NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2019
NOTE
1 –
ORGANIZATION AND BUSINESS OPERATIONS
Transportation
and Logistics Systems, Inc. (“TLSS”), formerly PetroTerra Corp., was incorporated under the laws of the State of Nevada,
on July 25, 2008.
On
March 30, 2017 (the “Closing Date”), TLSS and Save On Transport Inc. (“Save On”) entered into a Share
Exchange Agreement, dated as of the same date (the “Share Exchange Agreement”). Pursuant to the terms of the Share
Exchange Agreement, on the Closing Date, Save On became a wholly-owned subsidiary of TLSS (the “Reverse Merger”).
Save On was incorporated in the state of Florida and started business on July 12, 2016. Save On is a provider of integrated transportation
management solutions consisting of brokerage and logistic services such as transportation scheduling, routing and other value
added services related to the transportation of automobiles and other freight. As an early stage company, TLSS’s current
operations are subject to all risks inherent in the establishment of a new business enterprise
The
Share Exchange was treated as a reverse merger and recapitalization of Save On for financial reporting purposes since the Save
On shareholders retained an approximate 80% controlling interest in the post-merger consolidated entity. Save On was considered
the acquirer for accounting purposes, and the Company’s historical financial statements before the Merger was replaced with
the historical financial statements of Save On before the Merger. The balance sheets at their historical cost basis of both entities
were combined at the merger date and the results of operations from the merger date forward include the historical results of
Save On and results of TLSS from the merger date forward. The Merger was intended to be treated as a tax-free reorganization under
Section 368(a) of the Internal Revenue Code of 1986, as amended.
On
June 18, 2018 (the “Acquisition Date”), the Company completed the acquisition of 100% of the issued and outstanding
membership interests of Prime EFS, LLC, a New Jersey limited liability company (“Prime”), from its members pursuant
to the terms and conditions of a Stock Purchase Agreement entered into among the Company and the Prime members on the Closing
Date (the “SPA”). Prime is a New Jersey based transportation company with a focus on deliveries for on-line retailers
in New York, New Jersey and Pennsylvania.
On
July 24, 2018, the Company formed Shypdirect LLC (“Shypdirect”), a company organized under the laws of New Jersey.
Shypdirect is a transportation company with a focus on tractor trailer and box truck deliveries of product on the east coast of
the United States from one distributor’s warehouse to another warehouse or from a distributor’s warehouse to the post
office.
TLSS
and its wholly-owned subsidiaries, Save On, Prime and Shypdirect are hereafter referred to as the “Company”.
On
July 16, 2018, the Company filed a Certificate of Amendment to the Amended and Restated Articles of Incorporation (the “Certificate
of Amendment”) with the Secretary of State of the State of Nevada to (1) change the name of the Company from PetroTerra
Corp. to Transportation and Logistics Systems, Inc., (2) authorize an increase of the shares of the preferred stock to 10,000,000
shares, par value $0.001 per share and (3) effect a 1-for-250 reverse stock split (the “Reverse Stock Split”) with
respect to the outstanding shares of the Company’s common stock. The Certificate of Amendment became effective on July 17,
2018. The corporate name change, increase of authorized shares of preferred stock and Reverse Stock Split were previously approved
by the sole director and the majority of stockholders of the Company. The corporate name change and the Reverse Stock Split were
deemed effective at the open of business on July 18, 2018. All share and per share data in the accompanying consolidated financial
statements have been retroactively restated to reflect the effect of the recapitalization.
On
May 1, 2019, the Company entered into a Share Exchange Agreement with Save On and Steven Yariv, whereby the Company returned all
of the stock of Save On to Steven Yariv in exchange for Mr. Yariv conveying 1,000,000 shares of common stock of the Company back
to the Company. In addition, the Company will grant an aggregate of 80,000 options to certain employees of Save On. Mr. Yariv
ceased to be an officer or director of the Company effective with the filing of the Company’s Annual Report on Form 10-K
for the fiscal year ended December 31, 2018 as filed with the Securities and Exchange Commission of April 16, 2019.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2019
NOTE
2 –
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis
of presentation and principles of consolidation
The
condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting
principles in the United States of America and the rules and regulations of the United States Securities and Exchange Commission
for interim financial information. Accordingly, they do not include all the information and disclosures necessary for comprehensive
presentation of financial position, results of operations or cash flow. However, these unaudited condensed consolidated financial
statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary
for fair presentation of the information contained therein. It is suggested that these unaudited interim condensed consolidated
financial statements be read in conjunction with the financial statements of the Company for the year ended December 31, 2018,
and notes thereto included in the Company’s annual report on Form 10-K, filed on April 16, 2019. The Company follows the
same accounting policies in the preparation of its annual and interim reports. The results of operations in interim periods are
not necessarily an indication of operating results to be expected for the full year.
The
unaudited condensed consolidated financial statements of the Company include the accounts of TLSS and its wholly owned subsidiaries,
Save On, Prime and Shypdirect. All intercompany accounts and transactions have been eliminated in consolidation.
On
May 1, 2019, the Company entered into a Share Exchange Agreement with Save On and Steven Yariv, whereby the Company returned all
of the stock of Save On to Steven Yariv in exchange for Mr. Yariv conveying 1,000,000 shares of common stock of the Company back
to the Company. Pursuant to Accounting Standard Codification (“ASC”) 205-20-45, the financial statement in which net
income or loss of a business entity is reported shall report the results of operations of the discontinued operation in the period
in which a discontinued operation either has been disposed of or is classified as held for sale. Accordingly, the Company shall
reflect Save On as a discontinued operations beginning in the second quarter of 2019, the period that Save On was disposed of.
Going
concern
The
accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and satisfaction of liabilities and commitments in the normal course of business. As reflected in the accompanying condensed
consolidated financial statements, for the three months ended March 31, 2019, the Company had a net loss of $19,647,723 and net
cash used in operations was $1,983,978, respectively. Additionally, the Company had an accumulated deficit, shareholders’
deficit, and a working capital deficit of $34,417,573, $24,117,542 and $29,045,146, respectively, at March 31, 2019. Furthermore,
the Company failed to make required payments of principal and interest on its convertible debt instruments and defaulted on other
provisions in these Notes. On April 9, 2019, the Company entered into agreements with these lenders that modified these Notes
(See Note 14 – Subsequent Events). It is management’s opinion that these factors raise substantial doubt about the
Company’s ability to continue as a going concern for a period of twelve months from the issuance date of this report. Management
cannot provide assurance that the Company will ultimately achieve profitable operations, become cash flow positive, or raise additional
debt and/or equity capital. The Company is seeking to raise capital through additional debt and/or equity financings to fund its
operations in the future. Although the Company has historically raised capital from sales of common shares and from the issuance
of convertible promissory notes, there is no assurance that it will be able to continue to do so.
If
the Company is unable to raise additional capital or secure additional lending in the near future, management expects that the
Company will need to curtail its operations. These consolidated financial statements do not include any adjustments related to
the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern.
Use
of estimates
The
preparation of the condensed consolidated financial statements, in accordance with U.S. GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates. Significant estimates included in the accompanying unaudited condensed consolidated
financial statements and footnotes include the valuation of accounts receivable, the useful life of property and equipment, the
valuation of intangible assets, the valuation of right of use asset, assumptions used in assessing impairment of long-lived assets,
estimates of current and deferred income taxes and deferred tax valuation allowances, the fair value of non-cash equity transactions,
the valuation of derivative liabilities, and the fair value of assets acquired and liabilities assumed in business acquisitions.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2019
Fair
value of financial instruments
The
Financial Accounting Standards Board (“FASB”) issued ASC 820 — Fair Value Measurements and Disclosures
,
which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. ASC 820 requires disclosures about the fair value of all financial instruments,
whether or not recognized, for financial statement purposes. Disclosures about the fair value of financial instruments are based
on pertinent information available to the Company on March 31, 2019. Accordingly, the estimates presented in these financial statements
are not necessarily indicative of the amounts that could be realized on disposition of the financial instruments. ASC 820 specifies
a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions.
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level
1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).
The
three levels of the fair value hierarchy are as follows:
|
●
|
Level
1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
|
|
|
|
|
●
|
Level
2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or
similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs
derived from or corroborated by observable market data.
|
|
|
|
|
●
|
Level
3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market
participants would use in pricing the asset or liability based on the best available information.
|
The
Company measures certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value
on a recurring basis are as follows at March 31, 2019 and December 31, 2018:
|
|
At
March 31, 2019
|
|
|
At
December 31, 2018
|
|
Description
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Derivative
liabilities
|
|
|
—
|
|
|
|
—
|
|
|
$
|
20,188,362
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
7,888,684
|
|
A
roll forward of the level 3 valuation financial instruments is as follows:
|
|
For the Three
Months Ended
March 31, 2019
|
|
Balance at beginning of period
|
|
$
|
7,888,684
|
|
Gain on extinguishment of debt
|
|
|
(246,111
|
)
|
Cumulative effect adjustment for change in derivative accounting
|
|
|
(838,471
|
)
|
Change in fair value included in derivative expense
|
|
|
13,384,260
|
|
Balance at end of period
|
|
$
|
20,188,362
|
|
The
Company accounts for its derivative financial instruments, consisting of certain conversion options embedded in our convertible
instruments and warrants, at fair value using level 3 inputs. The Company determined the fair value of these derivative liabilities
using the Black-Scholes option pricing model, binomial lattice models, or other accepted valuation practices. When determining
the fair value of its financial assets and liabilities using these methods, the Company is required to use various estimates and
unobservable inputs, including, among other things, expected terms of the instruments, expected volatility of its stock price,
expected dividends, and the risk-free interest rate. Changes in any of the assumptions related to the unobservable inputs identified
above may change the fair value of the instrument. Increases in expected term, anticipated volatility and expected dividends generally
result in increases in fair value, while decreases in the unobservable inputs generally result in decreases in fair value.
