SCHEDULE
OF INTANGIBLE ASSETS
|
|
Useful life
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
Customer relations
|
|
3 - 5 years
|
|
$
|
2,490,161
|
|
|
|
-
|
|
Non-compete agreement
|
|
5 years
|
|
|
150.000
|
|
|
|
-
|
|
Intangible assets gross
|
|
|
|
|
2,640,161
|
|
|
|
-
|
|
Less: accumulated amortization
|
|
|
|
|
(179,835
|
)
|
|
|
-
|
|
Intangible assets net
|
|
|
|
$
|
2,460,326
|
|
|
$
|
-
|
|
For
the six months ended June 30, 2021 and 2020, amortization of intangible assets amounted to $179,835 and $0, respectively.
Amortization
of intangible assets attributable to future periods is as follows:
SCHEDULE
OF FUTURE AMORTIZATION OF INTANGIBLE ASSETS
Year ending June 30:
|
|
Amount
|
|
2022
|
|
$
|
577,825
|
|
2023
|
|
|
577,825
|
|
2024
|
|
|
520,771
|
|
2025
|
|
|
453,342
|
|
2026
|
|
|
330,563
|
|
Total
|
|
$
|
2,460,326
|
|
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2021
NOTE
7 – CONVERTIBLE PROMISSORY NOTES PAYABLE
August
30, 2019 convertible debt and related warrants
On
August 30, 2019, the Company closed Securities Purchase Agreements (the “August 2019 Purchase Agreements”) with accredited
investors. The August 2019 Notes and related August 2019 Warrants included down-round provisions under which the August 2019 Note conversion
price and August 2019 Warrant exercise price could be affected, on a full-ratchet basis, by future equity offerings undertaken by the
Company. During 2020 and prior, down-round protection was triggered. As of March 31, 2021 and December 31, 2020, the conversion price
on the August 2019 Notes was $0.006 per share and the exercise price of any remaining August 2019 Warrants was $0.006 per share. On June
30, 2021 and December 31, 2020, convertible notes payable related to August 30, 2019 convertible debt amounted to $0 and $22,064, which
consists of $0 and $22,064 of principal/default interest balances due, respectively.
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 includes, amongst other events, any default in the payment of principal and interest payments
(including Q1/Q2 2020 Note Amortization Payments) under any Q1/Q2 2020 Note or any other Indebtedness (as defined in the Q1/Q2 2020 Notes),
interest accrues at the lesser of (i) the rate of 18% per annum, or (ii) the maximum amount permitted by law. Commencing on the thirteenth
month anniversary of the issuance of each Q1/Q2 2020 Note, monthly payments of interest and monthly principal payments, based on a 12-month
amortization schedule (each, a “Q1/Q2 2020 Note Amortization Payment”), was due and payable, until the Maturity Date
(as defined in the applicable Q1/Q2 2020 Note), at which time all outstanding principal, accrued and unpaid interest and all other amounts
due and payable on such Q1/Q2 2020 Note will be immediately due and payable. The Q1/Q2 2020 Note Amortization Payments are being paid
in cash unless the investor requests payment in the Company’s Common Stock in lieu of a cash payment (each, a “Q1/Q2 2020
Note Stock Payment”). If a holder of a Q1/Q2 2020 Note requests a Q1/Q2 2020 Note Stock Payment, the number of shares of common
stock issued will be based on the amount of the applicable Q1/Q2 2020 Note Amortization Payment divided by 80% of the lowest VWAP (as
defined in the Q1/Q2 2020 Notes) during the five Trading Day (as defined in the applicable Q1/Q2 2020 Note) period prior to the due date
of such Q1/Q2 2020 Note Amortization Payment.
The
Q1/Q2 2020 Notes may be prepaid, provided that certain Equity Conditions, as defined in the Q1/Q2 2020 Notes, have been met (or any such
failure to meet the Equity Conditions has been waived): (i) from each Q1/Q2 2020 Note’s respective original issuance date until
and through the day that falls on the third month anniversary of such original issue date (each a “Q1/Q2 2020 Note 3 Month Anniversary”)
at an amount equal to 105% of the aggregate of the outstanding principal balance of the Q1/Q2 2020 Note and accrued and unpaid interest,
and (ii) after the applicable Q1/Q2 2020 Note 3 Month Anniversary at an amount equal to 115% of the aggregate of the outstanding principal
balance of the Q1/Q2 2020 Note and accrued and unpaid interest. In the event that the Company closes a Public Offering, each holder may
elect to: (x) have its principal and accrued interest prepaid directly from the proceeds of the Public Offering at the prices set forth
above, (y) exchange its Q1/Q2 2020 Note at the closing of the Public Offering for the securities being issued in the Public Offering
at the Public Offering prices based upon the outstanding principal, accrued interest and other charges, or (z) continue to hold its Q1/Q2
2020 Note(s). Except for a Public Offering and Q1/Q2 2020 Note Amortization Payments, in order to prepay a Q1/Q2 2020 Note, the Company
must provide at least 30 days’ prior written notice to the holder thereof, during which time the holder may convert its Q1/Q2 2020
Note in whole or in part at the applicable conversion price. The Q1/Q2 2020 Note Amortization Payments are prepayments and are subject
to prepayment penalties equal to 115% of the Q1/Q2 2020 Note Amortization Payment.
In
the event the Company consummates a Public Offering while the Q1/Q2 2020 Notes are outstanding, then 25% of the net proceeds of such
offering will, within two business days of the closing of such Public Offering, be applied to reduce the outstanding obligations pursuant
to the Q1/Q2 2020 Notes. As the Equity Conditions have not been met, through March 31, 2021 and the date hereof, the Company has not
prepaid any the Q1/Q2 2020 Notes, in whole or in part.
From
the original issue date of a Q1/Q2 2020 Note until such Q1/Q2 2020 Note is no longer outstanding, such Q1/Q2 2020 Note is convertible,
in whole or in part, at any time, and from time to time, into shares of Common Stock at the option of the holder. The “Conversion
Price” in effect on any Conversion Date (as defined in the 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 are convertible at the lower of: (i) $0.40
and (ii) 70% of the second lowest closing price of the common stock as reported on the Trading Market (as defined in the 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 are 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.
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 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 principal and interest balances
due aggregating $277,916. Hence, as of June 30, 2021, convertible notes payable and default interest due related to the Q1/Q2 2020 Notes
amounted to $0. On December 31, 2020, on the same construction of the Q1/Q2 Notes, convertible notes payable and default interest due
related to the Q1/Q2 2020 Notes amounted to $717,852, which consists of $801,400 of principal and default penalty balances due and is
net of unamortized debt discount of $83,548.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2021
April
20, 2020 convertible debt
On
April 20, 2020, the Company issued and sold to an investor a convertible promissory note in the principal amount of $456,500 (the “April
20 Note”). The April 20 Note contained a 10% original issue discount amounting to $41,500 for a purchase price of $415,000.
The Company did not receive any proceeds from the April 20 Note because the investor converted previous notes and accrued interest due
to him in the amount of $195,000 into the April 20 Note. In connection with the conversion of notes payable to the April 20 Note, the
Company recorded a loss from debt extinguishment of $220,000. The April 20 Note initially bore interest at 6% per annum and becomes due
and payable on April 20, 2022 (the “April 20 Note Maturity Date”). During the existence of an Event of Default (as
defined in the April 20 Note), which includes, amongst other events, any default in the payment of principal and interest payment (including
any April 20 Note Amortization Payments) under any note or any other indebtedness, interest accrues at the lesser of (i) the rate of
18% per annum, or (ii) the maximum amount permitted by law. Commencing on the thirteenth month anniversary of the April 20 Note, monthly
payments of interest and monthly principal payments, based on a 12-month amortization schedule, will be due and payable (each, an “April
20 Note Amortization Payment”), until the April 20 Note Maturity Date, at which time all outstanding principal, accrued and
unpaid interest and all other amounts due and payable under the April 20 Note will be immediately due and payable. The April 20 Note
Amortization Payments will be made in cash unless the investor payment in the Company’s common stock in lieu of a cash payment
(each, an “April 20 Note Stock Payment”). If the investor requests an April 20 Note Stock Payment, the number of shares
of common stock issued will be based on the amount of the applicable April 20 Note Amortization Payment divided by 80% of the lowest
VWAP (as defined in the April 20 Note) during the five Trading Day (as defined in the April 20 Note) period prior to the due date of
the April 20 Note Amortization Payment.
The
April 20 Note may be prepaid, provided that certain Equity Conditions, as defined in the April 20 Note, have been met (or any such failure
to meet the Equity Conditions has been waived): (i) from April 20, 2020 until and through July 20, 2020 at an amount equal to 105% of
the aggregate of the outstanding principal balance of the April 20 Note and accrued and unpaid interest, and (ii) after July 20, 2020
at an amount equal to 115% of the aggregate of the outstanding principal balance of the April 20 Note and accrued and unpaid interest.
In the event that the Company closes a Public Offering, the holder may elect to: (x) have its principal and accrued interest prepaid
directly from the proceeds of the Public Offering at the prices set forth above, (y) exchange its April 20 Note at the closing of the
Public Offering for the securities being issued in the Public Offering at the Public Offering prices based upon the outstanding principal,
accrued interest and other charges, or (z) continue to hold the April 20 Note. Except for a Public Offering and April 20 Note Amortization
Payments, in order to prepay the April 20 Note, the Company must provide at least 30 days’ prior written notice to the holder,
during which time the holder may convert the April 20 Note in whole or in part at the then applicable conversion price. For avoidance
of doubt, the April 20 Note Amortization Payments will be prepayments and are subject to prepayment penalties equal to 115% of the April
20 Note Amortization Payment. In the event the Company consummates a Public Offering while the April 20 Note is outstanding, then 25%
of the net proceeds of such offering will, within two business days of the closing of such Public Offering, be applied to reduce the
outstanding obligations pursuant to the April 20 Note.
