NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2019 and 2018
NOTE
1 – ORGANIZATION AND BUSINESS OPERATIONS
Transportation
and Logistics Systems, Inc. (“TLSS” or the “Company”), formerly PetroTerra Corp., was incorporated under
the laws of the State of Nevada, on July 25, 2008. The Company operates through its subsidiaries as a leading logistics and transportation
company specializing in ecommerce fulfillment, last mile deliveries, two-person home delivery and line haul services for some
of the world’s leading online retailers.
On
March 30, 2017 (the “Closing Date”), TLSS and Save On Transport Inc. (“Save On”) entered into a Share
Exchange Agreement, dated as of the same date (the “Share Exchange Agreement”). Pursuant to the terms of the Share
Exchange Agreement, on the Closing Date, Save On became a wholly-owned subsidiary of TLSS (the “Reverse Merger”).
Save On was incorporated in the state of Florida and started business on July 12, 2016. This 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. On May 1, 2019, the Company entered into a share exchange agreement with Save On and Steven Yariv, whereby
the Company returned all of the stock of Save On to Steven Yariv in exchange for Mr. Yariv conveying 1,000,000 shares of common
stock of the Company back to the Company. In addition, the Company granted an aggregate of 80,000 options to certain employees
of Save On and on April 16, 2019, Mr. Yariv ceased to be an officer or director of the Company.
On
June 18, 2018 (the “Acquisition Date”), the Company completed the acquisition of 100% of the issued and outstanding
membership interests of Prime EFS, LLC, a New Jersey limited liability company (“Prime”), from its members pursuant
to the terms and conditions of a Stock Purchase Agreement entered into among the Company and the Prime members on the Closing
Date (the “SPA”). Prime is a New Jersey based transportation company with a focus on deliveries for on-line retailers
in New York, New Jersey and Pennsylvania.
On
July 24, 2018, the Company formed Shypdirect LLC (“Shypdirect”), a company organized under the laws of New Jersey.
Shypdirect is a transportation company with a focus on tractor trailer and box truck deliveries of product on the east coast of
the United States from one distributor’s warehouse to another warehouse or from a distributor’s warehouse to the post
office.
TLSS
and its wholly-owned subsidiaries, Prime and Shypdirect are hereafter referred to as the “Company”.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis
of presentation and principles of consolidation
The
consolidated financial statements of the Company include the accounts of TLSS and its wholly owned subsidiaries, Save On (through
April 30, 2019), Prime and Shypdirect. All intercompany accounts and transactions have been eliminated in consolidation.
On
May 1, 2019, the Company entered into a Share Exchange Agreement with Save On and Steven Yariv, whereby the Company returned all
of the stock of Save On to Steven Yariv in exchange for Mr. Yariv conveying 1,000,000 shares of common stock of the Company back
to the Company. Pursuant to Accounting Standard Codification (“ASC”) 205-20-45, the financial statement in which net
income or loss of a business entity is reported shall report the results of operations of the discontinued operation in the period
in which a discontinued operation either has been disposed of or is classified as held for sale. Accordingly, beginning in the
second quarter of 2019, the period that Save On was disposed of, the Company reflects Save On as a discontinued operation and
such presentation is retroactively applied to all periods presented in the accompanying consolidated financial statements.
Going
concern
The
accompanying 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 consolidated
financial statements, for the years ended December 31, 2019 and 2018, the Company had a net loss of $44,864,462 and $14,478,157
and net cash used in operations was $5,659,094 and $283,678, respectively. Additionally, the Company had an accumulated deficit,
shareholders’ deficit, and a working capital deficit of $60,615,860, $12,886,424 and $13,513,502, respectively,
at December 31, 2019. Furthermore, the Company failed to make required payments of principal and interest on certain of its convertible
debt instruments and notes payable (see Note 8). 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.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2019 and 2018
The
Company is seeking to raise capital through additional debt and/or equity financings to fund its operations in the future. Although
the Company has historically raised capital from sales of common shares and from the issuance of convertible promissory notes
and notes payable, there is no assurance that it will be able to continue to do so. If the Company is unable to raise additional
capital or secure additional lending in the near future, management expects that the Company will need to curtail its operations.
These consolidated financial statements do not include any adjustments related to the recoverability and classification of assets
or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Use
of estimates
The
preparation of the 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 consolidated financial statements and footnotes
include the valuation of accounts receivable, the useful life of property and equipment, the valuation of intangible assets, the
valuation of right of use assets and related liabilities, assumptions used in assessing impairment of long-lived assets, estimates
of current and deferred income taxes and deferred tax valuation allowances, the fair value of non-cash equity transactions, the
value of claims against the Company, and the valuation of derivative liabilities.
Fair
value of financial instruments
FASB
ASC 820 — Fair Value Measurements and Disclosures, 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. FASB 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 December 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. FASB 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 December 31, 2019 and 2018:
|
|
At
December 31, 2019
|
|
|
At
December 31, 2018
|
|
Description
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Derivative
liabilities
|
|
|
—
|
|
|
|
—
|
|
|
$
|
2,135,939
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
7,888,684
|
|
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2019 and 2018
A
roll forward of the level 3 valuation financial instruments is as follows:
|
|
For
the Year ended
December 31, 2019
|
|
|
For
the Year ended
December 31, 2018
|
|
Balance
at beginning of year
|
|
$
|
7,888,684
|
|
|
$
|
601,615
|
|
Initial
valuation of derivative liabilities included in debt discount
|
|
|
1,332,512
|
|
|
|
1,487,787
|
|
Initial
valuation of derivative liabilities included in derivative expense
|
|
|
1,073,889
|
|
|
|
6,839,065
|
|
Gain
on extinguishment of debt related to repayment of debt
|
|
|
(246,110
|
)
|
|
|
-
|
|
Gain
on extinguishment of debt related to April 9, 2019 modifications
|
|
|
(61,841,708
|
)
|
|
|
-
|
|
Cumulative
effect adjustment for change in derivative accounting
|
|
|
(838.471
|
)
|
|
|
-
|
|
Change
in fair value included in derivative expense
|
|
|
54,767,143
|
|
|
|
(1,039,783
|
)
|
Balance
at end of year
|
|
$
|
2,135,939
|
|
|
$
|
7,888,684
|
|
The
Company accounts for its derivative financial instruments, consisting of certain conversion options embedded in our convertible
instruments and warrants, at fair value using level 3 inputs. The Company determined the fair value of these derivative liabilities
using the Black-Scholes option pricing model, binomial lattice models, or other accepted valuation practices. When determining
the fair value of its financial assets and liabilities using these methods, the Company is required to use various estimates and
unobservable inputs, including, among other things, expected terms of the instruments, expected volatility of its stock price,
expected dividends, and the risk-free interest rate. Changes in any of the assumptions related to the unobservable inputs identified
above may change the fair value of the instrument. Increases in expected term, anticipated volatility and expected dividends generally
result in increases in fair value, while decreases in the unobservable inputs generally result in decreases in fair value.
ASC
825-10 “Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and
liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is
irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses
for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair
value option to any outstanding instruments.
The
carrying amounts reported in the consolidated balance sheets for cash, accounts receivable, prepaid expenses, 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 December 31, 2019 and 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 December 31, 2019 and 2018. The Company has not experienced any losses
in such accounts through December 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.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2019 and 2018
Intangible
asset
Intangible
assets are carried at cost less accumulated amortization, computed using the straight-line method over the estimated useful life,
less any impairment charges. At December 31, 2018, intangible asset consisted of a customer relationship acquired on June 18,
2018 which was being amortized over a period of five years. In connection with an impairment of such intangible assets, the Company
recorded an impairment charge of $3,842,259 for the year ended December 31, 2019 (see Note 7).
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 consolidated statements of operations.
Impairment
of long-lived assets
In
accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an
impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount
of impairment is measured as the difference between the asset’s estimated fair value and its book value.
Segment
reporting
The
Company uses “the management approach” in determining reportable operating segments. The management approach considers
the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions
and assessing performance as the source for determining the Company’s reportable segments. The Company’s chief operating
decision maker is the chief executive officer of the Company, who reviews operating results to make decisions about allocating
resources and assessing performance for the entire Company. On May 1, 2019, the Company disposed of its Save On business segment
and the results of operations of Save On are included in discontinued operations. Accordingly, during the years ended December
31, 2019 and 2018, the Company believes that it operates in one operating segment related to deliveries for on-line retailers
in New York, New Jersey and Pennsylvania and tractor trailer and box truck deliveries of product on the east coast of the United
States from one distributor’s warehouse to another warehouse or from a distributor’s warehouse to the post office.
Derivative
financial instruments
The
Company has certain financial instruments that are embedded derivatives associated with capital raises. The Company evaluates
all its financial instruments to determine if those contracts or any potential embedded components of those contracts qualify
as derivatives to be separately accounted for in accordance with ASC 815-10-05-4, Derivatives and Hedging and 815-40, Contracts
in Entity’s Own Equity. This accounting treatment requires that the carrying amount of any embedded derivatives be recorded
at fair value at issuance and marked-to-market at each balance sheet date. In the event that the fair value is recorded as a liability,
as is the case with the Company, the change in the fair value during the period is recorded as either other income or expense.
Upon conversion, exercise or repayment, the respective derivative liability is marked to fair value at the conversion, repayment
or exercise date and then the related fair value amount is reclassified to other income or expense as part of gain or loss on
extinguishment.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2019 and 2018
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 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.
Bargain
purchase gain
In
connection with the acquisition of Prime, the Company allocated the purchase price to the acquired assets and intangible asset
and assumed liabilities of Prime based on their estimated fair values as of the acquisition date. The excess of the estimated
fair values of net assets acquired over the acquisition consideration paid was recorded as a bargain purchase gain in other income
in the consolidated statements of operations. The determination of the fair values of the assets acquired and liabilities assumed
requires significant judgment, including valuation estimates relating to the value of the acquired customer relationship.
Revenue
recognition and cost of revenue
On
January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue
recognition requirements in Accounting Standards Codification (ASC) Topic 605, Revenue Recognition. This ASC is based on the principle
that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. This ASC also requires additional disclosure
about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer service orders, including significant
judgments.
For
the Company’s Prime and Shypdirect business activities, the Company recognizes revenues and the related direct costs of
such revenue which generally include compensation and related benefits, gas costs, insurance, parking and tolls, truck rental
fees, and maintenance fees as of the date the freight is delivered which is when the performance obligation is satisfied. In accordance
with ASC Topic 606, the Company recognizes revenue on a gross basis. The Company’s payment terms are net seven days from
acceptance of delivery. The Company does not incur incremental costs obtaining service orders from its Prime customers, however,
if the Company did, because all of Prime and Shypdirect customer contracts are less than a year in duration, any contract costs
incurred would be expensed rather than capitalized. The revenue that the Company recognizes arises from deliveries of packages
on behalf of the Company’s customers. Primarily, the Company’s performance obligations under these service orders
correspond to each delivery of packages that the Company makes under the service agreements. Control of the package transfers
to the recipient upon delivery. Once this occurs, the Company has satisfied its performance obligation and the Company recognizes
revenue.
For
the Company’s Save On business activities, through the date of disposition on May 1, 2019, the Company recognized revenues
and the related direct costs of such revenue which includes carrier fees and dispatch costs as of the date the freight is delivered
by the carrier which is when the performance obligation is satisfied. Customer payments received prior to delivery was recorded
as a deferred revenue liability and related carrier fees if paid prior to delivery were recorded as a deferred expense asset.
In accordance with ASC Topic 606, the Company recognized revenue on a gross basis. Our payment terms for corporate customers are
net 30 days from acceptance of delivery and individual customers generally must pay in advance. The Company did not incur incremental
costs obtaining service orders from its Save On customers, however, if the Company did, because all of the Save On customer’s
contracts were less than a year in duration, any contract costs incurred were expensed rather than capitalized. The revenue that
the Company recognized arose from service orders it received from its Save On customers. The Company’s performance obligations
under these service orders corresponded to each delivery of a vehicle that the Company made for its customer under the service
orders; as a result, each service order generally contained only one performance obligation based on the delivery to be completed.
Management
has reviewed the revenue disaggregation disclosure requirements pursuant to ASC 606 and determined that no further disaggregation
disclosure is required to be presented.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2019 and 2018
Basic
and diluted loss per share
Pursuant
to ASC 260-10-45, basic loss per common share is computed by dividing net loss attributable to common shareholders by the weighted
average number of shares of common stock outstanding for the periods presented. Diluted loss per share is computed by dividing
net loss attributable to common shareholders by the weighted average number of shares of common stock, common stock equivalents
and potentially dilutive securities outstanding during the period. Potentially dilutive common shares consist of common stock
issuable for stock warrants (using the treasury stock method) and shares issuable for convertible debt (using the as-if converted
method). These common stock equivalents may be dilutive in the future.
The
reconciliation of the numerator of the basic and diluted loss per share calculations, due to the inclusion of a deemed dividend
related to price protection is as follows:
|
|
For
the Year Ended December 31, 2019
|
|
|
For
the Year Ended December 31, 2018
|
|
Basic
numerator:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(44,864,462
|
)
|
|
$
|
(14,478,157
|
)
|
Deemed
dividend related to price protection
|
|
|
(981,548
|
)
|
|
|
-
|
|
Net
loss attributable to common shareholders (basic and diluted)
|
|
$
|
(45,846,010
|
)
|
|
$
|
(14,478,157
|
)
|
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:
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
Stock
warrants
|
|
|
3,649,861
|
|
|
|
1,648,570
|
|
Stock
options
|
|
|
80,000
|
|
|
|
-
|
|
Convertible
debt
|
|
|
1,612,758
|
|
|
|
3,158,465
|
|
Series
A convertible preferred stock
|
|
|
-
|
|
|
|
6,666,667
|
|
Series
B convertible preferred stock
|
|
|
1,700,000
|
|
|
|
-
|
|
Stock-based
compensation
Stock-based
compensation is accounted for based on the requirements of ASC 718 – “Compensation –Stock Compensation”,
which requires recognition in the financial statements of the cost of employee, director, and non-employee services received in
exchange for an award of equity instruments over the period the employee, director , or non-employee is required to perform the
services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee,
director, and non-employee services received in exchange for an award based on the grant-date fair value of the award. The Company
has elected to recognize forfeitures as they occur as permitted under ASU 2016-09 Improvements to Employee Share-Based Payment.
Recent
Accounting Pronouncements
In
July 2017, FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic
480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features.
These amendments simplify the accounting for certain financial instruments with down-round features. The amendments require companies
to disregard the down-round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining
liability or equity classification. The guidance was adopted as of January 1, 2019 and the Company elected to record the effect
of this adoption retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect
adjustment to the condensed consolidated balance sheet as of the beginning of 2019, the period which the amendment is effective.
In accordance with the guidance presented in the ASU 2017-11, the fair value of derivative liabilities associated with certain
convertible notes as of December 31, 2018 of $838,471 and the offsetting effect of reclassifying such debt to stock-settled debt
for which the Company recorded a put premium liability of $385,385 was reclassified by means of a cumulative-effect adjustment
to opening accumulated deficit as of January 1, 2019 in the amount of $453,086.
In
August 2018, the FASB issued ASU 2018-13 to modify the disclosure requirements on fair value measurements. The amendments are
effective for years beginning after December 15, 2019. An entity is permitted to early adopt any removed or modified disclosures
and delay adoption of the additional disclosures until the effective date. Most amendments should be applied retrospectively,
but certain amendments will be applied prospectively. The 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.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2019 and 2018
NOTE
3 – ACQUISITION
On
June 18, 2018, (the “Closing Date”), the Company completed the acquisition of 100% of the issued and outstanding membership
interests of Prime from its members pursuant to the terms and conditions of a SPA entered into among the Company and the Prime
members on the Closing Date. Prime is a New Jersey based transportation company with a focus on deliveries for on-line retailers
in New York, New Jersey and Pennsylvania. The Company’s acquisition of Prime diversified the Company’s revenue sources
and gives the Company access to the growing market of online retail deliveries.
