10-Q 1 form10-q.htm Proof - form10-q.htm

 

 

 

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, 2018

 

[  ] 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

 

2833 Exchange Court, Suite A

West Palm Beach, Florida 33409

 

 

33409

(Address of principal executive offices)   (Zip code)

 

561-801-9188

(Registrant’s telephone number, including area code)

 

 

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

 

Indicate by checkmark whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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, 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 [  ] Small 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 February 13, 2019
Common Stock, $0.001   4,220,106

 

 

 

 
 

 

Transportation and Logistics Systems, Inc.

FORM 10-Q

 

INDEX

 

    Page
PART I. FINANCIAL INFORMATION F-1
     
Item 1. Financial Statements F-1
  Condensed Consolidated Balance Sheets - As of September 30, 2018 (unaudited) and December 31, 2017 F-1
  Condensed Consolidated Statements of Operations - For the Three and Nine Months Ended September 30, 2018 and 2017 (unaudited) F-2
  Consolidated Statements of Changes in Shareholders’ Equity (Deficit) – For the Nine Months Ended September 30, 2018 and 2017 (unaudited) F-3
  Consolidated Statements of Cash Flows - For the Nine Months Ended September 30, 2018 and 2017 (unaudited) F-4
  Condensed Notes to Consolidated Financial Statements (unaudited) F-5
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 3
Item 3. Quantitative and Qualitative Disclosures About Market Risk 9
Item 4. Controls and Procedures 9
     
PART II. OTHER INFORMATION 10
     
Item 1. Legal Proceedings 10
Item 1A. Risk Factors 10
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Mine Safety Disclosures 11
Item 5. Other Information 11
Item 6. Exhibits 11
Signatures 12

 

2
 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

TRANSPORTATION AND LOGISTICS SYSTEMS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

   September 30,   December 31, 
   2018   2017 
   (Unaudited)     
ASSETS        
CURRENT ASSETS:          
Cash  $164,218   $106,576 
Accounts receivable, net   1,070,456    254,150 
Prepaid expenses and other current assets   237,681    663 
           
Total Current Assets   1,472,355    361,389 
           
OTHER ASSETS:          
Property, plant and equipment, net   807,044    - 
Intangible asset, net   3,673,874    - 
           
Total Other Assets   4,480,918    - 
           
TOTAL ASSETS  $5,953,273   $361,389 
           
LIABILITIES AND SHAREHOLDERS’ DEFICIT          
           
CURRENT LIABILITIES:          
Convertible notes payable, net of debt discounts  $220,645   $272,616 
Notes payable   1,328,625    - 
Notes payable - related party   220,000    - 
Accounts payable   563,728    224,194 
Accrued expenses   511,883    - 
Insurance payable   829,786    - 
Derivative liability   16,718,740    601,615 
Deferred revenue   6,950    1,500 
Due to related parties   268,025    23,551 
Accrued compensation and related benefits   545,369    13,050 
           
Total Current Liabilities   21,213,751    1,136,526 
           
LONG-TERM LIABILITIES:          
Convertible notes payable, net of debt discounts   1,017,793    - 
           
Total Long-term Liabilities   1,017,793    - 
           
Total Liabilities   22,231,544    1,136,526 
           
Commitments and Contingencies (See Note 9)          
           
SHAREHOLDERS’ DEFICIT:          
Series A Convertible Preferred stock, par value $0.001 per share; authorized 10,000,000 shares; issued and outstanding 4,000,000 shares (Liquidation value $4,000,000)   4,000    4,000 
Common stock, par value $0.001 per share; authorized 500,000,000 shares; issued and outstanding 4,170,106 and 570,106 at September 30, 2018 and December 31, 2017, respectively   4,170    570 
Additional paid-in capital   7,377,472    (34,928)
Accumulated deficit   (23,663,913)   (744,779)
           
Total Shareholders’ Deficit   (16,278,271)   (775,137)
           
Total Liabilities and Shareholders’ Deficit  $5,953,273   $361,389 

 

See accompanying notes to unaudited consolidated financial statements.

 

F-1
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   For the Three Months Ended   For the Nine Months Ended 
   September 30,   September 30, 
   2018   2017   2018   2017 
                 
REVENUES  $5,895,160   $459,248   $8,831,751   $636,393 
                     
COST OF REVENUES                    
Third party   5,601,545    355,984    7,888,724    483,932 
Related party   42,050    -    47,450    - 
                     
Total Cost of Revenues   5,643,595    355,984    7,936,174    483,932 
                     
GROSS PROFIT   251,565    103,264    895,577    152,461 
                     
OPERATING EXPENSES:                    
Compensation and related benefits   639,762    -    4,197,123    - 
Legal and professional   306,613    58,494    1,680,606    173,463 
Rent   6,047    -    18,143    - 
Rent - affiliate   -    900    -    2,700 
General and administrative expenses   1,690,210    51,828    1,943,854    85,114 
                     
Total Operating Expenses   2,642,632    111,222    7,839,726    261,277 
                     
LOSS FROM OPERATIONS   (2,391,067)   (7,958)   (6,944,149)   (108,816)
                     
OTHER EXPENSES:                    
Interest expense   (280,635)   (15,633)   (339,826)   (18,824)
Interest expense - related party   (40,000)   -    (40,000)   - 
Amortization of debt discount   (633,458)   (121,121)   (965,822)   (149,404)
Gain on extinguishment of debt   -    10,169    -    10,169 
Derivative (expense) gain   (5,123,985)   133,791    (14,629,337)   (479,378)
                     
Total Other Expenses   (6,078,078)   7,206    (15,974,985)   (637,437)
                    
NET LOSS  $(8,469,145)  $(752)  $(22,919,134)  $(746,253)
                     
NET LOSS PER COMMON SHARE:                    
Basic and diluted  $(2.03)  $(0.00)  $(7.83)  $(1.40)
                     
WEIGHTED AVERAGE COMMON SHARE OUTSTANDING:                    
Basic and diluted   4,170,106    570,106    2,928,392    533,171 

 

See accompanying notes to unaudited consolidated financial statements.

 

F-2
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

 

   Preferred Stock Series A   Common Stock   Additional Paid-in   Retained Earnings (Accumulated   Total Shareholders’ 
   Shares   Amount   Shares   Amount   Capital   Deficit)   Equity (Deficit) 
                             
Balance, December 31, 2016   -   $-   $456,812   $457   $7,643   $26   $8,126 
                                    
Recapitalization   4,000,000    4,000    113,294    113    (42,571)   -    (38,458)
                                    
Net loss   -    -    -    -    -    (26,658)   (26,658)
                                    
Balance, March 31, 2017   4,000,000    4,000    570,106    570    (34,928)   (26,632)   (56,990)
                                    
Net loss   -    -    -    -    -    (718,843)   (718,843)
                                    
Balance, June 30, 2017   4,000,000    4,000    570,106    570    (34,928)   (745,475)   (775,833)
                                    
Net loss   -    -    -    -    -    (752)   (752)
                                    
Balance, September 30, 2017   4,000,000   $4,000   $570,106   $570   $(34,928)  $(746,227)  $(776,585)

 

   Preferred Stock Series A   Common Stock  

Additional

Paid-in

   Accumulated  

Total

Shareholders’

 
   Shares   Amount   Shares   Amount   Capital   Deficit   Deficit 
                             
Balance, December 31, 2017   4,000,000   $4,000    570,106   $570   $(34,928)  $(744,779)  $(775,137)
                                    
Net income   -    -    -    -    -    60,925    60,925 
                                    
Balance, March 31, 2018   4,000,000    4,000    570,106    570    (34,928)   (683,854)   (714,212)
                                    
Shares issued for services   -    -    2,100,000    2,100    4,323,900    -    4,326,000 
                                    
Shares issued for acquisition   -    -    1,500,000    1,500    3,088,500    -    3,090,000 
                                    
Net loss   -    -    -    -    -    (14,510,914)   (14,510,914)
                                    
Balance, June 30, 2018   4,000,000    4,000    4,170,106    4,170    7,377,472    (15,194,768)   (7,809,126)
                                    
Net loss   -    -    -    -    -    (8,469,145)   (8,469,145)
                                    
Balance, September 30, 2018   4,000,000   $4,000    4,170,106   $4,170   $7,377,472   $(23,663,913)  $(16,278,271)

 

See accompanying notes to unaudited consolidated financial statements.

 

F-3
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   For the Nine Months Ended 
   September 30, 
   2018   2017 
         
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(22,919,134)  $(746,253)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization expense   1,498,285    - 
Bad debt expense (recovery)   (3,054)   - 
Amortization of debt discount to interest expense   1,045,000    149,404 
Stock-based compensation and consulting fees   4,326,000    - 
Derivative expense   14,629,337    479,378 
Gain on extinguishment of debt   -    (10,169)
Loss on disposal of property and equipment   14,816    - 
Change in operating assets and liabilities:          
Accounts receivable   327,005    (179,225)
Prepaid expenses and other current assets   (93,760)   1,963 
Accounts payable and accrued expenses   346,245    146,390 
Insurance payable   309,363    - 
Deferred revenue   5,450    (1,300)
Accrued compensation and related benefits   278,604    5,369 
           
NET CASH USED IN OPERATING ACTIVITIES   (235,843)   (154,443)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Restricted cash acquired   -    10,000 
Purchase of property and equipment   (303,958)   - 
Cash received in acquisition   38,198    - 
Cash paid for acquisition   (489,174)   - 
           
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES   (754,934)   10,000 
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from convertible notes payable   2,497,503    280,000 
Debt issue costs paid   (1,009,714)   - 
Repayment of convertible notes payable   -    (6,464)
Proceeds from notes payable   710,845    - 
Repayment of notes payable   (1,568,708)   - 
Proceeds from notes payable - related party   650,000    - 
Repayment of notes payable - related party   (490,000)   - 
Net proceeds from related parties   258,493    - 
           
NET CASH PROVIDED BY FINANCING ACTIVITIES   1,048,419    273,536 
           
NET INCREASE IN CASH   57,642    129,093 
           
CASH, beginning of period   106,576    11,725 
           
CASH, end of period  $164,218   $140,818 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION          
Cash paid for:          
Interest  $100,895   $- 
Income taxes  $-   $- 
           
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Debt discounts recorded  $1,487,788   $510,000 
Transfer of advance from lender to convertible note  $-   $15,000 
           
Liabilities assumed in acquisition  $3,503,552   $38,458 
Less: assets acquired in acquisition   1,959,655    - 
Net liabilities assumed   1,543,897    38,458 
Fair value of shares for acquisition   3,090,000    - 
Increase in intangible assets - non-cash  $4,633,897   $38,458 

 

See accompanying notes to unaudited consolidated financial statements.

 

F-4
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

 

NOTE 1 – ORGANIZATION AND BUSINESS OPERATIONS

 

Transportation and Logistics Systems, Inc. (“TLSI”), formerly PetroTerra Corp., was incorporated under the laws of the State of Nevada, on July 25, 2008 and prior to the reverse merger discussed below, was inactive.

 

On March 30, 2017 (the “Closing Date”), TLSI 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 TLSI (the “Reverse Merger”). Save On was incorporated in the state of Florida and started business on July 12, 2016 (“Inception Date”). Save On is a provider of integrated transportation management solutions consisting of brokerage and logistic services such as transportation scheduling, routing and other value added services related to the transportation of automobiles and other freight. As an early stage company, TLSI’s current operations are subject to all risks inherent in the establishment of a new business enterprise

 

The Share Exchange was treated as a reverse merger and recapitalization of Save On for financial reporting purposes since the Save On shareholders retained an approximate 80% controlling interest in the post-merger consolidated entity. Save On was considered the acquirer for accounting purposes, and the Company’s historical financial statements before the Merger was replaced with the historical financial statements of Save On before the Merger. The balance sheets at their historical cost basis of both entities were combined at the merger date and the results of operations from the merger date forward include the historical results of Save On and results of TLSI from the merger date forward. The Merger was intended to be treated as a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended.