Until
the April 20 Note is no longer outstanding, it is convertible, in whole or in part, at any time, and from time to time, into shares of
common stock at the option of the investor. The “Conversion Price” in effect on any Conversion Date (as defined in the April
20 Note) means, as of any Conversion Date or other date of determination, the lower of: (i) $0.40 and (ii) 70% of the second lowest closing
price of the common stock as reported on the Trading Market (as defined in the April 20 Note) during the 20 consecutive Trading Day (as
defined in the April 20 Note) period ending and including the Trading Day immediately preceding the delivery or deemed delivery of the
applicable notice of conversion. All such Conversion Price determinations are to be appropriately adjusted for any stock dividend, stock
split, stock combination, reclassification or similar transaction that proportionately decreases or increases the common stock.
The
April 20 Note includes a down-round provision under which the April 20 Note conversion price could be affected, by future equity offerings
undertaken by the Company. During the year ended December 31, 2020, down-provisions were triggered. Since these instruments contained
embedded derivatives, the trigger only effected the quantity and valuation of derivative liabilities and there was no other accounting
effect.
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, 2021, convertible notes payable and default interest due related
to the April 20 Note amounted to $0. On December 31, 2020, convertible notes payable related to the April 20 Note amounted to $69,300,
which consists of $69,300 of default penalty balance due.
Other
convertible debt
As
discussed in Note 8 below, 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 bears no interest and is payable in monthly payments
of $7,500 commencing on September 1, 2020 until paid in full. The Holder shall have 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. On December 31, 2020, convertible notes payable related to this Note amounted to $170,000. 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, 2021, the convertible
note balance is $0..
Summary
of derivative liabilities
During
the six months ended June 30, 2021 and 2020, due to the non-payment of amortization payments due, substantially all convertible notes
were deemed in default. Since the default principal due is convertible at the same default terms contained in the related convertible
notes, the Company determined that various terms of the convertible notes discussed above caused derivative treatment of the embedded
conversion options related to the principal and default principal due. Accordingly, under the provisions of ASC 815-40 - Derivatives
and Hedging – Contracts in an Entity’s Own Stock, the embedded conversion option related to the principal and default
principal due were accounted for as derivative liabilities at the date of issuance and shall be adjusted to fair value through earnings
at each reporting date. The fair value of the embedded conversion option derivatives related to the principal balance default principal
due was determined using the Binomial valuation model. At the end of each period and on the date that debt is converted into common shares,
the Company revalues the embedded conversion option derivative liabilities.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2021
As
discussed above, the Company issued debt that consists of the issuance of convertible notes with variable conversion provisions. The
conversion terms of the convertible notes are variable based on certain factors, such as the future price of the Company’s common
stock, default provisions and payment of amortization payments in stock. The number of shares of common stock to be issued is based on
the future price of the Company’s common stock. The number of shares of common stock issuable upon conversion of each promissory
note is indeterminate. Due to the fact that the number of shares of common stock issuable may exceed the Company’s authorized share
limit, effective January 30, 2020, the equity environment was tainted and all convertible debentures and warrants were included in the
value of the derivative. Pursuant to ASC 815-15 Embedded Derivatives, the fair values of the variable conversion option and warrants
and shares to be issued were recorded as derivative liabilities. On January 30, 2020, the Company evaluated all outstanding warrants
to determine whether these instruments are tainted and, due to reasons discussed above, all warrants outstanding were considered tainted.
Accordingly, the Company recorded a reclassification from paid-in capital to derivative liabilities of $11,381,885 for warrants becoming
tainted. On January 30, 2020, the fair value of the warrants to be reclassified to derivative liabilities was determined using the Binomial
valuation model.
In
connection with the issuance of the Q1/Q2 2020 Notes and the warrants issued in February, March and April 2020, the Company determined
that various terms of the Q1/Q2 2020 Notes and Q1/Q2 2020 Warrants, including the default provisions in the Q1/Q2 2020 Notes discussed
above, caused derivative treatment of the embedded conversion options and warrants. Accordingly, under the provisions of ASC 815-40 -
Derivatives and Hedging – Contracts in an Entity’s Own Stock, the embedded conversion option contained in the Q1/Q2
2020 Notes and certain warrants were accounted for as derivative liabilities at the date of issuance and shall be adjusted to fair value
through earnings at each reporting date. The fair value of the embedded conversion option derivatives and warrants was determined using
the Binomial valuation model.
In
connection with the issuance of the April 20 Note, the Company determined that various terms of the April 20 Note, including the default
provisions in the April 20 Note discussed above, caused derivative treatment of the embedded conversion options and warrants. Accordingly,
under the provisions of ASC 815-40 - Derivatives and Hedging – Contracts in an Entity’s Own Stock, the embedded conversion
option contained in the April 20 Note were accounted for as derivative liabilities at the date of issuance and shall be adjusted to fair
value through earnings at each reporting date. The fair value of the embedded conversion option derivative was determined using the Binomial
valuation model. At the end of each period and on the date that the April 20 Note are converted into common shares, the Company revalues
the embedded conversion option derivative liabilities.
During
the six months ended June 30, 2021 and 2020, 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
|
|
|
|
2020
|
|
Expected dividend rate
|
|
|
-
|
|
|
|
-
|
|
Expected term (in years)
|
|
|
0.75 to 5.00
|
|
|
|
1.00 to 5.00
|
|
Volatility
|
|
|
169.7% to 367.0
|
%
|
|
|
154.2% to 362.0
|
%
|
Risk-free interest rate
|
|
|
0.04% to 0.87
|
%
|
|
|
0.15% to 1.62
|
%
|
On
June 30, 2021 and December 31, 2020, convertible promissory notes are as follows:
SCHEDULE
OF CONVERTIBLE PROMISSORY NOTES
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
Principal and default penalty amount
|
|
$
|
-
|
|
|
$
|
1,062,764
|
|
Less: unamortized debt discount
|
|
|
-
|
|
|
|
(83,548
|
)
|
Convertible notes payable, net
|
|
|
-
|
|
|
|
979,216
|
|
Less: current portion of convertible notes payable
|
|
|
-
|
|
|
|
(979,216
|
)
|
Convertible notes payable, net – long-term
|
|
$
|
-
|
|
|
$
|
-
|
|
On
December 31, 2020, the principal and default penalty amount due of $1,062,764 consisted of promissory note principal balances due of
$351,000 and default penalty amounts due of $711,764.
For
the six months ended June 30, 2021 and 2020, amortization of debt discounts related to convertible notes amounted to $83,548 and $2,162,507,
respectively, which has been included in interest expense on the accompanying condensed consolidated statements of operations.
NOTE
8 – NOTES PAYABLE
Promissory
notes
On
June 30, 2021 and December 31, 2020, Prime EFS notes payable related to Assumed Secured Merchant Loans and promissory notes amounted
to $80,490 and $80,490, respectively.
In
connection with the acquisition of Prime EFS, the Company assumed several notes payable liabilities due to entities or individuals. These
notes have effective interest rates ranging from 7% to 10% and are unsecured. On June 30, 2021 and December 31, 2020, Prime EFS remaining
notes payable to an entity amounted to $40,000 and $40,000, respectively.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2021
During
the year ended December 31, 2019, the Company entered into separate promissory notes with several individuals totaling $2,517,150, including
$40,000 of a previous note rolled into these new notes, and received net proceeds of $2,238,900, net of original issue discounts of $238,250.
These notes were due between 45 and 273 days from the respective note issuance date. During the year ended December 31, 2019, the Company
repaid $1,118,400 of these notes. Additionally, during the year ended December 31, 2019, the Company issued 439,623 shares of its common
stock and 439,623 five year warrants exercisable at $2.50 per share upon conversion of notes payable of $978,750 and accrued interest
of $120,307 at a conversion price of $2.50 per share. Since the conversion price of $2.50 was equal to the fair value of the shares as
determined by recent sales of the Company’s common shares, no beneficial feature conversion was recorded. During the year ended
December 31, 2020, the Company borrowed additional fund from individuals of $443,000, and received net proceeds of $423,000, net of original
issue discount of $20,000, the Company repaid $320,500 of these funds, and a note with a principal balance of $195,000 was transferred
into the April 20, 2020 convertible note discussed above. Furthermore, on June 30, 2020, one of these notes with a principal balance
due of $150,000 and accrued interest payable of $82,274 was settled and a new note was entered into with a principal balance of $200,000.
This new note bores no interest and was payable in monthly payments of $7,500 commencing on July 1, 2020 until paid in full. The Company
repaid $15,000 of such note. On August 28, 2020, this 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 (See Note 7). On June 30, 2021 and December 31, 2020, Prime EFS notes payable
related to one remaining individual amounted to $220,000 and $220,000, respectively.
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 is 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 on
October 15, 2021 and $100,000 plus all remaining accrued interest is due on January 15, 2022. Interest accrues at 4% per annum. On June
30, 2021, the liability related to this note was $300,000.
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 is payable in two installments of $175,000 plus accrued interest as follows: $175,000 plus accrued interest
is due on September 23, 2021 and $175,000 plus all remaining accrued interest is due on March 23, 2022. Interest accrues at 6% per annum.
On June 30, 2021, the liability related to this note was $350,000.
Equipment
and auto notes payable
In
connection with the acquisition of Prime EFS, the Company assumed several equipment notes payable liabilities due to entities. On June
30, 2021 and December 31, 2020, Prime EFS equipment notes payable to these entities amounted to $36,233 and $43,363, respectively.
