-term
|
|
$
|
443,443
|
|
|
$
|
-
|
|
NOTE
8 – NOTES PAYABLE
Secured
merchant loans
In
connection with the acquisition of Prime in 2018, the Company assumed several notes payable liabilities amounting to $944,281
pursuant to secured merchant agreements (the “Assumed Secured Merchant Loans”). Pursuant to the Assumed Secured Merchant
Loans, the Company is required to repay the noteholders by making daily payments on each business day or on demand payments until
the loan amounts are paid in full. Each payment is deducted directly from the Company’s bank accounts. The Assumed Secured
Merchant Loans are secured by the assets of Prime, and are personally guaranteed by the former majority member of Prime.
During
January 2019, the Company entered into a separate promissory note with one of these individuals and borrowed an additional $26,900
at a simple annual interest rate of 15% bringing the total promissory note balance to $77,090 for this individual. During the
nine months ended September 30, 2019, the Company repaid $59,359 of these notes. At September 30, 2019 and December 31, 2018,
notes payable related to Assumed Secured Merchant Loans and a new promissory note amounted to $98,592 and $157,951, respectively.
In connection with the January 2019 promissory note, the Company issued 1,000 warrants to purchase 1,000 shares of the Company’s
common stock at an exercise price of $1.00 per share. The warrant is exercisable over a five-year period.
On
September 20, 2018, the Company entered into a secured Merchant Loan with a lender in the amount of $521,250 and received net
proceeds of $375,000, net of original issue discount of $146,250. Pursuant to this Secured Merchant Loan, the Company repaid the
noteholders by making daily payments of $3,724 on each business day which was deducted directly from the Company’s bank
accounts. On January 14, 2019, the Company entered into a new secured Merchant Loan with this lender in the amount of $764,500.
The Company simultaneously repaid the September 20, 2018 loan which had a remaining principal balance of $223,329, paid an origination
fee of $10,034 and received net proceeds of $316,637, net of original issue discount of $214,500. Pursuant to this Secured Merchant
Loan, the Company repaid the noteholders by making daily payments of $6,371 on each business day which was deducted directly from
the Company’s bank account. On January 24, 2019, the Company entered into another secured Merchant Loan with this lender
in the amount of $417,000. The Company simultaneously paid an origination fee of $7,998 and received net proceeds of $292,002,
net of original issue discount of $117,000. Pursuant to this Secured Merchant Loan, the Company repaid the noteholders by making
daily payments of $3,972 on each business day which was deducted directly from the Company’s bank account. On May 8, 2019,
the Company entered into another secured Merchant Loan with this merchant in the principal amount of $1,242,000. The Company simultaneously
repaid prior loans of $362,961 which were entered into during January 2019, paid origination fees totaling $9,000 and paid an
original issue discount of $342,000, and received net proceeds of $528,039. Pursuant to this secured Merchant Loan, the Company
repaid the noteholder by making daily payments of $10,265 on each business day which deducted from the Company’s bank account.
During the nine months ended September 30, 2019, the Company repaid an aggregate of $2,503,044 of the loans and on August 28,
2019, the remaining note balance of $184,750 was converted into a new Note. Pursuant to the new Note, the Company shall pay the
lender in twelve monthly installments of $17,705 beginning on November 25, 2019 to the maturity date of November 25, 2020. The
new Note shall bear interest at 15% per annum. These Secured Merchant Loans are secured by the Company’s assets and are
personally guaranteed by the former majority member of Prime. At September 30, 2019 and December 31, 2018, secured merchant notes
payable related to these Secured Merchant Loans amounted to $184,750 and $190,125, which is net of unamortized debt discount of
$0 and $74,169, respectively.