ASC
825-10 “Financial
Instruments
”, allows entities to voluntarily choose to measure certain financial assets and
liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is
irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses
for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair
value option to any outstanding instruments.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2019
The
carrying amounts reported in the balance sheets for cash, accounts receivable, accounts payable and accrued expenses approximate
their fair values based on the short-term maturity of these instruments. The carrying amount of the Company’s convertible
notes payable and promissory note obligations approximate fair value, as the terms of these instruments are consistent with terms
available in the market for instruments with similar risk.
Cash
and cash equivalents
For
purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of
three months or less at the purchase date and money market accounts to be cash equivalents. At March 31, 2019 and December 31,
2018, the Company did not have any cash equivalents.
The
Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. There
were no balances in excess of FDIC insured levels as of March 31, 2019 and December 31, 2018. The Company has not experienced
any losses in such accounts through March 31, 2019.
Accounts
receivable
Accounts
receivable are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for
estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when
there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances,
the Company considers many factors, including the age of the balance, a customer’s historical payment history, its current
credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection.
Property
and equipment
Property
are stated at cost and are depreciated using the straight-line method over their estimated useful lives of five to six years.
Leasehold improvements are depreciated over the shorter of the useful life or lease term including scheduled renewal terms. Maintenance
and repairs are charged to expense as incurred. When assets are retired or disposed of, the cost and accumulated depreciation
are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company
examines the possibility of decreases in the value of these assets when events or changes in circumstances reflect the fact that
their recorded value may not be recoverable.
Intangible
asset
Intangible
assets are carried at cost less accumulated amortization, computed using the straight-line method over the estimated useful life.
At March 31, 2019 and December 31, 2018, intangible asset consists of a customer relationship acquired on June 18, 2018 which
is being amortized over a period of five years.
Leases
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The updated guidance requires lessees to recognize lease assets
and lease liabilities for most operating leases. In addition, the updated guidance requires that lessors separate lease and non-lease
components in a contract in accordance with the new revenue guidance in ASC 606. The updated guidance is effective for interim
and annual periods beginning after December 15, 2018.
On
January 1, 2019, the Company adopted ASU No. 2016-02, applying the package of practical expedients to leases that commenced before
the effective date whereby the Company elected to not reassess the following: (i) whether any expired or existing contracts contain
leases and; (ii) initial direct costs for any existing leases. For contracts entered into on or after the effective date, at the
inception of a contract the Company assessed whether the contract is, or contains, a lease. The Company’s assessment is
based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially
all the economic benefit from the use of the asset throughout the period, and (3) whether it has the right to direct the use of
the asset. The Company will allocate the consideration in the contract to each lease component based on its relative stand-alone
price to determine the lease payments. The Company has elected not to recognize right-of-use assets and lease liabilities for
short-term leases that have a term of 12 months or less.
Operating
lease ROU assets represents the right to use the leased asset for the lease term and operating lease liabilities are recognized
based on the present value of the future minimum lease payments over the lease term at commencement date. As most leases do not
provide an implicit rate, the Company use an incremental borrowing rate based on the information available at the adoption date
in determining the present value of future payments. Lease expense for minimum lease payments is amortized on a straight-line
basis over the lease term and is included in general and administrative expenses in the condensed consolidated statements of operations.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2019
Impairment
of long-lived assets
In
accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an
impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount
of impairment is measured as the difference between the asset’s estimated fair value and its book value.
Segment
reporting
The
Company uses “the management approach” in determining reportable operating segments. The management approach considers
the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions
and assessing performance as the source for determining the Company’s reportable segments. The Company’s chief operating
decision maker is the chief executive officer of the Company, who reviews operating results to make decisions about allocating
resources and assessing performance for the entire Company.
Derivative
financial instruments
The
Company has certain financial instruments that are embedded derivatives associated with capital raises. The Company evaluates
all its financial instruments to determine if those contracts or any potential embedded components of those contracts qualify
as derivatives to be separately accounted for in accordance with ASC 810-10-05-4 and 815-40. This accounting treatment requires
that the carrying amount of any embedded derivatives be recorded at fair value at issuance and marked-to-market at each balance
sheet date. In the event that the fair value is recorded as a liability, as is the case with the Company, the change in the fair
value during the period is recorded as either other income or expense. Upon conversion, exercise or repayment, the respective
derivative liability is marked to fair value at the conversion, repayment or exercise date and then the related fair value amount
is reclassified to other income or expense as part of gain or loss on extinguishment.
In
July 2017, FASB issued ASU No. 2017-11,
Earnings Per Share
(Topic 260);
Distinguishing Liabilities from Equity
(Topic
480);
Derivatives and Hedging
(Topic 815): (Part I)
Accounting for Certain Financial Instruments with Down Round Features
. These amendments simplify the accounting for certain financial instruments with down-round features. The amendments require
companies to disregard the down-round feature when assessing whether the instrument is indexed to its own stock, for purposes
of determining liability or equity classification. The guidance was adopted as of January 1, 2019 and the Company elected to record
the effect of this adoption retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect
adjustment to the condensed consolidated balance sheet as of the beginning of 2019, the period which the amendment is effective.
In accordance with the guidance presented in the ASU 2017-11, the fair value of derivative liabilities associated with certain
convertible notes as of December 31, 2018 of $838,471 and the offsetting effect of reclassifying such debt to stock-settled debt
for which the Company recorded a put premium liability of $385,385 was reclassified by means of a cumulative-effect adjustment
to opening accumulated deficit as of January 1, 2019 in the amount of $453,086.
Revenue
recognition and cost of revenue
On
January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue
recognition requirements in Accounting Standards Codification (ASC) Topic 605, Revenue Recognition. This ASC is based on the principle
that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. This ASC also requires additional disclosure
about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer service orders, including significant
judgments.
For
the Company’s Save On business activities, the Company recognizes revenues and the related direct costs of such revenue
which includes carrier fees and dispatch costs as of the date the freight is delivered by the carrier which is when the performance
obligation is satisfied. Customer payments received prior to delivery are recorded as a deferred revenue liability and related
carrier fees if paid prior to delivery are recorded as a deferred expense asset. In accordance with ASC Topic 606, the Company
recognizes revenue on a gross basis. Our payment terms for corporate customers are net 30 days from acceptance of delivery and
individual customers generally must pay in advance. The Company does not incur incremental costs obtaining service orders from
our Save On customers, however, if the Company did, because all of the Save On customer’s contracts are less than a year
in duration, any contract costs incurred would be expensed rather than capitalized. The Company’s adoption of this ASC,
resulted in no cumulative effect at January 1, 2018 and no change prospectively to the Company’s results of operations or
financial condition. The revenue that the Company recognizes arises from service orders it receives from its Save On customers.
The Company’s performance obligations under these service orders correspond to each delivery of a vehicle that the Company
makes for its customer under the service orders; as a result, each service order generally contains only one performance obligation
based on the delivery to be completed.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2019
For
the Company’s Prime and Shypdirect business activities, the Company recognizes revenues and the related direct costs of
such revenue which generally include compensation and related benefits, gas costs, insurance, parking and tolls, truck rental
fees, and maintenance fees as of the date the freight is delivered which is when the performance obligation is satisfied. In accordance
with ASC Topic 606, the Company recognizes revenue on a gross basis. Our payment terms are net seven days from acceptance of delivery.
The Company does not incur incremental costs obtaining service orders from its Prime customers, however, if the Company did, because
all of Prime and Shypdirect customer contracts are less than a year in duration, any contract costs incurred would be expensed
rather than capitalized. The revenue that the Company recognizes arises from deliveries of packages on behalf of the Company’s
customers. Primarily, the Company’s performance obligations under these service orders correspond to each delivery of packages
that the Company makes under the service agreements. Control of the package transfers to the recipient upon delivery. Once this
occurs, the Company has satisfied its performance obligation and the Company recognizes revenue.
Revenue
disaggregation disclosure required pursuant to ASC 606 are disclosed in Note 13 – Segment Information.
Basic
and diluted loss per share
Pursuant
to ASC 260-10-45, basic loss per common share is computed by dividing net loss by the weighted average number of shares of common
stock outstanding for the periods presented. Diluted loss per share is computed by dividing net loss by the weighted average number
of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period. Potentially
dilutive common shares consist of common stock issuable for stock warrants (using the treasury stock method) and shares issuable
for convertible debt (using the as-if converted method). These common stock equivalents may be dilutive in the future.
