NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
NOTE
1 – ORGANIZATION AND BUSINESS OPERATIONS
Transportation
and Logistics Systems, Inc. (“TLSS” or the “Company”), was incorporated under the laws of the State
of Nevada, on July 25, 2008. The Company operates through its active subsidiaries as a logistics and transportation company specializing
in ecommerce fulfillment, last mile deliveries, two-person home delivery, mid-mile, and long-haul services.
On
June 18, 2018 (the “Acquisition Date”), the Company completed the acquisition of 100% of the issued and outstanding
membership interests of Prime EFS, LLC, a New Jersey limited liability company (“Prime EFS”), from its members pursuant
to the terms and conditions of a Stock Purchase Agreement entered into among the Company and the Prime EFS members on the Acquisition
Date. Prime EFS was a New Jersey based transportation company that generated substantially all of its revenues from Amazon Logistics,
Inc. (“Amazon”) in New York, New Jersey, and Pennsylvania until it ceased operations on September 30, 2020 due to
Amazon’s non-renewal of its Delivery Service Partner (DSP) Agreement with Prime EFS, as described below.
On
July 24, 2018, the Company formed Shypdirect LLC (“Shypdirect”), a company organized under the laws of New Jersey.
Shypdirect was 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.
Since its inception, Shypdirect generated substantially all of its revenues from Amazon, Inc. As described below, Amazon elected to terminate
its Amazon Relay Carrier Terms of Service with Shypdirect. Accordingly, in June 2021, Shypdirect ceased its tractor trailer and box truck
delivery services to Amazon, and in July 2021, Shypdirect ceased all operations.
On
June 19, 2020, Amazon notified Prime EFS in writing (the “Prime EFS Termination Notice”), that Amazon would not renew
its Delivery Service Partner (DSP) Agreement with Prime EFS when that agreement (the “In-Force Agreement”) expired
on September 30, 2020 and such In-Force Agreement, in fact, expired on September 30, 2020.
Additionally,
on July 17, 2020, Amazon notified Shypdirect that Amazon had elected to terminate the Amazon Relay Carrier Terms of Service (the “Program
Agreement”) between Amazon and Shypdirect effective as of November 14, 2020 (the “Shypdirect Termination Notice”).
On August 3, 2020, Amazon offered to withdraw the Shypdirect Termination Notice and extend the term of the Program Agreement to and including
May 14, 2021, conditioned on Prime EFS executing, for nominal consideration, a separation agreement with Amazon under which Prime EFS
agrees to cooperate in an orderly transition of its Amazon last-mile delivery business to other service providers, Prime EFS released
any and all claims it may have against Amazon, and Prime EFS covenanted not to sue Amazon (the “Aug. 3 Proposal”).
On August 4, 2020, the Company, Prime EFS and Shypdirect accepted the Aug. 3 Proposal.
During
the six months ended June 30, 2022, four customers accounted for 70.0% of the Company’s total net revenues. Approximately 51.1%
of the Company’s revenue of $3,066,193 for the six months ended June 30, 2021 was attributable to Shypdirect’s now terminated
mid-mile and long-haul business with Amazon. The termination of Shypdirect’s Amazon mid-mile and long-haul business, which was
effective on or about May 14, 2021, had a material adverse impact on operations of Shypdirect. This impact caused Shypdirect to become
insolvent and to cease operations.
While
the Company has commenced replacing its Amazon business with the acquisitions as set forth below, the Company continues to: (i) seek
new last-mile, mid-mile and long-haul business with other, non-Amazon, customers; (ii) explore other strategic relationships; and (iii)
identify potential acquisition opportunities.
On
November 13, 2020, the Company formed a wholly owned subsidiary, Shyp FX, Inc., a company incorporated under the laws of the State of
New Jersey (“Shyp FX”). On January 15, 2021, through Shyp FX, the Company executed an asset purchase agreement (“APA”)
and closed a transaction to acquire substantially all of the assets and certain liabilities of Double D Trucking, Inc., a northern New
Jersey-based logistics provider specializing in servicing Federal Express over the past 25 years (“DDTI”), including last-mile
delivery services using vans and box trucks (See Note 3). On April 28, 2022, the Company entered into an Asset Purchase Agreement (the
“Asset Purchase Agreement” with a third party (the “Buyer”). Pursuant to the Asset Purchase Agreement, Shyp FX
sold substantially all its asset and specific liabilities to the Buyer. The Asset Purchase Agreement closed in June 2022 (See Note 3).
On
November 16, 2020, the Company formed a wholly owned subsidiary, TLSS Acquisition, Inc., a company incorporated under the laws of the
State of Delaware (“TLSS Acquisition”). On March 24, 2021, TLSS Acquisition acquired all of the issued and outstanding shares
of capital stock of Cougar Express, Inc., a New York-based full-service logistics provider specializing in pickup, warehousing, and delivery
services in the tri-state area (“Cougar Express”). Cougar Express was a family-owned full-service transportation business
that has been in operation for more than 30 years providing one-to-four person deliveries and offering white glove services. It utilizes
its own fleet of trucks, warehouse/driver/office personnel and on-call subcontractors from its convenient and secure New York JFK airport
area location, allowing it to pick-up and deliver throughout the New York tri-state area. Cougar Express serves a diverse base of approximately
50 commercial accounts, which are freight forwarders that work with some of the most notable retail businesses in the country (See Note
3).
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
On
February 21, 2021, the Company formed a wholly owned subsidiary, Shyp CX, Inc., a company incorporated under the laws of the State of
New York (“Shyp CX”). Shyp CX does not engage in any revenue-generating operations.
On
August 19, 2021, the Company’s subsidiaries, Prime EFS and Shypdirect, executed Deeds of Assignment for the Benefit of Creditors
in the State of New Jersey pursuant to N.J.S.A. §2A:19-1, et seq. (the “ABC Statute”), assigning all of the Prime EFS
and Shypdirect assets to Terri Jane Freedman as Assignee for the Benefit of Creditors (the “Assignee”) and filing for dissolution.
An “Assignment for the Benefit of Creditors,” “general assignment” or “ABC” in New Jersey is a state-law,
voluntary, judicially-supervised corporate liquidation and unwinding similar to the Chapter 7 bankruptcy process found in the United
States Bankruptcy Code. In the subject ABC, the debtor companies, Prime EFS and Shypdirect, together referred to as the “Assignors”,
executed Deeds of Assignment, assigning all their assets to the Assignee chosen by the Company, who acts as a fiduciary similar to a
Chapter 7 trustee in bankruptcy. On September 7, 2021, the ABC’s were filed with the Bergen County Clerk in Bergen County, New
Jersey and filed with the Bergen County Surrogate Court, initiating judicial proceedings. The Assignee has been charged with liquidating
the assets for the benefit of the Prime EFS and Shypdirect creditors pursuant to the provisions of the ABC Statute.
As
a result of Prime EFS and Shypdirect’s filing of the executed Deeds of Assignment for the Benefit of Creditors on September 7,
2021, the Assignee assumed all authority to manage Prime EFS or Shypdirect. Additionally, Prime EFS and Shypdirect no longer conduct
any business and are not permitted by the Assignee and ABC Statute to conduct any business. For these reasons, effective September 7,
2021, the Company relinquished control of Prime EFS and Shypdirect. Further, on October 13, 2021, Prime EFS and Shypdirect filed for
dissolution with the Secretary of State of New Jersey. Therefore, the Company deconsolidated Prime EFS and Shypdirect effective with
the filing of executed Deeds of Assignment for the Benefit of Creditors in September 2021 (See Note 10). The Company has been advised that the Assignee anticipates that she will
be able to conclude her work, make final distributions to creditors, and close out
the estates of Prime EFS and Shypdirect on or before June 30, 2023.
The
Company’s results of operations for the six months ended June 30, 2021 include the results of Prime EFS and Shypdirect prior to
the September 7, 2021, the filing of the executed Deeds of Assignment for the Benefit of Creditors with the State of New Jersey.
Unless
the context otherwise requires, TLSS and its wholly owned subsidiaries, TLSS Acquisition, Cougar Express, Shyp FX and Shyp CX, and its
deconsolidated subsidiaries, Prime EFS and Shypdirect, whose results of operations for the six months ended June 30, 2021 are included
in the results of the Company prior to the September 7, 2021 filing of the executed Deeds of Assignment for the Benefit of Creditors
with the State of New Jersey, are hereafter referred to as the “Company”. References herein to a “Company liability”
may be to a liability which is owed solely by a subsidiary and not by TLSS.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis
of presentation and principles of consolidation
The
unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting
principles in the United States of America (“U.S. GAAP”) and the rules and regulations of the United States Securities and
Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all the information and disclosures
necessary for comprehensive presentation of financial position, results of operations or cash flow. However, these unaudited condensed
consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management,
are necessary for fair presentation of the information contained therein. It is suggested that these unaudited interim condensed consolidated
financial statements be read in conjunction with the financial statements of the Company for the year ended December 31, 2021 and notes
thereto included in the Company’s annual report on SEC Form 10-K, filed on March 31, 2022.
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.
On
August 16, 2021 the Company’s subsidiaries, Prime EFS and Shypdirect executed Deed of Assignments for the Benefit of Creditors
in the State of New Jersey ABC Statute, assigning all the Prime EFS and Shypdirect assets to the Assignee and filing for dissolution.
The Company’s results of operations for the six months ended June 30, 2021 include the results of Prime EFS and Shypdirect prior
to the September 7, 2021 filing of the executed Deeds of Assignment for the Benefit of Creditors with the State of New Jersey. As a result
of Prime EFS and Shypdirect’s filing of the executed Deeds of Assignment for the Benefit of Creditors on September 7, 2021, the
Assignee assumed all authority to manage Prime EFS or Shypdirect. Additionally, Prime EFS and Shypdirect no longer conduct any business
and are not permitted by the Assignee and ABC Statute to conduct any business. For these reasons, effective September 7, 2021, the Company
relinquished control of Prime EFS and Shypdirect. Therefore, the Company deconsolidated Prime EFS and Shypdirect effective with the filing
of executed Deeds of Assignment for the Benefit of Creditors in September 2021. Further, on October 13, 2021, Prime EFS and Shypdirect
filed for dissolution with the Secretary of State of New Jersey.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
The
unaudited condensed consolidated financial statements of the Company include the accounts of TLSS and its wholly owned subsidiaries,
TLSS Acquisition, Cougar Express, Shyp FX and Shyp CX, and Prime EFS and Shypdirect through the date of deconsolidation (September 7,
2021). All intercompany accounts and transactions have been eliminated in consolidation. References below to a “Company liability”
may be to a liability which is owed solely by a subsidiary and not by TLSS.
Liquidity
The
accompanying unaudited condensed consolidated financial statements have been prepared on the basis of continuity of operations, realization
of assets and the satisfaction of liabilities and commitments in the ordinary course of business.
Historically,
the Company has primarily funded its operations with proceeds from sales of convertible debt and convertible preferred stock. Since its
inception, the Company has incurred recurring losses, including a loss from operations of $2,805,313 and $3,355,803 for the six months
ended June 30, 2022 and 2021, respectively. Until such time that the Company implements its growth through acquisition strategy, it expects
to continue to generate operating losses in the foreseeable future, mostly due to corporate overhead and costs of being a public company.
During
the year ended December 31, 2021, the Company issued an aggregate of 343,118 shares of its Series E preferred stock for net proceeds
of $3,590,500 and issued an aggregate of 615,000 shares of its Series G preferred stock for net proceeds of $5,479,560. Additionally,
during the year ended December 31, 2021, the Company received proceeds of $4,226,383 from the exercise of stock warrant. The proceeds
were used for the acquisition of Cougar Express and DDTI, the repayment of debt, and for working capital purposes. During the six months
ended June 30, 2022, the Company received net proceeds of $855,000 from the sale of Series G preferred stock and $245,714 from the exercise
of warrants which only further improved the Company’s financial condition. As such, the Company expects that its cash as of June
30, 2022 will be sufficient to fund the Company’s operations for at least the next twelve months from the date of the issuance
of its unaudited condensed consolidated financial statements.
Risks
and uncertainties
The
COVID-19 pandemic and resulting global disruptions have affected the Company’s businesses, as well as those of the Company’s
customers and their third-party suppliers and sellers. To serve the Company’s customers while also providing for the safety of
the Company’s employees and service providers, the Company has adapted numerous aspects of its logistics and transportation processes.
The Company continues to monitor the rapidly evolving situation and expect to continue to adapt its operations to address federal, state,
and local standards as well as to implement standards or processes that the Company determines to be in the best interests of its employees,
customers, and communities. The impact of the pandemic and actions taken in response to it had some effects on the Company’s results
of operations. Effects include increased fulfilment costs and cost of sales, primarily due to investments in employee hiring, pay, and
benefits, as well as costs to maintain safe workplaces, and higher shipping costs. The Company continues to be affected by possible procurement
and shipping delays, supply chain interruptions, higher product demand in certain categories, product demand in other categories, and
increased fulfilment costs and cost of sales as a percentage of net sales and it is not possible to determine the duration and spread
of the pandemic or such actions, the ultimate impact on the Company’s results of operations during 2022, or whether other currently
unanticipated consequences of the pandemic are reasonably likely to materially affect the Company’s results of operations.
Use
of estimates
The
preparation of the unaudited 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 unaudited condensed 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 assets acquired and liabilities assumed, the valuation of right of use assets and related liabilities,
assumptions used in assessing impairment of long-lived assets, estimates of current and deferred income taxes and deferred tax valuation
allowances, the fair value of non-cash equity transactions, the valuation of derivative liabilities, the valuation of beneficial conversion
features, and the value of claims against the Company.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
Fair
value of financial instruments
The
Financial Accounting Standards Board (“FASB”) issued ASC 820 — Fair Value Measurements and Disclosures, which
defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. ASC 820 requires disclosures about the fair value of all financial instruments, whether
or not recognized, for financial statement purposes. Disclosures about the fair value of financial instruments are based on pertinent
information available to the Company on June 30, 2022. Accordingly, the estimates presented in these financial statements are not necessarily
indicative of the amounts that could be realized on disposition of the financial instruments. ASC 820 specifies a hierarchy of valuation
techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market
data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority
to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable
inputs (Level 3 measurement).
The
three levels of the fair value hierarchy are as follows:
| |
● |
Level
1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date. |
| |
|
|
| |
● |
Level
2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar
assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from
or corroborated by observable market data. |
| |
|
|
| |
● |
Level
3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants
would use in pricing the asset or liability based on the best available information. |
The
Company measures certain financial instruments at fair value on a recurring basis. As of June 30, 2022 and December 31, 2021, the Company
had no assets and liabilities measured at fair value on a recurring basis.
