424B5 1 form424b5.htm

 

Filed Pursuant to Rule 424(b)(5)

File No: 333-234158

 

Transportation and Logistics Systems, Inc.

 

3,269,373 Shares of Common Stock

 

This prospectus relates to the sale or other disposition from time to time of up to 3,269,373 shares of our common stock, par value $0.0001 per share, which consists of (i) 585,000 shares currently outstanding, (ii) 1,111,433 shares issuable upon the conversion of outstanding convertible notes, and (iii) 1,572,940 shares issuable upon the exercise of outstanding warrants. All of the shares of common stock being registered in this prospectus are being offered for resale by the selling stockholders named in this prospectus (the “Selling Stockholders”). We are registering the sale of these shares to satisfy registration rights we have granted to the Selling Stockholders.

 

The Selling Stockholders may sell some or all of their shares of our common stock from time to time in the principal market on which the stock is traded at the prevailing market price or in negotiated transactions. The offering price bears no relationship to our assets, book value, earnings or any other customary investment criteria. We will not receive any proceeds from the sale of these shares by the Selling Stockholders. However, we will receive proceeds for any exercise of warrants, but not for the subsequent sale of the shares underlying the warrants. All expenses of registration incurred in connection with this offering are being borne by us, but all selling and other expenses incurred by the Selling Stockholders will be borne by the Selling Stockholders.

 

Our common stock is quoted on the OTC Pink Tier of the OTC Markets Group, Inc. under the symbol “TLSS”. On November 4, 2019, the last reported sale price of our common stock was $8.50 per share. As of the date of this prospectus, our common stock is subject to only limited quotation on the OTC Pink, and it is not otherwise regularly quoted on any other over-the-counter market. Until such time as our common stock is so quoted, the shares of common stock covered by this prospectus will be sold by the Selling Stockholders from time to time at a fixed price of $8.50 per share, representing the average of the high and low prices as reported on the OTC Pink Tier of the OTC Markets Group, Inc. on November 4, 2019. If and when our common stock is regularly quoted on an over-the-counter market or on a national securities exchange, the Selling Stockholders may sell their respective shares of our common stock, from time to time, at prevailing market prices or in privately negotiated transactions.

 

Investing in our common stock is highly speculative and involves a high degree of risk. You should carefully consider the risks and uncertainties in the section entitled “Risk Factors” beginning on page 6 of this prospectus before making a decision to purchase our stock.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

The date of this prospectus is November 8, 2019.

 

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TABLE OF CONTENTS

 

  Page
Prospectus Summary 1
Risk Factors 6
Special Note Regarding Forward Looking Statements 24
Use of Proceeds 24
Price Range of Common Stock 25
Dividend Policy 25
Management’s Discussion and Analysis of Financial Condition and Results of Operations 26
Business 38
Management 46
Executive Compensation 49
Certain Relationships and Related Transactions 50
Security Ownership of Certain Beneficial Owners and Management 51
Selling Stockholders 52
Description of Securities 55
Plan of Distribution 59
Legal Matters 60
Experts 60
Where You Can Find Additional Information 61
Index to Financial Statements F-1

 

You should rely only on the information contained in this prospectus. We have not, and the Selling Stockholders have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not making an offer to sell these securities in any jurisdiction where offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

 

For investors outside the United States, we have not done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus outside of the United States.

 

This prospectus includes estimates, statistics and other industry and market data that we obtained from industry publications, research, surveys and studies conducted by third parties and publicly available information. Such data involves a number of assumptions and limitations and contains projections and estimates of the future performance of the industries in which we operate that are subject to a high degree of uncertainty. This prospectus also includes data based on our own internal estimates. We caution you not to give undue weight to such projections, assumptions and estimates.

 

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PROSPECTUS SUMMARY

 

This summary highlights certain selected information about us, this offering and the securities offered hereby. This summary is not complete and does not contain all of the information that you should consider before deciding whether to invest in our common stock. For a more complete understanding of our company and this offering, we encourage you to read the entire prospectus, including the information presented under the section entitled “Risk Factors” and the financial data and related notes. Unless we specify otherwise, all references in this prospectus to “TLSI,” “we,” “our,” “us,” and “our company,” refer to Transportation and Logistics Systems, Inc. and its wholly-owned subsidiaries, Prime EFS, LLC and Shypdirect LLC.

 

Unless otherwise indicated, the information in this prospectus reflects a one-for-250 reverse stock split of our common stock effected on July 18, 2018. All share and per share data has been adjusted for the one-for-250 reverse stock split for all periods presented.

 

Our Company

 

Overview

 

We are a provider of a wide range of transportation and logistics services involving the movement of goods and e-commerce fulfillment. Fast, dependable order fulfillment and shipping is critical to the success of an online business. We focus primarily on the transportation of packages that are ultimately to be delivered to the business or retail consumer. Our transportation services typically involve the transport of goods from the manufacturer or fulfillment center to the delivery station, from the fulfillment center to the post office or from the delivery station to the end user or retail customer (known as the “last mile” deliveries). We also offer an increasing number of logistics services, including the management and transportation of retail returns, the removal, transportation and disposition of shipping pallets and storage solutions for manufacturers with limited storage facilities, to help our business customers manage their goods efficiently through their supply chain.

 

We currently operate through our two subsidiaries, Prime EFS, LLC, a New Jersey-based transportation company with a focus on deliveries to the retail consumer for on-line retailers in New York, New Jersey and Pennsylvania (“Prime”), and Shypdirect LLC, 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 (“Shypdirect”), which are known as line-haul and “mid-mile” deliveries.

 

We are primarily an asset-based point-to-point delivery company. An asset-based delivery company, as compared to a non-asset-based delivery company, own or leases its own transportation equipment and employs its own drivers. At June 30, 2019, we owned or leased an aggregate of 277 trucks or delivery vehicles and employed 428 drivers who worked in shifts that allowed us to utilize most of our transportation equipment on a 24/7 basis. We also utilize the services of independent contractors to provide our delivery services. At June 30, 2019, two independent contractors provided services to us on a full-time basis. The independent contractors are responsible for paying for their own vehicles, equipment, fuel and operating expenses. Point-to-point delivery refers to a transportation system in which passengers or goods travel directly to a destination, rather than going through a central hub. This differs from the spoke-hub distribution paradigm in which the passengers or goods go to a central location in order to reach their ultimate destination. Our business is referred to as “point-to-point” delivery because our drivers and independent contractors are dispatched directly to the warehouse or retailer, as the case may be, and they then travel directly to the delivery point, rather than returning to a central corporate office.

 

Our E-Commerce Fulfillment Solutions

 

The rapid growth of e-commerce and the online retailing segment of e-commerce is well documented. According to a recent internet retailer report of Digital Commence 360, a publisher of research in digital commerce, and U.S. Department of Commerce figures, consumers spent $517.36 billion online with U.S. merchants in 2018, up 15.0% from $449.88 billion spent the year prior. Total retail sales, not including the sale of items not normally bought online, such as fuel, automobiles and food at restaurants, increased to $3.628 trillion in 2018, up 3.9% year over year, from $3.490 trillion in 2017. The U.S. Department of Commerce estimates consumers spent $513.61 billion online in 2018, up 14.2% from 2017, and that total retail sales increased 4.1% to $3.63 trillion. E-commerce represented a growing share of the retail market in 2018, taking a 14.3% share of total retail sales in 2018, up from 12.9% in 2017 and 11.6% in 2016. Our largest customer, Amazon.com Inc., accounted for approximately 40.0% of overall U.S. online retail sales in 2018, and accounted for 43.3% of all 2018 e-commence year-over-year gains in the United States. We believe our technology platform positions us to provide transportation services and to grow at or faster than the rapidly-growing and evolving e-commerce marketplace.

 

 

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E-commerce retail brands have logistics needs that differ from those of traditional businesses. Unlike traditional inventory management, e-commerce companies need to ship items directly to customers, who expect their orders to arrive on time and as described. We have built our delivery services to perform effectively in the “on demand” shipping environment that is part of the e-commerce fulfillment solutions system.

 

Our e-commerce fulfillment solutions are primarily the transportation of goods between destination points along the way from the manufacturer to the customer. We provide delivery services to the end user ( “last mile” delivery), principally retail consumers, including deliveries which require two persons to complete the delivery of heavy or bulky items, as well as “mid-mile” delivery services between distribution centers and fulfillment centers and line-haul delivery services from the manufacturer to the distribution center. Our revenues are generated from the fixed price charged for each specific route between a delivery station to a fulfillment center or from the fulfillment center to the final destination with a fixed price per route.

 

In most instances we are paid a fixed fee for transporting products from one designated site to a specified delivery point without regard to the number of packages being transported. With the ongoing growth of e-commerce the specific routes between designated sites is regularly changing (primarily increasing) as the volume of the online retailing segment of e-commerce activity expands. An integral part of our strategy is to regularly be in contact with our customers to assure that we are anticipating and planning for the expansion of current routes and the addition of new routes to our service base.

 

Our scheduled route system allows us to adjust to the regular changes in which packages are received, sorted, stored, picked, packed, shipped and housed in fulfillment centers and distribution centers. We are structured to meet the demands of “last-mile” deliveries and home grocery shopping deliveries. In addition to delivering goods in full truckloads from distribution centers to fulfillment centers, based on customer requests, we perform unscheduled pickups and deliveries of bulk products. When delivering packages to a home, we adhere to certain time slots and sometimes make “live deliveries” to ensure the customer is aware that their package has been delivered. This entails a constantly refreshed and technologically modern transportation management system (TMS).

 

We have built a network operations center (“NOC”) in Jersey City, New Jersey that allows us to track the location of each of our vehicles and address any on road disruptions. Our NOC is designed to grow with our business as we add more vehicles for additional routes and expand geographically. Presently, we utilize our NOC solely for our own business. We anticipate that as our revenues grow and the reach and scope of our transportation activities expand (both geographically and within the tristate area in which we currently operate) that we will generate revenues from services provided via our NOC to other logistics providers.

 

Our infrastructure is built to support the e-commerce unique fulfillment requirements of distributing products to millions of homes instead of hundreds of stores, managing millions of stock keeping units (SKUs) instead of thousands, shipping to homes in parcels instead of truckloads to stores and transporting between fulfillment centers in addition to distribution centers. Our infrastructure is aligned with the requirements of the online retailer: Online retailers differ from traditional brick and mortar where customers visit the premises and the retailer maintains goods on the premises. Online retailers have goods located in multiple locations (3rd party warehouse, etc.) and ships items directly to the customer; customers expect their order to arrive on time and be the correct quantity and product ordered.

 

With our focus on on-time performance, customer satisfaction and challenging growth management opportunities for our employees, we believe we are one of the fastest growing e-commerce fulfillment services providers in the country. As an early stage company, we have experienced and anticipate that we will continue to experience the challenges that come from rapid growth in revenues such as identifying and hiring employees that are aligned with our expectations, securing assets and expanding our administrative support services for our rapidly growing operations. We believe that our ability to manage our company through this high growth is a key part of our success, as evidenced by the high performance ratings we have regularly achieved in our customers’ scoring systems. We expect to expand our revenue base as the traditional brick and mortar retailers develop omni-channel strategies of generating revenues through a combination of physical and online sales.

 

 

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Our Competitive Strengths and Strategy

 

Our strategy is to be a leader in the transportation industry in providing on-time, high-quality pick-up, transportation and delivery services. We attribute our growth and success to date to the following competitive strengths.

 

Market Knowledge and Understanding. While we have been operating our current business for only a few years, our senior management collectively have over 40 years of experience in the transportation industry and has broad knowledge in providing transportation services over the “last mile” as part of the e-commerce fulfillment solutions. These solutions are in high demand and are expected to continue to grow at a rapid pace. Many of our management employees have e-commerce experience with e-commerce retailers and understand the dynamics of e-commerce growth, demands and logistics since all or the vast majority of their career has been in e-commerce businesses. We believe we understand the various segments of the end-to-end solutions required to rapidly and accurately deliver goods between the various pick-up and delivery points in the e-commerce delivery chain.

 

Unwavering Focus on Relationships and Superior Service. We aim to be the premier platform and partner of choice for our customers. We believe we offer superior services and solutions due to our company-wide commitment to customer service. On behalf of our customers, we deliver goods from the manufacturer or fulfillment center to the delivery station, and from the delivery station to the U.S. post office or retail customer (known as the “last mile” deliveries) in a precise, safe and timely manner with complementary support from our dedicated sales and service teams. Our focus on customer relationships has allowed us to increase our sales to our largest customer, Amazon.com, which, on an unaudited pro forma basis, assuming our acquisition of Prime had occurred on January 1, 2017, increased from approximately $5.6 million in 2017 to approximately $17.7 million in 2018 and from approximately $4.8 million in the first six months of 2018 to approximately $13.9 million in the first six months of 2019.

 

Experienced and Proven Management Team. We believe our management team is among the most experienced in the industry. Our senior management team brings experience in transportation and logistics, mergers and acquisitions, information technology, e-commerce retailing and fulfillment, and has an understanding of the cultural nuances of the e-commerce sectors we serve.

 

We intend to leverage our competitive strengths to increase shareholder value through the following core strategies.

 

Build Upon Strong Customer Relationships to Expand Organically. We have built a strong relationship with Amazon.com that has allowed us to expand the size of our service area and add higher margin services to our service offerings. For example, due to our focus on consistent and timely deliveries and our superior safety record, we have increased the number of “last mile” local routes we serve for Amazon from five routes at December 31, 2017 to over 200 routes at December 31, 2018. In addition, we have been able to expand the type of transportation services we render to Amazon.com to include “mid-mile” and line-haul transportation services in which we deliver packages from one distribution center to another or from the distribution center to the U.S. post office. We intend to continue to build on our relationship with Amazon.com and we are working to build similar relationships with other e-commerce retailers to increase the type and scope of the transportation and logistics services we offer.

 

Expand Our Operations to Other Regions of the U.S. Our e-commerce “last mile” delivery services to retail consumers are currently provided primarily in New York, New Jersey and Pennsylvania and our e-commerce “mid-mile” delivery services between customer distribution centers or between such distribution centers and the U.S. post office are currently provided primarily in the northeastern region of the U.S. As we continue to expand our marketing and customer relationships, we anticipate expanding our geographic footprint to provide such services, and to capture market share, in other regions of the U.S. by opening our own operations centers and warehouses, acquiring existing regional transportation and logistics companies in operating in other areas and partnering with local operators in other regions. We believe the expansion of our business in other regions of the U.S. will also allow us to expand our relationships with existing customers who operate in those regions.

 

 

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Pursue Value-Enhancing Strategic Acquisitions. We intend to pursue strategic acquisitions as a means of adding new markets in the United States, expanding our transportation and logistics service offerings, adding talented management and operational employees, expanding and upgrading our technology platform and developing operational best practices. We are currently at various stages of reviewing several potential acquisition targets and believe we have significant opportunities to grow our business through our knowledge of our industry and possible acquisition targets.

 

Enhance Our Operating Margins. We expect to enhance our operating margins as our business expands through a combination of increased operational efficiencies, leveraging our existing assets and distribution facilities and increase usage of technology to help us better plan, execute and monitor the performance of our services and transportation assets. Many of our transportation assets were initially utilized for a single route per day. As we expand, we have been able to increase utilization through use of assets on multiple routes or the addition of a second shift per day. In addition, we expect that our operating margins will increase as we expand our Shypdirect line-haul and “mid mile” business-to-business transportation and logistics operations, which generally have higher margins than our direct to consumer delivery business.

 

General

 

Our business address is 3 Riverway, Suite 1430, Houston, Texas 77056 and our telephone number is (713) 481-3340. We maintain a website at www.translogsys.com. We have not incorporated by reference into this prospectus the information on our website, and you should not consider it to be a part of this prospectus.

 

Background of the Offering

 

Convertible Notes Transactions

 

On August 30, 2019, we entered into a securities purchase agreement with seven investors pursuant to which we sold for an aggregate purchase price of $2,222,854 (i) $2,469,840 aggregate principal amount of our original issue discount senior secured convertible notes (the “Notes”) and (ii) five-year warrants (the “Debt Warrants”) to purchase up to an aggregate of 987,940 shares of our common stock for a purchase price of $3.50 per share, subject to adjustment. The Notes mature on November 30, 2020 and bear interest at the rate of 10% per annum or 18% per annum during the continuance of an event of default (as defined). Commencing on December 30, 2019, we are obligated to make monthly payments of principal and interest on the Notes based upon a 12-month amortization schedule, provided that the final payment shall be made on the maturity date. Monthly payments of principal and interest shall be made in cash unless a noteholder requests its payment to be made in shares of our common stock, in which event the payment to such noteholder will be made in shares of our common stock valued at 80% of the lowest volume weighted average price per share of our common stock during the five-trading-day period preceding the date of the scheduled payment. The Notes also are convertible into shares of our common stock at any time at the option of the holder at a conversion price of $2.50 per share, subject to adjustment, or, during the continuation of any event of default (as defined), at a conversion price equal to the lower of (i) $2.50 per share or (ii) 70% of the second lowest closing price of our common stock during the 20-consecutive-trading-day period ending on the day prior to delivery of the applicable notice of conversion. The Notes are secured by a pledge of substantially all of our assets, including the shares of capital stock of our subsidiaries.

 

In connection with the sale of the Notes and the Debt Warrants, we entered into a registration rights agreement, pursuant to which we agreed to file a registration statement under the Securities Act of 1933, as amended (the “Securities Act”) to register the resale of the shares of our common stock issuable to the holders of the Notes and the Debt Warrants in connection with the payment, conversion or exercise of such securities. This prospectus forms a part of such registration statement and covers such shares of common stock.

 

Equity Transactions

 

On August 30, 2019, we entered into a securities purchase agreement with 22 investors pursuant to which we sold for an aggregate purchase price of $1,462,500 a total of 585,000 units, each unit comprised of one share of our common stock and a five-year warrant (an “Equity Warrant”) to purchase one share of common stock for a purchase price of $2.50 per share, subject to adjustment. An aggregate of 585,000 shares of our common stock and Equity Warrants to purchase an aggregate of 585,000 additional shares of our common stock were issued in this transaction.

 

In connection with the sale of such shares of common stock and the Equity Warrants, we entered into a registration rights agreement, pursuant to which we agreed to file a registration statement under the Securities Act to register the resale of such shares of common stock and the shares of common stock issuable upon exercise of the Equity Warrants. This prospectus forms a part of such registration statement and covers such shares of common stock.

 

 

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The Offering

 

Common Stock being offered by the selling stockholders(1)   3,269,373 shares including (i) 585,000 shares currently outstanding, (ii) 1,111,433 shares issuable upon conversion of, and the payment of interest from time to time on, the outstanding Notes, (iii) 987,940 shares issuable upon exercise of the Debt Warrants, which have an exercise price of $3.50 per share, subject to adjustment, and (iv) 585,000 shares issuable upon the exercise of the Equity Warrants, which have an exercise price of $2.50 per share, subject to adjustment.
     
Common Stock outstanding prior to the Offering   11,745,236 shares as of October 3, 2019(2)
     
Common Stock outstanding after the Offering   14,429,609(3)
     
Terms of Offering   The Selling Stockholders will determine when and how they will sell the shares of our common stock offered hereby, as described in “Plan of Distribution” beginning on page 59.
     
Use of proceeds   The Selling Stockholders will receive all of the proceeds from the sale of the shares offered under this prospectus. We will not receive proceeds from the sale of the shares by the Selling Stockholders. However, to the extent the Debt Warrants and the Equity Warrants are exercised for cash, we will receive up to an aggregate of $4,920,290 in gross proceeds. We expect to use the proceeds from the exercise of such warrants, if any, for working capital and general corporate purposes.
     
OTC Pink Symbol   TLSS
     
Risk Factors   Investing in our common stock involves a high degree of risk. You should carefully review and consider the “Risk Factors” section of this prospectus for a discussion of factors to consider before deciding to invest in shares of our common stock.

 

 

(1) Assumes conversion of the Notes in full at their respective maturity dates at the fixed conversion price per share, and assumes that interest paid through maturity will be paid in shares of our common stock at an average price per share of $2.25.
   
(2) This amount does not include:

 

  an aggregate of 1,700,000 shares of common stock issuable upon conversion of outstanding shares of our Series B Preferred Stock;
     
  an aggregate of 80,000 shares of common stock issuable upon the exercise of outstanding stock purchase options that are exercisable for a purchase price of $8.85 per share, subject to adjustment, and expire in April 2024;
     
  an aggregate of 114,000 shares of common stock issuable upon the exercise of outstanding stock purchase warrants that are exercisable for a purchase price of $1.00 per share, subject to adjustment, and expire in June 2024;
     
  an aggregate of 585,000 shares of common stock issuable upon the exercise of outstanding Equity Warrants for a purchase price of $2.50 per share, subject to adjustment, and expire in January 2025, which shares may be offered by certain Selling Stockholders pursuant to this prospectus;
     
  an aggregate of 987,940 shares of common stock issuable upon the exercise of outstanding Debt Warrants for a purchase price of $3.50 per share, subject to adjustment, and expire in August 2024, which shares may be offered by certain Selling Stockholders pursuant to this prospectus; and
     
  an aggregate of 1,111,433 shares of common stock issuable upon the conversion of, and the payment of interest from time to time on, the Notes at a conversion price of 2.50 per share, subject to adjustment, which shares may be offered by certain Selling Stockholders pursuant to this prospectus.

 

(3) This amount includes the estimated 1,111,433 shares issuable upon conversion of, and for the payment of interest from time to time on, the Notes and all 1,572,940 shares issuable upon exercise of the Equity Warrants and the Debt Warrants.

 

 

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RISK FACTORS

 

Some of the following risks relate principally to us, the industry in which we operate and our business in general. Other risks relate principally to the securities market and ownership of our common shares. The occurrence of any of the events described in this section could significantly and negatively affect our business, financial condition, operating results or cash available for dividends, if any, or the trading price of our common shares.

 

We lack an established operating history on which to evaluate our business and determine if we will be able to execute our business plan, and can give no assurance that operations will result in profits.

 

We have been engaged in our current continuing and proposed business operations since only June 2018. As a result, we have a limited operating history upon which you may evaluate our proposed business and prospects. Our proposed business operations are subject to numerous risks, uncertainties, expenses and difficulties associated with early stage enterprises. You should consider an investment in our company in light of these risks, uncertainties, expenses and difficulties. Such risks include:

 

  the absence of an operating history in our current business and at our current scale;
     
  our ability to raise capital to develop our business and fund our operations;
     
  expected continual losses for the foreseeable future;
     
  our ability to anticipate and adapt to a developing market(s);
     
  acceptance by customers;
     
  limited marketing experience;
     
  competition from internet-based logistics and freight companies;
     
  competitors with substantially greater financial resources and assets;
     
  the ability to identify, attract and retain qualified personnel;
     
  our ability to provide superior customer service; and
     
  reliance on key personnel.

 

Because we are subject to these risks, and the other risks discussed below, you may have a difficult time evaluating our business and your investment in our company. We may be unable to successfully overcome these risks, any one or more of which could harm our business.

 

Our business strategy may be unsuccessful and we may be unable to address the risks we face in a cost-effective manner, if at all. If we are unable to successfully address these risks our business will be harmed.

 

We may not successfully manage our growth.

 

We have grown rapidly and substantially since our acquisition of Prime in June 2018, including by expanding our internal resources and entering into new markets, and we intend to continue to focus on rapid growth, including organic growth and additional acquisitions. We may experience difficulties and higher-than-expected expenses in executing this strategy as a result of unfamiliarity with new markets, changes in revenue and business models, entering into new geographic areas and increased pressure on our existing infrastructure and information technology systems.

