UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2020

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________ to ___________

 

Commission File No. 001-34970

 

Transportation and Logistics Systems, Inc.

(Exact name of registrant as specified in its charter)

 

Nevada   26-3106763
(State or Other Jurisdiction   IRS Employer
of Organization)   Identification Number

 

5500 Military Trail, Suite 22-357    
Jupiter, Florida    33458
(Address of principal executive offices)   (Zip code)

 

(833) 764-1443

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report.)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
N/A   N/A   N/A

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [  ] Non accelerated filer [X] Smaller reporting company [X]
       
Emerging growth company [  ]      

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Class   Outstanding as of November 13, 2020
Common Stock, $0.001   1,564,388,350

 

 

 

 
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS, INC.

FORM 10-Q

September 30, 2020

 

INDEX

 

  Page
   
PART I. FINANCIAL INFORMATION 3
   
Item 1. Financial Statements 3
  Condensed Consolidated Balance Sheets - As of September 30, 2020 (unaudited) and December 31, 2019 3
  Condensed Consolidated Statements of Operations - For the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited) 4
  Condensed Consolidated Statements of Changes in Shareholders’ Deficit – For the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited) 5
  Condensed consolidated Statements of Cash Flows - For the Nine Months Ended September 30, 2020 and 2019 (unaudited) 7
  Condensed Notes to Consolidated Financial Statements (unaudited) 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 45
Item 3. Quantitative and Qualitative Disclosures About Market Risk 64
Item 4. Controls and Procedures 64
     
PART II. OTHER INFORMATION 65
     
Item 1. Legal Proceedings 65
Item 1A. Risk Factors 70
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 71
Item 3. Defaults Upon Senior Securities 71
Item 4. Mine Safety Disclosures 72
Item 5. Other Information 72
Item 6. Exhibits 72
Signatures 73

 

2
 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

TRANSPORTATION AND LOGISTICS SYSTEMS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   September 30,   December 31, 
   2020   2019 
   (Unaudited)     
         
ASSETS          
CURRENT ASSETS:          
Cash  $318,356   $50,026 
Accounts receivable, net   335,393    963,771 
Prepaid expenses and other current assets   1,462,736    1,246,555 
           
Total Current Assets   2,116,485    2,260,352 
           
OTHER ASSETS:          
Security deposit   206,250    76,500 
Property and equipment, net   658,815    240,406 
Right of use assets, net   1,534,411    1,750,430 
           
Total Other Assets   2,399,476    2,067,336 
           
TOTAL ASSETS  $4,515,961   $4,327,688 
           
LIABILITIES AND SHAREHOLDERS’ DEFICIT          
           
CURRENT LIABILITIES:          
Convertible notes payable, net of put premium of $0 and $385,385 and debt discounts of $346,953 and $2,210,950, respectively  $1,338,961   $3,634,344 
Notes payable, current portion, net of debt discount of $0 and $762,112, respectively   4,079,592    2,425,003 
Note payable - related party   500,000    500,000 
Accounts payable   899,076    1,517,082 
Accrued expenses   524,921    627,990 
Insurance payable   2,697,300    2,948,261 
Contingency liability   440,000    440,000 
Lease liabilities, current portion   366,511    333,126 
Derivative liability   2,886,811    2,135,939 
Due to related parties   245,007    325,445 
Accrued compensation and related benefits   1,113,079    886,664 
           
Total Current Liabilities   15,091,258    15,773,854 
           
LONG-TERM LIABILITIES:          
Notes payable, net of current portion   493,307    - 
Lease liabilities, net of current portion   1,203,765    1,440,258 
           
Total Long-term Liabilities   1,697,072    1,440,258 
           
Total Liabilities   16,788,330    17,214,112 
           
Commitments and Contingencies (See Note 9)          
           
SHAREHOLDERS’ DEFICIT:          
Preferred stock, par value $0.001; authorized 10,000,000 shares:          
Series B convertible preferred stock, par value $0.001 per share; 1,700,000 shares designated; 700,000 and 1,700,000 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively (Liquidation value $700 and $1,700, respectively)   700    1,700 
Series C preferred stock, par value $0.001 per share; 1 share designated; No shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively   -    - 
Series D preferred stock, par value $0.001 per share; 1,250,000 shares designated; 124,376 and 0 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively ($6.00 per share liquidation value)   124    - 
Common stock, par value $0.001 per share; 4,000,000,000 shares authorized; 1,472,924,335 and 11,832,603 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively   1,472,924    11,833 
Common stock issuable, par value $0.001 per share; 0 and 25,000 shares   -    25 
Additional paid-in capital   101,072,128    47,715,878 
Accumulated deficit   (114,818,245)   (60,615,860)
           