Pursuant
to the terms of the SPA, as amended in September 2018 to correct the purchase price error in the original SPA, the Company paid
$489,174 in cash which under the SPA was loaned back to Prime and therefore was included, net of repayments, in due to related
parties at December 31, 2018, and the Company issued 1,500,000 shares of its common stock in exchange for 100% of the issued and
outstanding membership units of Prime. These shares were valued at $3,090,000, or $2.06 per share, the fair value of the Company’s
common stock based on the quoted closing price of the Company’s common stock on the Closing Date.
Additionally,
the Company shall issue additional shares of its common stock intended to true-up the Purchase Interests such that the aggregate
value of the Purchase Interests would be equal to the trailing twelve-month gross profit of the Company (the “True-Up Value”),
to be calculated as of December 31, 2018 (the “True-up Stock”). On April 15, 2019, the Company shall issue to the
sellers such aggregate number of True-up Stock equal to (i) the True-Up Value minus $3,750,000 divided by (ii) the lower of (A)
$2.50, (B) the closing price of the Company’s common stock on April 15, 2019 or (C) the lowest price per share (as adjusted
for any stock splits) paid upon conversion of the Company’s series A convertible preferred stock on or prior to April 15,
2019. Based on Prime’s initial estimate of the 2018 gross profit, no contingent consideration was recorded on the acquisition
date. Based on actual 2018 gross profit, no additional True-up stock will be issued and therefore, no additional contingent consideration
was recorded as of December 31, 2018. Prime became a wholly owned subsidiary of the Company as of the Closing Date.
On
June 18, 2018, the Company entered into an employment agreement with a party related to the majority selling member of Prime which
did not represent additional purchase consideration.
The
fair value of the assets acquired and liabilities assumed are based on management’s initial estimates of the fair values
on June 18, 2018 and on subsequent measurement adjustments as of December 31, 2018. Based upon the purchase price allocation,
the following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition:
Assets
acquired:
|
|
|
|
Cash
|
|
$
|
38,198
|
|
Accounts
receivable
|
|
|
1,231,401
|
|
Prepaid
expensed and other current assets
|
|
|
143,258
|
|
Due
from related party
|
|
|
14,019
|
|
Property
and equipment, net
|
|
|
623,923
|
|
Intangible
asset
|
|
|
5,235,515
|
|
Total
assets acquired at fair value
|
|
|
7,286,314
|
|
|
|
|
|
|
Liabilities
assumed:
|
|
|
|
|
Notes
payable
|
|
|
2,224,242
|
|
Accounts
payable and accrued expenses
|
|
|
758,887
|
|
Insurance
payable
|
|
|
520,423
|
|
Total
liabilities assumed
|
|
|
3,503,552
|
|
Net
assets acquired
|
|
|
3,782,762
|
|
|
|
|
|
|
Purchase
consideration paid:
|
|
|
|
|
Cash
|
|
|
489,174
|
|
Common
stock
|
|
|
3,090,000
|
|
Total
purchase consideration paid
|
|
|
3,579,174
|
|
Gain
on bargain purchase
|
|
$
|
203,588
|
|
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2019 and 2018
In
connection with the acquisition, the Company recognized $203,588 of bargain purchase gain and a $5,235,515 intangible asset related
to the acquisition of a customer relationship. The bargain purchase gain of $203,588 represents the amount by which the acquisition-date
fair value of the net assets acquired exceeded the fair value of the consideration paid. The bargain purchase gain is reported
as other income in the consolidated statements of operations. Prior to recognizing a bargain purchase, management reassessed whether
all assets acquired and liabilities assumed had been correctly identified, and reviewed the key valuation assumptions and business
combination accounting procedures for this acquisition. After careful consideration and review, management concluded that the
recognition of a bargain purchase gain was appropriate for this acquisition.
The
assets acquired and liabilities assumed are recorded at their estimated fair values on the acquisition date as adjusted during
the measurement period with subsequent changes recognized in earnings or loss. These estimates are inherently uncertain and are
subject to refinement. Management develops estimates based on assumptions as a part of the purchase price allocation process to
value the assets acquired and liabilities assumed as of the business acquisition date. As a result, during the purchase price
measurement period, which may be up to one year from the business acquisition date, the Company may record adjustments to the
assets acquired and liabilities assumed based on completion of valuations, with the corresponding offset to goodwill or bargain
purchase gain. After the purchase price measurement period, the Company did not record any adjustments to assets acquired or liabilities
assumed in operating expenses in the period in which the adjustments may have been determined.
The
Company shall record acquisition and transaction related expenses in the period in which they are incurred. During the year ended
December 31, 2018, acquisition and transaction related expenses primarily consisted of legal fees of approximately $24,000 and
$1,236,000 of stock-based professional fees from the granting of 600,000 shares of the Company’s common stock to two consultants
for services rendered in connection with the acquisition. Additionally, debt issue costs were incurred relating to a loan in which
a portion of the proceeds were used to pay the cash portion of the purchase consideration (see Note 8 “Bellridge Capital
LLC”).
In
the event of the Company’s failure to satisfy the conditions set forth in the SPA, the former majority member, (the “Manager”),
acting in her sole discretion on behalf of the Sellers, had the right, for the one year period following the Closing, to unwind
the transactions and return the Purchase Price in exchange for 90% of the Interests of Prime. Conditions included:
|
1)
|
Within
twelve months from the Closing Date, the Company shall apply (the “Application”) to have its common stock listed
and trading on the (i) New York Stock Exchange, (ii) NASDAQ Global Select Market, (iii) NASDAQ Global Market, (iv) NASDAQ
Capital Market, or (v) NYSE American (each, a “Selected Market”). At the time of submitting the Application, the
Company shall meet all of the quantitative initial listing standards and corporate governance standards of such Selected Market.
The Company shall use its best efforts to have its application approved by the Selected Market. Within twelve months from
the Closing Date, The Company did not meet the requirement of any of these exchanges.
|
|
2)
|
The
Company covenants and agrees that, from and after the Closing Date for a period of twelve months, the Company shall not sell,
transfer, assign and convey its interests in Prime without the prior written consent of the Manager.
|
|
3)
|
The
Sellers shall have the right to appoint one nominee to the Board of Directors of the Company for a period of three years beginning
on the Closing Date.
|
|
4)
|
The
Company shall provide at least $267,000 of cash in additional working capital to the Company within six months from the Closing
Date.
|
The
Manager’s right to unwind the transaction expired on June 18, 2019 and no claim to unwind the transaction had been received.
The
following unaudited pro forma consolidated results of operations have been prepared as if the acquisition of Prime had occurred
as of the beginning of the following period:
|
|
Year
Ended
December 31, 2018
|
|
Net
Revenues, Continuing Operations
|
|
$
|
17,885,957
|
|
Net
Loss
|
|
$
|
(16,705,685
|
)
|
Net
Loss per Share
|
|
$
|
(6.64
|
)
|
Pro
forma data does not purport to be indicative of the results that would have been obtained had these events actually occurred at
the beginning of the period presented and is not intended to be a projection of future results.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2019 and 2018
NOTE
4 – DISCONTINUED OPERATIONS
On
May 1, 2019, the Company entered into a Share Exchange Agreement with Save On and Steven Yariv, whereby the Company returned all
of the stock of Save On to Steven Yariv in exchange for Mr. Yariv conveying 1,000,000 shares of common stock of the Company back
to the Company. In addition, the Company granted an aggregate of 80,000 options to certain employees of Save On. Mr. Yariv ceased
to be an officer or director of the Company effective with the filing of the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2018 as filed with the Securities and Exchange Commission of April 16, 2019.
Pursuant
to Accounting Standard Codification (“ASC”) 205-20-45, the financial statement in which net income or loss of a business
entity is reported shall report the results of operations of the discontinued operation in the period in which a discontinued
operation either has been disposed of or is classified as held for sale. Accordingly, the Company shall reflect Save On as a discontinued
operations beginning in the second quarter of 2019, the period that Save On was disposed of and retroactively for all periods
presented in the accompanying condensed consolidated financial statements. The business of Save On are considered discontinued
operations because: (a) the operations and cash flows of Save On were eliminated from the Company’s operations; and (b)
the Company has no interest in the divested operations.
The
assets and liabilities classified as discontinued operations in the Company’s consolidated financial statements as of December
31, 2019 and 2018, and for the years ended December 31, 2019 and 2018 is set forth below.
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
Assets:
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
$
|
-
|
|
|
$
|
334,275
|
|
Prepaid
expenses and other
|
|
|
-
|
|
|
|
1,619
|
|
Total
current assets
|
|
|
-
|
|
|
|
335,894
|
|
Total
assets
|
|
$
|
-
|
|
|
$
|
335,894
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
-
|
|
|
$
|
409,053
|
|
Accounts
payable – related party
|
|
|
-
|
|
|
|
3,700
|
|
Accrued
expenses and other liabilities
|
|
|
-
|
|
|
|
27,992
|
|
Total
current liabilities
|
|
|
-
|
|
|
|
440,745
|
|
Total
liabilities
|
|
$
|
-
|
|
|
$
|
440,745
|
|
The
summarized operating result of discontinued operations included in the Company’s consolidated statements of operations is
as follows:
|
|
Year
Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Revenues
|
|
$
|
1,491,253
|
|
|
$
|
4,498,499
|
|
Cost
of revenues
|
|
|
1,114,269
|
|
|
|
3,438,556
|
|
Gross
profit
|
|
|
376,984
|
|
|
|
1,059,943
|
|
Operating
expenses
|
|
|
1,058,410
|
|
|
|
959,564
|
|
(Loss)
income from discontinued operations
|
|
|
(681,426
|
)
|
|
|
100,379
|
|
Loss
on disposal of discontinued operations
|
|
|
-
|
|
|
|
-
|
|
(Loss)
income from discontinued operations, net of income taxes
|
|
$
|
(681,426
|
)
|
|
$
|
100,379
|
|
NOTE
5 – ACCOUNTS RECEIVABLE, NET
At
December 31, 2019 and 2018, accounts receivable, net consisted of the following:
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
Accounts
receivable
|
|
$
|
983,771
|
|
|
$
|
441,497
|
|
Allowance
for doubtful accounts
|
|
|
(20,000
|
)
|
|
|
-
|
|
Accounts
receivable, net
|
|
$
|
963,771
|
|
|
$
|
441,497
|
|
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2019 and 2018
NOTE
6 - PROPERTY AND EQUIPMENT
At
December 31, 2019 and 2018, property and equipment consisted of the following:
|
|
Useful
Life
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
Delivery
trucks and vehicles
|
|
5
- 6 years
|
|
$
|
301,142
|
|
|
$
|
1,033,397
|
|
Equipment
|
|
5
years
|
|
|
3,470
|
|
|
|
-
|
|
Subtotal
|
|
|
|
|
304,612
|
|
|
|
1,033,397
|
|
Less:
accumulated depreciation
|
|
|
|
|
(64,206
|
)
|
|
|
(96,566
|
)
|
Property
and equipment, net
|
|
|
|
$
|
240,406
|
|
|
$
|
936,831
|
|
For
the years ended December 31, 2019 and 2018, depreciation expense is included in general and administrative expenses and amounted
to $143,818 and $97,169, respectively. During the year ended December 31, 2019, the Company traded in, sold or disposed of delivery
trucks and vehicles of $783,511 with related accumulated depreciation of $176,178, and received cash of $81,000 and reduced notes
payable of $330,709, resulting in a loss of $195,624 which is included in general and administrative expenses on the accompanying
consolidated statement of operations. During the year ended December 31, 2018, the Company traded in delivery trucks and vehicles
of $72,342 with related accumulated depreciation of $603 and reduced notes payable of $56,933, resulting in a loss of $14,816
which is included in general and administrative expenses on the accompanying consolidated statement of operations.
NOTE
7 – INTANGIBLE ASSET
At
December 31, 2019 and 2018, intangible asset consisted of the following:
|
|
Useful
life
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
Customer
relationship
|
|
5
year
|
|
$
|
-
|
|
|
$
|
5,235,515
|
|
Less:
accumulated amortization
|
|
|
|
|
-
|
|
|
|
(567,181
|
)
|
|
|
|
|
$
|
-
|
|
|
$
|
4,668,334
|
|
For
the years ended December 31, 2019 and 2018, amortization of intangible assets amounted to $826,074 and $567,181, respectively.
During
the year ended December 31, 2019, the Company conducted an impairment assessment on intangible assets based on the guidelines
established in ASC Topic 360 to determine the estimated fair market value of intangible assets as of December 31, 2019. Such analysis
considered future cash flows and other industry factors. Upon completion of this impairment analysis, the Company determined that
the carrying value exceeded the fair market value of intangible assets. Accordingly, in connection with the impairment of such
intangible assets, the Company recorded an impairment charge of $3,842,259 for the year ended December 31, 2019, which was included
in operating expenses on the accompanying consolidated statements of operations.
NOTE
8 – CONVERTIBLE PROMISSORY NOTES PAYABLE
Red
Diamond Partners LLC and RDW Capital, LLC.
On
April 25, 2017, the Company entered into a Securities Purchase Agreement with RedDiamond Partners LLC (“RedDiamond”)
pursuant to which the Company would issue to RedDiamond Convertible Promissory Notes in an aggregate principal amount of up to
$355,000, which includes a purchase price of $350,000 and transaction costs of $5,000. Pursuant to this securities purchase agreement,
during 2017, the Company entered into three convertible promissory notes in the aggregate principal amount of $270,000 and the
Company received $265,000 after giving effect to the original issue discount of $5,000. These notes matured during 2018. The Purchaser
is not required to fund any additional tranches under this securities purchase agreement. Through date of default, the RedDiamond
Notes bore interest at a rate of 12% per annum and were convertible into shares of the Company’s common stock at RedDiamond’s
option at 65% of the lowest VWAP for the previous ten trading days preceding the conversion. During 2018, the Company failed to
make its required maturity date payments of principal and interest on Convertible Promissory Notes of $270,000. In accordance
with these notes, the Company entered into default in 2018, which increased the interest rate to 18.0% per annum. These convertible
promissory notes contain cross default provisions whereby a default in any one note greater than $25,000 will cause a default
in all the notes, however, this provision is only effective if there is a formal notice of default by the lender.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2019 and 2018
On
June 30, 2017, the Company issued RDW Capital, LLC a senior convertible note in the aggregate principal amount of $240,000, for
an aggregate purchase price of $30,000 of which $15,000 had been recorded as advance from lender as of March 31, 2017 and the
remaining $15,000 received on June 30, 2017. Through date of default, the principal due under the Note accrued interest at a rate
of 12% per annum. All principal and accrued interest under the Note was due six months following the issue date of the Note, and
is convertible into shares of the Company’s common stock, at a conversion price equal to fifty (50%) of the lowest volume-weighted
average price for the previous ten trading days immediately preceding the conversion. The Note includes anti-dilution protection,
including a down-round provision under which the conversion price could be affected by future equity offerings undertaken by the
Company, as well as customary events of default, including non-payment of the principal or accrued interest due on the Note. Upon
an event of default, all obligations under the Note will become immediately due and payable and the Company will be required to
make certain payments to the Lender. On December 31, 2017 the Company failed to make its required maturity date payment of principal
and interest. In accordance with the note, the Company entered into default on January 3, 2018, which increased the interest rate
to 24% per annum.
In
connection with the issuance of these Convertible Promissory Notes above, the Company determined that the terms of these Convertible
Promissory Notes included a down-round provision under which the conversion price could be affected by future equity offerings
undertaken by the Company.
The
Company evaluated these convertible promissory note transactions in accordance with ASC Topic 815, Derivatives and Hedging. Through
December 31, 2018, the Company determined that the conversion feature of the convertible promissory notes was not afforded the
exemption for conventional convertible instruments due to their respective variable conversion rate and price protection provision.
Accordingly, through December 31, 2018, under the provisions of FASB ASC Topic No. 815-40, “Derivatives and Hedging –
Contracts in an Entity’s Own Stock”, the embedded conversion option contained in the convertible instruments were
accounted for as derivative liabilities at the date of issuance and shall be adjusted to fair value through earnings at each reporting
date. On January 1, 2019, the Company adopted ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities
from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments
with Down Round Features, and the Company elected to record the effect of this adoption retrospectively to outstanding financial
instruments with a down round feature by means of a cumulative-effect adjustment to the consolidated balance sheet as of the beginning
of 2019, the period which the amendment is effective (See Note 2 - Derivative liabilities and summary of derivative liabilities
below).