 

Our growth will place a significant strain on our management, operational, financial and information technology resources. We will need to continually improve existing procedures and controls, as well as implement new transaction processing, operational and financial systems, and procedures and controls to expand, train and manage our employee base. Our working capital needs will continue to increase as our operations grow. Failure to manage our growth effectively, or obtain necessary working capital, could have a material adverse effect on our business, results of operations, cash flows, stock price and financial condition.

 

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Changes in our relationships with our significant customers, including the loss or reduction in business from one or more of them, could have an adverse impact on us.

 

For the six-month period ended June 30, 2019 and the year ended December 31, 2018, one customer, Amazon.com, Inc., represented 99.1% and 98.7%, respectively, of our total net revenues from continuing operations. Until such time, if ever, that we are able to diversify our customer base and add additional significant customers, the loss of Amazon as a customer would materially impair our overall consolidated financial condition and our consolidated results of operations. Our contractual relationships with customers, including Amazon, generally are terminable at will by the customers on short notice and do not require the customer to provide any minimum commitment. Our customers could choose to divert all or a portion of their business with us to one of our competitors, demand rate reductions for our services, require us to assume greater liability that increases our costs, or develop their own logistics capabilities. Failure to retain our existing customers or enter into relationships with new customers could materially impact the growth in our business and the ability to meet our current and long-term financial forecasts.

 

We have insufficient funds to develop our business, which may adversely affect our future growth.

 

Until we can generate a sufficient amount of revenue, if ever, we expect to finance our anticipated future growth and possibly future strategic acquisitions through public or private equity offerings or debt financings. Additional funds may not be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available, we may be required to delay, reduce the scope of, our plans to grow our revenues or to consummate one or more strategic acquisitions or otherwise to scale back our business plans. In addition, we could be forced to reduce or forego attractive business opportunities. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. In addition, debt financing, if available, may involve restrictive covenants. We may seek to access the public or private capital markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time. Our access to the financial markets and the pricing and terms we receive in the financial markets could be adversely impacted by various factors, including changes in financial markets and interest rates.

 

Our forecasts regarding the sufficiency of our financial resources to support our current and planned operations are forward-looking statements and involve significant risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed elsewhere in this “Risk Factors” section. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Our future capital requirements may be substantial and will depend on many factors including:

 

  marketing and developing expenses;
     
  revenue received from sales and operations, if any, in the future;
     
  the expenses needed to attract and retain skilled personnel; and
     
  the costs associated with being a public company.

 

Raising capital in the future could cause dilution to our existing shareholders, and may restrict our operations or require us to relinquish rights.

 

In the future, we may seek additional capital through a combination of private and public equity offerings, debt financings and collaborations and strategic and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a shareholder. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring debt, making capital expenditures or declaring dividends. If we raise additional funds through collaboration or strategic alliance arrangements with third parties, we may have to relinquish valuable rights to our future revenue streams or product candidates on terms that are not favorable to us.

 

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Economic recessions and other factors that reduce freight volumes could have a material adverse impact on our business.

 

The transportation industry historically has experienced cyclical fluctuations in financial results due to economic recession, downturns in business cycles of our customers, increases in prices charged by third-party carriers, interest rate fluctuations and other U.S. and global economic factors beyond our control. During economic downturns, reduced overall demand for transportation services will likely reduce demand for our services and exert downward pressures on rates and margins. In periods of strong economic growth, demand for limited transportation resources can result in increased network congestion and resulting operating inefficiencies. In addition, deterioration in the economic environment subjects our business to various risks that may have a material impact on our operating results and cause us to not reach our long-term growth goals. These risks may include the following:

 

  A reduction in overall freight volumes in the marketplace reduces our opportunities for growth.
     
  A downturn in our customers’ business cycles causes a reduction in the volume of freight shipped by those customers.
     
  Some of our customers may face economic difficulties and may not be able to pay us, and some may go out of business.
     
  Some of our customers may not pay us as quickly as they have in the past, causing our working capital needs to increase.
     
  A significant number of our transportation providers may go out of business and we may be unable to secure sufficient equipment or other transportation services to meet our commitments to our customers.
     
  We may not be able to appropriately adjust our expenses to changing market demands.

 

We have ongoing capital requirements that necessitate sufficient cash flow from operations and/or obtaining financing on favorable terms.

 

We have depended primarily on short term borrowings and cash from operations to expand the size of our operations and upgrade and expand the size of our delivery fleet. In the future, we may be unable to generate sufficient cash from operations to support or grow our operations or to obtain sufficient financing on favorable terms for such purposes. If any of these events occur, then we may face liquidity constraints or be forced to enter into less than favorable financing arrangements. Additionally, such events could adversely impact our ability to provide services to our customers.

 

Our operating results may fluctuate due to factors that are difficult to forecast and not within our control.

 

Our past operating results may not be accurate indicators of future performance, and you should not rely on such results to predict our future performance. Our operating results have fluctuated significantly in the past, and could fluctuate in the future. Factors that may contribute to fluctuations include:

 

  changes in aggregate capital spending, cyclicality and other economic conditions, or domestic and international demand for the products we deliver;
     
  our ability to effectively manage our working capital;
     
  our ability to satisfy consumer demands in a timely and cost-effective manner;
     
  pricing and availability of labor and delivery equipment;
     
  our inability to adjust certain fixed costs and expenses for changes in demand;
     
  shifts in geographic concentration of customers, supplies and labor pools; and
     
  seasonal fluctuations in demand and our revenue.

 

 8 
 

 

If we are unable to attract and retain qualified executive officers and managers, we will be unable to operate efficiently, which could adversely affect our business, financial condition, results of operations and prospects.

 

We depend on the continued efforts and abilities of our executive officers, particularly John Mercadante, our Chief Executive Officer, and Doug Cerny, our Chief Development Officer, as well as the senior management of our subsidiaries to establish and maintain our customer relationships and identify strategic opportunities. The loss of any one of them could negatively affect our ability to execute our business strategy and adversely affect our business, financial condition, results of operations and prospects. Competition for managerial talent with significant industry experience is high and we may lose access to executive officers for a variety of reasons, including more attractive compensation packages offered by our competitors. Although we have entered into employment agreements with certain of our executive officers and certain other key employees, we cannot guarantee that any of them or other key management personnel will remain employed by us for any length of time. Our inability to adequately fill vacancies in our senior executive positions on a timely basis could negatively affect our ability to implement our business strategy, which could adversely impact our results of operations and prospects.

 

Risks Related to Our Financial Results and Financing Plans

 

We have a history of losses and may continue to incur losses in the future, raising substantial doubts about our ability to continue as a going concern.

 

We have a history of losses and may continue to incur losses in the future, which could negatively impact the trading value of our common stock. We incurred losses from continuing operations of $25.9 million, $14.5 million, $14.6 million and $0.8 million in the six-month periods ended June 30, 2019 and 2018 and the years ended December 31, 2018 and 2017, respectively. We incurred a net loss of $26.6 million, $14.4 million, $14.5 million and $0.7 million in the six-month periods ended June 30, 2019 and 2018 and the years ended December 31, 2018 and 2017, respectively. We may continue to incur losses in future periods. These losses may increase and we may never achieve profitability for a variety of reasons, including increased competition, decreased growth in the e-commerce and the transportation and logistics industries and other factors described elsewhere in this “Risk Factors” section. These factors raise substantial doubt that we will be able to continue operations as a going concern, and our independent registered public accountants included an explanatory paragraph regarding this uncertainty in their reports on our consolidated financial statements for the years ended December 31, 2018 and 2017. Our ability to continue as a going concern is dependent upon our generating cash flow sufficient to fund operations and reducing operating expenses.

 

We may never achieve profitability, and if we do, we may not be able to sustain such profitability. Further, we may incur significant losses in the future due to the other risks described in this prospectus, and we may encounter unforeseen expenses, difficulties, complications and delays and other unknown events. If we cannot continue as a going concern, our stockholders may lose their entire investment.

 

 9 
 

 

We have identified material weaknesses in our internal control over financial reporting, and we cannot assure you that additional material weaknesses or significant deficiencies will not occur in the future. If our internal control over financial reporting or our disclosure controls and procedures are not effective, we may not be able to accurately report our financial results or prevent fraud, which may cause investors to lose confidence in our reported financial information and may lead to a decline in our stock price.

 

We have historically had a small internal accounting and finance staff with limited experience in public reporting. This lack of adequate accounting resources has resulted in the identification of material weaknesses in our internal controls over financial reporting. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. In connection with the preparation of our unaudited financial statements for the six-month period ended June 30, 2019 and the audit of our financial statements for the year ended December 31, 2018, our management team identified material weaknesses relating to, among other matters:

 

  Our 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;
     
  Our overall lack of segregation of duties among our management team and our lack of segregation of duties and monitoring controls regarding our accounting staff because we have a limited staff of accountants maintaining our books and records;
     
  Our Chief Executive Officer does not have significant financial experience resulting in our use of outside consultants to assist in financial matters;
     
  We do not have adequate controls over pre-closing legal and accounting review of loan transactions;
     
  We 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;
     
  We lacked supervision of outside consultants who may negotiate transactions on behalf of our company;
     
  We have not yet implemented any internal controls over financial reporting at our recently-acquired Prime subsidiary; and
     
  We lacked control over who was granted authorization to bind our company or its subsidiaries to legal contracts.

 

We have taken steps, including implementing a plan to improve the segregation of the duties of our accounting staff, and plan to continue to take additional steps, to seek to remediate these material weaknesses and to improve our financial reporting systems and implement new policies, procedures and controls. If we do not successfully remediate the material weaknesses described above, or if other material weaknesses or other deficiencies arise in the future, we may be unable to accurately report our financial results on a timely basis, which could cause our reported financial results to be materially misstated and require restatement which could result in the loss of investor confidence, delisting and/or cause the market price of our common stock to decline.

 

Our substantial indebtedness could adversely affect our business, financial condition and results of operations and our ability to meet our payment obligations.

 

As of June 30, 2019, we had total indebtedness of approximately $10.8 million, consisting of $10.2 million of notes payable and $0.6 million of lease liabilities relating to our office lease. Our substantial indebtedness could have important consequences to our stockholders. For example, it could:

 

  require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund acquisitions, working capital, capital expenditures, research and development efforts and other general corporate purposes;
     
  increase our vulnerability to and limit our flexibility in planning for, or reacting to, changes in our business;
     
  place us at a competitive disadvantage compared to our competitors that have less debt;
     
  limit our ability to borrow additional funds, dispose of assets, pay dividends and make certain investments; and
     
  make us more vulnerable to a general economic downturn than a company that is less leveraged.

 

 10 
 

 

A high level of indebtedness would increase the risk that we may default on our debt obligations. Our ability to meet our debt obligations and to reduce our level of indebtedness will depend on our future performance. General economic conditions and financial, business and other factors affect our operations and our future performance. Many of these factors are beyond our control. We may not be able to generate sufficient cash flows to pay the interest on our debt and future working capital, borrowings or equity financing may not be available to pay or refinance such debt. Factors that will affect our ability to raise cash through an offering of our capital stock or a refinancing of our debt include financial market conditions, the value of our assets and our performance at the time we need capital.

 

Our loan agreements impose restrictions on us that may prevent us from engaging in beneficial transactions.

 

We have a term loan pursuant to an Original Issue Discount Senior Secured Convertible Promissory Note dated June 18, 2018 and amended on April 9, 2019 (the “Bellridge Note”) from our company to Bellridge Capital, L.P. The Bellridge Note matures on August 31, 2020. At June 30, 2019, $1.8 million was outstanding under the Bellridge Note.

 

In addition, on August 30, 2019, we issued $2,469,840 aggregate principal amount of the Notes, which mature on November 30, 2020.

 

The terms of each of the Bellridge Note and the Notes contain covenants that restrict our ability to, among other things:

 

  make certain payments, including the payment of dividends;
     
  redeem or repurchase our capital stock;
     
  incur additional indebtedness and issue preferred stock;
     
  make investments or create liens;
     
  merge or consolidate with another entity;
     
  sell certain assets; and
     
  enter into transactions with affiliates.

 

We have in the past breached certain covenants under the Bellridge Note that have resulted in various events of default under such note, which events of default have either been cured or waived by the lender thereunder. As of the date of this prospectus, we were not in default of any of the covenants. Any additional breach of any of these covenants could result in new defaults or events of default under the Bellridge Note, in which case, depending on the actions taken by the lender thereunder or its successor or assignee, such lender could elect to declare all amounts borrowed, together with accrued interest, to be due and payable. An event of default under the Bellridge Note will also create an event of default under the Notes. If following an event of default we are unable to repay the borrowings or interest then due under our outstanding promissory notes, the lenders could proceed against their collateral. Further, if the indebtedness under any or all of our promissory notes were to be accelerated, our assets may not be sufficient to repay such indebtedness in full.

 

Actual results could differ from the estimates and assumptions that we use to prepare our consolidated financial statements.

 

To prepare consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions as of the date of the consolidated financial statements that affect the reported values of assets and liabilities, revenues and expenses, and disclosures of contingent assets and liabilities. Areas requiring significant estimates by our management include:

 

the valuation of accounts receivable;
   
the useful life of property and equipment; the valuation of intangible assets;
   
the valuation of right of use asset and related liability;
   
assumptions used in assessing impairment of long-lived assets;
   
estimates of current and deferred income taxes and deferred tax valuation allowances;
   
the fair value of non-cash equity transactions;
   
the valuation of derivative liabilities; and
   
the fair value of assets acquired and liabilities assumed in business acquisitions.

 

At the time the estimates and assumptions are made, we believe they are accurate based on the information available. However, our actual results could differ from, and could require adjustments to, those estimates.

 

 11 
 

 

Risks Related To Our Industry

 

The transportation industry in which we compete is affected by general economic and business risks that are largely beyond our control.

 

The point-to-point transportation industry is highly cyclical, and our business is dependent on a number of factors, many of which are beyond our control. We believe that some of the most significant of these factors are economic changes that affect supply and demand in transportation markets in general, such as:

 

  downturns in customers’ business cycles;
     
  recessionary economic cycles;
     
  changes in customers’ inventory levels and in the availability of funding for their working capital;
     
  commercial driver shortages and increases in driver compensation;
     
  industry compliance with a constantly changing regulatory environment;
     
  excess delivery vehicle capacity in comparison with shipping demand; and
     
  changes in government policies, tariffs and taxes.

 

The risks associated with these factors are heightened when the United States and/or global economy is weakened. Some of the principal risks during such times are as follows:

 

  we may experience low overall freight levels, which may impair our asset utilization, because our customers’ demand for our services generally correlate with the strength of the United States and, to a lesser extent, global economy;
     
  certain of our customers may face credit issues and cash flow problems, particularly if they encounter increased financing costs or decreased access to the capital markets, and such issues and problems may affect their ability to pay for our services;
     
  freight patterns may change as supply chains are redesigned, resulting in an imbalance between our capacity and our customers’ demands; and
     
  customers may bid out freight or select competitors that offer lower rates from among existing choices in an attempt to lower their costs, and we might be forced to lower our rates or lose freight.

 

We also are subject to cost increases outside of our control that could materially reduce our profitability if we are unable to increase our rates sufficiently. Such cost increases include, but are not limited to, increases in fuel prices, driver wages, owner-operator contracted rates, interest rates, taxes, tolls, license and registration fees, insurance, trucks and other transportation equipment and healthcare for our employees.

 

Our suppliers’ business levels also may be negatively affected by adverse economic conditions or financial constraints, which could lead to disruptions in the supply and availability of equipment, parts and services critical to our operations. A significant interruption in our normal supply chain could disrupt our operations, increase our costs and negatively impact our ability to serve our customers.

 

In addition, events outside our control, such as strikes or other work stoppages at our facilities or at customer, port, border or other shipping locations, or actual or threatened armed conflicts or terrorist attacks, efforts to combat terrorism, military action against a foreign state or group located in a foreign state, or heightened security requirements could lead to reduced economic demand, reduced availability of credit or temporary closing of the shipping locations or United States borders. Such events or enhanced security measures in connection with such events could impair our operating efficiency and productivity and result in higher operating costs.

 

 12 
 

 

Our industry is highly competitive and fragmented, and our business and results of operations may suffer if we are unable to adequately address downward pricing and other competitive pressures.

 

We compete with many carriers of varying sizes, including some that may have greater access to equipment, a wider range of services, greater capital resources, less indebtedness or other competitive advantages and including smaller, regional service providers that cover specific shipping lanes with specific customers or that offer niche services. We also compete, to a lesser extent, with some less-than-truckload carriers, railroads, and third-party logistics, brokerage, freight forwarding and other transportation companies. Numerous competitive factors could impair our ability to maintain or improve our profitability. These factors include the following:

 

  many of our competitors periodically reduce their freight rates to gain business, especially during times of reduced growth or a downturn in the economy, which may limit our ability to maintain or increase freight rates, may require us to reduce our freight rates or may limit our ability to maintain or expand our business;
     
  some shippers have reduced or may reduce the number of carriers they use by selecting core carriers as approved service providers and in some instances we may not be selected;
     
  many customers periodically solicit bids from multiple carriers for their shipping needs, which may depress freight rates or result in a loss of business to competitors;
     
  the continuing trend toward consolidation in the trucking industry may result in more large carriers with greater financial resources and other competitive advantages, and we may have difficulty competing with them;
     
  advances in technology may require us to increase investments in order to remain competitive, and our customers may not be willing to accept higher freight rates to cover the cost of these investments;
     
  higher fuel prices and, in turn, higher fuel surcharges to our customers may cause some of our customers to consider freight transportation alternatives, including rail transportation;
     
  competition from freight logistics and brokerage companies may negatively impact our customer relationships and freight rates;
     
  we may have higher exposure to litigation risks as compared to other carriers; and
     
  smaller carriers may build economies of scale with procurement aggregation providers, which may improve the smaller carriers’ abilities to compete with us.

 

Driver shortages and increases in driver compensation or owner-operator contracted rates could adversely affect our profitability and ability to maintain or grow our business.

 

Driver shortages in our industry have required, and could continue to require, us to spend more money to locate and retain company and owner-operator drivers. Our challenge with attracting and retaining qualified drivers primarily stems from intense market competition, which may subject us to increased payments for driver compensation and owner-operator contracted rates. Also, because of the intense competition for drivers, we may face difficulty maintaining or increasing our number of company and owner-operator drivers. Compliance and enforcement with initiatives included in the CSA program implemented by the FMCSA and regulations adopted by the DOT relating to driver time and safety and fitness could also reduce the availability of qualified drivers. In addition, like most in our industry, we suffer from a high turnover rate of drivers, especially, with respect to company drivers, in the first 180 days of employment. The high turnover rate requires us to continually recruit a substantial number of drivers in order to operate existing delivery vehicles. Further, with respect to owner-operator drivers, shortages can result from contractual terms or company policies that make contracting with us less desirable to certain owner-operator drivers. Due to the absence of long-term personal services contracts, owner-operators can quickly terminate their business relationships with us. If we are unable to continue to attract and retain a sufficient number of company and owner-operator drivers, we could be required to operate with fewer trucks and face difficulty meeting shipper demands or be forced to forego business that would otherwise be available to us, which developments could adversely affect our profitability and ability to maintain or grow our business.

 

 13 
 

 

Seasonality and the impact of weather and other catastrophic events adversely affect our operations and profitability.

 

Our operations are affected by the winter season because inclement weather impedes operations and some shippers reduce their shipments during winter. At the same time, operating expenses increase due to, among other things, a decline in fuel efficiency because of engine idling and harsh weather that creates higher accident frequency, increased claims and higher equipment repair expenditures. We also may suffer from weather-related or other events, such as tornadoes, hurricanes, blizzards, ice storms, floods, fires, earthquakes and explosions, which may disrupt fuel supplies, increase fuel costs, disrupt freight shipments or routes, affect regional economies, destroy our assets or the assets of our customers or otherwise adversely affect the business or financial condition of our customers, any of which developments could adversely affect our results or make our results more volatile.

 

We may be adversely affected by fluctuations in the price or availability of diesel fuel.

 

Fuel is one of our largest operating expenses. Diesel fuel prices fluctuate greatly due to factors beyond our control, such as political events, price and supply decisions by oil producing countries and cartels, terrorist activities, environmental laws and regulations, armed conflicts, depreciation of the dollar against other currencies, world supply and demand imbalances or imposition of tariffs, and hurricanes and other natural or man-made disasters, each of which may lead to an increase in the cost of fuel. Such events may lead not only to increases in fuel prices, but also to fuel shortages and disruptions in the fuel supply chain. Because our operations are dependent upon diesel fuel, significant diesel fuel cost increases, shortages or supply disruptions could materially and adversely affect our results of operations and financial condition. We have not used derivatives as a hedge against higher fuel costs in the past but continue to evaluate this possibility.

 

Increases in fuel costs, to the extent not offset by rate per mile increases or fuel surcharges, have an adverse effect on our operations and profitability. We incur certain fuel costs that cannot be recovered even with respect to customers with which we maintain fuel surcharge programs, such as those associated with empty miles or the time when our engines are idling. Because our fuel surcharge recovery lags behind changes in fuel prices, our fuel surcharge recovery may not capture in any particular period the increased costs we pay for fuel, especially when prices are rising. Further, during periods of low freight volumes, shippers can use their negotiating leverage to impose less compensatory fuel surcharge policies. There can be no assurance that our fuel surcharge program will be maintained indefinitely or will be sufficiently effective.

 

Increased prices for, or decreases in the availability of, new trucks and delivery vehicles and decreases in the value of used trucks and delivery vehicles could adversely affect our results of operations and cash flows.

 

Investment in new equipment is a significant part of our annual capital expenditures, and we require an available supply of trucks and other delivery vehicles from equipment manufacturers to operate and grow our business. In recent years, manufacturers have raised the prices of new trucks and other vehicles and equipment significantly due to increased costs of materials and, in part, to offset their costs of compliance with new tractor engine and emission system design requirements mandated by the EPA and various state agencies, which are intended to reduce emissions. For example, more restrictive EPA engine and emissions system design requirements became effective for engines built on or after January 1, 2010. In 2011, the EPA and the NHTSA established Phase 1 of a national program to reduce greenhouse gas emissions and establish new fuel efficiency standards for medium- and heavy-duty vehicles beginning for model year 2014 and extending through model year 2018. In October 2016, the EPA and NHTSA jointly published final Phase 2 standards for improving fuel efficiency and reducing greenhouse gas emissions from new on-road medium- and heavy-duty vehicles beginning for model year 2019 and extending to model year 2027. The Phase 2 standards build upon the Phase 1 standards, encouraging wider application of currently available technologies and the development of new and advanced cost-effective technologies through model year 2027. In addition, greenhouse gas emissions limits and fuel efficiency standards will be imposed on new trailers. Greenhouse gas emissions regulations are likely to affect equipment design and cost. More recently, in November 2018, the EPA announced the Cleaner Trucks Initiative (CTI), pursuant to which it plans to propose and finalize a rulemaking updating standards for nitrogen oxide emissions from highway heavy-duty trucks and engines. The EPA is expected to issue a proposed rulemaking to implement the CTI program in early 2020. Notwithstanding the federal standards, a number of states have mandated, and states may continue to individually mandate, additional emission-control requirements for equipment that could increase equipment or other costs for entire fleets. Further equipment price increases may result from these federal and state requirements. If new equipment prices increase more than anticipated, we could incur higher depreciation and rental expenses than anticipated. If we are unable to fully offset any such increases in expenses with freight rate increases and/or improved fuel economy, our results of operations and cash flows could be adversely affected.