 

On June 18, 2018 (the “Acquisition Date”), the Company completed the acquisition of 100% of the issued and outstanding membership interests of Prime EFS, LLC, a New Jersey limited liability company (“Prime”), from its members pursuant to the terms and conditions of a Stock Purchase Agreement entered into among the Company and the Prime members on the Closing Date (the “SPA”) (See Note 3). Prime is a New Jersey based transportation company with a focus on deliveries for on-line retailers in New York, New Jersey and Pennsylvania.

 

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

 

TLSI and its wholly-owned subsidiaries, Save On, Prime and Shypdirect are hereafter referred to as the “Company”.

 

On July 16, 2018, the Company filed a Certificate of Amendment to the Amended and Restated Articles of Incorporation (the “Certificate of Amendment”) with the Secretary of State of the State of Nevada to (1) change the name of the Company from PetroTerra Corp. to Transportation and Logistics Systems, Inc., (2) authorize an increase of the shares of the preferred stock to 10,000,000 shares, par value $0.001 per share and (3) effect a 1-for-250 reverse stock split (the “Reverse Stock Split”) with respect to the outstanding shares of the Company’s common stock. The Certificate of Amendment became effective on July 17, 2018. The corporate name change, increase of authorized shares of preferred stock and Reverse Stock Split were previously approved by the sole director and the majority of stockholders of the Company. The corporate name change and the Reverse Stock Split were deemed effective at the open of business on July 18, 2018. All share and per share data in the accompanying consolidated financial statements have been retroactively restated to reflect the effect of the recapitalization.

 

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

 

Basis of presentation and principles of consolidation

 

The consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America and the rules and regulations of the United States Securities and Exchange Commission for interim financial information. Accordingly, they do not include all the information and disclosures necessary for comprehensive presentation of financial position, results of operations or cash flow. However, these unaudited 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 financial statements of the Company for the year ended December 31, 2017, and notes thereto included in the Company’s annual report on Form 10-K, filed on April 17, 2018. 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 TLSI and its wholly owned subsidiaries, Save On, Prime and Shypdirect. All intercompany accounts and transactions have been eliminated in consolidation.

 

F-5
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

 

Going concern

 

The accompanying unaudited 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, the Company had a net loss of $22,919,134 for the nine months ended September 30, 2018. The net cash used in operations was $235,843 for the nine months ended September 30, 2018. Additionally, the Company had an accumulated deficit, shareholders’ deficit, and a working capital deficit of $23,663,913, $16,278,271 and $19,741,396, respectively, at September 30, 2018. Furthermore, the Company failed to make a required maturity date payment of principal and interest on certain of its convertible debt instruments. As of the date of this report the lender has not notified the Company of default and has not exercised any of its remedies provided for in these notes. One of the remedies the lender may request is an immediate repayment of the loan at 125% of the principal balance, which would result in the recording of $127,500 of penalty expense and the related liability. Additionally, the Company defaulted on a convertible note due to the late filing of this report on Form 10-Q among other events of default on this convertible note. Remedies this lender may request is an immediate repayment of the loan at 125% of the principal and interest balance, which would result in the recording of approximately $624,375 of penalty expense and the related liability and an increase in the interest rate to 24% annually. On December 27, 2018, the lender waived any and all defaults in existence on the Note and we agreed to issue a warrant that is convertible into 2% of the issued and outstanding shares existing as the time the Company files a registration statement or makes an application to up list to a national stock exchange. Additionally, the principal interest amount due under the Note was modified with a monthly payment of principal and interests due beginning on January 18, 2019 of $156,219 with all remaining principal and interest amounts on the Note due on December 18, 2019. In January 2019, the Company paid its first installment. It is management’s opinion that these factors raise substantial doubt about the Company’s ability to continue as a going concern for a period of twelve months from the issuance date of this report. Management cannot provide assurance that the Company will ultimately achieve profitable operations 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 common shares and from the issuance of convertible promissory notes, there is no assurance that it will be able to continue to do so.

 

If the Company is unable to raise additional capital or secure additional lending in the near future, management expects that the Company will need to curtail its operations. These consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

Use of estimates

 

The preparation of the unaudited 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 consolidated financial statements and footnotes include the valuation of accounts receivable, the useful life of property and equipment, the valuation of intangible assets, assumptions used in assessing impairment of long-lived assets, estimates of current and deferred income taxes and deferred tax valuation allowances, the fair value of non-cash equity transactions, the valuation of derivative liabilities, and the fair value of assets acquired and liabilities assumed in the business acquisition.

 

Fair value of financial instruments

 

FASB ASC 820 — Fair Value Measurements and Disclosures, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC 820 requires disclosures about the fair value of all financial instruments, whether or not recognized, for financial statement purposes. Disclosures about the fair value of financial instruments are based on pertinent information available to the Company on September 30, 2018. Accordingly, the estimates presented in these financial statements are not necessarily indicative of the amounts that could be realized on disposition of the financial instruments. FASB ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:

 

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

 

F-6
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

 

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, 2018 and December 31, 2017:

 

   At September 30, 2018   At December 31, 2017 
Description  Level 1   Level 2   Level 3   Level 1   Level 2   Level 3 
Derivative liabilities          $16,718,740           $601,615 
                               

 

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

 

   For the Nine Months ended
September 30, 2018
 
Balance at December 31, 2017  $601,615 
Initial valuation of derivative liabilities included in debt discount   1,487,788 
Initial valuation of derivative liabilities included in derivative expense   6,839,065 
Change in fair value included in derivative expense   7,790,272 
Balance at September 30, 2018  $16,718,740 

 

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 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, 2018 and December 31, 2017, the Company did not have any cash equivalents.

 

The Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. There were no balances in excess of FDIC insured levels as of September 30, 2018 and December 31, 2017. The Company has not experienced any losses in such accounts through September 30, 2018.

 

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.

 

F-7
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

 

Property and equipment

 

Property are stated at cost and are depreciated using the straight-line method over their estimated useful lives of five 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.

 

Impairment of long-lived assets

 

In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value.

 

Segment reporting

 

The Company uses “the management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. The Company’s chief operating decision maker is the chief executive officer of the Company, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company.

 

Derivative financial instruments

 

The Company has certain financial instruments that are embedded derivatives associated with capital raises. The Company evaluates all its financial instruments to determine if those contracts or any potential embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with ASC 810-10-05-4 and 815-40. This accounting treatment requires that the carrying amount of any embedded derivatives be recorded at fair value at issuance and marked-to-market at each balance sheet date. In the event that the fair value is recorded as a liability, as is the case with the Company, the change in the fair value during the period is recorded as either other income or expense. Upon conversion, exercise or repayment, the respective derivative liability is marked to fair value at the conversion, repayment or exercise date and then the related fair value amount is reclassified to other income or expense as part of gain or loss on extinguishment.

 

Revenue recognition and cost of revenue

 

On January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification (ASC) Topic 605, Revenue Recognition. This ASC is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASC also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer service orders, including significant judgments.

 

For the Company’s Save On business activities, the Company recognizes revenues and the related direct costs of such revenue which includes carrier fees and dispatch costs as of the date the freight is delivered by the carrier which is when the performance obligation is satisfied. Customer payments received prior to delivery are recorded as a deferred revenue liability and related carrier fees if paid prior to delivery are recorded as a deferred expense asset. In accordance with ASC Topic 606, the Company recognizes revenue on a gross basis. Our payment terms for corporate customers are net 30 days from acceptance of delivery and individual customers generally must pay in advance. The Company does not incur incremental costs obtaining service orders from our Save On customers, however, if the Company did, because all of the Save On customer’s contracts are less than a year in duration, any contract costs incurred would be expensed rather than capitalized. The Company’s adoption of this ASC, resulted in no cumulative effect at January 1, 2018 and no change prospectively to the Company’s results of operations or financial condition. The revenue that the Company recognizes arises from service orders it receives from its Save On customers. The Company’s performance obligations under these service orders correspond to each delivery of a vehicle that the Company makes for its customer under the service orders; as a result, each service order generally contains only one performance obligation based on the delivery to be completed.

 

For the Company’s Prime and Shypdirect business activities, the Company recognizes revenues and the related direct costs of such revenue which generally include compensation and related benefits, gas costs, insurance, parking and tolls, truck rental fees, and maintenance fees as of the date the freight is delivered which is when the performance obligation is satisfied. In accordance with ASC Topic 606, the Company recognizes revenue on a gross basis. Our payment terms are net seven days from acceptance of delivery. The Company does not incur incremental costs obtaining service orders from its Prime customers, however, if the Company did, because all of Prime and Shypdirect customer contracts are less than a year in duration, any contract costs incurred would be expensed rather than capitalized. The revenue that the Company recognizes arises from deliveries of packages on behalf of the Company’s customers. Primarily, the Company’s performance obligations under these service orders correspond to each delivery of packages that the Company makes under the service agreements. Control of the package transfers to the recipient upon delivery. Once this occurs, the Company has satisfied its performance obligation and the Company recognizes revenue.

 

F-8
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

 

Stock-based compensation

 

Stock-based compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.

 

Through March 31, 2018, pursuant to ASC 505-50 – “Equity-Based Payments to Non-Employees”, all share-based payments to non-employees, including grants of stock options, were recognized in the consolidated financial statements as compensation expense over the service period of the consulting arrangement or until performance conditions are expected to be met. Using a Black-Scholes valuation model, the Company periodically reassessed the fair value of non-employee options until service conditions are met, which generally aligns with the vesting period of the options, and the Company adjusts the expense recognized in the consolidated financial statements accordingly. In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which simplifies several aspects of the accounting for nonemployee share-based payment transactions by expanding the scope of the stock-based compensation guidance in ASC 718 to include share-based payment transactions for acquiring goods and services from non-employees. ASU No. 2018-07 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted, but entities may not adopt prior to adopting the new revenue recognition guidance in ASC 606. The Company early adopted ASU No. 2018-07 in the second quarter of 2018 and there was no cumulative effect of adoption.

 

Basic and diluted loss per share

 

Pursuant to ASC 260-10-45, basic loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding for the periods presented. Diluted loss per share is computed by dividing net loss by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period. Potentially dilutive common shares consist of common stock issuable for stock warrants (using the treasury stock method) and shares issuable for convertible debt (using the as-if converted method). These common stock equivalents may be dilutive in the future.

 

Potentially dilutive common shares were excluded from the computation of diluted shares outstanding as they would have an anti-dilutive impact on the Company’s net losses and consisted of the following:

 

   September 30, 2018   September 30, 2017 
Stock warrants   1,442,434    0 
Convertible debt   7,270,659    197,735 
Series A convertible preferred stock   7,912,857    202,170 

 

Recent Accounting Pronouncements

 

On February 25, 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”) to amend the accounting guidance for leases. The accounting applied by a lessor is largely unchanged under ASU 2016-02. However, the standard requires lessees to recognize lease assets and lease liabilities for leases classified as operating leases on the balance sheet. Lessees will recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it will recognize lease expense for such leases generally on a straight-line basis over the lease term. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and early adoption is permitted. The Company is currently assessing the impact of the guidance on its consolidated financial statements and notes to its consolidated financial statements.

 

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments in Part I of this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in Part II of this Update do not require any transition guidance because those amendments do not have an accounting effect. The Company is currently in the process of evaluating the impact of the adoption on its 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.