Total Shareholders’ Deficit   (12,272,369)   (12,886,424)
           
Total Liabilities and Shareholders’ Deficit  $4,515,961   $4,327,688 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

3
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   For the Three Months Ended   For the Nine Months Ended 
   September 30,   September 30, 
   2020   2019   2020   2019 
                 
REVENUES  $6,309,509   $7,759,451   $23,503,384   $21,664,070 
                     
COST OF REVENUES   5,978,265    6,293,699    20,831,870    19,366,374 
                     
GROSS PROFIT   331,244    1,465,752    2,671,514    2,297,696 
                     
OPERATING EXPENSES:                    
Compensation and related benefits   551,306    3,433,741    1,955,854    11,150,955 
Legal and professional fees   621,105    517,277    3,523,811    1,588,359 
Rent   156,738    83,911    496,349    269,148 
General and administrative expenses   173,680    720,481    615,331    2,316,016 
Impairment loss   -    -    -    1,724,591 
                     
Total Operating Expenses   1,502,829    4,755,410    6,591,345    17,049,069 
                     
LOSS FROM OPERATIONS   (1,171,585)   (3,289,658)   (3,919,831)   (14,751,373)
                     
OTHER (EXPENSES) INCOME:                    
Interest expense   (2,028,958)   (2,339,508)   (7,016,597)   (4,936,951)
Interest expense - related parties   (22,686)   (35,753)   (152,262)   (183,392)
Loan fees       -        (601,121)
Gain (loss) on debt extinguishment, net   907,447    (4,714,751)   7,151,041    39,203,017 
Other income   91,950    -    266,918    - 
Derivative income (expense), net   37,826,129    (981,244)   (31,835,642)   (56,018,849)
                     
Total Other (Expenses) Income   36,773,882    (8,071,256)   (31,586,542)   (22,537,296)
                     
INCOME (LOSS) FROM CONTINUING OPERATIONS   35,602,297    (11,360,914)   (35,506,373)   (37,288,669)
                     
LOSS FROM DISCONTINUED OPERATIONS:                    
Loss from discontinued operations   -    -    -    (681,426)
                     
NET INCOME (LOSS)   35,602,297    (11,360,914)   (35,506,373)   (37,970,095)
                     
Deemed dividend related to ratchet adjustment   -    (981,548)   (18,696,012)   (981,548)
                     
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS  $35,602,297   $(12,342,462)  $(54,202,385)  $(38,951,643)
                     
NET INCOME (LOSS) PER COMMON SHARE - BASIC                    
Net income (loss) from continuing operations  $0.03   $(1.10)  $(0.11)  $(4.34)
Loss from discontinued operations   0.00    (0.00)   (0.00)   (0.08)
                     
Net income (loss) per common share - basic  $0.03   $(1.10)  $(0.11)  $(4.42)
                     
NET INCOME (LOSS) PER COMMON SHARE - DILUTED                    
Net income (loss) from continuing operations  $0.00   $(1.10)  $(0.11)  $(4.34)
Loss from discontinued operations   0.00    (0.00)   (0.00)   (0.08)
                     
Net income (loss) per common share - diluted  $0.00   $(1.10)  $(0.11)  $(4.42)
                     
WEIGHTED AVERAGE COMMON SHARE OUTSTANDING:                    
Basic   1,136,231,561    11,247,054    472,432,161    8,811,489 
Diluted   2,506,145,678    11,247,054    472,432,161    8,811,489 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

(Unaudited)

 

   Preferred Stock
Series A
   Preferred Stock
Series B
   Preferred Stock
Series D
   Common Stock   Common Stock Issuable   Additional
Paid-in
   Accumulated   Total
Shareholders’
 
   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Deficit 
                                                     
Balance, December 31, 2019   -   $-    1,700,000    $1,700    -    $-    11,832,603    $11,833    25,000   $25    $47,715,878   $ (60,615,860)   $(12,886,424)
                                                                  
Reduction of put premium upon conversion   -    -    -    -    -    -    -    -    -    -    73,725    -    73,725 
                                                                  
Common stock issued for debt conversion   -    -    -    -    -    -    5,290,406    5,290    -    -    336,229    -    341,519 
                                                                  
