10-Q 1 form10-q.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2019

 

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

 

For the transition period from ___________ to ___________

 

Commission File No. 001-34970

 

Transportation and Logistics Systems, Inc.

(Exact name of registrant as specified in its charter)

 

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

 

2833 Exchange Court, Suite A
West Palm Beach, Florida 33409

 

33409

(Address of principal executive offices)   (Zip code)

 

561-801-9188

(Registrant’s telephone number, including area code)

 

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Title of each class   Trading Symbol(s)  

Name of each exchange on which registered

Common Stock   TLSS   OTC Markets

 

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

 

Class   Outstanding as of November 14, 2019
Common Stock, $0.001   11,739,236

 

 

 

 
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS, INC.

FORM 10-Q

September 30, 2019

 

INDEX

 

    Page
PART I. FINANCIAL INFORMATION 1
     
Item 1. Financial Statements 1
  Condensed Consolidated Balance Sheets - As of September 30, 2019 (unaudited) and December 31, 2018 1
  Condensed Consolidated Statements of Operations - For the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited) 2
  Consolidated Statements of Changes in Shareholders’ Deficit – For the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited) 3
  Consolidated Statements of Cash Flows - For the Nine Months Ended September 30, 2019 and 2018 (unaudited) 4
  Condensed Notes to Consolidated Financial Statements (unaudited) 5
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 28
Item 3. Quantitative and Qualitative Disclosures About Market Risk 38
Item 4. Controls and Procedures 38
     
PART II. OTHER INFORMATION 39
     
Item 1. Legal Proceedings 39
Item 1A. Risk Factors 39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 39
Item 3. Defaults Upon Senior Securities 40
Item 4. Mine Safety Disclosures 40
Item 5. Other Information 40
Item 6. Exhibits 40
Signatures 41

 

i
 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

TRANSPORTATION AND LOGISTICS SYSTEMS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    September 30, 2019     December 31, 2018  
    (Unaudited)        
             
ASSETS                
CURRENT ASSETS:                
Cash   $ 6,742     $ 296,196  
Accounts receivable     589,193       441,497  
Prepaid expenses and other current assets     683,721       509,068  
Assets of discontinued operations     -       335,894  
Due from related party     89,873       -  
                 
Total Current Assets     1,369,529       1,582,655  
                 
OTHER ASSETS:                
Security deposit     103,100       5,000  
Property and equipment, net     258,719       936,831  
Right of use assets, net     1,887,119       -  
Intangible asset, net     2,200,758       4,668,334  
                 
Total Other Assets     4,449,696       5,610,165  
                 
TOTAL ASSETS   $ 5,819,225     $ 7,192,820  
                 
LIABILITIES AND SHAREHOLDERS’ DEFICIT                
                 
CURRENT LIABILITIES:                
Convertible notes payable, net of debt discounts of $2,305,184 and $1,595,627, respectively   $ 1,321,213     $ 1,411,876  
Notes payable, net of debt discount of $4,485 and $255,843, respectively     1,812,296       1,509,804  
Notes payable - related party, net of debt discount of $0 and $6,383, respectively     500,000       213,617  
Accounts payable     1,425,198       655,183  
Accrued expenses     1,076,496       566,574  
Insurance payable     1,340,622       1,108,368  
Lease liabilities     337,487       -  
Liabilities of discontinued operations     -       440,745  
Derivative liability     1,917,888       7,888,684  
Due to related parties     269,760       275,300  
Accrued compensation and related benefits     287,421       435,944  
                 
Total Current Liabilities     10,288,381       14,506,095  
                 
LONG-TERM LIABILITIES:                
Lease liability     1,570,276       -  
Convertible notes payable     443,443       -  
Notes payable - related party     510,000       -  
Notes payable     89,088       424,019  
                 