 

F-9
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

 

NOTE 3 – ACQUISITION

 

On June 18, 2018, (the “Closing Date”), the Company completed the acquisition of 100% of the issued and outstanding membership interests of Prime from its members pursuant to the terms and conditions of a SPA entered into among the Company and the Prime members on the Closing Date. Prime is a New Jersey based transportation company with a focus on deliveries for on-line retailers in New York, New Jersey and Pennsylvania. The Company’s acquisition of Prime diversified the Company’s revenue sources and gives the Company access to the growing market of on line retail deliveries.

 

Pursuant to the terms of the SPA, as amended in September 2018 to correct the purchase price error in the original SPA, the Company agreed to pay $489,174 in cash which under the SPA was loaned back to Prime and therefore was included in due to related parties at September 30, 2018, and the Company issued 1,500,000 shares of its common stock in exchange for 100% of the issued and outstanding membership units of Prime. Additionally, the Company shall issue additional shares of its common stock intended to true-up the Purchase Interests such that the aggregate value of the Purchase Interests would be equal to the trailing twelve-month gross profit of the Company (the “True-Up Value”), to be calculated as of December 31, 2018 (the “True-up Stock”). On April 15, 2019, the Company shall issue to the sellers such aggregate number of True-up Stock equal to (i) the True-Up Value minus $3,750,000 divided by (ii) the lower of (A) $2.50, (B) the closing price of the Company’s common stock on April 15, 2019 or (C) the lowest price per share (as adjusted for any stock splits) paid upon conversion of the Company’s series A convertible preferred stock on or prior to April 15, 2019. Based on management’s estimate of 2018 gross profit, the Company believes that no additional True-up stock will be issued and therefore, no additional contingent consideration was recorded. Prime became a wholly owned subsidiary of the Company as of the Closing Date.

 

On June 18, 2018, the Company entered into an employment agreement with a party related to the majority selling member of Prime which did not represent additional purchase consideration.

 

In connection with the acquisition, the Company issued 1,500,000 unregistered shares of its common stock valued at $3,090,000, or $2.06 per share, the fair value of the Company’s common stock based on the quoted closing price of the Company’s common stock on the Closing Date.

 

The fair value of the assets acquired and liabilities assumed were based on management’s initial estimates of the fair values on June 18, 2018. Based upon the purchase price allocation, the following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition:

 

Cash  $38,198 
Accounts receivable   1,140,257 
Prepaid expensed and other current assets   143,258 
Due from related party   14,019 
Property and equipment, net   623,923 
Intangible asset   5,123,071 
Total assets acquired at fair value   7,082,726 
      
Notes payable   2,224,242 
Accounts payable and accrued expenses   758,887 
Insurance payable   520,423 
Total liabilities assumed   3,503,552 
      
Total purchase consideration  $3,579,174 

 

The assets acquired and liabilities assumed are recorded at their initial estimated fair values on the acquisition date 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 combination date. As a result, during the purchase price measurement period, which may be up to one year from the business acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed based on completion of valuations, with the corresponding offset to goodwill. After the purchase price measurement period, the Company will record adjustments to assets acquired or liabilities assumed in operating expenses in the period in which the adjustments were determined.

 

The purchase price exceeded the fair value of the net assets acquired by $5,123,071, which was initially allocated in its entirely to a customer contract. Any goodwill assigned as of the expiration of the measurement period shall represent the amount of consideration transferred in excess of the fair value assigned to identifiable assets acquired and liabilities assumed. Any goodwill recorded is not expected to be deductible for U.S. income tax purposes.

 

F-10
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

 

The Company shall record acquisition and transaction related expenses in the period in which they are incurred. During the nine months ended September 30, 2018, acquisition and transaction related expenses primarily consisted of legal fees of approximately $24,000 and $1,236,000 of stock-based professional fees from the granting of 600,000 shares of the Company’s common stock to two consultants for services rendered in connection with the acquisition. Additionally, debt issue costs were incurred relating to a loan in which a portion of the proceeds were used to pay the cash portion of the purchase consideration (see Note 7 “Bellridge Capital LLC”).

 

In the event of Buyer’s failure to satisfy the conditions set forth in the SPA, the former majority member, (the “Manager”), acting in her sole discretion on behalf of the Sellers, shall have the right, for the one year period following the Closing, to unwind the transactions and return the Purchase Price in exchange for 90% of the Interests of Prime. Conditions include:

 

  1) Within twelve months from the Closing Date, the Company shall apply (the “Application”) to have its common stock listed and trading on the (i) New York Stock Exchange, (ii) NASDAQ Global Select Market, (iii) NASDAQ Global Market, (iv) NASDAQ Capital Market, or (v) NYSE American (each, a “Selected Market”). At the time of submitting the Application, the Company shall meet all of the quantitative initial listing standards and corporate governance standards of such Selected Market. The Company shall use its best efforts to have its application approved by the Selected Market.
  2) The Company covenants and agrees that, from and after the Closing Date for a period of twelve months, the Company shall not sell, transfer, assign and convey its interests in Prime without the prior written consent of the Manager.
  3) The Sellers shall have the right to appoint one nominee to the Board of Directors of the Company for a period of three years beginning on the Closing Date.
  4) The Company shall provide at least $267,000 of cash in additional working capital to the Company within six months from the Closing Date.

 

The following unaudited pro forma consolidated results of operations have been prepared as if the acquisition of Prime had occurred as of the beginning of the following periods:

 

   Nine Months Ended
September 30, 2018
   Nine Months Ended
September 30, 2017
 
Net Revenues  $13,016,871   $4,387,593 
Net Loss  $(24,297,327)  $(1,510,968)
Net Loss per Share  $(8.30)  $(0.73)

 

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.

 

NOTE 4 – ACCOUNTS RECEIVABLE

 

The following table presents the accounts receivable:

 

   September 30, 2018   December 31, 2017 
Accounts receivable  $1,070,456   $254,150 
Allowance for doubtful accounts   -    - 
Accounts receivable, net  $1,070,456   $254,150 

 

NOTE 5 - PROPERTY AND EQUIPMENT

 

At September 30, 2018 and December 31, 2017, property and equipment consisted of the following:

 

   Useful Life  2018   2017 
Delivery trucks and vehicles  5 years  $855,529   $   - 
Less: accumulated depreciation      (48,485)   - 
Property and equipment, net     $807,044   $- 

 

For the nine months ended September 30, 2018 and 2017, depreciation expense is included in general and administrative expenses and amounted to $48,485 and $0, respectively.

 

F-11
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

 

NOTE 6 – INTANGIBLE ASSET

 

At September 30, 2018 and December 31, 2017, intangible asset consisted of the following:

 

   Useful life  September 30, 2018   December 31, 2017 
Customer contract  1 year  $5,123,071            - 
       5,123,071    - 
Less: accumulated amortization      (1,449,197)   - 
      $3,673,874   $- 

 

For the nine months ended September 30, 2018 and 2017, amortization of intangible assets amounted to $1,449,197 and $0, respectively.

 

Amortization of intangible assets attributable to future periods is as follows:

 

Year ending September 30:   Amount 
2019   $3,673,874 
    $3,673,874 

 

NOTE 7 – CONVERTIBLE PROMISSORY NOTES PAYABLE

 

Red Diamond Partners LLC

 

On April 25, 2017, the Company entered into a Securities Purchase Agreement with RedDiamond Partners LLC (“RedDiamond”) pursuant to which the Company would issue to RedDiamond Convertible Promissory Notes in an aggregate principal amount of up to $355,000, which includes a purchase price of $350,000 and transaction costs of $5,000. Pursuant to this securities purchase agreement, on April 25, 2017, the Company entered into a convertible promissory note in the aggregate principal amount of $100,000 and the Company received $95,000 after giving effect to the original issue discount of $5,000. This note matured on April 25, 2018 and each tranche will mature 1 year after the date of such funding. The second Tranche was received on June 2, 2017 for $85,000 and the third Tranche for $85,000 was received on August 8, 2017 upon filing of the Registration Statement. The fourth Tranche was to be for $85,000 and was to occur ninety days after the First Closing, however, as of the date of this filing, the fourth tranche has not yet been received. The Purchaser shall not be required to fund any Tranche subsequent to the first Tranche if there is an event of default as described in the promissory notes. Through date of default, the RedDiamond Notes bore interest at a rate of 12% per annum and are convertible into shares of the Company’s common stock at RedDiamond’s option at 65% of the lowest VWAP for the previous ten trading days preceding the conversion.

 

On April 25, 2018, June 2, 2018 and August 8, 2018, the Company failed to make its required maturity date payments of principal and interest on a Convertible Promissory Notes of $270,000. In accordance with these notes, the Company entered into default on April 27, 2018, June 2, 2018 and August 8, 2018, which increased the interest rate to 18.0% per annum. As of the date of this report the lender has not notified the Company of default and has not exercised any of its remedies provided for in the note. One of the remedies the lender may request is an immediate repayment of the loans at 125% of the principal balance, which would result in the recording of penalty expenses of $67,500 and the related liability.

 

In connection with the issuance of the Convertible Promissory Note above, the Company determined that the terms of the Convertible Promissory Note included a down-round provision under which the conversion price could be affected by future equity offerings undertaken by the Company.

 

These convertible promissory notes contain cross default provisions whereby a default in any one note greater than $25,000 will cause a default in all the notes, however, this provision is only effective if there is a formal notice of default by the lender.

 

We evaluated these convertible promissory note transactions in accordance with ASC Topic 815, Derivatives and Hedging, and determined that the conversion feature of the convertible promissory notes were not afforded the exemption for conventional convertible instruments due to their respective variable conversion rate and price protection provision. Accordingly, under the provisions of FASB ASC Topic No. 815-40, “Derivatives and Hedging – Contracts in an Entity’s Own Stock”, the embedded conversion option contained in the convertible instruments were accounted for as derivative liabilities at the date of issuance and shall be adjusted to fair value through earnings at each reporting date. The fair value of the embedded conversion option derivatives were determined using the Black-Scholes valuation model. During 2017, on the initial measurement dates of each tranche received, the fair value of the embedded conversion option derivatives of $376,841 was recorded as derivative liabilities and was allocated as a debt discount up to the net proceeds of the Convertible Promissory Notes of $265,000 with the remainder of $111,841 charged as initial derivative expense.

 

The balance of the note payable as of September 30, 2018 and December 31, 2017 amounted to $270,000 and $151,630, comprised of principal balance of $270,000 and $270,000, respectively, net of debt discount relating to the bifurcated derivative of $0 and $118,370, respectively.

 

F-12
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

 

RDW Capital, LLC.

 

On June 30, 2017, the Company issued RDW Capital, LLC a senior convertible note in the aggregate principal amount of $240,000, for an aggregate purchase price of $30,000 of which $15,000 had been recorded as advance from lender as of March 31, 2017 and the remaining $15,000 received on June 30, 2017. Through date of default, the principal due under the Note accrued interest at a rate of 12% per annum. All principal and accrued interest under the Note was due six months following the issue date of the Note, and is convertible into shares of the Company’s common stock, at a conversion price equal to fifty (50%) of the lowest volume-weighted average price for the previous ten trading days immediately preceding the conversion. The Note includes anti-dilution protection, including a down-round provision under which the conversion price could be affected by future equity offerings undertaken by the Company, as well as customary events of default, including non-payment of the principal or accrued interest due on the Note. Upon an event of default, all obligations under the Note will become immediately due and payable and the Company will be required to make certain payments to the Lender.