During
the years ended December 31, 2019 and 2018, the Company entered into auto financing agreements in the amount of $44,905 and $162,868,
respectively. On June 30, 2021 and December 31, 2020, Prime EFS auto notes payable to these entities amounted to $161,983 and $151,710,
respectively.
In
November 2019, the Company entered into a promissory note for the purchase of five trucks in the amount of $460,510. The note is due
in sixty monthly installments of $9,304. The first payment was paid in December 2019 and the remaining fifty-nine payments are due monthly
commencing on January 27, 2020. The note is secured by the trucks and is personally guaranteed by the Company’s chief executive
officer. On June 30, 2021 and December 31, 2020, equipment note payable to this entity amounted to $340,727 and $375,422, respectively.
In
connection with the acquisition of DDTI, the Company assumed several truck notes payable liabilities due to entities. On June 30, 2021,
truck notes payable to these entities amounted to $87,793.
In
connection with the acquisition of Cougar Express, the Company assumed several equipment notes payable liabilities due to entities. On
June 30, 2021, equipment notes payable to these entities amounted to $9,903.
Paycheck
Protection Program Promissory Notes
On
April 2, 2020, the Company’s subsidiary, Shypdirect, entered into a Paycheck Protection Program promissory note (the “Shypdirect
PPP Loan”) with M&T Bank in the amount of $504,940 under the Small Business Administration (the “SBA”)
Paycheck Protection Program (the “Paycheck Protection Program”) of the Coronavirus Aid, Relief and Economic Security
Act of 2020 (the “CARES Act”). On April 28, 2020, the Shypdirect PPP Loan was approved and Shypdirect received the
loan proceeds on May 1, 2020. Shypdirect used the proceeds for covered payroll costs, rent and utilities in accordance with the relevant
terms and conditions of the CARES Act. The Shypdirect PPP Loan has a two-year term, matures on April 28, 2022, and bears interest at
a rate of 1.00% per annum. Monthly principal and interest payments, less the amount of any potential forgiveness (discussed below), was
to commence on November 28, 2020.
On
April 15, 2020, the Company’s subsidiary, Prime EFS, entered into a Paycheck Protection promissory note (the “Prime EFS
PPP Loan” and together with the Shypdirect PPP Loan, the “PPP Loans”) with M&T Bank in the amount of
$2,941,212 under the SBA Paycheck Protection Program of the CARES Act. On April 15, 2020, the Prime EFS PPP Loan was approved and Prime
EFS received the loan proceeds on April 22, 2020. Prime EFS used the proceeds for covered payroll costs, rent and utilities in accordance
with the relevant terms and conditions of the CARES Act. The Prime EFS PPP Loan has a two-year term, matures on April 16, 2022, and bears
interest at a rate of 1.00% per annum. Monthly principal and interest payments, less the amount of any potential forgiveness (discussed
below), was to commence on November 16, 2020.
Neither
Prime EFS nor Shypdirect provided any collateral or guarantees for these PPP Loans, nor did they pay any facility charge to obtain the
PPP Loans. These promissory notes provide for customary events of default, including, among others, those relating to failure to make
payment, bankruptcy, breaches of representations and material adverse effects. Prime EFS and Shypdirect may prepay the principal of the
PPP Loans at any time without incurring any prepayment charges. These PPP Loans may be forgiven partially or fully if the loan proceeds
are used for covered payroll costs, rent and utilities, provided that such amounts are incurred during the twenty-four week period that
commenced on May 1, 2020 and at least 60% of any forgiven amount has been used for covered payroll costs. The Company exhausted such
funds in the third quarter of 2020. In the fourth quarter of 2020, Shypdirect applied for full forgiveness of the Shypdirect PPP Loan.
In the second quarter of 2021, Prime EFS applied for partial loan forgiveness on the Prime EFS PPP Loan in the amount of $2,691,884.
However, any forgiveness of these PPP Loans is subject to approval by the SBA and M&T Bank and there is no guarantee that such forgiveness
will be granted.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2021
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.
Since the Cougar PPP Loan was not forgiven as of March 31, 2021, the Company has reflected the Cougar PPP loan of $622,240
as outstanding on March 31, 2021 and the Company
recorded a note receivable of $622,240
which was due from the prior shareholder of Cougar
Express if the Cougar PPP Loan is not forgiven. 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.
On
June 30, 2021 and 2020, notes payable consisted of the following:
SCHEDULE
OF NOTES PAYABLE
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
Principal amounts
|
|
$
|
5,073,281
|
|
|
$
|
4,357,138
|
|
Less: current portion of notes payable
|
|
|
(4,626,661
|
)
|
|
|
(3,919,544
|
)
|
Notes payable – long-term
|
|
$
|
446,620
|
|
|
$
|
437,594
|
|
For
the six months ended June 30, 2021 and 2020, amortization of debt discounts related to notes payable amounted to $0 and $605,763, respectively,
which has been included in interest expense on the accompanying condensed consolidated statements of operations.
NOTE
9– STOCKHOLDERS’ DEFICIT
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 1,000,000 Series B preferred shares for services rendered to the former member of Prime EFS who was
considered a related party. On July 24, 2020, the Company issued 1,000,000 shares of its common stock upon conversion of 1,000,000 shares
of Series B Preferred shares.
On
August 16, 2019, the Company issued 700,000 shares of Series B Preferred shares upon settlement of 700,000 shares of issuable common
shares.
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.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2021
On
July 20, 2020 and July 22, 2020, the Company entered Exchange Agreements with two Investors to exchange outstanding August 2019 Notes
and August 2019 Warrants for a newly created series of preferred stock designated the Series D Convertible Preferred Stock. Pursuant
to the Exchange Agreements, the Investors exchanged August 2019 Notes with an aggregate remaining principal amount outstanding of $500,184,
accrued interest payable of $85,827, and Warrants to purchase 423,159,293 shares of Common Stock for 522,726 shares of Series D (the
“Exchange”). The Series D shares issued in the exchange had an equivalent fair value as if the investors had converted
their debt to common stock at the contractual rate in the convertible notes and therefore, there was no gain or loss on the exchange.
In connection with the issuance of the Series D shares, the Company recorded a loss on debt extinguishment of $239,678 which is associated
with the fair market value of the excess shares issued upon conversion of other settlement amounts.
During
the period from July 1, 2020 to December 31, 2020, the Company issued 522,726,000 shares of its common stock in connection with the conversion
of 522,726 shares of Series D. The conversion ratio was 1,000 shares of common stock for each share of Series D based on the Series D
COD. Accordingly, as of June 30, 2021 and December 31, 2020, no shares of Series D were outstanding.
These
Series D preferred share issuances which were not redeemable were evaluated to determine whether temporary or permanent equity classification
on the consolidated balance sheet was appropriate. As per the terms of the Series D preferred stock agreements, Series D preferred stock
was not redeemable. As such, since Series D preferred stock was not redeemable, the Series D preferred stock was classified as permanent
equity. The Company also concluded that the conversion rights under the Series D Preferred Stock were clearly and closely related to
the equity host instrument. Accordingly, the conversion rights feature on the Series D Preferred Stock were not considered an embedded
derivative that required bifurcation.
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.
|
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.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2021
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. During the six months
ended June 30, 2021, the Company accrued dividends of $103,890
which has been included in accrued expenses
on the accompanying condensed consolidated balance sheet.
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.
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.
On
October 8, 2020, the Company entered into a Securities Purchase Agreement with the investors party thereto (collectively the “Investors”)
pursuant to which the Investors agreed to purchase units, severally and not jointly, which consisted of an aggregate of (i) 47,977 shares
of Series E Convertible Preferred Stock (the “Series E”) and (ii) warrants (the “Warrants”) to purchase 23,988,500
shares of the Company’s common stock which are equal to 50% of the shares of common stock issuable upon conversion of the Series
E if the Series E were converted on October 8, 2020 (the “October 2020 Series E Offering”). The gross proceeds to the Company
were $640,000, or $13.34 per unit which is the stated value of each Series E share. The Company paid fees of $35,000 and received net
proceeds of $605,000. The initial exercise price of the Warrants related to the October 2020 Series E Offering is $0.04 per share, subject
to adjustment. Due to down-round provisions in the Warrants, the number of warrants was increased from 23,988,500 warrants to 95,954,000
warrants, and the exercise price was reduced to $0.01 per share.
On
December 28, 2020 and December 30, 2020, 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) 57,400 shares of Series E and (ii)
Warrants to purchase 76,571,429 shares of the Company’s common stock which are equal to 1,334 warrants for each for each share
of Series E purchased (the “December 2020 Series E Offering”). The gross proceeds to the Company were $670,000, or $11.67
per unit. The Company paid fees of $112,000 and received net proceeds of $558,000. The initial exercise price of the Warrants related
to the December 2020 Series E Offering is $0.01 per share, subject to adjustment. In connection with the issuance of the Series E and
related warrants, the Company recorded a deemed dividend of $527,230 related to the beneficial conversion features 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 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 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.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2021
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.
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 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 six months ended
June 30, 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 six 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.
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.
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.
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.
Shares
issued in connection with conversion of convertible debt and interest
During
the three months ended March 31, 2020, the Company issued 5,290,406 shares of its common stock upon the partial conversion of a convertible
note principal and default interest balances due of $310,894, and accrued interest payable of due of $30,625 at the contractual conversion
price. The Company accounted for the partial conversion of these convertible notes pursuant to the guidance of ASC 470-20, Debt with
Conversion and Other Options. Under ASC 470-20, the Company recognized an aggregate loss on debt extinguishment upon conversion in
the amount of $172,720 which is associated with the difference between the fair market value of the shares issued upon conversion and
the conversion price and is equal to the fair value of the shares of common stock transferred upon conversion.