Total Long-term Liabilities     2,612,807       424,019  
                 
Total Liabilities     12,901,188       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 September 30, 2019 and December 31, 2018, respectively (Liquidation value $0 and $4,000,000, respectively)     -       4,000  
Series B Convertible Preferred stock, par value $0.001 per share; authorized 1,700,000 shares; issued and outstanding 1,700,000 and 0 shares at September 30, 2019 and December 31, 2018, respectively (Liquidation value $1,700 and $0, respectively)     1,700       -  
Common stock, par value $0.001 per share; authorized 500,000,000 shares; issued and outstanding 11,445,236 and 4,220,837 at September 30, 2019 and December 31, 2018, respectively     11,445       4,220  
Common stock issuable, par value $0.001 per share; 50,000 and 0 shares     50          
Additional paid-in capital     46,626,335       7,477,422  
Accumulated deficit     (53,721,493 )     (15,222,936 )
                 
Total Shareholders’ Deficit     (7,081,963 )     (7,737,294 )
                 
Total Liabilities and Shareholders’ Deficit   $ 5,812,225     $ 7,192,820  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

1
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

    For the Three Months Ended     For the Nine Months Ended  
    September 30,     September 30,  
    2019     2018     2019     2018  
                         
REVENUES   $ 7,759,451     $ 4,831,952     $ 21,664,070     $ 5,458,772  
                                 
COST OF REVENUES     6,293,699       4,806,605       19,366,374       5,342,550  
                                 
GROSS PROFIT     1,465,752       25,347       2,297,696       116,222  
                                 
OPERATING EXPENSES:                                
Compensation and related benefits     3,433,741       459,186       11,150,955       3,608,962  
Legal and professional fees     517,277       306,613       1,588,359       1,680,606  
Rent     83,911       -       269,148       -  
General and administrative expenses     720,481       1,663,865       2,316,016       1,867,654  
Impairment loss     -       -       1,724,591       -  
                                 
Total Operating Expenses     4,755,410       2,429,664       17,049,069       7,157,222  
                                 
LOSS FROM OPERATIONS     (3,289,658 )     (2,404,317 )     (14,751,373 )     (7,041,000 )
                                 
OTHER (EXPENSES) INCOME:                                
Interest expense     (2,339,508 )     (914,093 )     (4,936,951 )     (1,305,648 )
Interest expense - related parties     (35,753 )     (40,000 )     (183,392 )     (40,000 )
Loan fees     -       -       (601,121 )     -  
(Loss) gain on debt extinguishment, net     (4,714,751 )     -       39,203,017       -  
Derivative expense     (981,244 )     (5,123,985 )     (56,018,849 )     (14,629,337 )
                                 
Total Other (Expenses) Income     (8,071,256 )     (6,078,078 )     (22,537,296 )     (15,974,985 )
                                 
LOSS FROM CONTINUING OPERATIONS     (11,360,914 )     (8,482,395 )     (37,288,669 )     (23,015,985 )
                                 
(LOSS) INCOME FROM DISCONTINUED OPERATIONS:                                
(Loss) income from discontinued operations     -       13,250       (681,426 )     96,851  
                                 
NET LOSS   $ (11,360,914 )   $ (8,469,145 )   $ (37,970,095 )   $ (22,919,134 )
Deemed dividend     (981,548 )     -       (981,548 )     -  
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS'   $ (12,342,462 )   $ (8,469,145 )   $ (38,951,643 )   $ (22,919,134 )
                                 
NET LOSS PER COMMON SHARE - BASIC AND DILUTED                                
Net loss from continuing operations   $

(1.10

)   $ (2.03 )   $

(4.34

)   $ (7.86 )
Net (loss) income from discontinued operations     -       0.00       (0.08 )     0.03  
                                 
Net loss per common share - basic and diluted   $

(1.10

)   $ (2.03 )   $

(4.42

)   $ (7.83 )
                                 
WEIGHTED AVERAGE COMMON SHARE OUTSTANDING:                                
Basic and diluted     11,247,054       4,170,106       8,811,489       2,928,392  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

2
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

(Unaudited)

 

   Preferred Stock Series A   Preferred Stock Series B   Common Stock   Common Stock Issuable   Additional Paid-in   Accumulated  

Total

Shareholders’

 
   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Deficit 
                                             
Balance, December 31, 2018   4,000,000   $4,000    -   $-    4,220,837   $4,220    -   $-   $7,477,422   $(15,222,936)  $(7,737,294)
                                                        