 

On December 31, 2017 the Company failed to make its required maturity date payment of principal and interest. In accordance with the note, the Company entered into default on January 3, 2018, which increased the interest rate to 24% per annum. As of the date of this report the lender has not notified the Company of default and has not exercised any of its remedies provided for in the note. One of the remedies the lender may request is an immediate repayment of the loan at 125% of the principal balance, which would result in the recording of $60,000 penalty expense and the related liability.

 

Under the provisions of FASB ASC Topic No. 815-40, “Derivatives and Hedging – Contracts in an Entity’s Own Stock”, the embedded conversion option contained in this convertible instruments were accounted for as derivative liabilities at the date of issuance and shall be adjusted to fair value through earnings at each reporting date. The fair value of the embedded conversion option derivatives were determined using the Black-Scholes valuation model. On June 30, 2017, on the initial measurement date, the fair value of the embedded conversion option derivatives of $527,477 was recorded as derivative liabilities and was allocated as a debt discount up to the net proceeds of the Convertible Promissory Notes of $30,000 with the remainder of $497,477 charged as initial derivative expense.

 

The balance as of September 30, 2018 and December 31, 2017 amounted to $240,000 and $120,986, comprised of principal balance of $240,000 and $240,000, respectively, net of Original Issue Discount (OID) of $0 and $104,137 and debt discount relating to the bifurcated derivative of $0 and $14,877, respectively.

 

Bellridge Capital, LLC.

 

On June 18, 2018, the Company entered into a securities purchase agreement (the “Purchase Agreement”), whereby it issued to an institutional investor (the “Lender”) a senior secured convertible note in the aggregate principal amount of $2,497,503 (the “Note”), for an aggregate purchase price of $1,665,000, net of an original issue discount of $832,503. In addition, the Company paid issue costs of $177,212. The original issue discount and issue costs were recorded as a debt discount to be amortized over the Note term. The principal due under the Note accrues interest at a rate of 10% per annum. Interest of $20,813 was payable monthly beginning on July 18, 2018 and was due monthly over the term of the Note in cash or common stock of the Company, at the Lender’s discretion.

 

In August 2018, the Company defaulted on this Note due to i) default on the payment of monthly interest payments due, ii) default caused by the late filing of the Company’s report on Form 10-Q for the periods ended June 30, 2018 and September 30, 2018, and iii) default of filing of a registration statement. Upon an event of default, all principal, accrued interest, and liquating damages and penalties are due upon request of the lender at 125% of such amounts. On December 27, 2018, the Lender waived any and all defaults in existence on the Note and the Company agreed to issue a warrant that is convertible into 2% of the issued and outstanding shares existing at the time the Company files a registration statement or makes an application to up list to a national stock exchange. Additionally, the principal interest amount due under the Note was modified with a monthly payment of principal and interests due beginning on January 18, 2019 of $156,219 with all remaining principal and interest amounts on the Note due on December 18, 2019.

 

All principal and accrued interest under the Note is convertible into shares of the Company’s common stock, at a conversion price equal to the lower of $1.50 and 65% of the lowest traded price during the fifteen trading days immediately prior to the conversion date. The Note includes anti-dilution protection, as well as customary events of default, including, but not limited to, non-payment of the principal or accrued interest due on the Note and cross default provisions on other Company obligations or contracts. Upon an event of default, all obligations under the Note will become immediately due and payable and the Company will be required to make certain payments to the Lender. In addition, the Lender was issued a warrant, with a term of two years, to purchase up to 4.75% of the fully-diluted outstanding Common Stock of the Company, for an aggregate purchase price of $100 (the “Warrant”).

 

The Lender was granted a right of first refusal on future financing transactions of the Company while the Note remains outstanding, plus an additional three months thereafter. In connection with the issuance of the Note, the Company entered into a security agreement with the Lender (the “Security Agreement”) pursuant to which the Company agreed that obligations under the Note and related documents will be secured by all of the assets of the Company. In addition, all of the Company’s subsidiaries are guarantors of the Company’s obligations to the Lender pursuant to the Note and have granted a similar security interest over substantially all of their assets. A portion of the proceeds of the Note were used to acquire 100% of the membership interests of Prime (See Note 3).

 

F-13
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

 

During the term of this Note, in the event that the Company consummates any public or private offering or other financing or capital raising transaction of any kind ( each a “Subsequent Offering”), in which the Company receives, in one or more contemporaneous transactions, gross proceeds of at least $5,000,000, at any time upon ten (10) days written notice to the Holder, but subject to the Holder’s conversion rights set forth in the Purchase Agreement, then the Company shall use 20% of the gross proceeds of the Subsequent Offering and shall make payment to the Holder of an amount in cash equal to the product of (i) the sum of (x) the then outstanding principal amount of this Note and (y) all accrued but unpaid interest, multiplied by (ii) (x) 110%, if the Prepayment Date is within 90 days of the date hereof the Closing Date (as defined in the Purchase Agreement), or (y) 125%, if the Prepayment Date is after the 90th day following the Closing Date, to which calculated amount the Company shall add all other amounts owed pursuant to this Note, including, but not limited to, all Late Fees and liquidated damages.

 

On connection with the Purchase agreement, the Company entered into a registration rights agreement which, among other things, required the Company to file a registration statement with the Securities and Exchange Commission no later than 120 days after June 18, 2018. The Company failed to file such registration statement. Accordingly, in addition to any other rights the Holders may have hereunder or under applicable law, on the default date and on each monthly anniversary of each such default date (if the applicable event shall not have been cured by such date) until the ninetieth day from such Event Date, the Company shall pay to each Holder an amount in cash, as partial liquidated damages and not as a penalty, equal to the product of one percent (1%) multiplied by the aggregate subscription amount paid by the Holder pursuant to the Purchase Agreement. Subsequent to the ninetieth day from such default date, the one percent (1%) penalty described in the foregoing sentence shall increase to two percent (2%), with an aggregate cap of twenty percent (20%) per annum. If the Company fails to pay any of these partial liquidated damages in full within seven (7) days after the date payable, the Company will pay interest thereon at a rate of 18% per annum to the Holder, accruing daily from the date such partial liquidated damages are due until such amounts, plus all such interest thereon, are paid in full. The partial liquidated damages pursuant to the terms hereof shall apply on a daily pro rata basis for any portion of a month prior to the cure of an Event.

 

In connection with this Purchase Agreement, the Company paid a placement agent $120,000 in cash which is included in issue costs previously discussed above and this placement agent was issued a warrant, with a term of two years, to purchase up to 4.75% of the fully-diluted outstanding Common Stock of the Company, for an aggregate purchase price of $100 (the “Placement Warrant”).

 

Summary of derivative liabilities

 

In connection with the issuance of this Note, Warrant, and Placement Warrant, the Company determined that this Note and both Warrants contains terms that are not fixed monetary amounts at inception. Accordingly, under the provisions of FASB ASC Topic No. 815-40, “Derivatives and Hedging – Contracts in an Entity’s Own Stock”, the embedded conversion option contained in the convertible instrument and the Warrant and Placement Warrant were accounted for as derivative liabilities at the date of issuance and shall be adjusted to fair value through earnings at each reporting date. The fair value of this embedded conversion option derivative, and the Warrant and Placement Warrant were determined using the Binomial valuation model and Monte-Carlo simulation model, respectively.

 

In connection with the issuance of this Note, Warrant and Placement Warrant, on June 18, 2018, the initial measurement date, the fair values of the embedded conversion option derivative and warrant derivatives of $8,326,853 was recorded as derivative liabilities and was allocated as a debt discount of $1,487,788, with the remainder of $6,839,065 charged to current period operations as initial derivative expense.

 

During the nine months ended September 30, 2018, the fair value of the derivative liabilities was estimated using the Black-Sholes valuation model, Binomial valuation model, and the Monte-Carlo simulation model with the following assumptions:

 

Dividend rate   0 
Term (in years)   0.01 to 2.00 years 
Volatility   261.2% to 307.7%
Risk-free interest rate   1.32% to 2.11%

 

At September 30, 2018 and December 31, 2017, convertible promissory notes are as follows:

 

   September 30, 2018   December 31, 2017 
Principal amounts  $3,007,503   $510,000 
Less: unamortized debt discount   (1,769,065)   (237,384)
Convertible notes payable, net   1,238,438    272,616 
Less: current portion of convertible notes payable   (1,238,438)   - 
Convertible notes payable, net – long-term  $-   $272,616 

 

For the nine months ended September 30, 2018 and 2017, amortization of debt discounts related to these convertible notes amounted to $965,821 and $149,404, respectively, which has been included in interest expense on the accompanying consolidated statements of operations. The weighted average interest rate during the nine months ended September 30, 2018 and 2017 was approximately 21.2% and 10.0%, respectively.

 

F-14
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

 

NOTE 8 – NOTES PAYABLE

 

Secured merchant loans

 

In connection with the acquisition of Prime (See Note 3), the Company assumed several notes payable liabilities amounting to $944,281 pursuant to secured merchant agreements (the “Secured Merchant Loans”). Pursuant to the Secured Merchant Loans, the Company is required to repay the noteholders by making daily payments on each business day or on demand payments until the loans amounts are paid in full. Each payment is deducted directly from the Company’s bank accounts. The Secured Merchant Loans are secured by the assets of Prime, and are personally guaranteed by the former majority member of Prime. During the period from acquisition date of Prime (June 18, 2018) to September 30, 2018, the Company repaid $649,419 of these notes. At September 30, 2018, notes payable related to Secured Merchant Loans amounted to $294,862.

 

On September 20, 2018, the Company entered into a secured Merchant Loan in the amount of $521,250 and received net proceeds of $375,000, net of original issue discount of $146,250. Pursuant to this Secured Merchant Loan, the Company is required to repay the noteholders by making daily payments of $3,724 on each business day until the loans amounts are paid in full. Each payment is deducted directly from the Company’s bank accounts. This Secured Merchant Loan is secured by the Company’s assets and are personally guaranteed by the former majority member of Prime. During the period from September 20, 2018 to September 30, 2018, the Company repaid $14,896 of this note. At September 30, 2018, note payable related to this Secured Merchant Loan amounted to $506,354.

 

Promissory notes

 

In connection with the acquisition of Prime (See Note 3), the Company assumed several notes payable liabilities due to former members of Prime amounting to $459,750 (the “Member Notes”). The Member Notes have effective interest rates ranging from 7% to 10%, and are unsecured. During the period from acquisition date of Prime (June 18, 2018) to September 30, 2018, the Company repaid $459,750 of these notes. At September 30, 2018, notes payable related to Member Notes amounted to $0.

 

In connection with the acquisition of Prime (See Note 3), the Company assumed several notes payable liabilities due to entities or individuals amounting to $297,005 (the “Note”). These notes have effective interest rates ranging from 7% to 10%, and are unsecured. During the period from acquisition date of Prime (June 18, 2018) to September 30, 2018, the Company borrowed an addition $50,000 and repaid $214,980 of these notes. At September 30, 2018, notes payable to these entities or individuals amounted to $132,025.

 

On August 1, 2018, the Company entered into a 10% Original Discount Senior Secured Demand Promissory Note with an investor (the “Promissory Note”). Pursuant to the Promissory Note, the Company borrowed $165,000 and received net proceeds of $150,000. The Note is payable on demand at any time prior to September 30, 2018. The Promissory Note is secured by the Company’s assets. On August 20, 2018, the Company repaid principal amounts of $165,000.

 

Equipment notes payable

 

In connection with the acquisition of Prime (See Note 3), the Company assumed several equipment notes payable liabilities due to entities amounting to $523,207 (the “Equipment Notes”). These Equipment Notes have effective interest rates ranging from 6.0% to 9.4%, and are secured by the underlying van or trucks. During the period from acquisition date of Prime (June 18, 2018) to September 30, 2018, the Company borrowed funds pursuant to Equipment Note agreements of $135,845, repaid $64,664 of these Equipment Notes, and reduce Equipment Notes by $56,933 related to the trade in of certain vans. At September 30, 2018, equipment notes payable to these entities amounted to $537,455.