The
following table presents a reconciliation of basic and diluted net (loss) income per share:
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
(Loss) income per common share - basic:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(19,647,723
|
)
|
|
$
|
60,925
|
|
Weighted average common shares outstanding - basic
|
|
|
5,229,764
|
|
|
|
570,106
|
|
Net (loss) income per common share - basic
|
|
$
|
(3.76
|
)
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
(Loss) income per common share - diluted:
|
|
|
|
|
|
|
|
|
Numerator for (loss) income per common share - diluted
|
|
$
|
(19,647,723
|
)
|
|
$
|
60,925
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
|
5,229,764
|
|
|
|
570,106
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Convertible notes
|
|
|
-
|
|
|
|
349,537
|
|
Series A preferred stock
|
|
|
-
|
|
|
|
208,801
|
|
Weighted average common shares outstanding - diluted
|
|
|
5,229,764
|
|
|
|
1,128,444
|
|
Net (loss) income per common share - diluted
|
|
$
|
(3.76
|
)
|
|
$
|
0.05
|
|
Potentially
dilutive common shares were excluded from the computation of diluted shares outstanding as they would have an anti-dilutive impact
on the Company’s net losses and consisted of the following:
|
|
March 31, 2019
|
|
|
March 31, 2018
|
|
Stock warrants
|
|
|
1,465,059
|
|
|
|
0
|
|
Convertible debt
|
|
|
4,415,776
|
|
|
|
0
|
|
Series A convertible preferred stock
|
|
|
8,333,333
|
|
|
|
0
|
|
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2019
Stock-based
compensation
Stock-based
compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition
in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments
over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting
period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based
on the grant-date fair value of the award.
Through
March 31, 2018, pursuant to ASC 505-50 – “Equity-Based Payments to Non-Employees”, all share-based payments
to non-employees, including grants of stock options, were recognized in the consolidated financial statements as compensation
expense over the service period of the consulting arrangement or until performance conditions are expected to be met. Using a
Black-Scholes valuation model, the Company periodically reassessed the fair value of non-employee options until service conditions
are met, which generally aligns with the vesting period of the options, and the Company adjusts the expense recognized in the
consolidated financial statements accordingly. In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based
Payment Accounting, which simplifies several aspects of the accounting for nonemployee share-based payment transactions by expanding
the scope of the stock-based compensation guidance in ASC 718 to include share-based payment transactions for acquiring goods
and services from non-employees. ASU No. 2018-07 is effective for annual periods beginning after December 15, 2018, including
interim periods within those annual periods. Early adoption is permitted, but entities may not adopt prior to adopting the new
revenue recognition guidance in ASC 606. The Company early adopted ASU No. 2018-07 in the second quarter of 2018 and there was
no cumulative effect of adoption.
Recent
Accounting Pronouncements
In
July 2017, FASB issued ASU No. 2017-11,
Earnings Per Share
(Topic 260);
Distinguishing Liabilities from Equity
(Topic
480);
Derivatives and Hedging
(Topic 815): (Part I)
Accounting for Certain Financial Instruments with Down Round Features
. These amendments simplify the accounting for certain financial instruments with down-round features. The amendments require
companies to disregard the down-round feature when assessing whether the instrument is indexed to its own stock, for purposes
of determining liability or equity classification. The guidance was adopted as of January 1, 2019 and the Company elected to record
the effect of this adoption retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect
adjustment to the condensed consolidated balance sheet as of the beginning of 2019, the period which the amendment is effective.
In accordance with the guidance presented in the ASU 2017-11, the fair value of derivative liabilities associated with certain
convertible notes as of December 31, 2018 of $838,471 and the offsetting effect of reclassifying such debt to stock-settled debt
for which the Company recorded a put premium liability of $385,385 was reclassified by means of a cumulative-effect adjustment
to opening accumulated deficit as of January 1, 2019 in the amount of $453,086.
In
August 2018, the FASB issued ASU 2018-13 to modify the disclosure requirements on fair value measurements. The amendments are
effective beginning after December 15, 2019. An entity is permitted to early adopt any removed or modified disclosures and delay
adoption of the additional disclosures until the effective date. Most amendments should be applied retrospectively, but certain
amendments will be applied prospectively. The Company is in the process of assessing the impact of the standard on the Company’s
fair value disclosures. However, the standard is not expected to have an impact on the Company’s consolidated financial
position, results of operations and cash flows.
There
are currently no other accounting standards that have been issued but not yet adopted that we believe will have a significant
impact on our consolidated financial position, results of operations or cash flows upon adoption.
NOTE
3 –
ACCOUNTS RECEIVABLE
At
March 31, 2019 and December 31, 2018, accounts receivable, net consisted of the following:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Accounts receivable
|
|
$
|
1,280,922
|
|
|
$
|
775,772
|
|
Allowance for doubtful accounts
|
|
|
-
|
|
|
|
-
|
|
Accounts receivable, net
|
|
$
|
1,280,922
|
|
|
$
|
775,772
|
|
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2019
NOTE
4 -
PROPERTY AND EQUIPMENT
At
March 31, 2019 and December 31, 2018, property and equipment consisted of the following:
|
|
Useful Life
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Delivery trucks and vehicles
|
|
5 - 6 years
|
|
$
|
899,139
|
|
|
$
|
1,033,397
|
|
Less: accumulated depreciation
|
|
|
|
|
(124,045
|
)
|
|
|
(96,566
|
)
|
Property and equipment, net
|
|
|
|
$
|
775,094
|
|
|
$
|
936,831
|
|
For
the three months ended March 31, 2019 and 2018, depreciation expense is included in general and administrative expenses and amounted
to $47,040 and $0, respectively. During the three months ended March 31, 2019, the Company traded in or sold delivery trucks and
vehicles of $185,514 with related accumulated depreciation of $19,561, and received cash of $81,000 and reduced notes payable
of $37,931, resulting in a loss of $47,022 which is included in general and administrative expenses on the accompanying consolidated
statement of operations.
NOTE
5 –
INTANGIBLE ASSET
At
March 31, 2019 and December 31, 2018, intangible asset consisted of the following:
|
|
Useful life
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Customer relationship
|
|
5 year
|
|
$
|
5,235,515
|
|
|
$
|
5,235,515
|
|
Less: accumulated amortization
|
|
|
|
|
(828,957
|
)
|
|
|
(567,181
|
)
|
|
|
|
|
$
|
4,406,558
|
|
|
$
|
4,668,334
|
|
For
the three months ended March 31, 2019 and 2018, amortization of intangible assets amounted to $261,776 and $0, respectively.
Amortization
of intangible assets attributable to future periods is as follows:
Year ending March 31:
|
|
Amount
|
|
2020
|
|
$
|
1,047,103
|
|
2021
|
|
|
1,047,103
|
|
2022
|
|
|
1,047,103
|
|
2023
|
|
|
1,047,103
|
|
2024
|
|
|
218,146
|
|
|
|
$
|
4,406,558
|
|
NOTE
6 –
CONVERTIBLE PROMISSORY NOTES PAYABLE
Red
Diamond Partners LLC
On
April 25, 2017, the Company entered into a Securities Purchase Agreement with RedDiamond Partners LLC (“RedDiamond”)
pursuant to which the Company would issue to RedDiamond Convertible Promissory Notes in an aggregate principal amount of up to
$355,000, which includes a purchase price of $350,000 and transaction costs of $5,000. Pursuant to this securities purchase agreement,
on April 25, 2017, the Company entered into a convertible promissory note in the aggregate principal amount of $100,000 and the
Company received $95,000 after giving effect to the original issue discount of $5,000. This note matured on April 25, 2018 and
each tranche will mature 1 year after the date of such funding. The second Tranche was received on June 2, 2017 for $85,000 and
the third Tranche for $85,000 was received on August 8, 2017 upon filing of the Registration Statement. The fourth Tranche was
to be for $85,000 and was to occur ninety days after the First Closing, however, as of the date of this filing, the fourth tranche
has not yet been received. The Purchaser shall not be required to fund any Tranche subsequent to the first Tranche if there is
an event of default as described in the promissory notes. Through date of default, the RedDiamond Notes bore interest at a rate
of 12% per annum and are convertible into shares of the Company’s common stock at RedDiamond’s option at 65% of the
lowest VWAP for the previous ten trading days preceding the conversion. During 2018, the Company failed to make its required maturity
date payments of principal and interest on Convertible Promissory Notes of $270,000. In accordance with these notes, the Company
entered into default in 2018, which increased the interest rate to 18.0% per annum. As of March 31, 2019, the lender has
not notified the Company of default and has not exercised any of its remedies provided for in these notes.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2019
In
connection with the issuance of the Convertible Promissory Note above, the Company determined that the terms of the Convertible
Promissory Note included a down-round provision under which the conversion price could be affected by future equity offerings
undertaken by the Company.
These
convertible promissory notes contain cross default provisions whereby a default in any one note greater than $25,000 will cause
a default in all the notes, however, this provision is only effective if there is a formal notice of default by the lender.
We
evaluated these convertible promissory note transactions in accordance with ASC Topic 815, Derivatives and Hedging. Through December
31, 2018, the Company determined that the conversion feature of the convertible promissory notes were not afforded the exemption
for conventional convertible instruments due to their respective variable conversion rate and price protection provision. Accordingly,
through December 31, 2018, under the provisions of FASB ASC Topic No. 815-40, “Derivatives and Hedging – Contracts
in an Entity’s Own Stock”, the embedded conversion option contained in the convertible instruments were accounted
for as derivative liabilities at the date of issuance and shall be adjusted to fair value through earnings at each reporting date.
On January 1, 2019, the Company adopted ASU No. 2017-11,
Earnings Per Share
(Topic 260);
Distinguishing Liabilities
from Equity
(Topic 480);
Derivatives and Hedging
(Topic 815): (Part I)
Accounting for Certain Financial Instruments
with Down Round Features,
and the Company elected to record the effect of this adoption retrospectively to outstanding financial
instruments with a down round feature by means of a cumulative-effect adjustment to the condensed consolidated balance sheet as
of the beginning of 2019, the period which the amendment is effective (See Note 2 - Derivative liabilities).