 

 14 
 

 

We may face difficulty in purchasing or leasing new equipment due to decreased supply. From time to time, some original equipment manufacturers (OEM) of tractors, trailers and other delivery vehicles may reduce their manufacturing output due to lower demand for their products in economic downturns or a shortage of component parts. Uncertainty as to future federal emission standards or possible future inconsistencies between federal and state emission standards may also serve to decrease such manufacturing output. Component suppliers may either reduce production or be unable to increase production to meet OEM demand, creating periodic difficulty for OEMs to react in a timely manner to increased demand for new equipment and/or increased demand for replacement components as economic conditions change. At times, market forces may create market situations in which demand outstrips supply. In those situations, we may face reduced supply levels and/or increased acquisition or lease costs. An inability to continue to obtain an adequate supply of new tractors or trailers for our operations could have a material adverse effect on our business, results of operations and financial condition.

 

During prolonged periods of decreased tonnage levels, we and other trucking companies may make strategic fleet reductions, which could result in an increase in the supply of used equipment. When the supply exceeds the demand for used trucks or other delivery vehicles, the general market value of such used equipment decreases. Used equipment prices are also subject to substantial fluctuations based on availability of financing and commodity prices for scrap metal. A depressed market for used equipment could require us to trade our truck or other delivery vehicles at depressed values or to record losses on disposal or an impairment of the carrying values of our equipment that is not protected by residual value arrangements. Trades at depressed values and decreases in proceeds under equipment disposals and impairment of the carrying values of our equipment could adversely affect our results of operations and financial condition.

 

We operate in a highly-regulated industry, and changes in existing laws or regulations, or liability under existing or future laws or regulations, could have a material adverse effect on our results of operations and profitability.

 

We operate in the United States pursuant to operating authority granted by the DOT. We, as well as our company and owner-operator drivers, must also comply with governmental regulations regarding safety, equipment, environmental protection and operating methods. Examples include regulation of equipment weight, equipment dimensions, fuel emissions, driver hours-of-service, driver eligibility requirements, on-board reporting of operations and ergonomics. We may become subject to new, or amendment of existing, laws and regulations, reinterpretation of legal requirements or increased governmental enforcement that may impose more restrictive regulations relating to such matters that may require changes in our operating practices, influence the demand for transportation services or require us to incur significant additional costs. Possible changes to laws and regulations include:

 

  increasingly stringent environmental laws and regulations, including changes intended to address NOx emissions as well as fuel efficiency and greenhouse gas emissions that are attributed to climate change;
     
  restrictions, taxes or other controls on emissions;
     
  regulation specific to the energy market and logistics providers to the industry;
     
  changes in the hours-of-service regulations, which govern the amount of time a driver may drive in any specific period;
     
  driver and vehicle ELD requirements;
     
  requirements leading to accelerated purchases of new trailers;
     
  mandatory limits on vehicle weight and size;
     
  driver hiring or retention restrictions;
     
  increased bonding or insurance requirements; and
     
  security requirements imposed by the DHS.

 

 15 
 

 

From time to time, various legislative proposals are introduced, including proposals to increase federal, state or local taxes, including taxes on motor fuels and emissions, which may increase our or our independent affiliates’ operating costs, require capital expenditures or adversely impact the recruitment of drivers.

 

Restrictions on greenhouse gas emissions or climate change laws or regulations could also affect our customers that use significant amounts of energy or burn fossil fuels in producing or delivering the products we carry, which, in turn, could adversely impact the demand for our services as well as our operations. Additionally, recent activism directed at shifting funding away from companies with energy-related assets could result in limitations or restrictions on certain sources of funding for the energy sector, which also could adversely impact the demand for our services and our operations. We also could lose revenue if our customers divert business from us because we have not complied with customer sustainability requirements. See “Item 1. Business - Regulation” for information regarding several governmental regulations that could significantly impact our business and operations.

 

Safety-related evaluations and rankings under the CSA program could adversely impact our relationships with our customers and our ability to maintain or grow our fleet, each of which could have a material adverse effect on our results of operations and profitability.

 

The CSA includes compliance and enforcement initiatives designed to monitor and improve commercial motor vehicle safety by measuring the safety record of both the motor carrier and the driver. These measurements are scored and used by the FMCSA to identify potential safety risks and to direct enforcement action. Certain measurements and scores collected by the CSA from transportation companies are available to the general public on the FMCSA’s website.

 

Our CSA scores are dependent upon our safety and compliance experience, which could change at any time. In addition, the safety standards prescribed in the CSA program or the underlying methodology used by the FMCSA to determine a carrier’s safety rating could change and, as a result, our ability to maintain an acceptable score could be adversely impacted. For example, pursuant to a 2015 federal statutory mandate, the FMCSA commissioned the National Academy of Sciences (NAS) to conduct a study and report upon the CSA program and its underlying Safety Measurement System (SMS), which is the FMCSA’s process for identifying patterns of non-compliance and issuing safety-fitness determinations for motor carriers. In June 2017, the NAS published a report on the subject providing specific recommendations and concluding, among other things, that the FMCSA should explore a more formal statistical model to replace the current SMS process. In June 2018, the FMCSA posted its response to the NAS study in a report to Congress, concluding, among other things, that it would develop and test a new model, the Item Response Theory (IRT), which would replace the SMS process currently used. The FMCSA was expected to commence small scale testing of the IRT model as early as September 2018, with full-scale testing expected to occur in April 2019 and possible program roll-out expected to occur in late 2019 but the testing schedule has been delayed. The FMCSA’s June 2018 response is under audit by the DOT Inspector General to assess consistency with the NAS recommendations, and the audit findings will guide the agency’s actions and timing with respect to testing of the IRT model as a potential replacement for the SMS. In the event and to the extent that the FMCSA adopts the IRT model in replacement of the SMS or otherwise pursues rulemakings in the future that revise the methodology used to determine a carrier’s safety rating in a manner that incorporates more stringent standards, then it is possible that we and other motor carriers could be adversely affected, as compared to consideration of the current standards. If we receive an unacceptable CSA score, whether under the current SMS process, the IRT model, should it be finalized and adopted, or as a result of some other safety-fitness determination, our relationships with customers could be damaged, which could result in a loss of business.

 

Additionally, the requirements of CSA could shrink the industry’s pool of drivers as those with unfavorable scores could leave the industry. As a result, the costs to attract, train and retain qualified drivers could increase. In addition, a shortage of qualified drivers could increase driver turnover, decrease asset utilization, limit growth and adversely impact our results of operations and profitability.

 

 16 
 

 

We are subject to environmental and worker health and safety laws and regulations that may expose us to significant costs and liabilities and have a material adverse effect on our results of operations, competitive position and financial condition.

 

We are subject to stringent and comprehensive federal, state and local environmental and worker health and safety laws and regulations governing, among other matters, the operation of fuel storage tanks, release of emissions from our vehicles (including engine idling) and facilities, the health and safety of our workers in conducting operations, and adverse impacts to the environment. Under certain environmental laws, we could be subject to strict joint and several liability, without regard to fault or legality of conduct, for costs relating to contamination at facilities we own or operate or previously owned or operated and at third-party sites where we disposed of waste, as well as costs associated with the clean-up of releases arising from accidents involving our vehicles. We often operate in industrial areas, where truck terminals and other industrial activities are located, and where soil, groundwater or other forms of environmental contamination have occurred from historical or recent releases and for which we have incurred and may, in the future, incur remedial or other environmental liabilities. We also maintain above-ground and underground bulk fuel storage tanks and fueling islands at some of our facilities and vehicle maintenance operations at certain of our facilities. Our operations involve the risks of fuel spillage or seepage into the environment, environmental damage and unauthorized hazardous material spills, releases or disposal actions, among others.

 

Increasing efforts to control air emissions, including greenhouse gases, may have an adverse effect on us. Federal and state lawmakers have implemented, and are considering, a variety of new climate-change initiatives and greenhouse gas regulations that could increase the cost of new tractors, impair productivity and increase our operating expenses. For example, in 2011, the NHTSA and the EPA adopted final Phase 1 rules that established the first-ever fuel economy and greenhouse gas standards for medium- and heavy-duty vehicles, including certain combination tractors’ model years 2014 to 2018 and, in October 2016, the EPA and NHTSA jointly published final Phase 2 standards for improving fuel efficiency and reducing greenhouse gas emissions from new on-road medium- and heavy-duty vehicles beginning for model year 2019 through model year 2027. In addition, greenhouse gas emissions limits and fuel efficiency standards will be imposed on new trailers. More recently, in November 2018, the EPA announced the CTI, pursuant to which it plans to propose and finalize a rulemaking updating standards for nitrogen oxide emissions from highway heavy-duty trucks and engines. The EPA is expected to issue a proposed rulemaking to implement the CTI program in early 2020.

 

Compliance with environmental laws and regulations may also increase the price of our delivery equipment and otherwise affect the economics of our industry by requiring changes in operating practices or by influencing the demand for, or the costs of providing, transportation services. For example, regulations issued by the EPA and various state agencies that require progressive reductions in exhaust emissions from diesel engines have resulted in higher prices for tractors and diesel engines and increased operating and maintenance costs. Also, in order to reduce exhaust emissions, some states and municipalities have begun to restrict the locations and amount of time where diesel-powered tractors, such as ours, may idle. These restrictions could force us to alter our drivers’ behavior, purchase on-board power units that do not require the engine to idle or face a decrease in productivity. We are also subject to potentially stringent rulemaking related to sustainability practices, including conservation of resources by decreasing fuel consumption. This increased focus on sustainability practices may result in new regulations and/or customer requirements that could adversely impact our business.

 

If we have operational spills or accidents or if we are found to be in violation of, or otherwise liable under, environmental or worker health or safety laws or regulations, we could incur significant costs and liabilities. Those costs and liabilities may include the assessment of sanctions, including administrative, civil and criminal penalties, the imposition of investigatory, remedial or corrective action obligations, the occurrence of delays in permitting or performance of projects, and the issuance of orders enjoining performance of some or all of our operations in a particular area. The occurrence of any one or more of these developments could have a material adverse effect on our results of operations, competitive position and financial condition. Environmental and worker health and safety laws are becoming increasingly more stringent and there can be no assurances that compliance with, or liabilities under, existing or future environmental and worker health or safety laws or regulations will not have a material adverse effect on our business, financial condition, results of operations, cash flows or prospects. See “Item 1. Business - Regulation” for information regarding several governmental regulations that could significantly affect our business and operations.

 

 17 
 

 

Our contractual agreements with our owner-operators expose us to risks that we do not face with our company drivers.

 

From time to time we have relied upon independent contractor owner-operators to perform the services for which we contract with customers. While our use of independent contractors has to date been limited, we may increase our usage of independent contractor owner-operators if we are unable to meet demand for our transportation services with our own delivery vehicles and drivers. Our reliance on independent contractor owner-operators creates numerous risks for our business. For example, if our independent contractor owner-operators fail to meet our contractual obligations or otherwise fail to perform in a manner consistent with our requirements, we may be required to utilize alternative service providers at potentially higher prices or with some degree of disruption of the services that we provide to customers. If we fail to deliver on time, if our contractual obligations are not otherwise met, or if the costs of our services increase, then our profitability and customer relationships could be harmed.

 

The financial condition and operating costs of our independent contractor owner-operators are affected by conditions and events that are beyond our control and may also be beyond their control. Adverse changes in the financial condition of our independent contractor owner-operators or increases in their equipment or operating costs could cause them to seek higher revenues or to cease their business relationships with our company. The prices we charge our customers could be impacted by such issues, which may in turn limit pricing flexibility with customers, resulting in fewer customer contracts and decreasing our revenues.

 

Independent contractor owner-operators may use tractors, trailers and other equipment bearing our trade names and trademarks. If one of our independent contractor owner-operators is subject to negative publicity, it could reflect on us and have a material adverse effect on our business, brand and financial performance. Under certain laws, we could also be subject to allegations of liability for the activities of our independent contractor owner-operators.

 

Owner-operators are third-party service providers, as compared to company drivers who are employed by us. As independent business owners, our owner-operators may make business or personal decisions that conflict with our best interests. For example, if a load is unprofitable, route distance is too far from home or personal scheduling conflicts arise, an owner-operator may deny loads of freight from time to time. In these circumstances, we must be able to timely deliver the freight in order to maintain relationships with customers.

 

If our owner-operators are deemed by regulators or judicial process to be employees, our business and results of operations could be adversely affected.

 

Tax and other regulatory authorities have in the past sought to assert that owner-operators in the trucking industry are employees rather than independent contractors. Taxing and other regulatory authorities and courts apply a variety of standards in their determination of independent contractor status. If our owner-operators are determined to be its employees, we would incur additional exposure under federal and state tax, workers’ compensation, unemployment benefits, labor, employment, and tort laws, including for prior periods, as well as potential liability for employee benefits and tax withholdings.

 

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We depend on third parties in our brokerage business, and service instability from these providers could increase our operating costs or reduce our ability to offer brokerage services, which could adversely affect our revenue, results of operations and customer relationships.

 

Our brokerage business is dependent upon the services of third-party capacity providers, including other truckload carriers. These third-party providers may seek other freight opportunities and may require increased compensation during times of improved freight demand or tight trucking capacity. Our inability to maintain positive relationships with, and secure the services of, these third parties, or increases in the prices we must pay to secure such services, could have an adverse effect on our revenue, results of operations and customer relationships. Our ability to secure the services of these third-party providers on competitive terms is subject to a number of risks, including the following, many of which are beyond our control:

 

  equipment shortages in the transportation industry, particularly among contracted truckload carriers and railroads;
     
  interruptions in service or stoppages in transportation as a result of labor disputes, seaport strikes, network congestion, weather-related issues, acts of God or acts of terrorism;
     
  changes in regulations impacting transportation;
     
  increases in operating expenses for carriers, such as fuel costs, insurance premiums and licensing expenses, that result in a reduction in available carriers; and
     
  changes in transportation rates.

 

We are dependent on computer and communications systems, and a systems failure or data breach could cause a significant disruption to our business.

 

Our business depends on the efficient and uninterrupted operation of our computer and communications hardware systems and infrastructure, including operating and financial reporting systems. Our computer and communications system is critical in meeting customer expectations, effectively tracking, maintaining and operating our trucks and other delivery vehicles, directing and compensating our employees, and interfacing with our financial reporting system. Our financial reporting system receives, processes, controls and reports information for operating our business and for tabulation into our financial statements. We currently maintain our computer systems at multiple locations, including several of our offices and terminals and third-party data centers, along with computer equipment at each of our terminals. Our operations and those of our technology and communications service providers are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure, terrorist attacks, Internet failures, computer viruses, data breaches (including cyber-attacks or cyber intrusions over the Internet, malware and the like) and other events generally beyond our control. Although we believe that we have robust information security procedures and other safeguards in place, as cyber threats continue to evolve, we may be required to expend additional resources to continue to enhance our information security measures and investigate and remediate any information security vulnerabilities. A significant natural disaster or cyber-attack incident, including system failure, security breach, disruption by malware or other damage, could interrupt or delay our operations, damage our reputation, cause a loss of customers, agents or third-party capacity providers, expose us to a risk of loss or litigation, or cause us to incur significant time and expense to remedy such an event, any of which could have a material adverse impact on our results of operations and financial position.

 

Our business may be harmed by terrorist attacks, future wars or anti-terrorism measures.

 

In the aftermath of the terrorist attacks of September 11, 2001, federal, state and municipal authorities have implemented and are implementing various security measures, including checkpoints and travel restrictions on large trucks and fingerprinting of drivers in connection with new hazardous materials endorsements on their licenses. Such existing measures and future measures may have significant costs associated with them which a motor carrier is forced to bear. Moreover, large trucks carrying large freight are potential terrorist targets, and we may be obligated to take measures, including possible capital expenditures, intended to protect our trucks. In addition, the insurance premiums charged for some or all of the coverage currently maintained by us could continue to increase dramatically or such coverage could be unavailable in the future.

 

 19 
 

 

If our employees were to unionize, our operating costs could increase and our ability to compete could be impaired.

 

None of our employees are currently represented under a collective bargaining agreement; however, we always face the risk that our employees will try to unionize, and if our owner-operators were ever re-classified as employees, the magnitude of this risk would increase. Further, Congress or one or more states could approve legislation and/or the National Labor Relations Board (the NLRB) could render decisions or implement rule changes that could significantly affect our business and our relationship with employees, including actions that could substantially liberalize the procedures for union organization. For example, in December 2014, the NLRB implemented a final rule amending the agency’s representation-case proceedings that govern the procedures for union representation. Pursuant to this amendment, union elections can now be held within 10 to 21 days after the union requests a vote, which makes it easier for unions to successfully organize all employers, in all industries. In addition, we can offer no assurance that the Department of Labor will not adopt new regulations or interpret existing regulations in a manner that would favor the agenda of unions.

 

Any attempt to organize by our employees could result in increased legal and other associated costs and divert management attention, and if we entered into a collective bargaining agreement, the terms could negatively affect our costs, efficiency and ability to generate acceptable returns on the affected operations. In particular, the unionization of our employees could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects because:

 

  restrictive work rules could hamper our efforts to improve and sustain operating efficiency and could impair our service reputation and limit our ability to provide same-day or next-day services;
     
  a strike or work stoppage could negatively impact our profitability and could damage customer and employee relationships, and some shippers may limit their use of unionized trucking companies because of the threat of strikes and other work stoppages; and
     
  an election and bargaining process could divert management’s time and attention from our overall objectives and impose significant expenses.

 

Risks Related to Ownership of Our Common Stock

 

Our shares of common stock are quoted on the OTC Pink Open Market and there is no active trading market for our common stock.

 

Our shares of common stock are traded on the OTC Pink Open Market. There is currently no active trading market for our common stock and our common stock has traded in recent years only on a limited basis. There can be no assurance that an active trading market for our common stock will develop or if one develops, it will be sustained. Furthermore, because our shares of common stock are traded on the OTC Pink Open Market, the shares of our common stock covered by this prospectus will only be offered and sold by Selling Stockholders at a fixed price of $8.50 per share until our shares are quoted on the OTCQX or OTCQB marketplace of the OTC Link, and, thereafter, at prevailing market prices or privately negotiated prices.

 

If a public market for our common stock develops, it may be volatile. This may affect the ability of our investors to sell their shares as well as the price at which they sell their shares.

 

The market price for shares of our common stock may be significantly affected by factors such as variations in quarterly and yearly operating results, general trends in the transportation and logistics industry, and changes in state or federal regulations affecting us and our industry. Furthermore, in recent years the stock market has experienced extreme price and volume fluctuations that are unrelated or disproportionate to the operating performance of the affected companies. Such broad market fluctuations may adversely affect the market price of our common stock, if a market for it develops.

 

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Our common stock price has fluctuated in recent years, and the trading price of our common stock is likely to continue reflect changes, which could result in losses to investors and litigation.

 

In addition to changes to market prices based on our results of operations and the factors discussed elsewhere in this “Risk Factors” section, the market price of and trading volume for our common stock may change for a variety of other reasons, not necessarily related to our actual operating performance. The capital markets have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. In addition, the average daily trading volume of the securities of small companies can be very low, which may contribute to future volatility. Factors that could cause the market price of our common stock to fluctuate significantly include:

 

  the results of operating and financial performance and prospects of other companies in our industry;
     
  strategic actions by us or our competitors, such as acquisitions or restructurings;
     
  announcements of innovations, increased service capabilities, new or terminated customers or new, amended or terminated contracts by our competitors;
     
  the public’s reaction to our press releases, media coverage and other public announcements, and filings with the SEC;
     
  lack of securities analyst coverage or speculation in the press or investment community about us or opportunities in the markets in which we compete;
     
  changes in government policies in the United States and, as our international business increases, in other foreign countries;
     
  changes in earnings estimates or recommendations by securities or research analysts who track our common stock or failure of our actual results of operations to meet those expectations;
     
  dilution caused by the conversion into common stock of convertible debt securities;
     
  market and industry perception of our success, or lack thereof, in pursuing our growth strategy;
     
  changes in accounting standards, policies, guidance, interpretations or principles;
     
  any lawsuit involving us, our services or our products;
     
  arrival and departure of key personnel;
     
  sales of common stock by us, our investors or members of our management team; and
     
  changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from natural or man-made disasters.

 

Any of these factors, as well as broader market and industry factors, may result in large and sudden changes in the trading volume of our common stock and could seriously harm the market price of our common stock, regardless of our operating performance. This may prevent stockholders from being able to sell their shares at or above the price they paid for shares of our common stock, if at all. In addition, following periods of volatility in the market price of a company’s securities, stockholders often institute securities class action litigation against that company. Our involvement in any class action suit or other legal proceeding, including the existing lawsuits filed against us and described elsewhere in this report, could divert our senior management’s attention and could adversely affect our business, financial condition, results of operations and prospects.

 

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If we do not meet the listing standards of a national securities exchange, our investors’ ability to make transactions in our securities will be limited and we will be subject to additional trading restrictions.

 

Our common stock currently is traded over-the-counter on the OTC Pink market and is not qualified to be listed on a national securities exchange, such as NASDAQ. Accordingly, we face significant material adverse consequences, including:

 

  a limited availability of market quotations for our securities;
     
  reduced liquidity with respect to our securities;
     
  our shares of common stock are currently classified as “penny stock” which requires brokers trading in our shares of common stock to adhere to more stringent rules, resulting in a reduced level of trading activity in the secondary trading market for our shares of common stock;
     
  a limited amount of news and analyst coverage for our company; and
     
  a decreased ability to issue additional securities or obtain additional financing in the future.

 

Our shares of common stock are subject to penny stock regulations. Because our common stock is a penny stock, holders of our common stock may find it difficult or may be unable to sell their shares.

 

The SEC has adopted rules that regulate broker/dealer practices in connection with transactions in penny stocks. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange system). The penny stock rules require a broker/dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the SEC that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker/dealer also must provide the customer with bid and offer quotations for the penny stock, the compensation of the broker/dealer, and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from such rules, the broker/dealer must make a special written determination that a penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in any secondary market for a stock that becomes subject to the penny stock rules, and accordingly, holders of our common stock may find it difficult or may be unable to sell their shares.

 

FINRA sales practice requirements may also limit a stockholder’s ability to buy and sell our common stock.

 

In addition to the “penny stock” rules described above, the Financial Industry Regulatory Authority (known as “FINRA”) has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.

 

We do not intend to pay cash dividends in the foreseeable future.

 

We have never paid dividends on our common stock and do not presently intend to pay any dividends in the foreseeable future. We anticipate that any funds available for payment of dividends will be re-invested into our company to further its business strategy. Because we do not anticipate paying dividends in the future, the only opportunity for our stockholders to realize value in our common stock will likely be through a sale of those shares.

 

Future sales of our securities could adversely affect the market price of our common stock and our future capital-raising activities could involve the issuance of equity securities, which would dilute your investment and could result in a decline in the trading price of our common stock.

 

We may sell securities in the public or private equity markets if and when conditions are favorable, or at prices per share below the current market price of our common stock, even if we do not have an immediate need for additional capital at that time. Sales of substantial amounts of shares of our common stock, or the perception that such sales could occur, could adversely affect the prevailing market price of our shares and our ability to raise capital. We may issue additional shares of common stock in future financing transactions or as incentive compensation for our executive management and other key personnel, consultants and advisors. Issuing any equity securities would be dilutive to the equity interests represented by our then-outstanding shares of common stock. Moreover, sales of substantial amounts of shares in the public market, or the perception that such sales could occur, may adversely affect the prevailing market price of our common stock and make it more difficult for us to raise additional capital. See “Description of Securities – Warrants.”

 

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If the Selling Stockholders sell a large number of shares all at once or in blocks, the market price of our shares would most likely decline.

