While the Company has commenced replacing its Amazon
business with the acquisitions as set forth below, the Company continues to: (i) seek new last-mile, mid-mile and long-haul business
with other, non-Amazon, customers; (ii) explore other strategic relationships; and (iii) identify potential acquisition opportunities.
On February 21, 2021, the Company formed a wholly
owned subsidiary, Shyp CX, Inc., a company incorporated under the laws of the State of New York (“Shyp CX”). Shyp CX does
not engage in any revenue-generating operations.
On August 16, 2021, the Company’s subsidiaries,
Prime EFS and Shypdirect, executed Deeds of Assignment for the Benefit of Creditors in the State of New Jersey pursuant to N.J.S.A. §2A:19-1,
et seq. (the “ABC Statute”), assigning all of the Prime EFS and Shypdirect assets to Terri Jane Freedman as Assignee for
the Benefit of Creditors (the “Assignee”) and filing for dissolution. An “Assignment for the Benefit of Creditors,”
“general assignment” or “ABC” in New Jersey is a state-law, voluntary, judicially-supervised corporate liquidation
and unwinding similar to the Chapter 7 bankruptcy process found in the United States Bankruptcy Code. In the subject ABC, the
debtor companies, Prime EFS and Shypdirect, together referred to as the “Assignors”, executed Deeds of Assignment, assigning
all of their assets to the Assignee chosen by the Company, who acts as a fiduciary similar to a Chapter 7 trustee in bankruptcy. On September
7, 2021, the ABC’s were filed with the Bergen County Clerk in Bergen County, New Jersey and filed with the Bergen County
Surrogate Court, initiating judicial proceedings. The Assignee has been charged with liquidating the assets for the benefit of the Prime
EFS and Shypdirect creditors pursuant to the provisions of the ABC Statute.
As a result of Prime EFS and Shypdirect’s filing
of the executed Deeds of Assignment for the Benefit of Creditors on September 7, 2021, the Assignee assumed all authority to manage
Prime EFS or Shypdirect. Additionally, Prime EFS and Shypdirect no longer conduct any business and are not permitted by the
Assignee and ABC Statute to conduct any business. For these reasons, effective September 7, 2021, the Company relinquished
control of Prime EFS and Shypdirect. Further, on October 13, 2021, Prime EFS and Shypdirect filed for dissolution with the Secretary
of State of New Jersey. Therefore, the Company deconsolidated Prime EFS and Shypdirect effective with the filing of executed Deeds of
Assignment for the Benefit of Creditors in September 2021 (See Note 10).
On August 16, 2021 the Company’s subsidiaries,
Prime EFS and Shypdirect executed Deed of Assignments for the Benefit of Creditors in the State of New Jersey ABC Statute, assigning
all of the Prime EFS and Shypdirect assets to the Assignee and filing for dissolution. The Company’s results of operations for
the years ended December 31, 2021 and 2020 include the results of Prime EFS and Shypdirect prior to the September 7, 2021
filing of the executed Deeds of Assignment for the Benefit of Creditors with the State of New Jersey. As a result of Prime EFS and Shypdirect’s
filing of the executed Deeds of Assignment for the Benefit of Creditors on September 7, 2021, the Assignee assumed all authority
to manage Prime EFS or Shypdirect. Additionally, Prime EFS and Shypdirect no longer conduct any business and are not
permitted by the Assignee and ABC Statute to conduct any business. For these reasons, effective September 7, 2021, the Company
relinquished control of Prime EFS and Shypdirect. Therefore, the Company deconsolidated Prime EFS and Shypdirect effective with
the filing of executed Deeds of Assignment for the Benefit of Creditors in September 2021. Further, on October 13, 2021, Prime EFS
and Shypdirect filed for dissolution with the Secretary of State of New Jersey. As of December 31, 2020, the assets and liabilities
of Prime EFS and Shypdirect subject to assignment for the benefit of creditors have been reflected as “Assets subject to assignment
for benefit of creditors” and “Liabilities subject to assignment for benefit of creditors” on the accompanying consolidated
balance sheets (See Note 10).
The COVID-19 pandemic and resulting global disruptions
have affected the Company’s businesses, as well as those of the Company’s customers and their third-party suppliers and sellers.