On
April 9, 2019, the Company entered into agreements with RedDiamond and RDW Capital, LLC, the holders of these convertible notes
representing an aggregate principal amount of $510,000, and agreed with such holders to:
|
●
|
extend
the maturity date of the notes to December 31, 2020;
|
|
●
|
remove
all convertibility features of the notes; and
|
|
●
|
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.
|
In
connection with this debt modification, on April 9, 2019, the Company recorded a gain on debt extinguishment of $432,589, which
consists of the removal of debt put premium of $385,385 since the debt is no longer convertible, and $47,204 related to the reversal
of default interest payable (see Note 13 – Debt Extinguishment).
The
conversion provisions contained in the agreement with RedDiamond
and RDW Capital, LLC shall be suspended and shall not be exercisable beginning as of the
date of this Agreement. However, the conversion provisions contained in this Agreement shall be reinstated and become exercisable
upon the occurrence of an Event of Default. The parties agree that it shall be considered an Event of Default under the Note if
the Company shall consummate any new offering of equity or equity linked securities containing a conversion or exercise price
which is variable based upon the market trading price of the Company’s securities. On August 30, 2019, Company entered
into a new offering of equity or equity linked securities containing a conversion or exercise price which is variable based upon
the market trading price of the Company’s securities. Accordingly, since the Company entered into a new offering of equity
or equity linked securities containing a conversion or exercise price which is variable based upon the market trading price of
the Company’s securities, the conversion terms were reinstated and the Company recorded a put premium of $385,385 and recorded
interest expense of $385,385.
The
aggregate principal amounts due as of December 31, 2019 and 2018 amounted to $895,385 and $510,000, which included a put premium
of $385,385 and $0, respectively. At December 31, 2019 and 2018, the principal balance of $510,000 was included in convertible
notes payable, a current liability, on the accompanying consolidated balance sheet.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2019 and 2018
Bellridge
Capital, LLC.
On
June 18, 2018, the Company entered into a securities purchase agreement (the “Purchase Agreement”), whereby it issued
to an institutional investor (the “Lender”) a senior secured convertible note in the aggregate principal amount of
$2,497,503 (the “Note”), for an aggregate purchase price of $1,665,000, net of an original issue discount of $832,503.
In addition, the Company paid issue costs of $177,212. The original issue discount and issue costs were recorded as a debt discount
to be amortized over the Note term. The principal due under the Note accrues interest at a rate of 10% per annum. Principal and
interest payments of $232,940 were payable monthly beginning on December 18, 2018 and were due monthly over the term of the Note
in cash or common stock of the Company, at the Lender’s discretion.
In
connection with the Purchase Agreement, the Lender was issued a warrant, with a term of two years, to purchase up to 4.75% of
the fully-diluted outstanding Common Stock of the Company, for an aggregate purchase price of $100. Additionally, the placement
agent was issued a warrant, with a term of two years, to purchase up to 4.75% of the fully-diluted outstanding Common Stock of
the Company, for an aggregate purchase price of $100.
In
August 2018, the Company defaulted on its convertible note payable with Bellridge due to (i) default on the payment of monthly
interest payments due, (ii) default caused by the late filing of the Company’s report on Form 10-Q for the periods ended
June 30, 2018 and September 30, 2018 and (iii) default of filing of a registration statement. Upon an event of default, all principal,
accrued interest, and liquating damages and penalties were due upon request of the lender at 125% of such amounts.
On
December 27, 2018, the lender waived any and all defaults in existence on the Note and the Company agreed to issue a warrant that
is convertible into 2% of the issued and outstanding shares existing as the time the Company files a registration statement or
makes an application to up list to a national stock exchange. Pursuant to this warrant, at any time on or before the date that
the Company files a registration statement on form S-l or applies for up-listing to a National Exchange, and on or prior to the
close of business on the early of the first year anniversary of the issuance of December 27, 2018 (the “Termination Date”),
Bellridge could have chosen to subscribe for and purchase from the Company up to 2% in shares of common stock for an aggregate
exercise price of $100. Additionally, the principal interest amount due under the Note was modified with a monthly payment of
principal and interests due beginning on January 18, 2019 of $156,219 with all remaining principal and interest amounts on the
Note due on December 18, 2019. This modification was not considered a debt extinguishment.
On
April 9, 2019, the Company entered into a new agreement with this lender that modified these Notes and cancelled these warrants
(see below).
Through
April 9, 2019, all principal and accrued interest under the Note was convertible into shares of the Company’s common stock,
at a conversion price equal to the lower of $1.50 and 65% of the lowest traded price during the fifteen trading days immediately
prior to the conversion date. The Note included anti-dilution protection, as well as customary events of default, including, but
not limited to, non-payment of the principal or accrued interest due on the Note and cross default provisions on other Company
obligations or contracts. Upon an event of default, all obligations under the Note will become immediately due and payable and
the Company will be required to make certain payments to the Lender.
The
Lender was granted a right of first refusal on future financing transactions of the Company while the Note remains outstanding,
plus an additional three months thereafter. In connection with the issuance of the Note, the Company entered into a security agreement
with the Lender (the “Security Agreement”) pursuant to which the Company agreed that obligations under the Note and
related documents will be secured by all of the assets of the Company. In addition, all of the Company’s subsidiaries are
guarantors of the Company’s obligations to the Lender pursuant to the Note and have granted a similar security interest
over substantially all of their assets. A portion of the proceeds of the Note were used to acquire 100% of the membership interests
of Prime.
During
the term of this Note, in the event that the Company consummates any public or private offering or other financing or capital
raising transaction of any kind (each a “Subsequent Offering”), in which the Company receives, in one or more contemporaneous
transactions, gross proceeds of at least $5,000,000, at any time upon ten (10) days written notice to the Holder, but subject
to the Holder’s conversion rights set forth in the Purchase Agreement, then the Company shall use 20% of the gross proceeds
of the Subsequent Offering and shall make payment to the Holder of an amount in cash equal to the product of (i) the sum of (x)
the then outstanding principal amount of this Note and (y) all accrued but unpaid interest, multiplied by (ii) (x) 110%, if the
Prepayment Date is within 90 days of the date hereof the Closing Date (as defined in the Purchase Agreement), or (y) 125%, if
the Prepayment Date is after the 90th day following the Closing Date, to which calculated amount the Company shall add all other
amounts owed pursuant to this Note, including, but not limited to, all Late Fees and liquidated damages.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2019 and 2018
In
connection with the Purchase agreement, the Company entered into a registration rights agreement which, among other things, required
the Company to file a registration statement with the Securities and Exchange Commission no later than 120 days after June 18,
2018. The Company failed to file such registration statement. Accordingly, in addition to any other rights the Holders may have
hereunder or under applicable law, on the default date and on each monthly anniversary of each such default date (if the applicable
event shall not have been cured by such date) until the ninetieth day from such Event Date, the Company shall pay to each Holder
an amount in cash, as partial liquidated damages and not as a penalty, equal to the product of one percent (1%) multiplied by
the aggregate subscription amount paid by the Holder pursuant to the Purchase Agreement. Subsequent to the ninetieth day from
such default date, the one percent (1%) penalty shall increase to two percent (2%), with an aggregate cap of twenty percent (20%)
per annum. If the Company fails to pay any of these partial liquidated damages in full within seven days after the date payable,
the Company will pay interest thereon at a rate of 18% per annum to the Holder, accruing daily from the date such partial liquidated
damages are due until such amounts, plus all such interest thereon, are paid in full. On December 27, 2018, the lender waived
any and all defaults.
In
connection with this Purchase Agreement, the Company paid a placement agent $120,000 in cash which is included in issue costs
previously discussed above and this placement agent was issued a warrant, with a term of two years, to purchase up to 4.75% of
the fully-diluted outstanding Common Stock of the Company, for an aggregate purchase price of $100 (the “Placement Warrant”).
On April 9, 2019, the Company entered into an agreement with this placement agent that cancelled the Placement Warrant.
In
connection with the issuance of this Note, Warrants, and Placement Warrant, the Company determined that this Note and the Warrants
contains terms that are not fixed monetary amounts at inception. Accordingly, under the provisions of ASC Topic No. 815-40, “Derivatives
and Hedging – Contracts in an Entity’s Own Stock”, the embedded conversion option contained in the convertible
instrument and the Warrant and Placement Warrant were accounted for as derivative liabilities at the date of issuance and shall
be adjusted to fair value through earnings at each reporting date. The fair value of this embedded conversion option derivative,
and the Warrant and Placement Warrant were determined using the Binomial valuation model and Monte-Carlo simulation model, respectively.
In
connection with the issuance of this Note, Initial Warrant and Placement Warrant, on June 18, 2018, the initial measurement date,
the fair values of the embedded conversion option derivative and warrant derivatives of $8,326,853 was recorded as derivative
liabilities and was allocated as a debt discount of $1,487,788, with the remainder of $6,839,065 charged to current period operations
as initial derivative expense.
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 modified its existing obligations to Bellridge as follows:
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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. In connection with these shares, the Company recorded a loss on debt
extinguishment of $10,248,000 (See Note 13 – Debt Extinguishment). As of August 19, 2019, 100,000 of these shares have
been issued and on August 16, 2019, the Company issued 700,000 shares of Series B Preferred shares upon settlement of 700,000
shares of issuable common shares as discussed in Note 10.
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the
maturity date of the Note was extended to August 31, 2020;
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the
interest rate was reduced from 10% to 5% per annum;
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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 Note;
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TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2019 and 2018
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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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the
convertibility of the Note was 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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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 were
cancelled and of no further force or effect. In exchange, the Company issued Bellridge 360,000 shares of restricted common
stock.
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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.
On
April 9, 2019, in connections with the cancellation of these warrants in exchange for an aggregate of 600,000 common shares of
the Company (360,000 shares to Bellridge and 240,000 shares to Placement Agent), these shares were valued at $7,686,000, or $12.81
per share, based on the quoted trading price on the date of grant and the Company recorded a loss on debt extinguishment of $7,686,000
(See Note 13 – Debt Extinguishment).
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. In connection with this debt modification, the Company reversed all remaining derivative liabilities and
recorded a gain on debt extinguishment of $61,841,708 (see Note 13 – Debt Extinguishment). Additionally, the Company wrote
off the remaining debt discount and recorded a loss on debt extinguishment of $1,013,118 (see Note 13 – Debt Extinguishment).
During
the year ended December 31, 2019, accrued interest payable on this debt of $126,740 was reclassified to principal amount due.
At December 31, 2019, convertible notes payable related to this convertible debt amounted to $1,813,402, which consists of $1,813,402
of principal balance due and is net of unamortized debt discount of $0. At December 31, 2018, convertible notes payable related
to this convertible debt amounted to $901,876, which consists of $2,497,503 of principal balance due and is net of unamortized
debt discount of $1,595,627.
August
30, 2019 convertible debt and related warrants
On
August 30, 2019, the Company closed Securities Purchase Agreements (the “Purchase Agreement”) with accredited investors.
Pursuant to the terms of the Purchase Agreements, the Company issued and sold to investors convertible promissory notes in the
aggregate principal amount of $2,469,840 (the “Notes”), and warrants to purchase up to 987,940 shares of the Company’s
common stock (the “Warrant”). The Company received net proceeds of $295,534, which is net of a 10% original issue
discounts of $246,984 and origination fees of $61,101, and is net of $1,643,367 for the repayment of notes payable (See Note 9),
and net of $222,854 related to the conversion of existing notes payable already outstanding to these lenders into these August
30, 2019 convertible notes (see Note 9). The Notes bear interest at 10% per annum and become due and payable on November 30, 2020.
During the existence of an Event of Default, interest shall accrue at the lesser of (i) the rate of 18% per annum, or (ii) the
maximum amount permitted by law. Commencing on the four month anniversary of these Notes, monthly payments of interest and monthly
principal payments, based on a 12 month amortization schedule (each, an “Amortization Payment”), shall be due and
payable, until the Maturity Date, at which time all outstanding principal, accrued and unpaid interest and all other amounts due
and payable hereunder shall be immediately due and payable. The Company’s Amortization Payments due on December 30, 2019
were paid on January 6, 2020 and the Company did not receive any default notice for this late payment. The Amortization Payments
shall be made in cash unless the investor requests it to be issued in the Company’s common stock in lieu of a cash payment
(“Stock Payment”). If the investor requests a Stock Payment, the number of shares of common stock issued shall be
based on the amount of the applicable Amortization Payment divided by 80% of the lowest VWAP during the five Trading Day period
prior to the due date of the Amortization Payment.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2019 and 2018
The
Notes may be prepaid, provided that equity conditions, as defined in the Notes, have been met (or any such failure to meet the
Equity Conditions have been waived): (i) from Original Issuance Date until and through the day that falls on the third month anniversary
of the Original Issue Date (the “3 Month Anniversary”) at an amount equal to 105% of the aggregate of the outstanding
principal balance of the Note and accrued and unpaid interest, and (ii) after the 3 Month Anniversary at an amount equal to 115%
of the aggregate of the outstanding principal balance of the Note and accrued and unpaid interest. In the event that the Company
closes a registered public offering of securities for its own account (a “Public Offering”), the Holder may elect
to: (x) have its principal and accrued interest prepaid directly from the Public Offering Proceeds at the prices set forth above,
or (y) exchange its Note at the closing of the Public Offering for the securities being issued in the Public Offering at the Public
Offering prices based upon the outstanding principal, accrued interest and other charges, or (z) continue to hold the Note. Except
for a Public Offering and Amortization Payments, in order to prepay the Note, the Company shall provide at least 20 days’
prior written notice to the Holder, during which time the Holder may convert the Note in whole or in part at the Conversion Price.
For avoidance of doubt, the Amortization Payments shall be prepayments and are subject to prepayment penalties equal to 115% of
the Amortization payment. In the event the Company consummates a Public Offering while the Notes are outstanding, then 25% of
the net proceeds of such offering shall, within two business days of the closing of such public offering, be applied to reduce
the outstanding obligations pursuant to the Notes.
In
connection with the Debt Offering, the Company entered into a Registration Rights Agreement, pursuant to which the Company agreed
to file a registration statement on Form S-1 to register the resale of the shares issuable to the Debt Investors in the Debt Offering.
After
the original issue date until the Notes are no longer outstanding, the Notes shall be convertible, in whole or in part, at any
time, and from time to time, into shares of Common Stock at the option of the investor. The “Conversion Price” in
effect on any Conversion Date means, as of any Conversion Date or other date of determination, the lower of: (i) $2.50 per share
and (ii) the price per share paid by investors in the contemplated equity offering of up to $1,000,000. If an Event of Default
has occurred, regardless of whether such Event of Default has been cured or remains ongoing, these Notes shall be convertible
at the lower of: (i) $2.50 and (ii) 70% of the second lowest closing price of the Common Stock as reported on the Trading Market
during the 20 consecutive Trading Day period ending and including the Trading Day immediately preceding the delivery or deemed
delivery of the applicable Notice of Conversion (the “Default Conversion Price”). All such Conversion Price determinations
are to be appropriately adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction
that proportionately decreases or increases the Common Stock.
The
Warrants are exercisable at any time on or after the date of the issuance and entitles the investors to purchase shares of the
Company’s common stock for a period of five years from the initial date the warrants become exercisable. Under the terms
of the Warrant, the investors are entitled to exercise the Warrants to purchase up to 987,840 shares of the Company’s common
stock at an initial exercise price of $3.50, subject to adjustment as detailed in the respective Warrant. The Company calculated
the relative fair value of these warrants using the Binomial valuation model in the amount of $1,225,109 which was added to debt
discount and is being amortized over the term of the notes (See Note 10 under Warrants).
These
Notes and related Warrants include a down-round provision under which the Note conversion price and warrant exercise price could
be affected, on a full-ratchet basis, by future equity offerings undertaken by the Company. On September 6, 2019, the Company
sold its common shares at $2.50 per share and accordingly, the warrant down-round provisions were triggered. As a result, the
number of warrants was increased to 1,383,116 warrants and the exercise price was lowered to $2.50. As a result, the Company recorded
a deemed dividend of $981,548 which represents the fair value transferred to the Warrant holders from the Down Round feature being
triggered. The Company calculated the difference between the warrants fair value on the date the down round feature was triggered
using the original exercise price and the new exercise price and the new number of warrants. The deemed dividend was recorded
as an increase in accumulated deficit and increase in paid-in capital and increased the net loss to common shareholders by the
same amount.