 

A significant number of shares of our common stock may be resold by the Selling Stockholders through this prospectus and as a result of any other registration statement we may file in the future. Should the Selling Stockholders decide to sell their shares at a price below the market price as quoted by the OTC Markets Group, Inc., or any other exchange or market on which our common stock might be listed or trade in the future, the price may continue to decline. A steep decline in the price of our common stock would adversely affect our ability to raise additional equity capital, and even if we were successful in raising such capital, the terms of such raise may be substantially dilutive to current stockholders

 

Our certificate of incorporation allows for our board of directors to create new series of preferred stock without further approval by our stockholders, which could adversely affect the rights of the holders of our common stock.

 

Our board of directors has the authority to fix and determine the relative rights and preferences of our preferred stock. Currently our board of directors has the authority to designate and issue up to 8,300,000 shares of our “blank check” preferred stock without further stockholder approval. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock. In addition, our board of directors could authorize the issuance of a series of preferred stock that has greater voting power than our common stock or that is convertible into our common stock, which could decrease the relative voting power of our common stock or result in dilution to our existing stockholders. See “Description of Securities – Preferred Stock.”

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements. Such statements include statements regarding our expectations, hopes, beliefs or intentions regarding the future, including but not limited to statements regarding our market, strategy, competition, development plans (including acquisitions and expansion), financing, revenues, operations, and compliance with applicable laws. Forward-looking statements involve certain risks and uncertainties, and actual results may differ materially from those discussed in any such statement. Factors that could cause actual results to differ materially from such forward-looking statements include the risks described in greater detail in the following paragraphs. All forward-looking statements in this document are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement. Market data used throughout this prospectus is based on published third party reports or the good faith estimates of management, which estimates are based upon their review of internal surveys, independent industry publications and other publicly available information.

 

In some cases, you can identify forward-looking statements by terminology, such as “expects”, “anticipates”, “intends”, “estimates”, “plans”, “potential”, “possible”, “probable”, “believes”, “seeks”, “may”, “will”, “should”, “could” or the negative of such terms or other similar expressions. Accordingly, these statements involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed in them. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this prospectus.

 

You should review carefully the section entitled “Risk Factors” beginning on page 6 of this prospectus for a discussion of these and other risks that relate to our business and investing in shares of our common stock.

 

USE OF PROCEEDS

 

The Selling Stockholders will receive all of the proceeds from the sale of the shares offered by them under this prospectus. We will not receive any proceeds from the sale of the shares by the Selling Stockholders covered by this prospectus, but we would receive any proceeds from the exercise of the Debt Warrants and the Equity Warrants. If all of such warrants are exercised for cash, we would receive $4,920,290 in proceeds. We will use all proceeds, if any, from any such exercise for working capital purposes.

 

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PRICE RANGE OF COMMON STOCK

 

Our common stock has been quoted on OTC Pink under the symbol “PTRA” through August 13, 2018 and “TLSS” beginning on August 14, 2018. Trading in OTC Pink stocks can be volatile, sporadic and risky, as thinly traded stocks tend to move more rapidly in price than more liquid securities. Such trading may also depress the market price of our common stock and make it difficult for our stockholders to resell their common stock. Our common stock does not have an established public trading market. The following table reflects the high and low bid price for our common stock for the period indicated. The bid information was obtained from the OTC Markets Group, Inc. and reflects inter-dealer prices, without retail mark-up, markdown or commission, and may not necessarily represent actual transactions.

 

   Quarter   High    Low 
Fiscal year ended December 31, 2017  First  $8.75   $4.00 
   Second  $27.50   $5.27 
   Third  $6.67   $2.75 
   Fourth  $4.97   $2.50 

 

           
Fiscal year ended December 31, 2018  First  $9.97   $1.80 
   Second  $6.25   $1.50 
   Third  $10.00   $0.60 
   Fourth  $2.75   $1.50 

 

         
Fiscal year ended December 31, 2019  First  $4.00   $0.93 
   Second  $16.25   $4.25 
   Third*  $13.00   $8.58 

 

 

* Through October 3, 2019.

 

Our common stock is considered to be penny stock under rules promulgated by the Securities and Exchange Commission. Under these rules, broker-dealers participating in transactions in these securities must first deliver a risk disclosure document which describes risks associated with these stocks, broker-dealers’ duties, customers’ rights and remedies, market and other information, and make suitability determinations approving the customers for these stock transactions based on financial situation, investment experience and objectives. Broker-dealers must also disclose these restrictions in writing, provide monthly account statements to customers, and obtain specific written consent of each customer. With these restrictions, the likely effect of designation as a penny stock is to decrease the willingness of broker- dealers to make a market for the stock, to decrease the liquidity of the stock and increase the transaction cost of sales and purchases of these stocks compared to other securities.

 

Holders

 

As of October 3, 2019, there were 48 record holders of our common stock, and there were 11,745,236 shares of our common stock outstanding.

 

DIVIDEND POLICY

 

We have never declared or paid any cash dividends on shares of our capital stock. We currently intend to retain all available funds to support operations and to finance the growth and development of our business. The terms of the Notes currently prohibit our payment of cash dividends. Any future determination related to payments of dividends will be at the discretion of our board of directors after taking into account various factors that our board of directors deems relevant, including our financial condition, operating results, current and anticipated cash needs, plans for expansion and debt restrictions, if any.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of financial condition and results of operations should be read together with our financial statements and accompanying notes appearing elsewhere in this Prospectus. This Management’s Discussion and Analysis contains forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” set forth in the beginning of this Prospectus, and see “Risk Factors” beginning on page 6 for a discussion of certain risk factors applicable to our business, financial condition, and results of operations. Operating results are not necessarily indicative of results that may occur in future periods.

 

Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission. Important factors currently known to management could cause actual results to differ materially from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that actual results of operations or the results of our future activities will not differ materially from our assumptions. Factors that could cause differences include, but are not limited to, expected market demand for our products, fluctuations in pricing for our products, and competition.

 

The following discussion provides information that management believes is relevant to an assessment and understanding of our past financial condition and plan of operations. The discussion below should be read in conjunction with the financial statements and accompanying notes contained elsewhere in this prospectus.

 

Overview

 

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

 

On March 30, 2017, we entered into a share exchange agreement, dated as of March 30, 2017 with Save on Transport pursuant to which Save on Transport became a wholly-owned subsidiary or our company. Save on Transport was incorporated in the State of Florida and commenced business operations on July 12, 2016. Save on Transport 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.

 

Our acquisition of Save on Transport was treated as a reverse merger and recapitalization of Save on Transport for financial reporting purposes because the shareholders of Save on Transport retained an approximate 80% controlling interest in the post-acquisition consolidated entity. Save on Transport was considered the acquirer for accounting purposes, and our historical financial statements before the acquisition were replaced with the historical financial statements of Save on Transport before the acquisition. The balance sheets at their historical cost basis of both entities were combined at the acquisition date and the results of operations from the acquisition date forward include the historical results of Save on Transport and results of our company from the acquisition date forward. The acquisition 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, 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 the Prime members and us on such date. Prime is a New Jersey-based transportation company with a focus on deliveries for on-line retailers to customers in New York, New Jersey and Pennsylvania.

 

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On July 16, 2018, we filed with the Secretary of State of the State of Nevada a certificate of amendment to our amended and restated articles of incorporation to (i) change the name of our company from PetroTerra Corp. to Transportation and Logistics Systems, Inc., (ii) authorize an increase of the number of our authorized shares of preferred stock, par value $0.001 per share, to 10,000,000 shares and (iii) effect a 1-for-250 reverse stock split of our outstanding shares of 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 holders of a majority of the outstanding shares of our common stock. 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 our consolidated financial statements included in this prospectus have been retroactively restated to reflect the effect of the recapitalization.

 

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

 

On May 1, 2019, we entered into a share exchange agreement with Save on Transport and Steven Yariv, our former Chief Executive Officer and director and the Chief Executive Officer of Save on Transport at such time, pursuant to which we sold all of the capital stock of Save on Transport to Mr. Yariv in exchange for Mr. Yariv conveying 1,000,000 shares of our common stock to our company, and granted to certain employees of Save on Transport an aggregate of 80,000 stock purchase options . Mr. Yariv ceased to be an officer or director of our company on April 16, 2019, effective with the filing with the SEC of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. Pursuant to Accounting Standard Codification (“ASC”) 205-20-45, the financial statement in which net income or loss of a business entity is reported shall report the results of operations of the discontinued operation in the period in which a discontinued operation either has been disposed of or is classified as held for sale. Accordingly, we reflect the operations of Save on Transport as a discontinued operations beginning in the second quarter of 2019, the period in which we disposed of Save on Transport, and retroactively for all prior periods presented.

 

The following discussion highlights the results of our operations and the principal factors that have affected our consolidated financial condition, as well as our liquidity and capital resources, for the periods described, and provides information that management believes is relevant for an assessment and understanding of our consolidated financial condition and results of operations at the dates and for the periods presented herein. The following discussion and analysis is based on the consolidated financial statements contained elsewhere in this prospectus, which have 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 consolidated financial statements for the years ended December 31, 2018 and 2017 include a summary of our significant accounting policies and should be read in conjunction with the discussion below.

 

Results of Operations

 

Our 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.

 

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For the six months ended June 30, 2019 compared with the six months ended June 30, 2018

 

The following table sets forth our revenues, expenses and net loss for the six-month periods ended June 30, 2019 and 2018. The financial information set forth below is derived from our condensed consolidated financial statements included elsewhere in this prospectus.

 

  

For the Six Months Ended
June 30,

 
   2019   2018 
Revenues  $13,904,619   $626,820 
Cost of revenues   13,072,675    535,945 
Gross Profit   831,944    90,875 
Operating expenses   12,293,659    4,727,558 
Loss from operations   (11,461,715)   (4,636,683)
Other (expenses) income   (14,466,040)   (9,896,907)
(loss) income from discontinued operations   (681,426)   83,601 
Net loss  $(26,609,181)  $(14,449,989)

 

Revenues. For the six months ended June 30, 2019, our revenues from continuing operations were $13,904,619 as compared to $626,820 for the six months ended June 30, 2018, an increase of $13,277,799. This increase was a result of our acquisition of Prime on June 18, 2018. Revenue of $12,909,864 was attributable to the business of Prime, which focuses on deliveries for on-line retailers in New York, New Jersey and Pennsylvania. Additionally, during the six months ended June 30, 2019, revenue related to our newly-formed subsidiary, Shypdirect, amounted to $994,755.

 

On May 1, 2019, we entered into a Share Exchange Agreement with Save on Transport and our former Chief Executive Officer and director, Steven Yariv, whereby we returned all of the capital stock of Save on Transport to Steven Yariv in exchange for Mr. Yariv conveying 1,000,000 shares of our common stock back to us. Accordingly, for all periods presented, all revenues from Save on Transport have been reflected as part of discontinued operations and we will not reflect any revenues from Save on Transport in future periods.

 

Cost of Revenue. For the six months ended June 30, 2019, our cost of revenues from continuing operations were $13,072,675 compared to $535,945 for the six months ended June 30, 2018, an increase of $12,536,730. This increase was a direct result of our acquisition of Prime on June 18, 2018. Cost of revenue of $11,798,743 was attributable to the business of Prime. During the six months ended June 30, 2019, cost of revenue related to our newly-formed subsidiary, Shypdirect, amounted to $1,273,932. Cost of revenues relating to our Prime and Shypdirect segments consists of truck and van rental fees, insurance, gas, maintenance, and compensation and related benefits.

 

Gross Profit. For the six months ended June 30, 2019, our gross profit was $831,944, or 6.0% of revenue, as compared to $90,875, or 14.5% of revenue, for the six months ended June 30, 2018, an increase of $741,069. The increase in gross profit primarily resulted from the acquisition of Prime on June 18, 2018. The gross profit for the six months ended June 30, 2019 represented six months of operating activity for Prime whereas the gross profit for the six months ended June 30, 2018 only represented only 12 days of operating activity of Prime. For the six months ended June 30, 2019, gross profit and gross profit percentage for Prime amounted to $1,111,121, or 8.6%. For the six months ended June 30, 2019, gross loss and gross loss percentage for Shypdirect amounted to $(279,177), or (28.1)%, which was primarily attributable to higher payroll, vehicle rental, insurance and other costs incurred in ramping up the Shypdirect business.

 

Operating Expenses. For the six months ended June 30, 2019, total operating expenses amounted to $12,293,659 as compared to $4,727,558 for the six months ended June 30, 2018, an increase of $7,566,101. For the six months ended June 30, 2019 and 2018, operating expenses consisted of the following:

 

  

For the Six Months Ended
June 30,

 
   2019   2018 
Compensation and related benefits  $7,717,214   $3,149,776 
Legal and professional Fees   1,071,082    1,373,993 
Rent   185,237     
General and administrative expenses   1,595,535    203,789 
Impairment loss   1,724,591     
Total Operating Expense  $12,293,659   $4,727,558 

 

 28 
 

 

Compensation and related benefits. For the six months ended June 30, 2019, compensation and related benefits amounted to $7,717,214 compared to $3,149,776 for the six months ended June 30, 2018, an increase of $4,567,438. Compensation and related benefits for the six months ended June 30, 2019 and 2018 included stock-based compensation of $4,950,808 and $3,090,000, respectively, from the granting of shares of our common stock to employees, our former chief executive officer, and our new chief executive officer for services rendered. Additionally, during the six months ended June 30, 2019, compensation and related benefits attributed to the business of Prime, which was acquired on June 18, 2018, were $2,026,718 and compensation and related benefits attributed to the business of Shypdirect was $681,527.

 

Legal and professional fees. For the six months ended June 30, 2019, legal and professional fees were $1,071,082 as compared to $1,373,993 for the six months ended June 30, 2018, a decrease of $302,911. During the six months ended June 30, 2019, we incurred stock-based consulting fees of $265,500 from the issuance of our common shares to consultants for business development services rendered. During the six months ended June 30, 2018, we incurred stock-based consulting fees of $1,236,000 from the issuance of our common shares to consultants for business development services rendered.

 

Rent expense. For the six months ended June 30, 2019, rent expense was $185,237 compared $-0- for the six months ended June 30, 2018. This increase was attributable to an expansion in office, warehouse and parking spaces pursuant to short and long-term operating leases related to our Prime and Shypdirect subsidiaries.

 

General and administrative expenses. General and administrative expenses include office expenses and supplies, travel and entertainment, depreciation and amortization, and other expenses.

 

For the six months ended June 30, 2019, general and administrative expenses were $1,595,535 as compared to $203,789 for the six months ended June 30, 2018, an increase of $1,391,746. The increase in operating expenses compared to the prior year period is due to the acquisition of Prime, which was acquired on June 18, 2018. For the six months ended June 30, 2019, general and administrative expenses included a full six months of operating activities. For the six months ended June 30, 2018, general and administrative expenses included only 12 days of operating activity. General and administrative expenses attributed to the business of Prime and Shypdirect were $1,474,342 and $111,980, respectively, which includes depreciation and amortization expense of $617,632 and $0, respectively.

 

Impairment expense. During the six months ended June 30, 2019, management tested the intangible asset for impairment. Based on our analysis, we recorded intangible asset impairment expense of $1,724,591 in the unaudited consolidated statement of operations for the six months ended June 30, 2019. No impairment expense was recorded during the six months ended June 30, 2018.

 

Loss from Operations. For the six months ended June 30, 2019, loss from operations amounted to $11,461,715 as compared to $4,636,683 for the six months ended June 30, 2018. This represented an increase in loss from operations of $6,825,032 for the six months ended June 30, 2019 compared to the same period of 2018.

 

Other (Expenses) Income. Total other (expenses) income include interest expense, derivative (expense) income, loan fees, and a gain on debt extinguishment. For the six months ended June 30, 2019 and 2018, other expenses (income) consisted of the following:

 

  

For the Six Months Ended
June 30,

 
   2019   2018 
Interest expense  $(2,597,443)  $(391,555)
Interest expense – related party   (147,639)   - 
Loan fees   (601,121)   - 
Gain on extinguishment of debt   43,917,768)   - 
Derivative (expense) income   (55,037,605)   (9,505,352)
Total Other (Expenses) Income  $(14,466,040)  $(9,896,907)

 

 29 
 

 

For the six months ended June 30, 2019 and 2018, aggregate interest expense was $2,745,082 and $243,302, respectively. The increase in interest expense for both periods resulted from an increase in interest-bearing loans and an increase in the amortization in debt discount.

 

For the six months ended June 30, 2019 and 2018, derivative expense was $55,037,605 and $9,505,352, respectively, an increase of $45,532,253. For the six months ended June 30, 2019, we adjusted our derivative liabilities to fair value and recorded derivative expense. This significant change was attributable to a higher stock price and having more financials instruments treated as derivatives, including embedded conversion options and warrants, as compared to the comparable previous period.

 

For the six months ended June 30, 2019 and 2018, loan fees were $601,121 and $-0-, respectively. In connection with previous promissory notes payable, on June 11, 2019, we issued 55,000 warrants to purchase 55,000 shares of common at an exercise price of $1.00 per share. On June 11, 2019, we calculated the fair value of these warrants of $601,121, which was expensed and included in loan fees on our condensed consolidated statement of operations.

 

For the six months ended June 30, 2019, gain on extinguishment of debt was $43,917,768. On April 9, 2019, in connections with certain debt modifications, debt repayments, share issuances and warrants cancellations, we recorded a gain on debt extinguishment. During the six months ended June 30,2018, we did not record any gain on debt extinguishment.

 

Discontinued Operations. On May 1, 2019, we entered into a share exchange agreement with Save on Transport and Steven Yariv, whereby we returned all of the capital stock of Save on Transport to Steven Yariv in exchange for Mr. Yariv conveying 1,000,000 shares of our common stock back to our company. In addition, we granted an aggregate of 80,000 options to certain employees of Save on Transport. Accordingly, we reflected Save on Transport as a discontinued operations beginning in the second quarter of 2019, the period that Save on Transport was disposed of and retroactively for all periods presented in our condensed consolidated financial statements included in this prospectus. The business of Save on Transport was considered discontinued operations because: (a) the operations and cash flows of Save on Transport were eliminated from our operations; and (b) we had no interest in the divested operations. For the six months ended June 30, 2019 and 2018, (loss) income from discontinued operations amounted to $(681,426) and $83,601, respectively. During the six months ended June 30, 2019, we recorded stock-based option expense related to the 80,000 options granted to Save on Transport employees of $700,816.

 

Net Loss. Due to the factors discussed above, for six months ended June 30, 2019 and 2018, net loss amounted to $26,609,181, or $(3.51) per basic and diluted common share, and $14,449,989, or $(17.87) per basic and diluted common share, respectively.

 

For the year ended December 31, 2018 compared with the year ended December 31, 2017

 

The following table sets forth our revenues, expenses and net income (loss) for the year ended December 31, 2018 and 2017. The financial information below is derived from our consolidated financial statements included in this prospectus.

 

  

For the Year Ended
December 31,

 
   2018   2017 
Revenues  $13,620,160   $- 
Cost of revenues   12,785,425    - 
Gross profit   834,735    - 
Operating expenses   7,903,885    200,600 
Loss from operations   (7,069,150)   (200,600)
Other expenses   (7,509,386)   (611,768)
Loss from continuing operations  (14,578,536)  (812,368)
Income from discontinued operations   

100,379

 

67,563

 
Net loss  $

(14,478,157

)  $

(744,805

)

 

 30 
 

 

Revenues. For the year ended December 31, 2018, our revenues were $13,620,160 as compared to $0 for the year ended December 31, 2017, an increase of $13,620,160. This increase was a result of our acquisition of Prime on June 18, 2018. Revenue 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. During the year ended December 31, 2018, revenue related to our newly formed subsidiary, Shypdirect amounted to $208,950.

 

Cost of Revenue. For the year ended December 31, 2018, our cost of revenues were $12,785,425 compared to $0 for the year ended December 31, 2017, an increase of $12,785,425. This increase was a direct result of our acquisition of Prime on June 18, 2018. Cost of revenue of $12,456,635 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. Cost of revenues relating to our Prime segment consists of truck and van rental fees, insurance, gas, maintenance, and compensation and related benefits. During the year ended December 31, 2018, cost of revenue related to our newly formed subsidiary, Shypdirect amounted to $328,790.

 

Gross Profit. For the year ended December 31, 2018, our gross profit was $834,735, or 6.1% of revenue, as compared to $0, for the year ended December 31, 2017, an increase of $834,735. This increase 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 December 31, 2018, gross profit and gross profit percentage for Prime amounted to $954,575, or 7.1% compared to gross loss and gross loss percentage for Shypdirect of $(119,840), or (57.4)%.

 

Operating Expenses. For the year ended December 31, 2018, total operating expenses amounted to $7,903,885 as compared to $200,600 for the year ended December 31, 2017, an increase of $7,703,285. For the year ended December 31, 2018 and 2017, operating expenses consisted of the following:

 

  

For the Year Ended
December 31,

 
   2018   2017 
Compensation and related benefits  $4,531,798   $- 
Legal and professional Fees   1,993,130    200,600 
Rent   23,100    - 
General and administrative expenses   1,355,857    - 
Total Operating Expense  $7,903,885   $200,600 

 

Compensation and related benefits. For the year ended December 31, 2018, compensation and related benefits amounted to $4,531,798 compared to $0 for the year ended December 31, 2017. Compensation and related benefits for 2018 included stock-based compensation of $3,090,000 from the granting of 1,500,000 shares of our common stock to our chief executive officer for services rendered. Additionally, compensation and related benefits attributed to the business of Prime, which was acquired on June 18, 2018, were $1,385,620, and compensation and related benefits attributed to the business of Shypdirect was $56,178.

 

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Legal and professional fees. For the year ended December 31, 2018, legal and professional fees amounted to $1,993,130 as compared to $200,600 for the year ended December 31, 2017, an increase of $1,792,530. During the year ended December 31, 2018, we incurred stock-based consulting fees of $1,236,000 from issuance of our shares to consultants for business development services rendered. Additionally, legal and professional fees attributed to the business of Prime, which was acquired on June 18, 2018, were $478,589.

 

General and administrative expenses. General and administrative expenses include office expenses and supplies, travel and entertainment, depreciation and amortization, and other expenses. For the year ended December 31, 2018, general and administrative expenses amounted to $1,355,857 as compared to $0 for the year ended December 31, 2017, an increase of $1,355,857. The increase in operating expenses compared to the prior year period is due to the Company’s organic growth and growth through the acquisition of Prime, including the expansion of office space. Additionally, general and administrative expenses attributed to the business of Prime, which was acquired on June 18, 2018, were $1,340,029, which includes depreciation and amortization expense of $664,350.

 

Loss from Operations. For the year ended December 31, 2018, loss from operations amounted to $7,069,150 as compared to $200,600 for the year ended December 31, 2017, an increase of $6,868,550.

 

Other Expenses. Total other expenses include interest expense, derivative expense, and a bargain purchase gain. For the year ended December 31, 2018 and 2017, other expenses consisted of the following:

 

  

For the Year Ended
December 31,

 
   2018   2017 
Interest expense  $1,720,075   $312,416 
Interest expense – related party   193,617    - 
Gain on extinguishment of debt   -    (10,169)
Bargain purchase gain   (203,588)   - 
Derivative expense   5,799,282    309,521 
Total Other Expense  $7,509,386   $611,768 

 

For the years ended December 31, 2018 and 2017, interest expense was $1,720,075 and $312,416, respectively. The increase in interest expense resulted from an increase in interest-bearing loans and an increase in the amortization in debt discount.