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 to employees of discontinued operations   -    -    -    -    -    -    -    -    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)
                                                        
Shares issued for services   -    -    1,000,000    1,000    -    -    50,000    50    2,527,596    -    2,528,646 
                                                        
Common stock issued for cash and warrants   -    -    -    -    585,000    585    -    -    1,461,915    -    1,462,500 
                                                        
Common stock issued for debt conversion   -    -    -    -    1,438,711    1,439    -    -    3,595,339    -    3,596,778 
                                                        

Issuance of Series B preferred stock to settle common shares issuable

   -    -    700,000    700    -    -    (700,000)   (700)   -    -    - 
                                                        
Warrants issued in connection with debt conversion   -    -    -    -    -    -    -    -    3,550,531    -    3,550,531 
                                                        
Relative fair value of warrants issued in connection with convertible debt   -    -    -    -    -    -    -    -    1,225,109    -    1,225,109 
                                                        
Adjustment of conversion for debt extinguishment   -    -    -    -    -    -    -    -    1,164,220    -    1,164,220 
                                                        
Deemed dividend related to price protection   -    -    -    -    -    -    -    -    981,548    (981,548)   - 
                                                        
Net loss   -    -    -    -    -    -    -    -    -    (11,360,914)   (11,360,914)
                                                        
Balance, September 30, 2019   -   $-    1,700,000   $1,700    11,445,236   $11,445    50,000   $50   $46,626,335   $(53,721,493)  $(7,081,963)

 

   Preferred Stock Series A   Preferred Stock Series B   Common Stock   Common Stock Issuable   Additional Paid-in   Accumulated  

Total

Shareholders’

 
   Shares   Amount   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)
                                                        
Net loss   -    -    -    -    -    -    -    -    -    (8,469,145)   (8,469,145)
                                                        
Balance, September 30, 2018   4,000,000   $4,000    -   $-    4,170,106   $4,170    -   $-   $7,377,472   $(23,663,913)  $(16,278,271)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

3
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

    For the Nine Months Ended  
    September 30,  
    2019     2018  
             
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net loss   $ (37,970,095 )   $ (22,919,134 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization expense     873,020       1,498,285  
Amortization of debt discount to interest expense     3,991,061       1,045,000  
Amortization of debt discount to interest expense - related party     26,383       -  
Stock-based compensation and consulting fees     7,744,954       4,326,000  
Stock-based compensation - discontinued operations     700,816       -  
Non-cash loan fees     601,121       -  
Derivative expense (income)     56,018,849       14,629,337  
Non-cash components of gain on extinguishment of debt, net     (39,316,359 )     -  
Deferred rent     20,644       -  
Loss on disposal of property and equipment     195,624       14,816  
Impairment loss     1,724,591       -  
Change in operating assets and liabilities:                
Accounts receivable     (147,696 )     426,801  
Prepaid expenses and other current assets     (174,653 )     (91,611 )
Assets of discontinued operations     (53,193 )     (104,999 )
Due from related party     (89,873 )     -  
Security deposit     (98,100 )     -  
Accounts payable and accrued expenses     1,626,306       97,864  
Insurance payable     232,254       309,363  
Liabilities of discontinued operations     10,954       256,904  
Accrued compensation and related benefits     (148,523 )     275,531  
                 
NET CASH USED IN OPERATING ACTIVITIES     (4,231,915 )     (235,843 )
                 
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     (59,256 )     (303,958 )
Proceeds from sale of property and equipment     81,000       -  
                 
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES     16,119       (754,934 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Proceeds from sale of common stock and warrants     1,462,500       -  
Proceeds from convertible notes payable - related party     2,500,000       2,497,503  
Debt issue costs paid     -       (1,009,714 )
Proceeds from convertible notes payable     1,938,900          
Repayment of convertible notes payable     (473,579 )     -  
Net proceeds from notes payable     7,791,020       710,845  
Repayment of notes payable     (9,584,459 )     (1,568,708 )
Net proceeds from notes payable - related party     755,000       650,000  
Repayment of notes payable - related party     (495,000 )     (490,000 )
Net proceeds from related parties     31,960       258,493  
                 