To serve the Company’s customers while also providing for the safety of the Company’s employees and service providers, the
Company has adapted numerous aspects of its logistics and transportation processes. The Company continues to monitor the rapidly evolving
situation and expect to continue to adapt its operations to address federal, state, and local standards as well as to implement standards
or processes that the Company determines to be in the best interests of its employees, customers, and communities. The impact of the
pandemic and actions taken in response to it had some effects on the Company’s results of operations. Effects include increased
fulfilment costs and cost of sales, primarily due to investments in employee hiring, pay, and benefits, as well as costs to maintain
safe workplaces, and higher shipping costs. The Company continues to be affected by possible procurement and shipping delays, supply
chain interruptions, higher product demand in certain categories, product demand in other categories, and increased fulfilment costs
and cost of sales as a percentage of net sales and it is not possible to determine the duration and spread of the pandemic or such actions,
the ultimate impact on the Company’s results of operations during 2022, or whether other currently unanticipated consequences
of the pandemic are reasonably likely to materially affect the Company’s results of operations.
The
following unaudited pro forma consolidated results of operations have been prepared as if the acquisition of Cougar Express had occurred
as of the beginning of the following periods:
Pro forma data does not purport to be indicative
of the results that would have been obtained had these events actually occurred at the beginning of the periods presented and is not
intended to be a projection of future results.
NOTE
6 – INTANGIBLE ASSETS
On
December 31, 2021 and 2020, intangible asset consisted of the following:
SCHEDULE OF INTANGIBLE ASSETS
| | |
Useful
life | |
December
31,
2021 | | |
December
31,
2020 | |
| Customer relations | |
3
- 5
years | |
$ | 2,497,217 | | |
| - | |
| Non-compete agreement | |
5
years | |
| 150,000 | | |
| - | |
| Intangible assets gross | |
| |
| 2,647,217 | | |
| - | |
| Less: accumulated
amortization | |
| |
| (469,835 | ) | |
| - | |
| Intangible assets net | |
| |
$ | 2,177,382 | | |
$ | - | |
For
the years ended December 31, 2021 and 2020, amortization of intangible assets amounted to $469,835
and $0,
respectively.
Amortization
of intangible assets attributable to future periods is as follows:
SCHEDULE OF FUTURE AMORTIZATION OF INTANGIBLE ASSETS
| Year ending
December 31: | |
Amount | |
| 2022 | |
$ | 579,237 | |
| 2023 | |
| 579,237 | |
| 2024 | |
| 459,940 | |
| 2025 | |
| 454,754 | |
| 2026 | |
| 104,214 | |
| Total | |
$ | 2,177,382 | |
NOTE
7 – CONVERTIBLE PROMISSORY NOTES PAYABLE
Red
Diamond Partners LLC and RDW Capital, LLC
On
April 9, 2019, the Company entered into agreements (the “RedDiamond Amendments”) with RedDiamond and RDW Capital, LLC, the
holders of these convertible notes representing an aggregate principal amount of $510,000,
and agreed with such holders to:
| |
● |
extend
the maturity date of the notes to December
31, 2020; |
| |
● |
remove
all convertibility features of the notes; and |
| |
● |
repay
not less than half of the obligations then outstanding pursuant to the notes if the Company
completes an offering of equity or equity linked securities (including warrants, convertible
preferred stock, convertible debentures or convertible promissory note) which results in
gross proceeds to the Company of at least $4,000,000,
using a portion of the proceeds thereof.
|
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2021 AND 2020
During
the year ended December 31, 2020, the Company issued 96,661,102
shares of its common stock upon the conversion
of debt of $510,000
and accrued interest of $158,141.
Upon conversion, the Company reclassified put premium of $385,385
to paid-in capital.
The
aggregate principal amounts due as of December 31, 2021 and 2020 amounted to $0.
Bellridge
Capital, LLC
In
an agreement dated August 3, 2020, Bellridge and the Company resolved many of the disputes between them. Among other things, Bellridge
and the Company agreed upon the balance of all indebtedness owed to Bellridge as of August 3, 2020, a new maturity date on the indebtedness
(April 30, 2021), and a price of $0.02
for the conversion of all Bellridge indebtedness
into shares of Company common stock. In the agreement, Bellridge also agrees to release its claims against the Company and its senior
management in a definitive settlement agreement. However, the August 3 agreement did not contain a release of claims by either party.
During
July and August 2020, the Company issued 107,500,001
shares of its common stock upon the conversion
of remaining debt of $1,813,402,
accrued interest of $70,671
and other amounts due. In connection with
the issuance of these shares, the Company recorded a loss on debt extinguishment of $512,366
which is associated with the fair market
value of the excess shares issued upon conversion of the principal balances converted at the conversion price.
On
December 31, 2021 and 2020, convertible notes payable related to this convertible debt amounted to $0.