 

For the years ended December 31, 2018 and 2017, derivative expense was $5,799,282 and $309,521, respectively, an increase of $5,489,761. In connection with the issuance of a certain note, warrant and placement warrant, during 2018, the initial measurement date, the fair values of the embedded conversion option derivative and warrant derivatives of $8,326,852 was recorded as derivative liabilities and was allocated as a debt discount of $1,487,787, with the remainder of $6,839,065 charged to current period operations as initial derivative expense. Additionally, for the year ended December 31, 2018, we adjusted our derivative liabilities to fair value and recorded a derivative gain of $1,039,783.

 

In connection with the acquisition of Prime, for the year ended December 31, 2018, we recognized $203,588 of bargain purchase gain, which represented the amount by which the acquisition-date fair value of the net assets acquired exceeded the fair value of the consideration paid.

 

Loss From Continuing Operations. Due to factors discussed above, for the years ended December 31, 2018 and 2017, loss from continuing operations amounted to $14,578,536, or $(5.79) per basic and diluted common share, and $812,368, or $(1.50) per basic and diluted common share, respectively.

 

Income From Discontinued Operations. On May 1, 2019, we entered into a Share Exchange Agreement with Save on Transport and Steven Yariv, whereby we returned all of the stock of Save on Transport to Steven Yariv in exchange for Mr. Yariv conveying 1,000,000 shares of our common stock back to our company. In addition, we granted an aggregate of 80,000 options to certain employees of Save on Transport. Accordingly, we reflected Save on Transport as a discontinued operations beginning in the second quarter of 2019, the period that Save on Transport was disposed of and retroactively for all periods presented in the accompanying condensed consolidated financial statements. The business of Save on Transport are considered discontinued operations because: (a) the operations and cash flows of Save on Transport were eliminated from our operations; and (b) we have no interest in the divested operations. For the years ended December 31, 2018 and 2017, income from discontinued operations amounted to $100,379 and $67,563, respectively.

 

Net Loss. Due to factors discussed above, for the years ended December 31, 2018 and 2017, net loss amounted to $14,478,157, or $(5.75) per basic and diluted common share, and $744,805, or $(1.37) 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 June 30, 2019 and December 31, 2018, we had a cash balance of $120,269 and $296,196, respectively, and our working capital deficit was $11,697,417 and $12,923,440, respectively.

 

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We reported a net decrease in cash for the six months ended June 30, 2019 of $175,927 and a net increase in cash for the year ended December 31, 2018 of $189,620.

 

Indebtedness

 

At June 30, 2019, we had outstanding indebtedness in the aggregate amount of $10.8 million, consisting of convertible notes and notes payable in the aggregate principal amount of $7.2 million, convertible notes and loans from related parties in the aggregate principal amount of $3.0 million and office lease liabilities of $0.6 million. Descriptions of the terms of our outstanding indebtedness at June 30, 2019 are set forth in Notes 7 and 8 to our unaudited consolidated financial statements for the six-month period ended June 30, 2019 included elsewhere in this prospectus.

 

On August 30, 2019, we entered into a securities purchase agreement with seven investors pursuant to which we sold for an aggregate purchase price of $2,222,854 (i) $2,469,840 aggregate principal amount of our original issue discount senior secured convertible notes and (ii) five-year warrants to purchase up to an aggregate of 987,940 shares of our common stock for a purchase price of $3.50 per share, subject to adjustment. The notes mature on November 30, 2020 and bear interest at the rate of 10% per annum or 18% per annum during the continuance of an event of default (as defined). Commencing on December 30, 2019, we are obligated to make monthly payments of principal and interest based upon a 12-month amortization schedule, provided that the final payment shall be made on the maturity date. Monthly payments of principal and interest shall be made in cash unless a noteholder requests its payment to be made in shares of our common stock, in which event the payment to such noteholder will be made in shares valued at 80% of the lowest volume weighted average price per share of our common stock during the five-trading-day period preceding the date of the scheduled payment. The notes also are convertible into shares of our common stock at any time at the option of the holder at a conversion price of $2.50 per share, subject to adjustment, or, during the continuation of any event of default (as defined), at a conversion price equal to the lower of (i) $2.50 per share or (ii) 70% of the second lowest closing price of our common stock during the 20-consecutive-trading-day period ending on the day prior to delivery of the applicable notice of conversion. The notes are secured by a pledge of substantially all of our assets, including the shares of capital stock of our subsidiaries.

 

The securities purchase agreement contains generally customary affirmative and negative covenants, including, but not limited to, our obligations to register for resale the shares of our common stock issuable upon payment or conversion of the notes or exercise of the warrants, a right of refusal for the investors to participate in our future debt or equity offerings, restrictions on future stock splits or combinations of our common stock, subject to certain exceptions, mandatory prepayments with a portion of the proceeds of any public offerings of our common stock, and restrictions on our ability to register shares of our common stock.

 

Of the $2.2 million of net proceeds we received from the sale of securities under the securities purchase agreement, approximately $1.6 million was applied to the repayment of notes payable.

 

Proceeds from Equity Issuances

 

On August 30, 2019, we entered into a securities purchase agreement with certain investors pursuant to which we sold for an aggregate purchase price of $1,462,500 a total of 585,000 units, each unit comprised of one share of our common stock and a five-year warrant to purchase one share of common stock for a purchase price of $2.50 per share, subject to adjustment.

 

 33 
 

 

Cash Flows

 

The following summary of our cash flows for the periods indicated has been derived from our historical consolidated financial statements included elsewhere in this prospectus.

 

   Six months
ended June 30,
   Year ended
December 31,
 
   2019   2018   2018   2017 
   (Unaudited)         
Net cash used in operations  $(3,115,838)  $(315,066)  $(283,678)  $(152,185)
Net cash provided by (used in) investing activities   24,119    (450,976)   (932,802)   (26,500)
Net cash provided by financing activities   2,915,792    1,344,055    1,406,100    273,536 

 

Operating activities. Net cash flows used in operating activities for the six months ended June 30, 2019 amounted to $3,115,838. During the six months ended June 30, 2019, net cash used in operating activities was primarily attributable to a net loss of $26,609,181 adjusted for the add back (reduction) of non-cash items such as depreciation and amortization expense of $617,632, derivative expense of $55,037,605, amortization of debt discount of $2,336,963, stock-based compensation of $5,917,124, a gain on debt extinguishment of $(44,031,110), impairment expense of $1,724,591, non-cash loan fees of $601,121 and changes in operating assets and liabilities such as an increase in accounts receivable of $486,226, offset by an increase in accounts payable and accrued expenses of $1,420,925.

 

Net cash flows used in operating activities for the six months ended June 30, 2018 amounted to $315,066. During the six months ended June 30, 2018, the net cash used in operations was primarily attributable to net loss of $14,449,989 adjusted for the add back (reduction) of non-cash items such as depreciation and amortization expense of $173,629, derivative expense of $9,505,352, amortization of debt discount of $332,364, stock-based compensation of $4,326,000 and changes in operating assets and liabilities such as an increase in accounts receivable of $325,551 and a decrease in in accounts payable and accrued expenses of $130,902.

 

Net cash flows used in operating activities for the year ended December 31, 2018 amounted to $283,678. During the year ended December 31, 2018, net cash used in operating activities was primarily attributable to a net loss of $14,478,157 adjusted for the add back (reduction) of non-cash items such as depreciation and amortization expense of $664,350, derivative expense of $5,799,282, amortization of debt discount of $1,566,847, loss of disposal of property and equipment of $14,816, stock-based compensation of $4,326,000, and a bargain purchase gain of $(203,588), and changes in operating assets and liabilities such as a decrease in accounts receivable of $789,904, an increase in accounts payable and accrued expenses of $668,416, an increase in liabilities of discontinued operations of $250,169, an increase in insurance payable of $587,945, and an increase in accrued compensation and related benefits of $182,229, offset by an increase in prepaid expenses and other current assets of $365,810 and an increase in assets of discontinued operations of $81,081. Net cash flows used in operating activities for the year ended December 31, 2017 amounted to $152,185. During the year ended December 31, 2017, net cash used in operating activities was primarily attributable to a net loss of $744,805 adjusted for the add back of non-cash items such as derivative expense of $309,521 and amortization of debt discount of $277,951, and changes in operating assets and liabilities such as an increase in assets of discontinued operations of $253,487 and an increase in liabilities of discontinued operations of $231,004.

 

Investing activities. Net cash provided by investing activities for the six months ended June 30, 2019 amounted to $24,119 and consisted of cash received from the disposal of trucks and van of $81,000 offset by cash paid for the purchase of property and equipment of $51,256 and a reduction of cash related to the disposal of Save on Transport of $5,625. Net cash used in investing activities for the six months ended June 30, 2018 amounted to $450,976 and consisted of cash received in acquisition of $38,198 offset by cash paid for the acquisition of Prime of $489,174.

 

Net cash used in investing activities for the year ended December 31, 2018 amounted to $932,802 and consisted of cash received in the acquisition of $38,198 offset by cash paid for the acquisition of $489,174 and the purchase of property and equipment of $481,826. Net cash flows used in investing activities for the year ended December 31, 2017 amounted to $26,500 and 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 offset by an investment in a license– discontinued operations of $36,500.

 

 34 
 

 

Financing activities. For the six months ended June 30, 2019, net cash provided by financing activities totaled $2,915,792. For the six months ended June 30, 2019, we received proceeds from related party convertible notes of $2,500,000, proceeds from notes payable of $6,631,020 and proceeds from related party notes of $255,000 offset by the repayment of convertible notes of $273,579, the repayment of related party notes of $495,000, and the repayment of notes payable of $5,697,856.

 

For the six months ended June 30, 2018, net cash provided by financing activities totaled $1,344,055. For the six months ended June 30, 2018, we received proceeds from related party convertible notes of $2,497,503 and proceeds from related party notes of $467,672 offset by the repayment of notes payable of $611,406 and debt issue costs of $1,009,714.

 

For the year ended December 31, 2018 and 2017, net cash provided by financing activities totaled $1,406,100 and $273,536, respectively. For the year ended December 31, 2018, we received gross proceeds from convertible notes of $2,497,503, proceeds from notes payable of $2,409,898, proceeds from related party notes if $1,050,000, and net cash proceeds from related party advances of $265,768 offset by the repayment of related party notes of $930,000, the payment of debt issue costs of $1,009,714 and the repayment of notes payable of $2,877,355. For the year ended December 31, 2017, we received net proceeds from convertible notes of $280,000 and we repaid notes of $6,464.

 

Going Concern Consideration

 

Our accompanying unaudited condensed consolidated financial statements for the six months ended June 30, 2019 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 unaudited condensed consolidated financial statements, we had a net loss of $26,609,181 for the six months ended June 30, 2019. The net cash used in operations was $3,115,838 for the six months ended June 30, 2019. Additionally, we had an accumulated deficit, shareholders’ deficit, and a working capital deficit of $41,379,031, $9,248,833 and $11,697,417, respectively, at June 30, 2019. Furthermore, as of June 30, 2019, we failed to make required payments of principal and interest on certain of our convertible debt instruments and defaulted on other provisions in these notes. On April 9, 2019, we entered into agreements with these lenders that modified these notes. It is management’s opinion that these factors raise substantial doubt about our ability to continue as a going concern for a period of 12 months from June 30, 2019. 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. Our consolidated financial statements included elsewhere in this prospectus 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.

 

 35 
 

 

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.

 

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. We maintain allowances for doubtful accounts for estimated losses. We review the accounts receivable on a periodic basis and make general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, we consider 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 our company, the change in the fair value during the period is recorded as either other income or expense. Upon conversion, exercise or repayment, the respective derivative liability is marked to fair value at the conversion, repayment or exercise date and then the related fair value amount is reclassified to other income or expense as part of gain or loss on extinguishment.

 

In July 2017, FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features. These amendments simplify the accounting for certain financial instruments with down-round features. The amendments require companies to disregard the down-round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining liability or equity classification. The guidance was adopted as of January 1, 2019 and we elected to record the effect of this adoption retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect adjustment to the condensed consolidated balance sheet as of the beginning of 2019, the period which the amendment is effective. In accordance with the guidance presented in ASU 2017-11, the fair value of derivative liabilities associated with certain convertible notes as of December 31, 2018 of $838,471 and the offsetting effect of reclassifying such debt to stock-settled debt for which we recorded a put premium liability of $385,385 was reclassified by means of a cumulative-effect adjustment to opening accumulated deficit as of January 1, 2019 in the amount of $453,086.

 

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

 

On January 1, 2019, we adopted ASU No. 2016-02, applying the package of practical expedients to leases that commenced before the effective date whereby we elected to not reassess the following: (i) whether any expired or existing contracts contain leases and; (ii) initial direct costs for any existing leases. For contracts entered into on or after the effective date, at the inception of a contract we assessed whether the contract is, or contains, a lease. Our assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether it has the right to direct the use of the asset. We will allocate the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments. We have elected not to recognize right-of-use assets and lease liabilities for short-term leases that have a term of 12 months or less.

 

Operating lease right-of-use assets represents the right to use the leased asset for the lease term and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, we use an incremental borrowing rate based on the information available at the adoption date in determining the present value of future payments. Lease expense for minimum lease payments is amortized on a straight-line basis over the lease term and is included in general and administrative expenses in the condensed consolidated statements of operations.

 

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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.

 

We recognize revenues for continuing operations 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 customers; however, if we did, because all of our 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 our 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 consolidated 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 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, we 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 we adjust 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 became effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption was permitted, but entities could not adopt prior to adopting the new revenue recognition guidance in ASC 606. We 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 our unaudited consolidated financial statements for the six-month periods ended June 30, 2019 and 2018 included elsewhere in this prospectus.

 

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BUSINESS

 

Overview

 

We are a provider of a wide range of transportation and logistics services involving the movement of goods and e-commerce fulfillment. Fast, dependable order fulfillment and shipping is critical to the success of an online business. We focus primarily on the transportation of packages that are ultimately to be delivered to the business or retail consumer. Our transportation services typically involve the transport of goods from the manufacturer or fulfillment center to the delivery station, from the fulfillment center to the post office or from the delivery station to the end user or retail customer (known as the “last mile” deliveries). We also offer an increasing number of logistics services, including the management and transportation of retail returns, the removal, transportation and disposition of shipping pallets and storage solutions for manufacturers with limited storage facilities, to help our business customers manage their goods efficiently through their supply chain.

 

We currently operate through our two subsidiaries, Prime EFS, LLC, a New Jersey-based transportation company with a focus on deliveries to the retail consumer for on-line retailers in New York, New Jersey and Pennsylvania (“Prime”), and Shypdirect LLC, 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 (“Shypdirect”), which are known as line-haul and “mid-mile” deliveries.

 

We are primarily an asset-based point-to-point delivery company. An asset-based delivery company, as compared to a non-asset-based delivery company, own or leases its own transportation equipment and employs its own drivers. At June 30, 2019, we owned or leased an aggregate of 277 trucks or delivery vehicles and employed 428 drivers who worked in shifts that allowed us to utilize most of our transportation equipment on a 24/7 basis. We also utilize the services of independent contractors to provide our delivery services. At June 30, 2019, two independent contractors provided services to us on a full-time basis. The independent contractors are responsible for paying for their own vehicles, equipment, fuel and operating expenses. Point-to-point delivery refers to a transportation system in which passengers or goods travel directly to a destination, rather than going through a central hub. This differs from the spoke-hub distribution paradigm in which the passengers or goods go to a central location in order to reach their ultimate destination. Our business is referred to as “point-to-point” delivery because our drivers and independent contractors are dispatched directly to the warehouse or retailer, as the case may be, and they then travel directly to the delivery point, rather than returning to a central corporate office.

 

Corporate History

 

We were incorporated under the name “PetroTerra Corp.” in the State of Nevada on July 25, 2008. Prior to March 2017, we were an independent oil or gas exploration and development company focused on the acquisition or lease of properties that potentially contained extractable oil or gas. However, at that time, we had not generated any revenues and, due to a decline of the oil and gas markets, elected to seek other business opportunities.

 

On March 30, 2017, we entered into a Share Exchange Agreement, dated as of the same date, with Save on Transport Inc., a Florida-based non-asset provider of integrated transportation management solutions, including brokerage and logistics services related to the transportation of automobiles and other freight (“Save on Transport”), pursuant to we acquired Save on Transport as a wholly-owned subsidiary.

 

Our acquisition of Save on Transport was treated as a reverse merger and recapitalization of Save on Transport for financial reporting purposes because the Save on Transport shareholders retained an approximate 80% controlling interest in our consolidated company. Save on Transport was considered the acquirer for accounting purposes, and our historical financial statements before the acquisition transaction was replaced with the historical financial statements of Save on Transport before such acquisition. The balance sheets at their historical cost basis of both entities were combined at the acquisition date and the results of operations from the acquisition date forward included the historical results of Save on Transport and our combined results of operations from the acquisition date forward.

 

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On June 18, 2018, we completed the acquisition of 100% of the issued and outstanding membership interests of Prime from its members, and on July 24, 2019, we formed Shypdirect. Prime was organized in, and has been engaged in its current line of business since, July 2016.

 

On May 1, 2019, we entered into a Share Exchange Agreement with Save on Transport and Steven Yariv, our former Chief Executive Officer and director and the Chief Executive Officer of Save on Transport at such time, pursuant to which, among other matters, we sold all of the capital stock of Save on Transport to Mr. Yariv in exchange for Mr. Yariv conveying 1,000,000 shares of our common stock back to our company, and granted to certain employees of Save on Transport, other than Mr. Yariv, stock options to purchase an aggregate of 80,000 shares of our common stock.

 

Our E-Commerce Fulfillment Solutions

 

The rapid growth of e-commerce and the online retailing segment of e-commerce is well documented. According to a recent internet retailer report of Digital Commence 360, a publisher of research in digital commerce, and U.S. Department of Commerce figures, consumers spent $517.36 billion online with U.S. merchants in 2018, up 15.0% from $449.88 billion spent the year prior. Total retail sales, not including the sale of items not normally bought online, such as fuel, automobiles and food at restaurants, increased to $3.628 trillion in 2018, up 3.9% year over year, from $3.490 trillion in 2017. The U.S. Department of Commerce estimates consumers spent $513.61 billion online in 2018, up 14.2% from 2017, and that total retail sales increased 4.1% to $3.63 trillion. E-commerce represented a growing share of the retail market in 2018, taking a 14.3% share of total retail sales in 2018, up from 12.9% in 2017 and 11.6% in 2016. Our largest customer, Amazon.com Inc., accounted for approximately 40.0% of overall U.S. online retail sales in 2018, and accounted for 43.3% of all 2018 e-commence year-over-year gains in the United States. We believe our technology platform positions us to provide transportation services and to grow at or faster than the rapidly-growing and evolving e-commerce marketplace.

 

E-commerce retail brands have logistics needs that differ from those of traditional businesses. Unlike traditional inventory management, e-commerce companies need to ship items directly to customers, who expect their orders to arrive on time and as described. We have built our delivery services to perform effectively in the “on demand” shipping environment that is part of the e-commerce fulfillment solutions system.

 

Our e-commerce fulfillment solutions are primarily the transportation of goods between destination points along the way from the manufacturer to the customer. We provide delivery services to the end user ( “Last Mile” delivery), principally retail consumers, including deliveries which require two persons to complete the delivery of heavy or bulky items, as well as “mid-mile” delivery services between distribution centers and fulfillment centers and line-haul delivery services from the manufacturer to the distribution center. Our revenues are generated from the fixed price charged for each specific route between a delivery station to a fulfillment center or from the fulfillment center to the final destination with a fixed price per route.

 

In most instances we are paid a fixed fee for transporting products from one designated site to a specified delivery point without regard to the number of packages being transported. With the ongoing growth of e-commerce, the specific routes between designated sites is regularly changing (primarily increasing) as the volume of the online retailing segment of e-commerce activity expands. An integral part of our strategy is to regularly be in contact with our customers to assure that we are anticipating and planning for the expansion of current routes and the addition of new routes to our service base.

 

Our scheduled route system allows us to adjust to the regular changes in which packages are received, sorted, stored, picked, packed, shipped and housed in fulfillment centers and distribution centers. We are structured to meet the demands of “last-mile” deliveries and home grocery shopping deliveries. In addition to delivering goods in full truckloads from distribution centers to fulfillment centers, based on customer requests, we perform unscheduled pickups and deliveries of bulk products. When delivering packages to a home, we adhere to certain time slots and sometimes make “live deliveries” to ensure the customer is aware that their package has been delivered. This entails a constantly-refreshed and technologically-modern transportation management system (TMS).

 

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We have built a network operations center (“NOC”) in Jersey City, New Jersey that allows us to track the location of each of our vehicles and address any on road disruptions. Our NOC is designed to grow with our business as we add more vehicles for additional routes and expand geographically. Presently, we utilize our NOC solely for our own business. We anticipate that as our revenues grow and the reach and scope of our transportation activities expand (both geographically and within the tristate area in which we currently operate) that we will generate revenues from services provided via our NOC to other logistics providers.

 

Our infrastructure is built to support the e-commerce unique fulfillment requirements of distributing products to millions of homes instead of hundreds of stores, managing millions of stock keeping units (SKUs) instead of thousands, shipping to homes in parcels instead of truckloads to stores and transporting between fulfillment centers in addition to distribution centers. Our infrastructure is aligned with the requirements of the online retailer: Online retailers differ from traditional brick and mortar where customers visit the premises and the retailer maintains goods on the premises. Online retailers have goods located in multiple locations (e.g., third party warehouses) and ship items directly to the customer; customers expect their order to arrive on time and to be the correct quantity and product ordered.

 

With our focus on on-time performance, customer satisfaction and challenging growth management opportunities for our employees, we believe we are one of the fastest growing e-commerce fulfillment services providers in the country. As an early stage company, we have experienced and anticipate that we will continue to experience the challenges that come from rapid growth in revenues such as identifying and hiring employees that are aligned with our expectations, securing assets and expanding our administrative support services for our rapidly growing operations. We believe that our ability to manage our company through this high growth is a key part of our success, as evidenced by the high-performance ratings we have regularly achieved in our customers’ scoring systems. We expect to expand our revenue base as the traditional brick-and-mortar retailers develop omni-channel strategies of generating revenues through a combination of physical and online sales.

 

Our Competitive Strengths and Strategy

 

Our strategy is to be a leader in the transportation industry in providing on-time, high-quality pick-up, transportation and delivery services. We attribute our growth and success to date to the following competitive strengths.

 

Market Knowledge and Understanding. While we have been operating our current business for only a few years, our senior management has over 40 years of experience in the transportation industry and has broad knowledge in providing transportation services over the “last mile” as part of the e-commerce fulfillment solutions. These solutions are in high demand and are expected to continue to grow at a rapid pace. Many of our management employees have e-commerce experience with e-commerce retailers and understand the dynamics of e-commerce growth, demands and logistics since all or the vast majority of their career has been in e-commerce businesses. We believe we understand the various segments of the end-to-end solutions required to rapidly and accurately deliver goods between the various pick-up and delivery points in the e-commerce delivery chain.

 

Unwavering Focus on Relationships and Superior Service. We aim to be the premier platform and partner of choice for our customers. We believe we offer superior services and solutions due to our company-wide commitment to customer service. On behalf of our customers, we deliver goods from the manufacturer or fulfillment center to the delivery station, and from the delivery station to the U.S. post office or retail customer (known as the “last mile” deliveries) in a precise, safe and timely manner with complementary support from our dedicated sales and service teams. Our focus on customer relationships has allowed us to increase our sales to our largest customer, Amazon.com, which, on an unaudited pro forma basis, assuming our acquisition of Prime had occurred on January 1, 2017, increased from approximately 5.6 million in 2017 to approximately $17.7 million in 2018 and from approximately $4.8 million in the first six months of 2018 to approximately $13.9 million in the first six months of 2019.