In
connection with the issuance of the August 30, 2019 Notes, the Company determined that various terms of the Note, including the
Stock Payment terms discussed above, caused derivative treatment of the embedded conversion options. On August 30, 2019, the initial
measurement date, the fair values of the embedded conversion option derivative of $1,953,968 was recorded as derivative liabilities
and was allocated as a debt discount up to the net proceeds of the Notes of $936,645, with the remainder of $1,017,323 charged
to current period operations as initial derivative expense (See Summary of derivative liabilities below).
At
December 31, 2019, convertible notes payable related to August 30, 2019 convertible debt amounted to $658,623, which consists
of $2,469,840 of principal balance due and is net of unamortized debt discount of $1,811,217.
In
January 2020, due to the default of the January 2020 Amortization Payment, these convertible notes were deemed in default. Accordingly,
the outstanding principal balance on date of default increased by 30% which amounted to approximately $693,000, default interest
shall accrue at 18%, and the default conversion terms shall apply.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2019 and 2018
October
3, 2019 convertible debt and related warrants
On
October 3, 2019, the Company closed on a Securities Purchase Agreement (the “October 3, 2019 Purchase Agreement”)
with an accredited investor. Pursuant to the terms of the October 3, 2019 Purchase Agreement, the Company issued and sold to an
investor a convertible promissory note in the principal amount of $166,667 (the “Note”), and warrants to purchase
up to 66,401 shares of the Company’s common stock (the “Warrant”). The Company received net proceeds of $150,000,
which is net of a 10% original issue discounts of $16,667. The Note bears interest at 10% per annum and becomes due and payable
on January 3, 2021. During the existence of an Event of Default, interest shall accrue at the lesser of (i) the rate of 18% per
annum, or (ii) the maximum amount permitted by law. Commencing on the four month anniversary of these Notes, monthly payments
of interest and monthly principal payments, based on a 12 month amortization schedule (each, an “Amortization Payment”),
shall be due and payable, until the Maturity Date, at which time all outstanding principal, accrued and unpaid interest and all
other amounts due and payable hereunder shall be immediately due and payable. The Amortization Payments shall be made in cash
unless the investor requests it to be issued in the Company’s common stock in lieu of a cash payment (“Stock Payment”).
If the investor requests a Stock Payment, the number of shares of common stock issued shall be based on the amount of the applicable
Amortization Payment divided by 80% of the lowest VWAP during the five Trading Day period prior to the due date of the Amortization
Payment.
The
Note may be prepaid, provided that equity conditions, as defined in the Notes, have been met (or any such failure to meet the
Equity Conditions have been waived): (i) from Original Issuance Date until and through the day that falls on the third month anniversary
of the Original Issue Date (the “3 Month Anniversary”) at an amount equal to 105% of the aggregate of the outstanding
principal balance of the Note and accrued and unpaid interest, and (ii) after the 3 Month Anniversary at an amount equal to 115%
of the aggregate of the outstanding principal balance of the Note and accrued and unpaid interest. In the event that the Company
closes a registered public offering of securities for its own account (a “Public Offering”), the Holder may elect
to: (x) have its principal and accrued interest prepaid directly from the Public Offering Proceeds at the prices set forth above,
or (y) exchange its Note at the closing of the Public Offering for the securities being issued in the Public Offering at the Public
Offering prices based upon the outstanding principal, accrued interest and other charges, or (z) continue to hold the Note. Except
for a Public Offering and Amortization Payments, in order to prepay the Note, the Company shall provide at least 20 days’
prior written notice to the Holder, during which time the Holder may convert the Note in whole or in part at the Conversion Price.
For avoidance of doubt, the Amortization Payments shall be prepayments and are subject to prepayment penalties equal to 115% of
the Amortization payment. In the event the Company consummates a Public Offering while the Notes are outstanding, then 25% of
the net proceeds of such offering shall, within two business days of the closing of such public offering, be applied to reduce
the outstanding obligations pursuant to the Notes.
After
the original issue date until the Note is no longer outstanding, the Notes shall be convertible, in whole or in part, at any time,
and from time to time, into shares of Common Stock at the option of the investor. The “Conversion Price” in effect
on any Conversion Date means, as of any Conversion Date or other date of determination, the lower of: (i) $2.51 per share and
(ii) the price per share paid by investors in the contemplated equity offering of up to $1,000,000. If an Event of Default has
occurred, regardless of whether such Event of Default has been cured or remains ongoing, these Notes shall be convertible at the
lower of: (i) $2.51 and (ii) 70% of the second lowest closing price of the Common Stock as reported on the Trading Market during
the 20 consecutive Trading Day period ending and including the Trading Day immediately preceding the delivery or deemed delivery
of the applicable Notice of Conversion (the “Default Conversion Price”). All such Conversion Price determinations
are to be appropriately adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction
that proportionately decreases or increases the Common Stock.
The
Warrants are exercisable at any time on or after the date of the issuance and entitles the investors to purchase shares of the
Company’s common stock for a period of five years from the initial date the warrants become exercisable. Under the terms
of the Warrant, the investors are entitled to exercise the Warrants to purchase up to 66,401 shares of the Company’s common
stock at an initial exercise price of $3.51, subject to adjustment as detailed in the respective Warrant. The Company calculated
the relative fair value of these warrants in the amount of $82,771 which was added to debt discount and is being amortized over
the term of the notes (See Note 10 under Warrants).
This
Note and related Warrant include a down-round provision under which the Note conversion price and warrant exercise price could
be affected, on a full-ratchet basis, by future equity offerings undertaken by the Company. Subsequent to October 3, 2019, the
Company issued convertible debt with a conversion price of $2.50 per share and accordingly, the convertible debt and warrant down-round
provisions were triggered. As a result, the conversion price and the exercise price was lowered to $2.50 and the number of warrants
was increased to 66,667 warrants.
In
connection with the issuance of the October 3, 2019 Note, the Company determined that various terms of the Note, including the
Stock Payment terms discussed above, caused derivative treatment of the embedded conversion options. On October 3, 2019, the initial
measurement date, the fair values of the embedded conversion option derivative of $123,795 was recorded as derivative liabilities
and was allocated as a debt discount up to the net proceeds of the Notes of $67,229, with the remainder of $56,566 charged to
current period operations as initial derivative expense (See Summary of derivative liabilities below).
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2019 and 2018
At
December 31, 2019, convertible notes payable related to the October 3, 2019 convertible debt amounted to $33,334, which consists
of $166,667 of principal balance due and is net of unamortized debt discount of $133,333.
In
February 2020, due to the default of the February 2020 Amortization Payment, this convertible note was deemed in default. Accordingly,
the outstanding principal balance on date of default increased by 30% which amounted to approximately $50,000, default interest
shall accrue at 18%, and the default conversion terms shall apply.
Other
convertible debt
On
October 14, 2019 and November 7, 2019, the Company entered into convertible note agreements with an accredited investor. Pursuant
to the terms of these convertible note agreements, the Company issued and sold to an investor convertible promissory notes in
the aggregate principal amount of $500,000 and the Company received cash proceeds of $500,000. The Notes bear interest at 10%
per annum. The October 14, 2019 note of $300,000 becomes due and payable on October 14, 2020 and the November 7, 2019 becomes
due and payable on November 7, 2020. Commencing on the seven-month anniversary and continuing each month thereafter through
the maturity date, payments of principal and interest shall made in accordance with the respective amortization schedule.
During the existence of an Event of Default, interest shall accrue at the lesser of (i) the rate of 18% per annum, or (ii) the
maximum amount permitted by law. Commencing on the seventh month anniversary of each respective note, monthly payments of interest
and monthly principal payments shall be due and payable, until the Maturity Date, at which time all outstanding principal, accrued
and unpaid interest and all other amounts due and payable hereunder shall be immediately due and payable.
At
any time after issuance, the Company shall have the right to prepay in cash all or a portion of the outstanding principal due
under this note. The Company shall provide the Holder with written notice at least twenty business days prior to the date on which
the Company shall be delivering payment of accrued interest and all or a portion, in $100,000 increments, of the principal.
After
the original issue date until the Note is no longer outstanding, the Notes shall be convertible, in whole or in part, at any time,
and from time to time, into shares of Common Stock at the option of the investor. The “Conversion Price” in effect
on any Conversion Date means, as of any Conversion Date or other date of determination, the lower of: (i) $2.50 per share and
(ii) the twenty day per share closing trading price of the Company’s common stock during the twenty trading days that close
with the last previous trading day ended three days prior to the date of exercise.
In
connection with the issuance of these convertible notes, the Company determined that various terms of the Notes, including the
Stock Payment terms discussed above, caused derivative treatment of the embedded conversion options. On the date of each respective
Note, the initial measurement date, the aggregate fair values of the embedded conversion option derivative of $328,638 was recorded
as derivative liabilities and was allocated as a debt discount up to the net proceeds of the Notes of $328,638 (See Summary of
derivative liabilities below).
At
December 31, 2019, convertible notes payable related to these convertible notes amounted to $233,600, which consists of $500,000
of principal balance due and is net of unamortized debt discount of $266,400.
In
May 2020, due to the non-payment of the May 2020 Amortization Payment, these convertible notes were deemed in default.
Summary
of derivative liabilities
On
January 1, 2019, the Company adopted ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from
Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with
Down Round Features, and the Company elected to record the effect of this adoption retrospectively to outstanding financial
instruments with a down round feature by means of a cumulative-effect adjustment to the consolidated balance sheet as of the beginning
of 2019, the period which the amendment is effective. 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 reduced derivative liabilities
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. (See Red Diamond Partners LLC and RDW Capital, LLC above).
Through
April 9, 2019, the Company revalued the embedded conversion option and warrant derivative liabilities related to the RedDiamond
and Bellridge debt. In connection with these revaluations, the Company recorded derivative expense of $55,037,605 for the year
ended December 31, 2019. Additionally, in connections with the RedDiamond and Bellridge debt modifications and warrants cancellations
discussed above, on the Modification Dates or repayment dates, for the year ended December 31, 2019, the Company reduced derivative
liabilities by $61,841,708 (see Note 13 – Debt Extinguishment).
In
connection with the issuance of the August 30, 2019 Notes, the Company determined that various terms of the Note, including the
Stock Payment terms discussed above, caused derivative treatment of the embedded conversion options. Accordingly, under the provisions
of ASC 815-40 - Derivatives and Hedging – Contracts in an Entity’s Own Stock, the embedded conversion option
contained in the convertible instrument were accounted for as derivative liability at the date of issuance and shall be adjusted
to fair value through earnings at each reporting date. The fair value of the embedded conversion option derivatives was determined
using the Binomial valuation model. At the end of each period and on the date that debt is converted into common shares, the Company
revalues the embedded conversion option derivative liabilities. In connection with the issuance of this Note, during the year
ended December 31, 2019, on the initial measurement date, the fair values of the embedded conversion option derivative of $1,953,968
was recorded as derivative liabilities and was allocated as a debt discount up to the net proceeds of the Notes of $936,645, with
the remainder of $1,017,323 charged to current period operations as initial derivative expense. At the end of the period, the
Company revalued this embedded conversion option derivative liability and recorded a derivative gain of $240,783. In connection
with the revaluation and the initial derivative expense, the Company recorded an aggregate derivative expense of $776,540 during
the year ended December 31, 2019.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2019 and 2018
In
connection with the issuance of the October 3, 2019 Notes, the Company determined that various terms of the Note, including the
Stock Payment terms discussed above, caused derivative treatment of the embedded conversion options. Accordingly, under the provisions
of ASC 815-40 - Derivatives and Hedging – Contracts in an Entity’s Own Stock, the embedded conversion option
contained in the convertible instrument were accounted for as derivative liability at the date of issuance and shall be adjusted
to fair value through earnings at each reporting date. The fair value of the embedded conversion option derivatives was determined
using the Binomial valuation model. At the end of each period and on the date that debt is converted into common shares, the Company
revalues the embedded conversion option derivative liabilities. In connection with the issuance of this Note, during the year
ended December 31, 2019, on the initial measurement date, the fair values of the embedded conversion option derivative of $123,795
was recorded as derivative liabilities and was allocated as a debt discount up to the net proceeds of the Notes of $67,229, with
the remainder of $56,566 charged to current period operations as initial derivative expense. At the end of the period, the Company
revalued this embedded conversion option derivative liability and recorded a derivative gain of $8,648. In connection with the
revaluation and the initial derivative expense, the Company recorded an aggregate derivative expense of $47,918 during the year
ended December 31, 2019.
In
connection with the issuance of the October 14, 2019 and November 7, 2019 Notes, the Company determined that various terms of
the Notes, including the Stock Payment terms discussed above, caused derivative treatment of the embedded conversion options.
Accordingly, under the provisions of ASC 815-40 - Derivatives and Hedging – Contracts in an Entity’s Own Stock,
the embedded conversion option contained in the convertible instrument were accounted for as derivative liability at the date
of issuance and shall be adjusted to fair value through earnings at each reporting date. The fair value of the embedded conversion
option derivatives was determined using the Binomial valuation model. At the end of each period and on the date that debt is converted
into common shares, the Company revalues the embedded conversion option derivative liabilities. On the date of each respective
Note, the initial measurement date, the aggregate fair values of the embedded conversion option derivative of $328,638 was recorded
as derivative liabilities and was allocated as a debt discount up to the net proceeds of the Notes of $328,638. At the end of
the period, the Company revalued this embedded conversion option derivative liability and recorded a derivative gain of $21,031.
In connection with the revaluation and the initial derivative expense, the Company recorded an aggregate derivative gain of $21,031
during the year ended December 31, 2019.
In
connection with these revaluations and the initial derivative expense, the Company recorded aggregate derivative expense of $55,841,032
and $5,799,282 for the years ended December 31, 2019 and 2018, respectively.
During
the year ended December 31, 2019 and 2018, the fair value of the derivative liabilities, warrants and conversion option was estimated
using the Black-Sholes valuation model, Binomial valuation model, and the Monte-Carlo simulation model with the following assumptions:
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|
|
2019
|
|
|
|
2018
|
|
Expected
dividend rate
|
|
|
-
|
|
|
|
-
|
|
Expected
term (in years)
|
|
|
0.05
to 5.00
|
|
|
|
0.01
to 2.00
|
|
Volatility
|
|
|
127.5%
to 228.7
|
%
|
|
|
261.2%
to 307.7
|
%
|
Risk-free
interest rate
|
|
|
1.39%
to 2.40
|
%
|
|
|
1.32%
to 2.63
|
%
|
At
December 31, 2019 and 2018, convertible promissory notes are as follows:
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
Principal
amount
|
|
$
|
5,459,909
|
|
|
$
|
3,007,503
|
|
Add:
Put premium
|
|
|
385.385
|
|
|
|
-
|
|
Less:
unamortized debt discount
|
|
|
(2,210,950
|
)
|
|
|
(1,595,627
|
)
|
Convertible
notes payable, net
|
|
|
3,634,344
|
|
|
|
1,411,876
|
|
Less:
current portion of convertible notes payable
|
|
|
(3,634,344
|
)
|
|
|
(1,411,876
|
)
|
Convertible
notes payable, net – long-term
|
|
$
|
-
|
|
|
$
|
-
|
|
For
the years ended December 31, 2019 and 2018, amortization of debt discounts related to convertible notes amounted to $1,184,463
and $1,139,259, respectively, which has been included in interest expense on the accompanying consolidated statements of operations.