August
30, 2019 convertible debt and related warrants
On
August 30, 2019, the Company closed Securities Purchase Agreements (the “August 2019 Purchase Agreements”) with accredited
investors. The August 2019 Notes and related August 2019 Warrants included down-round provisions under which the August 2019 Note
conversion price and August 2019 Warrant exercise price could be affected, on a full-ratchet basis, by future equity offerings undertaken
by the Company. On September 6, 2019, the Company sold shares of its common stock at $2.50
per share and accordingly, the conversion
price and warrant down-round provisions were triggered. As a result, the conversion price of the August 2019 Notes was reduced to $2.50
per share and the number of shares issuable
upon exercise of the warrants was increased to 1,383,116
and the exercise price was lowered to
$2.50.
On January 7, 2020, the Company issued new convertible debt with an initial conversion price of $0.40
per share and warrants exercisable at
$0.40
per share and accordingly, the conversion
price and warrant down-round provisions were triggered. As a result, the
conversion price of August 2019 Notes was reduced to $0.40
per
share, and the number of shares issuable upon exercise of the warrants was increased to 8,644,474
and
the exercise price was lowered to $0.40.
As a result of the January 7, 2020 trigger of the down-round provisions, on January 7, 2020, the Company recorded a deemed dividend of
$17,836,244
which
represents the fair value transferred to the warrant holders from the down round feature being triggered.
The Company calculated the difference between the warrants fair value on January 7, 2020, the date the down- round feature was triggered
using the current exercise price and the new exercise price and the new number shares issuable upon exercise of the warrants. The deemed
dividend was recorded as an increase in accumulated deficit and increase in paid-in capital and increased the net loss to common shareholders
by the same amount. As discussed in summary of derivative liabilities below, as of January 30, 2020, the August 2019 Warrants were treated
as derivative liabilities. Subsequent to January 7, 2020, additional down-round protection was triggered. As of December 31, 2020, the
conversion price on the August 2019 Notes was lowered to $0.006
per share, the exercise price of the August
2019 Warrants was lowered to $0.006
per share, and the number shares issuable
upon exercise of the August 2019 Warrants was increased.
On
January 30, 2020, due to the default of the January 2020 August 2019 Notes Amortization Payment, the August 2019 Notes were deemed in
default. Accordingly, the outstanding principal balance on date of default increased by 30%
which amounted to $723,985,
default interest accrues at 18%,
and the default conversion terms applied.
During
the six months ended June 30, 2020, the Company repaid principal of $257,139,
settled $128,674
of debt, and the Company issued 293,677,788
shares of its common stock upon the conversion
of principal and default interest of $2,118,311,
accrued interest of $48,685
and fees of $1,000.
Additionally, accrued interest payable of $84,416
was reclassified to principal balance.
During the three months ended September 30, 2020, the Company issued 39,885,602
shares of its common stock upon the conversion
of principal and default interest of $284,249,
accrued interest of $8,450
and fees of $900.
During the three months ended December 31, 2020, the Company issued 9,606,099
shares of its common stock upon the conversion
of accrued interest of $58,317.
Additionally,
on July 20, 2020 and July 22, 2020, the Company entered Exchange Agreements (the “Exchange Agreements”) with two Investors
to exchange outstanding August 2019 Notes and August 2019 Warrants for a newly created series of preferred stock designated the Series
D Convertible Preferred Stock (the “Series D”) (See Note 9). Pursuant to the Exchange Agreements, the Investors exchanged
August 2019 Notes with an aggregate remaining principal amount outstanding of $500,184,
accrued interest payable of $85,827,
and Warrants to purchase 423,159,293
shares of Common Stock for 522,726
shares of Series D (the “Exchange”).
In connection with the issuance of these shares, the Company recorded a loss on debt extinguishment of $239,678
which is associated with the fair market
value of the excess shares issued upon conversion of the principal balances and accrued interest converted at the conversion price.
In
connection with Exchange, the Company and Investors entered into leak-out agreements, dated as of July 20, 2020 and July 22, 2020 (the
“Leak-Out Agreements”), whereby the
respective Investor agreed that, until the earliest to occur of (a) 120 days from date of Exchange Agreement, (b) the common stock trading
at an average reported volume of at least 100,000,001
shares
for three consecutive trading days, (c) the price per share of the common stock exceeding $0.10
in
a transaction, (d) the time of release (whether by termination of an applicable leak-out agreement or otherwise), in whole or in part,
of any leak-out agreement with any other holder of securities, or (e) any breach by the Company of any term of the Leak-Out Agreement
that is not cured within five trading days following delivery of written notice of such breach by the respective Investor to the Company,
neither Investor, nor any of its Affiliates (as defined in the respective Leak-Out Agreement), collectively, shall sell, on any trading
day, more than 10%
of the common stock sold on such trading day.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2021 AND 2020
On
December 31, 2021 and 2020, convertible notes payable
related to August 30, 2019 convertible debt amounted to $0
and $22,064,
which consists of $0
and $22,064
of principal/default interest balances due, respectively.