 

Experienced and Proven Management Team. We believe our management team is among the most experienced in the industry. Our senior management team brings experience in transportation and logistics, mergers and acquisitions, information technology, e-commerce retailing and fulfillment, and has an understanding of the cultural nuances of the e-commerce sectors we serve.

 

We intend to leverage our competitive strengths to increase shareholder value through the following core strategies.

 

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Build Upon Strong Customer Relationships to Expand Organically. We have built a strong relationship with Amazon.com that has allowed us to expand the size of our service area and add higher margin services to our service offerings. For example, due to our focus on consistent and timely deliveries and our superior safety record, we have increased the number of “last mile” local routes we serve for Amazon from five routes at December 31, 2017 to over 200 routes at December 31, 2018. In addition, we have been able to expand the type of transportation services we render to Amaznon.com to include “mid-mile” and line-haul transportation services in which our recently-formed Shypdirect subsidiary delivers packages from one distribution center to another or from the distribution center to the U.S. post office. We intend to continue to build on our relationship with Amazon.com and we are working to build similar relationships with other e-commerce retailers to increase the type and scope of the transportation and logistics services we offer.

 

Expand Our Operations to Other Regions of the U.S. Our e-commerce “last mile” delivery services to retail consumers are currently provided primarily in New York, New Jersey and Pennsylvania and our e-commerce “mid-mile” delivery services between customer distribution centers or between such distribution centers and the U.S. post office are currently provided primarily in the northeastern region of the U.S. As we continue to expand our marketing and customer relationships, we anticipate expanding our geographic footprint to provide such services, and to capture market share, in other regions of the U.S. by opening our own operations centers and warehouses, acquiring existing regional transportation and logistics companies in operating in other areas and partnering with local operators in other regions. We believe the expansion of our business in other regions of the U.S. will also allow us to expand our relationships with existing customers who operate in those regions.

 

Pursue Value-Enhancing Strategic Acquisitions. We intend to pursue strategic acquisitions as a means of adding new markets in the United States, expanding our transportation and logistics service offerings, adding talented management and operational employees, expanding and upgrading our technology platform and developing operational best practices. We are currently at various stages of reviewing several potential acquisition targets and believe we have significant opportunities to grow our business through our knowledge of our industry and possible acquisition targets.

 

Enhance Our Operating Margins. We expect to enhance our operating margins as our business expands through a combination of increased operational efficiencies, leveraging our existing assets and distribution facilities and increase usage of technology to help us better plan, execute and monitor the performance of our services and transportation assets. Many of our transportation assets were initially utilized for a single route per day. As we expand, we have been able to increase utilization through use of assets on multiple routes or the addition of a second shift per day. In addition, we expect that our operating margins will increase as we expand our Shypdirect “mid mile” business to business transportation and logistics operations, which generally have higher margins than our direct to consumer delivery business.

 

Customers and Markets

 

Our e-commerce retailer delivery services are currently provided primarily in New York, New Jersey and Pennsylvania principally for one customer, Amazon.com Inc. During the six-month period ended June 30, 2019 and the year ended December 31, 2018, Amazon accounted for approximately 99.0% and 98.7% of our total sales. As discussed above, we intend to address this concentration risk by expanding our organic growth through the addition of new customers and through the acquisition of businesses that provide transportation services for new customer bases.

 

We anticipate our customer base will expand and diversify as the business-to-business segment of e-commerce expands, and the traditional retailers implement e-commerce strategies that expand their sales channels. We anticipate our fulfillment solutions will become available to other retailers that utilize our principal customers’ expanding transportation and delivery services in which our system is an integral part.

 

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Delivery Fleet

 

As of June 30, 2019, we operated a vehicle fleet consisting of 15 tractors and 42 26-foot box trucks that were primarily used by our Shypdirect subsidiary for warehouse to warehouse deliveries and deliveries from the warehouse to the U.S. post office, and 220 vans that were primarily used by our Prime subsidiary for deliveries from the warehouse to the local retail consumer. Substantially all of such vehicles were rented or leased; however, we expect to commence purchasing additional vehicles shortly as our financing alternatives for such purchases improve. In leasing or purchasing new vehicles, we consider a number of factors, including economy, price, the economic environment, technology, warranty terms, manufacturer support, driver comfort and resale value. We maintain strong relationships with a number of equipment vendors and will lease or purchase additional vehicles as market conditions dictate. We expect that future acquisitions will also provide a significant increase in our truck and van fleets.

 

Information Technology and Systems

 

We continue to invest in information systems and technology to drive our business decisions, enhance customer experience, improve sales opportunities and create operating efficiencies. We utilize third-party software for financial reporting, equipment management, customer databases and customer campaign management, including “cloud” back-up. We also utilize leading e-commerce platforms hosted by third-party providers and an internally-developed proprietary database to accumulate business information. In addition, we utilize best-in-class integrated systems for payroll and to manage dispatching of vehicles, employees, Department of Transportation and other regulatory compliance, vehicle maintenance, scheduling, and state and local taxes. We continue to innovate and optimize our technology systems and expect to continue to make significant investments in our technology and infrastructure.

 

An integral part of our operating philosophy is the utilization of technology to support our transportation services and provide our employees with real time information on the status of our operations. We believe our focus on technology as a support to our operations allows our employees to focus on performing at high levels for the benefit of our customers.

 

Each of our vehicles contain mobile communications devices. By being “always-connected”, we are able to monitor the real time location, performance and effectiveness of our drivers as well as the operating condition of the vehicle. The advancements in what is referred to as the telematic space allow us to develop more detailed and actionable solutions in the performance of our pick-up, transport and deliver operations – all an integral part of our e-commerce fulfilment solutions.

 

We regularly collect data, generate automatic reporting and measure that information against key performance indicators such as routes taken, travel time, destination arrival and departure time. Just as the e-commerce retailer instantaneously and continuously tracks what has been sold, our vehicles are tracked in parallel with the packages being tracked by our customer. Our NOC is designed to be scalable and will be expanded in reach and performance capability as our revenues grow and our assets increase in number.

 

Competition

 

Transportation services is highly competitive and composed of fragmented marketplaces, with dozens of companies competing in the geographic region in which we provide services. We compete on service, reliability, scope and scale of operations, technological capabilities and price. Our competitors include local, regional and national companies that offer the same services we provide, some of which with larger customer bases, significantly more resources and more experience than we have. The point-to-point delivery industry in particular is highly fragmented with a low entry barrier and therefore there are a large number of competitors that range from international to local in size. Additionally, some of our customers have internal resources that can perform some or all of the services we offer. Due in part to the fragmented nature of the industry, we must strive daily to retain existing business relationships and forge new relationships.

 

The health of the transportation industry will continue to be a function of domestic economic growth, particularly in the e-commerce marketplace. We believe that we have positioned the Company to grow with and benefit from the e-commerce expansion. Together with our scale, technology and company-specific initiatives, we believe that our positioning should keep us growing faster than the macro environment.

 

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Seasonality

 

Our business is affected by seasonality, which historically has resulted in higher sales volumes during July, when our largest customer, Amazon.com, annually offers its Amazon Prime “sale days”, which have ranged from one or two days to a whole week, exclusively to its Prime subscribers, and during our calendar year fourth quarter, which ends December 31st. Our gross revenue was 29% higher in July 2019 than our average monthly gross revenue for the first six months of 2019, and was 69% higher during the fourth quarter of 2018 compared to the third quarter of 2018. Fourth quarter 2018 results included revenue attributable to Shypdirect, which we founded on July 24, 2018.

 

Regulation

 

Our operations are regulated and licensed by various governmental agencies. These regulations impact us directly and indirectly by regulating third-party transportation providers we use to transport freight for our customers.

 

Regulation Affecting Motor Carriers, Owner-Operators and Transportation Brokers. In the United States, our subsidiaries that operate as motor carriers have motor carrier licenses issued by the Federal Motor Carrier Safety Administration (“FMCSA”) of the U.S. Department of Transportation (“DOT”). In addition, our subsidiaries acting as property brokers have property broker licenses issued by the FMCSA. Our motor carrier subsidiaries and the third-party motor carriers must comply with the safety and fitness regulations of the DOT, including those related to drug-testing, alcohol-testing, hours-of-service, records retention, vehicle inspection, driver qualification and minimum insurance requirements. Weight and equipment dimensions also are subject to government regulations. We also may become subject to new or more restrictive regulations relating to emissions, drivers’ hours-of-service, independent contractor eligibility requirements, onboard reporting of operations, air cargo security and other matters affecting safety or operating methods. Other agencies, such as the U.S. Environmental Protection Agency (“EPA”), the Food and Drug Administration (“FDA”), and the U.S. Department of Homeland Security (“DHS”), also regulate our equipment, operations and independent contractor drivers. Like our third-party support carriers, we are subject to a variety of vehicle registration and licensing requirements in certain states and local jurisdictions where we operate. In foreign jurisdictions where we operate, our operations are regulated by the appropriate governmental authorities.

 

In 2010, the FMCSA introduced the Compliance Safety Accountability program (“CSA”), which uses a Safety Management System (“SMS”) to rank motor carriers on seven categories of safety-related data, known as Behavioral Analysis and Safety Improvement Categories, or “BASICs.”

 

Although the CSA scores are not currently publicly available, this development is likely to be temporary. As a result, our fleet could be ranked worse or better than our competitors, and the safety ratings of our motor carrier operations could be impacted. Our network of third-party transportation providers may experience a similar result. A reduction in safety and fitness ratings may result in difficulty attracting and retaining qualified independent contractors and could cause our customers to direct their business away from the Company and to carriers with more favorable CSA scores, which would adversely affect our results of operations.

 

In addition, nearly all carriers and drivers that are required to maintain records of duty status have been required to install and use electronic logging devices (“ELDs”). ELD installation and use may increase costs for independent contractors and other third-party support carriers who provide services to XPO and may impact driver recruitment.

 

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Classification of Independent Contractors. Tax and other federal and state regulatory authorities, as well as private litigants, continue to assert that independent contractor drivers in the trucking industry are employees rather than independent contractors. Federal legislators have introduced legislation in the past to make it easier for tax and other authorities to reclassify independent contractors as employees, including legislation to increase the recordkeeping requirements and heighten the penalties for companies who misclassify workers and are found to have violated overtime and/or wage requirements. Additionally, federal legislators have sought to abolish the current safe harbor allowing taxpayers that meet certain criteria to treat individuals as independent contractors if they are following a longstanding, recognized practice. Federal legislators also sought to expand the Fair Labor Standards Act to cover “non-employees” who perform labor or services for businesses, even if said non-employees are properly classified as independent contractors; require taxpayers to provide written notice to workers based upon their classification as either an employee or a non-employee; and impose penalties and fines for violations of the notice requirement and/or for misclassifications. Some states have launched initiatives to increase revenues from items such as unemployment, workers’ compensation and income taxes, and the reclassification of independent contractors as employees could help states with those initiatives. Taxing and other regulatory authorities and courts apply a variety of standards in their determinations of independent contractor status. If our independent contractor drivers are determined to be employees, we would incur additional exposure under some or all of the following: federal and state tax, workers’ compensation, unemployment benefits, and labor, employment and tort laws, including for prior periods, as well as potential liability for employee benefits and tax withholdings.

 

Environmental Regulations. Our facilities and operations and our independent contractors are subject to various environmental laws and regulations dealing with the hauling, handling and disposal of hazardous materials, emissions from vehicles, engine-idling, fuel tanks and related fuel spillage and seepage, discharge and retention of storm water, and other environmental matters that involve inherent environmental risks. Similar laws and regulations may apply in many of the foreign jurisdictions in which we operate. We have instituted programs to monitor and control environmental risks and maintain compliance with applicable environmental laws and regulations. We may be responsible for the cleanup of any spill or other incident involving hazardous materials caused by our operations or business. In the past, we have been responsible for the costs of cleanup of diesel fuel spills caused by traffic accidents or other events, and none of these incidents materially affected our business or operations. We generally transport only hazardous materials rated as low-to-medium-risk, and a small percentage of our total shipments contains hazardous materials. We believe that our operations are in substantial compliance with current laws and regulations and we do not know of any existing environmental condition that reasonably would be expected to have a material adverse effect on our business or operating results. Future changes in environmental regulations or liabilities from newly discovered environmental conditions or violations (and any associated fines and penalties) could have a material adverse effect on our business, competitive position, results of operations, financial condition or cash flows. U.S. federal and state governments, as well as governments in certain foreign jurisdictions where we operate, have also proposed environmental legislation that could, among other things, potentially limit carbon, exhaust and greenhouse gas emissions. If enacted, such legislation could result in higher costs for new tractors and trailers, reduced productivity and efficiency, and increased operating expenses, all of which could adversely affect our results of operations.

 

Employees and Independent Contractors

 

As of June 30, 2019, we employed 491 employees, of whom 35 were employed in administration and corporate management positions, three were employed in accounting, finance and compliance positions, three were employed in marketing and sales positions, four were employed in vehicle maintenance positions, and 446 were employed as drivers. None of our employees is covered by a collective bargaining agreement and we consider our employee relations to be good.

 

We also contract with owner-operator drivers to provide and operate tractors, which provide additional delivery fleet capacity. Independent contractors own their own tractors and are responsible for all associated expenses, including financing costs, fuel, maintenance, insurance and highway use taxes. As of June 30, 2019, we had engaged two independent contractors on a full-time basis; however, the number of independent contractors we engage fluctuates throughout the year depending on several factors, including seasonality, the availability of company drivers, the availability of delivery vehicles to rent, lease or purchase, and the number of routes our customers have hired us to cover.

 

Our strategy for both company and owner-operator drivers is to (i) hire safe and experienced drivers (the majority of driver positions hired require twelve months of over-the-road experience); (ii) promote retention with a competitive compensation package in the case of company drivers and contracted rates in the case of owner-operator drivers and positive working conditions; and (iii) minimize safety problems through careful screening, mandatory drug testing, continuous training, electronic logging system and rewards for accident-free driving. We also seek to minimize turnover of company drivers by providing highly-attractive vehicles, flexible schedules and competitive compensation packages. As a result, we have achieved driver retention rates that we believe is superior to the trucking industry average.

 

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Properties

 

We do not own any real property. Our executive office is located at 3 Riverway, Suite 1430, Houston, Texas  77056, in the office of Doug Cerny, a director of our company and our Chief Development Officer. We are not charged rent for the use of this space. We believe that our existing facilities are sufficient for our current operations.

 

On November 30, 2018, we entered into a commercial lease agreement for the lease of 60 parking spaces in Carlstadt, New Jersey through November 2023 for a monthly rental fee of $6,000. Either we or the landlord 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, we entered into a lease for office and warehouse space and parking spaces in Carlstadt, New Jersey through December 2023. From the lease commencement date until the last day of the second lease year, monthly rent is $14,000. At the beginning of the 30th month following the commencement date and through the end of the term, minimum rent will be $14,420 per month. We are also obligated to pay all taxes and utilities related to this facility. We shall have an option to renew the term of this lease for an additional five years. On August 29, 2019, we entered into a one-year sublease of this space to sublease this space commencing on September 1, 2019 for $14,000 per month.

 

In July 2019, we entered into a 4.5-year lease for office and warehouse space and parking spaces in Carlstadt, New Jersey through December 2023. From the lease commencement date until the last day of the second lease year, monthly rent is $10,000. At the beginning of the 25th month following the commencement date and through the end of the term, minimum rent will be $10,500 per month. We are also obligated to pay all taxes and utilities related to this facility. We have an option to renew the term of this lease for an additional five years.

 

In July 2019, we entered into a five-year lease for office and warehouse space and parking spaces in Carlstadt, New Jersey through July 2024. Base rent is payable monthly at the rate of $18,000 per month for the first year, $18,540 per month for the second year, $19,096 per month for the third year, $19,669 per month for the fourth year and $20,259 per month for the fifth year. We are also obligated to pay all taxes and utilities related to this facility. We have an option to renew the term of this lease for an additional five or ten years at our option.

 

Legal Proceedings

 

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We are not currently a party to any legal proceeding that we believe would have a material adverse effect on our business, financial condition, or operating results.

 

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MANAGEMENT

 

Directors and Executive Officers

 

The following table sets forth the names and ages of our current directors and executive officers, the principal offices and positions held by each person. The directors serve one-year terms until their successors are elected. The executive officers serve terms of one year or until their death, resignation or removal by the Board of Directors. Unless described below, there are no family relationships among any of the directors and officers.

 

Name and Address   Age   Date First Elected or Appointed   Position(s)
             
John Mercadante   74   April 16, 2019   Chief Executive Officer, Chief Financial Officer and Director
             
Doug Cerny   60   April 16, 2019   Chief Development Officer and Director

 

Biographical Information

 

The principal occupation and business experience during at least the past five years for our executive officers and directors is as follows:

 

John Mercadante - Chairman of the Board, President and Chief Executive Officer. John Mercadante has been the President, Chief Executive Officer and a director of our company since April 16, 2019. For more than the past five years, John has been a consultant and a manager of his personal investments. John co-founded Leisure Line, Inc., a motor coach company serving New York City and Atlantic City, New Jersey, in 1970 and served as its Chief Executive Officer for a ten-year period through the sale of the company to Golden Nugget in 1980. At the time of the sale, Leisure Line was generating approximately $11 million in annual revenues. In 1988, John cofounded Cape Transit, Inc., a motor coach company servicing Atlantic City, Philadelphia and South New Jersey. Under John Mercadante’s leadership as CEO, annual revenues at Cape Transit grew from $2 million to more than $11 million. In May 1996, Cape Transit became one of the founding companies of Coach USA, Inc. and John Mercadante became Coach USA’s president and Chief Operating Officer. John was an integral part of growing Coach’s annual revenues from $100 million to over $1 billion in revenues in just three years.

 

Doug Cerny - Director, Chief Development Officer. Doug Cerny has been the Chief Development Officer and a director of our company since April 16, 2019. For more than the past five years, Doug has been engaged in the practice of law with the Law Offices of Douglas M. Cerny located in Houston, Texas. Doug was the Senior Vice President and General Counsel of Coach USA, Inc. A major portion of the acquisitions completed by Coach USA were through the teamwork of Doug and John Mercadante in conjunction with personnel experienced in financial, integration and human capital management. Doug has extensive experience in mergers and acquisitions and business transactions. Doug earned a Bachelor’s of Science Civil Engineering from Valparaiso University, and his law degree and his Masters of Business Administration from the University of Houston, Houston, Texas.

 

Family Relationships

 

There are no family relationships among our directors and executive officers.

 

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Involvement in Certain Legal Proceedings

 

None of our directors or executive officers has been involved in any of the following events during the past ten years:

 

  any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
     
  any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offences);
     
  being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his or her involvement in any type of business, securities or banking activities; or
     
  being found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.

 

Other Directorships

 

None of our officers and directors are directors of any company with a class of securities registered pursuant to Section 12 of the Exchange Act or subject to the requirements of section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940.

 

Director Independence

 

We are not currently subject to the listing requirements of any national securities exchange or inter-dealer quotation system which has requirements that a majority of the Board of Directors be “independent” and, as a result, we are not at this time required to have our Board of Directors comprised of a majority of “independent directors.” We do not have an independent director under the applicable standards of the SEC and the Nasdaq stock market.

 

Board Leadership Structure and Role in Risk Oversight

 

Although we have not adopted a formal policy on whether the Chairman and Chief Executive Officer positions should be separate or combined, we have traditionally determined that it is in the best interests of our company and its stockholders to partially combine these roles. Due to the small size of our company, we believe it is currently most effective to have the Chairman and Chief Executive Officer positions partially combined.

 

John Mercadante, our Chairman, also serves as our Chief Executive Officer. We are seeking other qualified individuals to serve on our board of directors. At this time, we do not have directors and officers liability insurance which has been a deterring factor in seeking other qualified directors. Mr. Mercadante is actively involved in oversight of our day-to-day activities.

 

Our board of directors is primarily responsible for overseeing our risk management processes. Our board of directors receives and reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding our company’s assessment of risks. Our board of directors focuses on the most significant risks facing our company and our general risk management strategy, and also ensures that risks undertaken by our company are consistent with our board’s appetite for risk. While the board of directors oversees our company, our company’s management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing our company and that our board leadership structure supports this approach.

 

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Board Diversity

 

While we do not have a formal policy on diversity, our board of directors considers diversity to include the skill set, background, reputation, type and length of business experience of our board members as well as a particular nominee’s contributions to that mix. Although there are many other factors, the board seeks individuals with experience on public company boards as well as experience with advertising, marketing, legal and accounting skills.

 

Board Assessment of Risk

 

Our risk management function is overseen by our board of directors. Our management keeps our board of directors apprised of material risks and provides our directors access to all information necessary for them to understand and evaluate how these risks interrelate, how they affect our company, and how management addresses those risks. Once material risks are identified, John Mercadante, our Chairman and Chief Executive Officer, determines how to best address such risk. If the identified risk poses an actual or potential conflict with management, our independent directors, if any, may conduct the assessment. Our board of directors focuses on these key risks and interfaces with management on seeking solutions. Currently, we have three members on the board of directors of our company.

 

Committees of the Board of Directors

 

We currently do not maintain any committees of our board of directors. Given our size and the development of our business to date, we believe that our board of directors through its meetings can perform all of the duties and responsibilities which might be contemplated by a committee.

 

Except as may be provided in our bylaws, we do not currently have specified procedures in place pursuant to which security holders may recommend nominees to our board of directors.

 

Compliance with Section 16(a) of the Securities Exchange Act of 1934, as Amended

 

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers and persons who own more than ten percent of a registered class of our equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of our company. Officers, directors and greater than ten percent stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. To the best of our knowledge, our officers, directors and greater than 10% stockholders have been in compliance with Section 16(a) of the Securities Exchange Act of 1934 for the year ended December 31, 2018.

 

Code of Ethics and Business Conduct

 

We have not yet adopted a Code of Ethics although we expect to do so as we develop our infrastructure and business.

 

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EXECUTIVE COMPENSATION

 

Summary Compensation Table

 

The following table sets forth information concerning the total compensation paid or accrued by us during our last two fiscal years to Steven Yariv, the only individual who served as our principal executive officer or acted in a similar capacity for us at any time during our two most recent fiscal years. No other executive officer of our company received annual compensation during such fiscal years in excess of $100,000.

 

Name &
Principal
Position
  Fiscal
Year
ended
Dec. 31,
   Salary
($)
   Bonus
($)
   Stock
Awards (2) ($)
   Option
Awards ($)
   Non-Equity
Incentive Plan
Compensation
($)
   Non-Qualified
Deferred
Compensation
Earnings ($)
   All Other
Compensation
($)
   Total ($) 
Steven Yariv,         2018   $441,000    -   $  3,090,000    -    -    -            -   $3,531,000 
Former Chief Executive Officer(1)   2017    42,500    -    -    -    -    -   $2    42,500 

 

(1) Mr. Yariv resigned as an officer and employee of our company on April 16, 2019. Mr. Yariv resigned as a director of our company on May 1, 2019 in connection with our disposition of our former Save on Transport subsidiary.
   
(2) On June 18, 2018, we issued 1,500,000 shares of our common stock to Mr. Yariv as additional compensation. The amount shown reflects the grant date fair value of such stock award computed in accordance with FASB ASC Topic 718. See Note 10 of notes to consolidated financial statements for the years ended December 31, 2018 and 2017 included elsewhere in this prospectus.

 

Employment Agreements

 

We have no employment agreements in place with our executive officers.

 

We have no pension or retirement plan in place and have never maintained any plan that provides for the payment of retirement benefits or benefits that will be paid primarily following retirement, including, but not limited to, tax qualified deferred benefit plans, supplemental executive retirement plans, tax-qualified deferred contribution plans and nonqualified deferred contribution plans. We also do not currently offer or have any benefits, such as health or life insurance, available to our employees.