NET CASH PROVIDED BY FINANCING ACTIVITIES     3,926,342       1,048,419  
                 
NET (DECREASE) INCREASE IN CASH     (289,454 )     57,642  
                 
CASH, beginning of period     296,196       106,576  
                 
CASH, end of period   $ 6,742     $ 164,218  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                
Cash paid for:                
Interest   $ 4,147,828     $ 100,895  
Income taxes   $ -     $ -  
                 
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:                
Debt discounts recorded   $ 1,288,690     $ 1,487,788  
Increase in derivative liability and equity   $ 936,645     $ -  
Increase in right of use asset and lease liability   $ 1,984,320     $ -  
Conversion of debt and accrued interest for common stock   $ 3,596,777     $ -  
                 
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     -       3,090,000  
Increase in intangible assets - non-cash   $ -     $ 4,633,897  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

 

NOTE 1 – ORGANIZATION AND BUSINESS OPERATIONS

 

Transportation and Logistics Systems, Inc. (“TLSS”), formerly PetroTerra Corp., was incorporated under the laws of the State of Nevada, on July 25, 2008.

 

On March 30, 2017 (the “Closing Date”), TLSS and Save On Transport Inc. (“Save On”) entered into a Share Exchange Agreement, dated as of the same date (the “Share Exchange Agreement”). Pursuant to the terms of the Share Exchange Agreement, on the Closing Date, Save On became a wholly-owned subsidiary of TLSS (the “Reverse Merger”). Save On was incorporated in the state of Florida and started business on July 12, 2016. Save On is a provider of integrated transportation management solutions consisting of brokerage and logistic services such as transportation scheduling, routing and other value-added services related to the transportation of automobiles and other freight.

 

The Share Exchange was treated as a reverse merger and recapitalization of Save On for financial reporting purposes since the Save On shareholders retained an approximate 80% controlling interest in the post-merger consolidated entity. Save On was considered the acquirer for accounting purposes, and the Company’s historical financial statements before the Merger was replaced with the historical financial statements of Save On before the Merger. The balance sheets at their historical cost basis of both entities were combined at the merger date and the results of operations from the merger date forward include the historical results of Save On and results of TLSS from the merger date forward. The Merger was intended to be treated as a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended. On May 1, 2019, the Company entered into a Share Exchange Agreement with Save On and Steven Yariv, whereby the Company returned all of the stock of Save On to Steven Yariv in exchange for Mr. Yariv conveying 1,000,000 shares of common stock of the Company back to the Company. In addition, the Company granted an aggregate of 80,000 options to certain employees of Save On. Mr. Yariv ceased to be an officer or director of the Company effective with the filing of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 as filed with the Securities and Exchange Commission of April 16, 2019.

 

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

 

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

 

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

 

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

 

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

 

Basis of presentation and principles of consolidation

 

The condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America and the rules and regulations of the United States Securities and Exchange Commission for interim financial information. Accordingly, they do not include all the information and disclosures necessary for comprehensive presentation of financial position, results of operations or cash flow. However, these unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments and a non-recurring adjustment for the impairment of intangible assets, which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these unaudited interim condensed consolidated financial statements be read in conjunction with the financial statements of the Company for the year ended December 31, 2018, and notes thereto included in the Company’s annual report on Form 10-K, filed on April 16, 2019.

 

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

 

5
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

 

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

 

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

 

Going concern

 

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. As reflected in the accompanying condensed consolidated financial statements, for the nine months ended September 30, 2019, the Company had a net loss of $37,970,095 and net cash used in operations was $4,231,915, respectively. Additionally, the Company had an accumulated deficit, shareholders’ deficit, and a working capital deficit of $53,721,493, $7,081,963 and $8,918,852, respectively, at September 30, 2019. Furthermore, the Company failed to make required payments of principal and interest on certain of its convertible debt instruments and defaulted on other provisions in these Notes. On April 9, 2019, the Company entered into agreements with these lenders that modified these Notes (See Note 7). It is management’s opinion that these factors raise substantial doubt about the Company’s ability to continue as a going concern for a period of twelve months from the issuance date of this report. Management cannot provide assurance that the Company will ultimately achieve profitable operations, become cash flow positive, or raise additional debt and/or equity capital. The Company is seeking to raise capital through additional debt and/or equity financings to fund its operations in the future. Although the Company has historically raised capital from sales of common shares and from the issuance of convertible promissory notes and notes payable, there is no assurance that it will be able to continue to do so.