October
3, 2019 convertible debt and related warrants
On
October 3, 2019, the Company issued and sold to an investor a convertible promissory note in the principal amount of $166,667
(the “October 3 Note”)
and warrants to purchase up to 66,401
shares of the Company’s common stock
(the “October 3 Warrant”). The Company received net proceeds of $150,000,
which is net of a 10%
original issue discount of $16,667.
The
October 3 Note and related October 3 Warrant included a down-round provision under which the October 3 Note conversion price and warrant
exercise price could be affected, on a full-ratchet basis, by future equity offerings undertaken by the Company. Subsequent to October
3, 2019, the Company issued convertible debt with a conversion price of $2.50
per share and accordingly, the convertible
debt and warrant down-round provisions were triggered. As a result, the conversion price and the exercise price were lowered to $2.50
and the number of shares issuable upon
exercise of the warrants was increased to 66,667.
On January 7, 2020, the Company issued new convertible debt with an initial conversion price of $0.40
per share and warrants exercisable at
$0.40
per share and accordingly, the conversion
price and warrant down-round provisions were triggered. As a result, the conversion price of the October 3 Note was reduced to $0.40
per share, and the number of shares issuable
upon exercise of the warrants was increased to 416,669
and the exercise price was lowered to
$0.40.
As a result of the January 7, 2020 trigger of the down-round provisions, on January 7, 2020, the Company recorded a deemed dividend of
$859,768
which represents the fair value transferred
to the October 3 Warrant holder from the down-round feature being triggered. The Company calculated the difference between the October
3 Warrant’s fair value on January 7, 2020, the date the down-round feature was triggered using the current exercise price and the
new exercise price and the new number of shares issuable upon exercise of the warrants. The deemed dividend was recorded as an increase
in accumulated deficit and increase in paid-in capital and increased the net loss to common shareholders by the same amount. As discussed
in summary of derivative liabilities below, as of January 30, 2020, the October 3 Warrant were treated as derivative liabilities. Subsequent
to January 7, 2020, additional down-round protection was triggered. Since these instruments contained embedded derivatives, the trigger
only effected the quantity and valuation of derivative liabilities and there was no other accounting effect. As of December 31, 2020,
the conversion price on the October 3 Note was lowered to $0.006
per share, the exercise price of the October
3 Warrant was lowered to $0.006
per share, and the number of shares issuable
upon exercise of the October 3 Warrant was increased.
In
February 2020, due to the default of the February 2020 October 3 Note Amortization Payment, the October 3 Note was deemed in default.
Accordingly, the outstanding principal balance on date of default increased by 30%
which amounted to $50,000,
default interest accrues at 18%,
and the default conversion terms apply.
During
the year ended December 31, 2020, the Company issued 27,525,109
shares of its common stock upon the conversion
of principal and default interest of $216,667,
accrued interest of $11,774,
fees of $5,000,
and additional interest expense of $2,180.
On
December 31, 2021 and 2020, convertible notes payable related to the October 3, 2019 convertible debt amounted to $0.
Fall
2019 notes
On
October 14, 2019 and November 7, 2019, the Company entered into convertible note agreements with an accredited investor. Pursuant to
the terms of these convertible note agreements, the Company issued and sold to an investor convertible promissory notes in the aggregate
principal amount of $500,000
(the “Fall 2019 Notes”)
and the Company received cash proceeds of $500,000.
The Fall 2019 Notes initially bore interest at 10%
per annum. The October 14, 2019 convertible promissory note of $300,000
became due and payable on October
14, 2020 and the November 7, 2019 convertible
promissory note of $200,000
became due and payable on November
7, 2020.
Each
Fall 2019 Note was convertible, in whole or in part, at any time, and from time to time, into shares of common stock at the option of
the investor. The “Conversion Price” in effect on any Conversion Date means, as of any date of determination, the
lower of: (i) $2.50 per share and (ii) the twenty day per share closing trading price of the Company’s common stock during the
twenty trading days that close with the last previous trading day ended three days prior to the date of exercise. The Fall 2019 Notes
did not contain anti-dilutive provisions. In
May 2020 and June 2020, due to the default of a May 2020 and June 2020 Fall 2019 Note Amortization Payments, the Fall 2019 Notes were
deemed in default. Accordingly, default interest accrues at 18% and the Fall 2019 Notes became due on the respective dates of default.
