NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023
(Unaudited)
NOTE
1 – ORGANIZATION AND BUSINESS OPERATIONS
Transportation
and Logistics Systems, Inc. (“TLSS” or the “Company”) is a holding company incorporated under the laws of the
State of Nevada, on July 25, 2008. Its active wholly-owned operating subsidiaries, Cougar Express, Inc., Freight Connections, Inc., JFK
Cartage, Inc. and Severance Trucking Co., Inc. (acquired in 2023, along with Severance Warehousing, Inc. and McGrath Trailer Leasing,
Inc., and hereafter referred to as “Severance Trucking”, together provide a full suite of logistics and transportation services,
specializing in ecommerce fulfillment, last mile deliveries, two-person home delivery, mid-mile, and long-haul services. Such entities
operate several warehouse locations located in New York, New Jersey, Connecticut and Massachusetts. Inactive subsidiaries include: TLSS
Acquisition, Inc. (“TLSSA”), Shyp CX, Inc. (“Shyp CX”), Shyp FX, Inc. (“Shyp FX”), TLSS-FC, Inc.
(“TLSS-FC”) and TLSS-STI, Inc. (“TLSS-STI”).
On
June 18, 2018, the Company completed the acquisition of 100% of the issued and outstanding membership interests of Prime EFS, LLC, a
New Jersey limited liability company (“Prime EFS”), from its members pursuant to the terms and conditions of a Stock Purchase
Agreement. Prime EFS was a New Jersey based transportation company that generated substantially all its revenues from Amazon Logistics,
Inc. (“Amazon”) until it ceased operations on September 30, 2020 due to Amazon’s non-renewal of its Delivery Service
Partner (DSP) Agreement with Prime EFS, as described below.
On
July 24, 2018, the Company formed Shypdirect LLC (“Shypdirect”), a company organized under the laws of New Jersey. Since
its inception, Shypdirect generated substantially all of its revenues from Amazon, Inc. As described below, Amazon elected to terminate
its Amazon Relay Carrier Terms of Service with Shypdirect. Accordingly, in June 2021, Shypdirect ceased its tractor trailer and box truck
delivery services to Amazon, and in July 2021, Shypdirect ceased all operations.
On
August 19, 2021, the Company’s former subsidiaries, Prime EFS and Shypdirect, executed Deeds of Assignment for the Benefit of Creditors
in the State of New Jersey pursuant to N.J.S.A. §2A:19-1, et seq. (the “ABC Statute”), assigning all of the Prime EFS
and Shypdirect assets to Terri Jane Freedman as Assignee for the Benefit of Creditors (the “Assignee”) and filing for dissolution.
(See Note 10).
Since
exiting the Amazon business, the Company has pursued a growth by acquisitions strategy as set forth below and as such, continues to pursue
potential acquisition opportunities.
On
November 13, 2020, the Company formed a wholly-owned subsidiary, Shyp FX, Inc., a company incorporated under the laws of the State of
New Jersey (“Shyp FX”). On January 15, 2021, through Shyp FX, the Company executed an asset purchase agreement (“APA”)
and closed a transaction to acquire substantially all of the assets and certain liabilities of Double D Trucking, Inc., a northern New
Jersey-based logistics provider specializing in servicing Federal Express over the past 25 years (“DDTI”), including last-mile
delivery services using vans and box trucks. On April 28, 2022, the Company entered into an Asset Purchase Agreement (the “Asset
Purchase Agreement” with an unrelated third party. Pursuant to the Asset Purchase Agreement, Shyp FX sold substantially all its
asset and specific liabilities. The Asset Purchase Agreement closed in June 2022.
On
November 16, 2020, the Company formed a wholly-owned subsidiary, TLSSA, a company incorporated under the laws of the State of Delaware.
On March 24, 2021, TLSS acquired all of the issued and outstanding shares of capital stock of Cougar Express, Inc., a New York-based
full-service logistics provider specializing in pickup, warehousing, and delivery services in the tri-state area (“Cougar Express”).
Cougar Express was a family-owned full-service transportation business that has been in operation for more than 30 years providing one-to-four
person deliveries and offering white glove services. It utilizes its own fleet of trucks, warehouse/driver/office personnel and on-call
subcontractors from its convenient and secure New York JFK airport area location, allowing it to pick-up and deliver throughout the New
York tri-state area. Cougar Express serves a diverse base of commercial accounts, which are freight forwarders that work with some of
the most notable retail businesses in the country.
On
February 21, 2021, the Company formed a wholly-owned subsidiary, Shyp CX, a company incorporated under the laws of the State of New York.
Shyp CX does not engage in any revenue-generating operations.
On
August 4, 2022, the Company’s wholly-owned subsidiary, Cougar Express, closed on its acquisition of all outstanding stock of JFK
Cartage, Inc., a New York-based full-service logistics provider specializing in pickup, warehousing and delivery services in the tri-state
area (“JFK Cartage”). Joan Ton, the sole shareholder of JFK Cartage, from whom the shares were acquired, is an unrelated
party. The effective date of the acquisition was July 31, 2022. With annual revenues of $3.6 million in 2021 and approximately $2.0 million
for the first six months of 2022, JFK Cartage operates from a 30,000 square foot warehouse with ten drive-in doors and is strategically
located approximately six miles from JFK International Airport. JFK Cartage has been in business since 2008 and has been providing warehousing,
cross-dock services, pickup and deliveries, and general trucking, handling airfreight, trade show freight, expedited and hotshot demand
work, LTL/cartage as well as FTL, reverse logistics, white glove and residential delivery services to a broad base of over 95 commercial
accounts and residential customers. JFK Cartage operates a wide-ranging fleet of specialty vehicles, from its Sprinter vans to full 53-ft.
tractor trailers. JFK Cartage, with its assets, fleet and warehouse is believed to be one of the largest leading cartage agents serving
the New York Tri-State area (See Note 3).
Effective
September 16, 2022, the Company’s newly formed wholly-owned subsidiary, TLSS-FC, closed on an acquisition of all outstanding stock
of Freight Connections, Inc., a New Jersey-based company offering an array of transportation, warehousing, consolidating, distribution,
and local cartage services throughout the New York tri-state area (“Freight Connections”). Joseph Corbisiero, the sole shareholder
of Freight Connections, from whom the shares were acquired. Freight Connections was founded in 2016 and is a privately held transportation
and logistics carrier headquartered in Ridgefield Park, New Jersey. Freight Connections currently operates with 30 power units and 50
trailers, including dry vans, pups, flatbeds, step decks, and double drop trailers out of three buildings in the area with 200,000 square
feet of warehouse and cross dock space, strategically located within one mile of each other. Freight Connections offers customers an
array of services including truckload, LTL, and consolidating of cartage, construction-trade, air, and rail freight, as well as warehousing
and distribution services (See Note 3).
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023
(Unaudited)
Effective
February 3, 2023, the Company’s newly formed wholly-owned subsidiary, TLSS-STI, closed on an acquisition of all outstanding stock
of Severance Trucking, which together, offer LTL trucking services throughout New England, with an effective date as of the close of
business on January 31 2023. The sellers of the stock of each entity were Kathryn Boyd, Clyde Severance, and Robert Severance, all individuals
(the “Sellers”). None of the Sellers are affiliated with the Company or its affiliates. Severance Trucking is a privately-owned
full-service transportation carrier and logistics business that has been in operation for over 100 years specializing in LTL trucking
that provides next day service to major cities in New England and New York, with cartage and interline agreements with respected carriers
that ensure reliable deliveries anywhere in the United States and Canada. With annual revenues of over $13.0 million in 2022, Severance
Trucking currently operates with over 120 power units and trailers and has two locations, comprised of approximately 18,000 square feet
of warehouse and cross dock space, 9,000 square feet of office and 5,750 square feet of repair facilities located in Dracut, Massachusetts
and approximately 16,000 square feet of warehouse space in North Haven, Connecticut (See Note 3).
Unless
the context otherwise requires, TLSS and its wholly-owned subsidiaries, TLSSA, TLSS-FC, Cougar Express, Shyp FX, Shyp CX, JFK Cartage,
Freight Connections, TLSS-STI, and Severance Trucking are hereafter referred to as the “Company”. References herein to a
“Company liability” may be to a liability which is owed solely by a subsidiary and not by TLSS.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis
of presentation and principles of consolidation
The
unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles
in the United States of America (“U.S. GAAP”) and the rules and regulations of the United States Securities and Exchange
Commission (“SEC”) for interim financial information. Accordingly, they do not include all the information and disclosures
necessary for comprehensive presentation of financial position, results of operations or cash flow. However, these unaudited consolidated
financial statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary
for fair presentation of the information contained therein. It is suggested that these unaudited interim consolidated financial statements
be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2022 and notes thereto
included in the Company’s annual report on SEC Form 10-K, filed on March 31, 2023.
The
Company follows the same accounting policies in the preparation of its annual and interim reports. The results of operations in interim
periods are not necessarily an indication of operating results to be expected for the full year.
The
consolidated financial statements of the Company include the accounts of TLSS and its wholly owned subsidiaries, TLSSA, TLSS-FC, Cougar
Express, Shyp FX, Shyp CX, TLSS-STI, JFK Cartage since its acquisition on July 31, 2022, Freight Connection since its acquisition on
September 16, 2022, and Severance Trucking since its acquisition on January 31, 2023. All intercompany accounts and transactions have
been eliminated in consolidation. References below to a “Company liability” may be to a liability which is owed solely by
a subsidiary and not by TLSS.
Going
concern
These
consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business. As reflected in the accompanying unaudited consolidated financial statements,
the Company had a net loss of $1,645,916 and $2,037,231 for the three months ended March 31, 2023 and 2022, respectively. The net cash
used in operations was $704,254 and $809,884 for the three months ended March 31, 2023 and 2022, respectively. Additionally, the Company
had an accumulated deficit and working capital deficit of $129,256,425 and $7,748,418, respectively, on March 31, 2023. 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 or become cash
flow positive or raise additional debt and/or equity capital. The Company is seeking to raise capital through additional debt and/or
equity financings to fund its operations in the future. Although the Company has historically raised capital from sales of preferred
shares, and from the issuance of promissory notes and convertible promissory notes, there is no assurance that it will be able to continue
to do so. If the Company is unable to raise additional capital or secure additional lending in the near future, management expects that
the Company will need to curtail its operations. These consolidated financial statements do not include any adjustments related to the
recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company
be unable to continue as a going concern.
Risks
and uncertainties
The
Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. On March 31,
2023, the Company had no cash in bank in excess of FDIC insured levels. On March 12, 2023, Signature Bank, the Company’s financial
institution, was closed by its state chartering authority, the New York State Department of Financial Services. On that same date the
FDIC was appointed as receiver and transferred all the deposits and substantially all of the assets of Signature Bank to Signature Bridge
Bank, N.A., a full-service bank that is being operated by the FDIC. At the time of closing, the Company had all of its cash at Signature
Bank. The Company did not lose access to its accounts or experience interruptions in banking services, and it suffered no losses with
respect to its deposits at Signature Bank as a result of the bank’s closure. Normal banking activities resumed on Monday, March
13, 2023. On March 19, 2023 Signature Bridge Bank N.A. was acquired by New York Community Bancorp Inc., which is the parent of Flagship
Bank, N.A. The Company is currently looking at additional banking options to ensure that its exposure is limited or reduced to the FDIC
protection limits.
The
COVID-19 pandemic and resulting global disruptions have affected the Company’s businesses, as well as those of the Company’s
customers and their third-party suppliers and sellers. To serve the Company’s customers while also providing for the safety of
the Company’s employees and service providers, the Company has adapted numerous aspects of its logistics and transportation processes.
The Company continues to monitor the rapidly evolving situation and expect to continue to adapt its operations to address federal, state,
and local standards as well as to implement standards or processes that the Company determines to be in the best interests of its employees,
customers, and communities. The impact of the pandemic and actions taken in response to it had some effects on the Company’s results
of operations. Effects include increased fulfilment costs and cost of sales, primarily due to investments in employee hiring, pay, and
benefits, as well as costs to maintain safe workplaces, and higher shipping costs. The Company continues to be affected by possible procurement
and shipping delays, supply chain interruptions, and increased fulfilment costs and cost of sales as a percentage of net sales and it
is not possible to determine the duration and spread of the pandemic or such actions, the ultimate impact on the Company’s results
of operations during 2023, or whether other currently unanticipated consequences of the pandemic are reasonably likely to materially
affect the Company’s results of operations. The Company plans on diversifying is bank and financial institution deposits to other
banks to mitigate such risk.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023
(Unaudited)
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 unaudited consolidated financial statements and footnotes include
the valuation of accounts receivable, the useful life of property and equipment, the valuation of intangible assets, the valuation of
assets acquired and liabilities assumed, the valuation of right of use assets and related liabilities, assumptions used in assessing
impairment of long-lived assets, estimates of current and deferred income taxes and deferred tax valuation allowances, the fair value
of non-cash equity transactions, and the value of claims against the Company.
Fair
value of financial instruments
The
Financial Accounting Standards Board (“FASB”) issued ASC 820 — Fair Value Measurements and Disclosures, which defines
fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. ASC 820 requires disclosures about the fair value of all financial instruments, whether or not
recognized, for financial statement purposes. Disclosures about the fair value of financial instruments are based on pertinent information
available to the Company on March 31, 2023. Accordingly, the estimates presented in these consolidated financial statements are not necessarily
indicative of the amounts that could be realized on disposition of the financial instruments. ASC 820 specifies a hierarchy of valuation
techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market
data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority
to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable
inputs (Level 3 measurement).
The
three levels of the fair value hierarchy are as follows:
| |
● |
Level
1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date. |
| |
|
|
| |
● |
Level
2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar
assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from
or corroborated by observable market data. |
| |
|
|
| |
● |
Level
3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants
would use in pricing the asset or liability based on the best available information. |
The
Company measures certain financial instruments at fair value on a recurring basis. As of March 31, 2023 and December 31, 2022, the Company
had no assets and liabilities measured at fair value on a recurring basis.
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 and other current assets,
accounts payable, accrued expenses, insurance payable, and other payables approximate their fair values based on the short-term maturity
of these instruments. The carrying amount of the Company’s promissory note obligations approximate fair value, as the terms of
these instruments are consistent with terms available in the market for instruments with similar risk.
Business
acquisitions
The
Company accounted for business acquisitions using the acquisition method of accounting where the assets acquired and liabilities assumed
are recognized based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the
net assets acquired is recorded as goodwill. Determining the fair value of certain acquired assets and liabilities is subjective in nature
and often involves the use of significant estimates and assumptions, including, but not limited to, the selection of appropriate valuation
methodology, projected revenue, expenses, and cash flows, weighted average cost of capital, discount rates, and estimates of terminal
values. Business acquisitions are included in the Company’s consolidated financial statements as of the date of the acquisition.