 

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

 

Use of estimates

 

The preparation of the condensed consolidated financial statements, in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates included in the accompanying unaudited condensed consolidated financial statements and footnotes include the valuation of accounts receivable, the useful life of property and equipment, the valuation of intangible assets, the valuation of right of use assets and related liabilities, assumptions used in assessing impairment of long-lived assets, estimates of current and deferred income taxes and deferred tax valuation allowances, the fair value of non-cash equity transactions, the valuation of derivative liabilities, the value of claims against the Company, and the fair value of assets acquired and liabilities assumed in business acquisitions.

 

Fair value of financial instruments

 

The Financial Accounting Standards Board (“FASB”) issued ASC 820 — Fair Value Measurements and Disclosures, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 requires disclosures about the fair value of all financial instruments, whether or not recognized, for financial statement purposes. Disclosures about the fair value of financial instruments are based on pertinent information available to the Company on September 30, 2019. Accordingly, the estimates presented in these financial statements are not necessarily indicative of the amounts that could be realized on disposition of the financial instruments. ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).

 

6
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

 

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

 

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

 

The Company measures certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows at September 30, 2019 and December 31, 2018:

 

   At September 30, 2019   At December 31, 2018 
Description  Level 1   Level 2   Level 3   Level 1   Level 2   Level 3 
Derivative liabilities          $1,917,888           $7,888,684 

 

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

 

   For the Nine
Months Ended
September 30, 2019
 
Balance at beginning of period  $7,888,684 
Initial valuation of derivative liabilities included in debt discount   936,644 
Initial valuation of derivative liabilities included in derivative expense   1,017,323 
Gain on extinguishment of debt related to repayment of debt   (246,110)
Gain on extinguishment of debt related to April 9, 2019 modifications   (61,841,708)
Cumulative effect adjustment for change in derivative accounting   (838,471)
Change in fair value included in derivative expense   55,001,526 
Balance at end of period  $1,917,888 

 

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

 

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

 

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

 

Cash and cash equivalents

 

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less at the purchase date and money market accounts to be cash equivalents. At September 30, 2019 and December 31, 2018, the Company did not have any cash equivalents.

 

7
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

 

The Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. There were no balances in excess of FDIC insured levels as of September 30, 2019 and December 31, 2018. The Company has not experienced any losses in such accounts through September 30, 2019.

 

Accounts receivable

 

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

 

Property and equipment

 

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

 

Intangible asset

 

Intangible assets are carried at cost less accumulated amortization, computed using the straight-line method over the estimated useful life, less any impairment charges. At September 30, 2019 and December 31, 2018, intangible asset consists of a customer relationship acquired on June 18, 2018 which is being amortized over a period of five years.

 

Leases

 

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

 

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

 

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

 

Impairment of long-lived assets

 

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

 

8
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

 

Segment reporting

 

The Company uses “the management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. The Company’s chief operating decision maker is the chief executive officer of the Company, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. On May 1, 2019, the Company disposed of its Save On business segment and the results of operations of Save On are included in discontinued operations. Accordingly, during the nine months ended September 30, 2019 and 2018, the Company believes that it operates in one operating segment related to deliveries for on-line retailers in New York, New Jersey and Pennsylvania and tractor trailer and box truck deliveries of product on the east coast of the United States from one distributor’s warehouse to another warehouse or from a distributor’s warehouse to the post office.