On
October 1, 2018, the Company entered into a secured Merchant Loan in the amount of $209,850 and received net proceeds of $137,962,
net of original issue discount of $59,850 and net of origination fees of $12,038. Pursuant to this Secured Merchant Loan, the
Company was required to repay the noteholders by making daily payments of $1,749 on each business day which was deducted directly
from the Company’s bank accounts. Additionally, on October 1, 2018, the Company entered into a second secured Merchant Loan
in the amount of $139,900 and received net proceeds of $92,000, net of original issue discount of $39,900 and net of origination
fees of $8,000. Pursuant to this Secured Merchant Loan, the Company was required to repay the noteholders by making daily payments
of $1,166 on each business day which was deducted directly from the Company’s bank accounts. These Secured Merchant Loans
were secured by the Company’s assets and are personally guaranteed by the former majority member of Prime. During the nine
months ended September 30, 2019, the Company repaid all of these notes. At September 30, 2019 and December 31, 2018, notes payable
related to these Secured Merchant Loans amounted to $0 and $128,726, which is net of unamortized debt discount of $0 and $51,371,
respectively.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2019
On
October 12, 2018, the Company entered into a secured Merchant Loan with a lender in the amount of $420,000. The Company simultaneously
repaid a prior loan of $31,634, paid an origination fee of $10,500 and received net proceeds of $254,552, net of original issue
discount of $123,314. Pursuant to this Secured Merchant Loan, the Company repaid the noteholder by making daily payments of $3,000
on each business which was deducted directly from the Company’s bank accounts. On January 28, 2019, the Company entered
into a new secured Merchant Loan with this lender in the amount of $759,000 and received net cash of $315,097 after paying origination
fee of $25,750, an original issue discount of $209,000, and the repayment of October 12, 2018 remaining loan and interest due
to this lender of $209,153. Pursuant to this Secured Merchant Loan, the Company repaid the noteholders by making daily payments
of $4,897 on each business day which was deducted directly from the Company’s bank account. On September 2, 2019, the Company
repaid the remaining note payable. These Secured Merchant Loans were secured by the Company’s assets and were personally
guaranteed by the former majority member of Prime. At September 30, 2019 and December 31, 2018, note payable related to these
Secured Merchant Loans amounted to $0 and $171,752, which is net of unamortized debt discount of $0 and $86,248, respectively.
From
February 25, 2019 to March 6, 2019, the Company entered into four secured Merchant Loans in the aggregate amount of $1,199,200.
The Company simultaneously repaid prior loans of $69,327 which were entered into during October 2018, paid origination fees totaling
$78,286 and received net proceeds of $652,387, net of original issue discounts of $399,200. Pursuant to these four secured Merchant
Loans, the Company was required to pay the noteholders by making daily payments aggregating $11,993 on each business day until
the loan amounts were paid in full. Each payment was deducted from the Company’s bank account. On April 10, 2019, the Company
paid off these secured Merchant Loans in full by paying an aggregate amount of $703,899. As a result of paying off these loans
early, the noteholders reduced the origination fees and debt discounts by $229,195 in the aggregate.
On
April 17, 2019, the Company entered into a secured Merchant Loan in the principal amount of $650,000 and received net proceeds
of $500,000, net of original issue discounts of $150,000. Pursuant to this secured Merchant Loan, the Company is required to pay
the noteholders by making three monthly installments of $216,667 beginning in June 2019 to August 2019. During the three months
ended September 30, 2019, the Company repaid this Secured Merchant Loan. At September 30, 2019, notes payable related to this
Secured Merchant Loan amounted to $0.
From
May 21, 2019 to July 16, 2019, the Company entered into several secured Merchant Loans in the aggregate amount of $2,099,500.
The Company received net proceeds of $1,239,500, net of original issue discounts and origination fees of $860,000. Pursuant to
these several secured Merchant Loans, the Company was required to pay the noteholders by making daily payments aggregating $27,498
on each business day until the loan amounts were paid in full. Each payment was deducted from the Company’s bank account.
During the nine months ended September 30, 2019, the Company repaid an aggregate of $1,837,870 of the loans and on August 28,
2019, the remaining note balances of $261,630 were converted into new notes payable. At September 30, 2019, notes payable related
to these Secured Merchant Loans amounted to $261,630, which is net of unamortized debt discount of $0.
From
June 19, 2019 to July 30, 2019, the Company entered into three secured Merchant Loans in the aggregate amount of $1,011,825. The
Company received net proceeds of $630,000, net of original issue discounts and origination fees of $381,825. Pursuant to these
two secured Merchant Loans, the Company was required to pay the noteholders by making daily payments aggregating $8,000 on each
business day and a weekly payment of $28,500 until the loan amounts were paid in full. Each payment was deducted from the Company’s
bank account. During the nine months ended September 30, 2019, the Company repaid an aggregate of $788,971 of the loans and on
August 28, 2019, the remaining note balances of $222,854 were converted into new convertible notes payable (See Note 7).
Promissory
notes
In
connection with the acquisition of Prime, the Company assumed several notes payable liabilities due to entities or individuals
amounting to $297,005 (the “Note”). These notes have effective interest rates ranging from 7% to 10%, and are unsecured.