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.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2021
Shares
issued in connection with conversion of Series E preferred shares
During
the six 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.
Shares
issued upon exercise of warrants
During
the six 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.
Stock
options
Stock
option activities for the six months ended June 30, 2021 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, 2020
|
|
|
80,000
|
|
|
$
|
8.84
|
|
|
|
3.58
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Balance Outstanding June 30, 2021
|
|
|
80,000
|
|
|
$
|
8.84
|
|
|
|
2.84
|
|
|
$
|
-
|
|
Exercisable, June 30, 2021
|
|
|
40,000
|
|
|
$
|
8.84
|
|
|
|
2.84
|
|
|
$
|
-
|
|
Warrants
Warrants
issued in connection with Series E preferred shares
In
connection with certain down-round provisions on the Series E warrants issued in October 2020, the Company increased the number of warrants
by 71,965,500.
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 six 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.
Warrant
activities for the six months ended June 30, 2021 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, 2020
|
|
|
147,112,603
|
|
|
|
0.052
|
|
|
|
4.83
|
|
|
$
|
1,780,356
|
|
Granted
|
|
|
549,257,147
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
Increase in warrants related to price protection
|
|
|
71,965,500
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
Exercises
|
|
|
(167,128,858
|
)
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
Balance Outstanding June 30, 2021
|
|
|
601,206,392
|
|
|
$
|
0.02
|
|
|
|
4.57
|
|
|
$
|
2,927,534
|
|
Exercisable, June 30, 2021
|
|
|
601,206,392
|
|
|
$
|
0.02
|
|
|
|
4.57
|
|
|
$
|
2,927,534
|
|
NOTE
10 – COMMITMENTS AND CONTINGENCIES
Legal
matters
From
time to time, we may be involved in litigation relating to claims arising out of our operation in the normal course of business.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2021
Disputes
Between Prime EFS, ELRAC LLC, and Enterprise Leasing Company of Philadelphia, LLC
On
or about January 10, 2020, Prime EFS was named as sole defendant in a civil action captioned ELRAC LLC v. Prime EFS, filed in the United
States District Court for the Eastern District of New York, assigned Case No. 1 :20-cv-00211 (the “ELRAC Action”).
The complaint in the ELRAC Action alleged that Prime EFS failed to pay in full for repairs allegedly required by reason of property damage
to delivery vehicles leased by Prime EFS from ELRAC LLC (“ELRAC”) to conduct its business. The complaint sought damages
of not less than $382,000 plus $58,000 in insurance claims that ELRAC believes were collected by the Company and not reimbursed to ELRAC.
ELRAC
subsequently moved for a default judgment against Prime EFS. By letter to the court dated March 9, 2020, Prime EFS opposed entry of a
default judgment and contended that all claims in the ELRAC Action were subject to mandatory arbitration clauses found in the individual
lease agreements. On March 19, 2020, ELRAC filed a stipulation dismissing the ELRAC Action without prejudice and advised Prime EFS that
it intends to file an arbitration at the American Arbitration Association alleging essentially identical claims.
During
the period it was leasing vans and trucks from ELRAC and its affiliate, Enterprise Leasing Company of Philadelphia, LLC (“Enterprise
PA” and, with ELRAC, “Enterprise”), Prime EFS paid $387,392 in deposits required by Enterprise as security
for the payment of deductibles and uninsured damage to Enterprise’s fleet. Despite due demand, Enterprise never accounted to Prime
EFS’s satisfaction regarding the application of these deposits. On June 10, 2020, Prime EFS therefore initiated an arbitration
(the “Arbitration”) against Enterprise at the American Arbitration Association seeking the return of not less than
$327,000 of these deposits.
On
October 9, 2020, Enterprise filed its Answer and Counterclaims in the Arbitration. In its Answer, Enterprise denies liability to Prime
for $327,000 or any other sum. In its Counterclaims, ELRAC seeks $382,000 in damages and Enterprise PA seeks $256,000 in damages. Enterprise
also seeks $62,000 in insurance payments allegedly made by Utica to Prime EFS.
Prime
EFS believes the Enterprise Answer and Counterclaims lack merit and intends to defend its position in the Arbitration vigorously. Nevertheless,
given the amount of the Counterclaim and the documentation which Enterprise has submitted in the arbitration in support thereof, the
Company continues to reflect a liability of $440,000, i.e., the amount originally claimed as damages by ELRAC in the ELRAC Federal Action,
as a contingency liability on the Company’s consolidated balance sheet. Based on our knowledge of the matter, as developed to date,
we continue to agree with this estimate of probable total Company liability.
While
it believes it has meritorious defenses to this action, out of an abundance of caution and without prejudice to its position in the matter,
as of June 30, 2021, Prime EFS had accrued a contingency liability of $440,000 for purposes of this matter.
Bellridge
Capital, L.P. v. TLSS and John Mercadante
After
discontinuing a prior action in federal court, on April 23, 2021, Bellridge Capital, L.P. (“Bellridge”) filed a civil
action in New York Supreme Court, New York County, against TLSS and John Mercadante. This mater, the “Bellridge Action,”
was assigned civil action number 652728/2021.
The
complaint in the Bellridge Action asserts 11 causes of action: (1) against TLSI, allegedly for breach of a convertible promissory note
issued June 18, 2018 (the “June 2018 Note”), which claim seeks $539,114.06 for allegedly unpaid principal plus interest,
costs and expenses; (2) against TLSI, also allegedly for breach of June 2018 Note, which claim seeks $343,000 plus interest, costs and
expenses for TLSI’s alleged failure to honor certain conversion notices in timely fashion; (3) against TLSI, allegedly for breach
of a promissory note dated December 26, 2018 (the “December 2018 Note”), which claim seeks $196,699 plus interest,
costs and expenses for amounts allegedly unpaid under the note; (4) against TLSI, purportedly for breach of an exchange agreement between
Bellridge and TLSI dated April 13, 2019 (the “Exchange Agreement”), which claim seeks $3,337,500 plus costs and interest;
(5) against TLSI and Mercadante, allegedly for fraud in connection with the Exchange Agreement, which claim seeks $447,500 plus costs
and interest; (6) against TLSI and Mercadante, allegedly for negligent misrepresentation in connection with the Exchange Agreement, which
claim seeks $447,500 plus costs and interest, in the alternative to the 5th claim; (7) against TLSI, allegedly for breach
of certain preferred stock terms relating to the conversion of 31,500 series A preferred shares, which claim seeks not less than $57,960;
(8) against TLSI and Mercadante, allegedly for fraudulent inducement of an August 2019 subordination agreement, which claim seeks a declaration
annulling the subordination agreement; (9) against TLSI, allegedly for failing to provide all consideration recited in a subordination
letter, which claim seeks a declaration that Bellridge is discharged from its obligations under the subordination agreement; (10) against
TLSI, allegedly for failing to honor a condition precedent to the subordination agreement, which claim seeks a declaration that Bellridge
is discharged from any obligations under the subordination agreement; and (11) against TLSI, allegedly for breach of the subordination
agreement and/or subordination letter, which claim seeks damages in an amount to be determined at trial.
The
purchase price stated in the June 2018 Note is $1,664,995. The principal amount of the June 2018 Note is $2,413,999.50. Hence the June
2018 Note was issued at a 33.33% discount (OID). The June 18 Note calls for the payment of interest computed at the rate of 10% per annum
prior to any default. The term of the Note is one year. The June 2018 Note calls for the application of New York law. OID is treated
as interest for purposes of the New York usury statutes (both civil and criminal). Since total interest payable under the Note at issuance
was 41% per annum, for a period of one year, TLSI believes the June 2018 Note was void ab initio under N.Y. Penal Law § 190.40
and cannot be enforced in this action.
The
purchase price stated in the December 2018 Note is $300,000. The principal amount of the December 2018 Note is $330,000. Hence the December
2018 Note was issued at a 10% discount (OID). The Note calls for the payment of interest computed at the rate of 10% per annum prior
to any default. The term of the Note is under 90 days; that is, it was made payable, in full, on March 15, 2019, after which the principal
amount increases “by 30%” and default interest is due under the instrument at a rate of 18% per annum (§ 7(b)). The
December 2018 Note, by its terms, is governed by New York law. As noted above, OID is to be treated as interest for purposes of the New
York usury statutes (both civil and criminal). Since total interest payable under the Note, over its term of under 90 days, was more
than 40% per annum, TLSI believes that the December 2018 Note, like the June 2018 Note, is void under N.Y. Penal Law § 190.40 and
cannot be enforced in this action.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2021
When
Bellridge offered to engage in the Exchange Agreement, Bellridge was able to dictate terms and extract concessions from TLSI that were
commercially unreasonable and unconscionable. It was able to do so solely because of its violations of N.Y. Penal Law § 190.40 Bellridge
in July 2018. As such, TLSI believes the Exchange Agreement is null and void under N.Y. Penal Law § 190.40 and cannot be enforced
in this action.
On
June 4, 2021, TLSI and Mercadante moved to dismiss this action for failure to state a claim and, as to Mercadante, lack of jurisdiction.
On July 7, 2021, Bellridge filed opposition papers and on July 21, 2021, the defendants filed reply papers on this motion. The motion
is scheduled to be argued to the assigned judge on October 20, 2021. In its reply papers, TLSI asserted, inter alia, that Bellridge
has no damages because giving effect to its conversions and cash payments by TLSI on the June and December 2018 Note, Bellridge had no
out-of-pocket losses and made approximately $500,000
on an investment of $1.92
million.