Beneficial conversion effect related to debt conversions   -    -    -    -    -    -    -    -    -    -    172,720    -    172,720 
                                                                  
Relative fair value of warrants issued in connection with convertible debt   -    -    -    -    -    -    -    -    -    -    262,872    -    262,872 
                                                                  
Accretion of stock-based compensation   -    -    -    -    -    -    -    -    -    -    31,250    -    31,250 
                                                                  
Reclassification of warrants from equity to derivative liabilities   -    -    -    -    -    -    -    -    -    -    (11,381,885)   -    (11,381,885)
                                                                  
Deemed dividend related to price protection   -    -    -    -    -    -    -    -    -    -    18,696,012    (18,696,012)   - 
                                                                  
Net loss   -    -    -    -    -    -    -    -    -    -    -    (3,453,338)   (3,453,338)
                                                                  
Balance, March 31, 2020   -    -    1,700,000    1,700    -    -    17,123,009    17,123    25,000    25    55,906,801    (82,765,210)   (26,839,561)
                                                                  
Cancellation of issuable shares   -    -    -    -    -    -    -    -    (25,000)   (25)   25    -    - 
                                                                  
Reduction of put premium upon conversion   -    -    -    -    -    -    -    -    -    -    311,660    -    311,660 
                                                                  
Common stock issued for debt conversion, accrued interest and fees   -    -    -    -    -    -    412,573,593    412,573    -    -    2,317,667    -    2,730,240 
                                                                  
Beneficial conversion effect related to debt conversions   -    -    -    -    -    -    -    -    -    -    15,531,703    -    15,531,703 
                                                                  
Common shares issued for cashless warrant exercise   -    -    -    -    -    -    70,203,889    70,204    -    -    (70,204)   -    - 
                                                                  
Warrants issued for services   -    -    -    -    -    -    -    -    -    -    1,963,291    -    1,963,291 
                                                                  
Accretion of stock-based compensation   -    -    -    -    -    -    -    -    -    -    5,208    -    5,208 
                                                                  
Net loss   -    -    -    -    -    -    -    -    -    -    -    (67,655,332)   (67,655,332)
                                                                  
Balance, June 30, 2020   -    -    1,700,000    1,700    -    -    499,900,491    499,900    -    -    75,966,151    (150,420,542)   (73,952,791)
                                                                  
Common stock issued for series B preferred stock   -    -    (1,000,000)   (1,000)   -    -    1,000,000    1,000    -    -    -    -    - 
                                                                  
Common stock issued for debt conversion, accrued interest and fees   -    -    -    -    -    -    477,682,407    477,682    -    -    4,334,087    -    4,811,769 
                                                                  
Beneficial conversion effect related to debt conversions   -    -    -    -    -    -    -    -    -    -    19,700,260    -    19,700,260 
                                                                  
Common shares issued for cashless warrant exercise   -    -    -    -    -    -    85,710,419    85,711    -    -    151,954    -    237,665 
                                                                  
Conversion of debt and accrued interest to series D preferred stock   -    -    -    -    522,726    522    -    -    -    -    825,167    -    825,689 
                                                                  
Conversion of series D preferred stock to common stock   -    -    -    -    (398,350)   (398)   398,350,000    398,350    -    -    (397,952)   -    - 
                                                                  
Common stock issued for settlement   -    -    -    -    -    -    10,281,018    10,281    -    -    492,461    -    502,742 
                                                                  
Net loss   -    -    -    -    -    -    -    -    -    -    -    35,602,297    35,602,297 
                                                                  
Balance, September 30, 2020   -   $-    700,000   $700    124,376   $124    1,472,924,335   $1,472,924    -   $-   $101,072,128   $(114,818,245)  $(12,272,369)

 

5
 

 

   Preferred Stock
Series A
   Preferred Stock
Series B
   Preferred Stock
Series D
   Common Stock   Common Stock Issuable   Additional
Paid-in
   Accumulated   Total
Shareholders’
 
   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Deficit 
                                                     
Balance, December 31, 2018   4,000,000    $4,000    -    

$

-    -    

$

-    4,220,837    

$

4,220    -    

$

-    

$

7,477,422    

$

(15,222,936)   

$

(7,737,294)
                                                                  
Warrants issued in connection with debt   -    -    -    -    -    -    -    -    -    -    63,581    -    63,581 
                                                                  