The
principal balance of the note payable as of March 31, 2019 and December 31, 2018 amounted to $270,000 and $270,000, respectively.
On April 9, 2019, the Company entered into a new agreement with this lender that modified these Notes (See Note 14 – Subsequent
Events).
RDW
Capital, LLC
On
June 30, 2017, the Company issued RDW Capital, LLC a senior convertible note in the aggregate principal amount of $240,000, for
an aggregate purchase price of $30,000 of which $15,000 had been recorded as advance from lender as of March 31, 2017 and the
remaining $15,000 received on June 30, 2017. Through date of default, the principal due under the Note accrued interest at a rate
of 12% per annum. All principal and accrued interest under the Note was due six months following the issue date of the Note, and
is convertible into shares of the Company’s common stock, at a conversion price equal to fifty (50%) of the lowest volume-weighted
average price for the previous ten trading days immediately preceding the conversion. The Note includes anti-dilution protection,
including a down-round provision under which the conversion price could be affected by future equity offerings undertaken by the
Company, as well as customary events of default, including non-payment of the principal or accrued interest due on the Note. Upon
an event of default, all obligations under the Note will become immediately due and payable and the Company will be required to
make certain payments to the Lender. On December 31, 2017 the Company failed to make its required maturity date payment of principal
and interest. In accordance with the note, the Company entered into default on January 3, 2018, which increased the interest rate
to 24% per annum. As of March 31, 2019, the lender has not notified the Company of default and has not exercised any of its remedies
provided for in the note.
The
Company evaluated these convertible promissory note transactions in accordance with ASC Topic 815, Derivatives and Hedging. Through
December 31, 2018, the Company determined that the conversion feature of the convertible promissory notes were not afforded the
exemption for conventional convertible instruments due to their respective variable conversion rate and price protection provision.
Accordingly, through December 31, 2018, under the provisions of FASB ASC Topic No. 815-40, “Derivatives and Hedging –
Contracts in an Entity’s Own Stock”, the embedded conversion option contained in the convertible instruments were
accounted for as derivative liabilities at the date of issuance and shall be adjusted to fair value through earnings at each reporting
date. On January 1, 2019, the Company adopted ASU No. 2017-11,
Earnings Per Share
(Topic 260);
Distinguishing Liabilities
from Equity
(Topic 480);
Derivatives and Hedging
(Topic 815): (Part I)
Accounting for Certain Financial Instruments
with Down Round Features,
and the Company elected to record the effect of this adoption retrospectively to outstanding financial
instruments with a down round feature by means of a cumulative-effect adjustment to the condensed consolidated balance sheet as
of the beginning of 2019, the period which the amendment is effective (See Note 2 - Derivative liabilities).
The
principal as of March 31, 2019 and December 31, 2018 amounted to $240,000 and $240,000, respectively. On April 9, 2019, the Company
entered into a new agreement with this lender that modified these Notes (See Note 14 – Subsequent Events).
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2019
Bellridge
Capital, LLC
On
June 18, 2018, the Company entered into a securities purchase agreement (the “Purchase Agreement”), whereby it issued
to an institutional investor (the “Lender”) a senior secured convertible note in the aggregate principal amount of
$2,497,503 (the “Note”), for an aggregate purchase price of $1,665,000, net of an original issue discount of $832,503.
In addition, the Company paid issue costs of $177,212. The original issue discount and issue costs were recorded as a debt discount
to be amortized over the Note term. The principal due under the Note accrues interest at a rate of 10% per annum. Principal and
interest payments of $232,940 were payable monthly beginning on December 18, 2018 and were due monthly over the term of the Note
in cash or common stock of the Company, at the Lender’s discretion.
In
August 2018, the Company defaulted on its convertible note payable with Bellridge due to (i) default on the payment of monthly
interest payments due, (ii) default caused by the late filing of the Company’s report on Form 10-Q for the periods ended
June 30, 2018 and September 30, 2018 and (iii) default of filing of a registration statement. Upon an event of default, all principal,
accrued interest, and liquating damages and penalties were due upon request of the lender at 125% of such amounts.
On
December 27, 2018, the lender waived any and all defaults in existence on the Note and the Company agreed to issue a warrant that
is convertible into 2% of the issued and outstanding shares existing as the time the Company files a registration statement or
makes an application to up list to a national stock exchange. Additionally, the principal interest amount due under the Note was
modified with a monthly payment of principal and interests due beginning on January 18, 2019 of $156,219 with all remaining principal
and interest amounts on the Note due on December 18, 2019. This modification was not considered a debt extinguishment, On April
9, 2019, the Company entered into a new agreement with this lender that modified these Notes (See Note 14 – Subsequent Events).
Pursuant
to the warrant, at any time on or before the date that the Company files a registration statement on form S-l or applies for up-listing
to a National Exchange, and on or prior to the close of business on the early of the first year anniversary of the issuance of
December 27, 2018 (the “Termination Date”), Bellridge can choose to subscribe for and purchase from the Company
up to 2% in shares (as subject to adjustment as defined in the warrant (the “Warrant Shares”) of common stock for
an aggregate exercise price of $100. In connection with the issuance of this Warrant, the Company determined that this Warrant
contains terms that are not fixed monetary amounts at inception. Accordingly, under the provisions of ASC Topic No. 815-40, “Derivatives
and Hedging – Contracts in an Entity’s Own Stock”, the embedded conversion option contained in this Warrant
shall be accounted for as derivative liabilities at the date of issuance and shall be adjusted to fair value through earnings
at each reporting date. The fair value of this Warrant shall be determined using the Monte-Carlo simulation model. On April 9,
2019, the Company entered into a new agreement with this lender that cancelled these warrants (See Note 14 – Subsequent
Events).
All
principal and accrued interest under the Note is convertible into shares of the Company’s common stock, at a conversion
price equal to the lower of $1.50 and 65% of the lowest traded price during the fifteen trading days immediately prior to the
conversion date. The Note includes anti-dilution protection, as well as customary events of default, including, but not limited
to, non-payment of the principal or accrued interest due on the Note and cross default provisions on other Company obligations
or contracts. Upon an event of default, all obligations under the Note will become immediately due and payable and the Company
will be required to make certain payments to the Lender. In addition, on June 18, 2018, the Lender was issued a warrant, with
a term of two years, to purchase up to 4.75% of the fully-diluted outstanding Common Stock of the Company, for an aggregate purchase
price of $100 (the “Warrant”). On April 9, 2019, the Company entered into a new agreement with this lender that cancelled
these warrants (See Note 14 – Subsequent Events).
The
Lender was granted a right of first refusal on future financing transactions of the Company while the Note remains outstanding,
plus an additional three months thereafter. In connection with the issuance of the Note, the Company entered into a security agreement
with the Lender (the “Security Agreement”) pursuant to which the Company agreed that obligations under the Note and
related documents will be secured by all of the assets of the Company. In addition, all of the Company’s subsidiaries are
guarantors of the Company’s obligations to the Lender pursuant to the Note and have granted a similar security interest
over substantially all of their assets. A portion of the proceeds of the Note were used to acquire 100% of the membership interests
of Prime.
During
the term of this Note, in the event that the Company consummates any public or private offering or other financing or capital
raising transaction of any kind ( each a “Subsequent Offering”), in which the Company receives, in one or more contemporaneous
transactions, gross proceeds of at least $5,000,000, at any time upon ten (10) days written notice to the Holder, but subject
to the Holder’s conversion rights set forth in the Purchase Agreement, then the Company shall use 20% of the gross proceeds
of the Subsequent Offering and shall make payment to the Holder of an amount in cash equal to the product of (i) the sum of (x)
the then outstanding principal amount of this Note and (y) all accrued but unpaid interest, multiplied by (ii) (x) 110%, if the
Prepayment Date is within 90 days of the date hereof the Closing Date (as defined in the Purchase Agreement), or (y) 125%, if
the Prepayment Date is after the 90th day following the Closing Date, to which calculated amount the Company shall add all other
amounts owed pursuant to this Note, including, but not limited to, all Late Fees and liquidated damages.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2019
In
connection with the Purchase agreement, the Company entered into a registration rights agreement which, among other things, required
the Company to file a registration statement with the Securities and Exchange Commission no later than 120 days after June 18,
2018. The Company failed to file such registration statement. Accordingly, in addition to any other rights the Holders may have
hereunder or under applicable law, on the default date and on each monthly anniversary of each such default date (if the applicable
event shall not have been cured by such date) until the ninetieth day from such Event Date, the Company shall pay to each Holder
an amount in cash, as partial liquidated damages and not as a penalty, equal to the product of one percent (1%) multiplied by
the aggregate subscription amount paid by the Holder pursuant to the Purchase Agreement. Subsequent to the ninetieth day from
such default date, the one percent (1%) penalty described in the foregoing sentence shall increase to two percent (2%), with an
aggregate cap of twenty percent (20%) per annum. If the Company fails to pay any of these partial liquidated damages in full within
seven days after the date payable, the Company will pay interest thereon at a rate of 18% per annum to the Holder, accruing daily
from the date such partial liquidated damages are due until such amounts, plus all such interest thereon, are paid in full. The
partial liquidated damages pursuant to the terms hereof shall apply on a daily pro rata basis for any portion of a month prior
to the cure of an Event. On December 27, 2018, the lender waived any and all defaults.