The
defendants believe they have good defenses to all claims alleged in the matter, including without limitation the defense of usury as
outlined above. Both the Company and Mr. Mercadante intend to defend this case vigorously.
Based
on the early stage of this matter, 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.
SCS,
LLC v. Transportation and Logistics Systems, Inc.
On
January 14, 2021, a civil action was filed against the Company in the Circuit Court of the 15th Judicial Circuit in and for
Palm Beach County, Florida, captioned SCS, LLC v. Transportation and Logistics Systems, Inc. The case was assigned Case No. 50-2020-CA-012684-xxxx-MB.
The
plaintiff in the case, SCS, LLC (“SCS”) alleges it is a limited liability company that entered into a renewable six-month
consulting agreement with the Company dated September 5, 2019 and that the Company failed to make certain monthly payments due thereunder
for the months of October 2019 through March 2020, summing to $42,000. The complaint alleges claims for breach of contract, quantum meruit,
unjust enrichment and account stated.
On
February 9, 2021, the Company filed its answer, defenses and counterclaims to this action. Among other things, the Company avers that
SCS’s claims are barred by its unclean hands and breaches of its duties under the consulting agreement. SCS filed a motion to strike
TLSI’s defenses and counterclaims and TLSI has opposed that application. Those motions remain sub judice.
The
Company believes it has substantial defenses to all claims alleged in SCS’s complaint. The Company therefore intends to defend
this case vigorously.
Based
on the early stage of this matter, 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.
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.
The
plaintiff in this action, SCS, alleges it is a limited liability company formed by a former chief executive officer and director of the
Company, Lawrence Sands. The complaint alleges that between April 2019 and June 2020, the current chairman and chief executive officer
of the Company, the current chief development officer of the Company and, since February 2020, the Company’s restructuring consultant,
breached fiduciary duties owed to the Company. The Company’s restructuring consultant, defendant Sebastian Giordano, renders his
services through another defendant in the action, Ascentaur LLC.
Briefly,
the complaint alleges that the Company’s chief executive officer breached duties to the Company by, among other things, requesting,
in mid-2019, that certain preferred equity holders, including SCS, convert their preferred shares into Company common stock in order
to facilitate an equity offering by the Company and then not consummating an equity offering. The complaint also alleges that current
management caused the Company to engage in purportedly wasteful and unnecessary transactions such as taking merchant cash advances (MCA)
on disadvantageous terms. The complaint further alleges that current management “issued themselves over two million shares of common
stock without consideration.” The complaint seeks unspecified compensatory and punitive damages on behalf of the Company for breach
of fiduciary duty, negligent breach of fiduciary duty, constructive fraud, and civil conspiracy and the appointment of a receiver or
custodian for the Company.
The
Company’s current management has tendered the complaint to its directors’ and officers’ liability carrier for defense
and indemnity purposes, which coverage is subject to a $250,000 self-insured retention. Company management, Mr. Giordano and Ascentaur
LLC each advise that they deny each and every allegation of wrongdoing alleged in the complaint. Among other things, current management
asserts that it made every effort to consummate an equity offering in late 2019 and early 2020 and could not do so solely because of
the Company’s precarious financial condition. Current management also asserts it made clear to SCS and other preferred equity holders,
before they converted their shares into common stock, that there was no guarantee the Company would be able to consummate an equity offering
in late 2019 or early 2020. In addition, current management asserts that it received equity in the Company on terms that were entirely
fair to the Company and entered into MCA transactions solely because there was no other financing available to the Company.
On
August 5, 2020, all defendants in this action moved to dismiss the complaint for failure to state a claim upon which relief can be granted.
Among other things, all defendants allege in their motion that, through this lawsuit, SCS is improperly attempting to second-guess business
decisions made by the Company’s Board of Directors, based solely on hindsight (as opposed to any well-pleaded facts demonstrating
a lack of care or good faith). All defendants also assert that the majority of the claims are governed by Nevada law because they concern
the internal affairs of the Company. Defendants further assert that, under Nevada law, each of the business decisions challenged by SCS
is protected by the business judgment rule. Defendants further assert that, even if SCS could rebut the presumption that the business
judgment rule applies to all such transactions, SCS has failed to allege facts demonstrating that intentional misconduct, fraud, or a
knowing violation of the law occurred—a requirement under Nevada law in order for director or officer liability to arise. Defendants
further assert that, because SCS’s constructive fraud claim simply repackages Plaintiff’s claims for breach of fiduciary
duty, it too must fail. Defendants also contend that in the absence of an adequately-alleged independent cause of action—let alone
an unlawful agreement between the defendants entered into for the purpose of harming the Company, SCS’s claim for civil conspiracy
must also be dismissed. Finally, defendants contend that SCS’s extraordinary request that a receiver or custodian be appointed
to manage and supervise the Company’s activities and affairs throughout the duration of this unfounded action is without merit
because SCS does not allege the Company is subject to loss so serious and significant that the appointment of a receiver or custodian
is “absolutely necessary to do complete justice.”
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2021
SCS
has a right to file court papers opposing the above motion and thereafter the defendants intend to file reply papers in further support
of the motion (the “MTD”). To date, the court has not entered an order scheduling these filings or a hearing on the
MTD.
While
they hope to prevail on the motion, win or lose, current Company management, Mr. Giordano and Ascentaur LLC advise that they 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.
Frank
Mazzola v. Prime EFS, et al.
On
July 24, 2020, Prime EFS terminated the employment of Frank Mazzola effective that day. On July 27, 2020, Mr. Mazzola filed a Complaint
and Jury Demand in the United States District Court for the Southern District of New York in which he named as defendants Prime EFS,
the Company, John Mercadante and Douglas Cerny. The case was assigned # 1:20-CV-5788-VM. In this action, Mr. Mazzola alleges that he
had an employment agreement with Prime EFS and that Prime EFS breached the alleged employment agreement through two alleged pay reductions
and by terminating his employment. The Complaint contains eight counts: (1) breach of contract against Prime EFS; (2) breach of the covenant
of good faith and fair dealing against Prime EFS; (3) intentional misrepresentation against Prime EFS, the Company and Mr. Mercadante;
(4) negligent misrepresentation against Prime EFS, the Company and Mr. Mercadante; (5) tortious interference with contract against the
Company, Mr. Mercadante and Mr. Cerny; (6) tortious interference with prospective economic advantage against the Company, Mr. Mercadante
and Mr. Cerny; (7) conversion against all defendants; and (8) unjust enrichment against all defendants. Mr. Mazzola seeks specific performance
of the alleged employment agreement and damages of not less than $3 million.
Without
Answering the Complaint, on August 14, 2020, the defendants objected to the Complaint on the grounds of lack of personal jurisdiction,
improper venue and because the Complaint failed to state a claim upon which relief could be granted. On August 25, 2020, the Court ordered
Mr. Mazzola to respond to the defendant’s objections within three days. On August 28, 2020, Mr. Mazzola voluntarily withdrew the
action.
On
September 1, 2020, Mr. Mazzola served the defendants with a Complaint and Jury Demand that Mr. Mazzola filed in the Superior Court of
New Jersey, Law Division, Bergen County, docket number BER-L-004967-20. The Complaint alleged the same claims as those set forth in the
Complaint that Mr. Mazzola had filed in the now withdrawn New York federal lawsuit. On September 28, 2020, the defendants removed the
New Jersey state court lawsuit to the United States District Court for the District of New Jersey, which has been assigned civil action
number 2:20-cv-13387-BRM-ESK. On October 5, 2020, all defendants filed a motion to dismiss each and every claim asserted against them
in the New Jersey federal action.
On
December 7, 2020, Mr. Mazzola filed an amended complaint in this action (the “AC”) alleging three (3) claims for relief:
one for Breach of Contract against Prime EFS; one for “Piercing the Corporate Veil” against the Company; and one for “Fraudulent
Inducement” against Messrs. Mercadante and Cerny.
The
damages sought by each claim are identical: “approximately $2,000,000, representing $1,040,000 in [alleged] severance”; $759,038.41
in alleged “accrued but unpaid salary”; and non-cash benefits under the alleged executive employment agreement.
On
January 11, 2021, Prime EFS filed an answer to the AC, denying, under the faithless servant doctrine and otherwise, that it has any liability
to Mr. Mazzola for any of the amounts sought. Prime EFS also filed counterclaims against Mr. Mazzola seeking recoupment of not less than
$925,492 in W-2 compensation paid to Mr. Mazzola; damages in the amount of $168,750 which Mr. Mazzola paid to his mother for a no-show
job; and damages of not less than $500,000 for usurpation of corporate opportunities belonging to Prime EFS. Also, on January 11, 2021,
the Company, Mr. Mercadante and Mr. Cerny filed motions to dismiss the AC insofar as pled against them for failure to state a claim and
for lack of personal jurisdiction.
On
January 27, 2021, Prime EFS filed an amended answer to the AC, increasing the amount sought on its counterclaim for recoupment of income
paid to Mr. Mazzola from $925,492 to $1,111,833.73 and adding a claim for indemnification for amounts paid by Prime EFS to resolve certain
litigation against it such as the Valesky case (see below).
The
motions to dismiss are currently sub judice. The case is currently in discovery.
Owing
to the early stage of this matter, 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.