Cumulative effect adjustment for change in derivative accounting   -    -    -    -    -    -    -    -    -    -    -    453,086    453,086 
                                                                  
Shares issued for services   -    -    -    -    -    -    2,670,688    2,671    -    -    2,748,137    -    2,750,808 
                                                                  
Net loss   -    -    -    -    -    -    -    -    -    -    -    (19,647,723)   (19,647,723)
                                                                  
Balance, March 31, 2019   4,000,000    4,000    -    -    -    -    6,891,525    6,891    -    -    10,289,140    (34,417,573)   (24,117,542)
                                                                  
Shares issued for debt and warrant modifications   -    -    -    -    -    -    700,000    700    700,000    700    17,932,600    -    17,934,000 
                                                                  
Shares issued for conversion of preferred shares   (4,000,000)   (4,000)   -    -    -    -    2,600,000    2,600    -    -    1,400    -    - 
                                                                  
Return and cancellation of shares for disposal of Save On   -    -    -    -    -    -    (1,000,000)   (1,000)             57,987    -    56,987 
                                                                  
Stock options granted to employees of discontinued operations   -    -    -    -    -    -    -    -    -    -    700,816    -    700,816 
                                                                  
Warrants issued in connection with debt   -    -    -    -    -    -    -    -    -    -    672,864    -    672,864 
                                                                  
Shares issued for services   -    -    -    -    -    -    230,000    230    -    -    2,465,270    -    2,465,500 
                                                                  
Net loss   -    -    -    -    -    -    -    -    -    -    -    (6,961,458)   (6,961,458)
                                                                  
Balance, June 30, 2019   -    -    -    -    -    -    9,421,525    9,421    700,000    700    32,120,077    (41,379,031)   (9,248,833)
                                                                  
Shares issued for services   -    -    1,000,000    1,000    -    -    -    -    50,000    50    2,527,596    -    2,528,646 
                                                                  
Common stock issued for cash and warrants   -    -    -    -    -    -    585,000    585    -    -    1,461,915    -    1,462,500 
                                                                  
Common stock issued for debt conversion   -    -    -    -    -    -    1,438,711    1,439    -    -    3,595,339    -    3,596,778 
                                                                  
Common of common shares issuable to Series B preferred   -    -    700,000    700    -    -    -    -    (700,000)   (700)   -    -    - 
                                                                  
Warrants issued in connection with debt conversion   -    -    -    -    -    -    -    -    -    -    3,550,531    -    3,550,531 
                                                                  
Relative fair value of warrants issued in connection with convertible debt   -    -    -    -    -    -    -    -    -    -    1,225,109    -    1,225,109 
                                                                  
Adjustment of conversion for debt extinguishment   -    -    -    -    -    -    -    -    -    -    1,164,220    -    1,164,220 
                                                                  
Deemed dividend related to price protection   -    -    -    -    -    -    -    -    -    -    981,548    (981,548)   - 
                                                                  
Net loss   -    -    -    -    -    -    -    -    -    -    -    (11,360,914)   (11,360,914)
                                                                  
Balance, September 30, 2019   -   $-    1,700,000   $1,700    -   $-    11,445,236   $11,445    50,000   $50   $46,626,335   $(53,721,493)  $(7,081,963)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

6
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   For the Nine Months Ended 
   September 30, 
   2020   2019 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(35,506,373)  $(37,970,095)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization expense   42,101    873,020 
Amortization of debt discount to interest expense   4,664,605    3,991,061 
Amortization of debt discount to interest expense - related party   -    26,383 
Stock-based compensation and consulting fees   1,999,749    7,744,954 
Stock-based compensation and consulting fees - discontinued operations   -    700,816 
Non-cash loan fees   -    601,121 
Other non-cash interest and fees   9,080    - 
Interest expense related to debt default   1,531,335    - 
Derivative expense, net   31,835,642    56,018,849 
Non-cash portion of gain on extinguishment of debt, net   (7,203,589)   (39,316,359)
Rent expense   12,911    20,644 
Loss on disposal of property and equipment   -    195,624 
Impairment loss   -    1,724,591 
Change in operating assets and liabilities:          
Accounts receivable   628,378    (147,696)
Prepaid expenses and other current assets   (216,181)   (174,653)
Assets of discontinued operations   -    (53,193)
Due from related party   -    (89,873)
Security deposit   (129,750)   (98,100)
Accounts payable and accrued expenses   (12,623)   1,626,306 
Insurance payable   (250,961)   232,254 
Liabilities of discontinued operations   -    10,954 
Accrued compensation and related benefits   226,415    (148,523)
           