A
roll-forward of the level 3 valuation financial instruments is as follows:
SCHEDULE OF RECONCILIATION OF DERIVATIVE LIABILITY FOR LEVEL 3 INPUTS
| | |
For the
Six Months ended
June 30, 2022 | | |
For the
Six Months ended
June 30, 2021 | |
| Balance at beginning of period | |
$ | - | | |
$ | 4,181,187 | |
| Gain on extinguishment of debt related to repayment or conversion of debt | |
| - | | |
| (896,881 | ) |
| Change in fair value included in derivative gain | |
| - | | |
| (3,284,306 | ) |
| Balance at end of period | |
$ | - | | |
$ | - | |
The
Company accounted for its derivative financial instruments, which consisted of certain conversion options embedded in convertible instruments
and warrants, at fair value using level 3 inputs. The Company determined the fair value of these derivative liabilities using the 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 unaudited condensed consolidated balance sheets for cash, accounts receivable, prepaid expenses and
other current assets, accounts payable, accrued expenses, insurance payable, and other payables approximate their fair values based on
the short-term maturity of these instruments. The carrying amount of the Company’s promissory note obligations approximate fair
value, as the terms of these instruments are consistent with terms available in the market for instruments with similar risk.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
Cash
and cash equivalents
For
purposes of the unaudited condensed consolidated statements of cash flows, the Company considers all highly liquid instruments with a
maturity of three months or less at the purchase date and money market accounts to be cash equivalents. On June 30, 2022 and December
31, 2021, the Company did not have any cash equivalents.
The
Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. On June 30,
2022, cash in bank in excess of FDIC insured levels amounted to approximately $5,247,000. The Company has not experienced any losses
in such accounts through June 30, 2022.
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
and equipment 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
assets
Intangible
assets are carried at cost less accumulated amortization, computed using the straight-line method over the estimated useful life, less
any impairment charges.
Leases
On
January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). The updated guidance
requires lessees to recognize lease assets and lease liabilities for most operating leases. In addition, the updated guidance requires
that lessors separate lease and non-lease components in a contract in accordance with the new revenue guidance in ASC 606. The Company
applied the package of practical expedients to leases that commenced before the effective date whereby the Company elected to not reassess
the following: (i) whether any expired or existing contracts contain leases and (ii) initial direct costs for any existing leases. For
contracts entered into on or after the effective date, at the inception of a contract the Company assessed whether the contract is, or
contains, a lease. The Company’s assessment is based on: (1) whether the contract involves the use of a distinct identified asset,
(2) whether it obtains the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether
it has the right to direct the use of the asset. The Company will allocate the consideration in the contract to each lease component
based on its relative stand-alone price to determine the lease payments. The Company has elected not to recognize right-of-use assets
and lease liabilities for short-term leases that have a term of 12 months or less.
Operating
lease ROU assets represents the right to use the leased asset for the lease term and operating lease liabilities are recognized based
on the present value of the future minimum lease payments over the lease term at commencement date. As most leases do not provide an
implicit rate, the Company uses an incremental borrowing rate based on the information available at the adoption date in determining
the present value of future payments. Lease expense for minimum lease payments is amortized on a straight-line basis over the lease term
and is included in general and administrative expenses in the consolidated statements of operations.
Impairment
of long-lived assets
In
accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss
when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured
as the difference between the asset’s estimated fair value and its book value.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
Deconsolidation
of subsidiaries
The
Company accounts for a gain or loss on deconsolidation of a subsidiary or derecognition of a group of assets in accordance with ASC 810-10-40-5.
The Company measures the gain or loss as the difference between (a) the aggregate of fair value of any consideration received, the fair
value of any retained noncontrolling investment and the carrying amount of any noncontrolling interest in the former subsidiary at the
date the subsidiary is deconsolidated and (b) the carrying amount of the former subsidiary’s assets and liabilities or the carrying
amount of the group of assets.
Segment
reporting
The
Company uses “the management approach” in determining reportable operating segments. The management approach considers the
internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing
performance as the source for determining the Company’s reportable segments. The Company’s chief operating decision maker
is the chief executive officer of the Company, who reviews operating results to make decisions about allocating resources and assessing
performance for the entire Company. During the six months ended June 30, 2022 and 2021, the Company believes that it operates in one
operating segment related to deliveries for on-line retailers in New York, New Jersey, Pennsylvania and other areas, and tractor trailer
and box truck deliveries of product on the east coast of the United States from one distributor’s warehouse to another warehouse
or from a distributor’s warehouse to the post office.
Derivative
financial instruments
The
Company had certain financial instruments that are embedded derivatives associated with capital raises. The Company evaluated all of
its financial instruments to determine if those contracts or any potential embedded components of those contracts qualify as derivatives
to be separately accounted for in accordance with ASC 815-10-05-4, Derivatives and Hedging and 815-40, Contracts in Entity’s
Own Equity. This accounting treatment requires that the carrying amount of any embedded derivatives be recorded at fair value at
issuance and marked-to-market at each balance sheet date. In the event that the fair value is recorded as a liability, as is the case
with the Company, the change in the fair value during the period is recorded as either other income or expense. Upon conversion, exercise
or repayment, the respective derivative liability is marked to fair value at the conversion, repayment, or exercise date and then the
related fair value amount is reclassified to other income or expense as part of gain or loss on extinguishment.
In
July 2017, FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480);
Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features. These
amendments simplify the accounting for certain financial instruments with down-round features. The amendments require companies to disregard
the down-round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining liability or equity
classification.
Revenue
recognition and cost of revenue
The
Company adopted Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. This ASC is based on the principle
that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services. This ASC also requires additional disclosure about the nature,
amount, timing, and uncertainty of revenue and cash flows arising from customer service orders, including significant judgments.
The
Company recognizes revenues and the related direct costs of such revenue which generally include compensation and related benefits, gas
costs, insurance, parking and tolls, truck rental fees, and maintenance fees, as of the date the freight is delivered which is when the
performance obligation is satisfied. In accordance with ASC Topic 606, the Company recognizes revenue on a gross basis. Our payment terms
are generally net seven days from acceptance of delivery. The Company does not incur incremental costs obtaining service orders from
its customers, however, if the Company did, because all of the Company’s customer contracts are less than a year in duration, any
contract costs incurred would be expensed rather than capitalized. The revenue that the Company recognizes arises from deliveries of
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.
Management
has reviewed the revenue disaggregation disclosure requirements pursuant to ASC 606 and determined that no further disaggregation disclosure
is required to be presented.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
Stock-based
compensation
Stock-based
compensation is accounted for based on the requirements of ASC 718 – “Compensation – Stock Compensation”,
which requires recognition in the financial statements of the cost of employee, director, and non-employee services received in exchange
for an award of equity instruments over the period the employee, director, or non-employee is required to perform the services in exchange
for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee, director, and non-employee
services received in exchange for an award based on the grant-date fair value of the award. The Company has elected to recognize forfeitures
as they occur as permitted under ASU 2016-09 Improvements to Employee Share-Based Payment.
Basic
and diluted (loss) income per share
Pursuant
to ASC 260-10-45, basic (loss) income per common share is computed by dividing net (loss) income attributable to common shareholders
by the weighted average number of shares of common stock outstanding for the periods presented. Diluted (loss) income per share is computed
by dividing net (loss) income attributable to common shareholders by the weighted average number of shares of common stock, common stock
equivalents and potentially dilutive securities outstanding during the period. Potentially dilutive common shares consist of common stock
issuable for stock options and warrants (using the treasury stock method) and shares issuable for convertible debt and Series B, E and
G preferred shares (using the as-if converted method). These common stock equivalents may be dilutive in the future.
The
following table presents a reconciliation of basic and diluted net (loss) income per share:
SCHEDULE OF RECONCILIATION OF BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| | |
Three Months Ended June 30, | | |
Six Months Ended June 30, | |
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| Net (loss) income per common share - basic: | |
| | | |
| | | |
| | | |
| | |
| Net (loss) income attributable to common stockholders | |
$ | (815,800 | ) | |
$ | 3,526,760 | | |
$ | (2,962,082 | ) | |
$ | 427,744 | |
| Weighted average common shares outstanding – basic | |
| 3,316,885,235 | | |
| 2,125,141,567 | | |
| 3,179,603,803 | | |
| 1,937,320,808 | |
| Net (loss) income per common share – basic | |
$ | (0.00 | ) | |
$ | 0.00 | | |
$ | (0.00 | ) | |
$ | 0.00 | |
| | |
| | | |
| | | |
| | | |
| | |
| Net (loss) income per common share - diluted: | |
| | | |
| | | |
| | | |
| | |
| Net (loss) income attributable to common shareholders – basic | |
$ | (815,800 | ) | |
$ | 3,526,760 | | |
$ | (2,962,082 | ) | |
$ | 427,744 | |
| Add: Series E dividends | |
| - | | |
| 156,097 | | |
| - | | |
| 985,933 | |
| Numerator for net (loss) income per common share – diluted | |
$ | (815,800 | ) | |
$ | 3,682,857 | | |
$ | (2,962,082 | ) | |
$ | 1,413,677 | |
| Weighted average common shares outstanding – basic | |
| 3,316,885,235 | | |
| 2,125,141,567 | | |
| 3,179,603,803 | | |
| 1,937,320,808 | |
| Add: dilutive shares related to: | |
| | | |
| | | |
| | | |
| | |
| Warrants | |
| - | | |
| 270,461,130 | | |
| - | | |
| 270,461,130 | |
| Series E preferred | |
| - | | |
| 144,272,100 | | |
| - | | |
| 144,272,100 | |
| Weighted average common shares outstanding – diluted | |
| 3,316,885,235 | | |
| 2,539,874,797 | | |
| 3,179,603,803 | | |
| 2,352,054,038 | |
| Net (loss) income per common share – diluted | |
$ | (0.00 | ) | |
$ | 0.00 | | |
$ | (0.00 | ) | |
$ | 0.00 | |
Potentially
dilutive common shares were excluded from the computation of diluted shares outstanding for the six months ended June 30, 2022 and 2021
as they would have an anti-dilutive impact on the Company’s net losses in that period and consisted of the following:
SCHEDULE OF POTENTIALLY DILUTIVE SHARES EXCLUDED FROM COMPUTATION OF DILUTED SHARES OUTSTANDING
| | |
June 30, 2022 | | |
June 30, 2021 | |
| Stock warrants | |
| 1,258,008,109 | | |
| 30,622,278 | |
| Stock options | |
| 80,000 | | |
| 80,000 | |
| Series B convertible preferred stock | |
| - | | |
| 700,000 | |
| Series E convertible preferred stock | |
| 28,571,600 | | |
| - | |
| Series G convertible preferred stock | |
| 617,500,000 | | |
| - | |
| Antidilutive securities excluded from computation of
earnings per share | |
| 1,904,159,709 | | |
| 31,402,278 | |
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
Recent
Accounting Pronouncements
In
August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts
in Entity’s Own Equity (Subtopic 815-40)—Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.
The ASU simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently,
more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion
features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception,
which will permit more equity contracts to qualify for the exception. The ASU also simplifies the diluted net income per share calculation
in certain areas. The new guidance is effective for fiscal years beginning after December 15, 2023, including interim periods within
those fiscal years, and early adoption is permitted. The Company is currently evaluating the impact of the adoption of the standard on
the unaudited condensed consolidated financial statements.
In
May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50),
Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic
815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus
of the FASB Emerging Issues Task Force). The ASU clarifies and reduces diversity in an issuer’s accounting for modifications
or exchanges of freestanding equity-classified written call options, warrants for instance, that remain equity classified after modification
or exchange. The ASU provides guidance that will clarify whether an issuer should account for a modification or an exchange of a freestanding
equity-classified written call option that remains equity classified after modification or exchange as (1) an adjustment to equity and,
if so, the related earnings per share effects, if any, or (2) an expense and, if so, the manner and pattern of recognition. The new guidance
is effective for annual and interim periods beginning after December 15, 2021, and early adoption is permitted, including adoption in
an interim period. The adoption of ASU 2021-04 did not have any impact on the Company’s unaudited condensed consolidated
financial statements.
There
are currently no other accounting standards that have been issued but not yet adopted that we believe will have a significant impact
on our unaudited condensed consolidated financial position, results of operations or cash flows upon adoption.
NOTE
3 – ACQUISITIONS AND DISPOSITION
Acquisitions
On
January 15, 2021, through Shyp FX, the Company executed an asset purchase agreement (“APA”) and closed a transaction to acquire
substantially all of the assets and certain liabilities of Double D Trucking, Inc., a northern New Jersey-based logistics provider specializing
in servicing Federal Express over the past 25 years (“DDTI”), including last-mile delivery services using vans and box trucks.
The purchase price was $100,000 of cash and a promissory note of $400,000. The principal assets involved in the acquisition were vehicles
for cargo transport, system equipment for vehicle tracking and navigation of vehicles, and delivery route rights together with assumption
of associated customer relationships. The acquisition of DDTI made the Company an approved contracted service provider of FedEx, which,
the Company believes fits in well with its current geographic coverage area and may lead to additional expansion opportunities within
the FedEx network.
On
March 24, 2021, TLSS Acquisition acquired all issued and outstanding shares of capital stock of Cougar Express, Inc., a New York-based
full-service logistics provider specializing in pickup, warehousing, and delivery services in the New York tri-state area (“Cougar
Express”). The purchase price was $2,000,000 of cash plus cash for the acquisition of security deposits, a cash payment equal to
50% of the difference between cash and accounts receivable acquired and accounts payable assumed, less the assumption of truck loans
and leases, and a promissory note of $350,000. The previous owner of Cougar Express is barred from competing with the Cougar Express
business for five years. Cougar Express was a family-owned full-service transportation business that has been in operation for more than
30 years providing one-to-four person deliveries and offering white glove services. It utilizes its own fleet of trucks, warehouse/driver/office
personnel and on-call subcontractors from its convenient and secure New York JFK airport area location, allowing it to pick-up and deliver
throughout the New York tri-state area. Cougar Express serves a diverse base of approximately 50 commercial accounts, which are freight
forwarders that work with some of the most notable retail businesses in the country. The Company believes that the acquisition of Cougar
Express fits its current business plan, given Cougar Express’s demographic location, services offered, and diversified customer
base, and given that it would provide the Company with a long-standing, well-run profitable operation as a step to begin replacing the
revenue it lost as a result of Amazon terminating its delivery service provider business. Furthermore, the Company believes that, because
Cougar Express is strategically based in New York and serves the tri-state area, organic growth opportunities will be available for expanding
its footprint into the Company’s primary base of operations in New Jersey, as well as efficiencies that could be derived by leveraging
Shypdirect’s operational capabilities.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
The
assets acquired and liabilities assumed were recorded at their estimated fair values on the acquisition date, subject to adjustment during
the measurement period with subsequent changes recognized in earnings or loss. These estimates are inherently uncertain and are subject
to refinement. Management develops estimates based on assumptions as a part of the purchase price allocation process to value the assets
acquired and liabilities assumed as of the business acquisition date. As a result, during the purchase price measurement period, which
may be up to one year from the business acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed
based on completion of valuations, with the corresponding offset to intangible assets. After the purchase price measurement period, the
Company may record any adjustments to assets acquired or liabilities assumed in operating expenses in the period in which the adjustments
may have been determined. During the three months ended September 30, 2021, the Company increased the customer relations intangible asset
acquired and accrued expenses by $7,057 to reflect additional funds due to the owner of Cougar Express.