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. On March 31, 2023, the Company did not have any cash equivalents.
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 along with general reserves for current accounts receivable that are projected to become
uncollectable. 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.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023
(Unaudited)
Property
and equipment
Property
and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives of one to twenty
years. Leasehold improvements are depreciated over the shorter of the useful life or lease term including scheduled renewal terms. Revenue
equipment acquired through acquisitions is generally revalued to current market values as of the acquisition date. Assets obtained more
than a year prior to the acquisition by the acquired company are depreciated on a straight-line basis aligned with the remaining period
of expected use, whereas those obtained less than a year prior are depreciated consistent with newly purchased assets. In addition to
purchasing new revenue equipment, the Company may rebuild the engines of its tractors. Because rebuilding an engine increases its useful
life, the Company capitalizes these costs and depreciates the cost over the remaining useful life of the unit. 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.
Goodwill
and other intangible assets
Intangible
assets are carried at cost less accumulated amortization, computed using the straight-line method over the estimated useful life, less
any impairment charges.
The
Company’s business acquisitions typically result in the recording of goodwill and other intangible assets, which affect the amount
of amortization expense and possibly impairment write-downs that the Company may incur in future periods.
Goodwill
represents the excess of the purchase price paid over the fair value of the net assets acquired in business acquisitions. Goodwill is
subject to impairment tests at least annually. The Company reviews the carrying amounts of goodwill by reporting unit at least annually,
or when indicators of impairment are present, to determine if goodwill may be impaired. The Company includes assumptions about the expected
future operating performance as part of a discounted cash flow analysis to estimate fair value. If the carrying value of these assets
is not recoverable, based on the discounted cash flow analysis, management compares the fair value of the assets to the carrying value.
Goodwill is considered impaired if the recorded value exceeds the fair value. The Company may first assess qualitative factors to determine
whether it is more likely than not that the fair value of goodwill is less than its carrying value. The Company would not be required
to quantitatively determine the fair value of goodwill unless it determines, based on the qualitative assessment, that it is more likely
than not that its fair value is less than the carrying value. Future cash flows of the individual indefinite-lived intangible assets
are used to measure their fair value after consideration of certain assumptions, such as forecasted growth rates and cost of capital,
which are derived from internal projection and operating plans. The Company performs its annual testing for goodwill during the fourth
quarter of each fiscal year or more frequently if an event occurs or circumstances change that would more likely than not reduce the
fair value of a reporting unit or the fair value of an indefinite-lived intangible asset below its carrying value.
Other
intangibles, net consists of covenants not to compete and customer relationships. All intangible assets determined to have finite lives
are amortized over their estimated useful lives. The useful life of an intangible asset is the period over which the asset is expected
to contribute directly or indirectly to future cash flows. The Company periodically evaluates both finite and indefinite lived intangible
assets for impairment upon occurrence of events or changes in circumstances that indicate the carrying amount of intangible assets may
not be recoverable.
See
Note 6 for additional information regarding intangible assets and goodwill.
Leases
On
January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). The updated guidance
requires lessees to recognize lease assets and lease liabilities for most operating leases. In addition, the updated guidance requires
that lessors separate lease and non-lease components in a contract in accordance with the new revenue guidance in ASC 606. The Company
applied the package of practical expedients to leases that commenced before the effective date whereby the Company elected to not reassess
the following: (i) whether any expired or existing contracts contain leases and (ii) initial direct costs for any existing leases. For
contracts entered into on or after the effective date, at the inception of a contract the Company assessed whether the contract is, or
contains, a lease. The Company’s assessment is based on: (1) whether the contract involves the use of a distinct identified asset,
(2) whether it obtains the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether
it has the right to direct the use of the asset. The Company will allocate the consideration in the contract to each lease component
based on its relative stand-alone price to determine the lease payments. The Company has elected not to recognize right-of-use assets
and lease liabilities for short-term leases that have a term of 12 months or less.
Operating
lease ROU assets represents the right to use the leased asset for the lease term and operating lease liabilities are recognized based
on the present value of the future minimum lease payments over the lease term at commencement date. As most leases do not provide an
implicit rate, the Company uses an incremental borrowing rate based on the information available at the adoption date in determining
the present value of future payments. Lease expense for minimum lease payments is amortized on a straight-line basis over the lease term
and is included in general and administrative expenses in the consolidated statements of operations.
Impairment
of long-lived assets
In
accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss
when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured
as the difference between the asset’s estimated fair value and its book value.
Segment
reporting
The
Company uses “the management approach” in determining reportable operating segments. The management approach considers the
internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing
performance as the source for determining the Company’s reportable segments. The Company’s chief operating decision maker
is the chief executive officer of the Company, who reviews operating results to make decisions about allocating resources and assessing
performance for the entire Company. During the three months ended March 31, 2023 and 2022, the Company believes that it operates in one
operating segment related to its full suite of logistics and transportation services, specializing in last mile deliveries, two-person
home and commercial deliveries, mid-mile, and long-haul services.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023
(Unaudited)
Revenue
recognition and cost of revenue
The
Company adopted Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. This ASC is based on the principle
that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services. This ASC also requires additional disclosure about the nature,
amount, timing, and uncertainty of revenue and cash flows arising from customer service orders, including significant judgments.
The
Company recognizes revenues and the related direct costs of such revenue which generally include compensation and related benefits, gas
costs, insurance, parking and tolls, truck rental fees, and maintenance fees, as of the date the freight is delivered which is when the
performance obligation is satisfied. In accordance with ASC Topic 606, the Company recognizes revenue on a gross basis. Our payment terms
are generally net 30 days from acceptance of delivery. The Company does not incur incremental costs obtaining service orders from its
customers, however, if the Company did, because all the Company’s customer contracts are less than a year in duration, any contract
costs incurred would be expensed rather than capitalized. The revenue that the Company recognizes arises from deliveries of freight on
behalf of the Company’s customers. Primarily, the Company’s performance obligations under these service orders correspond
to each delivery of freight that the Company makes under the service agreements. Control of the freight transfers to the recipient upon
delivery. Once this occurs, the Company has satisfied its performance obligation and the Company recognizes revenue.
The
Company covers a 100-mile radius around each of its terminals and each individual shipment accepted by the Company is considered a separate
contract with the performance obligation being the delivery of the freight. Our average length of haul for each load of freight generally
equals less than one week of continuous transit time.
The
Company’s revenues are primarily derived from the transportation services we provide through the delivery of goods over the duration
of a shipment. The bill of lading is a legally enforceable agreement between two parties, and where collectability is probable this document
serves as the contract as our basis to recognized revenue under ASC 606- Revenue Recognition. The Company has elected to expense initial
direct costs as incurred because the average shipment cycle is less than five days. The Company recognizes revenue and substantially
all the purchased transportation expenses on a gross basis. Direct costs of such revenue generally include compensation and related benefits,
gas costs, insurance, parking and tolls, truck rental fees, and maintenance fees. The Company directs the use of the transportation service
provided and remains responsible for the complete and proper shipment. The Company recognizes revenue for its performance obligations
under its customer contracts over time, as its customers receive the benefits of the services in accordance with ASC 606- Revenue Recognition.
Inherent
within the Company’s revenue recognition practices are estimates for revenue associated with shipments in transit. For shipments
in transit, the Company records revenue based on the percentage of service completed as of the period end and recognizes delivery costs
as incurred. The percentage of service completed for each shipment is based on how far along in the shipment cycle each shipment is in
relation to standard transit days. The estimated portion of revenue for all shipments in transit is accumulated at period end and recognized
as operating revenue. The significance of in transit shipments to the consolidated financial statements is limited due to the short duration,
generally less than five days, of the average shipment cycle. On March 31, 2023 and 2022, any reductions to operating revenue and accounts
receivable to reflect in transit shipments were insignificant.
Revenue
generated from warehousing services is generally recognized as the service is performed, based upon a monthly or weekly rate.
Stock-based
compensation
Stock-based
compensation is accounted for based on the requirements of ASC 718 – “Compensation – Stock Compensation”, which
requires recognition in the financial statements of the cost of employee, director, and non-employee services received in exchange for
an award of equity instruments over the period the employee, director, or non-employee is required to perform the services in exchange
for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee, director, and non-employee
services received in exchange for an award based on the grant-date fair value of the award. The Company has elected to recognize forfeitures
as they occur as permitted under ASU 2016-09 Improvements to Employee Share-Based Payment.
Basic
and diluted loss 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 options and warrants (using
the treasury stock method) and shares issuable for Series E, G and H preferred shares (using the as-if converted method). These common
stock equivalents may be dilutive in the future.
Potentially
dilutive common shares were excluded from the computation of diluted shares outstanding for the three months ended March 31, 2023 and
2022 as they would have an anti-dilutive impact on the Company’s net losses in that period and consisted of the following:
SCHEDULE OF POTENTIALLY DILUTIVE SHARES EXCLUDED FROM COMPUTATION OF DILUTED SHARES OUTSTANDING
| | |
| | |
| |
| | |
March 31, 2023 | | |
March 31, 2022 | |
| Stock warrants | |
| 1,258,008,109 | | |
| 1,280,150,966 | |
| Stock options | |
| 80,000 | | |
| 80,000 | |
| Series B convertible preferred stock | |
| - | | |
| 700,000 | |
| Series E convertible preferred stock | |
| 28,571,600 | | |
| 42,231,772 | |
| Series G convertible preferred stock | |
| 546,000,000 | | |
| 710,000,000 | |
| Series H convertible preferred stock | |
| 323,740,000 | | |
| - | |
| Antidilutive securities
excluded from computation of earnings per share | |
| 2,156,399,709 | | |
| 2,033,162,738 | |
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023
(Unaudited)
Recent
Accounting Pronouncements
In
August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts
in Entity’s Own Equity (Subtopic 815-40)—Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.
The ASU simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently,
more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion
features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception,
which will permit more equity contracts to qualify for the exception. The ASU also simplifies the diluted net income per share calculation
in certain areas. The new guidance is effective for fiscal years beginning after December 15, 2023, including interim periods within
those fiscal years, and early adoption is permitted. The Company is currently evaluating the impact of the adoption of the standard on
the consolidated financial statements.
In
June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments, which significantly changes how entities will measure credit losses for most financial assets, including accounts
receivable. ASU No. 2016-13 will replace today’s “incurred loss” approach with an “expected loss” model,
under which companies will recognize allowances based on expected rather than incurred losses. On November 15, 2019, the FASB delayed
the effective date of Topic 326 for certain small public companies and other private companies until fiscal years beginning after December
15, 2022 for SEC filers that are eligible to be smaller reporting companies under the SEC’s definition, as well as private companies
and not-for-profit entities. The adoption of this new guidance did not have a material impact on the Company’s unaudited consolidated
financial statements.
In
March 2022, the FASB issued ASU No. 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage
Disclosures. The guidance was issued as improvements to ASU No. 2016-13 described above. The vintage disclosure changes require an
entity to disclose current-period gross write-offs by year of origination for financing receivables. The guidance is effective for financial
statements issued for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The amendments should
be applied prospectively. Early adoption of the amendments is permitted, including adoption in an interim period. The adoption of this
new guidance did not have a material impact on the Company’s unaudited consolidated financial statements.
There
are currently no other accounting standards that have been issued but not yet adopted that we believe will have a significant impact
on our consolidated financial position, results of operations or cash flows upon adoption.
NOTE
3 – ACQUISITIONS AND DISPOSITION
Acquisitions
2023
Effective
February 3, 2023, the Company’s newly formed wholly-owned subsidiary, TLSS-STI, closed on an acquisition of all outstanding stock
of Severance Trucking, which together, offer LTL trucking services throughout New England, with an effective date as of the close of
business on January 31, 2023. The sellers of the stock of each entity were Kathryn Boyd, Clyde Severance, and Robert Severance, all individuals
(the “Sellers”). None of the Sellers are affiliated with the Company or its affiliates.
Prior
to the acquisition, Severance Trucking was a privately-owned full-service transportation carrier and logistics business that had been
in operation for over 100 years specializing in LTL trucking that provided next day service to major cities in New England and New York,
with cartage and interline agreements with respected carriers that ensure reliable deliveries anywhere in the United States and Canada.
With annual revenues of over $13.0 million in 2022, Severance Trucking currently operates with over 120 power units and trailers and
has two locations, comprised of approximately 18,000 square feet of warehouse and cross dock space, 9,000 square feet of office and 5,750
square feet of repair facilities located in Dracut, Massachusetts and approximately 16,000 square feet of warehouse space in North Haven,
Connecticut.
The
total purchase price was $2,250,000 plus closing expenses of $10,747. TLSS-STI: (i) paid $687,808 in cash, and (ii) entered into a $1,572,939
secured promissory note with the Seller, with interest accruing at the rate of 12% per annum. The entire unpaid principal under the note,
shall be due and payable in three equal payments on August 1, 2023, February 1, 2024, and August 1, 2024, respectively, together with
all accrued and unpaid interest thereunder, unless paid sooner. The promissory note is secured solely by the assets of Severance Trucking
and a corporate guaranty from TLSS. The purchase price is subject to a post-closing adjustment, up or down, determined by the amount
by which Severance Trucking working capital as of the close of business on January 31, 2023, exceeds or falls short of the target working
capital, as of September 30, 2022, on which the purchase price was calculated, which has not been calculated as of the date of this report.