During the nine months ended September 30, 2019, the Company repaid $25,000 of these notes and $40,000 of these notes was rolled
into a new note. In August 2019, the Company issued 12,455 shares of its common stock and 12,455 five year warrants exercisable
at $2.50 per share for the conversion of notes payable of $25,000 and accrued interest of $6,137. At September 30, 2019 and December
31, 2018, notes payable to these entities or individuals amounted to $40,000 and $130,000, respectively.
From
October 31, 2018 to December 31, 2018, the Company entered into Original Discount Senior Secured Demand Promissory Notes with
an investor (the “Promissory Note”). Pursuant to the Promissory Notes, the Company borrowed an aggregate of $770,000
and received net proceeds of $699,955, net of original issue discount of $70,000 and fees of $45. In December 2018, the Company
repaid $220,000 of these promissory notes. During the nine months ended September 30, 2019, the Company repaid $200,000 of these
promissory notes. At September 30, 2019 and December 31, 2018, notes payable to this entity amounted to $350,000 and $505,945,
which is net of unamortized debt discount of $0 and $44,055, respectively. The remaining notes were payable on demand. These promissory
notes are secured by the Company’s assets.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2019
From
January 2019 to September 30, 2019, the Company entered into separate promissory notes with several individuals totaling $2,352,150,
including $40,000 of a previous note rolled into these new notes, and received net proceeds of $2,048,900, net of original issue
discounts of $263,250. These Notes are due between 45 and 273 days from the respective Note date. Other than the original issue
discount, no additional interest is due to the holders. In connection with these promissory notes, the Company issued 58,000 warrants
to purchase 58,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The warrants are exercisable
over a five-year period. During the three months ended September 30, 2019, the Company issued 411,256 shares of its common stock
and 411,256 five year warrants exercisable at $2.50 per share upon conversion of notes payable of $921,250 and accrued interest
of $106,890 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. At September
30, 2019, notes payable to these individuals amounted to $687,500, which is net of debt discount of $1,758.
During
March 2019 and August 2019, the Company entered into three separate promissory notes with an entity totaling $220,000 and received
net proceeds of $200,000, net of original issue discounts of $20,000. During the nine months ended September 30, 2019, the Company
repaid $190,000 of these promissory notes. At September 30, 2019, notes payable to this entity amounted to $27,273, which is net
of debt discount of $2,727.
Equipment
and auto notes payable
In
connection with the acquisition of Prime, the Company assumed several equipment notes payable liabilities due to entities amounting
to $523,207 (the “Equipment Notes”). These Equipment Notes have effective interest rates ranging from 6.0% to 9.4%,
and are secured by the underlying van or trucks. During the three months ended September 30, 2019, the Company returned or abandoned
trucks and reduced equipment notes payable by $292,778. At September 30, 2019 and December 31, 2018, equipment notes payable to
these entities amounted to $60,286 and $488,289, respectively.
During
October and November 2018, the Company entered into several auto financing agreements. At September 30, 2019 and December 31,
2018, auto notes payable related to auto financing agreements amounted to $193,111 and $161,036, respectively.
At
September 30, 2019 and December 31, 2018, notes payable consisted of the following:
|
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
|
Principal
amounts
|
|
$
|
1,905,869
|
|
|
$
|
2,189,666
|
|
|
Less:
unamortized debt discount
|
|
|
(4,485
|
)
|
|
|
(255,843
|
)
|
|
Principal
amounts, net
|
|
|
1,901,384
|
|
|
|
1,933,823
|
|
|
Less:
current portion of notes payable
|
|
|
(1,812,296
|
)
|
|
|
(1,509,804
|
)
|
|
Notes
payable – long-term
|
|
$
|
89,088
|
|
|
$
|
424,019
|
|
NOTE
9– STOCKHOLDERS’ DEFICIT
Preferred
stock
Series
A preferred stock
The
Company increased its authorized preferred shares to 10,000,000 shares in July 2018.
Preferred
stock of 4,000,000 shares is designated Series A Convertible Preferred Stock. Each share of Series A preferred stock has a par
value of $0.001 and a stated value of $1.00. Dividends are payable on Series A preferred shares at the rate per share of 7% per
annum cumulative based on the stated value. The Series A preferred shares have no voting rights, except as required by law. Each
share of preferred stock is convertible based on the stated value at a conversion price of $20.83 at the option of the holder;
provided, however, if a triggering event occurs, as defined in the document, the conversion price shall thereafter be reduced,
and only reduced, to equal forty percent of the lowest VWAP during the thirty consecutive trading day period prior to the conversion
date. As of September 30, 2019, the Company believes a triggering event has occurred. The beneficial ownership limitation attached
to conversion is 4.99%, which can be decreased or increased, upon not less than 61 days’ notice to the Company, but in no
event exceeding 19.99% of the number of shares of common stock outstanding immediately after giving effect to the issuance of
common stock upon conversion of the preferred stock. After 36 months, the Company has the right to redeem all, but not less than
all, of the outstanding preferred shares in cash at a price equal to 130% of the stated value plus any accrued but unpaid dividends
thereon.