In
connection with this Purchase Agreement, the Company paid a placement agent $120,000 in cash which is included in issue costs
previously discussed above and this placement agent was issued a warrant, with a term of two years, to purchase up to 4.75% of
the fully-diluted outstanding Common Stock of the Company, for an aggregate purchase price of $100 (the “Placement Warrant”).
On April 9, 2019, the Company entered into an agreement with this placement agent that cancelled these warrants (See Note 14 –
Subsequent Events).
In
connection with the issuance of this Note, Warrants, and Placement Warrant, the Company determined that this Note and there Warrants
contains terms that are not fixed monetary amounts at inception. Accordingly, under the provisions of ASC Topic No. 815-40, “Derivatives
and Hedging – Contracts in an Entity’s Own Stock”, the embedded conversion option contained in the convertible
instrument and the Warrant and Placement Warrant were accounted for as derivative liabilities at the date of issuance and shall
be adjusted to fair value through earnings at each reporting date. The fair value of this embedded conversion option derivative,
and the Warrant and Placement Warrant were determined using the Binomial valuation model and Monte-Carlo simulation model, respectively.
Convertible
note payable – related party
On
March 13, 2019, the Company entered into a convertible note agreement with an individual, who is affiliated to the Company’s
chief executive officer, in the amount of $500,000. Commencing on April 11, 2019, and continuing on the eleventh day of each
month thereafter, payments of interest only on the outstanding principal balance of this Note of $7,500 shall be due and payable.
Commencing on October 11, 2019 and continuing on the eleventh day of each month thereafter through April 11, 2021, payments of
principal and interest of $31,902 shall be made, if not sooner converted as provided in the note agreement. The payment of all
or any portion of the principal and accrued interest may be paid prior to the April 11, 2021. Interest shall accrue with respect
to the unpaid principal sum identified above until such principal is paid or converted as provided below at a rate equal to 18%
per annum compounded annually. All past due principal and interest on this Note shall bear interest from maturity of such principal
or interest (in wha1ever manner same may be brought about) until paid at the lesser of (i) 20% per annum, or (ii) the highest
non-usurious rate allowed by applicable law. This Note may be converted by Holder at any time in principal amounts of $100,000
in accordance with the terms by delivery of written notice to the Company, into that number of shares of common stock equal to
the amount obtained by dividing the portion of the aggregate principal amount of this Note that is being converted by $1.37. In
connection with the issuance of this Note, the Company determined that this Note contains terms that are fixed monetary amounts
at inception. Since the conversion price of $1.37 was equal to the quoted closing of the Company’s common shares on the
note date, no beneficial feature conversion was recorded.
Summary
of derivative liabilities
At
the end of the period, the Company revalued the embedded conversion option and warrant derivative liabilities. In connection with
these revaluations, the Company recorded derivative (expense) income of $(13,384,260) and $216,448 for the three months
ended March 31, 2019 and 2018, respectively
During
the three months ended March 31, 2019 and 2018, the fair value of the derivative liabilities was estimated using the Black-Sholes
valuation model, Binomial valuation model, and the Monte-Carlo simulation model with the following assumptions:
|
|
2019
|
|
|
2018
|
|
Expected dividend rate
|
|
|
-
|
|
|
|
-
|
|
Expected term (in years)
|
|
|
0.05 to 0.25
|
|
|
|
0.76 to 0.36
|
|
Volatility
|
|
|
228.1
|
%
|
|
|
276.5
|
%
|
Risk-free interest rate
|
|
|
2.40
|
%
|
|
|
1.93
|
%
|
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2019
At
March 31, 2019 and December 31, 2018, convertible promissory notes are as follows:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Principal amounts
|
|
$
|
2,733,918
|
|
|
$
|
3,007,503
|
|
Put premium on stock-settled debt
|
|
|
385,385
|
|
|
|
-
|
|
Principal amount – related party
|
|
|
500,000
|
|
|
|
-
|
|
Total principal amount
|
|
|
3,619,303
|
|
|
|
3,007,503
|
|
Less: unamortized debt discount
|
|
|
(1,050,184
|
)
|
|
|
(1,595,627
|
)
|
Convertible notes payable, net
|
|
|
2,569,119
|
|
|
|
1,411,876
|
|
Less: current portion of convertible notes payable
|
|
|
(2,569,119
|
)
|
|
|
(1,411,876
|
)
|
Convertible notes payable, net – long-term
|
|
$
|
-
|
|
|
$
|
-
|
|
For
the three months ended March 31, 2019 and 2018, amortization of debt discounts related to these convertible notes amounted to
$545,443 and $125,753, respectively, which has been included in interest expense on the accompanying unaudited condensed consolidated
statements of operations.
NOTE
7 –
NOTES PAYABLE
Secured
merchant loans
In
connection with the acquisition of Prime, the Company assumed several notes payable liabilities amounting to $944,281 pursuant
to secured merchant agreements (the “Assumed Secured Merchant Loans”). Pursuant to the Assumed Secured Merchant Loans,
the Company is required to repay the noteholders by making daily payments on each business day or on demand payments until the
loans amounts are paid in full. Each payment is deducted directly from the Company’s bank accounts. The Assumed Secured
Merchant Loans are secured by the assets of Prime, and are personally guaranteed by the former majority member of Prime. During
January 2019, the Company entered into a separate promissory note with one of these individuals and borrowed an additional $26,900
at a simple annual interest rate of 15% bringing the total promissory note balance to $77,090 for this individual. During the
three months ended March 31, 2019, the Company repaid $57,355 of these notes. At March 31, 2019 and December 31, 2018, notes payable
related to Assumed Secured Merchant Loans and a new promissory note amounted to $127,496 and $157,951, respectively. In connection
with the January 2019 promissory note, the Company issued 1,000 warrants to purchase 1,000 shares of the Company’s common
stock at an exercise price of $1.00 per share. The warrant is exercisable over a five year period.
On
September 20, 2018, the Company entered into a secured Merchant Loan with a lender in the amount of $521,250 and received net
proceeds of $375,000, net of original issue discount of $146,250. Pursuant to this Secured Merchant Loan, the Company is required
to repay the noteholders by making daily payments of $3,724 on each business day until the loans amounts are paid in full. Each
payment is deducted directly from the Company’s bank accounts. This Secured Merchant Loan is secured by the Company’s
assets and are personally guaranteed by the former majority member of Prime. On January 14, 2019, the Company entered into a new
secured Merchant Loan with this lender in the amount of $764,500. The Company simultaneously repaid the September 20, 2018 loan
which had a remaining principal balance of $223,329, paid an origination fee of $10,034 and received net proceeds of $316,637,
net of original issue discount of $214,500. Pursuant to this Secured Merchant Loan, the Company is required to repay the noteholders
by making daily payments of $6,371 on each business day until the loans amounts are paid in full. Each payment is deducted directly
from the Company’s bank account. On January 24, 2019, the Company entered into another secured Merchant Loan with this lender
in the amount of $417,000. The Company simultaneously paid an origination fee of $7,998 and received net proceeds of $292,002,
net of original issue discount of $117,000. Pursuant to this Secured Merchant Loan, the Company is required to repay the noteholders
by making daily payments of $3,972 on each business day until the loans amounts are paid in full. Each payment is deducted directly
from the Company’s bank account. These Secured Merchant Loans are secured by the Company’s assets and are personally
guaranteed by the former majority member of Prime. During the three months ended March 31, 2019, the Company repaid $774,326 of
the loans. At March 31, 2019 and December 31, 2018, secured merchant notes payable related to these Secured Merchant Loans amounted
to $483,061 and $190,125, which is net of unamortized debt discount of $188,407 and $74,169, respectively.
On
October 1, 2018, the Company entered into a secured Merchant Loan in the amount of $209,850 and received net proceeds of $137,962,
net of original issue discount of $59,850 and net of origination fees of $12,038. Pursuant to this Secured Merchant Loan, the
Company is required to repay the noteholders by making daily payments of $1,749 on each business day until the loans amounts are
paid in full. Each payment is deducted directly from the Company’s bank accounts. Additionally, on October 1, 2018, the
Company entered into a second secured Merchant Loan in the amount of $139,900 and received net proceeds of $92,000, net of original
issue discount of $39,900 and net of origination fees of $8,000. Pursuant to this Secured Merchant Loan, the Company is required
to repay the noteholders by making daily payments of $1,166 on each business day until the loans amounts are paid in full. Each
payment is deducted directly from the Company’s bank accounts. These Secured Merchant Loans are secured by the Company’s
assets and are personally guaranteed by the former majority member of Prime. During the three months ended March 31, 2019, the
Company repaid all of these notes. At March 31, 2019 and December 31, 2018, notes payable related to these Secured Merchant Loans
amounted to $0 and $128,726, which is net of unamortized debt discount of $0 and $51,371, respectively.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2019
On
October 12, 2018, the Company entered into a secured Merchant Loan with a lender in the amount of $420,000. The Company simultaneously
repaid a prior loan of $31,634, paid an origination fee of $10,500 and received net proceeds of $254,552, net of original issue
discount of $123,314. Pursuant to this Secured Merchant Loan, the Company is required to repay the noteholder by making daily
payments of $3,000 on each business day until the loans amounts are paid in full. Each payment is deducted directly from the Company’s
bank accounts. This Secured Merchant Loans was secured by the Company’s assets and was personally guaranteed by the former
majority member of Prime. On January 28, 2019, the Company entered into a new secured Merchant Loan with this lender in the amount
of $759,000 and received net cash of $315,097 after paying origination fee of $25,750, an original issue discount of $209,000,
and the repayment of October 12, 2018 remaining loan and interest due to this lender of $209,153. Pursuant to this Secured Merchant
Loan, the Company is required to repay the noteholders by making daily payments of $4,897 on each business day until the loans
amounts are paid in full. Each payment is deducted directly from the Company’s bank account. This Secured Merchant Loans
is secured by the Company’s assets and are personally guaranteed by the former majority member of Prime. At March 31, 2019
and December 31, 2018, note payable related to these Secured Merchant Loans amounted to $383,669 and $171,752, which is net of
unamortized debt discount of $164,769 and $86,248, respectively.