One
of the Sellers also entered into a consulting agreement, including non-competition and non-solicitation provisions, to continue with
Severance Trucking after the acquisition for a period of no less than three (3) months and no more than one (1) year.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023
(Unaudited)
The
assets acquired and liabilities assumed were recorded at their estimated fair values on the acquisition date, subject to adjustment during
the measurement period with subsequent changes recognized in earnings or loss. These estimates are inherently uncertain and are subject
to refinement. Management develops estimates based on assumptions as a part of the purchase price allocation process to value the assets
acquired and liabilities assumed as of the business acquisition date. As a result, during the purchase price measurement period, which
may be up to one year from the business acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed
based on completion of valuations, with the corresponding offset to intangible assets. After the purchase price measurement period, the
Company may record any adjustments to assets acquired or liabilities assumed in operating expenses in the period in which the adjustments
may have been determined. Based upon the preliminary purchase price allocation, the following table summarizes the estimated fair value
of the assets acquired and liabilities assumed at the date of the acquisition:
SCHEDULE
OF FAIR VALUE OF ASSETS ACQUIRED AND LIABILITIES ASSUMED
| | |
Severance Trucking | |
| Assets acquired: | |
| | |
| Cash | |
$ | 207,471 | |
| Accounts receivable | |
| 836,886 | |
| Prepaid expenses and other assets | |
| 25,454 | |
| Property and equipment, net | |
| 1,186,198 | |
| Financing lease right of use assets | |
| 457,239 | |
| Intangible assets | |
| 404,374 | |
| Total assets acquired at fair value | |
| 3,117,622 | |
| Liabilities assumed: | |
| | |
| Notes payable | |
| 23,000 | |
| Accounts payable and accrued expenses | |
| 376,636 | |
| Lease liabilities | |
| 457,239 | |
| Total liabilities assumed | |
| 856,875 | |
| Net assets acquired | |
$ | 2,260,747 | |
| Purchase consideration paid: | |
| | |
| Cash paid | |
$ | 687,808 | |
| Promissory note | |
| 1,572,939 | |
| Total purchase consideration paid | |
$ | 2,260,747 | |
2022
On
August 4, 2022, the Company’s wholly-owned subsidiary, Cougar Express, closed on its acquisition of all outstanding stock of JFK
Cartage, a New York-based full-service logistics provider specializing in pickup, warehousing and delivery services in the tri-state
area. Joan Ton, the sole shareholder of JFK Cartage, from whom the shares were acquired, is an unrelated party (the “JFK Cartage
Seller”). The effective date of the acquisition was July 31, 2022. JFK Cartage operates from a 30,000 square foot warehouse with
ten drive-in doors and is strategically located approximately six miles from JFK International Airport. JFK Cartage has been in business
since 2008 and has been providing warehousing, cross-dock services, pickup and deliveries, and general trucking, handling airfreight,
trade show freight, expedited and hotshot demand work, LTL/cartage as well as FTL, reverse logistics, white glove and residential delivery
services to a broad base of over 95 commercial accounts and residential customers. JFK Cartage operates a wide-ranging fleet of specialty
vehicles, from its Sprinter vans to full 53-ft. tractor trailers. JFK Cartage, with its assets, fleet and warehouse is believed to be
one of the largest leading cartage agents serving the New York Tri-State area. Pursuant to the Stock Purchase and Sale Agreement with
Cougar Express and JFK Cartage dated May 24, 2022, the purchase price was $1,700,000, subject to certain adjustments. The Company: (i)
paid $405,712 in cash at closing; and (ii) JFK Cartage entered into a $696,935 promissory note with the JFK Cartage Seller, $98,448 of
which is payable weekly, in the amount of 25% of accounts receivable collected, but in any event, no later than October 4, 2022, with
the remaining balance of $598,487, payable in three annual installments of $199,496, with interest at 5.0% percent per annum on July
31, 2023, July 31, 2024 and July 31, 2025, respectively. Additionally, Cougar Express agreed to pay the $503,065 Small Business Administration
(“SBA”) loan that existed on the books of JFK Cartage, which was paid in August 2022; and (iv) agreed to pay certain accrued
liabilities and other notes payable that exists on the books of JFK Cartage. For accounting purposes, the total purchase consideration
paid, after closing adjustments, was deemed to be $1,102,647, which includes cash of $405,712 plus the $696,935 promissory note that
is in the name of JFK Cartage. The purchase consideration amount did not include the SBA loan of $503,065, and accrued liabilities and
other notes payable which were treated as assumed liabilities in the purchase price allocation.
Effective
September 16, 2022, the Company’s newly formed wholly-owned subsidiary, TLSS-FC, closed on an acquisition of all outstanding stock
of Freight Connections, a company offering an array of transportation, warehousing, consolidating, distribution, and local cartage services
throughout the New York tri-state area. Joseph Corbisiero, the sole shareholder of Freight Connections, from whom the shares were acquired
(the “Freight Connections Seller”). Freight Connections was founded in 2016 and is a transportation and logistics carrier
headquartered in Ridgefield Park, New Jersey. Freight Connections currently operates with 30 power units and 50 trailers, including dry
vans, pups, flatbeds, step decks, and double drop trailers out of three buildings in the area with 200,000 square feet of warehouse and
cross dock space, strategically located within one mile of each other. Freight Connections offers customers an array of services including
truckload, LTL, and consolidating of cartage, construction-trade, air, and rail freight, as well as warehousing and distribution services.
Prior to the closing, the Company, TLSSA and Freight Connections Seller entered into an amendment to their Stock Purchase and Sale Agreement,
dated as of May 23, 2022 (the “Amended SPA”), and TLSSA assigned its interest in the Amended SPA to TLSS-FC. Pursuant to
the Amended SPA, the total purchase price was $9,365,000, subject to certain adjustment. TLSS-FC: (i) paid $1,525,000 in cash at closing,
(ii) Freight Connections entered into a $4,544,671 secured promissory note with the Freight Connections Seller, with interest accruing
at the rate of 5% per annum and then 10% per annum as of March 1, 2023 (The entire unpaid principal under the note, together with all
accrued and unpaid interest thereon and all other amounts payable thereunder, shall be due and payable in one balloon payment on December
31, 2023, unless paid sooner. The promissory note is secured solely by the assets of Freight Connections), and (iii) assumed certain
debt. The Company issued to the Freight Connections Seller 178,911,844 shares of the Company’s common stock and 32,374 shares of
the Company’s Series H preferred stock which is convertible into an aggregate of 323,740,000 shares of the Company’s common
stock based on a conversion of 10,000 shares of common stock for each share of Series H preferred stock outstanding. The common stock
and the as if converted number of Series H preferred stock were valued at $0.0059 per share based on the quoted closing price of the
Company’s common stock on the measurement date, for an aggregate fair value of $2,965,646. The number of shares was calculated
as follows: (a) shares of common stock of the Company equal to no more than 4.99% of the number of shares of common stock outstanding
immediately after such issuance, and (b) the balance of the shares in Series H Convertible Preferred Stock, a new series of non-voting,
convertible preferred stock issuable to sellers in connection with acquisitions or strategic transactions approved by a majority of the
directors of the Company. TLSS-FC agreed to pay certain accrued liabilities and other notes payable that existed on the books of Freight
Connections and agreed to pay the $4,544,671 secured promissory note which was assumed by Freight Connections. For accounting purposes,
the total purchase consideration paid, after closing adjustments, was deemed to be $9,035,317 which includes (i) cash paid of $1,525,000,
(ii) the aggregate fair value of common shares and Series H preferred shares issued to Freight Connections Seller of $2,965,646, and
(iii) the $4,544,671 secured promissory note in the name of Freight Connections. The purchase consideration amount does not include accrued
liabilities and other notes payable which were treated as assumed liabilities in the purchase price allocation.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023
(Unaudited)
The
Freight Connections Seller also entered into an employment agreement, including non-competition provisions, to continue with Freight
Connections after the acquisition.
The
assets acquired and liabilities assumed were recorded at their estimated fair values on the respective acquisition date, subject to adjustment
during the measurement period with subsequent changes recognized in earnings or loss. These estimates are inherently uncertain and are
subject to refinement. Management develops estimates based on assumptions as a part of the purchase price allocation process to value
the assets acquired and liabilities assumed as of the business acquisition date. As a result, during the purchase price measurement period,
which may be up to one year from the business acquisition date, the Company may record adjustments to the assets acquired and liabilities
assumed based on completion of valuations, with the corresponding offset to intangible assets. After the purchase price measurement period,
the Company may record any adjustments to assets acquired or liabilities assumed in operating expenses in the period in which the adjustments
may have been determined. Based upon the adjusted purchase price allocations, the following table summarizes the estimated fair value
of the assets acquired and liabilities assumed at the date of the respective 2022 acquisition:
SCHEDULE
OF FAIR VALUE OF ASSETS ACQUIRED AND LIABILITIES ASSUMED
| | |
JFK Cartage | | |
Freight Connections | | |
Total | |
| Assets acquired: | |
| | | |
| | | |
| | |
| Cash | |
$ | 29,280 | | |
$ | 167,247 | | |
$ | 196,527 | |
| Accounts receivable, net | |
| 280,815 | | |
| 1,909,892 | | |
| 2,190,707 | |
| Other assets | |
| 206,591 | | |
| 428,666 | | |
| 635,257 | |
| Property and equipment | |
| 44,839 | | |
| 1,296,974 | | |
| 1,341,813 | |
| Right of use assets | |
| 1,172,972 | | |
| 7,911,622 | | |
| 9,084,594 | |
| Other intangible assets | |
| 752,025 | | |
| 4,892,931 | | |
| 5,644,956 | |
| Goodwill | |
| 502,642 | | |
| 1,603,237 | | |
| 2,105,879 | |
| Total assets acquired at fair value | |
| 2,989,164 | | |
| 18,210,569 | | |
| 21,199,733 | |
| Liabilities assumed: | |
| | | |
| | | |
| | |
| Notes payable | |
| (515,096 | ) | |
| (598,886 | ) | |
| (1,113,982 | ) |
| Accounts payable | |
| (10,559 | ) | |
| (422,902 | ) | |
| (433,461 | ) |
| Accrued expenses | |
| (187,890 | ) | |
| (241,842 | ) | |
| (429,732 | ) |
| Lease liabilities | |
| (1,172,972 | ) | |
| (7,911,622 | ) | |
| (9,084,594 | ) |
| Total liabilities assumed | |
| (1,886,517 | ) | |
| (9,175,252 | ) | |
| (11,061,769 | ) |
| Net asset acquired | |
$ | 1,102,647 | | |
$ | 9,035,317 | | |
$ | 10,137,964 | |
| Purchase consideration paid: | |
| | | |
| | | |
| | |
| Cash paid | |
$ | 405,712 | | |
$ | 1,525,000 | | |
$ | 1,930,712 | |
| Notes payable | |
| 696,935 | | |
| 4,544,671 | | |
| 5,241,606 | |
| Common shares and Series H preferred shares issued | |
| - | | |
| 2,965,646 | | |
| 2,965,646 | |
| Total purchase consideration paid | |
$ | 1,102,647 | | |
$ | 9,035,317 | | |
$ | 10,137,964 | |
The
following unaudited pro forma consolidated results of operations have been prepared as if the acquisition of JFK Cartage, Freight Connections
and Severance Trucking had occurred as of the beginning of the following periods:
SCHEDULE OF UNAUDITED PRO FORMA CONSOLIDATION
| | |
For the Three Months Ended
March 31, 2023 | | |
For the Three Months Ended
March 31, 2022 | |
| Net Revenues | |
$ | 6,356,956 | | |
$ | 7,879,665 | |
| Net Loss | |
$ | (1,971,233 | ) | |
$ | (1,642,570 | ) |
| Net Loss Attributable to Common Shareholders | |
$ | (2,071,633 | ) | |
$ | (2,146,282 | ) |
| Net Loss per Share | |
$ | (0.00 | ) | |
$ | (0.00 | ) |
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 periods presented and is not intended to be a projection of future results.
Disposition
Sale
of Shyp FX assets
On
June 21, 2022, the Company sold substantially all of the assets of Shyp FX in an all-cash transaction. The purchaser was Farhoud Logistics
Inc., a New Jersey corporation, an unrelated party. Under the terms of the sale, The Company sold the assets of Shyp FX consisting of
transportation equipment and other equipment and the business of Shyp FX for $825,000. The Company received net proceeds of $748,500
which is net of a broker commission of $75,000 and other expenses of $4,214. $25,000 was being held in escrow, pending bulk sale tax
clearance from the State of New Jersey and to cover the estimated cost of a vehicle repair. The Company received the escrowed funds during
the fourth quarter of 2022. In connection with the sale of these assets, for the year ended December 31, 2022, the Company recorded a
gain on the sale of $293,975. A loss on the sale of $720 was recorded during the three months ended March 31, 2023.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023
(Unaudited)
NOTE
4 – ACCOUNTS RECEIVABLE AND NOTE RECEIVABLE
Accounts
receivable
On
March 31, 2023 and December 31, 2022, accounts receivable, net consisted of the following:
SCHEDULE OF ACCOUNTS RECEIVABLE
| | |
March 31, 2023 | | |
December 31, 2022 | |
| Accounts receivable | |
$ | 3,959,109 | | |
$ | 2,523,778 | |
| Allowance for doubtful accounts | |
| (597,259 | ) | |
| (464,452 | ) |
| Accounts receivable, net | |
$ | 3,361,850 | | |
$ | 2,059,326 | |
During
the three months ended March 31, 2023 and 2022, the Company recorded bad debt expense (recovery) of $(23,273)and $0, respectively, which
is included in general and administrative expenses on the accompanying unaudited consolidated statements of operations.
Note
receivable
On
October 31, 2022, the Company entered into a promissory note receivable with Recommerce Group, Inc (“Recommerce”), a third
party, in the amount of $283,333. In connection with the note receivable, the Company disbursed $255,000 to Recommerce, which is net
of an original issue discount of $28,333. The promissory note bears interest at the rate of 6% per annum and matured on December 31,
2022 (the “Maturity Date”). On December 31, 2022, the note receivable amounted to $283,333 and accrued interest receivable
amounted to $2,833, which is included in prepaid expenses and other current assets on the accompanying unaudited consolidated balance
sheet. During the year ended December 31, 2022, in connection with this note receivable, the Company recorded interest income of $31,166.
In January 2023, Recommerce repaid this note receivable plus all interest due.
NOTE
5 - PROPERTY AND EQUIPMENT
On
March 31, 2023 and December 31, 2022, property and equipment consisted of the following:
SCHEDULE OF PROPERTY AND EQUIPMENT
| | |
Useful Life | |
March 31, 2023 | | |
December 31, 2022 | |
| Revenue equipment | |
3 - 20 years | |
$ | 2,552,365 | | |
$ | 1,316,518 | |
| Machinery and equipment | |
1 - 10 years | |
| 546,533 | | |
| 440,863 | |
| Office equipment and furniture | |
1 - 3 years | |
| 116,460 | | |
| 106,172 | |
| Leasehold improvements | |
1 - 3 years | |
| 63,710 | | |
| 22,329 | |
| Subtotal | |
| |
| 3,279,068 | | |
| 1,885,882 | |
| Less: accumulated depreciation | |
| |
| (391,455 | ) | |
| (278,670 | ) |
| Property and equipment, net | |
| |
$ | 2,887,613 | | |
$ | 1,607,212 | |
On
June 21, 2022, in connection with the sale of net assets of Shyp FX, the Company sold delivery trucks and equipment with a net book value
of $257,306 (See Note 3).
For
the three months ended March 31, 2023 and 2022, depreciation expense amounted to $112,785 and $46,333, respectively, and is included
in general and administrative expenses.
NOTE
6 – INTANGIBLE ASSETS AND GOODWILL
As
a result of the acquisition of Severance Trucking, during the three months ended March 31, 2023, there was a $404,374 increase in the
gross intangible assets made up of $404,374 of finite lived intangible assets (See Note 3). The increase in gross finite lived intangible
assets is associated with customer relationships that have finite lives.
As
a result of the acquisitions of JFK Cartage and Freight Connections, during the year ended December 31, 2022, there was a $7,750,835
increase in the gross intangible assets made up of $1,753,237 of finite lived intangible assets and $5,997,598 of goodwill (See Note
3). The increase in gross finite lived intangible assets is associated with customer relationships and covenants not to compete and have
finite lives.