Rosemary
Mazzola v. TLSS and Douglas Cerny
On
September 19, 2020, attorneys for Frank Mazzola’s mother, Rosemary Mazzola, filed an action in the United States District Court
for the Southern District of New York against the Company and Douglas Cerny. The case was assigned docket number 1:20-cv-7582 and assigned
to USDJ Gregory H. Woods. In this action, Ms. Mazzola claims that the Company entered into and breached an unspecified contract by failing
to pay her $94,000. In addition, the complaint claims that, although he was not a party to the unspecified contract, Mr. Cerny falsely
represented that the Company intended to “repay” Ms. Mazzola $94,000 plus interest. The complaint seeks $94,000 from each
defendant, plus late fees, costs, prejudgment interest and attorneys’ fees and, from Mr. Cerny punitive damages in an unspecified
amount. The complaint also alleges claims for account stated and breach of implied warranty of good faith and fair dealing, allegedly
premised on the same indebtedness.
On
November 23, 2020, counsel for Ms. Mazzola filed an Amended Complaint in this action, dropping Mr. Cerny and adding Prime EFS, LLC as
a party. The new pleading demands $209,000 rather than the $94,000 in damages previously alleged. The new complaint alleges three claims:
breach of contract against Prime EFS, alter ego liability against the company, and unjust enrichment against both the Company and Prime
EFS. Ms. Mazzola also demands legal fees and expenses under a prevailing-party provision in the Amended Stock Purchase Agreement.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2021
On
January 29, 2021, both TLSI and Prime EFS, LLC timely moved to the dismiss the Amended Complaint. Opposition and reply papers on this
motion were filed in February 2021. Meanwhile, on March 11, 2021, the court entered an order in the case requiring all fact discovery
to be concluded by September 9, 2021.
As
of June 30, 2021 and December 31, 2020, out of an abundance of caution and without prejudice to its position in this matter, a $94,000
liability is included in due to related parties on Prime EFS’s balance sheet as of such date. However, if the motion to dismiss
is denied, TLSS and/or Prime will file counterclaims seeking at least $168,750 from Ms. Mazzola.
Owing
to the early stage of this matter, it is not possible for us 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.
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. We intend to vigorously defend against this claim
and to pursue the coverage action. However, we cannot evaluate the likelihood of an adverse outcome or estimate our liability, if any,
in connection with this claim.
Valesky
v. Prime EFS, Shypdirect and TLSI
Plaintiff,
an ex-dispatcher for Prime EFS, brought this action in the U.S. District Court for the District of New Jersey under the Family and Medical
Leave Act of 1993 and the New Jersey Law Against Discrimination seeking unspecified compensatory and punitive damages. In April 2021,
we settled this matter for a payment of $35,000.
Ynes
Accilien v. Prime EFS
This
action was brought on April 27, 2020 in the Superior Court of New Jersey for Bergen County by the plaintiff alleging injuries from a
May 12, 2019 collision with a van leased by Prime EFS and operated by Prime EFS employees. The plaintiff has also filed a workers’
compensation claim. Prime EFS’s insurer has been defending this matter without charging Prime EFS, and the Company and Prime EFS
expect that the insurer will ultimately indemnify Prime EFS for any damages assessed.
Default
by Prime EFS on June 4, 2020 Settlement with Creditors
On
June 4, 2020, Prime EFS LLC (“Prime EFS”), a wholly-owned subsidiary of the Company, agreed with two related creditors
(the “Creditors”) to a payment plan (the “Payment Plan”) to settle, without interest, a total outstanding
balance of $2,038,556 (the “Outstanding Balance”) owed by Prime EFS to the Creditors.
Pursuant
to the Payment Plan, Prime EFS was obligated to pay $75,000 to the Creditors on or before June 5, 2020 and $75,000 to the Creditors on
or before June 12, 2020.
Thereafter,
under the Payment Plan, beginning on June 19, 2020, Prime EFS was obligated to make weekly payments of $15,000 to the Creditors each
Friday for 125 weeks ending with a final payment of $13,556 on November 18, 2022.
Under
the Payment Plan, Prime EFS also agreed that, if it fails to make a scheduled payment or otherwise defaults on its obligations, the remaining
Outstanding Balance would be accelerated and due, in full, within five business days after receipt by Prime EFS of a notice of default
from the Creditors.
Under
the Payment Plan, Prime EFS also agreed that, if Prime EFS does not pay the remaining Outstanding Balance within five business days after
receipt of a notice of default, then the Creditors will be entitled to 9% per annum simple interest on the remaining Outstanding Balance
from the date of default and to recover attorneys’ fees and costs for enforcement.
Prime
EFS made the $75,000 payments due on each of June 5, 2020 and June 12, 2020.
Prime
EFS also made each of the weekly payments due through Friday, September 18, 2020. However, Prime EFS did not make the payment due Friday,
September 25, 2020, did not make any further weekly payment due under the Payment Plan, and has no present plan or intention to make
any further payments under the Payment Plan because it lacks the cash-on-hand to do so.
By
letter dated October 16, 2020, attorneys for the Creditors gave Prime EFS notice of default (the “Notice of Default”)
under the settlement agreement that documents the Payment Plan and related terms and conditions. The Notice of Default correctly states
that Prime EFS did not make the payment due under the Payment Plan on September 25, 2020 and has not made any further weekly payments
since September 25, 2020. The Notice of Default correctly demands, under the settlement agreement that documents the Payment Plan and
related terms and conditions, that, as of the day of Prime EFS’s default, Prime EFS owed the Creditors $1,678,556.06, which is
accrued and included in insurance payable on the accompanying consolidated balance on June 30, 2021 and December 31, 2020. In the Notice
of Default, the Creditors reserve the right to institute legal proceedings against Prime EFS for its defaults under the Payment Plan,
to seek default interest at 9% per annum and to seek the Creditors’ costs of collection.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2021
To
date, Prime EFS has not responded to the Notice of Default and has no present plan or intention to respond.
Dispute
between Patrick Nicholson and Prime EFS
By
letter dated October 9, 2020, attorneys representing Patrick Nicholson allege that Prime EFS is in default of its payment obligations
under a “10% Senior Secured Demand Promissory Note” issued February 13, 2019, in the principal amount of $165,000, and under
a second promissory note issued April 24, 2019 in the principal amount of $55,000.
In
the demand, the attorneys for Mr. Nicholson allege the total balance owed, including interest, is $332,702.84 and that interest is continuing
to accrue on each promissory note.
In
the demand, the attorneys for Mr. Nicholson also contend that the Company is jointly and severally liable with Prime EFS for this balance.
If,
as threatened, Mr. Nicholson files suit for non-payment under either or both promissory notes, it is anticipated that the defendants
will mount a vigorous defense to the action. Among other things, it is Prime EFS’s position that Mr. Nicholson knew or should have
known that the promissory notes dated February 13, 2019, and April 24, 2019 were invalid and unenforceable, since they were signed by
Rosemary Mazzola, as owner or managing member of Prime, and it was public information that, after June 18, 2018, Ms. Mazzola was no longer
an owner or managing member of Prime EFS.
Nevertheless,
out of an abundance of caution and without prejudice to its position in this matter, as of June 30, 2021, Prime EFS recorded notes payable
due of $220,000 and accrued interest payable of $66,297.
Ryder
Truck Rental, Inc. Demand Letter
|
On
March 2, 2021, Shypdirect received a demand letter from Ryder Truck Rental, Inc. (“Ryder”) related to a breach of the Truck
Lease and Service Agreement between Shypdirect and Ryder, dated October 9, 2018. Pursuant to the letter, Ryder terminated the Truck Lease
and Service Agreement for failure to pay invoices due. Pursuant to the letter, Ryder also elected to require Shypdirect to purchase all
of the terminated Vehicle(s) in accordance with the agreement for $2,871,272. In connection with this breach, as of December 31, 2020,
the Company wrote off security deposits of $164,565 and has a recorded contingent liability, owed solely by Shypdirect, of $2,871,272
which is related to the default on truck leases for non-payment of monthly lease payments and the lessor’s demand for payment of
the trucks for an aggregate contingency loss of $3,035,837. Shypdirect intends to dispute this demand. In addition, Shypdirect has returned
all of the trucks to Ryder as Shypdirect is no longer using them.
Other
than discussed above, as of June 30, 2021, 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.
Consulting
Agreement
The
Company retained the services of a consultant, Ascentaur, LLC (“Ascentaur”), pursuant to a Consulting Agreement between the
Company and Ascentaur dated February 21, 2020, as amended (the “Consulting Agreement”). Under the Consulting Agreement, Sebastian
Giordano, the CEO and principal of Ascentaur, provides management services to the Company in the role of chief executive under direction
of the Board. Mr. Giordano devotes the majority of his business attention to the Company, but he may spend time on other business ventures.
The Consulting Agreement runs until January 31, 2023 (“Termination Date”), unless earlier terminated by an employment agreement
between Mr. Giordano and the Company. As consideration for Mr. Giordano’s services, Ascentaur receives a base consulting fee of
$300,000 annually, payable in installments of $12,500 twice a month and is eligible for bonuses based on certain Company revenue, EBITDA,
market capitalization or capital raise milestones. In addition, upon approval by the Board, Ascentaur received stock warrants to purchase
up to 25,000,000 shares of common stock of the Company at an exercise price of $0.06 per share. Mr. Giordano is also eligible for the
Company’s standard medical and dental plans. Upon any termination of the Consulting Agreement by the Company without “Cause,”
by Mr. Giordano for “Good Reason,” or by expiration and non-renewal of the Consulting Agreement as of the Termination, Mr.