From
February 25, 2019 to March 6, 2019, the Company entered into four secured Merchant Loans in the aggregate amount of $1,199,200.
The Company simultaneously repaid prior loans of $69,327 which were entered into during October 2018, paid origination fees totaling
$78,286 and received net proceeds of $652,387, net of original issue discounts of $399,200. Pursuant to these four secured Merchant
Loans, the Company was required to pay the noteholders by making daily payments aggregating $11,993 on each business day
until the loan amounts were paid in full. Each payment was deducted from the Company’s bank account. At March 31, 2019,
notes payable related to these Secured Merchant Loans amounted to $577,867, which is net of unamortized debt discount of $382,220.
On April 10, 2019, the Company paid off these secured Merchant Loans in full by paying an aggregate amount of $703,899. As a result
of paying off these loans early, the noteholders reduced the origination fees and debt discounts by $229,195 in the aggregate.
Promissory
notes
In
connection with the acquisition of Prime, the Company assumed several notes payable liabilities due to entities or individuals
amounting to $297,005 (the “Note”). These notes have effective interest rates ranging from 7% to 10%, and are unsecured.
During the three months ended March 31, 2019, the Company repaid $25,000 of these notes and $40,000 of these notes was rolled
into a new note. At March 31, 2019 and December 31, 2018, notes payable to these entities or individuals amounted to $65,000 and
$130,000, respectively.
From
October 31, 2018 to December 31, 2018, the Company entered into Original Discount Senior Secured Demand Promissory Notes with
an investor (the “Promissory Note”). Pursuant to the Promissory Notes, the Company borrowed an aggregate of $770,000
and received net proceeds of $699,955, net of original issue discount of $70,000 and fees of $45. In December 2018, the Company
repaid $220,000 of these promissory notes. At March 31, 2019 and December 31, 2018, notes payable to this entity amounted to $550,000
and $505,945, which is net of unamortized debt discount of $0 and $44,055, respectively. The remaining notes were payable on demand.
These promissory notes are secured by the Company’s assets.
From
January 2019 to March 31, 2019, the Company entered into separate promissory notes with seven individuals totaling $1,371,250,
including $40,000 of a previous note rolled into these new notes, and received net proceeds of $1,185,000, net of original issue
discounts of $146,250. These Notes are due between 45 and 273 days from the respective Note date. Other than the original issue
discount, no additional interest is due to the holders. In connection with these promissory notes, the Company issued 43,000 warrants
to purchase 43,000 shares of the Company’s common stock at exercise prices ranging from $1.00 to $2.10 per share. The warrants
are exercisable over a five year period. At March 31, 2019, notes payable to these individuals amounted to $1,098,971, which is
net of unamortized debt discount of $107,279.
During
March 2019, the Company entered into two separate promissory notes with an entity totaling $165,000 and received net proceeds
of $150,000, net of original issue discounts of $15,000. During March 2019, the Company repaid $55,000 of these promissory notes.
At March 31, 2019, notes payable to this entity amounted to $103,333, which is net of unamortized debt discount of $6,667.
Equipment
and auto notes payable
In
connection with the acquisition of Prime, the Company assumed several equipment notes payable liabilities due to entities amounting
to $523,207 (the “Equipment Notes”). These Equipment Notes have effective interest rates ranging from 6.0% to 9.4%,
and are secured by the underlying van or trucks. At March 31, 2019 and December 31, 2018, equipment notes payable to these entities
amounted to $402,923 and $488,289, respectively.
During
October and November 2018, the Company entered into several auto financing agreements. At March 31, 2019 and December 31, 2018,
auto notes payable related to auto financing agreements amounted to $205,207 and $161,036, respectively.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2019
At
March 31, 2019 and December 31, 2018, notes payable consisted of the following:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Principal amounts
|
|
$
|
4,846,869
|
|
|
$
|
2,189,666
|
|
Less: unamortized debt discount
|
|
|
(849,342
|
)
|
|
|
(255,843
|
)
|
Principal amounts, net
|
|
|
3,997,527
|
|
|
|
1,933,823
|
|
Less: current portion of notes payable
|
|
|
(3,618,790
|
)
|
|
|
(1,509,804
|
)
|
Notes payable – long-term
|
|
$
|
378,737
|
|
|
$
|
424,019
|
|
NOTE
8–
STOCKHOLDERS’ DEFICIT
Preferred
stock
The
Company increased its authorized preferred shares to 10,000,000 shares in July 2018.
Preferred
stock of 4,000,000 shares is designated Series A Convertible Preferred Stock. Each share of Series A preferred stock has a par
value of $.001 and a stated value of $1.00. Dividends are payable on Series A preferred shares at the rate per share of 7% per
annum cumulative based on the stated value. The Series A preferred shares have no voting rights, except as required by law. Each
share of preferred stock is convertible based on the stated value at a conversion price of $20.83 at the option of the holder;
provided, however, if a triggering event occurs, as defined in the document, the conversion price shall thereafter be reduced,
and only reduced, to equal forty percent of the lowest VWAP during the thirty consecutive trading day period prior to the conversion
date. As of March 31, 2019, the Company believes a triggering event has occurred. The beneficial ownership limitation attached
to conversion is 4.99%, which can be decreased or increased, upon not less than 61 days’ notice to the Company, but in no
event exceeding 19.99% of the number of shares of common stock outstanding immediately after giving effect to the issuance of
common stock upon conversion of the preferred stock. After 36 months, the Company has the right to redeem all, but not less than
all, of the outstanding preferred shares in cash at a price equal to 130% of the stated value plus any accrued but unpaid dividends
thereon. Undeclared cumulative preferred stock dividends were approximately $630,000 as of March 31, 2019. On April 9, 2019, these
Series A preferred shares were converted into 2,600,000 shares of the Company’s common stock (See Note 14 – Subsequent
Events).
Common
stock issued for services
On
February 25, 2019, the Company granted an aggregate of 2,670,688 shares of its common stock to an executive officer, employees
and consultants of the Company for services rendered. The shares were valued at $2,750,808, or $1.03 per share, based on the quoted
trading price on the date of grant. In connection with these shares, the Company recorded stock-based compensation of $2,750,808.
Warrants
In
connection with the Purchase Agreement (See Note 6 under Bellridge), the Lender was issued a warrant, with a term of two years,
to purchase up to 4.75% of the fully-diluted outstanding Common Stock of the Company, for an aggregate purchase price of $100.
Additionally, the placement agent was issued a warrant, with a term of two years, to purchase up to 4.75% of the fully-diluted
outstanding Common Stock of the Company, for an aggregate purchase price of $100.
On
December 27, 2018, the lender waived any and all defaults in existence on the Note and the Company agreed to issue a warrant that
is convertible into 2% of the issued and outstanding shares existing as the time the Company files a registration statement or
makes an application to up list to a national stock exchange (See Note 6 under Bellridge).
In
connection with several promissory notes payable (see Note 7), during the three months ended March 31, 2019, the Company
issued 44,000 warrants to purchase 44,000 shares of common at exercise prices ranging from $1.00 to $2.10 per share. During the
three months ended March 31, 2019, the Company calculated the relative fair value of these warrants of $63,581 which is being
amortized over the loan terms and was estimated using the Binomial valuation model with the following assumptions: expected dividend
rate, 0%; expected term (in years), 5 years; volatility of 228.1% and risk-free interest rate of 2.40%.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2019
Warrant
activities for the three months ended March 31, 2019 are summarized as follows:
|
|
Number of Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Term (Years)
|
|
|
Aggregate Intrinsic Value
|
|
Balance Outstanding December 31, 2018
|
|
|
1,648,570
|
|
|
$
|
0.00
|
|
|
|
1.47
|
|
|
$
|
2,472,655
|
|
Granted
|
|
|
44,000
|
|
|
|
1.40
|
|
|
|
|
|
|
|
|
|
Change is warrants related to dilutive rights
|
|
|
(227,511
|
)
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
Balance Outstanding March 31, 2019
|
|
|
1,465,059
|
|
|
$
|
0.04
|
|
|
|
1.25
|
|
|
$
|
5,797,165
|
|
Exercisable, March 31, 2019
|
|
|
1,465,059
|
|
|
$
|
0.04
|
|
|
|
1.25
|
|
|
$
|
5,797,165
|
|
NOTE
9 –
COMMITMENTS AND CONTINGENCIES
Employment
agreement
On
June 18, 2018, the Company entered into an employment agreement with the chief operating officer of Prime. The Company shall pay
to this executive a base salary of $520,000 per year, payable in accordance with the Company’s usual pay practices. The
executive’s base salary will increase by $260,000 per year upon (i) Prime achieving revenue of $20 million on an annualized
basis (the “Initial Target Goal”) for four consecutive weeks; and (ii) each time Prime achieves revenue of an additional
$10 million increment above the Initial Target Goal (i.e., $30 million, $40 million, $50 million, etc.) on an annualized basis
for four consecutive weeks. Executive’s base salary shall be subject to review annually by the Manager and may be increased
(but not decreased). The executive shall be entitled to participate in any bonus plan that the Manager or its designee may approve
for the senior executives of the Company and shall be entitled to participate in benefits under the Company’s benefit plans,
profit sharing and arrangements, including, without limitation, any employee benefit plan or arrangement made available in the
future by the Company to its employees or senior executives, subject to and on a basis consistent with the terms, conditions and
overall administration of such plans and arrangements. Notwithstanding the foregoing, during the Employment, the Company will
provide, at the Company’s expense, health and major medical insurance benefits to the Executive and his family members which
are at least equal to the benefits provided to the Executive and his family members immediately prior to the Effective Date. The
term of this Agreement (as it may be extended by the following sentence or terminated earlier pursuant to terms in the employment
agreement shall begin on the Effective Date and end on the close of business on May 31, 2023. The Employment Term shall be automatically
extended for additional one-year periods unless, at least sixty (60) days prior to the end of the expiration of the Employment
Term.