On
March 31, 2023, intangible assets subject to amortization consisted of the following:
SCHEDULE OF INTANGIBLE ASSETS
| | |
Amortization period (years) | |
Gross Amount | | |
Accumulated Amortization | | |
Net finite intangible assets | |
| | |
2023 |
| | |
Amortization period (years) | |
Gross Amount | | |
Accumulated Amortization | | |
Net finite intangible assets | |
| Customer relationships | |
3-5 | |
$ | 3,768,818 | | |
$ | 377,960 | | |
$ | 3,390,858 | |
| Covenants not to compete | |
3-5 | |
| 1,503,487 | | |
| 162,878 | | |
| 1,340,609 | |
| Other intangible assets | |
1 | |
| 25,000 | | |
| 13,542 | | |
| 11,458 | |
| Intangible assets net | |
| |
$ | 5,297,305 | | |
$ | 554,380 | | |
$ | 4,742,925 | |
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023
(Unaudited)
On
December 31, 2022, intangible assets subject to amortization consisted of the following:
| | |
Amortization period (years) | |
Gross Amount | | |
Accumulated Amortization | | |
Net finite intangible assets | |
| | |
2022 |
| | |
Amortization period (years) | |
Gross Amount | | |
Accumulated Amortization | | |
Net finite intangible assets | |
| Customer relationships | |
3-5 | |
$ | 3,364,444 | | |
$ | 196,259 | | |
$ | 3,168,185 | |
| Covenants not to compete | |
3-5 | |
| 1,503,487 | | |
| 87,703 | | |
| 1,415,784 | |
| Other intangible assets | |
1 | |
| 25,000 | | |
| 7,292 | | |
| 17,708 | |
| Intangible assets net | |
| |
$ | 4,892,931 | | |
$ | 291,254 | | |
$ | 4,601,677 | |
On
March 31, 2023 and December 31, 2022, goodwill consisted of the following:
SCHEDULE OF GOODWILL
| | |
Useful life | |
March 31, 2023 | | |
December 31, 2022 | |
| Goodwill (1) | |
- | |
$ | 2,105,879 | | |
$ | 2,105,879 | |
| Goodwill Total
| |
| |
$ | 2,105,879 | | |
$ | 2,105,879 | |
| (1) |
$502,642
of goodwill is related to a subsidiary that has negative equity as of March 31, 2023 and December 31, 2022. |
For
the three months ended March 31, 2023 and 2022, amortization of intangible assets amounted to $263,126 and $144,810, respectively.
Amortization
of intangible assets attributable to future periods is as follows:
SCHEDULE OF FUTURE AMORTIZATION OF INTANGIBLE ASSETS
| Year ending March 31: | |
Amount | |
| 2024 | |
$ | 1,065,919 | |
| 2025 | |
| 1,054,461 | |
| 2026 | |
| 1,054,461 | |
| 2027 | |
| 1,054,461 | |
| 2028 | |
| 513,623 | |
| Total | |
$ | 4,742,925 | |
NOTE
7 – NOTES PAYABLE
Promissory
notes
On
July 31, 2022, in connection with the acquisition of JFK Cartage, JFK Cartage issued a promissory note in the amount of $696,935. Principal
amount of $98,448 is payable weekly, in the amount of 25% of accounts receivable collected, but in any event, no later than October 4,
2022. This amount was paid prior to December 31, 2022. The remaining balance of $598,487 is payable in three annual installments of $199,496,
with interest at 5% per annum, payable on July 31, 2023, July 31, 2024 and July 31, 2025, respectively. On March 31, 2023 and December
31, 2022, the principal amount related to this note was $598,487.
In
connection with the acquisition of JFK Cartage, on July 31, 2022, the Company assumed an SBA loan that existed on the books of JFK Cartage
in the amount of $500,000 and the related accrued interest. The Company repaid this SBA loan and all accrued interest in August 2022.
On
September 16, 2022, in connection with the acquisition of Freight Connections, Freight Connections issued a promissory note in the amount
of $4,544,671 to the Freight Connections Seller. The secured promissory accrues interest at the rate of 5% per annum and then 10% per
annum as of March 1, 2023. The entire unpaid principal under the note, together with all accrued and unpaid interest thereon and all
other amounts payable thereunder, shall be due and payable in one balloon payment on December 31, 2023, unless paid sooner. The promissory
note is secured solely by the assets of Freight Connections. On March 31, 2023 and December 31, 2022, the principal amount related to
this note was $4,544,671.
On
January 31, 2023, in connection with the acquisition of Severance Trucking, Severance Trucking issued a promissory note in the amount
of $1,572,939 to the Severance Trucking Sellers. The secured promissory accrues interest at the rate of 12% per annum. The entire unpaid
principal under the note, shall be due and payable in three equal payments on August 1, 2023, February 1, 2024, and August 1, 2024, respectively,
together with all accrued and unpaid interest thereunder, unless paid sooner. The promissory note is secured solely by the assets of
Severance Trucking and a corporate guaranty from TLSS. On March 31, 2023, the principal amount related to this note was $1,572,939.
In
connection with the acquisition of Freight Connections, on September 16, 2022, the Company assumed a merchant loan with Paypal in the
amount of $15,612. This merchant was repaid and on December 31, 2022, the merchant loan amount due to Paypal was $0.
Equipment
and auto notes payable
In
connection with the acquisition of JFK Cartage, on July 31, 2022, the Company assumed several equipment notes payable due to entities
amounting to $15,096. On March 31, 2023 and December 31, 2022, equipment notes payable to these entities amounted to $7,093 and $9,605,
respectively.
On
July 7, 2022, Cougar Express entered into a promissory note for the purchase of a truck in the amount of $46,416. The note is due in
sixty monthly installments of $1,019 which began in August 2022. The note was secured by the truck. On March 31, 2023 and December 31,
2022, the equipment note payable to this entity amounted to $40,614 and $42,424, respectively.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023
(Unaudited)
In
connection with the acquisition of Freight Connections, on September 16, 2022, the Company assumed several equipment notes payable due
to entities amounting to $583,274. On March 31, 2023 and December 31, 2022, equipment notes payable to these entities amounted to $489,207
and $533,669, respectively.
On
September 22, 2022, JFK Cartage entered into a promissory note for the purchase of a truck in the amount of $61,979. The note is due
in forty-eight monthly installments of $1,645 which began in August 2022. The note was secured by the truck. On March 31, 2023 and December
31, 2022, the equipment note payable to this entity amounted to $52,648 and $55,720, respectively.
On
January 17, 2023, Cougar Express entered into a promissory note for the purchase of two trucks in the amount of $196,700. The note is
due in sixty monthly installments of $4,059 which began in August 2022. The note was secured by the truck. On March 31, 2023, the equipment
note payable to this entity amounted to $191,431.
In
connection with the acquisition of Severance Trucking, on January 31, 2023, the Company assumed an equipment note payable due to an entity
amounting to $23,000. On March 31, 2023, equipment note payable to this entity amounted to $21,853.
On
March 31, 2023 and December 31, 2022, notes payable consisted of the following:
SCHEDULE
OF NOTES PAYABLE
| | |
March 31, 2023 | | |
December 31, 2022 | |
| Principal amounts | |
$ | 7,518,943 | | |
$ | 5,784,577 | |
| Less: current portion of notes payable | |
| (6,035,877 | ) | |
| (4,953,078 | ) |
| Notes payable – long-term | |
$ | 1,483,066 | | |
$ | 831,499 | |
As
of March 31, 2023, future maturities of notes payable is as follows:
SCHEDULE
OF FUTURE MATURITIES OF NOTES PAYABLE
| Year ending March 31: | |
Amount | |
| 2024 | |
$ | 6,035,877 | |
| 2025 | |
| 961,592 | |
| 2026 | |
| 379,874 | |
| 2027 | |
| 99,592 | |
| 2028 | |
| 42,008 | |
| Total | |
$ | 7,518,943 | |
NOTE
8– SHAREHOLDERS’ EQUITY
Preferred
stock
The
Company has 10,000,000 authorized shares of preferred stock, $0.001 par value per share. The Company’s Amended and Restated Articles
of Incorporation explicitly authorize the Board to issue any or all of such shares of preferred stock in one (1) or more classes or series
and to fix the designations, powers, preferences and rights, the qualifications, limitations or restrictions thereof, including dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any class or series, without further vote or action by the stockholders.
Series
B preferred shares
In
August 2019, the Company designated Series B Preferred Shares consisting of 1,700,000 shares with a par value of $0.001 and a stated
value of $0.001. The Series B preferred shares have no voting rights and are not redeemable. Each share of Series B Preferred stock is
convertible into one share of common stock at the option of the holder subject to beneficial ownership limitation. In April 2022, the
Company and Bellridge entered into a settlement agreement pursuant to which 700,000 shares of Series B preferred shares were cancelled
and the Company recorded settlement income of $700. On March 31, 2023 and December 31, 2022, there were no Series B preferred stock issued
and outstanding.
Series
D preferred shares
On
July 20, 2020, the Board filed the Certificate of Designation of Preferences (“COD”), Rights and Limitations of Series D
Preferred Stock (the “Series D COD”) with the Secretary of State of the State of Nevada designating 1,250,000 shares of preferred
stock as Series D. The Series D preferred stock (“Series D Preferred”) does not have the right to vote. The Series D Preferred
has a stated value of $6.00 per share (the “Stated Value”). Subject only to the liquidation rights of the holders of Series
B Preferred that is currently issued and outstanding, upon the liquidation, dissolution or winding up of the business of the Company,
whether voluntary or involuntary, the Series D Preferred holders are entitled to receive an amount per share equal to the Stated Value
and then receive a pro-rata portion of the remaining assets available for distribution to the holders of common stock on an as-converted
to common stock basis. Until July 20, 2021, the holders of Series D Preferred had the right to participate, pro rata, in each subsequent
financing in an amount up to 25% of the total proceeds of such financing on the same terms, conditions and price otherwise available
in such subsequent financing.
Subject
to a beneficial ownership limitation and customary adjustments for stock dividends and stock splits, each share of Series D is convertible
into 1,000 shares of common stock. A holder of Series D Preferred may not convert any shares of Series D Preferred into common stock
if the holder (together with the holder’s affiliates and any persons acting as a group together with the holder or any of the holder’s
affiliates) would beneficially own in excess of 4.99% of the number of shares of common stock outstanding immediately after giving effect
to the conversion, as such percentage ownership is determined in accordance with the terms of the Series D COD. However, upon notice
from the holder to the Company, the holder may decrease or increase the beneficial ownership limitation, which may not exceed 9.99% of
the number of shares of common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined
in accordance with the terms of the Series D COD, provided that any such increase or decrease in the beneficial ownership limitation
will not take effect until 61 days following notice to the Company.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023
(Unaudited)
Approval
of at least a majority of the outstanding Series D Preferred is required to: (a) amend or repeal any provision of, or add any provision
to, the Company’s Articles of Incorporation or bylaws, or file any Certificate of Designation (however such document is named)
or articles of amendment to create any class or any series of preferred stock, if such action would adversely alter or change in any
respect the preferences, rights, privileges or powers, or restrictions provided for the benefit, of the Series D, regardless of whether
any such action shall be by means of amendment to the Articles of Incorporation or bylaws or by merger, consolidation or otherwise or
filing any Certificate of Designation, it being understood that the creation of a new security having rights, preferences or privileges
senior to or on parity with the Series D Preferred in a future financing will not constitute an amendment, addition, alteration, filing,
waiver or repeal for these purposes; (b) increase or decrease (other than by conversion) the authorized number of Series D Preferred;
(c) issue any Series D Preferred, other than to the Investors; or (d) without limiting any provision hereunder, whether or not prohibited
by the terms of the Series D Preferred, circumvent a right of the Series D Preferred.
As
of March 31, 2023 and December 31, 2022, no shares of Series D Preferred were outstanding.
Series
E preferred shares
To
consummate the Series E Offerings described below, the Company’s Board of Directors (the “Board”) created the Series
E Convertible Preferred Stock (the “Series E”) pursuant to the authority vested in the Board by the Company’s Amended
and Restated Articles of Incorporation to issue up to 10,000,000 shares of preferred stock, $0.001 par value per share, of which 7,049,999
are unissued and undesignated.
On
October 6, 2020, the Board filed the Certificate of Designation of Preferences, Rights and Limitations of Series E Convertible Preferred
Stock (the “Series E COD”) with the Secretary of State of the State of Nevada designating 562,250 shares of preferred stock
as Series E. On December 28, 2020, the Board filed an Amended and Restated Certificate of Designation of Preferences, Rights and Limitations
of Series E Convertible Preferred Stock (the “Amended Series E COD”) with the Secretary of State of the State of Nevada.
The Series E has a stated value of $13.34 per share (the “Stated Value”). Pursuant with the Amended Series E COD,
| |
● |
Each
holder of Series E has the right to cast the number of votes equal to the number of whole shares of Common Stock into which the shares
of Series E held by such holder are convertible as of the applicable record date. |
| |
|
|
| |
● |
Unless
prohibited by Nevada law governing distributions to stockholders, for a period of one-year beginning with the Original Issuance Date,
as defined, the Corporation shall have the right but not the obligation to redeem all outstanding Series E (and not any part of the
Series E) at a price equal to 115% of (i) the Stated Value per share plus (ii) all unpaid dividends thereon. If the Company fails
to redeem all outstanding Series E on the redemption date, it shall be deemed to have waived its redemption right. |
Subject
to a beneficial ownership limitation and customary adjustments for stock dividends and stock splits, each share of Series E shall be
convertible into that number of shares of Common Stock calculated by dividing the Stated Value of each share of Series E being converted
by the Conversion Price. The initial Conversion Price shall be $0.01 which shall be subject to adjustment as provided below. In addition,
the Company shall issue the Holder converting all or any portion of Series E an additional sum (the “Make Good Amount”) equal
to $210 for each $1,000 of Stated Value of the Series E converted pro-rated for amounts more or less than $1,000, increasing to $310
for each $1,000 of Stated Value during the Triggering Event Period (the “Extra Amount”). Subject to the Beneficial Ownership
Limitation, the Make Good Amount shall be paid in Shares of Common Stock, as follows: The number of shares of Common Stock issuable as
the Make Good Amount shall be calculated by dividing the Extra Amount by the product of 80% times the average VWAP for the five Trading
Days prior to the date a Holder delivered a notice of conversion to the Company (the “Conversion Date”). During the Triggering
Event Period, the number of shares of Common Stock issuable as the Make Good Amount shall be calculated by dividing the Extra Amount
by the product of 70% times the average VWAP for the five Trading Days prior to the Conversion Date.