NET CASH USED IN OPERATING ACTIVITIES   (2,369,261)   (4,231,915)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Decrease in cash from disposal of subsidiary   -    (5,625)
Purchase of property and equipment   (460,510)   (59,256)
Proceeds from sale of property and equipment   -    81,000 
           
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES   (460,510)   16,119 
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from sale of common stock and warrants   -    1,462,500 
Proceeds from convertible notes payable - related party   -    2,500,000 
Proceeds from convertible notes payable   1,912,382    1,938,900 
Repayment of convertible notes payable   (257,139)   (473,579)
Net proceeds from notes payable   4,479,662    7,791,020 
Repayment of notes payable   (2,956,366)   (9,584,459)
Net proceeds from notes payable - related party   -    755,000 
Repayment of notes payable - related party   -    (495,000)
Net payments on related party advances   (80,438)   31,960 
           
NET CASH PROVIDED BY FINANCING ACTIVITIES   3,098,101    3,926,342 
           
NET INCREASE (DECREASE) IN CASH   268,330    (289,454)
           
CASH, beginning of period   50,026    296,196 
           
CASH, end of period  $318,356   $6,742 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION          
Cash paid for:          
Interest  $1,051,418   $4,147,828 
Income taxes  $-   $- 
           
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Debt discounts recorded  $262,872   $1,288,690 
Increase in derivative liability and debt discount related to convertible notes  $1,702,471   $936,645 
Increase in right of use asset and lease liability  $-   $1,984,320 
Conversion of debt and accrued interest for common stock  $7,362,182   $3,596,777 
Reclassification of accrued interest to debt  $89,262   $- 
Decrease in put premium and paid-in capital  $385,385   $- 
Reclassification of warrant value from equity to derivative liabilities  $11,381,885   $- 
Deemed dividend related to price protection  $18,696,012   $- 
Conversion of debt and accrued interest for Series D preferred stock  $586,012   $- 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

7
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

 

NOTE 1 – ORGANIZATION AND BUSINESS OPERATIONS

 

Transportation and Logistics Systems, Inc. (“TLSS” or the “Company”), was incorporated under the laws of the State of Nevada, on July 25, 2008. The Company operates through its subsidiaries as a logistics and transportation company specializing in ecommerce fulfillment, last mile deliveries, two-person home delivery, mid-mile, and long-haul services for predominantly online retailers.

 

On March 30, 2017 (the “Closing Date”), TLSS and Save On Transport Inc. (“Save On”) entered into a Share Exchange Agreement, dated as of the same date (the “Share Exchange Agreement”). Pursuant to the terms of the Share Exchange Agreement, on the Closing Date, Save On became a wholly-owned subsidiary of TLSS (the “Reverse Merger”). Save On was incorporated in the state of Florida and started business on July 12, 2016. This transaction was treated as a reverse merger and recapitalization of Save On for financial reporting purposes because the Save On shareholders retained an approximate 80% controlling interest in the post-merger consolidated entity. Save On was considered the acquirer for accounting purposes, and the Company’s historical financial statements before the Reverse Merger were replaced with the historical financial statements of Save On before the Reverse Merger. The balance sheets at their historical cost basis of both entities were combined at the Closing Date and the results of operations from the Closing Date forward include the historical results of Save On and results of TLSS from the Closing Date forward. On May 1, 2019, the Company entered into a share exchange agreement with Save On and Steven Yariv, whereby the Company returned all of the stock of Save On to Steven Yariv in exchange for Mr. Yariv conveying 1,000,000 shares of common stock of the Company back to the Company. In addition, the Company granted an aggregate of 80,000 options to certain employees of Save On. On April 16, 2019, Mr. Yariv ceased to be an officer or director of the Company.

 

On June 18, 2018 (the “Acquisition Date”), the Company completed the acquisition of 100% of the issued and outstanding membership interests of Prime EFS, LLC, a New Jersey limited liability company (“Prime EFS”), from its members pursuant to the terms and conditions of a Stock Purchase Agreement entered into among the Company and the Prime EFS members on the Acquisition Date (the “SPA”). Prime EFS is a New Jersey based transportation company with a focus on deliveries for on-line retailers in New York, New Jersey and Pennsylvania.