 

At September 30, 2018 and December 31, 2017, notes payable consisted of the following:

 

   September 30, 2018   December 31, 2017 
Principal amounts  $1,470,696   $        - 
Less: unamortized debt discount   (142,071)   - 
Principal amounts, net   1,328,625    - 
Less: current portion of notes payable   (1,328,625)   - 
Notes payable – long-term  $-   $- 

 

NOTE 9 – COMMITMENTS AND CONTINGENCIES

 

Related party – lease

 

The Company executed a sublease agreement with an affiliate for office space for a one-year term. The sublease commenced on August 1, 2016 at a rate of $300 per month. The sublease was extended on August 1, 2017 and terminated on December 14, 2017, at which point the Company signed a new one-year term lease with the third-party landlord directly for the entire space previously occupied by the affiliate. The monthly rent under the renewed lease is $1,600 plus maintenance charges and taxes.

 

F-15
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

 

Common stock ownership

 

As a result of the Company’s non-effectiveness of the 1 for 30 reverse stock-split, which was previously represented to have been effective prior to the March 30, 2017 reverse merger, the Company’s Chief Executive Officer’s post reverse merger common stock ownership percentage has been reduced from approximately 99% to approximately 80%. The Company and the Chief Executive Officer are exploring remedies, which may include capital stock or other consideration, to correct this situation.

 

Employment agreement

 

On June 18, 2018, the Company entered into an employment agreement with the chief operating officer of Prime. The Company shall pay to this executive a base salary of $520,000 per year, payable in accordance with the Company’s usual pay practices. The executive’s base salary will increase by $260,000 per year upon (i) Prime achieving revenue of $20 million on an annualized basis (the “Initial Target Goal”) for four consecutive weeks; and (ii) each time Prime achieves revenue of an additional $10 million increment above the Initial Target Goal (i.e., $30 million, $40 million, $50 million, etc.) on an annualized basis for four consecutive weeks. Executive’s base salary shall be subject to review annually by the Manager and may be increased (but not decreased). The executive shall be entitled to participate in any bonus plan that the Manager or its designee may approve for the senior executives of the Company and shall be entitled to participate in benefits under the Company’s benefit plans, profit sharing and arrangements, including, without limitation, any employee benefit plan or arrangement made available in the future by the Company to its employees or senior executives, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. Notwithstanding the foregoing, during the Employment, the Company will provide, at the Company’s expense, health and major medical insurance benefits to the Executive and his family members which are at least equal to the benefits provided to the Executive and his family members immediately prior to the Effective Date. The term of this Agreement (as it may be extended by the following sentence or terminated earlier pursuant to terms in the employment agreement shall begin on the Effective Date and end on the close of business on May 31, 2023. The Employment Term shall be automatically extended for additional one-year periods unless, at least sixty (60) days prior to the end of the expiration of the Employment Term.

 

Other

 

From time to time, we may be involved in litigation relating to claims arising out of our operation in the normal course of business. As of September 30, 2018, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on results of our operations.

 

NOTE 10– STOCKHOLDERS’ DEFICIT

 

Preferred stock

 

The preferred stock is designated Series A Convertible Preferred Stock. Each share of preferred stock has a par value of $.001 and a stated value of $1.00. Dividends are payable at the rate per share of 7% per annum cumulative based on the stated value. The Series A preferred shares have no voting rights, except as required by law. Each share of preferred stock is convertible based on the stated value at a conversion price of $20.83 at the option of the holder; provided, however, if a triggering event occurs, as defined in the document, the conversion price shall thereafter be reduced, and only reduced, to equal forty percent of the lowest VWAP during the thirty consecutive trading day period prior to the conversion date. As of September 30, 2018, the Company believes a triggering event has occurred. The beneficial ownership limitation attached to conversion is 4.99%, which can be decreased or increased, upon not less than 61 days’ notice to the Company, but in no event exceeding 19.99% of the number of shares of common stock outstanding immediately after giving effect to the issuance of common stock upon conversion of the preferred stock. After 36 months, the Company has the right to redeem all, but not less than all, of the outstanding preferred shares in cash at a price equal to 130% of the stated value plus any accrued but unpaid dividends thereon. Undeclared cumulative preferred stock dividends were approximately $490,000 as of September 30, 2018.

 

Common stock issued for services

 

On June 18, 2018, the Company granted 1,500,000 shares of its common stock to the Company chief executive officer for services rendered. The shares were valued at $3,090,000, or $2.06 per share, based on the quoted trading price on the date of grant. In connection with these shares, the Company recorded stock-based compensation of $3,090,000.

 

On June 18, 2018, the Company granted 600,000 shares of its common stock to two consultants for services rendered. The shares were valued at $1,236,000, or $2.06 per share, based on the quoted trading price on the date of grant. In connection with these shares, the Company recorded stock-based professional fees of $1,236,000.

 

Common stock issued for acquisition

 

In connection with the acquisition (See Note 3), the Company issued 1,500,000 unregistered shares of its common stock valued at $3,090,000, or $2.06 per share, the fair value of the Company’s common stock based on the quoted closing price of the Company’s common stock on the Closing Date.

 

F-16
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

 

Warrants

 

In connection with the Purchase Agreement (See Note 7 under Bellridge), the Lender was issued a warrant, with a term of two years, to purchase up to 4.75% of the fully-diluted outstanding Common Stock of the Company, for an aggregate purchase price of $100. Additionally, the placement agent was issued a warrant, with a term of two years, to purchase up to 4.75% of the fully-diluted outstanding Common Stock of the Company, for an aggregate purchase price of $100.

 

Warrant activities for the nine months ended September 30, 2018 are summarized as follows:

 

   Number of Warrants   Weighted Average Exercise Price   Weighted Average Remaining Contractual Term (Years)   Aggregate Intrinsic Value 
Balance Outstanding December 31, 2017   -   $-    -   $- 
Granted   1,442,434    0.00    1.72      
Balance Outstanding September 30, 2018   1,442,434   $0.00    1.72   $2,884,768 
Exercisable, September 30, 2018   1,442,434   $0.00    1.72   $2,884,768 

 

NOTE 11– RELATED PARTY TRANSACTIONS AND BALANCES

 

The Company executed a sublease agreement with an affiliate for office space for a one-year term. The sublease commenced on August 1, 2016 at a rate of $300 per month. The sublease was extended on August 1, 2017 and terminated on December 14, 2017, at which point the Company signed a new one-year term lease with the third-party landlord directly for the entire space previously occupied by the affiliate. Rent expense to the affiliate was $0 and $2,700 for the nine months ended September 30, 2018 and 2017, respectively.

 

The Company utilized an affiliate as one of the carriers, providing auto transportation, in the normal course of business. The carrier fees incurred to the affiliate were $47,450 for the nine months ended September 30, 2018. At September 30, 2018, amount due to this affiliate amounted to $3,875 and is included in due to related parties on the accompanying consolidated balance sheets.

 

During 2017 certain revenue and related costs initially recorded by the Company were deemed as affiliate revenue and related costs and were therefore reversed. This was caused by either customers who had not yet approved the Company as a vendor or remittances which were made to the affiliate directly. Such remittances were then remitted from the affiliate back to the Company. The outcome resulted in a net due to affiliate of $3,150 as of September 30, 2018 and $23,551 as of December 31, 2017.

 

The Company utilized various ancillary services of the affiliate including software and certain technology without any charge by the affiliate.

 

In connection with the acquisition of Prime (See Note 3), the Company acquired a balance of $14,019 that was due from the former majority owner of Prime. Pursuant to the terms of the SPA, the Company agreed to pay $489,174 in cash to the former majority owner of Prime who then advanced back the $489,174 to Prime. Additionally, during the period from acquisition date of Prime (June 18, 2018) to September 30, 2018, the Company repaid $214,155 of this advance. This advance is non-interest bearing and is due on demand. At September 30, 2018, amount due to related party amounted to $261,000.

 

Notes payable – related party

 

On July 25, 2018, the Company entered into a 10% Promissory Note with the spouse of the Company’s chief executive officer. Pursuant to this promissory note, the Company borrowed $270,000 and received net proceeds of $250,000, net of original issue discount of $20,000. This promissory note was repaid in August 2018. In August and September 2018, the Company borrowed an additional $440,000 from the Company’s chief executive officer and received net proceeds of $400,000, net of original issue discount of $40,000. In September 2018, $220,000 of these loans were repaid. At September 30, 2018, notes payable amount due to this related party amounted to $220,000. This promissory note was repaid in October 2018.

 

NOTE 12 – CONCENTRATIONS

 

For the nine months ended September 30, 2018, one customer represented 61.6% of the Company’s total net revenues. This revenue is from one Prime customer for the period from June 19, 2018 to September 30, 2018. For the nine months ended September 30, 2017, no single customer accounted for more than 10% of the Company’s total net revenues.

 

At September 30, 2018, one customer represented 66.2% of the Company’s net accounts receivable. As of December 31, 2017, two customers represented 12% and 10% of the Company’s net accounts receivable.

 

F-17
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

 

For the nine months ended September 30, 2018 and 2017, the Company had no carriers that were in excess of 10% of carrier fees.

 

During the period from June 19, 2018 and September 30, 2018, the Company rented delivery vans from one vendor. Any shortage of supply of vans available to rent to the Company could have a material adverse effect on the Company’s business, financial condition and results of operations.

 

All revenues are derived from customers in the United States.

 

NOTE 13 – SEGMENT INFORMATION

 

During the three and nine months ended September 30, 2017, and for the period from January 1, 2018 to June 18, 2018, the Company operated in one reportable business segment consisting of brokerage and logistic services such as transportation scheduling, routing and other value added services related to the transportation of automobiles and other freight. Since June 18, 2018, the Company operated in two reportable business segments - (1) the transportation of automobiles and other freight (the “Save On” segment) and (2) a segment which concentrates on deliveries for on-line retailers in New York, New Jersey and Pennsylvania (the “Prime” segment). The Company’s reportable segments were strategic business units that offered different products. They were managed separately based on the fundamental differences in their operations and locations.

 

Information with respect to these reportable business segments for the three and nine months ended September 30, 2018 and 2017 was as follows:

 

   For the Three Months ended
September 30,
   For the Nine Months ended
September 30,
 
   2018   2017   2018   2017 
Revenues:                    
Save On  $1,063,208   $459,248   $3,372,979   $636,393 
Prime   4,813,036    -    5,439,856    - 
Shypdirect   18,916    -    18,916    - 
    5,895,160    459,248    8,831,751    363,393 
Depreciation and amortization:                    
Save On   -    -    -    - 
Prime   1,324,656    -    1,498,285    - 
Shypdirect   -    -    -    - 
    1,324,656    -    1,498,285    - 
Interest expense                    
Save On   -    -    -    - 
Prime   158,350    -    163,396    - 
Shypdirect   -    -    -    - 
Other (a)   795,743    136,754    1,182,252    168,228 
    954,093    136,754    1,345,648    168,228 
Net loss                    
Save On   (85,022)   (752)   (131,642)   (746,253)
Prime   (2,429,531)   -    (2,615,039)   - 
Shypdirect   (34,864)   -    (34,864)   - 
Other (a)   (5,919,728)   -    (20,137,589)   - 
   $(8,469,145)  $(752)  $(22,919,134)  $(746,253)

 

   September 30, 2018   December 31, 2017 
Identifiable long-lived tangible assets at September 30, 2018 and December 31, 2017 by segment          
Save On  $-   $        - 
Prime   807,044    - 
Shypdirect   -    - 
   $807,044   $- 

 

(a) The Company does not allocate any general and administrative expense of its holding company activities to its reportable segments, because these activities are managed at the corporate level.