Based
upon the purchase price allocation, the following table summarizes the estimated fair value of the assets acquired and liabilities assumed
at the date of the respective acquisition:
SCHEDULE OF ESTIMATED FAIR VALUE OF THE ASSETS ACQUIRED AND LIABILITIES ASSUMED
| | |
DDTI | | |
Cougar Express | | |
Total | |
| Assets acquired: | |
| | | |
| | | |
| | |
| Cash | |
$ | - | | |
$ | 10,031 | | |
$ | 10,031 | |
| Accounts receivable | |
| - | | |
| 265,175 | | |
| 265,175 | |
| Other assets | |
| - | | |
| 40,874 | | |
| 40,874 | |
| Transportation vehicles | |
| 209,585 | | |
| - | | |
| 209,585 | |
| Equipment | |
| 20,000 | | |
| 27,831 | | |
| 47,831 | |
| Right of use assets | |
| 44,388 | | |
| - | | |
| 44,388 | |
| Other receivable | |
| - | | |
| 622,240 | | |
| 622,240 | |
| Non-compete agreement | |
| - | | |
| 150,000 | | |
| 150,000 | |
| Customer relations | |
| 373,449 | | |
| 2,123,768 | | |
| 2,497,217 | |
| Total assets acquired at fair value | |
| 647,422 | | |
| 3,239,919 | | |
| 3,887,341 | |
| Liabilities assumed: | |
| | | |
| | | |
| | |
| Notes payable | |
| (103,034 | ) | |
| (16,184 | ) | |
| (119,218 | ) |
| PPP loan payable | |
| - | | |
| (622,240 | ) | |
| (622,240 | ) |
| Accounts payable | |
| - | | |
| (132,155 | ) | |
| (132,155 | ) |
| Accrued expenses | |
| - | | |
| (40,059 | ) | |
| (40,059 | ) |
| Lease liabilities | |
| (44,388 | ) | |
| - | | |
| (44,388 | ) |
| Total liabilities assumed | |
| (147,422 | ) | |
| (810,638 | ) | |
| (958,060 | ) |
| Net asset acquired | |
$ | 500,000 | | |
$ | 2,429,281 | | |
$ | 2,929,281 | |
| Purchase consideration paid: | |
| | | |
| | | |
| | |
| Cash paid | |
$ | 100,000 | | |
$ | 2,033,146 | | |
$ | 2,133,146 | |
| Acquisition payable | |
| - | | |
| 46,135 | | |
| 46,135 | |
| Promissory notes | |
| 400,000 | | |
| 350,000 | | |
| 750,000 | |
| Total purchase consideration paid | |
$ | 500,000 | | |
$ | 2,429,281 | | |
$ | 2,929,281 | |
The
Company shall record acquisition and transaction related expenses in the period in which they are incurred. During the six months ended
June 30, 2022 and 2021, acquisition and transaction related expenses primarily consisted of legal fees of approximately $0 and $8,200,
respectively. Additionally, the Company paid expenses and fees relating to the sale of Series E preferred stock in which a portion of
the proceeds were used to pay the cash portion of the consideration (see Note 9).
Sale
of Shyp FX assets
On
June 21, 2022, the Company sold substantially all of the assets of Shyp FX in an all-cash transaction. The purchaser was Farhoud
Logistics Inc., a New Jersey corporation, an unrelated party. Under the terms of the sale, The Company sold the assets of Shyp FX
consisting of transportation equipment and other equipment and the business of Shyp FX for $825,000.
The Company received net proceeds of $748,500
which is net of a broker commission of $75,000
and other expenses of $1,500.
$25,000 is
being held in escrow, pending bulk sale tax clearance from the State of New Jersey and to cover the estimated cost of a vehicle
repair. In the connection with the sale of these assets, for the three and six months ended June 30, 2022, the Company recorded a
gain on the sale of $296,689 which consisted of the following:
SCHEDULE
OF GAIN ON SALE OF SUBSIDIARY ASSETS
| | |
Amount | |
| Total sale price consideration received | |
$ | 825,000 | |
| | |
| | |
| Less: | |
| | |
| Commissions and other fees paid | |
| 76,500 | |
| Write-off of unamortized intangible assets | |
| 194,505 | |
| Net book value of property and equipment sold | |
| 257,306 | |
| Cost
of sale of assets | |
| 528,311 | |
| Gain on sale of subsidiaries asset’s | |
$ | 296,689 | |
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
NOTE
4 – ACCOUNTS RECEIVABLE
On
June 30, 2022 and December 31, 2021, accounts receivable, net consisted of the following:
SCHEDULE OF ACCOUNTS RECEIVABLE
| | |
June 30, 2022 | | |
December 31, 2021 | |
| Accounts receivable | |
$ | 473,640 | | |
$ | 481,734 | |
| Allowance for doubtful accounts | |
| - | | |
| - | |
| Accounts receivable, net | |
$ | 473,640 | | |
$ | 481,734 | |
NOTE
5 - PROPERTY AND EQUIPMENT
On
June 30, 2022 and December 31, 2021, property and equipment consisted of the following:
SCHEDULE OF PROPERTY AND EQUIPMENT
| | |
Useful Life | | |
June 30, 2022 | | |
December 31, 2021 | |
| Delivery trucks and vehicles | |
| 3 - 5 years | | |
$ | 368,820 | | |
$ | 747,889 | |
| Equipment | |
| 1 - 5 years | | |
| 31,301 | | |
| 51,301 | |
| Subtotal | |
| | | |
| 400,121 | | |
| 799,190 | |
| Less: accumulated depreciation | |
| | | |
| (170,697 | ) | |
| (221,985 | ) |
| Property and equipment, net | |
| | | |
$ | 229,424 | | |
$ | 577,205 | |
On
June 21, 2022, in connection with the sale of net assets of Shyp FX, the Company sold delivery trucks and equipment with a net book value
of $257,306 (See Note 3).
For
the six months ended June 30, 2022 and 2021, depreciation expense is included in general and administrative expenses and amounted to
$90,475 and $113,781, respectively.
NOTE
6 – INTANGIBLE ASSETS
On
June 30, 2022 and December 31, 2021, intangible asset consisted of the following:
SCHEDULE OF INTANGIBLE ASSETS
| | |
Useful life | | |
June 30, 2022 | | |
December 31, 2021 | |
| Customer relations | |
| 3 - 5 years | | |
$ | 2,123,768 | | |
| 2,497,217 | |
| Non-compete agreement | |
| 5 years | | |
| 150,000 | | |
| 150,000 | |
| Intangible assets gross | |
| | | |
| 2,273,768 | | |
| 2,647,217 | |
| Less: accumulated amortization | |
| | | |
| (577,916 | ) | |
| (469,835 | ) |
| Intangible assets net | |
| | | |
$ | 1,695,852 | | |
$ | 2,177,382 | |
On
June 21, 2022, in connection with the sale of net assets of Shyp FX, the Company wrote off the remaining net book value of intangible
assets related to the acquisition of Shyp FX of $194,505 (See Note 3).
For
the six months ended June 30, 2022 and 2021, amortization of intangible assets amounted to $287,025 and $179,835, respectively.
Amortization
of intangible assets attributable to future periods is as follows:
SCHEDULE OF FUTURE AMORTIZATION OF INTANGIBLE ASSETS
| Year ending June 30: | |
Amount | |
| 2023 | |
$ | 454,754 | |
| 2024 | |
| 454,754 | |
| 2025 | |
| 454,754 | |
| 2026 | |
| 331,590 | |
| Total | |
$ | 1,695,852 | |
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
NOTE
7 – CONVERTIBLE PROMISSORY NOTES PAYABLE
Q1/Q2
2020 convertible debt and related warrants
During
the year ended December 31, 2020, the Company issued and sold to certain investors convertible promissory notes in the aggregate principal
amount of $2,068,000 (the “Q1/Q2 2020 Notes”) and warrants to purchase up to 827,200 shares of the Company’s
common stock (the “Q1/Q2 2020 Warrants”). The Company received net proceeds of $1,880,000, which is net of a 10% original
issue discounts of $188,000. The Q1/Q2 2020 Notes initially bore interest at 6% per annum and become due and payable on the date that
is the 24-month anniversary of the original issue date of the respective Q1/Q2 2020 Note. During the existence of an Event of Default
(as defined in the Q1/Q2 2020 Notes), which included, amongst other events, any default in the payment of principal and interest payments
(including Q1/Q2 2020 Note Amortization Payments) under any Q1/Q2 2020 Note or any other Indebtedness (as defined in the Q1/Q2 2020 Notes),
interest accrued at the lesser of (i) the rate of 18% per annum, or (ii) the maximum amount permitted by law.
From
the original issue date of a Q1/Q2 2020 Note until such Q1/Q2 2020 Note was no longer outstanding, such Q1/Q2 2020 Note was convertible,
in whole or in part, at any time, and from time to time, into shares of Common Stock at the option of the holder. The “Conversion
Price” in effect on any Conversion Date (as defined in the Q1/Q2 2020 Notes) means, as of any date of determination, $0.40 per
share, subject to adjustment as provided therein and summarized below. If an Event of Default (as defined in the Q1/Q2 2020 Notes) has
occurred, regardless of whether it has been cured or remains ongoing, the Q1/Q2 2020 Notes were convertible at the lower of: (i) $0.40
and (ii) 70% of the second lowest closing price of the common stock as reported on the Trading Market (as defined in the Q1/Q2 2020 Notes)
during the 20 consecutive Trading Day (as defined in the Q1/Q2 2020 Notes) period ending and including the Trading Day immediately preceding
the delivery or deemed delivery of the applicable notice of conversion. All such Conversion Price determinations were to be appropriately
adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction that proportionately decreases
or increases the number of shares of Common Stock outstanding.
The
Q1/Q2 2020 Warrants are exercisable at any time on or after the date of the issuance and entitle the investors to purchase shares of
the Company’s common stock for a period of five years from the initial date the Q1/Q2 2020 Warrants become exercisable. Under the
terms of the Q1/Q2 2020 Warrants, the investors are entitled to exercise the Q1/Q2 2020 Warrants to purchase up to 827,200 shares of
the Company’s common stock at an initial exercise price of $0.40, subject to adjustment as detailed in the respective Q1/Q2 2020
Warrants.
Due
to the default of amortization payments due on our August 2019 Notes and other notes, in 2020, the Q1/Q2 2020 Notes were deemed in default.
Accordingly, in 2020, the outstanding principal balance on date of default increased by 30% which amounted to approximately $620,400,
default interest accrues at 18%, and the default conversion terms applied. In the third fiscal quarter of 2020, the great majority of
principal amount of Q1/Q2 2020 Notes was exchanged for Common Stock at the conversion price that applied if an Event of Default occurred.
It is the Company’s position (and it was the Company’s intent at issuance) that, to the extent the Q1/Q2 2020 Notes were
converted for Common Stock at the advantageous conversion price applicable to post-Events of Default, the Q1/Q2 Notes are not also entitled
to receive the Mandatory Default Payment (as defined in the Q1/Q2 2020 Notes) of 130% of principal amount. During 2020, since a note
holder could conceivably disagree with the Company’s position in this regard, the Company has decided, out of an abundance of caution
and despite its confidence that its construction of the Q1/Q2 2020 Notes is the only correct one, to accrue a reserve as if a note holder
were entitled both to convert its Q1/Q2 Notes at the advantageous conversion price applicable to post-Events of Default and to
receive the Mandatory Default Payment of 130% on the entire original principal amount of Q1/Q2 2020 Notes.
During
the three months ended June 30, 2021, the Company and each investor entered into a letter agreement whereby the investor waived its right
to any Mandatory Default Payment. Accordingly, during the year ended December 31, 2021, the Company reversed the accrued Mandatory Penalty
amount due of $620,400 and principal amounts due of $44,000 and recorded a gain on debt extinguishment of $664,400. Additionally, during
the year ended December 31, 2021, the Company issued 28,358,841 shares of its common stock upon the conversion of all remaining principal
and interest balances due aggregating $277,916. Hence, as of June 30, 2022 and December 31, 2021, convertible notes payable and default
interest due related to the Q1/Q2 2020 Notes amounted to $0.
April
20, 2020 convertible debt
On
April 20, 2020, the Company issued and sold to an investor a convertible promissory note in the principal amount of $456,500 (the “April
20 Note”). The April 20 Note contained a 10% original issue discount amounting to $41,500 for a purchase price of $415,000.
The April 20 Note initially bore interest at 6% per annum and becomes due and payable on April 20, 2022 (the “April 20 Note
Maturity Date”). During the existence of an Event of Default (as defined in the April 20 Note), which includes, amongst other
events, any default in the payment of principal and interest payment (including any April 20 Note Amortization Payments) under any note
or any other indebtedness, interest accrues at the lesser of (i) the rate of 18% per annum, or (ii) the maximum amount permitted by law.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
Until
the April 20 Note was no longer outstanding, it was convertible, in whole or in part, at any time, and from time to time, into shares
of common stock at the option of the investor. The “Conversion Price” in effect on any Conversion Date (as defined in the
April 20 Note) means, as of any Conversion Date or other date of determination, the lower of: (i) $0.40 and (ii) 70% of the second lowest
closing price of the common stock as reported on the Trading Market (as defined in the April 20 Note) during the 20 consecutive Trading
Day (as defined in the April 20 Note) period ending and including the Trading Day immediately preceding the delivery or deemed delivery
of the applicable notice of conversion. All such Conversion Price determinations were to be appropriately adjusted for any stock dividend,
stock split, stock combination, reclassification or similar transaction that proportionately decreases or increases the common stock.
Due
to the default of August 2019 Note Amortization Payments due on our August 2019 Notes and other notes, the April 20 Note was deemed in
default. Accordingly, in 2020, the outstanding principal balance on date of default increased by 30% which amounted to approximately
$136,950, default interest accrued at 18%, and the default conversion terms applied.
During
the three months ended June 30, 2021, the Company issued 15,923,322 shares of its common stock upon the conversion of all remaining principal
and interest balances due aggregating $95,540. Hence, as of June 30, 2022 and December 31, 2021, convertible notes payable and default
interest due related to the April 20 Note amounted to $0.
Other
convertible debt
On
August 28, 2020, a note payable with a principal balance due of $185,000 was cancelled and a new convertible note was entered into with
a principal balance of $185,000. This new convertible note bore no interest and was payable in monthly payments of $7,500 commencing
on September 1, 2020 until paid in full. The Holder had the right, at Holder’s option, at any time prior to the close of business
five or more days prior to a payment of principal and interest, to convert any of such Holder’s Note, in whole or in part (in denominations
of $20.000 or multiples of it), into that number of shares of common stock of the Company at the conversion price equal to the lowest
closing price of the Company’s common stock on the OTC Market during the ten trading days ending the business day before the date
of conversion. During the year ended December 31, 2020, the Company repaid $15,000 of this convertible note. In January 2021, the Company
issued 15,454,546 shares of its common stock upon conversion of this convertible note and accordingly, as of June 30, 2022 and December
31, 2021, the convertible note balance is $0.
Summary
of derivative liabilities
During
the six months ended June 30, 2021, the fair value of the derivative liabilities, warrants and conversion option was estimated using
the Binomial valuation model with the following assumptions:
SCHEDULE OF FAIR VALUE OF DERIVATIVE LIABILITIES ESTIMATED USING BLACK-SHOLES VALUATION MODEL
| | |
| 2021 | |
| Expected dividend rate | |
| - | |
| Expected term (in years) | |
| 0.75 to 5.00 | |
| Volatility | |
| 169.7% to 367.0 | % |
| Risk-free interest rate | |
| 0.04% to 0.87 | % |
For
the six months ended June 30, 2022 and 2021, amortization of debt discounts related to convertible notes amounted to $0 and $83,548,
respectively, which has been included in interest expense on the accompanying unaudited condensed consolidated statements of operations.