On
April 9, 2019, the Company entered into agreements with all holders of its Series A Convertible Preferred Stock to exchange all
4,000,000 outstanding shares of preferred stock for an aggregate of 2,600,000 shares of restricted common stock.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2019
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 as discussed below in “Shares issued in connection with debt modification”.
Common
stock issued for services
On
February 25, 2019, the Company granted an aggregate of 2,670,688 shares of its common stock to an executive officer, employees
and consultants of the Company for services rendered. The shares were valued at $2,750,808, or $1.03 per share, based on the quoted
trading price on the date of grant. In connection with these shares, the Company recorded stock-based compensation of $2,750,808.
On
May 1, 2019, the Company granted an aggregate of 30,000 shares of its common stock to consultants for business development and
investor relations services rendered. The shares were valued at $265,500, or $8.85 per share, based on the quoted trading price
on the date of grant. In connection with these shares, the Company recorded stock-based professional fees of $265,500.
On
June 14, 2019, the Company granted 200,000 shares of its common stock to an employee of the Company for services rendered. The
shares were valued at $2,200,000, or $11.00 per share, based on the quoted trading price on the date of grant. In connection with
these shares, the Company recorded stock-based compensation of $2,200,000.
On
July 8, 2019, pursuant to a one-year consulting agreement, the Company agreed to issue 50,000 shares of its common stock to a
consultant for investor relations services to be rendered. These shares were valued at $125,000, or $2.50 per common share, based
on contemporaneous common share sales. 25,000 of these shares will vest on January 8, 2020 and 25,000 shares will vest on July
8, 2020. In connection with these shares, the Company shall record stock-based consulting fees over the vest period of one year.
During the nine months ended September 30, 2019, aggregate accretion of stock-based professional fees on granted non-vested shares
amounted to $28,646 respectively. Total unrecognized professional fees related to these unvested common shares at September 30,
2019 amounted to $96,354 which will be amortized over the remaining vesting period. The 50,000 shares are reflected as common
stock issuable on the accompanying condensed consolidated balance sheet.
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 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 June 30, 2019, 100,000 of these shares
were issued and 700,000 shares were issuable. These 800,000 shares issued and issuable were valued at $10,248,000, or $12.81 per
share, based on the quoted trading price on the date of grant. In connection with these shares, the Company recorded a loss on
debt extinguishment of $10,248,000 (See Note 7). On August 16, 2019, the 700,000 shares issuable were converted into 700,000 shares
of Series B preferred shares.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2019
Sale
of common shares
During
the three months ended September 30, 2019, the Company issued 585,000 shares of its common stock and 585,000 five-year warrants
to purchase common shares for an exercise price of $2.50 per common share to investors for cash proceeds of $1,462,500 or $2.50
per share, pursuant to unit subscription agreements.
Shares
issued in connection with conversion of debt
During
the three months ended September 30, 2019, the Company issued 423,711 shares of its common stock and 423,711 warrants at an exercise
price of $2.50 per share in connection with the conversion of notes payable of $946,250 and accrued interest of $113,027 (see
Note 8). These shares were valued at $1,059,277, or $2.50 per common share, based on contemporaneous common share sales. 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.
In
connection with a Note Conversion Agreement dated July 12, 2019, (see Note 7), the Company issued 203,000 shares of its common
stock at $2.50 per share for the conversion of a related party convertible note payable of $500,000 and accrued interest payable
of $7,500. In connection with the conversion of this convertible note, the Company issued the entity warrants to purchase 203,000
shares of the Company’s common stock at an exercise price of $1.81 per share for a period of five years.
In
connection with a Note Conversion Agreement dated July 12, 2019 (see Note 7), the Company issued 812,000 shares of its common
stock at $2.50 per share for the conversion of related party convertible note payable of $2,000,000 and accrued interest payable
of $30,000. In connection with the conversion of this convertible notes, the Company issued the entity warrants to purchase 812,000
shares of the Company’s common stock at an exercise price of $2.50 per share for a period of five years.