 

Derivative financial instruments

 

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

 

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

 

Revenue recognition and cost of revenue

 

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

 

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

 

For the Company’s Save On business activities, through the date of disposition on May 1, 2019, the Company recognized revenues and the related direct costs of such revenue which includes carrier fees and dispatch costs as of the date the freight is delivered by the carrier which is when the performance obligation is satisfied. Customer payments received prior to delivery are recorded as a deferred revenue liability and related carrier fees if paid prior to delivery are recorded as a deferred expense asset. In accordance with ASC Topic 606, the Company recognizes revenue on a gross basis. Our payment terms for corporate customers are net 30 days from acceptance of delivery and individual customers generally must pay in advance. The Company does not incur incremental costs obtaining service orders from our Save On customers, however, if the Company did, because all of the Save On customer’s contracts are less than a year in duration, any contract costs incurred would be expensed rather than capitalized. The Company’s adoption of this ASC, resulted in no cumulative effect at January 1, 2018 and no change prospectively to the Company’s results of operations or financial condition. The revenue that the Company recognizes arises from service orders it receives from its Save On customers. The Company’s performance obligations under these service orders correspond to each delivery of a vehicle that the Company makes for its customer under the service orders; as a result, each service order generally contains only one performance obligation based on the delivery to be completed.

 

9
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

 

Management has reviewed the revenue disaggregation disclosure requirements pursuant to ASC 606 and determined that no further disaggregation disclosure is required to be presented.

 

Basic and diluted loss per share

 

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

 

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

 

   September 30, 2019   September 30, 2018 
Stock warrants   3,520,827    1,442,434 
Stock options   80,000    - 
Convertible debt   987,936    7,912,857 
Series A convertible preferred stock   -    7,912,857 
Series B convertible preferred stock   1,700,000    - 

 

Stock-based compensation

 

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

 

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

 

Recent Accounting Pronouncements

 

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

 

10
 

 

TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

 

In August 2018, the FASB issued ASU 2018-13 to modify the disclosure requirements on fair value measurements. The amendments are effective for years beginning after December 15, 2019. An entity is permitted to early adopt any removed or modified disclosures and delay adoption of the additional disclosures until the effective date. Most amendments should be applied retrospectively, but certain amendments will be applied prospectively. The Company is in the process of assessing the impact of the standard on the Company’s fair value disclosures. However, the standard is not expected to have an impact on the Company’s consolidated financial position, results of operations and cash flows.

 

There are currently no other accounting standards that have been issued but not yet adopted that we believe will have a significant impact on our consolidated financial position, results of operations or cash flows upon adoption.

 

NOTE 3 – DISCONTINUED OPERATIONS

 

On May 1, 2019, the Company entered into a Share Exchange Agreement with Save On and Steven Yariv, whereby the Company returned all of the stock of Save On to Steven Yariv in exchange for Mr. Yariv conveying 1,000,000 shares of common stock of the Company back to the Company. In addition, the Company granted an aggregate of 80,000 options to certain employees of Save On. Mr. Yariv ceased to be an officer or director of the Company effective with the filing of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 as filed with the Securities and Exchange Commission of April 16, 2019.

 

Pursuant to Accounting Standard Codification (“ASC”) 205-20-45, the financial statement in which net income or loss of a business entity is reported shall report the results of operations of the discontinued operation in the period in which a discontinued operation either has been disposed of or is classified as held for sale. Accordingly, the Company shall reflect Save On as a discontinued operations beginning in the second quarter of 2019, the period that Save On was disposed of and retroactively for all periods presented in the accompanying condensed consolidated financial statements. The business of Save On are considered discontinued operations because: (a) the operations and cash flows of Save On were eliminated from the Company’s operations; and (b) the Company has no interest in the divested operations.

 

The assets and liabilities classified as discontinued operations in the Company’s condensed consolidated financial statements as of September 30, 2019 and December 31, 2018, and for the three and nine months ended September 30, 2019 and 2018 is set forth below.

 

   September 30, 2019   December 31, 2018 
Assets:          
Current assets:          
Accounts receivable, net  $       -   $334,275 
Prepaid expenses and other   -    1,619 
Total current assets   -    335,894 
Total assets  $-   $335,894 
Liabilities:          
Current liabilities:          
Accounts payable  $-   $409,053 
Accounts payable – related party   -    3,700