 

Outstanding Equity Awards at Fiscal Year-End

 

At December 31, 2018, we did not have any outstanding equity awards to our executive officers.

 

Director Compensation

 

No director compensation was paid during the years ended December 31, 2018 and 2017 in the form of cash expenses, stock awards, option awards, non-equity incentive plan compensation, pension value and nonqualified deferred compensation earnings or any other type of compensation. We do not currently pay any cash fees to our directors, nor do we pay directors’ expenses in attending board meetings.

 

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

Other than compensation arrangements for our named executive officers and directors, we describe below each transaction or series of similar transactions, since January 1, 2017, to which we were a party or will be a party, in which:

 

  the amounts involved exceeded or will exceed $120,000; and
     
  any of our directors, executive officers or holders of more than 5% of our capital stock, or any member of the immediate family of the foregoing persons, had or will have a direct or indirect material interest.

 

Borrowings From Affiliates

 

Since January 1, 2018, we have from time to time borrowed funds from various executive officers or directors of our company, or persons or entities related to or affiliated with such persons, as follows:

 

  In connection with our acquisition of Prime on June 18, 2018, we paid $489,174 in cash to Rosemary Mazzola, the former majority owner of Prime and now the owner of more than 5% of our common stock, who then loaned $489,174 back to Prime. This loan is non-interest bearing and is due on demand. During the period from our acquisition of Prime (June 18, 2018) to December 31, 2018, we repaid $216,155 of this loan. During the six months ended June 30, 2019, we repaid $50,000 of this loan. At June 30, 2019 and December 31, 2018, the outstanding principal amount of this loan was $209,000 and $259,000, respectively.
     
  From July 25, 2018 through December 31, 2018, we borrowed an aggregate of $1,150,000 from Steven Yariv, our chief executive officer at such time, or his spouse, and received net proceeds of $1,050,000, net of original issue discounts of $100,000. These loans were evidenced by promissory notes that were payable within 90 days of the loan date. From July 25, 2018 through December 31, 2018, $930,000 of these loans were repaid and during January 2019, we repaid the remaining outstanding principal of $220,000. During February 2019, we borrowed an additional $220,000 from Mr. Yariv’s spouse, net of an original issue discount of $20,000. In April 2019, we repaid this loan in full. During the six months ended June 30, 2019, amortization of debt discount related to these loans amounted to $26,383.
     
  On March 13, 2019, we borrowed $500,000 from an individual who was affiliated with our Chief Executive Officer, John Mercadante, that was evidenced by a promissory note that requires interest payments in the amount of $7,500, commencing on April 11, 2019 and continuing on the eleventh day of each month thereafter, and payments of principal and interest in the amount of $31,902 commencing on October 11, 2019 and continuing on the eleventh day of each month thereafter through April 11, 2021. Interest accrues with respect to the unpaid principal until such principal is paid or converted as provided below at a rate equal to 18% per annum compounded annually. All past due principal and interest on this note bears interest from maturity of such principal or interest until paid at the lesser of (i) 20% per annum, or (ii) the highest non-usurious rate allowed by applicable law. This note may be converted by the holder at any time in principal amounts of $100,000 into a number of shares of common stock equal to the amount obtained by dividing the portion of the aggregate principal amount of this note that is being converted by $1.37. During the six months ended June 30, 2019, interest expense related to these notes amounted to $27,616.
     
  On April 11, 2019, we borrowed $2,000,000 from an entity that was affiliated with Mr. Mercadante that was evidenced by a promissory note that requires interest payments in the amount of $30,000, commencing on May11, 2019 and continuing on the eleventh day of each month thereafter, and payments of principal and interest in the amount of $117,611 commencing on November 11, 2019 and continuing on the eleventh day of each month thereafter through April 11, 2021. Interest accrues with respect to the unpaid principal until such principal is paid or converted as provided below at a rate equal to 18% per annum compounded annually. All past due principal and interest on this note bears interest from maturity of such principal or interest until paid at the lesser of (i) 20% per annum, or (ii) the highest non-usurious rate allowed by applicable law. This note may be converted by the holder at any time in principal amounts of $100,000 into a number of shares of common stock equal to the amount obtained by dividing the portion of the aggregate principal amount of this note that is being converted by $11.81. During the six months ended June 30, 2019, interest expense related to these notes amounted to $79,890.

 

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Conflicts of Interest

 

There are not currently any conflicts of interest by or among our current officers, directors, key employees or advisors. We have not yet formulated a policy for handling conflicts of interest; however, we intend to do so prior to adding additional directors to our board of directors.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth information with respect to the beneficial ownership of our common stock as of October 3, 2019, by (i) each stockholder known by us to be the beneficial owner of more than 5% of our common stock (our only class of voting securities), (ii) each of our directors and executive officers, and (iii) all of our directors and executive officers as a group. To the best of our knowledge, except as otherwise indicated, each of the persons named in the table has sole voting and investment power with respect to the shares of our common stock beneficially owned by such person, except to the extent such power may be shared with a spouse. To our knowledge, none of the shares listed below are held under a voting trust or similar agreement, except as noted. To our knowledge, there is no arrangement, including any pledge, by any person of securities of our company, the operation of which may at a subsequent date result in a change of control of our company.

 

Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. In accordance with Securities and Exchange Commission rules, shares of our common stock which may be acquired upon exercise of stock options or warrants which are currently exercisable or which become exercisable within 60 days of the date of the applicable table below are deemed beneficially owned by the holders of such options and warrants and are deemed outstanding for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage of ownership of any other person. Subject to community property laws, where applicable, the persons or entities named in the tables below have sole voting and investment power with respect to all shares of our common stock indicated as beneficially owned by them.

 

In the table below, percentage ownership of our common stock prior to the offering is based upon 11,745,326 shares of common stock outstanding as of October 3, 2019. Percentage ownership of our common stock after this offering assumes the sale of all shares in this offering. Unless otherwise indicated in the following table, the address for each person named in the table is c/o Transportation and Logistics Systems, Inc., 3 Riverway, Suite 1430, Houston, Texas 77056.

 

Name and Address of Beneficial Owner  Amount and
Nature of
Beneficial
Ownership
  

 

Percent
of Class

 
Directors and Executive Officers          
John Mercadante   1,400,000    11.9%
Douglas Cerny   1,000,000    8.5 
           
All directors and executive officers as a group (two persons)   2,400,000    20.4 
           
5% or More Stockholders          
SCS, LLC(1)   1,583,750    13.5 
RedDiamond Partners, LLC(2)   1,583,750    13.5 
Rosemary Mazzola(3)   1,000,000    8.5 
Steven Yariv(4)   1,050,000    8.9 

 

(1) We have been advised by SCS, LLC that Lawrence Sands is the managing members of SCS, LLC. The address of SCS, LLC is 980 N. Federal Highway, Suite 304, Boca Raton, FL 33432
   
(2) Does not include 111,112 shares issuable upon the conversion of a Note or 111,112 shares issuable upon the exercise of Debt Warrants. The Notes and Debt Warrants contain a 4.99% beneficial ownership blocker. Pursuant to a Schedule 13G filed by RedDiamond Partners, LLC with the SEC on May 29, 2019, John DeNobile is the managing member of RedDiamond Partners, LLC. The address of RedDiamond Partners, LLC is 156 West Saddle River Road, Saddle River, NJ 07458.
   
(3) Does not include 1,000,000 shares of common stock issuable upon the conversion of 1,000,000 shares of our Series B Preferred Stock, which shares may not be issued to the extent such shares would cause Ms. Mazzola to beneficially own more than 4.99% of the outstanding shares of our common stock. The address of Ms. Mazzola is 27 Dogwood Hill Road, Upper Saddle River, NJ 07458.
   
(4) Includes 50,000 shares of common stock owned by Mr. Yariv’s spouse. The address of Mr. Yariv is 1634 Trotter Court, Wellington, FL 33414.

 

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SELLING STOCKHOLDERS

 

This prospectus covers the resale, from time to time by the Selling Stockholders identified below, of up to 3,269,373 shares of our common stock, which includes 585,000 outstanding shares of common stock, 1,111,433 shares of common stock issuable upon the conversion of, and the payment of interest from time to time on, the outstanding Notes and 1,572,940 shares of common stock issuable upon the exercise of the outstanding Warrants. All of these shares of our common stock are being offered for resale by the Selling Stockholders.

 

We are registering the shares hereby pursuant to the terms of our agreements with certain stockholders, in order to permit the Selling Stockholders identified in the table below to offer the shares for resale from time to time.

 

The table below sets forth certain information regarding the Selling Stockholders and the shares of our common stock offered by them in this prospectus. The Selling Stockholders have not had a material relationship with us within the past three years other than as described in the footnotes to the table below or as a result of acquisition of our shares or other securities. To the best of our knowledge, none of the Selling Stockholders is a broker dealer or an affiliate of a broker dealer other than as described in the footnotes to the table below. Unless otherwise indicated, the mailing address of all listed Selling Stockholders is c/o Transportation and Logistics Systems, Inc., 3 Riverway, Suite 1430, Houston, Texas 77056.

 

Under the terms of the Notes, a Selling Stockholder may not convert the Notes to the extent such conversion would cause such Selling Stockholder, together with its affiliates and attribution parties, to beneficially own a number of shares of our common stock which would exceed 4.99% of our then outstanding shares of common stock following such conversion, excluding for purposes of such determination shares of common stock issuable upon conversion of the Notes have not been converted. Under the terms of the Warrants, a Selling Stockholder may not exercise the Warrants to the extent such exercise would cause such Selling Stockholder, together with its affiliates and attribution parties, to beneficially own a number of shares of our common stock which would exceed 4.99% of our then outstanding shares of common stock following such exercise, excluding for purposes of such determination shares of common stock issuable upon exercise of the Warrants which have not been exercised. The number of shares in the table below does not reflect these limitations. The Selling Stockholders may sell all, some or none of their shares in this offering. See “Plan of Distribution.”

 

   Number of Shares   Number of   Number of Shares 
   Beneficially Owned   Shares   Beneficially Owned 
   Prior to this Offering   Being Sold   After this Offering** 
Selling Stockholder  Number   Percent   Offered   Number   Percent 
                     
Barnard & Fifth Capital Group LLC(1)   117,494    1.0%   117,494    -    -%
BMF Capital LLC(2)   80,600    *    80,600    -    - 
Cavalry Fund I LP(3)   666,668    5.52    666,668    -    - 
GS Capital Partners, LLC(4)   222,224    1.86    222,224    -    - 
Puritan Partners LLC (5)   444,446    3.71    444,446    -    - 
RedDiamond Partners LLC(6)   1,805,974    15.09    222,224    1,583,750    13.48 
SBI Investments LLC, 2014-1(7)   222,224    1.86    222,224    -    - 
Joseph Morello(8)   100,000    *    100,000    -    - 
James Leto(9)   10,000    *    10,000    -    - 
Michael Anderson(10)   80,000    *    80,000    -    - 
Michael Joseph de Castro(11)   200,000    1.69    200,000    -    - 
Benjamin Rae(12)   12,000    *    12,000    -    - 
Kurt Ralston(13)   16,000    *    16,000    -    - 
Luann Wowkanech(14)   12,000    *    12,000    -    - 
June Nedick(15)   12,000    *    12,000    -    - 
Eric Koeppel(16)   120,000    1.02    120,000    -    - 
GPS Securities, LLC(17)   120,000    1.02    120,000    -    - 
Richard Cohen(18)   40,000    *    40,000    -    - 
Patricia Peters(19)   24,000    *    24,000    -    - 
Daniel Mercadante(20)   20,000    *    20,000    -    - 
Kathleen Osterkamp(21)   48,000    *    48,000    -    - 
Mary Martire(22)   40,000    *    40,000    -    - 
Green 2014 Family Trust(23) Lyle green trustee   20,000    *    20,000    -    - 
Heath Korenstein(24)   60,000    *    60,000    -    - 
Paul & Cara Pluta(25)   88,000    *    88,000    -    - 
Karthik Annadorai (Cumin) (26)   28,000    *    28,000    -    - 
Anthony Catapano(27)   80,000    *    80,000    -    - 
Stanley Germain(28)   40,000    *    40,000    -    - 

 

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* Denotes less than 1%.
   
** Assumes that all the shares are sold
   
(1) Includes (i) 58,747 shares issuable upon conversion of a Note, and (ii) 58,747 shares of common stock issuable upon exercise of a Debt Warrant. Mr. Samuel Burger has voting and dispositive powers over the shares held by Barnard & Fifth Capital Group LLC. Mr. Burger disclaims beneficial ownership over the shares held by Barnard & Fifth Capital Group LLC. The address of Barnard & Fifth Capital Group LLC is 1573 Broadway, Hewlett, NY 11557.
   
(2) Includes (i) 40,300 shares issuable upon conversion of a Note, and (ii) 40,300 shares of common stock issuable upon exercise of a Debt Warrant. Mr. Gavriel Yitzchakov has voting and dispositive powers over the shares held by BMF Capital LLC. Mr. Yitzchakov disclaims beneficial ownership over the shares held by BMF Capital LLC. The address of BMF Capital LLC is 1829 Avenue M Suite 125, Brooklyn, NY 11230.
   
(3) Includes (i) 333,334 shares issuable upon conversion of a Note, and (ii) 333,334 shares of common stock issuable upon exercise of a Debt Warrant. The Notes and the Debt Warrants contain a 4.99% beneficial ownership blocker. Mr. Thomas Walsh has voting and dispositive powers over the shares held by Cavalry Fund I LP. Mr. Walsh disclaims beneficial ownership over the shares held by Cavalry Fund I LP. The address of Cavalry Fund I LP is 61 Kinderkamack Road, Woodcliff Lake, NJ 07677.
   
(4) Includes (i) 111,112 shares issuable upon conversion of a Note, and (ii) 111,112 shares of common stock issuable upon exercise of a Debt Warrant. Mr. Gabriel Sayegh has voting and dispositive powers over the shares held by GS Capital Partners, LLC. Mr. Sayegh disclaims beneficial ownership over the shares held by GS Capital Partners, LLC. The address of GS Capital Partners, LLC is 110 Wall Street, New York, New York 10005.
   
(5) Includes (i) 222,223 shares issuable upon conversion of a Note, and (ii) 222,223 shares of common stock issuable upon exercise of a Debt Warrant. Mr. Richard Smithline has voting and dispositive powers over the shares held by Puritan Partners LLC. Mr. Smithline disclaims beneficial ownership over the shares held by Puritan Partners LLC. The address of Puritan Partners LLC is c/o Centrecourt Asset Management LLC, 369 Lexington Avenue, 25th Floor New York, NY 10017.
   
(6) Includes (i) 1,583,750 shares of common stock, (ii) 111,112 shares issuable upon conversion of a Note, and (iii) 111,112 shares of common stock issuable upon exercise of a Debt Warrant. Mr. John DeNobile has voting and dispositive powers over the shares held by RedDiamond Partners LLC. Mr. DeNobile disclaims beneficial ownership over the shares held by RedDiamond Partners LLC. The address of RedDiamond Partners LLC is 156 West Saddle River Road, Saddle River, NJ 07458.
   
(7) Includes (i) 111,112 shares issuable upon conversion of a Note, and (ii) 111,112 shares of common stock issuable upon exercise of a Debt Warrant. Mr. Jonathan Juchno has voting and dispositive powers over the shares held by SBI Investments LLC, 2014-1. Mr. Juchno disclaims beneficial ownership over the shares held by SBI Investments LLC, 2014-1. The address of SBI Investments LLC, 2014-1 is 107 Grand Street, 7th Floor, New York, NY 10013.

 

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(8) Includes (i) 50,000 shares of common stock, and (ii) 50,000 shares of common stock issuable upon exercise of an Equity Warrant. The address of Joseph Morello is 8164 Lakeview Dr., West Palm Beach, FL 33412.
   
(9) Includes (i) 5,000 shares of common stock, and (ii) 5,000 shares of common stock issuable upon exercise of an Equity Warrant. The address of James Leto is 208 Honeysuckle Dr., Jupiter, FL 33458.
   
(10) Includes (i) 40,000 shares of common stock, and (ii) 40,000 shares of common stock issuable upon exercise of an Equity Warrant. The address of Michael Anderson is 3092 Flint Hill Rd., Coopersburg, PA 18036.
   
(11) Includes (i) 100,000 shares of common stock, and (ii) 100,000 shares of common stock issuable upon exercise of an Equity Warrant. The address of Michael Joseph de Castro is 5572 Northwood Drive, Center Valley, PA 18034.
   
(12) Includes (i) 6,000 shares of common stock, and (ii) 6,000 shares of common stock issuable upon exercise of an Equity Warrant. The address of Benjamin Rae is 618 Louisiana Dr., Bayfield, CO 81122.
   
(13) Includes (i) 8,000 shares of common stock, and (ii) 8,000 shares of common stock issuable upon exercise of an Equity Warrant. The address of Kurt Ralston is 106 Sycamore Ridge Dr., Simpsonville, SC 29681.
   
(14) Includes (i) 6,000 shares of common stock, and (ii) 6,000 shares of common stock issuable upon exercise of an Equity Warrant. The address of Luann Wowkanech is 18 Gilbert Lane, Ocean City, NJ 08226.
   
(15) Includes (i) 6,000 shares of common stock, and (ii) 6,000 shares of common stock issuable upon exercise of an Equity Warrant. The address of June Nedick is 8 Wingate Court, Allentown, NJ 08501.
   
(16) Includes (i) 60,000 shares of common stock, and (ii) 60,000 shares of common stock issuable upon exercise of an Equity Warrant. The address of Eric Koeppel is 11284 Boca Woods Lane, Boca Raton, FL 33428.
   
(17) Includes (i) 60,000 shares of common stock, and (ii) 60,000 shares of common stock issuable upon exercise of an Equity Warrant. Mr. Michael Shindle has voting and dispositive powers over the shares held by GPS Securities LLC. Mr. Shindle disclaims beneficial ownership over the shares held by GPS Securities LLC. The address of GPS Securities LLC is 256 Columbia Turnpike, Florham Park, NJ 07932.
   
(18) Includes (i) 20,000 shares of common stock, and (ii) 20,000 shares of common stock issuable upon exercise of an Equity Warrant. The address of Richard Cohen is 8009 Lagoon Drive, Margate, NJ 08402.
   
(19) Includes (i) 12,000 shares of common stock, and (ii) 12,000 shares of common stock issuable upon exercise of an Equity Warrant. The address of Patricia Peters is 19 Roy Drive, Hudson, NH 03051.
   
(20) Includes (i) 10,000 shares of common stock, and (ii) 10,000 shares of common stock issuable upon exercise of an Equity Warrant. The address of Daniel Mercadante is 264 Harmony Lane, Titusville, FL 32780. Daniel Mercadante is the brother of our Chief Executive Officer, John Mercandante.
   
(21) Includes (i) 24,000 shares of common stock, and (ii) 24,000 shares of common stock issuable upon exercise of an Equity Warrant. The address of Kathleen Osterkamp is 23 Hideaway Lane, Hollis, NH 03049.
   
(22) Includes (i) 20,000 shares of common stock, and (ii) 20,000 shares of common stock issuable upon exercise of an Equity Warrant. The address of Mary Martire is 136 Rotunda Drive, Jupiter, FL 33477.
   
(23) Includes (i) 10,000 shares of common stock, and (ii) 10,000 shares of common stock issuable upon exercise of an Equity Warrant. Mr. Lyle Green has voting and dispositive powers over the shares held by the Green Family Trust. Mr. Green disclaims beneficial ownership over the shares held by the Green Family Trust. The address of the Green Family Trust is 734 Jason Way, Pacific Palisades, CA 90272.
   
(24) Includes (i) 30,000 shares of common stock, and (ii) 30,000 shares of common stock issuable upon exercise of an Equity Warrant. The address of Heath Korenstein is 16 Willowbrook Drive North Caldwell, NJ 07006.
   
(25) Includes (i) 44,000 shares of common stock, and (ii) 44,000 shares of common stock issuable upon exercise of an Equity Warrant. The address of Paul and Cara Pluta is 80-67 222 Street Hollis Hills, NY 11427.
   
(26) Includes (i) 14,000 shares of common stock, and (ii) 14,000 shares of common stock issuable upon exercise of an Equity Warrant. Mr. Karthik Annadorai has voting and dispositive powers over the shares held Cumin Ventures, LLC. Mr. Annadorai disclaims beneficial ownership over the shares held by Cumin Ventures, LLC. The address of Cumin Ventures, LLC is 14122 River Forest Dr., Houston, TX 77079.
   
(27) Includes (i) 40,000 shares of common stock, and (ii) 40,000 shares of common stock issuable upon exercise of an Equity Warrant. The address of Anthony Catapano is 19870 Meadowside Lane, Boca Raton, FL 33498.
   
(28) Includes (i) 20,000 shares of common stock, and (ii) 20,000 shares of common stock issuable upon exercise of an Equity Warrant. The address of Stanley Germain is 15800 88th Trail North, West Palm Beach, FL 33418.

 

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DESCRIPTION OF SECURITIES

 

The following description of our capital stock summarizes the material terms and provisions of our Common Stock and preferred stock.

 

Authorized Capital Stock

 

Our authorized capital stock consists of 500,000,000 shares of common stock, par value $0.001 per share, of which 11,745,236 shares are currently issued and outstanding, and 10,000,000 shares of preferred stock, par value $0.001 per share, of which 1,700,000 shares have been designated as Series B Preferred Stock, all of which shares are issued and outstanding.

 

Common Stock

 

The holders of our common stock have equal ratable rights to dividends from funds legally available therefore, when, as and if declared by our board of directors and are entitled to share ratably in all of our assets available for distribution to holders of common stock upon the liquidation, dissolution or winding up of our affairs. Holders of shares of common stock do not have preemptive, subscription or conversion rights.

 

Holders of shares of common stock are entitled to one vote per share on all matters which stockholders are entitled to vote upon at all meetings of stockholders. The holders of shares of common stock do not have cumulative voting rights, which means that the holders of more than 50% of our outstanding voting securities can elect all of our directors.

 

The payment of dividends, if any, in the future rests within the discretion of our board of directors and will depend, among other things, upon our earnings, capital requirements and financial condition, as well as other relevant factors. We have not paid any dividends since our inception and do not intend to pay any cash dividends in the foreseeable future, but intend to retain all earnings, if any, for use in our business.

 

Preferred Stock

 

Our board of directors has been authorized, subject to any limitations prescribed by law, without further vote or action by our stockholders, to issue from time to time up to 10,000,000 shares of preferred stock in one or more series. Each series of preferred stock will have the number of shares, designations, preferences, voting powers, qualifications and special or relative rights or privileges as shall be determined by our board of directors, which may include, among other things, dividend rights, voting rights, liquidation preferences, conversion rights and preemptive rights.

 

Series B Preferred Stock

 

In July 2019, our board of directors designated 1,700,000 shares of our authorized shares of preferred stock as Series B Preferred Stock, which has the following preferences, voting powers, qualifications and special or relative rights or privileges.

 

Conversion. On the second business day following the date upon which an increment of at least 100,000 shares of Series B Preferred Stock can be converted by the holder thereof into shares of common stock on a one-for-one basis without exceeding the Beneficial Ownership Limitation (as defined below), such shares of the Series B Preferred Stock shall automatically convert into the maximum number of shares of common stock that can be issued without such holder exceeding the Beneficial Ownership Limitation. We may not convert any shares of Series B Preferred Stock, and the holders of Series B Preferred Stock do not have the right to convert shares of Series B Preferred Stock, to common stock if, after giving effect to such conversion, the holder thereof, together with such holder’s affiliates, or any persons acting as a group with such holder, would beneficially own (determined in accordance with Section 13(d) of the Exchange Act, shares of common stock in excess of the Beneficial Ownership Percentage. The “Beneficial Ownership Percentage” has been defined, with respect to any holder of Series B Preferred Stock, as 4.99% of the number of shares of our common stock outstanding immediately after giving effect to the conversion of shares of Series B Preferred Stock by such holder.