 

On July 24, 2018, the Company formed Shypdirect LLC (“Shypdirect”), a company organized under the laws of New Jersey. Shypdirect is a transportation company with a focus on tractor trailer and box truck deliveries of product on the east coast of the United States from one distributor’s warehouse to another warehouse or from a distributor’s warehouse to the post office.

 

On June 19, 2020, Amazon Logistics, Inc. (“Amazon”) notified Prime EFS in writing (the “Prime EFS Termination Notice”), that Amazon would not renew its Delivery Service Partner (DSP) Agreement with Prime EFS when that agreement (the “In-Force Agreement”) expired on September 30, 2020 and such In-Force Agreement, in fact, expired on September 30, 2020.

 

Additionally, on July 17, 2020, Amazon notified Shypdirect that Amazon had elected to terminate the Amazon Relay Carrier Terms of Service (the “Program Agreement”) between Amazon and Shypdirect effective as of November 14, 2020 (the “Shypdirect Termination Notice”). On August 3, 2020, Amazon offered to withdraw the Shypdirect Termination Notice and extend the term of the Program Agreement to and including May 14, 2021, conditioned on Prime EFS executing, for nominal consideration, a separation agreement with Amazon under which Prime EFS agrees to cooperate in an orderly transition of its Amazon last-mile delivery business to other service providers, Prime EFS released any and all claims it may have against Amazon, and Prime EFS covenanted not to sue Amazon (the “Aug. 3 Proposal”). On August 4, 2020, the Company, Prime EFS and Shypdirect accepted the Aug. 3 Proposal.

 

Approximately 58.5% and 39.0% (for a total of 97.5%) of the Company’s revenue of $23,503,384 for the nine months ended September 30, 2020 was attributable to Prime EFS’s last-mile DSP business and Shypdirect’s mid-mile and long-haul business with Amazon, respectively. The termination of the Amazon last-mile business will have a material adverse impact on the Company’s business in the 4th fiscal quarter of 2020 and thereafter. If the Amazon mid-mile and long-haul business is discontinued after May 14, 2021 it would have a material adverse impact on the Company’s business in 2nd fiscal quarter of 2021 and thereafter.

 

While the Company will seek to replace its last-mile DSP Amazon business and supplement its mid-mile and long-haul Amazon business, such initiatives are consistent with its already existing business plan to: (i) seek new last-mile, mid-mile and long-haul business with other, non-Amazon, customers; (ii) explore other strategic relationships; and (iii) identify potential acquisition opportunities, while continuing to execute our restructuring plan, commenced in February 2020.

 

TLSS and its wholly-owned subsidiaries, Prime EFS and Shypdirect are hereafter referred to as the “Company”.

 

8
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION

 

Basis of presentation and principles of consolidation

 

The condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and the rules and regulations of the United States Securities and Exchange Commission for interim financial information. Accordingly, they do not include all the information and disclosures necessary for comprehensive presentation of financial position, results of operations or cash flow. However, these unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these unaudited interim condensed consolidated financial statements be read in conjunction with the financial statements of the Company for the year ended December 31, 2019, and notes thereto included in the Company’s annual report on Form 10-K, filed on May 29, 2020.

 

The Company follows the same accounting policies in the preparation of its annual and interim reports. The results of operations in interim periods are not necessarily an indication of operating results to be expected for the full year.

 

The unaudited condensed consolidated financial statements of the Company include the accounts of TLSS and its wholly-owned subsidiaries, Save On (through April 30, 2019), Prime EFS and Shypdirect. All intercompany accounts and transactions have been eliminated in consolidation.

 

On May 1, 2019, the Company entered into a Share Exchange Agreement with Save On and Steven Yariv, whereby the Company returned all of the stock of Save On to Steven Yariv in exchange for Mr. Yariv conveying 1,000,000 shares of common stock of the Company back to the Company. Pursuant to Accounting Standard Codification (“ASC”) 205-20-45, the financial statement in which net income or loss of a business entity is reported shall report the results of operations of the discontinued operation in the period in which a discontinued operation either has been disposed of or is classified as held for sale. Accordingly, beginning in the second quarter of 2019, the period that Save On was disposed of, the Company reflects Save On as a discontinued operation and such presentation is retroactively applied to all periods presented in the accompanying condensed consolidated financial statements.