The weighted average interest rate during the six months ended June 30, 2021 was approximately 18.0%.
NOTE
8 – NOTES PAYABLE
Promissory
notes
On
January 15, 2021, in connection with the acquisition of DDTI, the Company issued a promissory note in the amount of $400,000. The principal
amount of $400,000 was payable in four installments of $100,000 plus accrued interest as follows: $100,000 plus accrued interest was
due and paid on April 15, 2021, $100,000 plus accrued interest was due and paid on July 15, 2021, $100,000 plus accrued interest is due
and paid on October 15, 2021 and $100,000 plus all remaining accrued interest was due and paid on January 15, 2022. Interest accrued
at 4% per annum. On June 30, 2022 and December 31, 2021, the principal amount related to this note was $0 and $100,000, respectively.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
On
March 24, 2021, in connection with the acquisition of Cougar Express, the Company issued a promissory note in the amount of $350,000.
The principal amount of $350,000 was payable in two installments of $175,000 plus accrued interest as follows: $175,000 plus accrued
interest was due and paid on September 23, 2021 and $175,000 plus all remaining accrued interest was due and paid on March 23, 2022.
Interest accrued at 6% per annum. On June 30, 2022 and December 31, 2021, the principal amount related to this note was $0 and $175,000,
respectively.
Equipment
and auto notes payable
In
November 2019, the Company entered into a promissory note for the purchase of five trucks in the amount of $460,510. The note was due
in sixty monthly installments of $9,304. The first payment was paid in December 2019 and the remaining fifty-nine payments were due monthly
commencing on January 27, 2020. The note was secured by the trucks and was personally guaranteed by the Company’s former chief
executive officer. During the year ended December 31, 2021, this note was repaid. On June 30, 2022 and December 31, 2021, equipment note
payable to this entity amounted to $0.
In
connection with the acquisition of DDTI, the Company assumed several truck notes payable liabilities due to entities. On June 30, 2022
and December 31, 2021, truck notes payable to these entities amounted to $0 and $17,985, respectively.
In
connection with the acquisition of Cougar Express, the Company assumed several equipment notes payable liabilities due to entities. On
June 30, 2022 and December 31, 2021, equipment notes payable to these entities amounted to $0 and $2,611, respectively.
Paycheck
Protection Program Promissory Note
During
2020, prior to the acquisition of Cougar Express by the Company, Cougar Express entered into a Paycheck Protection Program promissory
note (the “Cougar PPP Loan”) in the amount of $622,240 under the SBA Paycheck Protection Program of the CARES Act.
Pursuant to the Cougar Stock Purchase Agreement, the Company did not assume and shall not be responsible to pay the Cougar PPP loan.
The prior shareholder of Cougar Express agreed to indemnify and hold the Buyer (and its directors, officers, employees and affiliates)
harmless from and with respect to any and all claims, liabilities, losses, damages, costs and expenses, including, without limitation,
the reasonable fees and expenses of counsel (collectively, the “Losses”), related to or arising directly or indirectly out
of, among other items, any claim that any portion or all of the Cougar PPP loan secured by Cougar Express is to be repaid to the lender.
Cougar Express filed for forgiveness of this loan and on June 10, 2021, Cougar Express received a Notice of Paycheck Protection Program
Forgiveness Payment from the SBA. Accordingly, the note payable and related note receivable were reversed and no gain or loss was recorded.
Line
of credit
Through
December 2021, the Company’s subsidiary, Cougar Express, maintained a $5,000 line of credit with the bank. This line of credit
was closed in December 2021 and was payable of demand. On December 31, 2021, principal amount outstanding under the line of credit amounted
to $0.
On
June 30, 2022 and December 31, 2021, notes payable consisted of the following:
SCHEDULE OF NOTES PAYABLE
| | |
June 30, 2022 | | |
December 31, 2021 | |
| Principal amounts | |
$ | - | | |
$ | 295,596 | |
| Less: current portion of notes payable | |
| - | | |
| (283,141 | ) |
| Notes payable – long-term | |
$ | - | | |
$ | 12,455 | |
NOTE
9– SHAREHOLDERS’ EQUITY
Preferred
stock
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 700,000 shares of Series B Preferred shares to Bellridge Capital, L.P. upon settlement of 700,000
shares of issuable common shares. In April 2022, the Company and Bellridge entered into a settlement agreement pursuant to which the 700,000 shares
of Series B preferred shares were cancelled and the Company recorded settlement income of $700.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
Series
D preferred shares
The
Board of Directors (the “Board”) created the Series D pursuant to the authority vested in the Board by the Company’s
Amended and Restated Articles of Incorporation to issue up to 10,000,000 shares of preferred stock, $0.001 par value per share. The Company’s
Amended and Restated Articles of Incorporation explicitly authorize the Board to issue any or all of such shares of preferred stock in
one (1) or more classes or series and to fix the designations, powers, preferences and rights, the qualifications, limitations or restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any class or series, without further vote or action by the stockholders.
On
July 20, 2020, the Board filed the Certificate of Designation of Preferences (“COD”), Rights and Limitations of Series D
Preferred Stock (the “Series D COD”) with the Secretary of State of the State of Nevada designating 1,250,000 shares
of preferred stock as Series D. The Series D does not have the right to vote. The Series D has a stated value of $6.00 per share (the
“Stated Value”). Subject only to the liquidation rights of the holders of Series B Preferred Stock that is currently
issued and outstanding, upon the liquidation, dissolution or winding up of the business of the Company, whether voluntary or involuntary,
the Series D is entitled to receive an amount per share equal to the Stated Value and then receive a pro-rata portion of the remaining
assets available for distribution to the holders of common stock on an as-converted to common stock basis. Until July 20, 2021, the holders
of Series D have the right to participate, pro rata, in each subsequent financing in an amount up to 25% of the total proceeds of such
financing on the same terms, conditions and price otherwise available in such subsequent financing.
Subject
to a beneficial ownership limitation and customary adjustments for stock dividends and stock splits, each share of Series D is convertible
into 1,000 shares of common stock. A holder of Series D may not convert any shares of Series D into common stock if the holder (together
with the holder’s affiliates and any persons acting as a group together with the holder or any of the holder’s affiliates)
would beneficially own in excess of 4.99% of the number of shares of common stock outstanding immediately after giving effect to the
conversion, as such percentage ownership is determined in accordance with the terms of the Series D COD. However, upon notice from the
holder to the Company, the holder may decrease or increase the beneficial ownership limitation, which may not exceed 9.99% of the number
of shares of common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in
accordance with the terms of the Series D COD, provided that any such increase or decrease in the beneficial ownership limitation will
not take effect until 61 days following notice to the Company.
Approval
of at least a majority of the outstanding Series D is required to: (a) amend or repeal any provision of, or add any provision to, the
Company’s Articles of Incorporation or bylaws, or file any Certificate of Designation (however such document is named) or articles
of amendment to create any class or any series of preferred stock, if such action would adversely alter or change in any respect the
preferences, rights, privileges or powers, or restrictions provided for the benefit, of the Series D, regardless of whether any such
action shall be by means of amendment to the Articles of Incorporation or bylaws or by merger, consolidation or otherwise or filing any
Certificate of Designation, it being understood that the creation of a new security having rights, preferences or privileges senior to
or on parity with the Series D in a future financing will not constitute an amendment, addition, alteration, filing, waiver or repeal
for these purposes; (b) increase or decrease (other than by conversion) the authorized number of Series D; (c) issue any Series D, other
than to the Investors; or (d) without limiting any provision hereunder, whether or not prohibited by the terms of the Series D, circumvent
a right of the Series D.
Series
E preferred shares
To
consummate the Series E Offering, the Company’s Board of Directors (the “Board”) created the Series E Convertible
Preferred Stock (the “Series E”) pursuant to the authority vested in the Board by the Company’s Amended and
Restated Articles of Incorporation to issue up to 10,000,000 shares of preferred stock, $0.001 par value per share, of which 7,049,999
are unissued and undesignated. The Company’s Amended and Restated Articles of Incorporation explicitly authorize the Board to issue
any or all of such shares of preferred stock in one (1) or more classes or series and to fix the designations, powers, preferences and
rights, the qualifications, limitations or restrictions thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any class or series, without
further vote or action by the stockholders.
On
October 6, 2020, the Board filed the Certificate of Designation of Preferences, Rights and Limitations of Series E Convertible Preferred
Stock (the “Series E COD”) with the Secretary of State of the State of Nevada designating 562,250 shares of preferred
stock as Series E. On December 28, 2020, the Board filed an Amended and Restated Certificate of Designation of Preferences, Rights and
Limitations of Series E Convertible Preferred Stock (the “Amended Series E COD”) with the Secretary of State of the
State of Nevada. The Series E has a stated value of $13.34 per share (the “Stated Value”). Pursuant with the Amended
Series E COD,
| |
● |
Each
holder of Series E has the right to cast the number of votes equal to the number of whole shares of Common Stock into which the shares
of Series E held by such holder are convertible as of the applicable record date. |
| |
|
|
| |
● |
Unless
prohibited by Nevada law governing distributions to stockholders, for a period of one-year beginning with the Original Issuance Date,
as defined, the Corporation shall have the right but not the obligation to redeem all outstanding Series E (and not any part of the
Series E) at a price equal to 115% of (i) the Stated Value per share plus (ii) all unpaid dividends thereon. If the Company fails
to redeem all outstanding Series E on the redemption date, it shall be deemed to have waived its redemption right. |
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
Subject to a beneficial ownership limitation and customary adjustments
for stock dividends and stock splits, each share of Series E shall be convertible into that number of shares of Common Stock calculated
by dividing the Stated Value of each share of Series E being converted by the Conversion Price. The initial Conversion Price shall be
$0.01 which shall be subject to adjustment as provided below. In addition, the Company shall issue the Holder converting all or any portion
of Series E an additional sum (the “Make Good Amount”) equal to $210 for each $1,000 of Stated Value of the Series
E converted pro-rated for amounts more or less than $1,000, increasing to $310 for each $1,000 of Stated Value during the Triggering Event
Period (the “Extra Amount”). Subject to the Beneficial Ownership Limitation, the Make Good Amount shall be paid in
Shares of Common Stock, as follows: The number of shares of Common Stock issuable as the Make Good Amount shall be calculated by dividing
the Extra Amount by the product of 80% times the average VWAP for the five Trading Days prior to the date a Holder delivered a
notice of conversion to the Company (the “Conversion Date”). During the Triggering Event Period, the number of shares
of Common Stock issuable as the Make Good Amount shall be calculated by dividing the Extra Amount by the product of 70% times the
average VWAP for the five Trading Days prior to the Conversion Date.
Subject
to the Beneficial Ownership Limitation, at any time during the period commencing on the date of the occurrence of a Triggering Event
and ending on the date of the cure of such Triggering Event (the “Triggering Event Period”), a Holder may, at such Holder’s
option, by delivery of a conversion notice to the Company to convert all, or any number of Series E (such conversion amount of the Series
E to be converted pursuant to this Section 6(b) (the “Triggering Event Conversion Amount”), into shares of Common
Stock at the Triggering Event Conversion Price. The “Triggering Event Conversion Amount” means 125% of the Stated
Value and the “Triggering Event Conversion Price” means $0.006.
Triggering
events include, but are not limited to, (1) failure to satisfy Rule 144 current public information requirements; (2) ceasing to be a
reporting company under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or failing to comply
with the reporting requirements of a reporting company under the Exchange Act; (3) suspension from or termination of trading; (4) failure
to reserve sufficient shares of Common Stock (after cure periods and subject to certain extensions); (5) various insolvency proceedings
(subject to certain carveouts); (6) material breach of the Series E Offering transaction documents; and (7) failure to comply with conversion
of any Series E shares when requested by the holder thereof.
If
and whenever on or after the Initial Issuance Date but not after two years from the Original Issuance Date, the Company issues or sells,
or is deemed to have issued or sold, additional shares of common stock, options, warrants of convertible instruments, other than an Exempt
Issuance, for a consideration per share (the “Base Share Price”) less than a price equal to the Conversion Price in
effect immediately prior to such issuance or sale or deemed issuance or sale (such Conversion Price then in effect is reflected to herein
as the “Applicable Price”) (the foregoing a “Dilutive Issuance”), then immediately after such Dilutive
Issuance, the conversion price then in effect shall be reduced to an amount equal to the Base Share Price.
From
and after the Original Issuance Date, cumulative dividends on each share of Series E shall accrue, whether or not declared by the Board
of Directors and whether or not there are funds legally available for the payment of dividends, on a daily basis in arrears at the rate
of 6% per annum based on a 360-day year on the Stated Value plus all unpaid accrued and accumulated dividends thereon. As of June 30,
2022 and December 31, 2021, the Company has accrued dividends of $152,450 and $140,872, respectively, which has been included in accrued
expenses on the accompanying unaudited condensed consolidated balance sheets.
On
a pari passu basis with the holders of Series D Convertible Preferred Stock that was issued and outstanding, upon the liquidation, dissolution
or winding up of the business of the Company, whether voluntary or involuntary, the Series E is entitled to receive an amount per share
equal to the Stated Value and then receive a pro-rata portion of the remaining assets available for distribution to the holders of Common
Stock on an as-converted to Common Stock basis. Until the date that such Series E shareholder no longer owns at least 50% of the Series
E, the holders of Series E have the right to participate, pro rata, in each subsequent financing in an amount up to 25% of the total
proceeds of such financing on the same terms, conditions and price otherwise available in such subsequent financing.
A
holder of Series E may not convert any shares of Series E into Common Stock if the holder (together with the holder’s affiliates
and any persons acting as a group together with the holder or any of the holder’s affiliates) would beneficially own in excess
of 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to the conversion, as such percentage ownership
is determined in accordance with the terms of the Series E COD. However, upon notice from the holder to the Company, the holder may decrease
or increase the beneficial ownership limitation, which may not exceed 9.99% of the number of shares of Common Stock outstanding immediately
after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Amended Series E
COD, provided that any such increase or decrease in the beneficial ownership limitation will not take effect until 61 days following
notice to the Company.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
Approval
of at least a majority of the outstanding Series E is required to: (a) amend or repeal any provision of, or add any provision to, the
Company’s Articles of Incorporation or bylaws, or file any Certificate of Designation (however such document is named) or articles
of amendment to create any class or any series of preferred stock, if such action would adversely alter or change in any respect the
preferences, rights, privileges or powers, or restrictions provided for the benefit, of the Series E, regardless of whether any such
action shall be by means of amendment to the Articles of Incorporation or bylaws or by merger, consolidation or otherwise or filing any
Certificate of Designation, but the creation of a new security having rights, preferences or privileges senior to or on parity with the
Series E in a future financing will not constitute an amendment, addition, alteration, filing, waiver or repeal for these purposes; (b)
increase or decrease (other than by conversion) the authorized number of Series E; (c) issue any Series D Convertible Preferred Stock,
(d) issue any Series E in excess of 562,250 or (e) without limiting any provision under the Series E COD, whether or not prohibited by
the terms of the Series E, circumvent a right of the Series E.