The weighted average interest rate during the year ended December 31, 2019 and 2018 was approximately 8.5% and 21.2%, respectively.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2019 and 2018
NOTE
9 – NOTES PAYABLE
Secured
merchant loans
In
connection with the acquisition of Prime (See Note 3), the Company assumed several notes payable liabilities amounting to $944,281
pursuant to secured merchant agreements (the “Assumed Secured Merchant Loans”). Pursuant to the Assumed Secured Merchant
Loans, the Company is required to repay the noteholders by making daily payments on each business day or on demand payments until
the loan amounts are paid in full. Each payment is deducted directly from the Company’s bank accounts. The Assumed Secured
Merchant Loans are secured by the assets of Prime, and are personally guaranteed by the former majority member of Prime. During
the period from acquisition date of Prime (June 18, 2018) to December 31, 2018, the Company repaid $786,330 of these notes. 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
years ended December 31, 2019, the Company repaid $86,259 of these notes. At December 31, 2019 and 2018, notes payable related
to Assumed Secured Merchant Loans and a new promissory note amounted to $98,592 and $157,951, respectively. In connection with
the January 2019 promissory note, the Company issued 1,000 warrants to purchase 1,000 shares of the Company’s common stock
at an exercise price of $1.00 per share. The warrant is exercisable over a five-year period.
On
September 20, 2018, the Company entered into a secured Merchant Loan with a lender in the amount of $521,250 and received net
proceeds of $375,000, net of original issue discount of $146,250. Pursuant to this Secured Merchant Loan, the Company repaid the
noteholders by making daily payments of $3,724 on each business day which was deducted directly from the Company’s bank
accounts. On January 14, 2019, the Company entered into a new secured Merchant Loan with this lender in the amount of $764,500.
The Company simultaneously repaid the September 20, 2018 loan which had a remaining principal balance of $223,329, paid an origination
fee of $10,034 and received net proceeds of $316,637, net of original issue discount of $214,500. Pursuant to this Secured Merchant
Loan, the Company repaid the noteholders by making daily payments of $6,371 on each business day which was deducted directly from
the Company’s bank account. On January 24, 2019, the Company entered into another secured Merchant Loan with this lender
in the amount of $417,000. The Company simultaneously paid an origination fee of $7,998 and received net proceeds of $292,002,
net of original issue discount of $117,000. Pursuant to this Secured Merchant Loan, the Company repaid the noteholders by making
daily payments of $3,972 on each business day which was deducted directly from the Company’s bank account. On May 8, 2019,
the Company entered into another secured Merchant Loan with this merchant in the principal amount of $1,242,000. The Company simultaneously
repaid prior loans of $362,961 which were entered into during January 2019, paid origination fees totaling $9,000 and paid an
original issue discount of $342,000, and received net proceeds of $528,039. Pursuant to this secured Merchant Loan, the Company
repaid the noteholder by making daily payments of $10,265 on each business day which deducted from the Company’s bank account.
During the year ended December 31, 2019, the Company repaid an aggregate of $2,511,456 of the loans and on August 28, 2019, the
remaining note balance of $184,750 was converted into a new Note. Pursuant to the new Note, the Company shall pay the lender in
twelve monthly installments of $17,705 beginning on November 25, 2019 to the maturity date of November 25, 2020. The new Note
shall bear interest at 15% per annum. These Secured Merchant Loans are secured by the Company’s assets and are personally
guaranteed by the former majority member of Prime. At December 31, 2019 and 2018, notes payable and secured merchant notes payable
related to the new Note and Secured Merchant Loans amounted to $176,339 and $190,125, which is net of unamortized debt discount
of $0 and $74,169, respectively.
On
October 1, 2018, the Company entered into a secured Merchant Loan in the amount of $209,850 and received net proceeds of $137,962,
net of original issue discount of $59,850 and net of origination fees of $12,038. Pursuant to this Secured Merchant Loan, the
Company is required to repay the noteholders by making daily payments of $1,749 on each business day until the loan 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 loan 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 period from October 1, 2018 to December
31, 2018, the Company repaid $169,653 of these notes. During the year ended December 31, 2019, the Company repaid the remaining
principal balance of these notes of $180,097. At December 31, 2019 and 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 CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2019 and 2018
On
October 12, 2018, the Company entered into a secured Merchant Loan with a lender in the amount of $420,000. The Company simultaneously
repaid a prior loan of $31,634, paid an origination fee of $10,500 and received net proceeds of $254,552, net of original issue
discount of $123,314. Pursuant to this Secured Merchant Loan, the Company repaid the noteholder by making daily payments of $3,000
on each business which was deducted directly from the Company’s bank accounts. On January 28, 2019, the Company entered
into a new secured Merchant Loan with this lender in the amount of $759,000 and received net cash of $315,097 after paying origination
fee of $25,750, an original issue discount of $209,000, and the repayment of October 12, 2018 remaining loan and interest due
to this lender of $209,153. Pursuant to this Secured Merchant Loan, the Company repaid the noteholders by making daily payments
of $4,897 on each business day which was deducted directly from the Company’s bank account. On September 2, 2019, the Company
repaid the remaining note payable. These Secured Merchant Loans were secured by the Company’s assets and were personally
guaranteed by the former majority member of Prime. At December 31, 2019 and 2018, note payable related to these Secured Merchant
Loans amounted to $0 and $171,752, which is net of unamortized debt discount of $0 and $86,248, respectively.
From
February 25, 2019 to March 6, 2019, the Company entered into four secured Merchant Loans in the aggregate amount of $1,199,200.
The Company simultaneously repaid prior loans of $69,327 which were entered into during October 2018, paid origination fees totaling
$78,286 and received net proceeds of $652,387, net of original issue discounts of $399,200. Pursuant to these four secured Merchant
Loans, the Company was required to pay the noteholders by making daily payments aggregating $11,993 on each business day until
the loan amounts were paid in full. Each payment was deducted from the Company’s bank account. On April 10, 2019, the Company
paid off these secured Merchant Loans in full by paying an aggregate amount of $703,899.
On
April 17, 2019, the Company entered into a secured Merchant Loan in the principal amount of $650,000 and received net proceeds
of $500,000, net of original issue discounts of $150,000. Pursuant to this secured Merchant Loan, the Company is required to pay
the noteholders by making three monthly installments of $216,667 beginning in June 2019 to August 2019. During the year ended
December 31, 2019, the Company repaid this Secured Merchant Loan. At December 31, 2019, notes payable related to this Secured
Merchant Loan amounted to $0.
From
May 21, 2019 to July 16, 2019, the Company entered into several secured Merchant Loans in the aggregate amount of $2,099,500.
The Company received net proceeds of $1,285,000, net of original issue discounts and origination fees of $814,500. Pursuant to
these several secured Merchant Loans, the Company was required to pay the noteholders by making daily payments aggregating $27,498
on each business day until the loan amounts were paid in full. Each payment was deducted from the Company’s bank account.
During the year ended December 31, 2019, the Company repaid an aggregate of $1,854,642 of the loans and on August 28, 2019, the
remaining note balances of $261,630 were converted into new notes payable. At December 31, 2019, notes payable related to these
new notes amounted to $244,858, which is net of unamortized debt discount of $0.
From
June 19, 2019 to July 30, 2019, the Company entered into two secured Merchant Loans in the aggregate amount of $1,011,825. The
Company received net proceeds of $630,000, net of original issue discounts and origination fees of $381,825. Pursuant to these
two secured Merchant Loans, the Company was required to pay the noteholders by making daily payments aggregating $8,000 on each
business day and a weekly payment of $28,500 until the loan amounts were paid in full. Each payment was deducted from the Company’s
bank account. During the year ended December 31, 2019, the Company repaid an aggregate of $764,209 of the loans and on August
28, 2019, the remaining note balances of $247,616 were converted into new convertible notes payable. In connection with these
new convertible notes, the Company recorded a debt discount of $24,762. (See Note 8).
From
November 22, 2019 to December 31, 2019, the Company entered into several secured Merchant Loans in the aggregate amount of $2,283,540.
The Company received net proceeds of $1,355,986, net of original issue discounts and origination fees of $927,554. Pursuant to
these several secured Merchant Loans, the Company was required to pay the noteholders by making daily and/or weekly payments on
each business day or week until the loan amounts were paid in full. Each payment was deducted from the Company’s bank account.
During the year ended December 31, 2019, the Company repaid an aggregate of $464,344 of the loans. At December 31, 2019, notes
payable related to these secured merchant loans amounted to $1,057,074, which consists of $1,819,196 of principal balance due
and is net of unamortized debt discount of $762,122.
Promissory
notes
In
connection with the acquisition of Prime (See Note 3), the Company assumed several notes payable liabilities due to former members
of Prime amounting to $459,750 (the “Member Notes”). The Member Notes have effective interest rates ranging from 7%
to 10%, and are unsecured. During the period from acquisition date of Prime (June 18, 2018) to December 31, 2018, the Company
repaid $459,750 of these notes. At December 31, 2018, notes payable related to former Member Notes amounted to $0.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2019 and 2018
In
connection with the acquisition of Prime (See Note 3), 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 period from acquisition date of Prime (June 18, 2018) to December 31, 2018, the Company borrowed
an addition $50,000 and repaid $217,005 of these notes. During the year ended December 31, 2019, the Company repaid $25,000 of
these notes and $40,000 of these notes was rolled into a new note. In August 2019, the Company issued 12,455 shares of its common
stock and 12,455 five year warrants exercisable at $2.50 per share for the conversion of notes payable of $25,000 and accrued
interest of $6,137. At December 31, 2019 and 2018, notes payable to these entities or individuals amounted to $40,000 and $130,000,
respectively.
On
August 1, 2018, the Company entered into a 10% Original Discount Senior Secured Demand Promissory Note with an investor. Pursuant
to this promissory note, the Company borrowed $165,000 and received net proceeds of $150,000. The promissory note is payable on
demand at any time prior to December 31, 2018. The promissory note was secured by the Company’s assets. On August 20, 2018,
the Company repaid this promissory note of $165,000. Additionally, from October 31, 2018 to December 31, 2018, the Company entered
into additional Original Discount Senior Secured Demand Promissory Notes with an investor (the “Promissory Note”).
Pursuant to the Promissory Notes, the Company borrowed an aggregate of $770,000 and received net proceeds of $699,955, net of
original issue discount of $70,000 and fees of $45. In December 2018, the Company repaid $220,000 of these promissory notes. During
the year ended December 31, 2019, the Company repaid $437,532 of these notes and interest due of $36,760 was reclassified to principal
amount due. At December 31, 2019 and 2018, notes payable to this entity amounted to $149,228 and $505,945, which is net of unamortized
debt discount of $0 and $44,055, respectively. The remaining notes are payable on demand. These promissory notes are secured by
the Company’s assets.
In
October 2018, the Company entered into a promissory note with an individual totaling $110,000 and received net proceeds of $10,000,
net of original issue discount of $10,000. In December 2018, the Company repaid this note.
From
November 2018 to December 2018, the Company entered into separate promissory notes with two individual totaling $215,000 and received
net proceeds of $200,000, net of original issue discounts of $15,000. In December 2018, the Company repaid these loans.
During
the year ended December 31, 2019, the Company entered into separate promissory notes with several individuals totaling $2,517,150,
including $40,000 of a previous note rolled into these new notes, and received net proceeds of $2,238,900, net of original issue
discounts of $238,250. These Notes were due between 45 and 273 days from the respective Note date. In connection with these promissory
notes, the Company issued 58,000 warrants to purchase 58,000 shares of the Company’s common stock at an exercise price of
$1.00 per share. The warrants are exercisable over a five-year period. During the year ended December 31, 2019, the Company repaid
$1,118,400 of these notes. Additionally, during the year ended December 31, 2019, the Company issued 439,623 shares of its common
stock and 439,623 five year warrants exercisable at $2.50 per share upon conversion of notes payable of $978,750 and accrued interest
of $120,307 at a conversion price of $2.50 per share. Since the conversion price of $2.50 was equal to the fair value of the shares
as determined by recent sales of the Company’s common shares, no beneficial feature conversion was recorded. At December
31, 2019, notes payable to these individuals amounted to $342,500, which is net of debt discount of $0.
During
March 2019 and August 2019, the Company entered into three separate promissory notes with an entity totaling $220,000 and received
net proceeds of $200,000, net of original issue discounts of $20,000. During the year ended December 31, 2019, the Company repaid
$220,000 of these promissory notes and at December 31, 2019, notes payable to this entity amounted to $0.
Equipment
and auto notes payable
In
connection with the acquisition of Prime (See Note 3), the Company assumed several equipment notes payable liabilities due to
entities amounting to $523,207 (the “Equipment Notes”). These Equipment Notes have effective interest rates ranging
from 6.0% to 9.4%, and are secured by the underlying van or trucks. During the period from acquisition date of Prime (June 18,
2018) to December 31, 2018, the Company borrowed funds pursuant to Equipment Note agreements of $135,845, repaid $113,830 of these
Equipment Notes, and reduce Equipment Notes by $56,933 related to the trade in of certain vans. During the year ended December
31, 2019, the Company returned or abandoned trucks and reduced equipment notes payable by $292,778. Additionally, during the year
ended December 31, 2019, the Company repaid $138,510 of these notes. At December 31, 2019 and 2018, equipment notes payable to
these entities amounted to $57,001 and $488,289, respectively.
During
the years ended December 31, 2019 and 2018, the Company entered into auto financing agreements in the amount of $44,905 and $162,868,
respectively. During the years ended December 31, 2019 and 2018, the Company repaid $24,030 and $1,832 of these notes, respectively.
At December 31, 2019 and 2018, auto notes payable to these entities amounted to $181,911 and $161,036, respectively.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2019 and 2018
At
December 31, 2019 and 2018, notes payable consisted of the following:
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
Principal amounts
|
|
$
|
3,187,125
|
|
|
$
|
2,189,666
|
|
Less: unamortized debt discount
|
|
|
(762,122
|
)
|
|
|
(255,843
|
)
|
Principal amounts, net
|
|
|
2,425,003
|
|
|
|
1,933,823
|
|
Less: current portion of notes payable
|
|
|
(2,425,003
|
)
|
|
|
(1,509,804
|
)
|
Notes payable – long-term
|
|
$
|
-
|
|
|
$
|
424,019
|
|
For
the years ended December 31, 2019 and 2018, amortization of debt discounts related to notes payable amounted to $3,351,903 and
$327,588, respectively, which has been included in interest expense on the accompanying consolidated statements of operations.
NOTE
10– STOCKHOLDERS’ DEFICIT
Preferred
stock
Series
A preferred stock
The
Company increased its authorized preferred shares to 10,000,000 shares in July 2018.
Preferred
stock of 4,000,000 shares is designated Series A Convertible Preferred Stock. Each share of Series A preferred stock has a par
value of $0.001 and a stated value of $1.00. Dividends are payable on Series A preferred shares at the rate per share of 7% per
annum cumulative based on the stated value. The Series A preferred shares have no voting rights, except as required by law. Each
share of preferred stock is convertible based on the stated value at a conversion price of $20.83 at the option of the holder;
provided, however, if a triggering event occurs, as defined in the document, the conversion price shall thereafter be reduced,
and only reduced, to equal forty percent of the lowest VWAP during the thirty consecutive trading day period prior to the conversion
date.
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.
Series
B preferred stock
In
August 2019, the Company designated Series B Preferred Shares consisting of 1,700,000 shares with a par value of $0.001 and a
stated value of $0.001. The Series B preferred shares have no voting rights and are not redeemable. Each share of Series B Preferred
stock is convertible into one share of common stock at the option of the holder subject to beneficial ownership limitation.
On
August 16, 2019, the Company issued 1,000,000 Series B preferred shares for services rendered to the former member of Prime EFS
who is considered a related party. The shares were valued at $2.50 per shares on an as if converted basis to common shares based
on recent sales of the Company’s common stock of $2.50 per share. In connection with the issuance of these Series B Preferred
shares, the Company recorded stock-based compensation of $2,500,000.
On
August 16, 2019, the Company issued 700,000 shares of Series B Preferred shares upon settlement of 700,000 shares of issuable
common shares as discussed below in “Shares issued in connection with debt modification”.
Common
stock
Common
stock issued for acquisition
In
connection with the acquisition in 2018 (See Note 3), the Company issued 1,500,000 shares of its common stock valued at $3,090,000,
or $2.06 per share, the fair value of the Company’s common stock based on the quoted closing price of the Company’s
common stock on the Closing Date.