 

Going concern

 

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. As reflected in the accompanying condensed consolidated financial statements, for the nine months ended September 30, 2020, the Company had a net loss of $35,506,373 and net cash used in operations was $2,369,261. Additionally, the Company had an accumulated deficit, shareholders’ deficit, and a working capital deficit of $114,818,245, $12,272,369 and $12,974,773, respectively, at September 30, 2020. Furthermore, the Company failed to make required payments of principal and interest on certain of its convertible debt instruments and notes payable (see Note 6).

 

On June 19, 2020, Amazon notified Prime EFS by the Prime EFS Termination Notice that it does not intend to renew the In-Force Agreement when that agreement expires. In the Prime EFS Termination Notice, Amazon stated that the In-Force Agreement expires on September 30, 2020. Additionally, on July 17, 2020, pursuant to the Shypdirect Termination Notice, Amazon notified Shypdirect that Amazon had elected to terminate the Program Agreement between Amazon and Shypdirect effective as of November 14, 2020 (see Note 1). However, on August 3, 2020, Amazon offered pursuant to the Aug. 3 Proposal to withdraw the Shypdirect Termination Notice and extend the term of the Program Agreement to and including May 14, 2021, conditioned on Prime EFS executing, for nominal consideration, a separation agreement with Amazon under which Prime EFS agrees to cooperate in an orderly transition of its Amazon last-mile delivery business to other service providers, Prime EFS releases any and all claims it may have against Amazon, and Prime EFS covenants not to sue Amazon. In a “Separation Agreement” dated August 23, 2020, by and among Amazon, Prime EFS and the Company, Prime EFS and the Company agreed, for nominal consideration, that the Delivery Service Partner Program Agreement between Amazon and Prime EFS would terminate effective September 30, 2020; that Prime EFS and the Company would cooperate in an orderly transition of the last-mile delivery business from Prime EFS to other service providers; that Prime EFS would return any and all vehicles leased from Element Fleet Corporation by October 7, 2020 in good repair; and that Prime EFS would dismiss the Amazon Arbitration with prejudice. Under the same Separation Agreement, Prime EFS and the Company released any and all claims they had against Amazon and covenant not to sue Amazon. In a “Settlement and Release Agreement” dated August 21, 2020, by and among Amazon, Shypdirect, Prime EFS and the Company, Amazon withdrew the Shypdirect Termination Notice and extended the term of the Program Agreement to and including May 14, 2021. In the Settlement and Release Agreement, Shypdirect released any and all claims it had against Amazon, arising under the Program Agreement between Amazon and Shypdirect effective as of November 14, 2020, or otherwise.

 

9
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

 

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 minimal effects on the Company’s results of operations. The Company is experiencing higher net sales, which reflect increased demand, particularly as more people are staying at home, for household staples and other essential products, partially offset by decreased demand for discretionary consumer products, delayed procurement and shipment of non-priority products, and supply chain interruptions. Other 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 expects to continue to be affected by possible procurement and shipping delays, supply chain interruptions, higher product demand in certain categories, lower product demand in other categories, and increased fulfilment costs and cost of sales as a percentage of net sales through at least Q4 2020, although 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 2020, or whether other currently unanticipated consequences of the pandemic are reasonably likely to materially affect the Company’s results of operations.

 

It is management’s opinion that these factors raise substantial doubt about the Company’s ability to continue as a going concern for a period of twelve months from the issuance date of this report. In April 2020, the Company’s subsidiaries, Prime EFS and Shypdirect, entered into Paycheck Protection Program promissory notes with M&T Bank in the aggregate amount of $3,446,152 (see Note 7). Management cannot provide assurance that the Company will ultimately achieve profitable operations, become cash flow positive, or raise additional debt and/or equity capital.

 

The Company will continue to: (i) seek to replace its last-mile DSP Amazon business and supplement its mid-mile and long-haul Amazon business with other, non-Amazon, customers; (ii) explore other strategic relationships; and (iii) identify potential acquisition opportunities, while continuing to execute our restructuring plan, commenced in February 2020. The Company is seeking to raise capital through additional debt and/or equity financings to fund its operations in the future. Although the Company has historically raised capital from sales of common shares and from the issuance of convertible promissory notes and notes payable, there is no assurance that it will be able to continue to do so. If the Company is unable to replace its Amazon business, to raise additional capital or secure additional lending in the near future, management expects that the Company will need to curtail its operations. These consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

Use of estimates

 

The preparation of the condensed consolidated financial statements, in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates included in the accompanying unaudited condensed consolidated financial statements and footnotes include the valuation of accounts receivable, the useful life of property and equipment, the valuation of intangible assets, the valuation of right of use assets and related liabilities, assumptions used in assessing impairment of long-lived assets, estimates of current and deferred income taxes and deferred tax valuation allowances, the fair value of non-cash equity transactions, the valuation of derivative liabilities, 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 September 30, 2020. Accordingly, the estimates presented in these financial statements are not necessarily indicative of the amounts that could be realized on disposition of the financial instruments. ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).