Giordano will receive (i) a separation payment equal to one year’s worth of the base consulting fee, (ii) all accrued and unpaid
bonuses and (iii) accelerated vesting of all unvested options he may have received. The Company and Mr. Giordano have also, as required
by Nevada Revised Statutes Section 78.751, entered into an Indemnity Agreement (the “Indemnity Agreement”) whereby the Company
indemnifies Mr. Giordano and Ascentaur, to the fullest extent as provided by Nevada corporate law, for all fees, costs and charges (including
attorneys’ fees) for any actual or threatened claims against him, except to the extent that Mr. Giordano’s actions constituted
gross negligence; criminal, fraudulent or reckless misconduct; or with respect to any criminal actions of Mr. Giordano that the Company
had reasonable cause to believe were unlawful.
Leases
See
Note 12.
On
March 2, 2021, Shypdirect received a demand letter from Ryder Truck Rental, Inc. (“Ryder”) related to a breach of the Truck
Lease and Service Agreement between Shypdirect and Ryder, dated October 9, 2018. Pursuant to the letter, Ryder terminated the Truck Lease
and Service Agreement for failure to pay invoices due. Pursuant to the letter, Ryder elected to require Shypdirect to purchase all of
the terminated Vehicle(s) in accordance with the agreement for $2,871,272. In connection with this breach, as of December 31, 2020, the
Company wrote off security deposits of $164,565 and has a recorded contingent liability of $2,871,272 which is related to the default
on truck leases for non-payment of monthly lease payments and the lessor’s demand for payment of the trucks for an aggregate contingency
loss of $3,035,837. The Company intends to dispute this demand and has returned all of the trucks to Ryder as Shypdirect is no longer
using the trucks and accordingly, the trucks are not included as assets in the accompanying condensed consolidated balance sheet.
On
June 30, 2021 and December 31, 2020, contingency liability related to the Ryder termination amounted to $2,871,272.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2021
Potential
acquisition
On
June 15, 2021, the Company entered into a Securities Purchase and Sale Agreement (the “SPSA”) with Anthony Berritto (“Berritto,”
who is the sole shareholder of SalSon Logistics, Inc., a Georgia corporation (“SalSon”)), for the Company to purchase 100%
of all the issued and outstanding shares of capital stock of SalSon. SalSon, which is strategically
located in the heart of Port of Newark, with additional locations in Florida, Georgia, New York, South Carolina, Texas, and Virginia,
offers a range of services including warehousing, transload services, dedicated contract carriage, dray management, and store delivery
servicing the retail, food and beverage, and industrial sectors. With more than 1,200 associates, over 1 million square feet of warehousing
and a dedicated fleet of 550 tractors and 1,500 trailers, SalSon’s capabilities include cross dock, regional and local truckload,
intermodal, vendor consolidation and deconsolidation, pool distribution, and unattended store delivery. The Company believes this
acquisition could improve the growth potential of TLSS because, with SalSon as the core foundational operation of the Company, synergistic
targets that complement this business could bring immediate value when more acquisitions are secured. Furthermore, the opportunity for
broadening existing customer relationships of SalSon customers or future strategic acquisition customers would likely improve with a
linchpin transaction like SalSon.
Consideration
for the purchase of the shares of SalSon shall be $90 Million (the “Purchase Price”). If the verifiable earnings before interest,
taxes, depreciation and amortization (“EBITDA”) of SalSon for the full 12 calendar month period ending prior to the month
of the closing is less than $12 Million, then the Purchase Price shall be reduced to 7.5 times verifiable 12 months trailing EBITDA.
Further, if the working capital of SalSon at the closing shall be greater than or less than the average month-end working capital of
SalSon for the months ended May 31, 2020 to April 30, 2021, the Purchase Price shall be increased or decreased dollar-for-dollar by the
difference as appropriate.
The
Purchase Price shall be paid by delivery at closing of:
1)
An amount of the Company’s common stock equal to 19.9% of the outstanding shares of the Company (the “Shares”);
2)
$50 Million in immediately available funds (less the amount of unforgiven SalSon PPP loans, which amount will be held in escrow controlled
by the lender that will be released to Mr. Berritto if such loans are forgiven or shall otherwise be applied to repayment of such loans);
and
3)
A secured promissory note (the “Note”) in the principal amount of $20 Million. The Note shall be secured by a second position
pledge of the assets of SalSon, but such pledge shall be subordinate to the security interest to be granted in connection with the Financing
(described below). The term of the Note shall be 60 months and interest shall accrue at 1.07% per annum. Principal and interest shall
be due to Mr. Berritto on a monthly basis, based on a 25-year amortization, with a balloon payment due on the maturity date of the Note.
The Note will be subject to certain mandatory pre-payments upon the occurrence of certain events described in the SPSA. If the value
of the Shares is greater than or less than $20 Million (calculated as the average of the closing price for 5 consecutive trading days
ending on the third business day before the closing), the principal balance of the Note will be decreased or increased as appropriate.
Mr.
Berritto is expected to stay on to oversee the operation of SalSon and the Company’s existing fulfillment services subsidiaries.
It is a condition to the closing of the transaction that Mr. Berritto enter into an employment agreement with SalSon. Mr. Berritto has
agreed in principle to do so, but if the parties do not reach an agreement on employment terms, the Company does not intend to complete
the transaction.
The
transaction is contingent upon the Company’s ability to secure debt financing for the cash portion of the purchase price. The financing
will be secured by the assets of SalSon, and it will likely rely exclusively on SalSon’s assets and financial performance. SalSon
currently is profitable with almost $100 million in annual revenues. If the debt financing for the cash portion of the purchase price
cannot be obtained, then the transaction will not close.
The
Company expects that it will need to raise the aggregate of approximately $60 million in financing (including approximately $6 million
in equity financing) to fund the cash portion of the purchase price, investment banking fees, transaction costs and working capital for
SalSon and the Company’s other operations. The financing amount is approximately 2.4 times the Company’s market capitalization
as of the date of this press release. If the financing is completed, the Company also will be required to issue up common stock equal
in value to up to 5% of the value aggregate debt financing and warrants (with a 5-year term and cashless exercise) to purchase shares
equal in value to up to 10% of the aggregate debt financed in common stock as investment banking fees, if completed. securities financing.
The
Company has experienced losses in its recent years of operations, and currently has a negative net worth, and has not received any proposed
terms for such financing. Therefore, no assurance can be provided that the Company will be able obtain such financing. If the contemplated
additional equity financing cannot be obtained, the Company will not have adequate cash available to fully fund the acquisition and transaction
costs, the operations of SalSon and its other subsidiaries and investment banking fees. Such inability could also impair the Company’s
ability to raise the necessary debt financing, or, if. such inability is first encountered after the Company procures a commitment for
the debt financing and the contingency period for terminating the stock purchase agreement lapses, then it could also result in the Company’s
default under the stock purchase agreement, since the closing of the transaction is not conditioned upon the Company securing such additional
equity financing.
The
closing of the transaction under the SPSA (the “Closing”) is to occur within 90 days of the SPSA agreement date (on or before
September 13, 2021), provided all conditions shall have been met or waived. The Company shall have the one time right to extend the Closing
for period of 15 days, provided the Company provides written evidence of loan approval for the Financing.
The
closing shall be further contingent on satisfaction of the Company’s due diligence review of SalSon and the absence of the occurrence
of any material adverse effect on SalSon or its business. The transaction does not include any deposit, breakup or termination fee in
the event that it does not close due to a failure to meet any of the contingencies, including that the Company cannot reach terms with
Mr. Berritto for his employment or the Company cannot obtain the financing needed to close the acquisition.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2021
NOTE
11– RELATED PARTY TRANSACTIONS AND BALANCES
Due
to related parties
In
connection with the acquisition of Prime EFS, the Company acquired a balance of $14,019 that was due from the former majority owner of
Prime EFS, Rosemary Mazzola. Pursuant to the terms of the SPA, the Company agreed to pay $489,174 in cash to the former majority owner
of Prime EFS who then advanced back the $489,174 to Prime EFS. During the period from Acquisition Date of Prime EFS (June 18, 2018) to
December 31, 2018, the Company repaid $216,155 of this advance. During the year ended December 31, 2019, the Company repaid $130,000
of this advance. During the year ended December 31, 2020, the Company repaid $35,000 of this advance. This advance is non-interest bearing
and is due on demand. On December 31, 2020, amount due to this former majority owner of Prime amounted to $94,000, and have been included
in due to related parties on the accompanying condensed consolidated balance sheets. On June 30, 2021, amount due to this former majority
owner of Prime amounted to $94,000, and have been included in accrued expenses on the accompanying condensed consolidated balance sheet
since Ms. Mazzola is no longer considered a related party.
During
the year ended December 31, 2019, a former employee of Prime EFS who exerted significant influence over the business of Prime EFS and
Shypdirect, Frank Mazzola, advanced the Company $88,000. Additionally, during the year ended December 31, 2020, this employee advanced
the Company $75,000 and was repaid $163,000. During the year ended December 31, 2020, the Company paid this employee interest of $57,200
related to these working capital advances. On June 30, 2021 and December 31, 2020, amounts due to this former related party employee
amounted to $0.
During
the year ended December 31, 2019, an entity which is controlled by a former employee of Prime EFS who exerted significant influence over
the business of Prime EFS and Shypdirect, Frank Mazzola, advanced the Company $25,000. In January 2020, this advance was repaid. During
the year ended December 31, 2020, the Company paid this entity interest expense of $27,500 related to 2019 working capital advances made.
On June 30, 2021 and December 31, 2020, amounts due to this former related party entity amounted to $0.
On
December 22, 2020, the Company’s chief executive officer advanced the Company $30,000. The advance is non-interest bearing and
payable on demand. On December 31, 2020, amount due to the chief executive officer amounted to $30,000 and has been included in due to
related parties on the accompanying condensed consolidated balance sheet. On January 29, 2021, the Company repaid this advance.