During
the three months ended March 31, 2021, the Company entered into Securities Purchase Agreements with investors pursuant to which the Investors
agreed to purchase units, severally and not jointly, which consisted of an aggregate of (i) 310,992 shares of Series E and (ii) Warrants
to purchase 414,857,146 shares of the Company’s common stock which are equal to 1,334 warrants for each share of Series E purchased
(the “Q1 2021 Series E Offering”). The gross proceeds to the Company were $3,630,000, or $11.67 per unit. The Company paid
fees of $372,000 and received net proceeds of $3,258,000. The initial exercise price of the Warrants related to the Q1 2021 Series E
Offering is $0.01 per share, subject to adjustment. Additionally, the Company issued 82,971,429 warrants to the placement agent at an
initial exercise price of $0.01 per share. In connection with the issuance of the Series E and related warrants, during the three months
ended March 31, 2021, the Company recorded a deemed dividend of $777,510 related to the beneficial conversion features of the Series
E.
During
April 2021, the Company entered into Securities Purchase Agreements with investors pursuant to which the Investors agreed to purchase
units, severally and not jointly, which consisted of an aggregate of (i) 32,126 shares of Series E and (ii) Warrants to purchase 42,857,143
shares of the Company’s common stock which are equal to 1,334 warrants for each share of Series E purchased (the “April 2021
Series E Offering”). The gross proceeds to the Company were $375,000, or $11.67 per unit. The Company paid fees of $42,500 and
received net proceeds of $332,500. The initial exercise price of the Warrants related to the April 2021 Series E Offering is $0.01 per
share, subject to adjustment. Additionally, the Company issued 8,571,429 warrants to the placement agent at an initial exercise price
of $0.01 per share. In connection with the issuance of the Series E and related warrants, on April 9, 2021, the Company recorded a deemed
dividend of $104,533 related to the beneficial conversion features of the Series E.
In
connection with the Series E Offerings, the Company entered into Registration Rights Agreements (the “Series E Registration
Rights Agreements”) pursuant to which the Company agreed to file a registration statement on Form S-1 to register the resale
of the shares of Common Stock issuable to the Investors upon conversion of the Series E Preferred Stock and exercise of the Warrants.
Pursuant to the Series E Registration Rights Agreements, if a registration statement registering for resale all of the shares of common
stock issuable under Series E Convertible Preferred Stock and Warrants (i) is not filed with the Commission by the Company within 30
days of the closing dates or any other registration statement, (ii) is not declared effective by the Commission by the Effectiveness
Date of the initial registration statement (90 days following the closing date) or any other registration statement, or (iii) after the
effective date of a registration statement, such registration statement ceases for any reason to remain continuously effective as to
all registrable securities included in such registration statement for more than 30 calendar days during any 12-month period (any such
failure or breach being referred to as an “Event”, and the date on which such Event occurs, being referred to as “Event
Date”), then, in addition to any other rights the Holders may have under the Series E Registration Rights Agreements or under
applicable law, on each such Event Date and on each monthly anniversary of each such Event Date (if the applicable Event shall not have
been cured by such date) until the applicable Event is cured, the Company is obligated to pay to each Holder an amount in cash, as partial
liquidated damages and not as a penalty, equal to 1% of the purchase price paid by such Holder pursuant to the Series E Purchase Agreement,
during which such Event continues uncured. Also pursuant to the Series E Registration Rights Agreements, the partial liquidated damages
provisions summarized above apply on a daily pro rata basis for any portion of a month prior to the cure of an Event. The Company did
not file its initial registration statement within 30 days of the closing date of certain of the Registration Rights Agreements (the
“Filing Events”) and such registration statement was not declared effective by the Commission by the Effectiveness
Date of certain of the Registration Rights Agreements (the “Effectiveness Events”). The Company filed a registration
statement on Form S-1 for the shares of Common Stock issuable to the Investors upon conversion of the Series E Preferred Stock and exercise
of the Warrants (the “S-1 Registration Statement”) on April 22, 2021 (the “Filing Date”), which
was declared effective by the Commission on May 5, 2021 (the “Effective Date”). The filing of the S-1 Registration
Statement cured the Filing Events as of the Filing Date. The declaration of effectiveness of the S-1 Registration Statement cured the
Effectiveness Events as of the Effective Date.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
These
Series E preferred share issuances with redemption provisions that permit the issuer to settle in either cash or common stock, at the
option of the issuer, were evaluated to determine whether temporary or permanent equity classification on the unaudited condensed consolidated
balance sheet was appropriate. As per the terms of the Series E preferred stock agreements, the Company shall have the right but not
the obligation to redeem all outstanding Series E (and not any part of the Series E) at a price equal to 115% of (i) the Stated Value
per share plus (ii) all unpaid dividends thereon. As such, since Series E preferred stock is redeemable upon the occurrence of an event
that is within the Company’s control, the Series E preferred stock is classified as permanent equity.
The
Company concluded that the Series E Preferred Stock represented an equity host and, therefore, the redemption feature of the Series E
Preferred Stock was considered to be clearly and closely related to the associated equity host instrument. The redemption features did
not meet the net settlement criteria of a derivative and, therefore, were not considered embedded derivatives that required bifurcation.
The Company also concluded that the conversion rights under the Series E Preferred Stock were clearly and closely related to the equity
host instrument. Accordingly, the conversion rights feature on the Series E Preferred Stock were not considered an embedded derivative
that required bifurcation.
On
December 8, 2020, the Company entered into an Engagement Agreement (the “Engagement Agreement”) with a placement agent to
act as an exclusive selling/placement agent for the Company to assist in a financing for the Company. In connection with the engagement
letter, the Company agreed to pay to the placement agent at each full or incremental closing of any equity financing, convertible debt
financing, debt conversion or any instrument convertible or exercisable into the Company’s common stock (the “Securities
Financing”) during the Exclusive Period which is for a period of 90 days from the date of execution of this Letter Agreement; (i)
a cash transaction fee in the amount of 10% of the amount of the Securities Financing; and (ii) warrants (the “Warrants”)
with a 5 year term and cashless exercise, equal to 10% of the amount of securities sold (on an as converted basis) in the Securities
Financing, at an exercise price equal to the investor’s warrant exercise price of the Securities Financing. In connection with
this Engagement Agreement, through December 31, 2020, the Company paid the placement agent cash of $67,000 and issued 15,314,285 warrants
to the placement agent at an initial exercise price of $0.01 per share. Additionally, during the year ended December 31, 2021, the Company
paid the placement agent cash of $385,500 and issued 91,542,858 warrants to the placement agent at an initial exercise price of $0.01
per share. The cash fee of $400,500 was charged against the proceeds of the offering in additional paid-in capital and there is no effect
on equity for the placement agent warrants.
During
the three months ended June 30, 2021, the Company issued 571,296,287 shares of its common stock in connection with the conversion of
340,346 shares of Series E. The conversion ratio was based on the Series E certificate of designation, as amended.
During
the three months ended September 30, 2021, the Company issued 25,725,519 shares of its common stock in connection with the conversion
of 17,135 shares of Series E. The conversion ratio was based on the Series E certificate of designation, as amended.
During
the three months ended December 31, 2021, the Company issued 60,758,228 shares of its common stock in connection with the conversion
of 39,410 shares of Series E. The conversion ratio was based on the Series E certificate of designation, as amended.
During
the three months ended March 31, 2022, the Company issued 75,000,000 shares of its common stock in connection with the conversion of
19,947 shares of Series E. The conversion ratio was based on the Series E certificate of designation, as amended.
During
the three months ended June 30, 2022, the Company issued 38,500,868 shares of its common stock in connection with the conversion of 10,240
shares of Series E and paid liquidating damages of $24,000. The conversion ratio was based on the Series E certificate of designation,
as amended.
Series
F preferred share
Pursuant
to the terms of the Securities Purchase Agreements entered in connection with the Series E Offering by and among the Company and the
investors named therein (the “Series E Investors”), the Company is required to keep reserved for issuance to the Series E
Investors three times the number of shares of common stock issuable to the Series E Investors upon conversion or exercise, as applicable,
of convertible notes and warrants held by the Series E Investors (the “Series E Reserve Requirement”). If the Company fails
to meet the Series E Reserve Requirement within 45 days after written notice from a Series E Investor, the Company must, inter alia,
sell to Company’s chief executive officer (or such other officer as the board of directors may designate) a series of preferred
stock which holds voting power equal to 51% of the number of votes eligible to vote at any special or annual meeting of the Company’s
stockholders (with the power to take action by written consent in lieu of a stockholders meeting) for the sole purpose of amending the
Company’s Amended and Restated Articles of Incorporation to increase the number of shares of common stock that the Company is authorized
to issue, which such preferred stock will be automatically cancelled upon the effectiveness of the resulting increase in the Company’s
authorized stock.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
On
February 22, 2021, the Company sold to John Mercadante, for $10, one share of Series F Preferred Stock which has voting power equal to
51% of the number of votes eligible to vote at any special or annual meeting of the Company’s stockholders (with the power to take
action by written consent in lieu of a stockholders meeting) for the sole purpose of amending the Company’s Amended and Restated
Articles of Incorporation to increase the number of shares of common stock that the Company is authorized to issue. Upon the effectiveness
of the amendment on April 15, 2021, the Series F Preferred Stock was automatically cancelled. The Series F Preferred Stock was not entitled
to vote on any other matter, was not entitled to dividends, was not convertible into any other security of the Company and was not entitled
to any distributions upon liquidation of the Company.
Series
G preferred share
On
December 28, 2021, the Company’s Board of Directors (the “Board”) Board filed the Certificate of Designation of Preferences,
Rights and Limitations of Series G Convertible Preferred Stock (the “Series G COD”) with the Secretary of State of the State
of Nevada designating 1,000,000 shares of preferred stock as Series G. The Series G has a stated value of $10.00 per share (the “Series
G Stated Value”). Pursuant with the Series G COD,
| |
● |
Each
holder of Series G has the right to cast the number of votes equal to the number of whole shares of Common Stock into which the shares
of Series G held by such holder are convertible as of the applicable record date. |
| |
|
|
| |
● |
Unless
prohibited by Nevada law governing distributions to stockholders, for a period of one-year beginning with the Original Issuance Date,
as defined, the Corporation shall have the right but not the obligation to redeem all outstanding Series G (and not any part of the
Series G) at a price equal to 115% of (i) the Stated Value per share plus (ii) all unpaid dividends thereon. If the Company fails
to redeem all outstanding Series G on the redemption date, it shall be deemed to have waived its redemption right. |
Subject
to a beneficial ownership limitation and customary adjustments for stock dividends and stock splits, each share of Series G shall be
convertible into that number of shares of Common Stock calculated by dividing the Stated Value of each share of Series G being converted
by the Conversion Price. The initial Conversion Price shall be $0.01 which shall be subject to adjustment as provided below. In addition,
the Company shall issue the Holder converting all or any portion of Series G an additional sum (the “Series G Make Good Amount”)
equal to $210 for each $1,000 of Stated Value of the Series G converted pro-rated for amounts more or less than $1,000 (the “Series
G Extra Amount”). Subject to the Beneficial Ownership Limitation, the Make Good Amount shall be paid in Shares of Common Stock,
as follows: The number of shares of Common Stock issuable as the Make Good Amount shall be calculated by dividing the Series G Extra
Amount by the product of 80% times the average VWAP for the five Trading Days prior to the date a Holder delivered a notice of conversion
to the Company (the “Conversion Date”), subject to beneficial ownership limitations.
If
and whenever on or after the Initial Issuance Date but not after two years from the Original Issuance Date, the Company issues or sells,
or is deemed to have issued or sold, additional shares of common stock, options, warrants of convertible instruments, other than an Exempt
Issuance, for a consideration per share (the “Base Share Price”) less than a price equal to the Conversion Price in
effect immediately prior to such issuance or sale or deemed issuance or sale (such Conversion Price then in effect is reflected to herein
as the “Applicable Price”) (the foregoing a “Dilutive Issuance”), then immediately after such Dilutive
Issuance, the conversion price then in effect shall be reduced to an amount equal to the Base Share Price.
From
and after the Original Issuance Date, cumulative dividends on each share of Series G shall accrue, whether or not declared by the Board
of Directors and whether or not there are funds legally available for the payment of dividends, on a daily basis in arrears at the rate
of 6% per annum based on a 360-day year on the Stated Value plus all unpaid accrued and accumulated dividends thereon. As of June 30,
2022 and December 31, 2021, the Company has accrued dividends of $183,173 and $0, respectively, which has been included in accrued expenses
on the accompanying unaudited condensed consolidated balance sheets.
On
a pari passu basis with the holders of Series E Convertible Preferred Stock that was issued and outstanding, upon the liquidation, dissolution
or winding up of the business of the Company, whether voluntary or involuntary, the Series G is entitled to receive an amount per share
equal to the Stated Value and then receive a pro-rata portion of the remaining assets available for distribution to the holders of Common
Stock on an as-converted to Common Stock basis. The holders of Series G have the right to participate, pro rata, in each subsequent financing
in an amount up to 40% of the total proceeds of such financing on the same terms, conditions and price otherwise available in such subsequent
financing.
A
holder of Series G may not convert any shares of Series G into Common Stock if the holder (together with the holder’s affiliates
and any persons acting as a group together with the holder or any of the holder’s affiliates) would beneficially own in excess
of 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to the conversion, as such percentage ownership
is determined in accordance with the terms of the Series G COD. However, upon notice from the holder to the Company, the holder may decrease
or increase the beneficial ownership limitation, which may not exceed 9.99% of the number of shares of Common Stock outstanding immediately
after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Series G COD, provided
that any such increase or decrease in the beneficial ownership limitation will not take effect until 61 days following notice to the
Company.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
Approval
of at least two-thirds of the outstanding Series G is required to: (a) amend or repeal any provision of, or add any provision to, the
Company’s Articles of Incorporation or bylaws, or file any Certificate of Designation (however such document is named) or articles
of amendment to create any class or any series of preferred stock, if such action would adversely alter or change in any respect the
preferences, rights, privileges or powers, or restrictions provided for the benefit, of the Series G, regardless of whether any such
action shall be by means of amendment to the Articles of Incorporation or bylaws or by merger, consolidation or otherwise or filing any
Certificate of Designation, but the creation of a new security having rights, preferences or privileges senior to or on parity with the
Series G in a future financing will not constitute an amendment, addition, alteration, filing, waiver or repeal for these purposes; (b)
increase or decrease (other than by conversion) the authorized number of Series G; (c) issue any Series E or Series D Convertible Preferred
Stock, (d) issue any Series G in excess of 1,000,000 or (e) without limiting any provision under the Series G COD, whether or not prohibited
by the terms of the Series G, circumvent a right of the Series G.
On
December 31, 2021, the Company entered into Securities Purchase Agreements with investors pursuant to which the Investors agreed to purchase
units, severally and not jointly, which consisted of an aggregate of (i) 615,000 shares of Series G and (ii) Warrants to purchase 615,000,000
shares of the Company’s common stock which are equal to 1,000 warrants for each share of Series G purchased (the “December
2021 Series G Offering”). The gross proceeds to the Company were $6,150,000, or $10.00 per unit. The Company paid fees of $615,507,
paid cash of $54,933 for the settlement of disputed penalties related the Series E and received net proceeds of $5,479,560 The initial
exercise price of the Warrants related to the December 2021 Series G Offering is $0.01 per share, subject to adjustment. In connection
with the issuance of the Series G and related warrants, the Company recorded a deemed dividend of $2,041,802 related to the beneficial
conversion features of the Series G.