 

F-18
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

 

NOTE 14 – SUBSEQUENT EVENTS

 

Secured merchant loans

 

On October 1, 2018, the Company entered into a secured Merchant Loan in the amount of $209,850 and received net proceeds of $137,962, net of original issue discount of $59,850 and net of origination fees of $12,038. Pursuant to this Secured Merchant Loan, the Company is required to repay the noteholders by making daily payments of $1,749 on each business day until the loans amounts are paid in full. Each payment is deducted directly from the Company’s bank accounts. This Secured Merchant Loans is secured by the Company’s assets and are personally guaranteed by the former majority member of Prime. Additionally, on October 1, 2018, the Company entered into a second secured Merchant Loan in the amount of $139,900 and received net proceeds of $92,000, net of original issue discount of $39,900 and net of origination fees of $8,000. Pursuant to this Secured Merchant Loan, the Company is required to repay the noteholders by making daily payments of $1,166 on each business day until the loans amounts are paid in full. Each payment is deducted directly from the Company’s bank accounts. This Secured Merchant Loans is secured by the Company’s assets and are personally guaranteed by the former majority member of Prime.

 

On October 12, 2018, the Company entered into a secured Merchant Loan in the amount of $420,000. The Company simultaneously repaid a prior loan of $31,634, paid an origination fee of $10,500 and received net proceeds of $254,552, net of original issue discount of $123,314. Pursuant to this Secured Merchant Loan, the Company is required to repay the noteholder by making daily payments of $3,000 on each business day until the loans amounts are paid in full. Each payment is deducted directly from the Company’s bank accounts. This Secured Merchant Loans is secured by the Company’s assets and are personally guaranteed by the former majority member of Prime. Additionally, on January 28, 2019, the Company entered into a second secured Merchant Loan in the amount of $759,000. The Company simultaneously repaid a prior loan of $207,000, paid an origination fee of $13,750 and received net proceeds of $315,098, net of original issue discount of $209,000 and fees of $14,152. Pursuant to this Secured Merchant Loan, the Company is required to repay the noteholders by making daily payments of $4,897 on each business day until the loans amounts are paid in full. Each payment is deducted directly from the Company’s bank accounts. This Secured Merchant Loans is secured by the Company’s assets and are personally guaranteed by the former majority member of Prime.

 

On January 14, 2019, the Company entered into a secured Merchant Loan in the amount of $764,500. The Company simultaneously repaid a prior loan of $223,329 which was entered into during September 2018, paid an origination fee of $10,034 and received net proceeds of $316,637, net of original issue discount of $214,500. Pursuant to this Secured Merchant Loan, the Company is required to repay the noteholders by making daily payments of $6,371 on each business day until the loans amounts are paid in full. Each payment is deducted directly from the Company’s bank accounts. This Secured Merchant Loans is secured by the Company’s assets and are personally guaranteed by the former majority member of Prime. Additionally, on January 24, 2019, the Company entered into a second secured Merchant Loan in the amount of $417,000. The Company simultaneously paid an origination fee of $7,998 and received net proceeds of $292,002, net of original issue discount of $117,000. Pursuant to this Secured Merchant Loan, the Company is required to repay the noteholders by making daily payments of $3,972 on each business day until the loans amounts are paid in full. Each payment is deducted directly from the Company’s bank accounts. This Secured Merchant Loans is secured by the Company’s assets and are personally guaranteed by the former majority member of Prime.

 

Promissory notes

 

From October 2018 to February 13, 2019, the Company entered into separate Promissory Notes with three individuals totaling $336,900 and received net proceeds of $316,400, net of original issue discount of $10,000 and net of fees of $10,500. In connection with these promissory notes, the Company issued 7,000 warrants to purchase 7,000 shares of the Company’s common stock at an exercise price equal to the closing price of the Company’s common stock on the date of issuance which ranged from $1.00 to $1.03 per share. The warrants are exercisable over a five-year period.

 

From November 2018 to January 2019, the Company entered into separate promissory notes with an individual totaling $325,000 and received net proceeds of $300,000, net of original issue discount of $25,000. From December 2018 to February 2019, the Company repaid these loans.

 

From October 2018 to December 2018, the Company entered into separate promissory notes with an entity totaling $770,000 and received net proceeds of $699,955, net of original issue discount of $70,000 and fees of $45. In December 2018, the Company repaid $220,000 of these notes.

 

Notes payable – related party

 

In October 2018 and November 2018, the Company entered into a 10% Promissory Note with the spouse of the Company’s chief executive officer. Pursuant to this promissory notes, the Company borrowed $440,000 and received net proceeds of $400,000, net of original issue discount of $40,000. These promissory notes were repaid in November 2018 and January 2019.

 

F-19

 

 

Common stock issued for debt

 

In October 2018, the Company issued 50,000 shares of its common stock to the related party lender in connection with loans made between July and October 2018.

 

Convertible debt

 

In August 2018, the Company defaulted on its convertible note payable with Bellridge due to i) default on the payment of monthly interest payments due, ii) default caused by the late filing of the Company’s report on Form 10-Q for the periods ended June 30, 2018 and iii) default of filing of a registration statement (See Note 7). Upon an event of default, all principal, accrued interest, and liquating damages and penalties were due upon request of the lender at 125% of such amounts. On December 27, 2018, the lender waived any and all defaults in existence on the Note and the Company agreed to issue a warrant that is convertible into 2% of the issued and outstanding shares existing as the time the Company files a registration statement or makes an application to up list to a national stock exchange. Additionally, the principal interest amount due under the Note was modified with a monthly payment of principal and interests due beginning on January 18, 2019 of $156,219 with all remaining principal and interest amounts on the Note due on December 18, 2019. In January 2019, the Company paid its first installment.

 

Pursuant to the warrant, at any time on or before the date that the Company files a registration statement on form S-l or applies for up-listing to a National Exchange, and on or prior to the close of business on the early of the first year anniversary of the issuance of December 27, 2018 (the “Termination Date”), Bellridge can to subscribe for and purchase from the Company up to 2% in shares (as subject to adjustment as defined in the warrant (the “Warrant Shares”) of common stock for an aggregate exercise price of $100. In connection with the issuance of this Warrant, the Company determined that this Warrant contains terms that are not fixed monetary amounts at inception. Accordingly, under the provisions of FASB ASC Topic No. 815-40, “Derivatives and Hedging – Contracts in an Entity’s Own Stock”, the embedded conversion option contained in this Warrant shall be accounted for as derivative liabilities at the date of issuance and shall be adjusted to fair value through earnings at each reporting date. The fair value of this Warrant shall be determined using the Monte-Carlo simulation model.

 

Operating lease agreements

 

On November 30, 2018, the Company entered into a commercial lease agreement for the lease of sixty parking spaces under an operating lease through November 2023 for a monthly rental fee of $6,000. Either party can cancel this lease on the annual anniversary date of the lease provided that the party who wishes to terminate provides the other party with at least 30-day prior written notice of such termination.

 

In December 2018, the Company entered into a lease agreement for the lease of office and warehouse space and parking spaces under a non-cancelable operating lease through December 2023. From the lease commencement date until the last day of the second lease year, monthly rent shall be $14,000. At the beginning of the 30th month following the commencement date and through the end of the term, minimum rent shall be $14,420 per month. The Company shall have one option to renew the term of this lease for an additional five years. In January 2019, the Company paid a security deposit of $28,000.

 

F-20

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FORWARD LOOKING STATEMENTS

 

Statements made in this Form 10-Q that are not historical or current facts are “forward-looking statements” made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements often can be identified by the use of terms such as “may,” “will,” “expect,” “believe,” “anticipate,” “estimate,” “approximate” or “continue,” or the negative thereof. We intend that such forward-looking statements be subject to the safe harbors for such statements. We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Any forward-looking statements represent management’s best judgment as to what may occur in the future. However, forward-looking statements are subject to risks, uncertainties and important factors beyond our control that could cause actual results and events to differ materially from historical results of operations and events and those presently anticipated or projected. We disclaim any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statement or to reflect the occurrence of anticipated or unanticipated events.

 

Overview

 

We were incorporated under the laws of the State of Nevada on July 25, 2008 and prior to the reverse merger discussed below, were inactive.

 

On March 30, 2017 (the “Closing Date”), TLSI 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 TLSI (the “Reverse Merger”). Save On was incorporated in the State of Florida and started business on July 12, 2016 (“Inception Date”). Save On is a provider of integrated transportation management solutions consisting of brokerage and logistics services such as transportation scheduling, routing and other value added services related to the transportation of automobiles and other freight. As an early stage company, TLSI’s current operations are subject to all risks inherent in the establishment of a new business enterprise

 

The Share Exchange was treated as a reverse merger and recapitalization of Save On for financial reporting purposes since the Save On shareholders retained an approximate 80% controlling interest in the post-merger consolidated entity. Save On was considered the acquirer for accounting purposes, and the Company’s historical financial statements before the Merger were replaced with the historical financial statements of Save On before the Merger. The balance sheets at their historical cost basis of both entities were combined at the merger date and the results of operations from the merger date forward include the historical results of Save On and results of TLSI from the merger date forward. The Merger was intended to be treated as a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended.

 

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

 

On July 16, 2018, we filed a Certificate of Amendment to the Amended and Restated Articles of Incorporation (the “Certificate of Amendment”) with the Secretary of State of the State of Nevada to (1) change the name of the Company from PetroTerra Corp. to Transportation and Logistics Systems, Inc., (2) authorize an increase of the shares of the preferred stock to 10,000,000 shares, par value $0.001 per share and (3) effect a 1-for-250 reverse stock split (the “Reverse Stock Split”) with respect to the outstanding shares of the Company’s common stock. The Certificate of Amendment became effective on July 17, 2018. The corporate name change, increase of authorized shares of preferred stock and Reverse Stock Split were previously approved by the sole director and the majority of stockholders of the Company. The corporate name change and the Reverse Stock Split were deemed effective at the open of business on July 18, 2018. All share and per share data in the accompanying consolidated financial statements have been retroactively restated to reflect the effect of the recapitalization.

 

On 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.

 

The following discussion highlights the results of our operations and the principal factors that have affected its consolidated financial condition as well as its liquidity and capital resources for the periods described, and provides information that management believes is relevant for an assessment and understanding of the consolidated financial condition and results of operations presented herein. The following discussion and analysis is based on the unaudited consolidated financial statements contained in this Quarterly Report, which has been prepared in accordance with generally accepted accounting principles in the United States. You should read the discussion and analysis together with such consolidated financial statements and the related notes thereto.

 

Basis of Presentation

 

The unaudited consolidated financial statements for the three and nine months ended September 30, 2018 include a summary of our significant accounting policies and should be read in conjunction with the discussion below. In the opinion of management, all material adjustments necessary to present fairly the results of operations for such periods have been included in these unaudited consolidated financial statements.

 

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RESULTS OF OPERATIONS

 

Our unaudited consolidated financial statements have been prepared assuming that we will continue as a going concern and, accordingly, do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should we be unable to continue our operation.

 

We expect we will require additional capital to meet our long term operating requirements. We expect to raise additional capital through, among other things, the sale of equity or debt securities.

 

For the three and nine months ended September 30, 2018 compared with the three and nine months ended September 30, 2017

 

The following table sets forth our revenues, expenses and net income (loss) for the three and nine months ended September 30, 2018 and 2017. The financial information below is derived from our unaudited consolidated financial statements included in Item 1 of this Quarterly Report.