Common
stock issued as loan fee
In
October 2018, the Company issued 50,000 shares of its common stock to the related party lender in connection with loans made between
July and October 2018. The shares were valued at $100,000, or $2.00 per share, based on the quoted trading price on the date of
grant. In connection with these shares, the Company recorded interest expense – related party of $100,000.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2019 and 2018
Common
stock issued for services
On
June 18, 2018, the Company granted 1,500,000 shares of its common stock to the Company chief executive officer for services rendered.
The shares were valued at $3,090,000, or $2.06 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 $3,090,000.
On
June 18, 2018, the Company granted 600,000 shares of its common stock to two consultants for services rendered. The shares were
valued at $1,236,000, or $2.06 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 $1,236,000.
On
February 25, 2019, the Company granted an aggregate of 2,670,688 shares of its common stock to an executive officer, employees
and consultants of the Company for services rendered. The shares were valued at $2,750,808, or $1.03 per share, based on the quoted
trading price on the date of grant. In connection with these shares, the Company recorded stock-based compensation of $2,750,808.
On
May 1, 2019, the Company granted an aggregate of 30,000 shares of its common stock to consultants for business development and
investor relations services rendered. The shares were valued at $265,500, or $8.85 per share, based on the quoted trading price
on the date of grant. In connection with these shares, the Company recorded stock-based professional fees of $265,500.
On
June 14, 2019, the Company granted 200,000 shares of its common stock to an employee of the Company for services rendered. The
shares were valued at $2,200,000, or $11.00 per share, based on the quoted trading price on the date of grant. In connection with
these shares, the Company recorded stock-based compensation of $2,200,000.
On
July 8, 2019, pursuant to a one-year consulting agreement, the Company agreed to issue 50,000 shares of its common stock to a
consultant for investor relations services to be rendered. These shares were valued at $125,000, or $2.50 per common share, based
on contemporaneous common share sales. 25,000 of these shares will vest on January 8, 2020 and 25,000 shares will vest on July
8, 2020. In connection with these shares, the Company shall record stock-based consulting fees over the vest period of one year.
During the year ended December 31, 2019, aggregate accretion of stock-based professional fees on these granted non-vested shares
amounted to $59,896. Total unrecognized professional fees related to these unvested common shares at December 31, 2019 amounted
to $65,104 which will be amortized over the remaining vesting period. At December 31, 2019, 25,000 shares are reflected as common
stock issuable on the accompanying consolidated balance sheet.
On
October 2, 2019, the Company granted 300,000 shares of its common stock to a former employee for accounting services rendered.
The shares were valued at $750,000, or $2.50 per share, based on contemporaneous common share sales. In connection with these
shares, the Company recorded stock-based compensation of $750,000.
Cancellation
of common shares
On
May 1, 2019, the Company entered into a Share Exchange Agreement with Save On and Steven Yariv, whereby the Company returned all
of the stock of Save On to Steven Yariv in exchange for Mr. Yariv conveying 1,000,000 shares of common stock of the Company back
to the Company and the shares were cancelled. In connection with the disposal of Save On, the Company recorded an increase in
equity of $56,987 related to the amount of net liabilities disposed of in a transaction with the former chief executive officer
of the Company since the CEO was still a related party after this transaction as he remained a principal shareholder (see Note
4).
Shares
issued in connection with debt modification
On
April 9, 2019, the Company entered into an agreement with Bellridge that modified its existing obligations to Bellridge. In connection
with this modification, principal balance of the Bellridge Note was reduced to $1,800,000, in exchange for the issuance to Bellridge
of 800,000 shares of restricted common stock, which shall be delivered to Bellridge, either in whole or in part, at such time
or times as when the beneficial ownership of such shares by Bellridge will not result in Bellridge’s beneficial ownership
of more than the Beneficial Ownership Limitation and such shares will be issued within three business days of the date the Bellridge
has represented to the Company that it is below the Beneficial Ownership Limitation. Such issuances will occur in increments of
no fewer than the lesser of (i) 50,000 shares and (ii) the balance of the 800,000 shares owed. The “Beneficial Ownership
Limitation” shall be 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving
effect to the issuance of shares of common stock issuable pursuant to this Agreement. As of June 30, 2019, 100,000 of these shares
were issued and 700,000 shares were issuable. These 800,000 shares issued and issuable were valued at $10,248,000, or $12.81 per
share, based on the quoted trading price on the date of grant. In connection with these shares, the Company recorded a loss on
debt extinguishment of $10,248,000 (See Note 13 – Debt Extinguishment). On August 16, 2019, the 700,000 shares issuable
were converted into 700,000 shares of Series B preferred shares.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2019 and 2018
In
connection with the Purchase Agreement in 2018 (See Note 8 under Bellridge), the Lender was issued a warrant, with a term of two
years, to purchase up to 4.75% of the fully-diluted outstanding Common Stock of the Company, for an aggregate purchase price of
$100. Additionally, the placement agent was issued a warrant, with a term of two years, to purchase up to 4.75% of the fully-diluted
outstanding Common Stock of the Company, for an aggregate purchase price of $100. Also, on December 27, 2018, the lender waived
any and all defaults in existence on the Note and the Company agreed to issue a warrant that is convertible into 2% of the issued
and outstanding shares existing as the time the Company files a registration statement or makes an application to up list to a
national stock exchange. On April 9, 2019, the Company entered into an agreement with Bellridge and the Placement Agent that cancelled
these warrants in exchange for an aggregate of 600,000 common shares of the Company (360,000 shares to Bellridge and 240,000 shares
to Placement Agent). These shares were valued at $7,686,000, or $12.81 per share, based on the quoted trading price on the date
of grant. In connection with these shares, the Company recorded a loss on debt extinguishment of $7,686,000 (See Note 13 –
Debt Extinguishment).
Sale
of common shares
From
August 2019 to October 2019, the Company issued 619,000 shares of its common stock and 619,000 five-year warrants to purchase
common shares for an exercise price of $2.50 per common share to investors for cash proceeds of $1,547,500, or $2.50 per share,
pursuant to unit subscription agreements.
Shares
issued in connection with conversion of debt
During
the three months ended September 30, 2019, the Company issued 423,711 shares of its common stock and 423,711 warrants at an exercise
price of $2.50 per share in connection with the conversion of notes payable of $946,250 and accrued interest of $113,027 (see
Note 8). These shares were valued at $1,059,277, or $2.50 per common share, based on contemporaneous common share sales. Since
the conversion price of $2.50 was equal to the fair value of the shares as determined by recent sales of the Company’s common
shares, no beneficial feature conversion was recorded.
In
connection with a Note Conversion Agreement dated July 12, 2019, (see Note 12), the Company issued 203,000 shares of its common
stock at $2.50 per share for the conversion of a related party convertible note payable of $500,000 and accrued interest payable
of $7,500. In connection with the conversion of this convertible note, the Company issued the entity warrants to purchase 203,000
shares of the Company’s common stock at an exercise price of $1.81 per share for a period of five years.
In
connection with a Note Conversion Agreement dated July 12, 2019 (see Note 12), the Company issued 812,000 shares of its common
stock at $2.50 per share for the conversion of related party convertible note payable of $2,000,000 and accrued interest payable
of $30,000. In connection with the conversion of this convertible notes, the Company issued the entity warrants to purchase 812,000
shares of the Company’s common stock at an exercise price of $2.50 per share for a period of five years.
In
connection with the modification of the related convertible notes, the Company changed the conversion price of the notes to $2.50
per share and issued an aggregate if 1,015,000 warrants as discussed above. The Company accounted for the full conversion of these
related party convertible notes pursuant to the guidance of ASC 470-20, Debt with Conversion and Other Options. Under ASC
470-20, the Company recognized a aggregate loss on debt extinguishment upon conversion in the amount of $3,669,367 of which $1,164,220
is associated with the change between the debt’s original conversion terms and the induced conversion terms and is equal
to the fair value of the additional shares of common stock transferred in the transaction, and $2,505,147 association with the
valuation of the 1,015,000 warrants (see Note 13 – Debt Extinguishment).
On
October 1, 2019, the Company issued 28,367 shares of its common stock and 28,367 warrants at an exercise price of $2.50 per share
in connection with the conversion of notes payable of $57,500 and accrued interest of $13,417 (see Note 9). These shares were
valued at $70,917, or $2.50 per common share, based on contemporaneous common share sales. Since the conversion price of $2.50
was equal to the fair value of the shares as determined by recent sales of the Company’s common shares, no beneficial feature
conversion was recorded.
Stock
options
In
connection the disposal of Save On, on May 1, 2019, the Company granted an aggregate of 80,000 options to certain employees of
Save On. The options are exercisable at $8.85 per share for a period of five years. 25% of the options vest on January 1, 2020
and 25% shall vest annually thereafter. On May 1, 2019, the Company calculated the fair value of these options of $700,816 which
was calculated using the Black-Sholes option pricing model with the following assumptions: expected dividend rate, 0%; expected
term of 5 years; volatility of 228.1% and risk-free interest rate of 2.31%. During the year ended December 31, 2019, the Company
recorded stock-based compensation of $700,816 related to these options which has been included in loss from discontinued operations
on the accompany statement of operations.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2019 and 2018
Stock
option activities for the year ended December 31, 2019 are summarized as follows:
|
|
Number
of Options
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term (Years)
|
|
|
Aggregate
Intrinsic Value
|
|
Balance Outstanding
December 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
80,000
|
|
|
|
8.84
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Balance
Outstanding December 31, 2019
|
|
|
80,000
|
|
|
$
|
8.84
|
|
|
|
4.33
|
|
|
$
|
0
|
|
Exercisable,
December 31, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Warrants
Warrants
issued in connection with debt
In
connection with several promissory notes payable (see Note 9), during the year ended December 31, 2019, the Company issued 59,000
warrants to purchase 59,000 shares of common at an exercise price of $1.00 per share. During the year ended December 31, 2019,
the Company calculated the relative fair value of these warrants of $135,324 which was amortized into interest expense over the
loan terms and was estimated using the Binomial valuation model with the following assumptions: expected dividend rate, 0%; expected
term (in years), 5 years; volatility of 228.1% and risk-free interest rate ranging from 2.28% to 2.40%.
In
connection with previous promissory notes payable (see Note 9), on June 11, 2019, the Company issued 55,000 warrants to purchase
55,000 shares of common at an exercise price of $1.00 per share. On June 11, 2019, the Company calculated the fair value of these
warrants of $601,121 which was expensed and included in loan fees on the accompanying consolidated statement of operations. The
fair value of these warrants was estimated using the Binomial valuation model with the following assumptions: expected dividend
rate, 0%; expected term (in years), 5 years; volatility of 228.1% and risk-free interest rate of 1.92%.
Relative
fair value of warrants issued in connection with convertible debt
On
August 30, 2019, the Company closed Securities Purchase Agreements with accredited investors. Pursuant to the terms of the Purchase
Agreements, the Company issued warrants to purchase up to 987,940 shares of the Company’s common stock (See Note 8). The
Warrants are exercisable at any time on or after the date of the issuance and entitles the investors to purchase shares of the
Company’s common stock for a period of five years from the initial date the warrants become exercisable. Under the terms
of the Warrant, the investors are entitled to exercise the Warrants to purchase up to 987,940 shares of the Company’s common
stock at an initial exercise price of $3.50, subject to adjustment as detailed in the respective Warrant. These Warrants include
a down-round provision under which the warrant exercise price could be affected, on a full-ratchet basis, by future equity offerings
undertaken by the Company. The Company calculated the relative fair value of these warrants in the amount of $1,225,109 which
was added to debt discount and will be amortized over the term of the notes (see Note 8). The fair value of these warrants was
estimated using the Binomial valuation model with the assumptions as outlined in Note 8. On September 6, 2019, the Company sold
its common shares at $2.50 per share and accordingly, the warrant down-round provisions were triggered. As a result, the number
of warrants was increased by 395,176 to 1,383,116 warrants and the exercise price was lowered to $2.50. As a result, the Company
recorded a deemed dividend of $981,548 which represents the fair value transferred to the Warrant holders from the Down Round
feature being triggered. The Company calculated the difference between the warrants fair value on the date the down round feature
was triggered using the original exercise price and the new exercise price and the new number of warrants. The deemed dividend
was recorded as a reduction of accumulated deficit and increase in paid-in capital and increased the net loss to common shareholders
by the same amount.
On
October 3, 2019, the Company closed Securities Purchase Agreements with an accredited investor. Pursuant to the terms of the Purchase
Agreement, the Company issued warrants to purchase up to 66,667 shares of the Company’s common stock (See Note 8). The Warrants
are exercisable at any time on or after the date of the issuance and entitles the investor to purchase shares of the Company’s
common stock for a period of five years from the initial date the warrants become exercisable. Under the terms of the Warrant,
the investor is entitled to exercise the Warrants to purchase up to 66,667 shares of the Company’s common stock at a current
exercise price of $2.50, subject to adjustment as detailed in the Warrant. This Warrant includes a down-round provision under
which the warrant exercise price could be affected, on a full-ratchet basis, by future equity offerings undertaken by the Company.
The Company calculated the relative fair value of these warrants in the amount of $82,771 which was added to debt discount and
will be amortized over the term of the note (see Note 8). The fair value of these warrants was estimated using the Binomial valuation
model with the assumptions as outlined in Note 8.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2019 and 2018
Warrants
issued in connection with sale of common stock
From
August 2019 and October 2019, in connection with the sale of 619,000 shares of its common stock, the Company issued 619,000 five-year
warrants to purchase common shares for an exercise price of $2.50 per common share to investors.
Warrants
issued in connection with debt conversion
During
the three months ended September 30, 2019, in connection with the conversion of notes payable and accrued interest (see Note 9),
the Company issued 423,711 five-year warrants to purchase 423,711 shares of common stock at an exercise price of $2.50 per share.
The Company calculated the fair value of these warrants of $1,045,384 which was expensed and included in gain (loss) on debt extinguishment
on the accompanying consolidated statement of operations (see Note 13 – Debt Extinguishment). The fair value of these warrants
was estimated using the Binomial valuation model with the assumptions as outlined in Note 8.
During
the three months ended September 30, 2019, in connection with the conversion of related party convertible notes payable (see Note
13), the Company issued 1,015,000 five-year warrants to purchase 1,015,000 shares of common stock at an exercise price of $2.50
per share. The Company calculated the fair value of these warrants of $2,505,147 which was expensed and included in gain (loss)
on debt extinguishment on the accompanying consolidated statement of operations. The fair value of these warrants was estimated
using the Binomial valuation model with the assumptions as outlined in Note 8.
On
October 1, 2019, in connection with the conversion of a note payable and accrued interest (see Note 9), the Company issued 28,367
five-year warrants to purchase 28,367 shares of common stock at an exercise price of $2.50 per share. The Company calculated the
fair value of these warrants of $69,967 which was expensed and included in gain (loss) on debt extinguishment on the accompanying
consolidated statement of operations. The fair value of these warrants was estimated using the Binomial valuation model with the
assumptions as outlined in Note 8.
Warrant
activities for the year ended December 31, 2019 and 2018 are summarized as follows:
|
|
Number
of Warrants
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term (Years)
|
|
|
Aggregate
Intrinsic Value
|
|
Balance Outstanding December 31, 2017
|
|
-
|
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
Granted
|
|
|
1,648,570
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
Balance Outstanding December 31, 2018
|
|
|
1,648,570
|
|
|
|
0.00
|
|
|
|
1.47
|
|
|
|
|
|
Granted
|
|
|
3,254,685
|
|
|
|
2.40
|
|
|
|
|
|
|
|
|
|
Cancellations
|
|
|
(1,421,059
|
)
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
Increase in warrants related to price
protection
|
|
|
395,176
|
|
|
|
2.50
|
|
|
|
|
|
|
|
|
|
Change in warrants
related to dilutive rights
|
|
|
(227,511
|
)
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
Balance Outstanding December 31,
2019
|
|
|
3,649,861
|
|
|
$
|
2.41
|
|
|
|
4.66
|
|
|
$
|
311,070
|
|
Exercisable, December 31, 2019
|
|
|
3,649,861
|
|
|
$
|
2.41
|
|
|
|
4.66
|
|
|
$
|
311,070
|
|
NOTE
11 – 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.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2019 and 2018
Legal
matters
From
time to time, we may be involved in litigation relating to claims arising out of our operation in the normal course of business.