Subject
to the Beneficial Ownership Limitation, at any time during the period commencing on the date of the occurrence of a Triggering Event
and ending on the date of the cure of such Triggering Event (the “Triggering Event Period”), a Holder may, at such Holder’s
option, by delivery of a conversion notice to the Company to convert all, or any number of Series E (such conversion amount of the Series
E to be converted pursuant to this Section 6(b) (the “Triggering Event Conversion Amount”), into shares of Common Stock at
the Triggering Event Conversion Price. The “Triggering Event Conversion Amount” means 125% of the Stated Value and the “Triggering
Event Conversion Price” means $0.006.
Triggering
events include, but are not limited to, (1) failure to satisfy Rule 144 current public information requirements; (2) ceasing to be a
reporting company under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or failing to comply with the
reporting requirements of a reporting company under the Exchange Act; (3) suspension from or termination of trading; (4) failure to reserve
sufficient shares of Common Stock (after cure periods and subject to certain extensions); (5) various insolvency proceedings (subject
to certain carveouts); (6) material breach of the Series E Offerings transaction documents; and (7) failure to comply with conversion
of any Series E shares when requested by the holder thereof.
If
and whenever on or after the Initial Issuance Date but not after two years from the Original Issuance Date, the Company issues or sells,
or is deemed to have issued or sold, additional shares of common stock, options, warrants of convertible instruments, other than an Exempt
Issuance, for a consideration per share (the “Base Share Price”) less than a price equal to the Conversion Price in effect
immediately prior to such issuance or sale or deemed issuance or sale (such Conversion Price then in effect is reflected to herein as
the “Applicable Price”) (the foregoing a “Dilutive Issuance”), then immediately after such Dilutive Issuance,
the conversion price then in effect shall be reduced to an amount equal to the Base Share Price.
From
and after the Original Issuance Date, cumulative dividends on each share of Series E shall accrue, whether or not declared by the Board
of Directors and whether or not there are funds legally available for the payment of dividends, on a daily basis in arrears at the rate
of 6% per annum based on a 360-day year on the Stated Value plus all unpaid accrued and accumulated dividends thereon. As of March 31,
2023 and December 31, 2022, the Company has accrued dividends of $165,319 and $161,092, respectively, which has been included in accrued
expenses on the accompanying unaudited consolidated balance sheets.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023
(Unaudited)
On
a pari passu basis with the holders of Series D Convertible Preferred Stock that was issued and outstanding, upon the liquidation, dissolution
or winding up of the business of the Company, whether voluntary or involuntary, the Series E is entitled to receive an amount per share
equal to the Stated Value and then receive a pro-rata portion of the remaining assets available for distribution to the holders of Common
Stock on an as-converted to Common Stock basis. Until the date that such Series E shareholder no longer owns at least 50% of the Series
E, the holders of Series E have the right to participate, pro rata, in each subsequent financing in an amount up to 25% of the total
proceeds of such financing on the same terms, conditions and price otherwise available in such subsequent financing.
A
holder of Series E may not convert any shares of Series E into Common Stock if the holder (together with the holder’s affiliates
and any persons acting as a group together with the holder or any of the holder’s affiliates) would beneficially own in excess
of 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to the conversion, as such percentage ownership
is determined in accordance with the terms of the Series E COD. However, upon notice from the holder to the Company, the holder may decrease
or increase the beneficial ownership limitation, which may not exceed 9.99% of the number of shares of Common Stock outstanding immediately
after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Amended Series E
COD, provided that any such increase or decrease in the beneficial ownership limitation will not take effect until 61 days following
notice to the Company.
Approval
of at least a majority of the outstanding Series E is required to: (a) amend or repeal any provision of, or add any provision to, the
Company’s Articles of Incorporation or bylaws, or file any Certificate of Designation (however such document is named) or articles
of amendment to create any class or any series of preferred stock, if such action would adversely alter or change in any respect the
preferences, rights, privileges or powers, or restrictions provided for the benefit, of the Series E, regardless of whether any such
action shall be by means of amendment to the Articles of Incorporation or bylaws or by merger, consolidation or otherwise or filing any
Certificate of Designation, but the creation of a new security having rights, preferences or privileges senior to or on parity with the
Series E in a future financing will not constitute an amendment, addition, alteration, filing, waiver or repeal for these purposes; (b)
increase or decrease (other than by conversion) the authorized number of Series E; (c) issue any Series D Convertible Preferred Stock,
(d) issue any Series E in excess of 562,250 or (e) without limiting any provision under the Series E COD, whether or not prohibited by
the terms of the Series E, circumvent a right of the Series E.
In
connection with the Series E Offerings, the Company entered into Registration Rights Agreements (the “Series E Registration Rights
Agreements”) pursuant to which the Company agreed to file a registration statement on Form S-1 to register the resale of the shares
of Common Stock issuable to the Investors upon conversion of the Series E Preferred Stock and exercise of the Warrants. Pursuant to the
Series E Registration Rights Agreements, if a registration statement registering for resale all of the shares of common stock issuable
under Series E Convertible Preferred Stock and Warrants (i) is not filed with the Commission by the Company within 30 days of the closing
dates or any other registration statement, (ii) is not declared effective by the Commission by the Effectiveness Date of the initial
registration statement (90 days following the closing date) or any other registration statement, or (iii) after the effective date of
a registration statement, such registration statement ceases for any reason to remain continuously effective as to all registrable securities
included in such registration statement for more than 30 calendar days during any 12-month period (any such failure or breach being referred
to as an “Event”, and the date on which such Event occurs, being referred to as “Event Date”), then, in addition
to any other rights the Holders may have under the Series E Registration Rights Agreements or under applicable law, on each such Event
Date and on each monthly anniversary of each such Event Date (if the applicable Event shall not have been cured by such date) until the
applicable Event is cured, the Company is obligated to pay to each Holder an amount in cash, as partial liquidated damages and not as
a penalty, equal to 1% of the purchase price paid by such Holder pursuant to the Series E Purchase Agreement, during which such Event
continues uncured. Also pursuant to the Series E Registration Rights Agreements, the partial liquidated damages provisions summarized
above apply on a daily pro rata basis for any portion of a month prior to the cure of an Event. The Company did not file its initial
registration statement within 30 days of the closing date of certain of the Registration Rights Agreements (the “Filing Events”)
and such registration statement was not declared effective by the Commission by the Effectiveness Date of certain of the Registration
Rights Agreements (the “Effectiveness Events”). The Company filed a registration statement on Form S-1 for the shares of
Common Stock issuable to the Investors upon conversion of the Series E Preferred Stock and exercise of the Warrants (the “S-1 Registration
Statement”) on April 22, 2021 (the “Filing Date”), which was declared effective by the Commission on May 5, 2021 (the
“Effective Date”). The filing of the S-1 Registration Statement cured the Filing Events as of the Filing Date. The declaration
of effectiveness of the S-1 Registration Statement cured the Effectiveness Events as of the Effective Date.
These
Series E preferred share issuances with redemption provisions that permit the issuer to settle in either cash or common stock, at the
option of the issuer, were evaluated to determine whether temporary or permanent equity classification on the consolidated balance sheet
was appropriate. As per the terms of the Series E preferred stock agreements, the Company shall have the right but not the obligation
to redeem all outstanding Series E (and not any part of the Series E) at a price equal to 115% of (i) the Stated Value per share plus
(ii) all unpaid dividends thereon. As such, since Series E preferred stock is redeemable upon the occurrence of an event that is within
the Company’s control, the Series E preferred stock is classified as permanent equity.
The
Company concluded that the Series E Preferred Stock represented an equity host and, therefore, the redemption feature of the Series E
Preferred Stock was considered to be clearly and closely related to the associated equity host instrument. The redemption features did
not meet the net settlement criteria of a derivative and, therefore, were not considered embedded derivatives that required bifurcation.
The Company also concluded that the conversion rights under the Series E Preferred Stock were clearly and closely related to the equity
host instrument. Accordingly, the conversion rights feature on the Series E Preferred Stock were not considered an embedded derivative
that required bifurcation.
During
the three months ended March 31, 2022, the Company issued 75,000,000 shares of its common stock in connection with the conversion of
19,947 shares of Series E. The conversion ratio was based on the Series E certificate of designation, as amended.
Series
G preferred shares
On
December 28, 2021, the Company’s Board of Directors (the “Board”) filed the Certificate of Designation of Preferences,
Rights and Limitations of Series G Convertible Preferred Stock (the “Series G COD”) with the Secretary of State of the State
of Nevada designating 1,000,000 shares of preferred stock as Series G (“Series G”). The Series G has a stated value of $10.00
per share (the “Series G Stated Value”). Pursuant with the Series G COD,
| |
● |
Each
holder of Series G has the right to cast the number of votes equal to the number of whole shares of Common Stock into which the shares
of Series G held by such holder are convertible as of the applicable record date. |
| |
|
|
| |
● |
Unless
prohibited by Nevada law governing distributions to stockholders, for a period of one-year beginning with the Original Issuance Date,
as defined, the Corporation shall have the right but not the obligation to redeem all outstanding Series G (and not any part of the
Series G) at a price equal to 115% of (i) the Stated Value per share plus (ii) all unpaid dividends thereon. If the Company fails
to redeem all outstanding Series G on the redemption date, it shall be deemed to have waived its redemption right. |
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023
(Unaudited)
Subject
to a beneficial ownership limitation and customary adjustments for stock dividends and stock splits, each share of Series G shall be
convertible into that number of shares of Common Stock calculated by dividing the Stated Value of each share of Series G being converted
by the Conversion Price. The initial Conversion Price shall be $0.01 which shall be subject to adjustment as provided below. In addition,
the Company shall issue the Holder converting all or any portion of Series G an additional sum (the “Series G Make Good Amount”)
equal to $210 for each $1,000 of Stated Value of the Series G converted pro-rated for amounts more or less than $1,000 (the “Series
G Extra Amount”). Subject to the Beneficial Ownership Limitation, the Make Good Amount shall be paid in Shares of Common Stock,
as follows: The number of shares of Common Stock issuable as the Make Good Amount shall be calculated by dividing the Series G Extra
Amount by the product of 80% times the average VWAP for the five Trading Days prior to the date a Holder delivered a notice of conversion
to the Company (the “Conversion Date”), subject to beneficial ownership limitations.
If
and whenever on or after the Initial Issuance Date but not after two years from the Original Issuance Date, the Company issues or sells,
or is deemed to have issued or sold, additional shares of common stock, options, warrants of convertible instruments, other than an Exempt
Issuance, for a consideration per share (the “Base Share Price”) less than a price equal to the Conversion Price in effect
immediately prior to such issuance or sale or deemed issuance or sale (such Conversion Price then in effect is reflected to herein as
the “Applicable Price”) (the foregoing a “Dilutive Issuance”), then immediately after such Dilutive Issuance,
the conversion price then in effect shall be reduced to an amount equal to the Base Share Price.
From
and after the Original Issuance Date, cumulative dividends on each share of Series G shall accrue, whether or not declared by the Board
of Directors and whether or not there are funds legally available for the payment of dividends, on a daily basis in arrears at the rate
of 6% per annum based on a 360-day year on the Stated Value plus all unpaid accrued and accumulated dividends thereon. As of March 31,
2023 and December 31, 2022, the Company has accrued dividends of $434,137 and $385,009, respectively, which has been included in accrued
expenses on the accompanying unaudited consolidated balance sheets.
On
a pari passu basis with the holders of Series E Convertible Preferred Stock that was issued and outstanding, upon the liquidation, dissolution
or winding up of the business of the Company, whether voluntary or involuntary, the Series G is entitled to receive an amount per share
equal to the Stated Value and then receive a pro-rata portion of the remaining assets available for distribution to the holders of Common
Stock on an as-converted to Common Stock basis. The holders of Series G have the right to participate, pro rata, in each subsequent financing
in an amount up to 40% of the total proceeds of such financing on the same terms, conditions and price otherwise available in such subsequent
financing.
A
holder of Series G may not convert any shares of Series G into Common Stock if the holder (together with the holder’s affiliates
and any persons acting as a group together with the holder or any of the holder’s affiliates) would beneficially own in excess
of 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to the conversion, as such percentage ownership
is determined in accordance with the terms of the Series G COD. However, upon notice from the holder to the Company, the holder may decrease
or increase the beneficial ownership limitation, which may not exceed 9.99% of the number of shares of Common Stock outstanding immediately
after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Series G COD, provided
that any such increase or decrease in the beneficial ownership limitation will not take effect until 61 days following notice to the
Company.
Approval
of at least two-thirds of the outstanding Series G is required to: (a) amend or repeal any provision of, or add any provision to, the
Company’s Articles of Incorporation or bylaws, or file any Certificate of Designation (however such document is named) or articles
of amendment to create any class or any series of preferred stock, if such action would adversely alter or change in any respect the
preferences, rights, privileges or powers, or restrictions provided for the benefit, of the Series G, regardless of whether any such
action shall be by means of amendment to the Articles of Incorporation or bylaws or by merger, consolidation or otherwise or filing any
Certificate of Designation, but the creation of a new security having rights, preferences or privileges senior to or on parity with the
Series G in a future financing will not constitute an amendment, addition, alteration, filing, waiver or repeal for these purposes; (b)
increase or decrease (other than by conversion) the authorized number of Series G; (c) issue any Series E or Series D Convertible Preferred
Stock, (d) issue any Series G in excess of 1,000,000 or (e) without limiting any provision under the Series G COD, whether or not prohibited
by the terms of the Series G, circumvent a right of the Series G.
On
January 25, 2022, the Company entered into Securities Purchase Agreements with investors pursuant to which the Investors agreed to purchase
units, severally and not jointly, which consisted of an aggregate of (i) 70,000 shares of Series G and (ii) Warrants to purchase 70,000,000
shares of the Company’s common stock which are equal to 1,000 warrants for each share of Series G purchased (the “January
2022 Series G Offering”). The gross proceeds to the Company were $700,000, or $10.00 per unit. The Company paid placement agent
fees of $70,000 and received net proceeds of $630,000. On March 4, 2022, the Company entered into a Securities Purchase Agreement with
an investor pursuant to which the Investor agreed to purchase units, severally and not jointly, which consisted of an aggregate of (i)
25,000 shares of Series G and (ii) Warrants to purchase 25,000,000 shares of the Company’s common stock which are equal to 1,000
warrants for each for each share of Series G purchased (the “March 2022 Series G Offering”). The gross proceeds to the Company
were $250,000, or $10.00 per unit. The Company paid placement agent fees of $25,000 and received net proceeds of $225,000. The initial
exercise price of the Warrants related to the January 2022 and March 2022 Series G Offerings is $0.01 per share, subject to adjustment.
Additionally, the Company issued 19,000,000 warrants to the placement agent at an initial exercise price of $0.01 per share. The aggregate
cash fees of $95,000 was charged against the proceeds of the offering in additional paid-in capital and there is no effect on equity
for the placement agent warrants.