On
December 17, 2020, the Company issued 55,000,000
shares of its common stock upon the conversion
of principal of $500,000
and accrued interest of $81,616.
On
December 31, 2021 and 2020, convertible notes payable related to the Fall 2019 Notes amounted to $0.
Q1/Q2
2020 convertible debt and related warrants
During
the year ended December 31, 2020, the Company issued and sold to certain investors convertible promissory notes in the aggregate principal
amount of $2,068,000 (the “Q1/Q2 2020 Notes”) and warrants to purchase up to 827,200 shares of the Company’s
common stock (the “Q1/Q2 2020 Warrants”). The Company received net proceeds of $1,880,000, which is net of a 10% original
issue discounts of $188,000. The Q1/Q2 2020 Notes initially bore interest at 6% per annum and become due and payable on the date that
is the 24-month anniversary of the original issue date of the respective Q1/Q2 2020 Note. During the existence of an Event of Default
(as defined in the Q1/Q2 2020 Notes), which includes, amongst other events, any default in the payment of principal and interest payments
(including Q1/Q2 2020 Note Amortization Payments) under any Q1/Q2 2020 Note or any other Indebtedness (as defined in the Q1/Q2 2020 Notes),
interest accrues at the lesser of (i) the rate of 18% per annum, or (ii) the maximum amount permitted by law. Commencing on the thirteenth
month anniversary of the issuance of each Q1/Q2 2020 Note, monthly payments of interest and monthly principal payments, based on a 12-month
amortization schedule (each, a “Q1/Q2 2020 Note Amortization Payment”), was due and payable, until the Maturity Date (as
defined in the applicable Q1/Q2 2020 Note), at which time all outstanding principal, accrued and unpaid interest and all other amounts
due and payable on such Q1/Q2 2020 Note will be immediately due and payable. The Q1/Q2 2020 Note Amortization Payments are being paid
in cash unless the investor requests payment in the Company’s Common Stock in lieu of a cash payment (each, a “Q1/Q2 2020
Note Stock Payment”). If a holder of a Q1/Q2 2020 Note requests a Q1/Q2 2020 Note Stock Payment, the number of shares of common
stock issued will be based on the amount of the applicable Q1/Q2 2020 Note Amortization Payment divided by 80% of the lowest VWAP (as
defined in the Q1/Q2 2020 Notes) during the five Trading Day (as defined in the applicable Q1/Q2 2020 Note) period prior to the due date
of such Q1/Q2 2020 Note Amortization Payment.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2021 AND 2020
The
Q1/Q2 2020 Notes may be prepaid, provided that certain Equity Conditions, as defined in the Q1/Q2 2020 Notes, have been met (or any such
failure to meet the Equity Conditions has been waived): (i) from each Q1/Q2 2020 Note’s respective original issuance date until
and through the day that falls on the third month anniversary of such original issue date (each a “Q1/Q2 2020 Note 3 Month Anniversary”)
at an amount equal to 105% of the aggregate of the outstanding principal balance of the Q1/Q2 2020 Note and accrued and unpaid interest,
and (ii) after the applicable Q1/Q2 2020 Note 3 Month Anniversary at an amount equal to 115% of the aggregate of the outstanding principal
balance of the Q1/Q2 2020 Note and accrued and unpaid interest. In the event that the Company closes a Public Offering, each holder may
elect to: (x) have its principal and accrued interest prepaid directly from the proceeds of the Public Offering at the prices set forth
above, (y) exchange its Q1/Q2 2020 Note at the closing of the Public Offering for the securities being issued in the Public Offering
at the Public Offering prices based upon the outstanding principal, accrued interest and other charges, or (z) continue to hold its Q1/Q2
2020 Note(s). Except for a Public Offering and Q1/Q2 2020 Note Amortization Payments, in order to prepay a Q1/Q2 2020 Note, the Company
must provide at least 30 days’ prior written notice to the holder thereof, during which time the holder may convert its Q1/Q2 2020
Note in whole or in part at the applicable conversion price. The Q1/Q2 2020 Note Amortization Payments were prepayments and were subject
to prepayment penalties equal to 115% of the Q1/Q2 2020 Note Amortization Payment.
In
the event the Company consummates a Public Offering while the Q1/Q2 2020 Notes are outstanding, then 25% of the net proceeds of such
offering will, within two business days of the closing of such Public Offering, be applied to reduce the outstanding obligations pursuant
to the Q1/Q2 2020 Notes. As the Equity Conditions have not been met, through March 31, 2021 and the date hereof, the Company has not
prepaid any the Q1/Q2 2020 Notes, in whole or in part.