 

  

For the three months ended

September 30,

  

For the nine months ended

September 30,

 
   2018   2017   2018   2017 
Revenues  $5,895,160   $459,248   $8,831,751   $636,393 
Cost of revenues   5,643,595    355,984    7,936,174    483,932 
Gross profit   251,565    103,264    895,577    152,461 
Operating expenses   2,642,632    111,222    7,839,726    261,277 
Loss from operations   (2,391,067)   (7,958)   (6,944,149)   (108,816)
Other (expenses) income   (6,078,078)   7,206    (15,974,985)   (637,437)
Net loss  $(8,469,145)  $(752)  $(22,919,134)  $(746,253)

 

Results of Operations

 

Revenues

 

For the three months ended September 30, 2018, our revenues were $5,895,160 as compared to $459,248 for the three months ended September 30, 2017, an increase of $5,435,912. This increase was a result of our acquisition of Prime on June 18, 2018. Revenue of $4,813,036 was attributable to the business of Prime which focuses on deliveries for on-line retailers in New York, New Jersey and Pennsylvania. In future periods, we expect the revenue generated by Prime to be a material part of our total revenues. The remaining increase in revenue primarily results from an increase in revenue from Save On. The increase in Save On revenue compared to the prior year is a shift away from individual customers to corporate customers, which offers the potential for more frequent business. Save On consists of individual and corporate customers contracting to transport a vehicle from location to location; primarily auto dealers, contracting to transport purchased vehicles from location to location. During the three months ended September 30, 2018, revenue related to our newly formed subsidiary, Shypdirect amounted to $18,916.

 

For the nine months ended September 30, 2018, our revenues were $8,831,751 as compared to $636,393 for the nine months ended September 30, 2017, an increase of $8,195,358. This increase was a result of our acquisition of Prime on June 18, 2018. Revenue of $5,439,856 was attributable to the business of Prime. In future periods, we expect the revenue generated by Prime to be a material part of our total revenues. The remaining increase of $2,755,502 in revenue primarily results from an increase in revenue from Save On. The increase in Save On revenue compared to the prior year is a shift away from individual customers to corporate customers, which offers the potential for more frequent business. During the nine months ended September 30, 2018, revenue related to our newly formed subsidiary, Shypdirect amounted to $18,916.

 

Cost of Revenue

 

For the three months ended September 30, 2018, our cost of revenues were $5,643,595 compared to $355,984 for the three months ended September 30, 2017, an increase of $5,287,611. This increase was a direct result of our acquisition of Prime on June 18, 2018. Cost of revenue of $4,795,642 was attributable to the business of Prime. In future periods, we expect the cost of revenue generated by Prime to be a material part of our total cost of revenues. The remaining increase in cost of revenue of $491,969 primarily results from an increase in cost of revenue from Save On. The increase in Save On cost of revenue compared to the prior year is a shift away from individual customers to corporate customers, which offers the potential for more frequent business. Save On consists of individual and corporate customers contracting to transport a vehicle from location to location; primarily auto dealers, contracting to transport purchased vehicles from location to location. Cost of revenues relating to our Prime segment consists of truck and van rental fees, insurance, gas, maintenance, and compensation and related benefits. Cost of revenues for our Save On segment consists primarily of carrier fees of which $42,050 was to a related party affiliate.

 

For the nine months ended September 30, 2018, our cost of revenues were $7,936,174 compared to $483,932 for the nine months ended September 30, 2017, an increase of $7,452,242. This increase was a direct result of our acquisition of Prime on June 18, 2018. Cost of revenue of $5,331,587 was attributable to the business of Prime. In future periods, we expect the cost of revenue generated by Prime to be a material part of our total cost of revenues. The remaining increase in cost of revenue of $2,120,655 primarily results from an increase in cost of revenue from Save On. The increase in Save On cost of revenue compared to the prior year is a shift away from individual customers to corporate customers, which offers the potential for more frequent business. Save On consists of individual and corporate customers contracting to transport a vehicle from location to location; primarily auto dealers, contracting to transport purchased vehicles from location to location. Cost of revenues relating to our Prime segment consists of truck and van rental fees, insurance, gas, maintenance, and compensation and related benefits. Cost of revenues for our Save On segment consists primarily of carrier fees of which $47,450 was to a related party affiliate.

 

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Gross Profit

 

For the three months ended September 30, 2018, our gross profit was $251,565, or 4.3% of revenue, as compared to $103,264, or 22.5% of revenue, for the three months ended September 30, 2017, an increase of $148,301. For the nine months ended September 30, 2018, our gross profit was $895,577, or 10.1% of revenue, as compared to $152,461, or 24.0% of revenue, for the nine months ended September 30, 2017, an increase of $743,116. The decrease in gross profit percentage related to the effect of the acquisition of Prime on June 18, 2018, For the period from June 19, 2018 to September 30, 2018, gross profit and gross profit percentage amounted to $108,269, or 2.0% for Prime as compared to gross profit and gross profit percentage of $779,355, or of 23.1% for Save On.

 

Operating Expenses

 

For the three months ended September 30, 2018, total operating expenses amounted to $2,642,632 as compared to $111,222 for the three months ended September 30, 2017, an increase of $2,531,410. For the nine months ended September 30, 2018, total operating expenses amounted to $7,839,726 as compared to $261,277 for the nine months ended September 30, 2017, an increase of $7,578,449. For the three and nine months ended September 30, 2018 and 2017, operating expenses consisted of the following:

 

  

For the three months ended

September 30

  

For the nine months ended

September 30,

 
   2018   2017   2018   2017 
Compensation and related benefits  $639,762   $-   $4,197,123   $- 
Legal and professional fees   306,613    58,494    1,680,606    173,463 
Rent   6,047    -    18,143    - 
Rent – affiliate   -    900    -    2,700 
General and administrative expenses   1,690,210    51,828    1,943,854    85,114 
Total operating expenses  $2,642,632   $111,222   $7,839,726   $261,277 

 

Compensation and related benefits

 

For the three and nine months ended September 30, 2018, compensation and related benefits amounted to $639,762 and $4,197,123, respectively, which included stock-based compensation of $3,090,000 for the nine months ended September 30, 2018 from the granting of 1,500,000 shares of our common stock to our chief executive officer for services rendered. We did not incur compensation and related benefits during the 2017 periods.

 

Legal and professional fees

 

For the three months ended September 30, 2018, legal and professional fees amounted to $306,613 as compared to $58,494 for the three months ended September 30, 2017, an increase of $248,119. For the nine months ended September 30, 2018, legal and professional fees amounted to $1,680,606 as compared to $173,463 for the nine months ended September 30, 2017, an increase of $1,507,143. During the nine months ended September 30, 2018, we incurred stock-based consulting fees of $1,236,000 from issuance of our shares to consultants for business development services rendered.

 

General and administrative expenses

 

General and administrative expenses include office expenses and supplies, travel and entertainment, depreciation and amortization and other expenses. For the three months ended September 30, 2018, general and administrative expenses amounted to $1,690,210 as compared to $51,828 for the three months ended September 30, 2017, an increase of $1,638,382. For the nine months ended September 30, 2018, general and administrative expenses amounted to $1,943,854 as compared to $85,114 for the nine months ended September 30, 2017, an increase of $1,858,740. The increase in operating expenses compared to the prior year period is due to the Company’s organic growth and growth through acquisition, including the expansion of office space.

 

Loss from Operations

 

For the three months ended September 30, 2018, loss from operations amounted to $2,391,067 as compared to $7,958 for the three months ended September 30, 2017, an increase of $2,383,109. For the nine months ended September 30, 2018, loss from operations amounted to $6,944,149 as compared to $108,816 for the nine months ended September 30, 2017, an increase of $6,835,333.

 

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Other Expenses

 

Total other expenses include interest expense and derivative expense. For the three and nine months ended September 30, 2018 and 2017, other expenses consisted of the following:

 

  

For the three months ended

September 30

  

For the nine months ended

September 30,

 
   2018   2017   2018   2017 
Interest expense  $280,635   $15,633   $339,826   $18,824 
Interest expense – related party   40,000    -    40,000    - 
Amortization of debt discount   633,458    121,121    965,822    149,404 
Gain on extinguishment of debt   -    (10,169)   -    (10,169)
Derivative expense   5,123,985    (133,791)   14,629,337    479,378 
Total other expenses  $6,078,078   $(7,206)  $15,974,985   $637,437 

 

For the three and nine months ended September 30, 2018, interest expense increased by $265,002 and $321,002 as compared to the 2017 periods, respectively, and related to an increase in interest-bearing loans.

 

For the three and nine months ended September 30, 2018, amortization of debt discount increased by $512,337 and $816,418 as compared to the 2017 periods, respectively, and related to an increase in amortization of debt discount from interest-bearing loans.

 

For the three months ended September 30, 2018, derivative expense increased by $5,257,776 as compared to the three months ended September 30, 2017. For the nine months ended September 30, 2018, derivative expense increased by $14,149,959 as compared to the nine months ended September 30, 2017. In connection with the issuance of a certain Note, Warrant and Placement Warrant, on June 18, 2018, the initial measurement date, the fair values of the embedded conversion option derivative and warrant derivatives of $8,326,853 was recorded as derivative liabilities and was allocated as a debt discount of $1,487,788, with the remainder of $6,839,065 charged to current period operations as initial derivative expense. Additionally, for the three and nine months ended September 30, 2018, we adjusted our derivative liabilities to fair value and recorded derivative expense of $5,123,985 and $14,629,337, respectively.

 

Net Loss

 

Due to factors discussed above, for the three months ended September 30, 2018 and 2017, net loss amounted to $8,469,145, or $2.03 per basic and diluted common share, and $752, or $0.00 per basic and diluted common share, respectively. For the nine months ended September 30, 2018 and 2017, net loss amounted to $22,919,134, or $7.83 per basic and diluted common share, and $746,253, or $1.40 per basic and diluted common share, respectively.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. At September 30, 2018, we had a cash balance of $164,218. Our working capital deficit was $19,741,396 at September 30, 2018.

 

We reported a net increase in cash for the nine months ended September 30, 2018 of $57,642.

 

Operating activities

 

Net cash flows used in operating activities for the nine months ended September 30, 2018 amounted to $235,843. During the nine months ended September 30, 2018, net cash used in operating activities was primarily attributable to a net loss of $22,919,134 adjusted for the add back of non-cash items such as depreciation and amortization expense of $1,498,285, derivative expense of $14,629,337, amortization of debt discount of $1,045,000, loss of disposal of property and equipment of $14,816, and stock-based compensation of $4,326,000, and changes in operating assets and liabilities such as a decrease in accounts receivable of $327,005, an increase in accounts payable and accrued expenses of $346,245 and an increase in insurance payable of $309,363. Net cash flows used in operating activities for the nine months ended September 30, 2017 amounted to $154,443. During the nine months ended September 30, 2017, net cash used in operating activities was primarily attributable to a net loss of $746,253 adjusted for the add back of non-cash items such as derivative expense of $479,378 and amortization of debt discount of $149,404, and changes in operating assets and liabilities such as an increase in accounts receivable of $179,225 and an increase in accounts payable and accrued expenses of $146,390.

 

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Investing activities

 

Net cash used in investing activities for the nine months ended September 30, 2018 amounted to $754,934 and consisted of cash received in the acquisition of $38,198 offset by cash paid for the acquisition of $489,174 and restricted cash acquired of $303,958. Net cash flows provided by investing activities for the nine months ended September 30, 2017 was comprised of a $10,000 cash escrow acquired on March 30, 2017 in connection with the reverse merger, to be held for a six month period to pay unpaid liabilities in conjunction with the Reverse Merger.