In
connection with the Series G Offerings, the Company entered into Registration Rights Agreements (the “Series G Registration Rights
Agreements”) pursuant to which the Company agreed to file a registration statement on Form S-1 to register the resale of the shares
of Common Stock issuable to the Investors upon conversion of the Series G Preferred Stock and exercise of the Warrants. Pursuant to the
Series G Registration Rights Agreements, if a registration statement registering for resale all of the shares of common stock issuable
under Series G Convertible Preferred Stock and Warrants (i) is not filed with the Commission by the Company within 45 days of the closing
dates or any other registration statement, (ii) is not declared effective by the Commission by the Effectiveness Date of the initial
registration statement (90 days following the closing date) or any other registration statement, or (iii) after the effective date of
a registration statement, such registration statement ceases for any reason to remain continuously effective as to all registrable securities
included in such registration statement for more than 30 calendar days during any 12-month period (any such failure or breach being referred
to as an “Event”, and the date on which such Event occurs, being referred to as “Event Date”), then, in addition
to any other rights the Holders may have under the Series G Registration Rights Agreements or under applicable law, on each such Event
Date and on each monthly anniversary of each such Event Date (if the applicable Event shall not have been cured by such date) until the
applicable Event is cured, the Company is obligated to pay to each Holder an amount in cash, as partial liquidated damages and not as
a penalty, equal to 1% of the purchase price paid by such Holder pursuant to the Series G Purchase Agreement, during which such Event
continues uncured. Also pursuant to the Series G Registration Rights Agreements, the partial liquidated damages provisions summarized
above apply on a daily pro rata basis for any portion of a month prior to the cure of an Event. The Company filed a registration statement
on Form S-1 for the shares of Common Stock issuable to the Investors upon conversion of the Series G Preferred Stock and exercise of
the Warrants (the “S-1 Registration Statement”) on January 28, 2022 (the “Filing Date”), which was declared effective
by the Commission on May 13, 2022. The filing of the S-1 Registration Statement cured the Filing Events as of the Filing Date. The declaration
of effectiveness of the S-1 Registration Statement cured the Effectiveness Events as of the Effective Date.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023
(Unaudited)
These
Series G preferred share issuances with redemption provisions that permit the issuer to settle in either cash or common stock, at the
option of the issuer, were evaluated to determine whether temporary or permanent equity classification on the consolidated balance sheet
was appropriate. As per the terms of the Series G preferred stock agreements, the Company shall have the right but not the obligation
to redeem all outstanding Series G (and not any part of the Series E) at a price equal to 115% of (i) the Stated Value per share plus
(ii) all unpaid dividends thereon. As such, since Series G preferred stock is redeemable upon the occurrence of an event that is within
the Company’s control, the Series G preferred stock is classified as permanent equity.
The
Company concluded that the Series G Preferred Stock represented an equity host and, therefore, the redemption feature of the Series G
Preferred Stock was considered to be clearly and closely related to the associated equity host instrument. The redemption features did
not meet the net settlement criteria of a derivative and, therefore, were not considered embedded derivatives that required bifurcation.
The Company also concluded that the conversion rights under the Series G Preferred Stock were clearly and closely related to the equity
host instrument. Accordingly, the conversion rights feature on the Series G Preferred Stock were not considered an embedded derivative
that required bifurcation.
In
connection with issuance of the Series G, during the three months ended March 31, 2022, the Company paid the placement agent cash of
$95,000 and issued 19,000,000 warrants to the placement agent at an initial exercise price of $0.01 per share. The cash fee of $95,000
was charged against the proceeds of the offering in additional paid-in capital and there is no effect on equity for the placement agent
warrants.
During
the three months ended March 31, 2023, the Company issued 43,684,680 shares of its common stock in connection with the conversion of
29,000 shares of Series G and accrued dividends payable of $20,056. The conversion ratio was based on the Series G certificate of designation,
as amended.
Series
H preferred shares
On
September 20, 2022, the Company’s Board of Directors (the “Board”) Board filed the Certificate of Designation of Preferences,
Rights and Limitations of Series H Convertible Preferred Stock (the “Series H COD”) with the Secretary of State of the State
of Nevada designating 35,000 shares of preferred stock as Series H (“Series H”). The Series H has no stated value. Pursuant
with the Series H COD,
| |
● |
Each
holder of Series H shall have no voting rights. |
| |
● |
Each
share of Series H shall be convertible into 10,000 shares of the Company’s common stock, subject to beneficial ownership limitations.
The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the common stock outstanding immediately
after giving effect to the issuance of shares of common stock issuable upon conversion of the Series H held by the Holder. The Holder
and the Company, by mutual consent, may increase or decrease the Beneficial Ownership Limitation provisions of the Series H COD,
provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares of the common stock outstanding
immediately after giving effect to the issuance of shares of common stock upon conversion of the Series H held by the Holder. |
| |
|
|
| |
● |
Upon
the liquidation, dissolution or winding up of the business of the Company, whether voluntary or involuntary, each holder of Series
H preferred stock shall be entitled to receive out of assets of the Company legally available therefor the same amount that a holder
of the Company’s common stock would receive on an as-converted basis (without regard to the beneficial ownership limitation
or any other conversion limitations hereunder). The right of a Series H Holder to receive such payment shall be preferential to the
right of holders of common stock but shall be subordinate to the rights of the holder of any other series of preferred stock of the
Company. |
In
connection with the acquisitions of Freight Connections, on September 16, 2022, the Company issued 32,374 shares of Series H preferred
stock. These shares were value in the amount of $1,910,066 based on the as if converted fair value of the underlying common shares, or
$0.0059 per common share, based on the quoted closing price of the Company’s common stock on the measurement date.
Common
stock
Shares
issued in connection with conversion of Series E preferred shares
On
January 19, 2022, the Company issued 75,000,000 shares of its common stock in connection with the conversion of 19,947 shares of Series
E. The conversion ratio was based on the Series E certificate of designation, as amended.
Shares
issued in connection with conversion of Series G preferred shares
During
the three months ended March 31, 2023, the Company issued 43,684,680 shares of its common stock in connection with the conversion of
29,000 shares of Series G and accrued dividends payable of $20,056. The conversion ratio was based on the Series G certificate of designation,
as amended.
Shares
issued upon exercise of warrants
During
the three months ended March 31, 2022, the Company issued 24,571,429 shares of its common stock and received proceeds of $245,714 from
the exercise of 24,571,429 warrants at $0.01 per share.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023
(Unaudited)
Shares
issued for compensation
On
March 11, 2022, pursuant to an employment agreement with the Company’s chief executive officer dated January 4, 2022, the Company’s
Board of Directors granted the chief executive officer 122,126,433 shares of its common stock which were valued at $1,343,391, or $0.011
per common share, based on the quoted closing price of the Company’s common stock on the measurement date. These shares will vest
in equal annual installments with the first installment of 30,531,608 shares vesting on January 3, 2022, and 30,531,608 common shares
vesting each year through January 3, 2025. In connection with these shares, the Company valued these common shares at a fair value of
$1,343,391 and will record stock-based compensation expense over the vesting period which is included in the aggregate accretion of stock-based
compensation reflected below.
On
March 11, 2022 and effective January 4, 2022, the Company agreed to grant restricted stock awards to three independent members of the
Company’s board of directors for an aggregate of 5,454,546 common shares of the Company which were valued at $60,000, or $0.011
per common share, based on the quoted closing price of the Company’s common stock on the measurement date. These shares will vest
in equal quarterly installments with the first installment of 1,363,636.50 shares vesting on March 31, 2022, and 1,363,636.50 common
shares vesting each quarter through December 31, 2022. In connection with these shares, the Company valued these common shares at a fair
value of $60,000 and will record stock-based compensation expense over the vesting period which is included in the aggregate accretion
of stock-based compensation reflected below.
On
March 11, 2022 and effective January 4, 2022, the Company agreed to grant restricted stock awards to the Company’s chief financial
officer for 11,363,636 common shares of the Company which were valued at $125,000, or $0.011 per common share, based on the quoted closing
price of the Company’s common stock on the measurement date. These shares will vest in equal quarterly installments with the first
installment of 2,840,909 shares vesting on March 31, 2022, and 2,840,909 common shares vesting each quarter through December 31, 2022.
In connection with these shares, the Company valued these common shares at a fair value of $125,000 and will record stock-based compensation
expense over the vesting period which is included in the aggregate accretion of stock-based compensation reflected below.
On
January 3, 2023, the Company’s Board of Directors granted the chief operating officer 21,634,615 shares of its common stock which
were valued at $90,865, or $0.0042 per common share, based on the quoted closing price of the Company’s common stock on the measurement
date. These shares will vest in equal quarterly installments with the first installment of 5,408,653 shares vesting on March 31, 2023,
and 5,408,654 common shares vesting each quarter through December 31, 2023. In connection with these shares, the Company valued these
common shares at a fair value of $90,865 and will record stock-based compensation expense over the one-year vesting period.
During
the three months ended March 31, 2023 and 2022, aggregate accretion of stock-based compensation expense on the above granted shares amounted
to $117,292 and $586,133, respectively. Total unrecognized compensation expense related to these vested and unvested common shares on
December 31, 2022 amounted to $391,821 which will be amortized over the remaining vesting period of approximately two (2) years.
On
March 11, 2022, the Company agreed to grant restricted stock awards to the Company’s former chief executive officer and current
member of the Company’s board of directors for 22,727,273 common shares of the Company which were valued at $250,000, or $0.011
per common share, based on the quoted closing price of the Company’s common stock on the measurement date. These shares vested
immediately. In connection with these shares, the Company valued these common shares at a fair value of $250,000 and recorded stock-based
compensation expense of $250,000.
The
following table summarizes activity related to non-vested shares:
SUMMARY
OF ACTIVITY RELATED TO NON-VESTED SHARES
| | |
Number of
Non-Vested
Shares | | |
Weighted
Average
Grant Date
Fair Value | |
| Non-vested, December 31, 2022 | |
| 91,594,824 | | |
$ | 0.011 | |
| Granted | |
| 21,634,615 | | |
| 0.004 | |
| Shares vested | |
| (35,940,262 | ) | |
| (0.010 | ) |
| Non-vested, March 31, 2023 | |
| 77,289,177 | | |
$ | 0.009 | |
Warrants
Warrants
issued and exercised in connection with Series E preferred shares
During
the three months ended March 31, 2022, the Company issued 24,571,429 shares of its common stock and received proceeds of $245,714 from
the exercise of 24,571,429 warrants at $0.01 per share.
Warrants
issued in connection with Series G preferred shares
In
connection with the sale of Series G preferred shares, during the three months ended March 31, 2022, the Company issued warrants to purchase
95,000,000 shares of the Company’s common stock at an initial exercise price of $0.01 per share. Additionally, the Company issued
19,000,000 warrants to the placement agent at an initial exercise price of $0.01 per share.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023
(Unaudited)
Warrant
activities for the three months ended March 31, 2023 are summarized as follows:
SUMMARY
OF WARRANT ACTIVITES
| | |
Number of Shares
Issuable Upon
Exercise of
Warrants | | |
Weighted
Average Exercise
Price | | |
Weighted Average
Remaining
Contractual Term
(Years) | | |
Aggregate
Intrinsic Value | |
| Balance Outstanding December 31, 2022 | |
| 1,258,008,109 | | |
$ | 0.014 | | |
| 3.80 | | |
$ | 0 | |
| Granted | |
| - | | |
| - | | |
| - | | |
| - | |
| Balance Outstanding March 31, 2023 | |
| 1,258,008,109 | | |
$ | 0.014 | | |
| 3.55 | | |
$ | 0 | |
| Exercisable, March 31, 2023 | |
| 1,258,008,109 | | |
$ | 0.014 | | |
| 3.55 | | |
$ | 0 | |
Stock
options
Stock
option activities for the three months ended March 31, 2023 are summarized as follows:
SUMMARY
OF STOCK OPTION ACTIVITIES
| | |
Number of Options | | |
Weighted Average Exercise Price | | |
Weighted Average Remaining Contractual Term (Years) | | |
Aggregate
Intrinsic Value | |
| Balance Outstanding December 31, 2022 | |
| 80,000 | | |
$ | 8.85 | | |
| 1.33 | | |
$ | - | |
| Granted/Cancelled | |
| - | | |
| - | | |
| - | | |
| - | |
| Balance Outstanding March 31, 2023 | |
| 80,000 | | |
$ | 8.85 | | |
| 1.08 | | |
$ | - | |
| Exercisable, March 31, 2023 | |
| 80,000 | | |
$ | 8.85 | | |
| 1.08 | | |
$ | - | |
NOTE
9 – ASSIGNMENT FOR THE BENEFIT OF CREDITORS
On
August 19, 2021, the Company’s subsidiaries, Prime EFS and Shypdirect, executed Deeds of Assignments for the Benefit of Creditors
in the State of New Jersey pursuant to N.J.S.A. §2A:19-1, et seq. (the “ABC Statute”), assigning all Prime EFS and Shypdirect
assets to Terri Jane Freedman as Assignee for the Benefit of Creditors (the “Assignee”) and filing for dissolution. An “Assignment
for the Benefit of Creditors,” “general assignment” or “ABC” in New Jersey is a state-law, voluntary, judicially-supervised
corporate liquidation and unwinding similar to the Chapter 7 bankruptcy process found in the United States Bankruptcy Code. In the subject
ABC, the debtor companies, here Prime EFS and Shypdirect, together referred to as the “assignors”, executed Deeds of Assignment,
assigning all of their assets to an Assignee chosen by the Company, who acts as a fiduciary similar to a Chapter 7 trustee in bankruptcy.
Due to the termination of their respective agreements with Amazon, Prime EFS and Shypdirect became insolvent and unable to pay their
debts when they became due. Accordingly, the Company deemed it to be desirable and in the best interest of Prime EFS and Shypdirect and
its creditors to make an assignment of all of Prime EFS and Shypdirect’s assets for the benefit of the Prime EFS and Shypdirect’s
creditors in accordance with the ABC Statute.
On
September 7, 2021, the ABC’s were filed with the Bergen County Clerk in Bergen County, New Jersey and filed with the Bergen County
Surrogate Court, initiating a judicial proceeding. The Assignee has been charged with liquidating the assets for the benefit of the Prime
EFS and Shypdirect creditors pursuant to the provisions of the ABC Statute. The Company’s results of operations for the year ended
December 31, 2021 include the results of Prime EFS and Shypdirect prior to the September 7, 2021 filing of the executed Deeds of Assignment
for the Benefit of Creditors with the State of New Jersey. As a result of Prime EFS and Shypdirect’s filing of the executed Deeds
of Assignment for the Benefit of Creditors on September 7, 2021, the Assignee assumed all authority to manage Prime EFS or Shypdirect.