From
the original issue date of a Q1/Q2 2020 Note until such Q1/Q2 2020 Note is no longer outstanding, such Q1/Q2 2020 Note is convertible,
in whole or in part, at any time, and from time to time, into shares of Common Stock at the option of the holder. The “Conversion
Price” in effect on any Conversion Date (as defined in the Q1/Q2 2020 Notes) means, as of any date of determination, $0.40 per
share, subject to adjustment as provided therein and summarized below. If an Event of Default (as defined in the Q1/Q2 2020 Notes) has
occurred, regardless of whether it has been cured or remains ongoing, the Q1/Q2 2020 Notes are convertible at the lower of: (i) $0.40
and (ii) 70% of the second lowest closing price of the common stock as reported on the Trading Market (as defined in the Q1/Q2 2020 Notes)
during the 20 consecutive Trading Day (as defined in the Q1/Q2 2020 Notes) period ending and including the Trading Day immediately preceding
the delivery or deemed delivery of the applicable notice of conversion. All such Conversion Price determinations are to be appropriately
adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction that proportionately decreases
or increases the number of shares of Common Stock outstanding.
The
Q1/Q2 2020 Warrants are exercisable at any time on or after the date of the issuance and entitle the investors to purchase shares of
the Company’s common stock for a period of five years from the initial date the Q1/Q2 2020 Warrants become exercisable. Under the
terms of the Q1/Q2 2020 Warrants, the investors are entitled to exercise the Q1/Q2 2020 Warrants to purchase up to 827,200
shares of the Company’s common stock
at an initial exercise price of $0.40,
subject to adjustment as detailed in the respective Q1/Q2 2020 Warrants.
In
connection with the issuance of the January 2020 warrants, the Company calculated the relative fair value of these warrants in the amount
of $262,872 which was added to debt discount and paid-in capital and shall be amortized over the term of the Q1/Q2 2020 Notes. In connection
with the issuance of the notes in January, February, March and April 2020 and the issuance of the warrants in February, March and April
2020, the Company determined that various terms of these Q1/Q2 2020 Notes and Q1/Q2 2020 Warrants, including the default provisions in
the Q1/Q2 2020 Notes discussed above, caused derivative treatment of the embedded conversion options and warrants. During the year ended
December 31, 2020, on the initial measurement dates, the fair values of the embedded conversion option and warrant derivatives of $8,817,568
was recorded as derivative liabilities
and was allocated as a debt discount up to the net proceeds of the Q1/Q2 2020 Notes of $1,287,474,
with the remainder of $7,530,095
charged to current period operations as
initial derivative expense.
The
Q1/Q2 2020 Notes included a down-round provision under which the Q1/Q2 2020 Note conversion price could be affected, by future equity
offerings undertaken by the Company. During the year ended December 31, 2020, down-provisions were triggered. Since these instruments
contained embedded derivatives, the trigger only effected the quantity and valuation of derivative liabilities and there was no other
accounting effect. As of December 31, 2020, the conversion price of the Q1/Q2 Notes was lowered to $0.006
per share.
Due
to the default of amortization payments due on our August 2019 Notes and other notes as discussed above, the Q1/Q2 2020 Notes were deemed
in default. Accordingly, the outstanding principal
balance on date of default increased by 30%
which amounted to approximately $620,400,
default interest accrues at 18%,
and the default conversion terms apply. In the third
fiscal quarter of 2020, the great majority of principal amount of Q1/Q2 2020 Notes was exchanged for Common Stock at the conversion price
that applied if an Event of Default occurred. It is the Company’s position (and it was the Company’s intent at issuance)
that, to the extent the Q1/Q2 2020 Notes were converted for Common Stock at the advantageous conversion price applicable to post-Events
of Default, the Q1/Q2 Notes are not also entitled to receive the Mandatory Default Payment (as defined in the Q1/Q2 2020 Notes) of 130%
of principal amount. During 2020, since a note holder could conceivably disagree with the Company’s position in this regard, the
Company has decided, out of an abundance of caution and despite its confidence that its construction of the Q1/Q2 2020 Notes is the only
correct one, to accrue a reserve as if a note holder were entitled both to convert its Q1/Q2 Notes at the advantageous conversion price
applicable to post-Events of Default and to receive the Mandatory Default Payment of 130% on the entire original principal amount
of Q1/Q2 2020 Notes.
During
the three months ended September 30, 2020, the Company issued 291,796,804
shares of its common stock upon the conversion
of principal and default interest of $1,887,000
and accrued interest of $3,731.