On
January 25, 2022, the Company entered into Securities Purchase Agreements with investors pursuant to which the Investors agreed to purchase
units, severally and not jointly, which consisted of an aggregate of (i) 70,000 shares of Series G and (ii) Warrants to purchase 70,000,000
shares of the Company’s common stock which are equal to 1,000 warrants for each share of Series G purchased (the “January
2022 Series G Offering”). The gross proceeds to the Company were $700,000, or $10.00 per unit. The Company paid placement agent
fees of $70,000 and received net proceeds of $630,000. On March 4, 2022, the Company entered into a Securities Purchase Agreement with
an investor pursuant to which the Investor agreed to purchase units, severally and not jointly, which consisted of an aggregate of (i)
25,000 shares of Series G and (ii) Warrants to purchase 25,000,000 shares of the Company’s common stock which are equal to 1,000
warrants for each for each share of Series G purchased (the “March 2022 Series G Offering”). The gross proceeds to the Company
were $250,000, or $10.00 per unit. The Company paid placement agent fees of $25,000 and received net proceeds of $225,000. The initial
exercise price of the Warrants related to the January 2022 and March 2022 Series G Offerings is $0.01 per share, subject to adjustment.
Additionally, the Company issued 19,000,000 warrants to the placement agent at an initial exercise price of $0.01 per share. The aggregate
cash fees of $95,000 was charged against the proceeds of the offering in additional paid-in capital and there is no effect on equity
for the placement agent warrants.
In
connection with the Series G Offerings, the Company entered into Registration Rights Agreements (the “Series G Registration
Rights Agreements”) pursuant to which the Company agreed to file a registration statement on Form S-1 to register the resale
of the shares of Common Stock issuable to the Investors upon conversion of the Series G Preferred Stock and exercise of the Warrants.
Pursuant to the Series G Registration Rights Agreements, if a registration statement registering for resale all of the shares of common
stock issuable under Series G Convertible Preferred Stock and Warrants (i) is not filed with the Commission by the Company within 45
days of the closing dates or any other registration statement, (ii) is not declared effective by the Commission by the Effectiveness
Date of the initial registration statement (90 days following the closing date) or any other registration statement, or (iii) after the
effective date of a registration statement, such registration statement ceases for any reason to remain continuously effective as to
all registrable securities included in such registration statement for more than 30 calendar days during any 12-month period (any such
failure or breach being referred to as an “Event”, and the date on which such Event occurs, being referred to as “Event
Date”), then, in addition to any other rights the Holders may have under the Series G Registration Rights Agreements or under
applicable law, on each such Event Date and on each monthly anniversary of each such Event Date (if the applicable Event shall not have
been cured by such date) until the applicable Event is cured, the Company is obligated to pay to each Holder an amount in cash, as partial
liquidated damages and not as a penalty, equal to 1% of the purchase price paid by such Holder pursuant to the Series G Purchase Agreement,
during which such Event continues uncured. Also pursuant to the Series G Registration Rights Agreements, the partial liquidated damages
provisions summarized above apply on a daily pro rata basis for any portion of a month prior to the cure of an Event. The Company filed
a registration statement on Form S-1 for the shares of Common Stock issuable to the Investors upon conversion of the Series G Preferred
Stock and exercise of the Warrants (the “S-1 Registration Statement”) on January 28, 2022 (the “Filing Date”),
which was declared effective by the Commission omn May 13, 2022. The filing of the S-1 Registration Statement cured the Filing Events
as of the Filing Date. The declaration of effectiveness of the S-1 Registration Statement cured the Effectiveness Events as of the Effective
Date.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
These
Series G preferred share issuances with redemption provisions that permit the issuer to settle in either cash or common stock, at the
option of the issuer, were evaluated to determine whether temporary or permanent equity classification on the unaudited condensed consolidated
balance sheet was appropriate. As per the terms of the Series G preferred stock agreements, the Company shall have the right but not
the obligation to redeem all outstanding Series G (and not any part of the Series E) at a price equal to 115% of (i) the Stated Value
per share plus (ii) all unpaid dividends thereon. As such, since Series G preferred stock is redeemable upon the occurrence of an event
that is within the Company’s control, the Series G preferred stock is classified as permanent equity.
The
Company concluded that the Series G Preferred Stock represented an equity host and, therefore, the redemption feature of the Series G
Preferred Stock was considered to be clearly and closely related to the associated equity host instrument. The redemption features did
not meet the net settlement criteria of a derivative and, therefore, were not considered embedded derivatives that required bifurcation.
The Company also concluded that the conversion rights under the Series G Preferred Stock were clearly and closely related to the equity
host instrument. Accordingly, the conversion rights feature on the Series G Preferred Stock were not considered an embedded derivative
that required bifurcation.
In
connection with issuance of the Series G, on December 31, 2021, the Company paid the placement agent cash of $609,507 and issued 123,000,000
warrants to the placement agent at an initial exercise price of $0.01 per share. The cash fee of $609,507 was charged against the proceeds
of the offering in additional paid-in capital and there is no effect on equity for the placement agent warrants.
In
connection with issuance of the Series G, during the six months ended June 30, 2022, the Company paid the placement agent cash of $95,000
and issued 19,000,000 warrants to the placement agent at an initial exercise price of $0.01 per share. The cash fee of $95,000 was charged
against the proceeds of the offering in additional paid-in capital and there is no effect on equity for the placement agent warrants.
During
the three months ended June 30, 2022, the Company issued 129,272,885 shares of its common stock in connection with the conversion of
92,500 shares of Series G and accrued dividends payable of $21,134. The conversion ratio was based on the Series E certificate of designation,
as amended.
Common
stock
On
February 23, 2021, stockholders holding at least 51% of the voting power of the stock of the Company entitled to vote thereon consented,
in writing, to amend the Company’s Amended and Restated Articles of Incorporation, by adoption of the Certificate of Amendment
to the Amended and Restated Articles of Incorporation of the Company to authorize an increase of the number of shares of common stock
that the Company may issue to 10,000,000,000 shares, par value $0.001 (the “2021 Amendment”). The increase in the number
of authorized shares was needed to meet the share reserve requirements under the Series E.
The
Company filed a preliminary information statement on Schedule 14C regarding the stockholders’ consent to the Authorized Share Increase
Amendment with the SEC on March 3, 2021. This consent was sufficient to approve the 2021 Amendment under Nevada law. The Company filed
a definitive information statement on Schedule 14C on March 15, 2021 and first mailed that information statement to stockholders on March
15, 2021.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
Shares
issued in connection with conversion of convertible debt and interest
On
January 11, 2021, the Company issued 15,454,545 shares of its common stock in connection with the conversion of a convertible note payable
of $170,000. The conversion price was based on contractual terms of the related debt.
During
the three months ended June 30, 2021, the Company and each Q1/Q2 2020 Note investor entered into a letter agreement whereby the investor
waived its right to any Mandatory Default Payment. Accordingly, during the three months ended June 30, 2021, the Company reversed the
accrued Mandatory Penalty amount due of $664,400 and recorded a gain on debt extinguishment of $664,400. Additionally, during the three
months ended June 30, 2021, the Company issued 28,358,841 shares of its common stock upon the conversion of all remaining Q1/Q2 2020
Note principal and interest balances due aggregating $277,916.
During
the three months ended June 30, 2021, the Company issued 15,923,322 shares of its common stock upon the conversion of all remaining April
20 Note principal and interest balances due aggregating $95,540. The Company accounted for the conversion of these convertible notes
pursuant to the guidance of ASC 470-20, Debt with Conversion and Other Options. Under ASC 470-20, the Company recognized an aggregate
loss on debt extinguishment upon conversion in the amount of $143,872 which is associated with the difference between the fair market
value of the shares issued upon conversion and the conversion price and is equal to the fair value of the shares of common stock transferred
upon conversion.
Shares
issued in connection with conversion of Series E preferred shares
During
the three months ended June 30, 2021, the Company issued 571,296,287 shares of its common stock in connection with the conversion of
340,346 shares of Series E. The conversion ratio was based on the Series E certificate of designation, as amended.
On
January 19, 2022, the Company issued 75,000,000 shares of its common stock in connection with the conversion of 19,947 shares of Series
E. The conversion ratio was based on the Series E certificate of designation, as amended.
On
April 13, 2022, the Company issued 38,500,868 shares of its common stock in connection with the conversion of 10,240 shares of Series
E preferred shares and paid liquidating damages of $24,000. The conversion ratio was based on the Series E certificate of designation,
as amended.
Shares
issued upon exercise of warrants
During
the three months ended June 30, 2021, the Company issued 52,482,141 shares of its common stock in connection with the cashless exercise
of 98,557,429 warrants. The exercise price was based on contractual terms of the related warrant.
In
May and June 2021, the Company issued 68,571,429 shares of its common stock and received proceeds of $685,714 from the exercise of 68,571,429
warrants at $0.01 per share.
During
the three months ended March 31, 2022, the Company issued 24,571,429 shares of its common stock and received proceeds of $245,714 from
the exercise of 24,571,429 warrants at $0.01 per share.
During
the three months ended June 30, 2022, the Company issued 40,086,207 shares of its common stock in connection with the cashless exercise
of 22,142,857 warrants. The exercise price was based on contractual terms of the related warrant.
Shares
issued for compensation
On
March 11, 2022, pursuant to an employment agreement with the Company’s chief executive officer dated January 4, 2022, the Company’s
Board of Directors granted the chief executive officer 122,126,433 shares of its common stock which were valued at $1,343,391, or $0.011
per common share, based on the quoted closing price of the Company’s common stock on the measurement date. These shares will vest
in equal annual installments with the first installment of 30,531,608 shares vesting on January 3, 2022, and 30,531,608 common shares
vesting each year quarter through January 3, 2025. In connection with these shares, the Company valued these common shares at a fair
value of $1,343,391 and will record stock-based compensation expense over the vesting period which is included in the aggregate accretion
of stock-based compensation reflected below.
On
March 11, 2022 and effective January 4, 2022, the Company agreed to grant restricted stock awards to three independent members of the
Company’s board of directors for an aggregate of 5,454,546 common shares of the Company which were valued at $60,000, or $0.011
per common share, based on the quoted closing price of the Company’s common stock on the measurement date. These shares will vest
in equal quarterly installments with the first installment of 1,363,636.50 shares vesting on March 31, 2022, and 1,363,636.50 common
shares vesting each quarter through December 31, 2022. In connection with these shares, the Company valued these common shares at a fair
value of $60,000 and will record stock-based compensation expense over the vesting period which is included in the aggregate accretion
of stock-based compensation reflected below.
On
March 11, 2022 and effective January 4, 2022, the Company agreed to grant restricted stock awards to the Company’s chief financial
officer for 11,363,636 common shares of the Company which were valued at $125,000, or $0.011 per common share, based on the quoted closing
price of the Company’s common stock on the measurement date. These shares will vest in equal quarterly installments with the first
installment of 2,840,909 shares vesting on March 31, 2022, and 2,840,909 common shares vesting each quarter through December 31, 2022.
In connection with these shares, the Company valued these common shares at a fair value of $125,000 and will record stock-based compensation
expense over the vesting period which is included in the aggregate accretion of stock-based compensation reflected below.
During
the six months ended June 30, 2022 and 2021, aggregate accretion of stock-based compensation expense on the above granted shares amounted
to $790,167 and $0, respectively. Total unrecognized compensation expense related to these vested and unvested common shares on June
30, 2022 amounted to $738,224 which will be amortized over the remaining vesting period of approximately 0.50 to 2.50 years.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
On
March 11, 2022, the Company agreed to grant restricted stock awards to the Company’s former chief executive officer and current
member of the Company’s board of directors for 22,727,273 common shares of the Company which were valued at $250,000, or $0.011
per common share, based on the quoted closing price of the Company’s common stock on the measurement date. These shares vested
immediately. In connection with these shares, the Company valued these common shares at a fair value of $250,000 and recorded stock-based
compensation expense of $250,000.
On
February 1, 2022 and amended on May 1, 2022, the Company issued an aggregate of 969,149 of its common shares pursuant to a consulting
agreement. These shares were valued at $10,000, or a share price ranging from $0.008 to $0.014, based on the quoted closing price of
the Company’s common stock on the measurement dates. In connection with these shares, the Company valued these common shares at
a fair value of $10,000 and the Company recorded stock-based professional fees of $8,333 and prepaid expenses of $1,667 which will amortized
over the remaining service period of one month.
The
following table summarizes activity related to non-vested shares:
SUMMARY
OF ACTIVITY RELATED TO NON-VESTED SHARES
| | |
Number of
Non-Vested
Shares | | |
Weighted
Average
Grant Date
Fair Value | |
| Non-vested, December 31, 2021 | |
| - | | |
$ | - | |
| Granted | |
| 138,944,615 | | |
| 0.011 | |
| Shares vested | |
| (38,940,700 | ) | |
| (0.011 | ) |
| Non-vested, June 30, 2022 | |
| 100,003,915 | | |
$ | 0.011 | |
Warrants
Warrants
exercised in connection with Series E preferred shares
In
connection with the sale of Series E preferred shares, during the six months ended June 30, 2021, the Company issued warrants to purchase
457,714,289 shares of the Company’s common stock at an initial exercise price of $0.01 per share. Additionally, the Company issued
91,542,858 warrants to the placement agent at an initial exercise price of $0.01 per share. (See Series E preferred shares above).
During
the three months ended June 30, 2021, the Company issued 52,482,141 shares of its common stock in connection with the cashless exercise
of 98,557,429 warrants. The exercise price was based on contractual terms of the related warrant.
In
May and June 2021, the Company issued 68,571,429 shares of its common stock and received proceeds of $685,714 from the exercise of 68,571,429
warrants at $0.01 per share.
During
the three months ended March 31, 2022, the Company issued 24,571,429 shares of its common stock and received proceeds of $245,714 from
the exercise of 24,571,429 warrants at $0.01 per share.
During
the three months ended June 30, 2022, the Company issued 40,086,207 shares of its common stock in connection with the cashless exercise
of 22,142,857 warrants. The exercise price was based on contractual terms of the related warrant.