 

Financing activities

 

For the nine months ended September 30, 2018 and 2017, net cash provided by financing activities amount to $1,048,419 and $273,536, respectively. For the nine months ended September 30, 2018, we received gross proceeds from convertible notes of $2,497,503, proceeds from notes payable of $710,845and net cash proceeds from related party advances of $908,493 offset by the repayment of related party advances of $490,000, the payment of debt issue costs of $1,009,714 and the repayment of notes payable of $1,568,708. For the nine months ended September 30, 2017, we received net proceeds from convertible notes of $280,000.

 

Going Concern Consideration

 

Our accompanying unaudited consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. As reflected in the accompanying consolidated financial statements, we had a net loss of $22,919,134 for the nine months ended September 30, 2018. The net cash used in operations was $235,843 for the nine months ended September 30, 2018. Additionally, we had an accumulated deficit, shareholders’ deficit, and a working capital deficit of $23,663,913, $16,278,271 and $19,741,396, respectively, at September 30, 2018. Furthermore, the Company failed to make a required maturity date payment of principal and interest on certain of its convertible debt instruments. As of the date of this report the lender has not notified the Company of default and has not exercised any of its remedies provided for in these notes. One of the remedies the lender may request is an immediate repayment of the loan at 125% of the principal balance, which would result in the recording of $127,500 of penalty expense and the related liability. Additionally, we were in default on a convertible note due to the late filing of this report on Form 10-Q. Remedies this lender may request is an immediate repayment of the loan at 125% of the principal balance, which would have resulted in the recording of $624,375 of penalty expense and the related liability and an increase in the interest rate to 24% annually. On December 27, 2018, the lender waived any and all defaults in existence on the Note and we agreed to issue a warrant that is convertible into 2% of the issued and outstanding shares existing as the time the Company files a registration statement or makes an application to up list to a national stock exchange. Additionally, the principal interest amount due under the Note was modified with a monthly payment of principal and interests due beginning on January 18, 2019 of $156,219 with all remaining principal and interest amounts on the Note due on December 18, 2019. In January 2019, the Company paid its first installment. It is management’s opinion that these factors raise substantial doubt about our 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 we will ultimately achieve profitable operations or become cash flow positive or raise additional debt and/or equity capital. We are seeking to raise capital through additional debt and/or equity financings to fund our operations in the future. Although we have historically raised capital from sales of common shares and from the issuance of convertible promissory notes, there is no assurance that we will be able to continue to do so.

 

If we are unable to raise additional capital or secure additional lending in the near future, management expects that we will need to curtail our 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 we be unable to continue as a going concern.

 

Contractual Obligations

 

We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

 

Critical Accounting Policies and Significant Accounting Estimates

 

The methods, estimates, and judgments that we use in applying our accounting policies have a significant impact on the results that we report in our consolidated financial statements. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. Significant estimates included in the accompanying consolidated financial statements and footnotes include the valuation of accounts receivable, the useful life of property and equipment, the valuation of intangible assets, assumptions used in assessing impairment of long-lived assets, estimates of current and deferred income taxes and deferred tax valuation allowances, the fair value of non-cash equity transactions, the valuation of derivative liabilities, and the fair value of assets acquired and liabilities assumed in the business acquisition.

 

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We have identified the accounting policies below as critical to our business operation:

 

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.

 

Derivative Financial Instruments

 

We have certain financial instruments that are embedded derivatives associated with capital raises. We evaluate all our financial instruments to determine if those contracts or any potential embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with ASC 810-10-05-4 and 815-40. This accounting treatment requires that the carrying amount of any embedded derivatives be recorded at fair value at issuance and marked-to-market at each balance sheet date. In the event that the fair value is recorded as a liability, as is the case with the Company, the change in the fair value during the period is recorded as either other income or expense. Upon conversion, exercise or repayment, the respective derivative liability is marked to fair value at the conversion, repayment or exercise date and then the related fair value amount is reclassified to other income or expense as part of gain or loss on extinguishment.

 

Revenue recognition and cost of revenue

 

On January 1, 2018, we adopted ASC 606, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification (ASC) Topic 605, Revenue Recognition. This ASC is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASC also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer service orders, including significant judgments.

 

For the Company’s Save On business activities, we recognize revenues and the related direct costs of such revenue which includes carrier fees and dispatch costs as of the date the freight is delivered by the carrier which is when the performance obligation is satisfied. Customer payments received prior to delivery are recorded as a deferred revenue liability and related carrier fees if paid prior to delivery are recorded as a deferred expense asset. In accordance with ASC Topic 606, we recognize revenue on a gross basis. Our payment terms for corporate customers are net 30 days from acceptance of delivery and individual customers generally must pay in advance. We do not incur incremental costs obtaining service orders from our Save On customers, however, if we did, because all of Save On customer’s contracts are less than a year in duration, any contract costs incurred would be expensed rather than capitalized. Our adoption of this ASC, resulted in no cumulative effect at January 1, 2018 and no change prospectively to our results of operations or financial condition. The revenue that we recognize arises from service orders we receive from our Save On customers. Our performance obligations under these service orders correspond to each delivery of a vehicle that we make for our customer under the service orders; as a result, each service order generally contains only one performance obligation based on the delivery to be completed.

 

For the Company’s Prime and Shypdirect business activities, we recognize 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, we recognize revenue on a gross basis. Our payment terms are net seven days from acceptance of delivery. We do not incur incremental costs obtaining service orders from our Prime customers, however, if we did, because all of Prime and Shypdirect’s customer contracts are less than a year in duration, any contract costs incurred would be expensed rather than capitalized. The revenue that we recognize arises from deliveries of packages on behalf of the Company’s customers. Primarily, our performance obligations under these service orders correspond to each delivery of packages that we make under the service agreements. Control of the delivery transfers to the recipient upon delivery. Once this occurs, we have satisfied our performance obligation and we recognize revenue.

 

Stock-based compensation

 

Stock-based compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition in the financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.

 

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Through the current reporting period, pursuant to ASC 505-50 – “Equity-Based Payments to Non-Employees”, all share-based payments to non-employees, including grants of stock options, were recognized in the consolidated financial statements as compensation expense over the service period of the consulting arrangement or until performance conditions are expected to be met. Using a Black-Scholes valuation model, the Company periodically reassessed the fair value of non-employee options until service conditions are met, which generally aligns with the vesting period of the options, and the Company adjusts the expense recognized in the consolidated financial statements accordingly. In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which simplifies several aspects of the accounting for nonemployee share-based payment transactions by expanding the scope of the stock-based compensation guidance in ASC 718 to include share-based payment transactions for acquiring goods and services from non-employees. ASU No. 2018-07 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted, but entities may not adopt prior to adopting the new revenue recognition guidance in ASC 606. The Company early adopted ASU No. 2018-07 in the second quarter of 2018 and there was no cumulative effect of adoption.

 

Recently Enacted Accounting Standards

 

For a description of accounting changes and recent accounting standards, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see “Note 2: Recent Accounting Pronouncements” in the financial consolidated statements filed with this Quarterly Report.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

We are not required to provide quantitative and qualitative disclosures about market risk because we are a smaller reporting company.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management, consisting of our sole officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Rule 13a-15(e)) as of September 30, 2018. Management recognizes that any disclosure controls and procedures no matter how well designed and operated, can only provide reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our management has assessed the effectiveness of our disclosure controls and procedures and based upon that evaluation, our sole officer concluded that our disclosure controls and procedures were not effective as of September 30, 2018.

 

Our management has reassessed the effectiveness of our disclosure controls and procedures and based upon that evaluation, our sole officer concluded that our disclosure controls and procedures were not effective as of September 30, 2018 because of the items set forth below:

 

  1) Lack of a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures;
     
  2) The Company lacks segregation of duties as our sole director is also our sole officer;
     
  3) There is a lack of segregation of duties and monitoring controls regarding accounting because there are a limited staff of accountants maintaining the books and records;
     
  4) Our Chief Executive Officer does not have significant financial experience resulting in the Company’s use of outside consultants to assist in financial expertise;
     
  5) The Company does not have adequate controls in place related to its acquisition process including lack of due diligence process, lack of proper pre-closing legal and accounting review of acquisition documents, and lack of personnel to conduct such analysis;
     
  6) The Company does not have adequate controls over pre-closing legal and accounting review of loan transactions;

 

  7) The Company did not have adequate controls over accounting systems that would prohibit unauthorized changes to historical accounting records. Recently, the Company implemented controls to address this situation;
     
  8) The Company lacks supervision of outside consultants who may negotiate transactions on behalf of the Company; and
     
  9) The Company has not yet implemented any internal controls over financial reporting at its recently acquired subsidiary.

 

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We do not believe the material weaknesses described above caused any meaningful or significant misreporting of our consolidated financial condition and results of operations for the quarter ended September 30, 2018. However, the material weaknesses did cause delays in the completion of our financial reporting. Management also believes that the lack of a functioning audit committee and the lack of a majority of outside directors on our board of directors results in ineffective oversight in the establishment and monitoring of required internal controls and procedures, which could result in a material misstatement in our consolidated financial statements in future periods.

 

Changes in Internal Control over Financial Reporting

 

Except for lack of internal controls over financial reporting related to our recently acquired subsidiary as discussed above, there were no other changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

In the ordinary course of business, we may be involved in legal proceedings from time to time. At the date of this Quarterly Report on Form 10-Q, there are no known legal proceedings against the Company. No governmental agency has instituted proceedings, served, or threatened the Company with any litigation.

 

ITEM 1A. RISK FACTORS

 

Not applicable.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

In August 2018, we defaulted on its convertible note payable with Bellridge due to i) default on the payment of monthly interest payments due, ii) default caused by the late filing of the Company’s report on Form 10-Q for the periods ended June 30, 2018 and iii) default of filing of a registration statement (See Note 7). Upon an event of default, all principal, accrued interest, and liquating damages and penalties were due upon request of the lender at 125% of such amounts. On December 27, 2018, the lender waived any and all defaults in existence on the Note and we agreed to issue a warrant that is convertible into 2% of the issued and outstanding shares existing as the time the Company files a registration statement or makes an application to up list to a national stock exchange. Additionally, the principal interest amount due under the Note was modified with a monthly payment of principal and interests due beginning on January 18, 2019 of $156,219 with all remaining principal and interest amounts on the Note due on December 18, 2019. In January 2019, the Company paid its first installment.

 

Pursuant to the warrant, at any time on or before the date that the Company files a registration statement on form S-l or applies for up-listing to a National Exchange, and on or prior to the close of business on the early of the first year anniversary of the issuance of December 27, 2018 (the “Termination Date”), Bellridge can to subscribe for and purchase from the Company up to 2% in shares (as subject to adjustment as defined in the warrant (the “Warrant Shares”) of common stock for an aggregate exercise price of $100. In connection with the issuance of this Warrant, the Company determined that this Warrant contains terms that are not fixed monetary amounts at inception.

 

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ITEM 4. MINE SAFETY DISCLOSURES

 

No report required.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

Exhibits:    
     
31.1   Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act*
     
31.2   Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act*
     
32.1   Certification of Chief Executive Officer and Chief Financial Officer Under Section 1350 as Adopted Pursuant Section 906 of the Sarbanes-Oxley Act.*
     
101   Interactive data files pursuant to Rule 405 of Regulation S-T.*

 

* Filed Herewith

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  PETROTERRA CORP.
     
Dated: February 14, 2019 By: /s/ Steven Yariv
    Steven Yariv
    Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer)

 

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