During
the three months ended June 30, 2021, the Company
and each investor entered into a letter agreement whereby the investor waived its right to any Mandatory Default Payment. Accordingly,
during the year ended December 31, 2021, the Company reversed the accrued Mandatory Penalty amount due of $664,400
and recorded a gain on debt extinguishment of
$664,400.
Additionally, during the year ended December 31, 2021, the Company issued 28,358,841
shares of its common stock upon the conversion
of all remaining principal and interest balances due aggregating $277,916.
Hence, as of December 31, 2021, convertible notes payable and default interest due related to the Q1/Q2 2020 Notes amounted to
$0.
On December 31, 2020, on the same construction of the Q1/Q2 Notes, convertible notes payable and default interest due related to the
Q1/Q2 2020 Notes amounted to $717,852,
which consists of $801,400
of principal and default penalty balances due
and is net of unamortized debt discount of $83,548.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2021 AND 2020
April
20, 2020 convertible debt
On
April 20, 2020, the Company issued and sold to an investor a convertible promissory note in the principal amount of $456,500
(the “April 20 Note”).
The April 20 Note contained a 10%
original issue discount amounting to $41,500
for a purchase price of $415,000.
The Company did not receive any proceeds from the April 20 Note because the investor converted previous notes and accrued interest due
to him in the amount of $195,000
into the April 20 Note. In connection
with the conversion of notes payable to the April 20 Note, the Company recorded a loss from debt extinguishment of $220,000.
The April 20 Note initially bore interest at 6%
per annum and becomes due and payable on April 20, 2022 (the “April 20 Note Maturity Date”). During
the existence of an Event of Default (as defined in the April 20 Note), which includes, amongst other events, any default in the payment
of principal and interest payment (including any April 20 Note Amortization Payments) under any note or any other indebtedness, interest
accrues at the lesser of (i) the rate of 18% per annum, or (ii) the maximum amount permitted by law. Commencing on the thirteenth month
anniversary of the April 20 Note, monthly payments of interest and monthly principal payments, based on a 12-month amortization schedule,
will be due and payable (each, an “April 20 Note Amortization Payment”), until the April 20 Note Maturity Date, at
which time all outstanding principal, accrued and unpaid interest and all other amounts due and payable under the April 20 Note will
be immediately due and payable. The April 20 Note Amortization Payments will be made in cash unless the investor payment in the Company’s
common stock in lieu of a cash payment (each, an “April 20 Note Stock Payment”). If the investor requests an April
20 Note Stock Payment, the number of shares of common stock issued will be based on the amount of the applicable April 20 Note Amortization
Payment divided by 80% of the lowest VWAP (as defined in the April 20 Note) during the five Trading Day (as defined in the April 20 Note)
period prior to the due date of the April 20 Note Amortization Payment.
The
April
20 Note may be prepaid, provided that certain Equity Conditions, as defined in the April 20 Note, have been met (or any such failure
to meet the Equity Conditions has been waived): (i) from April 20, 2020 until and through July 20, 2020 at an amount equal to 105% of
the aggregate of the outstanding principal balance of the April 20 Note and accrued and unpaid interest, and (ii) after July 20, 2020
at an amount equal to 115% of the aggregate of the outstanding principal balance of the April 20 Note and accrued and unpaid interest.
In the event that the Company closes a Public Offering, the holder may elect to: (x) have its principal and accrued interest prepaid
directly from the proceeds of the Public Offering at the prices set forth above, (y) exchange its April 20 Note at the closing of the
Public Offering for the securities being issued in the Public Offering at the Public Offering prices based upon the outstanding principal,
accrued interest and other charges, or (z) continue to hold the April 20 Note. Except for a Public Offering and April 20 Note Amortization
Payments, in order to prepay the April 20 Note, the Company must provide at least 30 days’ prior written notice to the holder,
during which time the holder may convert the April 20 Note in whole or in part at the then applicable conversion price. For avoidance
of doubt, the April 20 Note Amortization Payments will be prepayments and are subject to prepayment penalties equal to 115% of the April
20 Note Amortization Payment. In the event the Company consummates a Public Offering while the April 20 Note is outstanding, then 25%
of the net proceeds of such offering will, within two business days of the closing of such Public Offering, be applied to reduce the
outstanding obligations pursuant to the April 20 Note.