Warrants
issued in connection with Series G preferred shares
In
connection with the sale of Series G preferred shares, during the six months ended June 30, 2022, the Company issued warrants to purchase
95,000,000 shares of the Company’s common stock at an initial exercise price of $0.01 per share. Additionally, the Company issued
19,000,000 warrants to the placement agent at an initial exercise price of $0.01 per share.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
Warrant
activities for the six months ended June 30, 2022 are summarized as follows:
SUMMARY OF WARRANT ACTIVITIES
| | |
Number of Shares
Issuable Upon
Exercise of
Warrants | | |
Weighted
Average Exercise
Price | | |
Weighted Average
Remaining
Contractual Term
(Years) | | |
Aggregate
Intrinsic Value | |
| Balance Outstanding December 31, 2021 | |
| 1,190,722,395 | | |
$ | 0.015 | | |
| 4.7 | | |
$ | 3,831,380 | |
| Granted | |
| 114,000,000 | | |
| 0.010 | | |
| | | |
| | |
| Exercises | |
| (46,714,286 | ) | |
| 0.010 | | |
| | | |
| | |
| Balance Outstanding June 30, 2022 | |
| 1,258,008,109 | | |
$ | 0.014 | | |
| 4.3 | | |
$ | 0 | |
| Exercisable, June 30, 2022 | |
| 1,258,008,109 | | |
$ | 0.014 | | |
| 4.3 | | |
$ | 0 | |
Stock
options
Stock
option activities for the six months ended June 30, 2022 are summarized as follows:
SUMMARY OF STOCK OPTION ACTIVITIES
| | |
Number of Options | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Contractual Term (Years) | | |
Aggregate
Intrinsic Value | |
| Balance Outstanding December 31, 2021 | |
| 80,000 | | |
$ | 8.85 | | |
| 3.3 | | |
$ | - | |
| Granted/Cancelled | |
| - | | |
| - | | |
| | | |
| | |
| Balance Outstanding June 30, 2022 | |
| 80,000 | | |
$ | 8.85 | | |
| 2.3 | | |
$ | - | |
| Exercisable, June 30, 2022 | |
| 60,000 | | |
$ | 8.85 | | |
| 2.3 | | |
$ | - | |
NOTE
10 – ASSIGNMENT FOR THE BENEFIT OF CREDITORS
On
August 19, 2021, the Company’s subsidiaries, Prime EFS and Shypdirect, executed Deeds of Assignments for the Benefit of Creditors
in the State of New Jersey pursuant to N.J.S.A. §2A:19-1, et seq. (the “ABC Statute”), assigning all Prime EFS and Shypdirect
assets to Terri Jane Freedman as Assignee for the Benefit of Creditors (the “Assignee”) and filing for dissolution. An “Assignment
for the Benefit of Creditors,” “general assignment” or “ABC” in New Jersey is a state-law, voluntary, judicially-supervised
corporate liquidation and unwinding similar to the Chapter 7 bankruptcy process found in the United States Bankruptcy Code. In the subject
ABC, the debtor companies, here Prime EFS and Shypdirect, together referred to as the “assignors”, executed Deeds of Assignment,
assigning all of their assets to an Assignee chosen by the Company, who acts as a fiduciary similar to a Chapter 7 trustee in bankruptcy.
Due to the termination of their respective agreements with Amazon, Prime EFS and Shypdirect became insolvent and unable to pay their
debts when they became due. Accordingly, the Company deemed it to be desirable and in the best interest of Prime EFS and Shypdirect and
its creditors to make an assignment of all of Prime EFS and Shypdirect’s assets for the benefit of the Prime EFS and Shypdirect’s
creditors in accordance with the ABC Statute.
On
September 7, 2021, the ABC’s were filed with the Bergen County Clerk in Bergen County, New Jersey and filed with the Bergen
County Surrogate Court, initiating a judicial proceeding. The Assignee has been charged with liquidating the assets for the benefit
of the Prime EFS and Shypdirect creditors pursuant to the provisions of the ABC Statute. The Company’s results of operations
for the six months ended June 30, 2021 include the results of Prime EFS and Shypdirect prior to the September 7, 2021 filing of the
executed Deeds of Assignment for the Benefit of Creditors with the State of New Jersey. As a result of Prime EFS and
Shypdirect’s filing of the executed Deeds of Assignment for the Benefit of Creditors on September 7, 2021, the Assignee
assumed all authority to manage Prime EFS or Shypdirect. Additionally, Prime EFS and Shypdirect no longer conduct any business and
are not permitted by the Assignee and ABC Statute to conduct any business. For these reasons, effective September 7, 2021, the
Company relinquished control of Prime EFS and Shypdirect. Further, on October 13, 2021, Prime EFS and Shypdirect filed for
dissolution with the Secretary of State of New Jersey. Therefore, the Company deconsolidated Prime EFS and Shypdirect effective with
the filing of executed Deeds of Assignment for the Benefit of Creditors in September 2021. The Company has been advised that the
Assignee anticipates that she will be able to conclude her work, make final distributions
to creditors, and close out the estates of Prime EFS and Shypdirect on or before June 30, 2023.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
In
order to deconsolidate Prime EFS and Shypdirect, the carrying values of the assets and liabilities of Prime EFS and Shypdirect were removed
from the Company’s consolidated balance sheet as of September 7, 2021. In connection with the deconsolidation, the Company recognized
a gain on deconsolidation of subsidiaries of $12,363,449 which is included in “Gain on deconsolidation of subsidiaries” within
other income (expenses) during the year ended December 31, 2021 and consisted of the following:
SCHEDULE OF THE ASSIGNMENT OF GAIN ON DECONSOLIDATION OF SUBSIDIARIES
| | |
September 7, 2021 | |
| Liabilities deconsolidated: | |
| | |
| Notes payable (a) | |
$ | 3,908,050 | |
| Accounts payable | |
| 1,242,421 | |
| Accrued expenses | |
| 314,927 | |
| Insurance payable | |
| 1,678,556 | |
| Contingency liabilities | |
| 3,311,272 | |
| Lease liabilities, current portion | |
| 1,263,494 | |
| Accrued compensation and related benefits | |
| 827,753 | |
| Total liabilities deconsolidated | |
| 12,546,473 | |
| Assets deconsolidated: | |
| | |
| Cash | |
| 21,679 | |
| Accounts receivable | |
| 1,078 | |
| Property and equipment, net | |
| 96,496 | |
| Total assets deconsolidated | |
| 119,253 | |
| Gain on deconsolidation of subsidiaries | |
| 12,427,220 | |
| Less: additional cash payments made on behalf of deconsolidated subsidiaries | |
| (63,771 | ) |
| Gain on deconsolidation of subsidiaries | |
$ | 12,363,449 | |
NOTE
11 – COMMITMENTS AND CONTINGENCIES
Legal
matters
From
time to time, we may be involved in litigation or received claims arising out of our operations in the normal course of business. Other
than discussed below, we are not currently a party to any other legal proceeding or are aware of claims that we believe would, if decided adversely, have
a material adverse effect on our business, financial condition, or operating results. We also disclose any recent settlements and accruals
taken in connection therewith, whether material or not.
Disputes
Between ELRAC LLC and Enterprise Leasing Company of Philadelphia, LLC on the one hand, and Prime EFS, LLC on the other hand
In
2021 and as of December 31, 2021, the Company’s prior subsidiary, Prime EFS, LLC (“Prime EFS”), was a party to an arbitration
with two companies, ELRAC LLC (“ELRAC”), and Enterprise Leasing Company of Philadelphia, LLC (“ELC”).
As
previously disclosed, since the Company deconsolidated Prime EFS effective with the filing of executed Deeds of Assignment for the Benefit
of Creditors in September 2021, as of December 31, 2021, the Company’s consolidated balance sheet no longer included an accrual
for this matter.
Solely
to avoid the expense and distraction of the matter, effective March 31, 2022, the Company and Prime EFS, on the one hand, and ERLAC and
ELC, on the other hand, settled the above matter for a single payment, by TLSS, to ERLAC and ELC, in an immaterial amount. Pursuant to
the settlement, the Company and Prime, on the one hand, and ERLAC and ELC, on the other hand, exchanged mutual general releases, thereby
releasing and discharging any and all claims between the Company, Prime EFS and their affiliates, on the one hand, and ERLAC, ELC and
their affiliates, on the other hand. In connection with this settlement, in April 2022, the Company paid ERLAC and ELC $30,000, which
amount as December 31, 2021 had been accrued and included in accrued expenses on the accompanying unaudited condensed consolidated balance
sheets.
Bellridge
Capital, L.P. v. TLSS and Mercadante
On
September 11, 2020, a prior lender to the Company, Bellridge Capital, LP. filed a civil action against TLSS, John Mercadante and Douglas
Cerny in the U.S. District Court for the Southern District of New York, captioned Bellridge Capital, L.P. v. Transportation and Logistics
Systems, Inc., John Mercadante and Douglas Cerny. The case was assigned Case No. 20-cv-7485. The complaint alleged claims, inter
alia, for purported violations of section 10(b) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”);
for breach of an exchange agreement dated April 13, 2019 (the “Exchange Agreement”); and for the alleged failure to pay certain
amounts allegedly due under certain TLSS promissory notes.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
After
discontinuing the foregoing federal action voluntarily and without prejudice, on April 23, 2021, Bellridge filed a civil action in New
York Supreme Court, New York County, against the Company and Mercadante. This mater, the “Bellridge State Court Action,”
was assigned civil action number 652728/2021. The Complaint in the Bellridge State Court Action essentially repeated the claims in the
federal action.
On
June 4, 2021, the Company and Mercadante moved to dismiss the Bellridge State Court Action for failure to state a claim and, as to Mercadante,
for lack of jurisdiction. On October 20, 2021, the Court decided the MTD, dismissing all claims in the case against both Defendants predicated
on fraud and negligent misrepresentation. The Court thereby dismissed the Complaint insofar as alleged against Mercadante. On October
29, 2021, the Company filed its Answer in this case. On November 18, 2021, Bellridge filed an Amended Complaint purporting to revive
its claims for fraud and negligent misrepresentation against both Defendants. Both Defendants filed objections to the Amended Complaint
as procedurally improper. On December 17, 2021, the Defendants filed a renewed motion to dismiss the Amended Complaint with prejudice.
That motion was fully briefed. In February 2022, all proceedings in this action were stayed 60 days to facilitate a March 2022 mediation.
On
April 29, 2022, all parties to the Bellridge State Court Action agreed to settle the case and exchange mutual general releases for a
cash payment by the Company to Bellridge of $250,000, which amount was paid in May 2022, at which time the releases took effect. In connection
with this settlement, during the six months ended June 30, 2022, the Company recorded settlement expense of $227,111.
In
partial consideration for the settlement, the Company and Bellridge also cancelled the 700,000 shares of Series B Preferred Stock previously
held by Bellridge, as reflected on the Company’s balance sheets as of December 31, 2021.
SCS,
LLC v. TLSS
On
January 14, 2021, a former financial consultant to the Company, SCS, LLC, filed an action against the Company in the Circuit Court of
the 15th Judicial Circuit, Palm Beach County, Florida, captioned SCS, LLC v. Transportation and Logistics Systems, Inc.
The case was assigned Case No. 50-2020-CA-012684.
In
this action, SCS alleges that it entered into a renewable six-month consulting agreement with the Company dated September 5, 2019 and
that the Company failed to make certain monthly payments due thereunder for the months of October 2019 through March 2020, summing to
$42,000. The complaint alleges claims for breach of contract, quantum meruit, unjust enrichment and account stated.
On
February 9, 2021, the Company filed its answer, defenses and counterclaims in this action. Among other things, the Company avers that
SCS’s claims are barred by its unclean hands and other inequitable conduct, including breach of its duties (i) to maintain the
confidentiality of information provided to SCS and (ii) to work only in furtherance of the Company’s interests, not in furtherance
of SCS’s own, and conflicting, interests. The Company also avers, in its counterclaims, that SLS owes the Company damages in excess
of the $42,000 sought in the main action because SLS was at least grossly negligent in any due diligence it undertook before recommending
that the Company acquire Prime EFS LLC in June 2018. SCS filed a motion to strike TLSS’s defenses and counterclaims, and TLSS opposed
that application. Those motions remain sub judice.
A
two-day non-jury trial was held in this action in Palm Beach County, Florida, on April 20-21, 2022. However, at the end of the second
day a mistrial was declared because SCS had not withdrawn its motion to strike and answered the counterclaims. Since the mistrial, there
have been no further filings or proceedings in this case.
The
Company believes it has substantial defenses to all claims alleged in SCS’s complaint. The Company therefore intends to defend
this case vigorously.
Because
there have been no further filings or proceedings on this case since April 2022, it is not possible to evaluate the likelihood of a favorable
or unfavorable outcome, nor is it possible to estimate the amount or range of any potential loss in the matter. However, the demand remains
$42,000.
Shareholder
Derivative Action
On
June 25, 2020, the Company was served with a putative shareholder derivative action filed in the Circuit Court of the 15th
Judicial Circuit in and for Palm Beach County, Florida (the “Court”) captioned SCS, LLC, derivatively on behalf of Transportation
and Logistics Systems, Inc. v. John Mercadante, Jr., Douglas Cerny, Sebastian Giordano, Ascentaur LLC and Transportation and Logistics
Systems, Inc. The action has been assigned Case No. 2020-CA-006581.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
The
plaintiff in this action, SCS, alleges it is a limited liability company formed by a former chief executive officer and director of the
Company, Lawrence Sands. The complaint alleges that between April 2019 and June 2020, the immediately prior chairman and chief executive
officer of the Company, Mercadante, the former chief development officer of the Company, Cerny, and, since February 2020, the Company’s
then restructuring consultant who is now chairman and chief executive officer of the Company, Giordano, breached fiduciary duties owed
to the Company. Prior to becoming CEO, Giordano rendered his services to the Company through the final named defendant in the action,
Ascentaur LLC.
Briefly,
the complaint alleges that Mercadante breached duties to the Company by, among other things, requesting, in mid-2019, that certain preferred
equity holders, including SCS, convert their preferred shares into Company Common Stock in order to facilitate an equity offering by
the Company and then not consummating that offering. The complaint also alleges that Mercadante and Cerny caused the Company to engage
in purportedly wasteful and unnecessary transactions such as taking merchant cash advances (MCA) on disadvantageous terms. The complaint
further alleges that Mercadante and Cerny “issued themselves over two million shares of common stock without consideration.”
The complaint seeks unspecified compensatory and punitive damages on behalf of the Company for breach of fiduciary duty, negligent breach
of fiduciary duty, constructive fraud, and civil conspiracy and the appointment of a receiver or custodian for the Company.
Company
management tendered the complaint to the Company’s directors’ and officers’ liability carrier for defense and indemnity
purposes, which coverage is subject to a $250,000 self-insured retention. Each of the individual defendants and Ascentaur LLC has advised
that they vigorously deny each and every allegation of wrongdoing alleged in the complaint. Among other things, Mercadante asserts that
he made every effort to consummate an equity offering in late 2019 and early 2020 and could not do so solely because of the Company’s
precarious financial condition. Mercadante also asserts that he made clear to SCS and other preferred equity holders, before they converted
their shares into common stock, that there was no guarantee the Company would be able to consummate an equity offering in late 2019 or
early 2020. In addition, Mercadante and Cerny assert that they received equity in the Company on terms that were entirely fair to the
Company and entered into MCA transactions solely because no other financing was available to the Company.
On
August 5, 2020, all defendants moved to dismiss the complaint for failure to state a claim upon which relief can be granted. Among other
things, movants assert that, through this lawsuit, SCS is improperly attempting to second-guess business decisions made by the Company’s
Board of Directors, based solely on hindsight (as opposed to any well-pleaded facts demonstrating a lack of care or good faith). Movants
also assert that the majority of the claims are governed by Nevada law because they concern the internal affairs of the Company. Movants
further assert that, under Nevada law, each of the business decisions challenged by SCS is protected by the business judgment rule. Movants
further assert that, even if SCS could rebut the presumption that the business judgment rule applies to all such transactions, SCS has
failed to allege facts demonstrating that intentional misconduct, fraud, or a knowing violation of the law occurred, a requirement under
Nevada law in order for director or officer liability to arise. Movants further assert that, because SCS’s constructive fraud claim
simply repackages Plaintiff’s claims for breach of fiduciary duty, it too must fail. Movants also contend that in the absence of
an adequately-alleged independent cause of action, let alone an unlawful agreement between the defendants entered into for the purpose
of harming the Company, SCS’s claim for civil conspiracy must also be dismissed. Finally, movants contend that SCS’s extraordinary
request that a receiver or custodian be appointed to manage and supervise the Company’s activities and affairs throughout the duration
of this unfounded action is without merit inter alia because SCS does not allege the Company is subject to loss so serious and
significant that the appointment of a receiver or custodian is “absolutely necessary to do complete justice.”