In
connection with the modification of the related convertible notes, the Company changed the conversion price of the notes to $2.50
per share and issued an aggregate if 1,015,000 warrants as discussed above. The Company accounted for the full conversion of these
related party convertible notes pursuant to the guidance of ASC 470-20, Debt with Conversion and Other Options. Under ASC
470-20, the Company recognized a aggregate loss on debt extinguishment upon conversion in the amount of $3,669,367 of which $1,164,220
is associated with the change between the debt’s original conversion terms and the induced conversion terms and is equal
to the fair value of the additional shares of common stock transferred in the transaction, and $2,505,147 association with the
valuation of the 1,015,000 warrants.
Stock
options
In
connection the disposal of Save On, on May 1, 2019, the Company granted an aggregate of 80,000 options to certain employees of
Save On. The options are exercisable at $8.85 per share for a period of five years. 25% of the options vest on January 1, 2020
and 25% shall vest annually thereafter. On May 1, 2019, the Company calculated the fair value of these options of $700,816 which
was calculated using the Black-Sholes option pricing model with the following assumptions: expected dividend rate, 0%; expected
term of 5 years; volatility of 228.1% and risk-free interest rate of 2.31%. During the nine months ended September 30, 2019, the
Company recorded stock-based compensation of $700,816 related to these options which has been included in loss from discontinued
operations on the accompany statement of operations.
Stock
option activities for the nine months ended September 30, 2019 are summarized as follows:
|
|
|
Number
of Options
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining
Contractual Term (Years)
|
|
|
Aggregate
Intrinsic Value
|
|
|
Balance
Outstanding December 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
Granted
|
|
|
80,000
|
|
|
|
8.84
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Balance
Outstanding September 30, 2019
|
|
|
80,000
|
|
|
$
|
8.84
|
|
|
|
4.58
|
|
|
$
|
0
|
|
|
Exercisable,
September 30, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2019
Warrants
In
connection with the Purchase Agreement in 2018 (See Note 7 under Bellridge), the Lender was issued a warrant, with a term of two
years, to purchase up to 4.75% of the fully-diluted outstanding Common Stock of the Company, for an aggregate purchase price of
$100. Additionally, the placement agent was issued a warrant, with a term of two years, to purchase up to 4.75% of the fully-diluted
outstanding Common Stock of the Company, for an aggregate purchase price of $100. Also, on December 27, 2018, the lender waived
any and all defaults in existence on the Note and the Company agreed to issue a warrant that is convertible into 2% of the issued
and outstanding shares existing as the time the Company files a registration statement or makes an application to up list to a
national stock exchange. On April 9, 2019, the Company entered into an agreement with Bellridge and the Placement Agent that cancelled
these warrants in exchange for an aggregate of 600,000 common shares of the Company. These shares were valued at $7,686,000, or
$12.81 per share, based on the quoted trading price on the date of grant. In connection with these shares, the Company recorded
a loss on debt extinguishment of $7,686,000 (See Note 7).
In
connection with several promissory notes payable (see Note 8), during the nine months ended September 30, 2019, the Company issued
59,000 warrants to purchase 59,000 shares of common at an exercise price of $1.00 per share. During the nine months ended September
30, 2019, the Company calculated the relative fair value of these warrants of $135,324 which was amortized into interest expense
over the loan terms and was estimated using the Binomial valuation model with the following assumptions: expected dividend rate,
0%; expected term (in years), 5 years; volatility of 228.1% and risk-free interest rate ranging from 2.28% to 2.40%.
In
connection with previous promissory notes payable (see Note 8), on June 11, 2019, the Company issued 55,000 warrants to purchase
55,000 shares of common at an exercise price of $1.00 per share. On June 11, 2019, the Company calculated the fair value of these
warrants of $601,121 which was expensed and included in loan fees on the accompanying condensed consolidated statement of operations.
The fair value of these warrants was estimated using the Binomial valuation model with the following assumptions: expected dividend
rate, 0%; expected term (in years), 5 years; volatility of 228.1% and risk-free interest rate of 1.92%.