Other
From
time to time, we may be involved in litigation relating to claims arising out of our operation in the normal course of business.
As of March 31, 2019, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect
on results of our operations.
NOTE
10–
RELATED PARTY TRANSACTIONS AND BALANCES
Accounts
payable – related party
During
the three months ended March 31, 2019 and 2018, the Company utilized an affiliate company as one of the carriers, providing auto
transportation, in the normal course of business. The carrier fees incurred to this affiliate were $2,675 and $3,600 for the three
months ended March 31, 2019 and 2018, respectively. At March 31, 2019 and December 31, 2018, amount due to this affiliate amounted
to $350 and $3,700, respectively, and is included in accounts payable – related party on the accompanying unaudited condensed
consolidated balance sheets.
Due
to related parties
In
connection with the acquisition of Prime, the Company acquired a balance of $14,019 that was due from the former majority owner
of Prime. Pursuant to the terms of the SPA, the Company agreed to pay $489,174 in cash to the former majority owner of Prime who
then advanced back the $489,174 to Prime. During the three months ended March 31, 2019, the Company repaid $50,000 of this advance.
This advance is non-interest bearing and is due on demand. At March 31, 2019 and December 31, 2018, amount due to this related
party amounted to $209,000 and $259,000.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2019
During
the period from acquisition date of Prime (June 18, 2018) to March 31, 2019, an employee of Prime who exerts significant influence
over the business of Prime, paid costs and expenses and was reimbursed funds by the Company. These advances are non-interest bearing
and is due on demand. At March 31, 2019 and December 31, 2018, amounts due to this related party amounted to $95,115 and $16,300,
respectively.
Notes
payable – related party
From
July 25, 2018 through December 31, 2018, the Company entered into several Promissory Notes with the Company’s former
chief executive officer or the spouse of the Company’s former chief executive officer. Pursuant to these promissory notes,
the Company borrowed an aggregate of $1,150,000 and received net proceeds of $1,050,000, net of original issue discounts of $100,000.
From July 25, 2018 through December 31, 2018, $930,000 of these loans were repaid and during January 2019, the Company repaid
the remaining existing promissory note totaling $220,000 with the spouse of the Company’s chief executive officer. In addition,
during February 2019, the Company entered into another promissory note with the spouse of the chief executive officer totaling
$230,000, net of an original issue discount of $30,000.
At
March 31, 2019 and December 31, 2018, notes payable – related party amounted to $215,000 and $213,617, which is net of unamortized
debt discount of $15,000 and $6,383, respectively. During the three months ended March 31, 2019, amortization of debt discount
related to these notes amounted to $21,383 and is included in interest expense – related parties on the accompanying condensed
consolidated statement of operations.
Convertible note payable – related
party
On March 13, 2019, the Company entered
into a convertible note agreement with an individual, who is affiliated to the Company’s chief executive officer, in the
amount of $500,000 (See Note 6).
NOTE
11 –
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 January 2024. From the lease commencement date until the last day of the second lease
year, monthly rent shall be $14,000. At the beginning of the 25
th
month following the commencement date and through
the end of the term, minimum rent shall be $14,420 per month. The Company shall have one option to renew the term of this lease
for an additional five years. In January 2019, the Company paid a security deposit of $28,000.
In
adopting ASC Topic 842, Leases (Topic 842), the Company has elected the ‘package of practical expedients’, which permit
it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct
costs (see Note 2). In addition, the Company elected not to apply ASC Topic 842 to arrangements with lease terms of 12 month or
less. On January 1, 2019, upon adoption of ASC Topic 842, the Company recorded right-of-use assets and lease liabilities of $631,723.
At
March 31, 2019, right-of-use asset (“ROU”) is summarized as follows:
|
|
March 31, 2019
|
|
Office lease right of use asset
|
|
$
|
631,723
|
|
Less: accumulated amortization into rent expense
|
|
|
(29,498
|
)
|
Right of use asset, net
|
|
$
|
602,225
|
|
At
March 31, 2019, operating lease liability related to the ROU asset is summarized as follows:
|
|
March 31, 2019
|
|
Lease liability related to office lease right of use asset
|
|
$
|
616,281
|
|
Less: current portion of lease liability
|
|
|
(99,395
|
)
|
Lease liability – long-term
|
|
$
|
516,886
|
|
During
the three months ended March 31, 2019 and 2018, in connection with this operating lease, the Company recorded rent expense of
$42,056 and $0, respectively.
At
March 31, 2019, future minimum base lease payments due under non-cancelable operating leases is as follows:
Year
|
|
Amount
|
|
2019 (remainder of year)
|
|
$
|
126,000
|
|
2020
|
|
|
168,000
|
|
2021
|
|
|
173,040
|
|
2022
|
|
|
173,040
|
|
2023
|
|
|
173,040
|
|
Total
|
|
$
|
813,120
|
|
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2019
NOTE
12 –
CONCENTRATIONS
For
the three months ended March 31, 2019, one customer represented 82.8% of the Company’s total net revenues. This revenue
is from one Prime customer. For the three months ended March 31, 2018, one customer represented 12% of the Company’s total
net revenues. At March 31, 2019, one customer represented 65.9% of the Company’s accounts receivable balance. At December
31, 2018, one customer represented 54.5% of the Company’s accounts receivable balance.
For
the three months ended March 31, 2019 and 2018, the Company had no carriers that were in excess of 10% of carrier fees.
During
the three months ended March 31, 2019, the Company rented delivery vans from two vendors. Any shortage of supply of vans available
to rent to the Company could have a material adverse effect on the Company’s business, financial condition and results of
operations.
All
revenues are derived from customers in the United States.
NOTE
13 –
SEGMENT INFORMATION
During
the period from January 1, 2018 to June 18, 2018, the Company operated in one reportable business segment consisting of brokerage
and logistic services such as transportation scheduling, routing and other value added services related to the transportation
of automobiles and other freight. Since June 18, 2018, the Company operated in three reportable business segments - (1) the transportation
of automobiles and other freight (the “Save On” segment), (2) a segment which concentrates on deliveries for on-line
retailers in New York, New Jersey and Pennsylvania (the “Prime” segment), and (3) a segment with a focus on tractor
trailer and box truck deliveries of product on the east coast of the United States from one distributor’s warehouse to another
warehouse or from a distributor’s warehouse to the post office. The Company’s reportable segments were strategic business
units that offered different products. They were managed separately based on the fundamental differences in their operations and
locations. Information with respect to these reportable business segments for the three months ended March 31, 2019 and 2018 was
as follows:
|
|
For the Three Months ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Save On
|
|
$
|
1,131,525
|
|
|
$
|
1,177,763
|
|
Prime
|
|
|
5,396,060
|
|
|
|
-
|
|
Shypdirect
|
|
|
407,147
|
|
|
|
-
|
|
|
|
|
6,934,732
|
|
|
|
1,177,763
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
Save On
|
|
|
-
|
|
|
|
-
|
|
Prime
|
|
|
308,816
|
|
|
|
-
|
|
Shypdirect
|
|
|
-
|
|
|
|
-
|
|
|
|
|
308,816
|
|
|
|
-
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
Save On
|
|
|
-
|
|
|
|
-
|
|
Prime
|
|
|
652,829
|
|
|
|
-
|
|
Shypdirect
|
|
|
-
|
|
|
|
-
|
|
Other (a)
|
|
|
594,124
|
|
|
|
148,253
|
|
|
|
|
1,246,953
|
|
|
|
148,253
|
|
Net (loss) income:
|
|
|
|
|
|
|
|
|
Save On
|
|
|
(12,937
|
)
|
|
|
(7,270
|
)
|
Prime
|
|
|
(2,308,392
|
)
|
|
|
-
|
|
Shypdirect
|
|
|
(617,695
|
)
|
|
|
-
|
|
Other (a)
|
|
|
(16,708,699
|
)
|
|
|
68,195
|
|
|
|
$
|
(19,647,723
|
)
|
|
$
|
60,925
|
|
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Identifiable long-lived tangible assets at March 31, 2019 and December 31, 2018 by segment:
|
|
|
|
|
|
|
|
|
Prime
|
|
$
|
775,094
|
|
|
$
|
936,831
|
|
Shypdirect
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
775,094
|
|
|
$
|
936,831
|
|
(a)
|
The
Company does not allocate any general and administrative expense of its holding company activities to its reportable segments,
because these activities are managed at the corporate level.
|
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2019
NOTE
14 –
SUBSEQUENT EVENTS
Secured
merchant loans
On April 17, 2019, the Company entered into
a secured Merchant Loan in the principal amount of $650,000 and received net proceeds of $500,000, net of original issue discounts
of $150,000. Pursuant to this secured Merchant Loan, the Company is required to pay the noteholders by making three monthly installments
of $216,667 beginning in June 2019 to August 2019.