Additionally, Prime EFS and Shypdirect no longer conduct any business and are not permitted by the Assignee and ABC Statute to conduct
any business. For these reasons, effective September 7, 2021, the Company relinquished control of Prime EFS and Shypdirect. Further,
on October 13, 2021, Prime EFS and Shypdirect filed for dissolution with the Secretary of State of New Jersey. Therefore, the Company
deconsolidated Prime EFS and Shypdirect effective with the filing of executed Deeds of Assignment for the Benefit of Creditors in September
2021. The Company has been advised that the Assignee anticipates that she will be able to conclude her work, make final distributions
to creditors, and close out the estates of Prime EFS and Shypdirect on or before June 30, 2023.
In
connection with the finalization of the ABC, the Assignee has demanded a one-time payment of $200,000 to close out the estates of Prime
EFS and Shypdirect. The Company is currently negotiating this amount and cannot predict the outcome of this demanded amount. Accordingly,
during the year ended December 31, 2022, the Company recorded a contingency loss of $200,000 and as of March 31, 2023 and December 31,
2022, the Company accrued the potential settlement amount of $200,000 which is included in accrued expenses on the accompanying unaudited
consolidated balance sheets.
NOTE
10 – COMMITMENTS AND CONTINGENCIES
Legal
matters
From
time to time, we may be involved in litigation or received claims arising out of our operations in the normal course of business. Other
than discussed below, we are not currently a party to any other legal proceeding or are aware of claims that we believe would, if decided
adversely, have a material adverse effect on our business, financial condition, or operating results. We also disclose any recent settlements
and accruals taken in connection therewith, whether material or not.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023
(Unaudited)
Bellridge
Capital, L.P. v. TLSS and Mercadante
On
September 11, 2020, a prior lender to the Company, Bellridge Capital, L.P., filed a civil action against TLSS and others in the United
States District Court for the Southern District of New York. The case was assigned Case No. 20-cv-7485.
After
discontinuing the foregoing federal action voluntarily and without prejudice, on April 23, 2021, Bellridge filed a substantially similar
civil action in New York Supreme Court, New York County, which was assigned index number 652728/2021.
On
April 29, 2022, all parties to the Bellridge State Court Action agreed to settle the case and exchange mutual general releases for a
cash payment by the Company to Bellridge of $250,000, which amount was paid in May 2022, at which time the releases took effect. In partial
consideration for the settlement, the Company and Bellridge also cancelled the 700,000 shares of Series B Preferred Stock previously
held by Bellridge, as reflected on the Company’s balance sheets as of December 31, 2021. In connection with this settlement, during
the year ended December 31, 2022, the Company recorded settlement expense of $227,811.
SCS,
LLC v. TLSS
On
January 14, 2021, a former financial consultant to the Company, SCS, LLC, filed an action against the Company in the Circuit Court of
the 15th Judicial Circuit, Palm Beach County, Florida, captioned SCS, LLC v. Transportation and Logistics Systems, Inc. The
case was assigned Case No. 50-2020-CA-012684.
In
this action, SCS alleges that it entered into a renewable six-month consulting agreement with the Company dated September 5, 2019 and
that the Company failed to make certain monthly payments due thereunder for the months of October 2019 through March 2020, summing to
$42,000. The complaint alleges claims for breach of contract, quantum meruit, unjust enrichment and account stated.
On
February 9, 2021, the Company filed its answer, defenses and counterclaims in this action. Among other things, the Company avers that
SCS’s claims are barred by its unclean hands and other inequitable conduct, including breach of its duties (i) to maintain the
confidentiality of information provided to SCS and (ii) to work only in furtherance of the Company’s interests, not in furtherance
of SCS’s own, and conflicting, interests. The Company also avers, in its counterclaims, that SLS owes the Company damages in excess
of the $42,000 sought in the main action because SLS was at least grossly negligent in any due diligence it undertook before recommending
that the Company acquire Prime EFS LLC in June 2018. SCS filed a motion to strike TLSS’s defenses and counterclaims, and TLSS opposed
that application. Those motions remain sub judice.
A
two-day non-jury trial was held in this action in Palm Beach County, Florida, on April 20-21, 2022. However, at the end of the second
day a mistrial was declared because SCS had not withdrawn its motion to strike and answered the counterclaims. Since the mistrial, there
have been no further filings or proceedings in this case.
The
Company believes it has substantial defenses to all claims alleged in SCS’s complaint. The Company therefore intends to defend
this case vigorously.
Because
there have been no further filings or proceedings on this case since April 2022, it is not possible to evaluate the likelihood of a favorable
or unfavorable outcome, nor is it possible to estimate the amount or range of any potential loss in the matter. However, the demand remains
$42,000.
Shareholder
Derivative Action
On
June 25, 2020, the Company was served with a putative shareholder derivative action filed in the Circuit Court of the 15th
Judicial Circuit in and for Palm Beach County, Florida (the “Court”) captioned SCS, LLC, derivatively on behalf of Transportation
and Logistics Systems, Inc. v. John Mercadante, Jr., Douglas Cerny, Sebastian Giordano, Ascentaur LLC and Transportation and Logistics
Systems, Inc. The action has been assigned Case No. 2020-CA-006581.
The
plaintiff in this action, SCS, alleges it is a limited liability company formed by a former chief executive officer and director of the
Company, Lawrence Sands. The complaint alleges that between April 2019 and June 2020, the immediately prior chairman and chief executive
officer of the Company, Mercadante, the former chief development officer of the Company, Cerny, and, since February 2020, the Company’s
then restructuring consultant who is now chairman and chief executive officer of the Company, Giordano, breached fiduciary duties owed
to the Company. Prior to becoming CEO, Giordano rendered his services to the Company through the final named defendant in the action,
Ascentaur LLC.
Briefly,
the complaint alleges that Mercadante breached duties to the Company by, among other things, requesting, in mid-2019, that certain preferred
equity holders, including SCS, convert their preferred shares into Company Common Stock in order to facilitate an equity offering by
the Company and then not consummating that offering. The complaint also alleges that Mercadante and Cerny caused the Company to engage
in purportedly wasteful and unnecessary transactions such as taking merchant cash advances (MCA) on disadvantageous terms. The complaint
further alleges that Mercadante and Cerny “issued themselves over two million shares of common stock without consideration.”
The complaint seeks unspecified compensatory and punitive damages on behalf of the Company for breach of fiduciary duty, negligent breach
of fiduciary duty, constructive fraud, and civil conspiracy and the appointment of a receiver or custodian for the Company.
Company
management tendered the complaint to the Company’s directors’ and officers’ liability carrier for defense and indemnity
purposes, which coverage is subject to a $250,000 self-insured retention. Each of the individual defendants and Ascentaur LLC has advised
that they vigorously deny each and every allegation of wrongdoing alleged in the complaint. Among other things, Mercadante asserts that
he made every effort to consummate an equity offering in late 2019 and early 2020 and could not do so solely because of the Company’s
precarious financial condition. Mercadante also asserts that he made clear to SCS and other preferred equity holders, before they converted
their shares into common stock, that there was no guarantee the Company would be able to consummate an equity offering in late 2019 or
early 2020. In addition, Mercadante and Cerny assert that they received equity in the Company on terms that were entirely fair to the
Company and entered into MCA transactions solely because no other financing was available to the Company.
By
order dated and issued September 15, 2022, the Circuit Judge assigned to this case dismissed the original Complaint in the matter, finding
(a) that SCS had failed to adequately allege it has standing and (b) that the complaint fails to adequately allege a cognizable claim.
The dismissal was without prejudice, meaning SCS could attempt to replead its claims.
On
October 5, 2022, SCS filed an Amended Complaint in this action. By order dated and issued December 19, 2022, the Circuit Judge assigned
to this case once again dismissed the case, finding (a) that SCS still failed to adequately allege it has standing and (b) that the complaint
still fails to adequately allege a cognizable claim. Once again, however, the dismissal was without prejudice.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023
(Unaudited)
On
January 18, 2023, SCS filed a Second Amended Complaint in this action. All defendants once again moved to dismiss the pleading or in
the alternative for summary judgment on it in their favor. The Court heard argument on that motion on March 9, 2023. As of this writing,
the parties are awaiting a ruling by the Court on the motion.
While
they hope to prevail on the March 9, 2023, motion, win or lose, defendants in this action advise that they believe the action to be frivolous
(a position with which we agree) and intend to mount a vigorous defense to this action.
Owing
to the fact that no discovery has occurred in the case, however, 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. In a derivative case, any recovery is
to be paid to the corporation; however, the individual defendants in this case are fully indemnified by the Company unless a final judgment
is entered against them for deliberate or intentional misconduct.
Jose
R. Mercedes-Mejia v. Shypdirect LLC, Prime EFS LLC et al.
On
August 4, 2020, an action was filed against Shypdirect, Prime EFS and others in the Superior Court of New Jersey for Bergen County captioned
Jose R. Mercedes-Mejia v. Shypdirect LLC, Prime EFS LLC et al. The case was assigned docket number BER-L-004534-20.
In
this action, the plaintiff seeks reimbursement of his medical expenses and damages for personal injuries following an accident with a
box truck leased by Prime EFS and subleased to Shypdirect and being driven by a Prime EFS employee, in which the plaintiff’s ankle
was injured. Plaintiff has thus far transmitted medical bills exceeding $789,000. Prime EFS and Shypdirect demanded their vehicle liability
carrier assume the defense of this action. To date, the carrier has not done so, allegedly inter alia because the box truck was
not on the list of insured vehicles at the time of the accident.
On
November 9, 2020, Prime EFS and Shypdirect filed their answer to the complaint in this action and also filed a third-party action against
the insurance company in an effort to obtain defense and indemnity for this action.
On
May 21, 2021, Prime EFS and Shypdirect also filed an action in the Supreme Court, State of New York, Suffolk County (the “Suffolk
County Action”), seeking defense and indemnity for this claim from the insurance brokerage, TCE/Acrisure LLC, which sold the County
Hall insurance policy to Shypdirect.
On
August 19, 2021, the Plaintiff filed a motion for leave to file a First Amended Complaint to name four (4) additional parties as defendants
– TLSS, Shyp CX, Inc., Shyp FX, Inc. and Cougar Express, Inc. In the claim against TLSS, Plaintiff seeks to “pierce the corporate
veil” and hold TLSS responsible for the alleged liabilities of Prime and/or Shypdirect as the supposed alter ego of these subsidiaries.
In the claims against Shyp CX, Inc., Shyp FX, Inc. and Cougar Express, Inc., Plaintiff seeks to hold these entities responsible for the
alleged liabilities of Prime and/or Shypdirect on a successor liability theory.
On
September 16, 2021, each of these entities filed papers in opposition to this motion.
On
September 24, 2021, the Court granted Plaintiff’s motion for leave to amend the complaint, thus adding TLSS, Shyp CX, Inc., Shyp
FX, Inc. and Cougar Express, Inc. as Defendants.
On
October 22, 2021, Acrisure stipulated to consolidate the Suffolk County Action into and with the Bergen County action.
On
November 22, 2021, all Defendants filed their Answer to the First Amended Complaint. On November 3, 2021, Prime EFS and Shypdirect refiled
their Third-Party Complaint against TCI/Acrisure in the Bergen County action. On December 23, 2021, Acrisure filed its Answer to the
Third-Party Complaint, denying its material allegations.
On
March 2, 2022, Plaintiff sought and was granted leave to file a Second Amended Complaint, bringing claims against Prime and Shypdirect’s
vehicle liability carrier, County Hall (for discovery) as well as the producing broker, TCE/Acrisure. Plaintiff also asserted additional
alter ego allegations against TLSS.
On
February 15, 2023, Plaintiff filed a motion for leave to file a Third Amended Complaint in this action, seeking to assert claims against
TLSS’s former CEO, John Mercadante, also on a “pierce the corporate veil” theory. On March 9, 2023, TLSS, Prime and
Shypdirect opposed the motion for leave to add Mercadante, arguing that any claim against Mercadante would be both futile and time-barred.
On March 31, 2023, the Court denied Plaintiff’s motion to add Mr. Mercadante as a party.
In
January and February 2023, numerous depositions were taken in the case, including those of Messrs. Giordano and Mercadante. Under the
currently operative pre-trial order, entered October 4, 2022, all discovery in this case must be concluded by June 30, 2023. However,
it appears likely that the discovery cutoff will be extended beyond June 30, 2023.
Under
New Jersey law, it is well established that a corporation is a separate entity from its shareholder(s) and a primary reason for incorporation
is the insulation of shareholders from the liabilities of the corporate enterprise.
The
New Jersey Supreme Court in Richard A. Pulaski Const. Co. v. Air Frame Hangars, Inc., 195 N.J. 457, 472–73 (2008) held that,
in light of the fundamental propositions that a corporation is a separate entity from its shareholders, and “that a primary reason
for incorporation is the insulation of shareholders from the liabilities of the corporate enterprise,” courts will not pierce a
corporate veil “[e]xcept in cases of fraud, injustice, or the like...’” (citations omitted). The New Jersey Supreme
Court further held that:
The
limitations placed on a claimant’s ability to reach behind a corporate structure are intentional, as “[t]he purpose of the
doctrine of piercing the corporate veil is to prevent an independent corporation from being used to defeat the ends of justice, to perpetrate
fraud, to accomplish a crime, or otherwise to evade the law[.]” (citations omitted). Hence, to invoke that form of relief, “the
party seeking an exception to the fundamental principle that a corporation is a separate entity from its principal bears the burden of
proving that the court should disregard the corporate entity.”.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023
(Unaudited)
The
purpose of piercing the corporate veil is thus to prevent an independent corporation from being used to defeat the ends of justice, perpetrate
fraud, to accomplish a crime, or otherwise to evade the law.
To
pierce the corporate veil and impute alter ego liability on TLSS for the alleged torts of Prime, Shypdirect and/or their agents, employees
and servants, the Plaintiff herein would have to establish: (1) that Prime and Shypdirect were “utterly dominated” by TLSS
and (2) that respecting the separate corporate existences of the subsidiaries would perpetrate a fraud or injustice, or otherwise circumvent
the law. FDASmart, Inc. v. Dishman Pharmaceuticals and Chemicals, Ltd., et al., 448 N.J. Super. 195, 204 (App. Div. 2016). A plaintiff
must satisfy this burden by clear and convincing evidence.
To
determine whether the first element has been satisfied, courts consider whether the parent company so dominated the subsidiary that the
latter had no separate existence but was merely a conduit for the parent. In considering the level of dominance exercised by the parent
over the subsidiary, the court will consider factors such as common ownership, financial dependency, interference with a subsidiary’s
selection of personnel, disregard of corporate formalities, and control over a subsidiary’s marketing and operational policies.
To
date, to the best of the undersigned’s knowledge, information and belief, no discovery has been taken in this action which would
permit the imposition of alter ego liability on TLSS for the subject accident.