Notes
payable – related parties
On
July 3, 2019, the Company entered into a note agreement with an entity that is controlled by the Company’s 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 is due and payable. Commencing on January 3, 2020 and continuing
on the third day of each month thereafter through January 3, 2021, equal payments of principal and interest will be made. The principal
amount of this note and all accrued, but unpaid interest under this note 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). The payment of
all or any portion of the principal and accrued interest may be paid prior to the CEO Note Maturity Date. Interest accrues with respect
to the unpaid principal sum identified above until such principal is paid at a rate equal to 18% per annum. All past due principal and
interest on this Note will bear interest from maturity of such principal or interest until paid at the lesser of (i) 20% per annum, or
(ii) the highest rate allowed by applicable law. To date, no repayments have been made on this related party note. On June 30, 2021 and
December 31, 2020, interest payable to related parties amounted to $218,322 and $173,692 and is included in due to related parties on
the accompanying condensed consolidated balance sheets, respectively. On June 30, 2021 and December 31, 2020, notes payable – related
party amounted to $500,000 and $500,000, respectively. 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.
During
the six months ended June 30, 2021 and 2020, interest expense associated with advances from related parties, related party notes payable
and convertible notes payable to related parties amounted to $44,630 and $129,576 and is included in interest expense – related
parties on the accompanying condensed consolidated statement of operations.
NOTE
12 – OPERATING LEASE RIGHT-OF-USE (“ROU”) ASSETS AND OPERATING LEASE LIABILITIES
In
December 2018, the Company entered into a lease agreement for the lease of office and warehouse space and parking spaces under a non-cancelable
operating lease through December 2023. From the lease commencement date until the last day of the second lease year, monthly rent will
be $14,000. At the beginning of the 30th month following the commencement date and through the end of the term, minimum rent
will be $14,420 per month. The Company will have one option to renew the term of this lease for an additional five years. In January
2019, the Company paid a security deposit of $28,000.
In
July 2019, the Company entered into a 4.5-year lease agreement for the lease of office and warehouse space and parking spaces under a
non-cancelable operating lease through February 2024. From the lease commencement date until the last day of the second lease year, monthly
rent will be $10,000. At the beginning of the 25th month following the commencement date and through the end of the term,
minimum rent will be $10,500 per month. The Company will have one option to renew the term of this lease for an additional five years.
In July 2019, the Company paid a security deposit of $20,000.
In
July 2019, the Company entered into a five-year lease agreement for the lease of office and warehouse space and parking spaces under
a non-cancelable operating lease through August 2024. During the first year on the lease term, the base monthly rent will be $18,000
and will increase by 3% each lease year. Additionally, the Company will pay its portion of operating expenses. The Company will have
one option to renew the term of this lease for an additional five years. As of December 31, 2019, the Company paid a security deposit
of $18,000. Due to a reduction in the Company’s revenues and the loss of its Amazon revenues, during the second quarter of 2021,
the Company abandoned this property. Accordingly, the Company wrote the remaining balance of this right of use asset and recorded a loss
on lease abandonment of $616,074.
On
January 15, 2021, in connection with the acquisition of DDTI, the Company assumed leases for trucks with remaining terms over twelve
months.
In
adopting ASC Topic 842, Leases (Topic 842), the Company has elected the ‘package of practical expedients’, which permit it
not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs
(see Note 2). In addition, the Company elected not to apply ASC Topic 842 to arrangements with lease terms of 12 month or less.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2021
During
the six months ended June 30, 2021 and 2020, in connection with these operating leases, other miscellaneous rental payments and common
area maintenance costs, the Company recorded rent expense of $267,556 and $339,611, respectively, which is expensed during the period
and included in operating expenses on the accompanying condensed consolidated statements of operations.
During
the six months ended June 30, 2021 and 2020, the Company recognized sublease income of $183,822 and $149,359 which is included in other
income on the accompanying condensed consolidated statement of operations, respectively.
The
significant assumption used to determine the present value of the lease liability was a discount rate of 10% to 12% which was based on
the Company’s estimated incremental borrowing rate.
On
June 30, 2021 and December 31, 2020, right-of-use asset (“ROU”) is summarized as follows:
SCHEDULE
OF RIGHT OF USE ASSET
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
Office leases and truck right of use assets
|
|
$
|
1,126,966
|
|
|
$
|
1,984,320
|
|
Less: accumulated amortization into rent expense or cost of sales
|
|
|
(450,155
|
)
|
|
|
(539,046
|
)
|
Balance of ROU assets as of end of period
|
|
$
|
676,811
|
|
|
$
|
1,445,274
|
|
On
June 30, 2021 and December 31, 2020, operating lease liabilities related to the ROU assets are summarized as follows:
SCHEDULE
OF OPERATING LEASE LIABILITY RELATED TO ROU ASSET
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
Lease liabilities related to office and truck leases right of use assets
|
|
$
|
1,333,190
|
|
|
$
|
1,483,460
|
|
Less: current portion of lease liabilities
|
|
|
(422,161
|
)
|
|
|
(380,843
|
)
|
Lease liabilities – long-term
|
|
$
|
911,029
|
|
|
$
|
1,102,617
|
|
On
Jun 30, 2021, future minimum base lease payments due under non-cancelable operating leases are as follows:
SCHEDULE
OF LEASE PAYMENTS DUE UNDER OPERATING LEASES
June 30,
|
|
Amount
|
|
2022
|
|
$
|
551,962
|
|
2023
|
|
|
549,094
|
|
2024
|
|
|
415,166
|
|
2025
|
|
|
40,518
|
|
Total minimum non-cancelable operating lease payments
|
|
|
1,556,740
|
|
Less: discount to fair value
|
|
|
(223,550
|
)
|
Total lease liability on June 30, 2021
|
|
$
|
1,333,190
|
|
NOTE
13 – CONCENTRATIONS
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. For the six months ended June 30, 2020, one customer, Amazon, represented 98.7%
of the Company’s total net revenues. On June 30, 2021, three customers, represented 47.7%
of the Company’s accounts receivable balance (16.4%,
20.8%
and 10.5%,
respectively). On June 19, 2020, Amazon notified Prime EFS in writing that Amazon does not intend to renew the In-Force Agreement when
that agreement expires. In the Prime EFS Termination Notice, Amazon stated that the In-Force Agreement expires on September 30, 2020.
Additionally, on July 17, 2020, Amazon notified Shypdirect that Amazon had elected to terminate the Program Agreement between Amazon
and Shypdirect effective as of November 14, 2020. However, on August 3, 2020, Amazon offered pursuant to the Aug. 3 Proposal to withdraw
the Shypdirect Termination Notice and extend the term of the Program Agreement to and including May 14, 2021, conditioned on Prime EFS
executing, for nominal consideration, a separation agreement with Amazon under which Prime EFS agrees to cooperate in an orderly transition
of its Amazon last-mile delivery business to other service providers, Prime EFS releases any and all claims it may have against Amazon,
and Prime EFS covenants not to sue Amazon. On August 4, 2020, the Company, Prime EFS and Shypdirect accepted the Aug. 3 Proposal. The
termination of the Amazon last-mile business had a material adverse impact on the Company’s business in the 1st fiscal quarter
of 2021 and will have a material impact thereafter. As expected, the Company’s mid-mile business with Amazon terminated on or about
May 14, 2021. Unless and until this business is resumed or replaced, its loss will have a material adverse impact on the Company’s
business in the 2nd fiscal quarter of 2021 and thereafter. In June 2021, Shypdirect ceased its tractor trailer and box truck delivery
services to Amazon, and in July 2021, Shypdirect ceased operations.
During
the six months year ended June 30, 2021 and 2010, the Company rented delivery vans and trucks from a limited number of vendors, some
of which the Company has legal issues with (see Note 10). Any shortage of supply of vans and trucks available to rent to the Company
could have a material adverse effect on the Company’s business, financial condition and results of operations.
All
revenues are derived from customers in the United States.
NOTE
14 – SUBSEQUENT EVENTS
Shares
issued upon exercise of warrants
During the period from July 1, 2021 to August
6, 2021, the Company issued 115,412,571 shares of its common stock and received proceeds of $1,153,683 from the exercise of 115,412,571
warrants at $0.01 per share.
During the period from July 1, 2021 to August
5, 2021, the Company entered into Securities Purchase Agreements with certain of the holders of its existing Series E preferred warrants
(“Exercising Warrants Holders”). Pursuant to the Securities Purchase Agreements, the Exercising Warrants Holders and the
Company agreed that the Exercising Warrants Holders would cash exercise their existing warrants, into shares of common stock underlying
such existing warrants Shares. In order to induce the Exercising Warrant Holders to cash exercise their existing Warrants,
the Securities Purchase Agreements provided for the issuance of new warrants (“New Warrants”) with such New Warrants to be
issued in an amount equal to 50% of the number of shares acquired by the Existing Warrant Holder through the exercise of existing warrants
for cash by August 5, 2021. The New Warrants are exercisable upon issuance and terminate five years following the initial exercise date.
The New Warrants have an exercise price per share of $0.01. A total of 115,412,571 existing warrants were exercised contemporaneously
with the execution of the Securities Purchase Agreements resulting in total proceeds to the Company of $1,153,683. In connection with
the exercise of existing warrants, the Company issued an aggregate of 57,706,286 New Warrants. Additionally, the Company issued 34,285,716
New Warrants to certain investors that had previously exercised existing warrants for cash in May and June 2021. The New Warrants issued
in connection with the Securities Purchase Agreements were considered inducement warrants and are classified in equity. The fair value
of the New Warrants issued was $1,281,873 and will be expensed as warrant inducement expense.