On
May 8, 2019, the Company entered into a secured Merchant Loans in the principal amount of $1,242,000. The Company simultaneously
repaid prior loans of $362,961 which were entered into during January 2019, paid origination fees totaling $9,000 and paid an
original issue discount of $342,000, and received net proceeds of $528,039. Pursuant to this secured Merchant Loan, the
Company is required to pay the noteholder by making daily payments of $10,265 on each business day until the loan amounts are
paid in full. Each payment is deducted from the Company’s bank account.
Promissory
notes
From
April 1, 2019 to May 15, 2019, the Company entered into separate promissory notes with five individuals totaling $435,000 and
received net proceeds of $390,000, net of original issue discounts of $45,000. These Notes are due in 45 days from the respective
Note date. Other than the original issue discount, no additional interest is due to the holders. In connection with these promissory
notes, the Company issued 5,000 warrants to purchase 5,000 shares of the Company’s common stock at exercise price of $5.26
per share. The warrants are exercisable over a five year period.
Convertible debt modifications and
warrant cancellations
On
April 9, 2019 (the “Modification Date”), the Company entered into an agreement with Bellridge Capital, L.P.
(“Bellridge”) that modifies its existing obligations to Bellridge (See Note 6) as follows:
|
●
|
the
overall principal amount of that certain Convertible Promissory Note, dated June 18, 2018, issued by the Company in favor
of Bellridge (the “Note”) was reduced from the original principal amount of $2,497,502 (principal amount
was $2,223,918 at April 9, 2019) to $1,800,000, in exchange for the issuance to Bellridge of 800,000 shares of restricted
common stock, which shall be delivered to Bellridge, either in whole or in part, at such time or times as when the beneficial
ownership of such shares by Bellridge will not result in Bellridge’s beneficial ownership of more than the Beneficial
Ownership Limitation and such shares will be issued within three business days of the date the Bellridge has represented to
the Company that it is below the Beneficial Ownership Limitation. Such issuances will occur in increments of no fewer than
the lesser of (i) 50,000 shares and (ii) the balance of the 800,000 shares owed. The “Beneficial Ownership Limitation”
shall be 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to
the issuance of shares of common stock issuable pursuant to this Agreement. As of April 15, 2019, 100,000 of these shares
have been issued;
|
|
|
|
|
●
|
the
maturity date of the Note was extended to August 31, 2020;
|
|
|
|
|
●
|
the
interest rate was reduced from 10% to 5% per annum;
|
|
|
|
|
●
|
if
the Company completes an offering of equity or equity linked securities (including warrants, convertible preferred stock,
convertible debentures or convertible promissory note) which results in gross proceeds to the Company of at least $4,000,000,
then the Company shall use a portion of the proceeds thereof to repay not less than half of the obligations then outstanding
pursuant to the Note;
|
|
|
|
|
●
|
if
the Company completes an offering of debt which results in gross proceeds to the Company of at least $3,000,000, then the
Company shall use a portion of the proceeds thereof to repay any remaining obligations then outstanding pursuant to the Note;
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●
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the
convertibility of the Note will now be amended such that the Note shall only be convertible at a conversion price to be mutually
agreed upon between the Company and the Holder. As of the date of this report, the Company and Holder have not mutually agreed
on a conversion price, Since the conversion terms are unknown, the Company will account for this conversion feature when
the contingency is resolved;
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●
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the
registration rights previously granted to Bellridge have now been eliminated; and
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those
certain Warrants, dated June 18, 2018 and December 27, 2018, respectively, issued by the Company in favor of Bellridge shall
be cancelled and of no further force or effect. In exchange, the Company will issue Bellridge 360,000 shares of restricted
common stock.
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TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2019
In
addition, on the Modification Date, warrant holders holding warrants exercisable into an aggregate of 4.75% of the outstanding
common stock of the Company all agreed to exercise such warrants for an aggregate of 240,000 shares of common stock of the Company.
In connection with the modification of
the Bellridge Note and the cancellation of the related warrants, under the provisions of ASC Topic No. 815-40, “Derivatives
and Hedging – Contracts in an Entity’s Own Stock”, the embedded conversion option contained in the convertible
instrument and the Warrant and Placement Warrant were adjusted to fair value through earnings on the Modification Date. The fair
value of this embedded conversion option derivative, and the Warrant and Placement Warrant were determined using the Binomial
valuation model and Monte-Carlo simulation model, respectively. For the period from April 1, 2019 to April 9, 2019, the change
of fair value of derivative liabilities associated with these instruments amounted to $41,653,345, which was recorded as derivative
expense on the Modification date. The increase in derivative liabilities was caused by an increase in the Company’s stock
price, as quoted on OTC Markets. Additionally, on the Modification Date, the Company analyzed the Bellridge Note modification
and the cancellation of the warrants and pursuant to ASC 470-50, the modifications were treated as a debt extinguishment.
On
the Modification Date, the Company entered into agreements with another institutional investor, RedDiamond Partners LLC,
holding convertible notes representing an aggregate principal amount of $510,000, and agreed with such holder to:
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extend
the maturity date of the notes to December 31, 2020;
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remove
all convertibility features of the notes; and
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if
the Company completes an offering of equity or equity linked securities (including warrants, convertible preferred stock,
convertible debentures or convertible promissory note) which results in gross proceeds to the Company of at least $4,000,000,
then the Company shall use a portion of the proceeds thereof to repay not less than half of the obligations then outstanding
pursuant to the notes.
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In connections with the debt modifications
and warrants cancellations discussed above, on the Modification Date, the Company recorded a gain on debt extinguishment of $43,745,975
which consists of the following.
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Gain on
Extinguishment
on Modification
Date
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Gain from reversal of derivative liabilities on Modification Date
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$
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61,841,708
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Fair value of common shares issued on Modification Date
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(17,934,000
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)
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Write-off of remaining debt discount
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(1,013,118
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)
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Reversal of put premium on stock-settled debt related cancellation of conversion terms
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385,385
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Reduction of principal and interest balances due
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466,000
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Gain of debt extinguishment
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$
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43,745,975
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Convertible note – related party
On
April 11, 2019, the Company entered into a convertible note agreement with an entity affiliated with the Company’s chief
executive officer in the amount of $2,000,000. Commencing on May 11, 2019, and continuing on the eleventh day of each month
thereafter, payments of interest only on the outstanding principal balance of this Note of $30,000 shall be due and payable. Commencing
on November 11, 2019 and continuing on the eleventh day of each month thereafter through April 11, 2021, payments of principal
and interest of $117,611 are due, if the note is not sooner converted as provided in the note agreement. The payment of all or
any portion of the principal and accrued interest may be prepaid prior to April 11, 2021. Interest shall accrue with respect to
the unpaid principal sum identified above until such principal is paid or converted as provided below at a rate equal to 18% per
annum compounded annually. All past due principal and interest on this Note shall bear interest from maturity of such principal
or interest until paid at the lesser of (i) 20% per annum, or (ii) the highest non-usurious rate allowed by applicable law. This
Note may be converted by Holder at any time in principal amounts of $100,000 in accordance with the terms by delivery of written
notice to the Company, into that number of shares of common stock equal to the amount obtained by dividing the portion of the
aggregate principal amount of this Note that is being converted by $11.81.
Series
A preferred stock
On
April 9, 2019, the Company entered into agreements with all holders of its Series A Convertible Preferred Stock to exchange all
4,000,000 outstanding shares of preferred stock for an aggregate of 2,600,000 shares of restricted common stock.
Shares
issued for services
On
May 1, 2019, the Company issued an aggregate of 30,000 shares of its common stock to two individuals (15,000 shares each) for
consulting services rendered. The shares were valued at $265,500, or $8.85 per share, based on the quoted trading price on the
date of grant. In connection with these shares, the Company recorded stock-based professional fees of $265,500.
Disposal of Save On
On May 1, 2019, the Company entered into
a Share Exchange Agreement with Save On and Steven Yariv, whereby the Company returned all of the stock of Save On to Steven Yariv
in exchange for Mr. Yariv conveying 1,000,000 shares of common stock of the Company back to the Company. In addition, the Company
will grant an aggregate of 80,000 options to certain employees of Save On. Mr. Yariv ceased to be an officer or director of the
Company effective with the filing of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018
as filed with the Securities and Exchange Commission of April 16, 2019. . Pursuant to Accounting Standard Codification (“ASC”)
205-20-45, the financial statement in which net income or loss of a business entity is reported shall report the results of operations
of the discontinued operation in the period in which a discontinued operation either has been disposed of or is classified as
held for sale. Accordingly, the Company shall reflect Save On as a discontinued operations beginning in the second quarter of
2019, the period that Save On was disposed of.
Due to related party
In May 2019, the former majority owner
of Prime advanced the Company $400,000 which is due on demand.