The
Court is scheduled to hear argument on all defendants’ MTD on September 9, 2022.
While
they hope to prevail on the motion, win or lose, Company management and Ascentaur LLC advise that they believe the action is frivolous
and intend to mount a vigorous defense to this action, as they believe the action to be entirely bereft of merit.
It
is not possible to evaluate the likelihood of a favorable or unfavorable outcome, nor is it possible to estimate the amount or range
of any potential loss in the matter.
Jose
R. Mercedes-Mejia v. Shypdirect LLC, Prime EFS LLC et al.
On
August 4, 2020, an action was filed against Shypdirect, Prime EFS and others in the Superior Court of New Jersey for Bergen County captioned
Jose R. Mercedes-Mejia v. Shypdirect LLC, Prime EFS LLC et al. The case was assigned docket number BER-L-004534-20. In this action,
the plaintiff seeks reimbursement of his medical expenses and damages for personal injuries following an accident with a box truck leased
by Prime EFS and being driven by a Prime EFS employee, in which the plaintiff’s ankle was injured. Plaintiff has thus far transmitted
medical bills exceeding $789,000. Prime EFS and Shypdirect have demanded their vehicle liability carrier assume the defense of this action.
To date, the carrier has not done so, allegedly inter alia because the box truck was not on the list of insured vehicles at the
time of the accident.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
On
November 9, 2020, Prime EFS and Shypdirect filed their answer to the complaint in this action and also filed a third-party action against
the insurance company in an effort to obtain defense and indemnity for this action.
On
May 21, 2021, Prime EFS and Shypdirect also filed in action in the Supreme Court, State of New York, Suffolk County (the “Suffolk
County Action”), seeking defense and indemnity for the Mercedes-Mejia action from the insurance brokerage, Acrisure LLC, which
sold the County Hall insurance policy to Prime.
On
August 19, 2021, the Plaintiff filed a motion for leave to file a first amended complaint to name four (4) additional parties as defendants
– TLSS, Shyp CX, Inc., Shyp FX, Inc. and Cougar Express, Inc. On September 16, 2021, each of these entities filed papers in opposition
to this motion.
On
September 24, 2021, the Court granted Plaintiff’s motion for leave to amend the complaint herein, thus adding TLSS, Shyp CX, Inc.,
Shyp FX, Inc. and Cougar Express, Inc. as Defendants. On October 22, 2021, Acrisure stipulated to consolidate the Suffolk County Action
into and with the Bergen County action. On November 22, 2021, all Defendants filed their Answer to the First Amended Complaint. On November
3, 2021, Prime EFS and Shypdirect refiled their Third-Party Complaint against Acrisure in the Bergen County action. On December 23, 2021,
Acrisure filed its Answer to the Third-Party Complaint, denying its material allegations.
Under
the currently operative pre-trial order, the discovery period in this action has been extended to December 2, 2022. All Defendants in
this action intend to vigorously defend themselves in this action and to pursue the third-party actions against both County Hall and
Acrisure. However, owing to the early stage of this action, we cannot evaluate the likelihood of an adverse outcome or estimate the Company’s
liability, if any, in connection with this claim.
Holdover
Proceeding
On
February 16, 2022, the landlord for the leased premises from which Cougar Express conducts its Valley Stream New York business, Airport
Park LLC (“Airport”), filed an action to evict and for unpaid holdover rent against Cougar Express and TLSS. The case
was No. LT-000550-22/NA, filed in Landlord Tenant Court in Nassau County District Court.
In
the case, Airport sought to evict the tenants forthwith and to collect $51,079.78 for each month of holdover occupancy starting January
1, 2022 through the month of any eviction, plus statutory interest, costs and attorneys’ fees. $51,079.78 is twice the monthly
rent collected in the last year of the expired lease and is computed correctly under the holdover provision in the expired lease.
By
stipulation filed with the Court on May 19, 2022, this matter was settled and terminated. Pursuant to the settlement, Cougar agreed to
pay, and paid, certain unpaid common charges of $8,016.25 and monthly rent at a rate of $33,275 per month until Cougar vacates the premises.
Cougar also agreed to vacate the premises by September 30, 2022. Owing to the Cougar’s acquisition of JFK Cartage, Cougar does
not anticipate having any difficulties whatsoever vacating the Valley Stream location by the September 30, 2022 lease termination.
COR
Holdings, LLC
In
the second quarter of 2022, COR Holdings LLC, a lender to the Company’s former Prime EFS subsidiary, made an informal (email) demand
that it be issued 3,882,480 shares of Company common stock in exchange for an alleged $97,062.00 balance due. The Company had, pursuant
to a debt conversion rights agreement dated August 28, 2020, granted COR a one-year option to exchange the debt at $0.025 per share of
Company common stock; however, COR never exercised that option prior to its expiration on August 28, 2021. The Company believes, on advice
of counsel, that COR’s sole remedy for the unpaid debt is through Prime EFS’s Assignment for Benefit of Creditors proceeding
in New Jersey. Therefore, if COR choses to pursue this claim against the Company, the Company intends to oppose it vigorously. However,
because no formal claim has been filed, we cannot evaluate the likelihood of an adverse outcome or estimate the Company’s liability,
if any, in connection with this claim.
Ryder
Truck Rental, Inc.
In
the first quarter of 2022, an attorney representing Ryder Truck Rental issued a letter to certain former officers and employees of the
Company’s former Shypdirect subsidiary, demand payment of $308,240.65 under certain open invoices for trucks leased by Shypdirect, $1,141,211.55
in certain additional charges under a 2018 contract, and $434,835.66 in attorney’s fees. Solely to avoid the expense and distraction
of litigation, including without limitation, certain alter ego and derivative liability claims alleged by Ryder, on August 5, 2022, the
Company, pursuant to a Settlement Agreement and Mutual General Releases dated August 2, 2022, paid Ryder $6,500 in full and final settlement.
The release of claims executed by Ryder covers, among others, the Company and all its former and current subsidiaries, directors, officers
and employees as well as all former members and managers of Shypdirect.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
Other
than discussed above, as of June 30, 2022, and as of the date of this filing, there were no pending or threatened lawsuits that could
reasonably be expected to have a material effect on results of our operations.
Employment
agreements
On
January 3, 2022, the Company and Mr. Sebastian Giordano entered into an employment agreement with a term extending through December 31,
2025, which provides for annual compensation of $400,000 as well as annual discretionary bonuses based on the Company’s achievement
of performance targets, grants of options, restricted stock or other equity, potentially constituting (with prior grants made to Ascentaur),
at the discretion of the Company’s Board of Directors, up to 5% of the outstanding common stock of the Company, vesting over the
term of the employment agreement, business expense reimbursement and benefits as generally made available to the Company’s executives.
Pursuant to this employment agreement, on March 11, 2022, the Company’s Board of Directors granted the chief executive officer
122,126,433 shares of its common stock (see Note 9).
On
January, 3, 2022, the Company retained the services of Mr. James Giordano (no relation to Mr. Sebastian Giordano) as Chief Financial
Officer. In addition, Mr. James Giordano is appointed the Company’s Treasurer. Previously, Mr. James Giordano served as Chief Financial
Officer and consultant to Freight Connections, Inc., a LTL/line haul transportation services and warehousing provider. Prior to that,
he served as Chief Financial Officer for Farren International, a global supplier of transportation and rigging services. Mr. James Giordano’s
employment with the Company is at will. He will receive annual compensation of $250,000 as well as annual discretionary bonuses and equity
grants, business expense reimbursement and benefits as generally made available to the Company’s executives. On March 11, 2022
and effective January 4, 2022, the Company agreed to grant restricted stock awards to the Company’s chief financial officer for
11,363,636 common shares of the Company which were valued at $125,000, or $0.011 per common share, based on the quoted closing price
of the Company’s common stock on the measurement date. These shares will vest in equal quarterly installments with the first installment
of 2,840,909 shares vesting on March 31, 2022, and 2,840,909 common shares vesting each quarter through December 31, 2022. In connection
with these shares, the Company valued these common shares at a fair value of $125,000 and will record stock-based compensation expense
over the vesting period (See Note 9).
NOTE
12– RELATED PARTY TRANSACTIONS AND BALANCES
Due
to related parties
On
December 22, 2020, the Company’s former chief executive officer advanced the Company $30,000. The advance is non-interest bearing
and payable on demand. On January 29, 2021, the Company repaid this advance.
Notes
payable – related party
On
July 3, 2019, the Company entered into a note agreement with an entity that is controlled by the Company’s former chief executive
officer’s significant other, 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 was 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 should
have been made. The principal amount of this note and all accrued, but unpaid interest under this note was due and payable on the earlier
to occur of (i) January 3, 2021 (the “CEO Note Maturity Date”), or (ii) an Event of Default (as defined in the note
agreement). Interest accrued with respect to the unpaid principal sum identified above until such principal was paid at a rate equal
to 18% per annum. On March 17, 2021, the Company and the noteholder entered into a forbearance agreement whereby the Holder agreed to
forbear from prosecuting any enforcement efforts in respect of the Note and extended the payment of the note until December 31, 2021.
On October 31, 2021, the Company and this related party note holder entered into a confidential settlement agreement and mutual release.
The Parties adjusted, settled and compromised the principal balance of the Note of $500,000 and unpaid accrued interest thereon of $240,822,
for a discounted amount of $600,000, in full settlement of any and all amounts outstanding. The settlement amount was paid in November
2021.
During
the six months ended June 30, 2021, interest expense associated with advances from related parties and related party notes payable amounted
to $44,630 and is included in interest expense – related parties on the accompanying unaudited condensed consolidated statement
of operations.
NOTE
13 – CONCENTRATIONS
For
the six months ended June 30, 2022, four customers represented 70.0% of the Company’s total net revenues (19.8%, 20.4%, 19.8% and
10.0%, respectively). For the six months ended June 30, 2021, two customers, Amazon and Federal Express, represented 51.1% and 17.7%
of the Company’s total net revenues, respectively.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2022
On
June 30, 2022, three customers, represented 46.7% of the Company’s accounts receivable balance (16.2%, 20.3% and 10.2%, respectively).
On December 31 2021, three customers, represented 48.4 of the Company’s accounts receivable balance (22.7%, 13.0% and 12.7%, respectively).
All
revenues are derived from customers in the United States.
NOTE
14 – SUBSEQUENT EVENTS
Acquisition
On
August 4, 2022, the Company’s wholly-owned subsidiary, Cougar Express, closed on its acquisition of all outstanding stock of JFK
Cartage, Inc., a New York-based full-service logistics provider specializing in pickup, warehousing and delivery services in the tri-state
area (“JFK Cartage”). Joan Ton, the sole shareholder of JFK Cartage, from whom the shares were acquired, is an unrelated
party (the “Seller”). The effective date of the acquisition was July 31, 2022. With annual revenues of $3.6 million in 2021
and approximately $2.0 million for the first six months of 2022, JFK Cartage operates from a 30,000 square foot warehouse with ten drive-in
doors and is strategically located approximately six miles from JFK International Airport. JFK Cartage has been in business since 2008
and has been providing warehousing, cross-dock services, pickup and deliveries, and general trucking, handling airfreight, trade show
freight, expedited and hotshot demand work, LTL/cartage as well as FTL, reverse logistics, white glove and residential delivery services
to a broad base of over 95 commercial accounts and residential customers. JFK Cartage operates a wide-ranging fleet of specialty vehicles,
from its Sprinter vans to full 53-ft. tractor trailers. JFK Cartage, with its assets, fleet and warehouse is believed to be one of the
largest leading cartage agents serving the New York Tri-State area.
Pursuant to the Stock Purchase and Sale
Agreement with Cougar Express and JFK Cartage dated May 24, 2022, the purchase price was $1,700,000. The
Company: (i) paid $401,552 in cash at closing; and (ii) entered into a $696,935 promissory note with the Seller, $98,448 of which is
payable weekly, in the amount of 25% of accounts receivable collected, but in any event, no later than October 4, 2022, with the
remaining balance of $598,487, payable in three annual installments of $199,496, with interest at 5.0% percent per annum on July 31
2023, 2024 and 2025, respectively. Additionally, Cougar Express agreed to pay the $503,065 Small Business Administration
(“SBA”) loan that exists on the books of JFK Cartage; and (iv) agreed to pay $151,389 of accrued liabilities and other
notes payable that exists on the books of JFK Cartage. For accounting purposes, the total purchase consideration paid, after closing adjustments, was deemed to be $1,098,487,
the cash paid of $401,552 plus the promissory note of $696,935. The purchase consideration amount did not include the SBA loan of $503,065
and accrued liabilities and other notes payable of $151,389 which were treated as assumed liabilities in the purchase price allocation.
The
assets acquired and liabilities assumed were recorded at their estimated fair values on the acquisition date, subject to adjustment
during the measurement period with subsequent changes recognized in earnings or loss. These estimates are inherently uncertain and
are subject to refinement. Management develops estimates based on assumptions as a part of the purchase price allocation process to
value the assets acquired and liabilities assumed as of the business acquisition date. As a result, during the purchase price
measurement period, which may be up to one year from the business acquisition date, the Company may record adjustments to the assets
acquired and liabilities assumed based on completion of valuations, with the corresponding offset to intangible assets. After the
purchase price measurement period, the Company may record any adjustments to assets acquired or liabilities assumed in operating
expenses in the period in which the adjustments may have been determined. Based upon the preliminary purchase price allocation, the
following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of the
acquisition:
SCHEDULE
OF BUSINESS ACQUISITION PURCHASE PRICE ALLOCATION
| | |
| | |
| |
JFK Cartage | |
| Assets acquired: | |
| | |
| Cash | |
$ | 35,758 | |
| Accounts receivable | |
| 221,664 | |
| Property and equipment | |
| 35,326 | |
| Security deposit | |
| 97,477 | |
| Intangible assets | |
| 1,362,616 | |
| Total assets acquired at fair value | |
| 1,752,841 | |
| Liabilities assumed: | |
| | |
| SBA loan payable | |
| 503,065 | |
| Accounts payable and accrued expenses | |
| 115,362 | |
| Other notes payable | |
| 35,927 | |
| Total liabilities assumed | |
| 654,354 | |
| Net assets acquired | |
$ | 1,098,487 | |
| Purchase consideration paid: | |
| | |
| Cash paid | |
$ | 401,552 | |
| Promissory note | |
| 696,935 | |
| Total purchase consideration paid | |
$ | 1,098,487 | |
Employment
Agreement
On
July 6, 2022, the Company entered into a definitive Employment Agreement with James Giordano for Mr. Giordano to serve as the Company’s
Chief Financial Officer. The term of such Employment agreement is for a period of two and one-half years through December 31, 2025, which
term may not be terminated early by the Company except for “cause” as defined in such agreement. Annual base compensation
is $250,000, with an annual bonus for 2022 in total up to a maximum of $125,000 per year conditioned on the achievement of specified
milestones, and future annual bonuses to be conditioned on achievement of milestones to be negotiated based on the circumstances of the
Company at such time.