On
August 30, 2019, the Company closed Securities Purchase Agreements with accredited investors. Pursuant to the terms of the Purchase
Agreements, the Company issued warrants to purchase up to 987,940 shares of the Company’s common stock (See Note 7). The
Warrants are exercisable at any time on or after the date of the issuance and entitles the investors to purchase shares of the
Company’s common stock for a period of five years from the initial date the warrants become exercisable. Under the terms
of the Warrant, the investors are entitled to exercise the Warrants to purchase up to 987,940 shares of the Company’s common
stock at an initial exercise price of $3.50, subject to adjustment as detailed in the respective Warrant. These Warrants include
a down-round provision under which the warrant exercise price could be affected, on a full-ratchet basis, by future equity offerings
undertaken by the Company. The Company calculated the relative fair value of these warrants in the amount of $1,225,109 which
was added to debt discount and will be amortized over the term of the notes (see Note 7). The fair value of these warrants was
estimated using the Binomial valuation model with the assumptions as outlined in Note 7. On September 6, 2019, the Company sold
its common shares at $2.50 per share and accordingly, the warrant down-round provisions were triggered. As a result, the number
of warrants was increased by 395,176 to 1,383,116 warrants and the exercise price was lowered to $2.50. As a result, the Company
recorded a deemed dividend of $981,548 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 the date the down round feature
was triggered using the original exercise price and the new exercise price and the new number of warrants. The deemed dividend
was recorded as a reduction of accumulated deficit and increase in paid-in capital and increased the net loss to common shareholders
by the same amount.
During
the three months ended September 30, 2019, in connection with the sale of 585,000 shares of its 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.
During
the three months ended September 30, 2019, in connection with the conversion of notes payable and accrued interest (see Note 8),
the Company issued 423,711 five-year warrants to purchase 423,711 shares of common stock at an exercise price of $2.50 per share.
The Company calculated the fair value of these warrants of $1,045,384 which was expensed and included in gain (loss) on debt extinguishment
on the accompanying condensed consolidated statement of operations. The fair value of these warrants was estimated using the Binomial
valuation model with the assumptions as outlined in Note 7.
During
the three months ended September 30, 2019, in connection with the conversion of related party convertible notes payable (see Note
7), the Company issued 1,015,000 five-year warrants to purchase 1,015,000 shares of common stock at an exercise price of $2.50
per share. The Company calculated the fair value of these warrants of $2,505,147 which was expensed and included in gain (loss)
on debt extinguishment on the accompanying condensed consolidated statement of operations. The fair value of these warrants was
estimated using the Binomial valuation model with the assumptions as outlined in Note 7.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2019
Warrant
activities for the nine months ended September 30, 2019 are summarized as follows:
|
|
|
Number
of Warrants
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term (Years)
|
|
|
Aggregate
Intrinsic Value
|
|
|
Balance
Outstanding December 31, 2018
|
|
|
1,648,570
|
|
|
$
|
0.00
|
|
|
|
1.47
|
|
|
$
|
2,472,655
|
|
|
Granted
|
|
|
3,125,651
|
|
|
|
2.41
|
|
|
|
|
|
|
|
|
|
|
Cancellations
|
|
|
(1,421,059
|
)
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Increase
in warrants related to price protection
|
|
|
395,176
|
|
|
|
2.50
|
|
|
|
|
|
|
|
|
|
|
Change
in warrants related to dilutive rights
|
|
|
(227,511
|
)
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Balance
Outstanding September 30, 2019
|
|
|
3,520,827
|
|
|
$
|
2.41
|
|
|
|
4.91
|
|
|
$
|
311,070
|
|
|
Exercisable,
September 30, 2019
|
|
|
3,520,827
|
|
|
$
|
2.41
|
|
|
|
4.91
|
|
|
$
|
311,070
|
|
NOTE
10 – COMMITMENTS AND CONTINGENCIES
Employment
agreement
On
June 18, 2018, the Company entered into an employment agreement with the chief operating officer of Prime. The Company shall pay
to this executive a base salary of $520,000 per year, payable in accordance with the Company’s usual pay practices. The
executive’s base salary will increase by $260,000 per year upon (i) Prime achieving revenue of $20 million on an annualized
basis (the “Initial Target Goal”) for four consecutive weeks; and (ii) each time Prime achieves revenue of an additional
$10 million increment above the Initial Target Goal (i.e., $30 million, $40 million, $50 million, etc.) on an annualized basis
for four consecutive weeks. Executive’s base salary shall be subject to review annually by the Manager and may be increased
(but not decreased). The executive shall be entitled to participate in any bonus plan that the Manager or its designee may approve
for the senior executives of the Company and shall be entitled to participate in benefits under the Company’s benefit plans,
profit sharing and arrangements, including, without limitation, any employee benefit plan or arrangement made available in the
future by the Company to its employees or senior executives, subject to and on a basis consistent with the terms, conditions and
overall administration of such plans and arrangements. Notwithstanding the foregoing, during the Employment, the Company will
provide, at the Company’s expense, health and major medical insurance benefits to the Executive and his family members which
are at least equal to the benefits provided to the Executive and his family members immediately prior to the Effective Date. The
term of this Agreement (as it may be extended by the following sentence or terminated earlier pursuant to terms in the employment
agreement shall begin on the Effective Date and end on the close of business on May 31, 2023. The Employment Term shall be automatically
extended for additional one-year periods unless, at least sixty (60) days prior to the end of the expiration of the Employment
Term.