 

Dividends. Holders of Series B Convertible Stock are not entitled to receive dividends in respect of such shares.

 

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Voting Rights. Except as otherwise provided required by law, the Series B Preferred Stock has no voting rights.

 

Liquidation Preference. Upon our liquidation, dissolution or winding-up, whether voluntary or involuntary, holders of Series B Convertible Stock will first be entitled to receive out of our assets, whether capital or surplus, an amount equal to $0.001 for each share of Series B Preferred Stock before any distribution or payment shall be made to the holders of any junior securities, and thereafter, such holders shall be entitled to receive the same amount that a holder of common stock would receive if the Series B Preferred Stock were fully converted (disregarding for such purpose any conversion limitations under the certificate of designation) to common stock, which amounts shall be paid pari passu with all holders of common stock.

 

Redemption Rights. We are not obligated to redeem or repurchase any shares of Series B Preferred Stock. Shares of Series B Preferred Stock are not otherwise entitled to any redemption rights, or mandatory sinking fund or analogous provisions.

 

Warrants

 

At June 30, 2019, we had outstanding the following warrants to purchase shares of our common stock:

 

  Warrants to purchase 114,000 shares of common stock at an initial exercise price of $1.00 per share. Pursuant to the terms of such warrants, the exercise price of such warrants is subject to adjustment in the event of stock splits, stock combinations or the like of our common stock. These warrants expire on June 30, 2024.

 

In addition, on August 30, 2019, in connection with our sale of shares of our common stock and the Notes, we issued the following additional warrants:

 

  Warrants to purchase 585,000 shares of common stock at an initial exercise price of $2.50 per share. Pursuant to the terms of such warrants, the exercise price of such warrants is subject to adjustment in the event of stock splits, stock combinations or the like of our common stock. These warrants expire on January 30, 2025.
     
  Warrants to purchase 987,940 shares of common stock at an initial exercise price of $3.50 per share. Pursuant to the terms of such warrants, the exercise price of such warrants is subject to adjustment in the event of stock splits, stock combinations or the like of our common stock or if we issue shares of common stock, or securities exercisable to purchase or convertible into, shares of common stock, for a purchase price that is less than the exercise price in effect at such time, in which event the exercise price shall be reduced to the price per share at which we issued, or may be required to issue, shares of common stock. These warrants expire on August 30, 2024. However, pursuant to the terms of these warrants, commencing on the six-month anniversary of the date of issuance of these warrants, we have the option to cause the exercise of these warrants on a cashless basis pursuant to the terms of these warrants, subject to certain limitations, if (i) no breach shall have occurred under the documents pursuant to which the Notes were issued, (ii) the last closing price of the common stock was equal or greater than $6.125 per share (subject to adjustment) for the 20 trading-day-period preceding the date of our election to cause the exercise of these warrants, (iii) on each trading day during such 20 trading-day-period, the total trading volume of our common stock was at least $900,000, and (iv) during such period and on the date of exercise of our election to cause the exercise of these warrants, there must be an effective registration statement under the Securities Act covering the shares of common stock to be issued upon such mandatory exercise of these warrants. If the holder of any warrant fails to meet its obligations following our exercise of the mandatory exercise of these warrants, we have the option to purchase any unexercised warrants for cash at a price per warrant equal to the Purchase Option Black Scholes Value (as defined).

 

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Anti-Takeover Effects of Nevada Law

 

Business Combinations

 

The “business combination” provisions of Sections 78.411 to 78.444, inclusive, of the Nevada Revised Statutes, or NRS, generally prohibit a Nevada corporation with at least 200 stockholders from engaging in various “combination” transactions with any interested stockholder for a period of two years after the date of the transaction in which the person became an interested stockholder, unless the transaction is approved by the Board of Directors prior to the date the interested stockholder obtained such status or the combination is approved by the Board of Directors and thereafter is approved at a meeting of the stockholders by the affirmative vote of stockholders representing at least 60% of the outstanding voting power held by disinterested stockholders, and extends beyond the expiration of the two-year period, unless:

 

  the combination was approved by the Board of Directors prior to the person becoming an interested stockholder or the transaction by which the person first became an interested stockholder was approved by the Board of Directors before the person became an interested stockholder or the combination is later approved by a majority of the voting power held by disinterested stockholders; or
     
  if the consideration to be paid by the interested stockholder is at least equal to the highest of: (a) the highest price per share paid by the interested stockholder within the two years immediately preceding the date of the announcement of the combination or in the transaction in which it became an interested stockholder, whichever is higher, (b) the market value per share of common stock on the date of announcement of the combination and the date the interested stockholder acquired the shares, whichever is higher, or (c) for holders of preferred stock, the highest liquidation value of the preferred stock, if it is higher.

 

A “combination” is generally defined to include mergers or consolidations or any sale, lease exchange, mortgage, pledge, transfer, or other disposition, in one transaction or a series of transactions, with an “interested stockholder” having: (a) an aggregate market value equal to 5% or more of the aggregate market value of the assets of the corporation, (b) an aggregate market value equal to 5% or more of the aggregate market value of all outstanding shares of the corporation, (c) 10% or more of the earning power or net income of the corporation, and (d) certain other transactions with an interested stockholder or an affiliate or associate of an interested stockholder.

 

In general, an “interested stockholder” is a person who, together with affiliates and associates, owns (or within two years, did own) 10% or more of a corporation’s voting stock. The statute could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire our Company even though such a transaction may offer our stockholders the opportunity to sell their stock at a price above the prevailing market price.

 

Control Share Acquisitions

 

The “control share” provisions of Sections 78.378 to 78.3793, inclusive, of the NRS apply to “issuing corporations” that are Nevada corporations with at least 200 stockholders, including at least 100 stockholders of record who are Nevada residents, and that conduct business directly or indirectly in Nevada. The control share statute prohibits an acquirer, under certain circumstances, from voting its shares of a target corporation’s stock after crossing certain ownership threshold percentages, unless the acquirer obtains approval of the target corporation’s disinterested stockholders. The statute specifies three thresholds: one-fifth or more but less than one-third, one-third but less than a majority, and a majority or more, of the outstanding voting power. Generally, once an acquirer crosses one of the above thresholds, those shares in an offer or acquisition and acquired within 90 days thereof become “control shares” and such control shares are deprived of the right to vote until disinterested stockholders restore the right. These provisions also provide that if control shares are accorded full voting rights and the acquiring person has acquired a majority or more of all voting power, all other stockholders who do not vote in favor of authorizing voting rights to the control shares are entitled to demand payment for the fair value of their shares in accordance with statutory procedures established for dissenters’ rights.

 

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A corporation may elect to not be governed by, or “opt out” of, the control share provisions by making an election in its articles of incorporation or bylaws, provided that the opt-out election must be in place on the 10th day following the date an acquiring person has acquired a controlling interest, that is, crossing any of the three thresholds described above. We have not opted out of the control share statutes and will be subject to these statutes if we are an “issuing corporation” as defined in such statutes.

 

The effect of the Nevada control share statutes is that the acquiring person, and those acting in association with the acquiring person, will obtain only such voting rights in the control shares as are conferred by a resolution of the stockholders at an annual or special meeting. The Nevada control share law, if applicable, could have the effect of discouraging takeovers of our company.

 

Disclosure of Commission Position on Indemnification for Securities Act Liabilities

 

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

 

Transfer Agent and Registrar

 

The transfer agent and registrar for our common stock is ClearTrust, LLC. The transfer agent and registrar’s address is 16540 Pointe Village Drive, Suite 205, Lutz, Florida 33558 and its telephone number is (813) 235-4490.

 

Market Listing

 

Our common stock is listed for quotation on the OTCPK Tier of the OTC Markets Group, Inc. under the symbol “TLSS.”

 

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PLAN OF DISTRIBUTION

 

This prospectus relates to the resale of an aggregate of 3,269,373 shares of our common stock, par value $0.001 per share, which includes 585,000 outstanding shares, 1,111,433 shares issuable upon the conversion of, and the payment of interest from time to time on, the outstanding Notes and 1,572,940 shares issuable upon the exercise of outstanding warrants.

 

The Selling Stockholders may, from time to time, sell any or all of the shares of our common stock covered by this prospectus at a fixed price of $8.50 per share, representing the average of the high and low prices as reported on the OTC Pink Tier of the OTC Markets Group, Inc. on November 4, 2019. If and when our common stock is regularly quoted on an over-the-counter market or on a national securities exchange, the Selling Stockholders may sell their respective shares of Common Stock, from time to time, at prevailing market prices or in privately negotiated transactions. A selling stockholder may use any one or more of the following methods when selling securities:

 

  ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
     
  block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
     
  purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
     
  an exchange distribution in accordance with the rules of the applicable exchange;
     
  privately negotiated transactions;
     
  settlement of short sales entered into after the effective date of the registration statement of which this prospectus is a part;
     
  broker-dealers may agree with the Selling Stockholders to sell a specified number of such shares at a stipulated price per share;
     
  through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;
     
  a combination of any such methods of sale; or
     
  any other method permitted pursuant to applicable law.

 

The Selling Stockholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus.

 

Broker-dealers engaged by the Selling Stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling stockholders (or, if any broker-dealer acts as agent for the purchaser of securities, from the purchaser) in amounts to be negotiated, but, except as may be set forth in a supplement to this prospectus, in the case of an agency transaction, not in excess of a customary brokerage commission in compliance with FINRA Rule 2440; and in the case of a principal transaction a markup or markdown in compliance with FINRA IM-2440.

 

In connection with the sale of our common stock or interests therein, the Selling Stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume. The Selling Stockholders may also sell shares of our common stock short and deliver these shares to close out such short positions, or loan or pledge the shares of our common stock to broker-dealers that in turn may sell these shares. The Selling Stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or create one or more derivative securities that require the delivery to such broker-dealer or other financial institution of shares of our common stock offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (however, in such case, we must file a prospectus supplement or an amendment to this registration statement under applicable provisions of the Securities Act amending it to include such successors in interest as Selling Stockholders under this prospectus).

 

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The Selling Stockholders might not sell any, or all, of the shares of our common stock offered pursuant to this prospectus. In addition, we cannot assure you that the Selling Stockholders will not transfer the shares of our common stock by other means not described in this prospectus.

 

The Selling Stockholders and any brokers, dealers, agents or underwriters that participate with the Selling Stockholders in the distribution of our common stock pursuant to this prospectus may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. In this case, any commissions received by these broker-dealers, agents or underwriters and any profit on the resale of our common stock purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. In addition, any profits realized by the Selling Stockholders may be deemed to be underwriting commissions. If the Selling Stockholders and any brokers, dealers, agents or underwriters that participate with the Selling Stockholders in the distribution of our common stock pursuant to this prospectus are deemed to be an underwriter, the Selling Stockholders and such other participants in the distribution may be subject to certain statutory liabilities and would be subject to the prospectus delivery requirements of the Securities Act in connection with sales of shares of our common stock.

 

We are required to pay certain fees and expenses incurred by us incident to the registration of the shares of common stock offered hereby. We have agreed to indemnify the Selling Stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.

 

The shares of common stock offered hereby will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the shares of common stock offered hereby may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.

 

Under applicable rules and regulations under the Securities Exchange Act of 1934, any person engaged in the distribution of the resale securities may not simultaneously engage in market making activities with respect to the common stock for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution. In addition, the selling stockholder will be subject to applicable provisions of the Securities Exchange Act of 1934 and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of securities of the common stock by the selling stockholders or any other person. We will make copies of this prospectus available to the selling stockholders and will inform them of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale (including by compliance with Rule 172 under the Securities Act).

 

LEGAL MATTERS

 

Holley Driggs Walch Fine Puzey Stein & Thompson, Ltd., Las Vegas, Nevada, will pass upon the validity of the shares of common stock sold in this offering.

 

EXPERTS

 

Our consolidated financial statements for the fiscal years ended December 31, 2018 and 2017 have been audited by Salberg & Company, P.A., an independent registered public accounting firm as set forth in their report thereto, and are included herein in reliance upon such report given on the authority of said firm as experts in accounting and auditing.

 

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WHERE YOU CAN FIND ADDITIONAL INFORMATION

 

We filed with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 for the shares of common stock in this offering. This prospectus does not contain all of the information in the registration statement and the exhibits that were filed with the registration statement. For further information with respect to us and our common stock, we refer you to the registration statement and the exhibits that were filed with the registration statement. Statements contained in this prospectus about the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and we refer you to the full text of the contract or other document filed as an exhibit to the registration statement. The Securities and Exchange Commission maintains a website that contains reports, proxy and information statements, and other information regarding registrants that file electronically with the Securities and Exchange Commission. The address of the website is www.sec.gov.

 

We file periodic reports under the Securities Exchange Act of 1934, including annual, quarterly and special reports, and other information with the Securities and Exchange Commission. These periodic reports and other information are available for inspection and copying at the Commission’s regional offices and public reference facilities, and on the website of the Securities and Exchange Commission referred to above.

 

We make available free of charge on or through our internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. The information found on our website, www.translogsys.com, other than as specifically incorporated by reference in this prospectus, is not part of this prospectus.

 

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INDEX TO FINANCIAL STATEMENTS

 

Transportation and Logistics Systems, Inc.

 

Condensed Consolidated Interim Financial Statements

For the Six Months Ended June 30, 2019 and 2018

 

Condensed Consolidated Balance Sheets June 30, 2019 and December 31, 2018 (unaudited) F-2
   
Condensed Consolidated Statements of Operations for the Six Months Ended June 30, 2019 and 2018 (unaudited) F-3
   
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018 (unaudited) F-5
   
Notes to Condensed Consolidated Financial Statements (unaudited) F-6

 

Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

 

Report of Independent Registered Public Accounting Firm F-26
   
Balance Sheets as of December 31, 2018 and 2017 F-27
   
Statements of Operations for the Years Ended December 31, 2018 and 2017 F-28
   
Statement of Stockholders’ Deficit for the Years Ended December 31, 2018 and 2017 F-29
   
Statements of Cash Flows for the Years Ended December 31, 2018 and 2017 F-30
   
Notes to Combined Financial Statements F-31

 

 F-1 
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   June 30, 2019   December 31, 2018 
   (Unaudited)     
         
ASSETS          
CURRENT ASSETS:          
Cash  $120,269   $296,196 
Accounts receivable   927,723    441,497 
Prepaid expenses and other current assets   590,730    509,068 
Assets of discontinued operations   -    335,894 
Due from related party   81,489    - 
           
Total Current Assets   1,720,211    1,582,655 
           
OTHER ASSETS:          
Security deposit   39,350    5,000 
Property and equipment, net   728,054    936,831 
Right of use asset   578,421    - 
Intangible asset, net   2,420,191    4,668,334 
           
Total Other Assets   3,766,016    5,610,165 
           
TOTAL ASSETS  $5,486,227   $7,192,820 
           
LIABILITIES AND SHAREHOLDERS’ DEFICIT          
           
CURRENT LIABILITIES:          
Convertible notes payable, net of debt discounts of $0 and $1,595,627, respectively  $1,800,000   $1,411,876 
Convertible notes payable - related parties   2,500,000    - 
Notes payable, net of debt discount   4,256,738    1,509,804 
Notes payable - related party, net of debt discount   -    213,617 
Accounts payable   1,594,189    655,183 
Accrued expenses   815,151    566,574 
Insurance payable   1,403,070    1,108,368 
Lease liability   102,407    - 
Liabilities of discontinued operations   -    440,745 
Derivative liability   -    7,888,684 
Due to related parties   271,507    275,300 
Accrued compensation and related benefits   674,566    435,944 
           
Total Current Liabilities   13,417,628    14,506,095 
           
LONG-TERM LIABILITIES:          
Lease liability   490,126    - 
Notes payable - related party   510,000    - 
Notes payable   317,306    424,019 
           
Total Long-term Liabilities   1,317,432    424,019 
           
Total Liabilities   14,735,060    14,930,114 
           
Commitments and Contingencies (See Note 10)          
           
SHAREHOLDERS’ DEFICIT:          
Preferred stock, par value $0.001; authorized 10,000,000 shares: Series A Convertible Preferred stock, par value $0.001 per share; authorized 4,000,000 shares; issued and outstanding 0 and 4,000,000 shares at June 30, 2019 and December 31, 2018, respectively (Liquidation value $0 and $4,000,000, respectively)   -    4,000 
Common stock, par value $0.001 per share; authorized 500,000,000 shares; issued and outstanding 9,421,525 and 4,220,837 at June 30, 2019 and December 31, 2018, respectively   9,421    4,220 
Common stock issuable, par value $0.001 per share; 700,000 and 0 shares   700    - 
Additional paid-in capital   32,120,077    7,477,422 
Accumulated deficit   (41,379,031)   (15,222,936)
           
Total Shareholders’ Deficit   (9,248,833)   (7,737,294)
           
Total Liabilities and Shareholders’ Deficit  $5,486,227   $7,192,820 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

F-2
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   For the Six Months Ended 
   June 30, 
   2019   2018 
         
REVENUES  $13,904,619   $626,820 
           
COST OF REVENUES   13,072,675    535,945 
           
GROSS PROFIT   831,944    90,875 
           
OPERATING EXPENSES:          
Compensation and related benefits   7,717,214    3,149,776 
Legal and professional fees   1,071,082    1,373,993 
Rent   185,237    - 
General and administrative expenses   1,595,535    203,789 
Impairment loss   1,724,591    - 
           
Total Operating Expenses   12,293,659    4,727,558 
           
LOSS FROM OPERATIONS   (11,461,715)   (4,636,683)
           
OTHER (EXPENSES) INCOME:          
Interest expense   (2,597,443)   (391,555)
Interest expense - related parties   (147,639)   - 
Loan fees   (601,121)   - 
Gain on debt extinguishment, net   43,917,768    - 
Derivative expense   (55,037,605)   (9,505,352)
           
Total Other (Expenses) Income   (14,466,040)   (9,896,907)
           
LOSS FROM CONTINUING OPERATIONS   (25,927,755)   (14,533,590)
           
(LOSS) INCOME FROM DISCONTINUED OPERATIONS:          
(Loss) income from discontinued operations   (681,426)   83,601 
           
NET LOSS  $(26,609,181)  $(14,449,989)
           
NET LOSS PER COMMON SHARE - BASIC AND DILUTED          
Net loss from continuing operations  $(3.42)  $(17.97)
Net (loss) income from discontinued operations   (0.09)   0.10 
           
Net loss per common share - basic and diluted  $(3.51)  $(17.87)
           
WEIGHTED AVERAGE COMMON SHARE OUTSTANDING:          
Basic and diluted   7,573,522    808,780 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

F-3
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT

FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018

(Unaudited)

 

               Additional       Total 
  

Preferred Stock Series A

   Common Stock   Common Stock Issuable   Paid-in   Accumulated   Shareholders’ 
   Shares   Amount   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 loss   -    -    -    -    -    -    -    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)

 

               Additional       Total 
   Preferred Stock Series A   Common Stock   Common Stock Issuable   Paid-in   Accumulated   Shareholders’ 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Deficit 
                                     
Balance, December 31, 2018   4,000,000   $4,000    4,220,837   $4,220    -   $-   $7,477,422   $(15,222,936)  $(7,737,294)
                                              
Shares issued for services   -    -    2,670,688    2,671    -    -    2,748,137    -    2,750,808 
                                              
Warrants issued in connection with debt   -    -    -    -    -    -    63,581    -    63,581 
                                              
Cumulative effect adjustment for change in derivative accounting   -    -    -    -    -    -    -    453,086    453,086 
                                              
Net loss   -    -    -    -    -    -    -    (19,647,723)   (19,647,723)
                                              
Balance, March 31, 2019   4,000,000    4,000    6,891,525    6,891    -    -    10,289,140    (34,417,573)   (24,117,542)
                                              
Shares issued for services   -    -    230,000    230    -    -    2,465,270    -    2,465,500 
                                              
Shares issued for debt and warrant modifications             700,000    700    700,000    700    17,932,600    -    17,934,000 
                                              
Shares issued for conversion of preferred shares   (4,000,000)   (4,000)   2,600,000    2,600    -    -    1,400    -    - 
                                              
Return and cancellation of shares for disposal of Save On   -    -    (1,000,000)   (1,000)   -    -    57,987    -    56,987 
                                              
Stock options granted   -    -    -    -    -    -    700,816    -    700,816 
                                              
Warrants issued in connection with debt   -    -    -    -    -    -    672,864    -    672,864 
                                              
Net loss   -    -    -    -    -    -    -    (6,961,458)   (6,961,458)
                                              
Balance, June 30, 2019   -   $-    9,421,525   $9,421    700,000   $700   $32,120,077   $(41,379,031)  $(9,248,833)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

F-4
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   For the Six Months Ended 
   June 30, 
   2019   2018 
         
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(26,609,181)  $(14,449,989)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization expense   617,632    173,629 
Amortization of debt discount to interest expense   2,310,580    332,364 
Amortization of debt discount to interest expense - related party   26,383    - 
Stock-based compensation and consulting fees   5,216,308    4,326,000 
Stock-based compensation and consulting fees - discontinued operations   700,816    - 
Non-cash loan fees   601,121    - 
Derivative expense (income)   55,037,605    9,505,352 
Non-cash portion of gain on extinguishment of debt   (44,031,110)   - 
Deferred rent   14,112    - 
Loss on disposal of property and equipment   47,022    - 
Impairment loss   1,724,591    - 
Change in operating assets and liabilities:          
Accounts receivable   (486,226)   (325,551)
Prepaid expenses and other current assets   (81,662)   - 
Assets of discontinued operations   (53,193)   (93,073)
Due from related party   (81,489)   - 
Security deposit   (34,350)   - 
Accounts payable and accrued expenses   1,420,925    (130,902)
Insurance payable   294,702    (5,108)
Liabilities of discontinued operations   10,954    155,115 
Accrued compensation and related benefits   238,622    197,097 
           
NET CASH USED IN OPERATING ACTIVITIES   (3,115,838)   (315,066)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Cash received in acquisition   -    38,198 
Cash paid for acquisition   -    (489,174)
Decrease in cash from disposal of subsidiary   (5,625)   - 
Purchase of property and equipment   (51,256)   - 
Proceeds from sale of property and equipment   81,000    - 
           
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES   24,119    (450,976)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from convertible notes payable - related party   2,500,000    2,497,503 
Debt issue costs paid   -    (1,009,714)
Repayment of convertible notes payable   (273,579)   - 
Net proceeds from notes payable   6,631,020    - 
Repayment of notes payable   (5,697,856)   (611,406)
Net proceeds from notes payable - related party   255,000    - 
Repayment of notes payable - related party   (495,000)   - 
Net proceeds from related parties   (3,793)   467,672 
           
NET CASH PROVIDED BY FINANCING ACTIVITIES   2,915,792    1,344,055 
           
NET (DECREASE) INCREASE IN CASH   (175,927)   578,013 
           
CASH, beginning of period   296,196    106,576 
           
CASH, end of period  $120,269   $684,589 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION          
Cash paid for:          
Interest  $2,239,463   $- 
Income taxes  $-   $- 
           
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Debt discounts recorded  $1,222,986   $1,487,788 
Increase in right of use asset and lease liability  $631,723   $- 
           
Liabilities assumed in acquisition  $-   $3,503,552 
Less: assets acquired in acquisition   -    1,959,655 
Net liabilities assumed   -    1,543,897 
Fair value of shares for acquisition