Elrac
LLC v. Prime EFS
On
or about January 10, 2020, the Company was named as sole defendant in a civil action captioned Elrac LLC v. Prime EFS, filed
in the United States District Court for the Eastern District of New York, assigned Case No. 1 :20-cv-00211 (the “Elrac Action”).
The complaint in the Elrac Action alleged that Prime failed to pay in full for repairs allegedly required by reason of property
damage to delivery vehicles leased by Prime from Elrac to conduct its business. The complaint sought damages of not less than
$382,000 plus $58,000 in insurance claims that Elrac believes were collected by the Company and not reimbursed to Elrac. Elrac
subsequently moved for a default judgment against Prime. By letter to the court dated March 9, 2020, Prime opposed entry of a
default judgment and contended that all claims in the Elrac Action were subject to mandatory arbitration clauses found in the
individual lease agreements. On March 19, 2020, Elrac filed a stipulation dismissing the Elrac Action without prejudice and advised
Prime that it intends to file an arbitration at the American Arbitration Association alleging essentially identical claims. Elrac
now claims it is owed not $382,000 but $240,000. To date, Elrac has not filed an arbitration against Prime. In the event the arbitration
is filed, Prime will contest the case vigorously and assert counterclaims. Although the parties are currently exchanging information,
the matter is in a preliminary stage and it is not possible to evaluate the likelihood of a favorable or unfavorable outcome,
nor is it possible to estimate the amount or range of any potential loss in the matter. Accordingly, as of December 31, 2019,
the Company has reflected a liability of $440,000, the amount due under the default judgment, which has been included in contingency
liability on the accompanying consolidated balance sheet.
BMF
Capital v. Prime EFS LLC et al.
The
Company is aware of a settlement agreement made and entered into as of March 6, 2020, under which Prime and certain related entities
agreed to pay BMF Capital $275,000 on or by March 11, 2020, inter alia to discharge a convertible note, to cancel certain
Warrants on 40,300 shares of TLSS Common Stock, and to settle certain claims made by BMF Capital under certain merchant cash advance
agreements (MCAs) whereby BMF purchased specified percentages of Prime’s total future accounts receivable up to certain
agreed upon amounts in exchange for an upfront purchase price. Prime did not pay a portion of the agreed $275,000 settlement amount
by March 11, 2020 but the Company has subsequently paid the $275,000 in full. Under the March 6, 2020 settlement agreement, BMF
could make claim for additional amounts and/or for recognition of the common stock warrants but to date it has not done so. In
the event BMF pursues such a claim against Prime, Prime will contest the case vigorously. Since no such claim has in fact been
filed in court, but merely threatened, it is not possible to evaluate the likelihood of a favorable or unfavorable outcome, nor
is it possible to estimate the amount or range of any potential loss in the matter. However, it appears that the value of any
such claim is under $10,000.
Bellridge
Capital, L.P. and SCS, LLC v. TLSS
Currently,
the Company is in an ongoing dispute between the Company and two investors in the Company, namely Bellridge and SCS, LLC (“SCS”).
Among other things, Bellridge claims that the Company is in breach of its obligations under an August 29, 2019 letter agreement
to issue a confession of judgment and to pay Bellridge $150,000 per month against the amounts due under, inter alia, an
April 2019 promissory note. In an April 28, 2020 letter, Bellridge contends that TLSS owed Bellridge $1,978,557.76 as of that
date. In a purported standstill agreement subsequently proposed by Bellridge, Bellridge claims TLSS owes it $2,271,099.83, a figure
which allegedly includes default rate interest. Bellridge also claims that a subordination agreement it signed with the Company
on August 30, 2019, was void ab initio. Bellridge has also demanded the conversion of approximately $20,000 in indebtedness
into the common stock of the Company, a conversion which the Company has not effectuated because the parties did not come to agreement
on a conversion price. Such agreement is required for Bellridge to exercise its conversion rights under an agreement dated April
9, 2019 between Bellridge and the Company. SCS alleges it was induced by fraud to exchange two million shares of Company preferred
stock for Company common stock and was damaged thereby. The Company is currently in discussions with Bellridge, SCS and the Company’s
senior secured lenders to see whether this dispute can be amicably resolved. In the event Bellridge and/or SCS pursues the above
claims against the Company, the Company will contest the case vigorously. Since no such claims have in fact been filed in court,
but merely threatened, it is not possible to evaluate the likelihood of a favorable or unfavorable outcome, nor is it possible
to estimate the amount or range of any potential loss in the matter.
Other
than discussed above, as of December 31, 2019, there were no pending or threatened lawsuits that could reasonably be expected
to have a material effect on results of our operations.
Leases
See
Note 14.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2019 and 2018
NOTE
12– RELATED PARTY TRANSACTIONS AND BALANCES
Accounts
payable – related party
In
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 $50,625 for the year ended December 31, 2018. At December 31, 2018,
amount due to this affiliate amounted to $3,700 and is included in liabilities of discontinued operations on the accompanying
consolidated balance sheets.
Due
to related parties
In
connection with the acquisition of Prime (See Note 3), 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 period from acquisition date of Prime (June 18, 2018) to December
31, 2018, the Company repaid $216,155 of this advance. During the year ended December 31, 2019, the Company repaid $130,000 of
this advance. This advance is non-interest bearing and is due on demand. At December 31, 2019 and 2018, amount due to this related
party amounted to $129,000 and $259,000, respectively, and have been included in due to related parties on the accompanying consolidated
balance sheets.
During
the period from acquisition date of Prime (June 18, 2018) to December 31, 2018, an employee of Prime who exerts significant influence
over the business of Prime, paid costs and expenses of $56,507 on behalf of the Company and was reimbursed $40,207 by the company.
In 2018, these advances are non-interest bearing and were due on demand. During the year ended December 31, 2019, this employee
of Prime advanced the Company $88,000. In 2019, the Company paid this employee interest expense of $44,000 related to 2019 working
capital advances made. At December 31, 2019 and 2018, amounts due to this related party amounted to $88,000 and $16,300, respectively,
and have been included in due to related parties on the accompanying consolidated balance sheets.
During
the year ended December 31, 2019, an entity which is controlled by an employee of Prime who exerts significant influence
over the business of Prime advanced the Company $25,000. In 2019, the Company paid this entity interest expense of $12,500 related
to 2019 working capital advances made. At December 31, 2019, amounts due to this related party entity amounted to $25,000, and
has been included in due to related parties on the accompanying consolidated balance sheets.
Notes
payable – related parties
From
July 25, 2018 through December 31, 2018, the Company entered into a Promissory Notes with the Company’s former chief executive
office or the spouse of the Company’s 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. Additionally,
in October 2018, the Company issued 50,000 shares of its common stock to this related party in connection with loans made between
July and October 2018. The shares were valued at $100,000, or $2.00 per share, based on the quoted trading price on the date of
grant. In connection with these shares, the Company recorded interest expense – related party of $100,000. From July 25,
2018 through December 31, 2018, $930,000 of these loans were repaid. At December 31, 2018, notes payable – related party
amounted to $213,617, which consisted of a note payable of $220,000 and is net of unamortized debt discount of $6,383. During
January 2019, the Company repaid the remaining existing promissory note totaling $220,000 with the spouse of the Company’s
former chief executive officer. In addition, during February 2019, the Company entered into another promissory note with the spouse
of the former chief executive officer totaling $220,000, net of an original issue discount of $20,000. In April 2019, the Company
repaid this promissory note. During the year ended December 31, 2019 and 2018, amortization of debt discount related to these
notes amounted to $26,383 and $93,617 and is included in interest expense – related parties on the accompanying consolidated
statement of operations.
On
July 3, 2019, the Company entered into a note agreement with an entity, who is affiliated to the Company’s chief executive
officer, in the amount of $500,000. Commencing on September 3, 2019, and continuing on the third day of each month thereafter,
payments of interest only on the outstanding principal balance of this Note shall be due and payable. Commencing on January 3,
2020 and continuing on the third day of each month thereafter through January 3, 2021, equal payments of principal and interest
shall made. The principal amount of this Note and all accrued, but unpaid interest hereunder shall be due and payable on the earlier
to occur of (i) January 3, 2021 (the “Maturity Date”), or (ii) an Event of Default. The payment of all or any
portion of the principal and accrued interest may be paid prior to the Maturity Date. Interest shall accrue with respect to the
unpaid principal sum identified above until such principal is paid at a rate equal to 18% per annum. All past due principal and
interest on this Note shall bear interest from maturity of such principal or interest until paid at the lesser of (i) 20% per
annum, or (ii) the highest rate allowed by applicable law. To date, no repayments have been made on this related party note. At
December 31, 2019, interest payable to related parties amounted to $83,445 and is included in due to related parties on the accompanying
balance sheets.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2019 and 2018
In
August 2019, the Company’s chief executive officer advanced to the Company and was repaid $50,000, The advance was non-interest
bearing and payable on demand.
At
December 31, 2019 and 2018, notes payable – related parties amounted to $500,000 and $213,617, which consisted of a note
payable of $500,000 and $220,000 and is net of unamortized debt discount of $0 and $6,383, respectively.
Convertible
note payable – related parties
On
March 13, 2019, the Company entered into a convertible note agreement with an individual, who is affiliated to the Company’s
chief executive officer, in the amount of $500,000. Commencing on April 11, 2019, and continuing on the eleventh day of each month
thereafter, payments of interest only on the outstanding principal balance of this Note of $7,500 was due and payable. Commencing
on October 11, 2019 and continuing on the eleventh day of each month thereafter through April 11, 2021, payments of principal
and interest of $31,902 shall be made, if not sooner converted as provided in the note agreement. The payment of all or any portion
of the principal and accrued interest may be paid prior to the April 11, 2021. Interest shall accrue with respect to the unpaid
principal sum identified above until such principal is paid or converted as provided below at a rate equal to 18% per annum compounded
annually. All past due principal and interest on this Note shall bear interest from maturity of such principal or interest (in
whatever manner same may be brought about) until paid at the lesser of (i) 20% per annum, or (ii) the highest non-usurious rate
allowed by applicable law. This Note was convertible by Holder at any time in principal amounts of $100,000 in accordance with
the terms by delivery of written notice to the Company, into that number of shares of common stock equal to the amount obtained
by dividing the portion of the aggregate principal amount of this Note that is being converted by $1.37. In connection with the
issuance of this Note, the Company determined that this Note contains terms that are fixed monetary amounts at inception. Since
the conversion price of $1.37 was equal to the quoted closing of the Company’s common shares on the note date, no beneficial
feature conversion was recorded. On July 12, 2019, the Company entered into a Note Conversion Agreement with this individual.
In connection with this Note Conversion Agreement, the Company issued 203,000 shares of its common stock at $2.50 per share for
the conversion of convertible note payable of $500,000 and accrued interest payable of $7,500. In connection with the conversion
of this convertible notes, the Company issued the entity warrants to purchase 203,000 shares of the Company’s common stock
at an exercise price of $1.81 per share for a period of five years (see Note 10).
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 was 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 was convertible
by Holder at any time in principal amounts of $100,000 in accordance with the terms by delivery of written notice to the Company,
into that number of shares of common stock equal to the amount obtained by dividing the portion of the aggregate principal amount
of this Note that is being converted by $11.81. Since the conversion price of $11.81 was equal to the quoted closing of the Company’s
common shares on the note date, no beneficial feature conversion was recorded. On July 12, 2019, the Company entered into a Note
Conversion Agreement with this entity. In connection with this Note Conversion Agreement, the Company issued 812,000 shares of
its common stock at $2.50 per share for the conversion of convertible note payable of $2,000,000 and accrued interest payable
of $30,000. In connection with the conversion of this convertible notes, the Company issued the entity warrants to purchase 812,000
shares of the Company’s common stock at an exercise price of $2.50 per share for a period of five years (see Note 10).
In
connection with the modification of the related convertible notes, the Company changed the conversion price of the notes to $2.50
per share and issued an aggregate of 1,015,000 warrants as discussed above. The Company accounted for the full conversion of these
related party convertible notes pursuant to the guidance of ASC 470-20, Debt with Conversion and Other Options. Under ASC
470-20, the Company recognized a loss on debt extinguishment upon conversion in the amount of $3,669,367 of which $1,164,220 is
associated with the change between the debt’s original terms and the induced conversion terms and is equal to the fair value
of the additional shares of common stock transferred in the transaction, and $2,505,147 association with the valuation of the
1,015,000 warrants. The fair value of the warrants was determined using the Binomial valuation model using assumptions discussed
above.
During
the year ended December 31, 2019, interest expense related to these notes amounted to $222,328 and is included in interest
expense – related parties on the accompanying consolidated statement of operations.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2019 and 2018
NOTE
13 – DEBT EXTINGUISHMENT
Gain
on debt extinguishment
In
connections with the RedDiamond and Bellridge debt modifications and warrants cancellations and other debt modifications discussed
elsewhere, on the Modification Dates or repayment dates, for the year ended December 31, 2019, the Company recorded an aggregate
gain on debt extinguishment of $39,090,168 which consists of the following.
|
|
Gain
(loss) on extinguishment on modification date
|
|
|
Other
|
|
|
Total
gain (loss) on debt extinguishment
|
|
Gain
from reversal of derivative liabilities on Modification Date or repayment date (note 8)
|
|
$
|
61,841,708
|
|
|
$
|
246,110
|
|
|
$
|
62,087,818
|
|
Fair
value of common shares issued on Modification Date (note 10)
|
|
|
(17,934,000
|
)
|
|
|
-
|
|
|
|
(17,934,000
|
)
|
Fair
value of warrants issued on modification dates (note 10)
|
|
|
-
|
|
|
|
(3,620,498
|
)
|
|
|
(3,620,498
|
)
|
Conversion
inducement expense (note 10)
|
|
|
-
|
|
|
|
(1,164,220
|
)
|
|
|
(1,164,220
|
)
|
Write-off
of remaining debt discount
|
|
|
(1,013,118
|
)
|
|
|
(152,240
|
)
|
|
|
(1,165,358
|
)
|
Reversal
of put premium on stock-settled debt related to cancellation of conversion terms (note 8)
|
|
|
385,385
|
|
|
|
-
|
|
|
|
385,385
|
|
Reduction
of principal and interest balances due
|
|
|
501,041
|
|
|
|
-
|
|
|
|
501,041
|
|
Gain
(loss) of debt extinguishment
|
|
$
|
43,781,016
|
|
|
$
|
(4,690,848
|
)
|
|
$
|
39,090,168
|
|
NOTE
14 – OPERATING LEASE RIGHT-OF-USE (“ROU”) ASSETS AND OPERATING LEASE LIABILITIES
On
November 30, 2018, the Company entered into a commercial lease agreement for the lease of sixty parking spaces under an operating
lease through November 2023 for a monthly rental fee of $6,000. Either party can cancel this lease on the annual anniversary date
of the lease provided that the party who wishes to terminate provides the other party with at least 30-day prior written notice
of such termination.
In
December 2018, the Company entered into a lease agreement for the lease of office and warehouse space and parking spaces under
a non-cancelable operating lease through December 2023. From the lease commencement date until the last day of the second lease
year, monthly rent shall be $14,000. At the beginning of the 30th month following the commencement date and through
the end of the term, minimum rent shall be $14,420 per month. The Company shall have one option to renew the term of this lease
for an additional five years. In January 2019, the Company paid a security deposit of $28,000.
In
July 2019, the Company entered into a 4.5-year lease agreement for the lease of office and warehouse space and parking spaces
under a non-cancelable operating lease through February 2024. From the lease commencement date until the last day of the second
lease year, monthly rent shall be $10,000. At the beginning of the 25th month following the commencement date and through
the end of the term, minimum rent shall be $10,500 per month. The Company shall have one option to renew the term of this lease
for an additional five years. In July 2019, the Company paid a security deposit of $20,000.
In
July 2019, the Company entered into a five-year lease agreement for the lease of office and warehouse space and parking spaces
under a non-cancelable operating lease through August 2024. During the first year on the lease term, the base monthly rent shall
be $18,000 and shall increase by 3% each lease year. Additionally, the Company shall pay its portion of operating expenses. The
Company shall have one option to renew the term of this lease for an additional five years. As of December 31, 2019, the Company
paid a security deposit of $18,000.