Placement
agent agreement
In
August 2019, the Company engaged a placement agent, on a non-exclusive basis, to advise and assist the Company with respect to
the introductions new investors and the restructuring of existing debt, The Company shall pay the placement agent a fee (the “Advisor’s
Fee”) comprised of a cash fee and warrant fee. Any Advisor’s Fee payable is contingent upon the closing on future
capital raises.
Other
From
time to time, we may be involved in litigation relating to claims arising out of our operation in the normal course of business.
As of September 30, 2019, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect
on results of our operations.
NOTE
11– RELATED PARTY TRANSACTIONS AND BALANCES
Due
from/to related parties
In
connection with the acquisition of Prime, the Company acquired a balance of $14,019 that was due from the former majority owner
of Prime. Pursuant to the terms of the SPA, the Company agreed to pay $489,174 in cash to the former majority owner of Prime who
then advanced back the $489,174 to Prime. During the nine months ended September 30, 2019, the Company repaid $50,000 of this
advance. This advance is non-interest bearing and is due on demand. At September 30, 2019 and December 31, 2018, amount due to
this related party amounted to $209,000 and $259,000.
During
the period from acquisition date of Prime (June 18, 2018) to June 30, 2019, an employee of Prime who exerts significant influence
over the business of Prime, paid costs and expenses and was reimbursed funds by the Company. These advances are non-interest bearing
and are due on demand. At September 30, 2019 and December 31, 2018, amounts due from (to) this related party amounted to $89,873
and $(16,300), respectively.
At
September 30, 2019, accrued interest payable due to related parties amounted to $60,760 and is included in due to related parties
on the accompanying condensed consolidated balance sheet.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2019
Notes
payable – related parties
From
July 25, 2018 through December 31, 2018, the Company entered into several Promissory Notes with the Company’s former chief
executive officer or the spouse of the Company’s former chief executive officer. Pursuant to these promissory notes, the
Company borrowed an aggregate of $1,150,000 and received net proceeds of $1,050,000, net of original issue discounts of $100,000.
From July 25, 2018 through December 31, 2018, $930,000 of these loans were repaid and during January 2019, the Company repaid
the remaining existing promissory note totaling $220,000 with the spouse of the Company’s chief executive officer. In addition,
during February 2019, the Company entered into another promissory note with the spouse of the chief executive officer totaling
$220,000, net of an original issue discount of $20,000. In April 2019, the Company repaid this promissory note. During the nine
months ended September 30, 2019, amortization of debt discount related to these notes amounted to $26,383 and is included in interest
expense – related parties on the accompanying condensed consolidated statement of operations.
On
April 9, 2019, certain noteholders who were not considered related parties became related parties since they became beneficial
owners of the Company’s common stock. Accordingly, notes payable amounting to $510,000 were reclassified from notes payable
to note payable – related party (See Note 7).
On
July 3. 2019, the Company entered into a note agreement with an entity, who is affiliated to the Company’s chief executive
officer, in the amount of $500,000. 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 shall be 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
shall made. The principal amount of this Note and all accrued, but unpaid interest hereunder shall be due and payable on the earlier
to occur of (i) January 3, 2021 (the “Maturity Date”), or (ii) an Event of Default. The payment of all or any
portion of the principal and accrued interest may be paid prior to the Maturity Date. Interest shall accrue 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 shall 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.
In
August 2019, the Company’s chief executive officer advanced to the Company and was repaid $50,000, The advance was non-interest
bearing and payable on demand.
At
September 30, 2019, notes payable – related parties amounted to $500,000 (current) and $510,000 (non-current). At
December 31, 2018, notes payable – related parties amounted to $213,617 (current), which is net of unamortized debt
discount of $6,383.
Convertible
note payable – related parties
On
March 13, 2019, the Company entered into a convertible note agreement with an individual, who is affiliated to the Company’s
chief executive officer, in the amount of $500,000 (See Note 7).