 

The three levels of the fair value hierarchy are as follows:

 

  Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
     
  Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.
     
  Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

 

The Company measures certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows at September 30, 2020 and December 31, 2019:

 

   At September 30, 2020   At December 31, 2019 
Description  Level 1   Level 2   Level 3   Level 1   Level 2   Level 3 
Derivative liabilities          $2,886,811           $2,135,939 

 

10
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

 

A roll-forward of the level 3 valuation financial instruments is as follows:

 

   For the Nine
Months ended September 30, 2020
   For the Nine
Months ended
September 30, 2019
 
Balance at beginning of period  $2,135,939   $7,888,684 
Initial valuation of derivative liabilities included in debt discount   1,702,474    936,644 
Initial valuation of derivative liabilities included in derivative expense   14,892,068    1,017,323 
Gain on extinguishment of debt related to April 9, 2019 modifications   -    (61,841,708)
Gain on extinguishment of debt related to repayment/conversion of debt   (44,169,129)   (246,110)
Reclassification of warrants from equity to derivative liabilities   11,381,885    - 
Cumulative effect adjustment for change in derivative accounting   -    (838,471)
Change in fair value included in derivative (gain) expense   16,943,574    55,001,526 
Balance at end of period  $2,886,811   $1,917,888 

 

The Company accounts for its derivative financial instruments, consisting of certain conversion options embedded in our convertible instruments and warrants, at fair value using level 3 inputs. The Company determined the fair value of these derivative liabilities using the Black-Scholes option pricing model, binomial lattice models, or other accepted valuation practices. When determining the fair value of its financial assets and liabilities using these methods, the Company is required to use various estimates and unobservable inputs, including, among other things, expected terms of the instruments, expected volatility of its stock price, expected dividends, and the risk-free interest rate. Changes in any of the assumptions related to the unobservable inputs identified above may change the fair value of the instrument. Increases in expected term, anticipated volatility and expected dividends generally result in increases in fair value, while decreases in the unobservable inputs generally result in decreases in fair value.

 

ASC 825-10 “Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.

 

The carrying amounts reported in the condensed consolidated balance sheets for cash, accounts receivable, accounts payable and accrued expenses approximate their fair values based on the short-term maturity of these instruments. The carrying amount of the Company’s convertible notes payable and promissory note obligations approximate fair value, as the terms of these instruments are consistent with terms available in the market for instruments with similar risk.

 

Cash and cash equivalents

 

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less at the purchase date and money market accounts to be cash equivalents. At September 30, 2020 and December 31, 2019, the Company did not have any cash equivalents.

 

The Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. There were no balances in excess of FDIC insured levels as September 30, 2020 and December 31, 2019. The Company has not experienced any losses in such accounts through September 30, 2020.

 

Accounts receivable

 

Accounts receivable are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, a customer’s historical payment history, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection.

 

Property and equipment

 

Property are stated at cost and are depreciated using the straight-line method over their estimated useful lives of five to six years. Leasehold improvements are depreciated over the shorter of the useful life or lease term including scheduled renewal terms. Maintenance and repairs are charged to expense as incurred. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases in the value of these assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.

 

11
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

 

Intangible assets

 

Intangible assets are carried at cost less accumulated amortization, computed using the straight-line method over the estimated useful life, less any impairment charges.

 

Leases

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The updated guidance requires lessees to recognize lease assets and lease liabilities for most operating leases. In addition, the updated guidance requires that lessors separate lease and non-lease components in a contract in accordance with the new revenue guidance in ASC 606. The updated guidance is effective for interim and annual periods beginning after December 15, 2018.

 

On January 1, 2019, the Company adopted ASU No. 2016-02, applying the package of practical expedients to leases that commenced before the effective date whereby the Company elected to not reassess the following: (i) whether any expired or existing contracts contain leases and; (ii) initial direct costs for any existing leases. For contracts entered into on or after the effective date, at the inception of a contract the Company assessed whether the contract is, or contains, a lease. The Company’s assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether 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 administra