In
adopting ASC Topic 842, Leases (Topic 842), the Company has elected the ‘package of practical expedients’, which permit
it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct
costs (see Note 2). In addition, the Company elected not to apply ASC Topic 842 to arrangements with lease terms of 12 month or
less.
On
January 1, 2019, upon adoption of ASC Topic 842, the Company recorded right-of-use assets and lease liabilities of $631,723. Additionally,
during the year ended December 31, 2019, the Company entered into new operating lease agreements as discussed above, that require
the Company to record a lease liability and a right of use asset on its consolidated balance sheet, at fair value. Accordingly,
the Company recorded right-of-use assets and lease liabilities of $1,352,597.
During
the year ended December 31, 2019 and 2018, in connection with these operating leases, other miscellaneous rental payments and
common area maintenance costs, the Company recorded rent expense of $419,249 and $23,100, respectively, which is expensed during
the period and included in operating expenses on the accompanying consolidated statements of operations.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2019 and 2018
The
significant assumption used to determine the present value of the lease liability was a discount rate of 10% to 12% which was
based on the Company’s estimated incremental borrowing rate.
At
December 31, 2019, right-of-use asset (“ROU”) is summarized as follows:
|
|
December
31, 2019
|
|
Office
leases right of use assets
|
|
$
|
1,984,320
|
|
Less:
accumulated amortization into rent expense
|
|
|
(233,890
|
)
|
Balance of ROU
assets as of December 31, 2019
|
|
$
|
1,750,430
|
|
At
December 31, 2019, operating lease liabilities related to the ROU assets are summarized as follows:
|
|
December
31, 2019
|
|
Lease
liabilities related to office leases right of use assets
|
|
$
|
1,773,384
|
|
Less:
current portion of lease liabilities
|
|
|
(333,126
|
)
|
Lease
liabilities – long-term
|
|
$
|
1,440,258
|
|
At
December 31, 2019, future minimum base lease payments due under non-cancelable operating leases are as follows:
Year
ended December 31,
|
|
|
Amount
|
|
2020
|
|
$
|
507,240
|
|
2021
|
|
|
521,856
|
|
2022
|
|
|
531,630
|
|
2023
|
|
|
538,608
|
|
2024
|
|
|
184,288
|
|
Total
minimum non-cancelable operating lease payments
|
|
|
2,283,622
|
|
Less:
discount to fair value
|
|
|
(510,238
|
)
|
Total
lease liability at December 31, 2019
|
|
$
|
1,773,384
|
|
NOTE
15 – INCOME TAXES
The
Company accounts for income tax using the liability method prescribed by ASC 740, “Income Taxes”. Under this method,
deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets
and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse. The
deferred tax assets at December 31, 2019 and 2018 consist only of net operating loss carryforwards. The net deferred tax asset
has been fully offset by a valuation allowance because of the uncertainty of the attainment of future taxable income.
The
items accounting for the difference between income taxes at the effective statutory rate and the Company’s effective tax
rate for the years ended December 31, 2019 and 2018 were as follows:
|
|
Year
Ended
December
31, 2019
|
|
|
Year
Ended December 31, 2018
|
|
|
|
|
|
|
|
|
Income
tax benefit at U.S. statutory rate
|
|
|
21.00
|
%
|
|
|
21.00
|
%
|
Income
tax benefit - State
|
|
|
4.57
|
%
|
|
|
4.18
|
%
|
Permanent
items
|
|
|
(15.23
|
)%
|
|
|
(18.19
|
)%
|
Effect
of change in valuation allowance
|
|
|
(10.34
|
)%
|
|
|
(6.99
|
)%
|
Effective
income tax rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The
Company’s approximate net deferred tax asset as of December 31, 2019 and 2018 was as follows:
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
Deferred
Tax Asset:
|
|
|
|
|
|
|
|
|
Net
operating loss carryover
|
|
$
|
5,682,118
|
|
|
$
|
1,042,542
|
|
Less:
valuation allowance
|
|
|
(5,682,118
|
)
|
|
|
(1,042,542
|
)
|
Net
deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2019 and 2018
The
net operating loss carryforward was approximately $22,278,521 at December 31, 2019. The Company provided a valuation allowance
equal to the net deferred income tax asset as of December 31, 2019 and 2018 because it was not known whether future taxable income
will be sufficient to utilize the loss carryforward. During the year ended December 31, 2019, the valuation allowance increased
by $4,639,576. Additionally, the future utilization of the net operating loss carryforward to offset future taxable income
is subject to an annual limitation as a result of ownership changes that may occur in the future. The 2017 estimated loss carry
forward of $120,600 expires on December 31, 2037. Subsequent to 2017, all estimated loss carry forwards may be carried forward
indefinitely subject to annual usage limitations.
The
Company does not have any uncertain tax positions or events leading to uncertainty in a tax position. The Company’s 2016
to 2019 Corporate Income Tax Returns are subject to Internal Revenue Service examination.
NOTE
16 – CONCENTRATIONS
For
the years ended December 31, 2019 and 2018, one customer represented 98.7% and 99.0% of the Company’s total net revenues.
At December 31, 2019, this one customer represented 93.9% of the Company’s accounts receivable balance.
During
the years ended December 31, 2019 and 2018, the Company rented delivery vans and trucks from a limited number of vendors. Any
shortage of supply of vans and trucks available to rent to the Company could have a material adverse effect on the Company’s
business, financial condition and results of operations.
All
revenues are derived from customers in the United States.
NOTE
17 – SUBSEQUENT EVENTS
Secured
merchant loans
In
March 2020, the Company entered into several settlement agreements related to the payoff of several secured merchant loans as
follows:
In
connection with a settlement agreement, the Company paid off a merchant loan with a principal balance of $936,410 for a payment
of $600,000 which was made by the Company in March 2020.
In
connection with a settlement agreement dated March 9, 2020, the Company agreed to pay $233,434 in full settlement for a merchant
loan of with a principal balance of $364,740. The payment was due on March 11, 2020. Although the Company paid the $233,434,
the Company did not pay the settlement amount on the due date of March 11, 2020 and the settlement agreement is in dispute
and being renegotiated.
In
connection with a settlement agreement dated March 9, 2020, the Company agreed to pay $275,000 in full settlement for a merchant
loan of with a principal balance of $272,700 and a Senior Secured Convertible debt in the amount of $95,874 and cancellation of
40,300 warrants held by the same creditor. The settlement payment was due, in full, on March 12, 2020; however, due to
cash constraints at the time, the Company paid the $275,000 in weekly installments, which the creditor accepted, with its final
payment on May 12, 2020. While the Company never received a default or demand letter, the creditor verbally told the Company on
May 12, 2020, that the original full amount should be paid, although the creditor has not made any formal demand or commenced
any action. The Company believes any such claim, if made, would be without merit.
Promissory
notes
On
February 21, 2020, the Company borrowed $220,000 from an individual and received net proceeds of $220,000. From
January 2020 to February 2020, the Company entered into promissory notes with an individual totaling $110,000 and received net
proceeds of $100,000, net of original issue discounts of $10,000. In January and February 2020, the Company repaid these loans.
Due
to related parties
During
the period from January 1, 2020 to May 18, 2020, an employee of Prime who exerts significant influence over the business of Prime,
advanced the Company $75,000 and was repaid $138,000.
During
the year ended December 31, 2019, an entity which is controlled by an employee of Prime who exerts significant influence over
the business of Prime advanced the Company $25,000. This balance was repaid on January 8, 2020.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2019 and 2018
Convertible
debt and related warrants
From
January 2020 to the date of this report, the Company closed on a Securities Purchase Agreements with accredited investors. Pursuant
to the terms of these Purchase Agreement, the Company issued and sold to investors convertible promissory notes in the aggregate
principal amount of $2,095,500 (the “Notes”), and warrants to purchase up to 838,200 shares of the Company’s
common stock (the “Warrants”). The Company received net proceeds of $1,905,000, which is net of a 10% original issue
discounts of $190,500. The Notes bear interest at 6% per annum and becomes due and payable on the date that is the 24-month anniversary
of the original issue date of the respective Note. During the existence of an Event of Default, which includes, amongst other
events, any default in the payment of principal and interest payment (including Amortization Payments) under any Note or any other
indebtedness, interest shall accrue at the lesser of (i) the rate of 18% per annum, or (ii) the maximum amount permitted by
law. Commencing on the thirteenth month anniversary of these Notes, monthly payments of interest and monthly principal payments,
based on a 12 month amortization schedule (each, an “Amortization Payment”), shall be due and payable, until the Maturity
Date, at which time all outstanding principal, accrued and unpaid interest and all other amounts due and payable hereunder shall
be immediately due and payable. The Amortization Payments shall be made in cash unless the investor requests it to be issued in
the Company’s common stock in lieu of a cash payment (“Stock Payment”). If the investor requests a Stock Payment,
the number of shares of common stock issued shall be based on the amount of the applicable Amortization Payment divided by 80%
of the lowest VWAP during the five Trading Day period prior to the due date of the Amortization Payment.
The
Note may be prepaid, provided that equity conditions, as defined in the Notes, have been met (or any such failure to meet the
Equity Conditions have been waived): (i) from Original Issuance Date until and through the day that falls on the third month anniversary
of the Original Issue Date (the “3 Month Anniversary”) at an amount equal to 105% of the aggregate of the outstanding
principal balance of the Note and accrued and unpaid interest, and (ii) after the 3 Month Anniversary at an amount equal to 115%
of the aggregate of the outstanding principal balance of the Note and accrued and unpaid interest. In the event that the Company
closes a registered public offering of securities for its own account (a “Public Offering”), the Holder may elect
to: (x) have its principal and accrued interest prepaid directly from the Public Offering Proceeds at the prices set forth above,
or (y) exchange its Note at the closing of the Public Offering for the securities being issued in the Public Offering at the Public
Offering prices based upon the outstanding principal, accrued interest and other charges, or (z) continue to hold the Note. Except
for a Public Offering and Amortization Payments, in order to prepay the Note, the Company shall provide at least 30 days’
prior written notice to the Holder, during which time the Holder may convert the Note in whole or in part at the Conversion Price.
For avoidance of doubt, the Amortization Payments shall be prepayments and are subject to prepayment penalties equal to 115% of
the Amortization payment. In the event the Company consummates a Public Offering while the Notes are outstanding, then 25% of
the net proceeds of such offering shall, within two business days of the closing of such public offering, be applied to reduce
the outstanding obligations pursuant to the Notes.
After
the original issue date until the Note is no longer outstanding, the Notes shall be convertible, in whole or in part, at any time,
and from time to time, into shares of Common Stock at the option of the investor. The “Conversion Price” in effect
on any Conversion Date means, as of any Conversion Date or other date of determination, $0.40 per share, subject to adjustment
as provided herein. If an Event of Default has occurred, regardless of whether such Event of Default has been cured or remains
ongoing, these Notes shall be convertible at the lower of: (i) $0.40 and (ii) 70% of the second lowest closing price of the Common
Stock as reported on the Trading Market during the 20 consecutive Trading Day period ending and including the Trading Day immediately
preceding the delivery or deemed delivery of the applicable Notice of Conversion (the “Default Conversion Price”).
All such Conversion Price determinations are to be appropriately adjusted for any stock dividend, stock split, stock combination,
reclassification or similar transaction that proportionately.
The
Warrants are exercisable at any time on or after the date of the issuance and entitles the investors to purchase shares of the
Company’s common stock for a period of five years from the initial date the warrants become exercisable. Under the terms
of the Warrants, the investors are entitled to exercise the Warrants to purchase up to 838,200 shares of the Company’s
common stock at an initial exercise price of $0.40, subject to adjustment as detailed in the respective Warrant. The Company calculated
the relative fair value of these warrants in the amount of $727,659 which was added to debt discount and shall be amortized over
the term of the Notes.
These
Notes and related Warrants include a down-round provision under which the Note conversion price and warrant exercise price could
be affected, on a full-ratchet basis, by future equity offerings undertaken by the Company.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2019 and 2018
In
connection with the issuance of these Note, the Company determined that various terms of the Note, including the Stock Payment
terms discussed above, caused derivative treatment of the embedded conversion options. On the initial measurement dates, the fair
values of the embedded conversion option derivative of $8,295,096 was recorded as derivative liabilities and was allocated as
a debt discount up to the net proceeds of the Notes of $1,177,341, with the remainder of $7,117,755 charged to current period
operations as initial derivative expense. Pursuant to price protection clauses in substantially all convertible debt and related
warrants outstanding at December 31, 2019, these Notes and related Warrants include a down-round provision under which the Note
conversion price and warrant exercise price could be affected, on a full-ratchet basis, by future equity offerings undertaken
by the Company (see Note 8). Due to the default of Amortization Payments due on our August 30, 2019 Notes and other Notes as
discussed in Note 8, these convertible notes were deemed in default. Accordingly, the outstanding principal balance on date of
default increased by 30% which amounted to approximately $629,000, default interest shall accrue at 18%, and the default conversion
terms shall apply.
In
January 2020, due to the non-payment of the January 2020 Amortization Payment, the August 30, 2019 convertible notes were deemed
in default. Accordingly, the outstanding principal balance on date of default increased by 30% which amounted to approximately
$693,000, default interest shall accrue at 18%, and the default conversion terms shall apply. (See Note 8). Additionally, in February
2020, due to the default of the February 2020 Amortization Payment, the October 3, 2019 convertible note was deemed in default.
Accordingly, the outstanding principal balance on date of default increased by 30% which amounted to approximately $50,000, default
interest shall accrue at 18%, and the default conversion terms shall apply. Additionally, the exercise price of the related warrants
were reduced to less than a penny.
Paycheck
Protection Program Promissory Note
On
April 15, 2020, the Company’s subsidiary, Prime, entered into a Paycheck Protection promissory note (the “Prime PPP
Loan”) with M&T Bank in the amount of $2.941.212 under the Small Business Administration (the “SBA”) Paycheck
Protection Program of the Coronavirus Aid, Relief and Economic Security Act of 2020 (the “CARES Act”). On April 15,
2020, the Prime PPP Loan was approved and Prime received the loan proceeds on April 22, 2020. Prime plans to use the proceeds
for covered payroll costs, rent and utilities in accordance with the relevant terms and conditions of the CARES Act. The Prime
PPP Loan has a two-year term, matures on April 16, 2022, and bears interest at a rate of 1.00% per annum. Monthly principal and
interest payments, less the amount of any potential forgiveness (discussed below), will commence on November 16, 2020.
On
April 2, 2020, the Company’s subsidiary, Shypdirect, entered into a Paycheck Protection promissory note (the “Shypdirect
PPP Loan”) with M&T Bank in the amount of $504,940 under the SBA CARES Act. On April 28, 2020, the Shypdirect PPP Loan
was approved and Shypdirect received the Loan proceeds on May 1, 2020. Shypdirect plans to use the proceeds for covered payroll
costs, rent and utilities in accordance with the relevant terms and conditions of the CARES Act. The Shypdirect PPP Loan has a
two-year term, matures on April 28, 2022, and bears interest at a rate of 1.00% per annum. Monthly principal and interest payments,
less the amount of any potential forgiveness (discussed below), will commence on November 28, 2020.
Prime
or Shypdirect did not provide any collateral or guarantees for these PPP Loans, nor did they pay any facility charge to obtain
the Loans. These promissory notes provide for customary events of default, including, among others, those relating to failure
to make payment, bankruptcy, breaches of representations and material adverse effects. Prime and Shypdirect may prepay the principal
of the PPP Loans at any time without incurring any prepayment charges. These PPP Loans may be forgiven partially or fully if the
loan proceeds are used for covered payroll costs, rent and utilities, provided that such amounts are incurred during the eight-week
period that commenced on May 1, 2020 and at least 75% of any forgiven amount has been used for covered payroll costs. Any forgiveness
of these Loans will be subject to approval by the SBA and Lender and will require Prime and Shypdirect to apply for such treatment
in the future.
Common
shares issued for conversion of convertible debt and interest
During
the period from February 25, 2020 to May 14, 2020, the Company issued 294,584,216 shares of its common stock in connection with
the conversion of convertible notes payable of $2,068,131, accrued interest and default interest of $473,402, and fees of $5,000.
The conversion price was based on contractual terms of the related debt.