To
date, to the best of the undersigned’s knowledge, information and belief, no discovery has been taken in this action which would
permit the imposition of successor liability on Shyp CX, Inc., Shyp FX, Inc. and/or Cougar Express, Inc. for the subject accident.
Under
a so-called MCS-90 reimbursement endorsement to the County Hall policy, TLSS believes that Prime and Shypdirect may have up to $750,000
in coverage under a 1980 federal law under which County Hall is “require[d] to pay damages for certain claims or ‘suits’
that are not covered by the policy.” (See Endorsement CHI – 290 (02/19) to County Hall policy effective May 31, 2019.)
TLSS
intends to vigorously defend itself in this action and to pursue the third-party actions, in the name and right of Prime and Shypdirect,
against both County Hall and TCE/ Acrisure.
However,
owing to the early stage of this heavily litigated action, we cannot evaluate the likelihood of an adverse outcome or estimate the Company’s
liability, if any, in connection with this claim.
Maria
Lugo v. JFK Cartage
The
Company’s JFK Cartage, Inc. subsidiary is one of three (3) defendants in an action captioned Maria Lugo v. JFK Cartage, Inc.
d/b/a Fifth Dimension Logistix, Joan Ton, individually, and Chris Bartley, individually. The case is pending in Supreme Court, State
of New York, Queens County, Index No. 704862/2022.
In
this action, which was filed March 4, 2022, a former employee of JFK Cartage alleges that she suffered discrimination and retaliation
in violation of the New York City Human Rights Law and the New York State Human Rights Law. The former employee alleges that on December
28, 2021, she had Covid-19 symptoms, advised the defendants she was feeling ill and went home early to take a home test. She further
alleges that on December 30, 2021, she tested positive for Covid-19 and informed defendants she had to isolate for ten (10) days. Plaintiff
alleges that she returned to work on January 7, 2022, but that her employment was terminated later that day by defendant Bartley who
“questioned the authenticity of the at-home test, accusing her of fraud.” Plaintiff claims her employment “was terminated
due to her disability (a Covid-19 infection) and in retaliation for her requesting reasonable accommodation for the illness she suffered.”
She seeks unspecified compensatory damages, including lost pay and benefits, punitive damages and attorneys’ fees.
On
December 16, 2022, all defendants filed an answer and affirmative defenses, denying all claims for statutory violations. The case is
currently in discovery. The conduct alleged in the complaint occurred prior to the Company’s July 31, 2022, acquisition of JFK
Cartage, Inc. The Company believes that, in relation to this action, it has a right to full indemnification from the selling stockholder
(including for attorneys’ fees) as well as set-off rights against notes payable to the selling stockholder.
Owing
to (among other things) the fact that discovery in this action has just begun, 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.
Elaine
Pryor v. Rocio Perez, et al.
The
Company’s Freight Connections, Inc. subsidiary (“FCI”) was one of three (3) named defendants in an action captioned
Elaine Pryor v. Rocio Perez, North Trucking & Logistics, LLC and Freight Connections, Inc. The case is pending in Superior
Court of New Jersey, Essex County, Docket No. ESX-L-5147-18.
In
this action, which was filed in 2018, plaintiff alleges that on February 1, 2017, she suffered personal injuries in a collision between
her motor vehicle and a truck operated by a then employee of FCI. Plaintiff alleges that the truck was owned by FCI and leased to North
Trucking & Logistics at the time.
At
present, there are two other actions pending related to insurance coverage for the accident. They are Acceptance Indemnity Insurance
Company v. Freight Connections, LLC (Superior Court of New Jersey, Essex County, Docket No. ESX-L-7144-19) and New Jersey Manufacturers
Insurance Company, as subrogee of Elaine Pryor v. Acceptance Indemnity Insurance Company (Superior Court of New Jersey, Essex County,
Docket No. ESX-L-5120). These two actions involving insurance coverage questions have been consolidated with the Pryor personal
injury claim.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023
(Unaudited)
In
an opinion issued November 16, 2022, the court denied all parties’ motions for summary judgment on the insurance coverage issues.
The
conduct alleged in the Pryor complaint occurred prior to the Company’s September 16, 2022, acquisition of FCI. The selling
stockholder of FCI has advised the Company that the truck in question was not owned by FCI at the time of the accident and hence that
FCI is not a proper party defendant in this action.
On
May 8, 2023, the Court in the Elaine Pryor action the entered an order, on the consent of counsel for all parties, directing that
the name of defendant FCI be changed to Freight Connections LLC and that this change be reflected in the caption of the case (the “May
8, 2023 Order”). Freight Connections LLC is not a corporate affiliate of FCI but is rather an independent trucking company that
is wholly-owned by the individual who sold the stock of FCI to TLSS-FC effective September 16, 2022. (See Note 1 above.)
Owing
to the May 8, 2023 Order, the Company does not believe that it can be adjudged liable for any verdict or settlement in the Elaine
Pryor action.
Other
than discussed above, as of March 31, 2023, and as of the date of this filing, there were no pending or threatened lawsuits that could
reasonably be expected to have a material effect on the Company’s results of our operations.
Employment
agreements
On
January 3, 2022, the Company and Mr. Sebastian Giordano entered into an employment agreement with a term extending through December 31,
2025, which provides for annual compensation of $400,000 as well as annual discretionary bonuses based on the Company’s achievement
of performance targets, grants of options, restricted stock or other equity, potentially constituting (with prior grants made to Ascentaur),
at the discretion of the Company’s Board of Directors, up to 5% of the outstanding common stock of the Company, vesting over the
term of the employment agreement, business expense reimbursement and benefits as generally made available to the Company’s executives.
Pursuant to this employment agreement, on March 11, 2022, the Company’s Board of Directors granted the chief executive officer
122,126,433 shares of its common stock (see Note 8).
On
January 3, 2022, the Company retained the services of Mr. James Giordano (no relation to Mr. Sebastian Giordano) as Chief Financial Officer.
In addition, Mr. James Giordano is appointed the Company’s Treasurer. Previously, Mr. James Giordano served as Chief Financial
Officer and consultant to Freight Connections, Inc., a LTL/line haul transportation services and warehousing provider. Prior to that,
he served as Chief Financial Officer for Farren International, a global supplier of transportation and rigging services. Mr. James Giordano’s
employment with the Company is at will. He will receive annual compensation of $250,000 as well as annual discretionary bonuses and equity
grants, business expense reimbursement and benefits as generally made available to the Company’s executives. On March 11, 2022
and effective January 4, 2022, the Company agreed to grant restricted stock awards to the Company’s chief financial officer for
11,363,636 common shares of the Company which were valued at $125,000, or $0.011 per common share, based on the quoted closing price
of the Company’s common stock on the measurement date. These shares will vest in equal quarterly installments with the first installment
of 2,840,909 shares vesting on March 31, 2022, and 2,840,909 common shares vesting each quarter through December 31, 2022. In connection
with these shares, the Company valued these common shares at a fair value of $125,000 and will record stock-based compensation expense
over the vesting period (See Note 8).
On
July 6, 2022, the Company entered into a definitive Employment Agreement with James Giordano for Mr. Giordano to serve as the Company’s
Chief Financial Officer. The term of such Employment agreement is for a period of two and one-half years through December 31, 2025, which
term may not be terminated early by the Company except for “cause” as defined in such agreement. Annual base compensation
is $250,000, with an annual bonus for 2022 in total up to a maximum of $125,000 per year conditioned on the achievement of specified
milestones, and future annual bonuses to be conditioned on achievement of milestones to be negotiated based on the circumstances of the
Company at such time.
On
September 16, 2022, in connection with the acquisition of Freight Connections, Freight Connection and Mr. Joseph Corbisiero entered into
an employment agreement to act as Freight Connections chief executive officer with a term extending through September 16, 2025, which
provides for initial annual compensation of $165,000. Base salary shall increase to $175,000 in year two and $200,000 in year three.
In addition, Mr. Corbisiero shall be entitled to annual discretionary bonuses based on Freight Connection’s achievement of certain
performance results for earnings before interest, taxes, and depreciation and amortization. Furthermore, Mr. Corbisiero shall have the
opportunity to earn annual discretionary bonuses in the form of grants of stock options, restricted stock or other equity, at the discretion
of the Company’s Board of Directors, up to 25% of the annual base salary and such grant would vest over a three-year period. Mr.
Corbisiero shall be entitled to business expense reimbursement and benefits as generally made available to the Company’s executives
and shall receive an $800 per month auto allowance.
NOTE
11– RELATED PARTY TRANSACTIONS AND BALANCES
Due
to related parties
During
the three months March 31, 2023, Freight Connections incurred outside trucking costs with companies owned by the Freight Connections
Seller, who is currently Freight Connection’s chief executive officer. In connection with the outside trucking services, Freight
Connections recorded aggregate outside trucking expense of $770,707, which is included in costs of sales on the unaudited accompanying
consolidated statement of operations. As of March 31, 2023 and December 31, 2022, the aggregate amount due to these companies amounted
to $324,551 and $115,117, respectively, which is included in accounts payable on the accompanying unaudited consolidated balance sheets.
Notes
payable – related party
On
September 16, 2022, in connection with the acquisition of Freight Connections, Freight Connections issued a promissory note in the amount
of $4,544,671 to the Freight Connections Seller, who became the chief executive officer of Freight Connections. The secured promissory
accrues interest at the rate of 5% per annum and then 10% per annum as of March 1, 2023. The entire unpaid principal under the note,
together with all accrued and unpaid interest thereon and all other amounts payable thereunder, shall be due and payable in one balloon
payment on December 31, 2023, unless paid sooner. The promissory note is secured solely by the assets of Freight Connections. On March
31, 2023 and December 31, 2022, the principal amount related to this note was $4,544,671, which is included in notes payable on the unaudited
accompanying balance sheets (See Note 7).
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2023
(Unaudited)
NOTE
12 – CONCENTRATIONS
For
the three months ended March 31, 2023, one customer represented approximately 17.0% of the Company’s total net revenues. For the
three months ended March 31, 2022, four customers represented 71.7% of the Company’s total net revenues (22.2%, 20.2%, 18.1% and
11.2%, respectively).
On
March 31, 2023, one customer represented approximately 13.0% of the Company’s net accounts receivable balance. On December 31,
2022, three customers represented 46.7% (18.2%, 17.9% and 10.6%, respectively) of the Company’s net accounts receivable balance.
All
revenues are derived from customers in the United States.
NOTE
13 – OPERATING AND FINANCING LEASE RIGHT-OF-USE (“ROU”) ASSETS AND OPERATING AND FINANCING LEASE LIABILITIES
As
a result of the acquisition of JFK Cartage, Freight Connection and Severance Trucking, the Company assumed several non-cancelable operating
leases for the lease of office, warehouse spaces, and parking spaces. Additionally, as a result of the acquisition of Severance Trucking,
the Company assumed several non-cancelable financing leases for revenue equipment.
Effective
January 1, 2023, the Company entered into a lease agreement for warehouse space in Ridgefield, NJ. The lease is for a period of 60 months,
commencing on January 1, 2023 and expiring on December 31, 2027. Pursuant to the lease agreement, the lease requires the Company to pay
a monthly base rent of; (i) $41,071 in the first year; (ii) $42,303 in the second year; (iii) $43,572 in the third year; (iv) $44,880
in the fourth year and; (v) $46,226 in the fifth year, plus a pro rata share of operating expenses beginning January 2023.
In
adopting ASC Topic 842, Leases (Topic 842) on January 1, 2019, the Company had elected the ‘package of practical expedients’,
which permitted 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
months or less. Upon signing of new leases or the assumption of leases for property, the Company analyzed the new or assumed leases and
determined it is required to record a lease liability and a right of use asset on its consolidated balance sheets, at fair value.
During
the three months ended March 31, 2023 and 2022, in connection with its property operating leases, the Company recorded rent expense of
$1,078,560 and $101,337, respectively, which is expensed during the period and included in operating expenses on the accompanying unaudited
consolidated statements of operations.
The
significant assumption used to determine the present value of the lease liabilities was discount rates ranging from 8% to of 9% which
was based on the Company’s estimated average incremental borrowing rate.
On
March 31, 2023 and December 31, 2022, right-of-use asset (“ROU”) is summarized as follows:
SCHEDULE
OF RIGHT OF USE ASSET
| | |
March 31, 2023 | | |
December 31, 2022 | |
| Office leases and equipment right of use assets | |
$ | 13,500,093 | | |
$ | 9,084,594 | |
| Less: accumulated amortization | |
| (1,349,561 | ) | |
| (627,511 | ) |
| Balance of ROU assets | |
$ | 12,150,532 | | |
$ | 8,457,083 | |
On
March 31, 2023 and December 31, 2022, operating and financing lease liabilities related to the ROU assets are summarized as follows:
SCHEDULE
OF OPERATING LEASE LIABILITY TO ROU ASSET
| | |
March 31, 2023 | | |
December 31, 2022 | |
| Lease liabilities related to office leases and revenue equipment right of use assets | |
$ | 12,225,522 | | |
$ | 8,495,036 | |
| Less: current portion of lease liabilities | |
| (3,006,297 | ) | |
| (2,081,099 | ) |
| Lease liabilities – long-term | |
$ | 9,219,225 | | |
$ | 6,413,937 | |
On
March 31, 2023, future minimum base lease payments due under non-cancelable operating and financing leases are as follows:
SCHEDULE
OF LEASE PAYMENTS DUE UNDER OPERATING LEASES
| Twelve months ended March 31, | |
Amount | |
| 2024 | |
$ | 3,937,442 | |
| 2025 | |
| 3,783,418 | |
| 2026 | |
| 3,322,251 | |
| 2027 | |
| 2,336,213 | |
| 2028 | |
| 995,432 | |
| Thereafter | |
| 54,786 | |
| Total minimum non-cancelable operating lease payments | |
| 14,429,542 | |
| Less: discount to fair value | |
| (2,204,020 | ) |
| Total lease liability on March 31, 2023 | |
$ | 12,225,522 | |
NOTE
14 – SUBSEQUENT EVENTS
Credit
Facility – Related Parties
On
April 14, 2023, the Company’s Board of Directors approved a credit facility (the “Credit Facility”) under which the
Company would obtain unsecured senior debt financing of up to $1,000,000. The terms of the Credit Facility provide for interest at 12%
per annum. The maturity date of the financing will be December 31, 2023, provided, however, the Company may prepay a loan at any time
without premium or penalty. Each loan under the Credit Facility will be made on promissory notes. During April 2023, the Company received
initial loans under the Credit Facility, in the following amounts: (a) $500,000 from John Mercadante
on April 17, 2023; Mr. Mercadante is a Director of the Company; and (b) $100,000 from Sebastian Giordano on April 21, 2023; Mr.
Giordano is the Company’s Chief Executive Officer, President, and Chairman of the Board of
Directors.