In
April 2019, the Company entered into a convertible note agreement with a company, who is affiliated to the Company’s chief
executive officer, in the amount of $2,000,000 (See Note 7).
During
the nine months ended September 30, 2019, interest expense related to these notes amounted to $143,260 and is included in interest
expense – related parties on the accompanying condensed consolidated statement of operations.
NOTE
12 – OPERATING LEASE RIGHT-OF-USE (“ROU”) ASSETS AND OPERATING LEASE LIABILITIES
In
December 2018, the Company entered into a five-year lease agreement for the lease of office and warehouse space and parking spaces
under a non-cancelable operating lease through January 2024. From the lease commencement date until the last day of the second
lease year, monthly rent shall be $14,000. At the beginning of the 25th month following the commencement date and through
the end of the term, minimum rent shall be $14,420 per month. The Company shall have one option to renew the term of this lease
for an additional five years. In January 2019, the Company paid a security deposit of $28,000.
In
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 shall be $10,000. At the beginning of the 25th month following the commencement date and through
the end of the term, minimum rent shall be $10,500 per month. The Company shall 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.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2019
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 shall
be $18,000 and shall increase by 3% each lease year. Additionally, the Company shall pay its portion of operating expenses. The
Company shall have one option to renew the term of this lease for an additional five years. As of September 30, 2019, the Company
paid a security deposit of $18,000.
In
adopting ASC Topic 842, Leases (Topic 842), the Company has elected the ‘package of practical expedients’, which permit
it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct
costs (see Note 2). In addition, the Company elected not to apply ASC Topic 842 to arrangements with lease terms of 12 month or
less. On January 1, 2019, upon adoption of ASC Topic 842, the Company recorded right-of-use assets and lease liabilities of $631,723.
During
the nine months ended September 30, 2019 and 2018, in connection with these operating leases, the Company recorded rent expense
of $123,589 and $0, respectively, which is expensed during the period and included in operating expenses on the accompanying condensed
consolidated statements of operations.
The
significant assumption used to determine the present value of the lease liability was a discount rate of 12% which was based on
the Company’s estimated incremental borrowing rate.
At
September 30, 2019, right-of-use asset (“ROU”) is summarized as follows:
|
|
|
September
30, 2019
|
|
|
Office
leases right of use assets
|
|
$
|
1,984,320
|
|
|
Less:
accumulated amortization into rent expense
|
|
|
(97,201
|
)
|
|
Balance
of ROU assets as of September 30, 2019
|
|
$
|
1,887,119
|
|
At
September 30, 2019, operating lease liabilities related to the ROU assets are summarized as follows:
|
|
|
September
30, 2019
|
|
|
Lease
liabilities related to office leases right of use assets
|
|
$
|
1,907,763
|
|
|
Less:
current portion of lease liabilities
|
|
|
(337,487
|
)
|
|
Lease
liabilities – long-term
|
|
$
|
1,570,276
|
|
At
September 30, 2019, future minimum base lease payments due under non-cancelable operating leases are as follows:
|
Year
ended September 30,
|
|
Amount
|
|
|
2020
|
|
$
|
522,540
|
|
|
2021
|
|
|
515,316
|
|
|
2022
|
|
|
528,767
|
|
|
2023
|
|
|
535,659
|
|
|
2024
|
|
|
318,611
|
|
|
Total
minimum non-cancelable operating lease payments
|
|
|
2,420,893
|
|
|
Less:
discount to fair value
|
|
|
(513,130
|
)
|
|
Total
lease liability at September 30, 2019
|
|
$
|
1,907,763
|
|
NOTE
13 – CONCENTRATIONS
For
the nine months ended September 30, 2019, one customer represented 99.1% of the Company’s total net revenues. This revenue
is from one Prime customer. For the nine months ended September 30, 2018, one customer represented 98.8% of the Company’s
total net revenues. At September 30, 2019, one customer represented 80.0% of the Company’s accounts receivable balance.
During
the nine months ended September 30, 2019, the Company rented delivery vans from three vendors. As of September 30, 2019, the Company
only leases vans from two vendors. Any shortage of supply of vans available to rent to the Company could have a material adverse
effect on the Company’s business, financial condition and results of operations.
All
revenues are derived from customers in the United States.
NOTE
14 – SUBSEQUENT EVENTS
Sale
of common stock
During
October and November 2019, the Company issued 294,000 shares of its common stock and 294,000 five-year warrants to purchase common
shares for an exercise price of $2.50 per common share to investors for cash proceeds of $735,000 or $2.50 per share, pursuant
to unit subscription agreements.