Until
the April 20 Note is no longer outstanding, it is convertible, in whole or in part, at any time, and from time to time, into shares of
common stock at the option of the investor. The
“Conversion Price” in effect on any Conversion Date (as defined in the April 20 Note) means, as of any Conversion Date or
other date of determination, the lower of: (i) $0.40 and (ii) 70% of the second lowest closing price of the common stock as reported
on the Trading Market (as defined in the April 20 Note) during the 20 consecutive Trading Day (as defined in the April 20 Note) period
ending and including the Trading Day immediately preceding the delivery or deemed delivery of the applicable notice of conversion.
All such Conversion Price determinations are to be appropriately adjusted for any stock dividend, stock split, stock combination, reclassification
or similar transaction that proportionately decreases or increases the common stock.
In
connection with the issuance of the April 20 Note, the Company determined that various terms of the April 20 Note caused derivative treatment
of the embedded conversion option. On the initial measurement dates, the fair values of the embedded conversion option derivative of
$1,436,725
was recorded as derivative liabilities
and was allocated as a debt discount up to the net proceeds of the April 20 Note of $415,000,
with the remainder of $1,021,725
charged to current period operations as
initial derivative expense. Due to the default of August 2019 Note Amortization Payments due on our August 2019 Notes and other notes,
the April 20 Note was deemed in default. Accordingly, the outstanding principal balance on date of default increased by 30% which amounted
to approximately $136,950,
default interest accrues at 18%,
and the default conversion terms apply.
The
April 20 Note includes a down-round provision under which the April 20 Note conversion price could be affected, by future equity offerings
undertaken by the Company. During the year ended December 31, 2020, down-provisions were triggered. Since these instruments contained
embedded derivatives, the trigger only effected the quantity and valuation of derivative liabilities and there was no other accounting
effect.
During
the three months ended September 30, 2020, the Company issued 38,500,000
shares of its common stock upon the conversion
of principal and default interest of $231,000.
On October 7, 2020, the Company issued 53,255,583
shares of its common stock upon the conversion
of principal and default interest of $293,150
and accrued interest of $26,383.
During
the three months ended June 30, 2021, the Company issued 15,923,322
shares of its common stock upon the conversion
of all remaining principal and interest balances due aggregating $95,540.
Hence, as of December 31, 2021, convertible notes payable and default interest due related to the April 20 Note amounted to $0.
On December 31, 2020, convertible notes payable related to the April 20 Note amounted to $69,300,
which consists of $69,300
of default penalty balance due.
Other
convertible debt
As
discussed in Note 10, on August 28, 2020, a note payable with a principal balance due of $185,000
was cancelled and a new convertible note was
entered into with a principal balance of $185,000.
This new convertible note bears no interest and is payable in monthly payments of $7,500
commencing on September 1, 2020 until paid in
full. The Holder shall have the right, at Holder’s option, at any time prior to the close of business five or more days prior to
a payment of principal and interest, to convert any of such Holder’s Note, in whole or in part (in denominations of $20.000
or multiples of it), into that number of shares
of common stock of the Company at the conversion price equal to the lowest closing price of the Company’s common stock on the OTC
Market during the ten trading days ending the business day before the date of conversion. During the year ended December 31, 2020, the
Company repaid $15,000
of this convertible note. On December 31, 2020,
convertible notes payable related to this Note amounted to $170,000.
In January 2021, the Company issued 15,454,546
shares of its common stock upon conversion of
this convertible note and accordingly, as of December 31, 2021, the convertible note balance is $0.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2021 AND 2020
Summary
of derivative liabilities
During
the years ended December 31, 2021 and 2020, due to the non-payment of amortization payments due, substantially all convertible
notes were deemed in default. Since the default principal due is convertible at the same default terms contained in the related convertible
notes, the Company determined that various terms of the convertible notes discussed above caused derivative treatment of the embedded
conversion options related to the principal and default principal due. Accordingly, under the provisions of ASC 815-40 - Derivatives
and Hedging – Contracts in an Entity’s Own Stock, the embedded conversion option related to the principal and default
principal due were accounted for as derivative liabilities at the date of issuance and shall be adjusted to fair value through earnings
at each reporting date. The fair value of the embedded conversion option derivatives related to the principal balance default principal
due was determined using the Binomial valuation model. At the end of each period and on the date that debt is converted into common
shares, the Company revalues the embedded conversion option derivative liabilities. In connection with the default principal due, during
the year ended December 31, 2020, on the initial measurement date, the fair values of the embedded conversion option
derivatives related to default principal due of $6,340,248
was recorded as
derivative liabilities and charged to current period operations as initial derivative expense.
As
discussed above, the Company issued debt that consists of the issuance of convertible notes with variable conversion provisions. The
conversion terms of the convertible notes are variable based on certain factors, such as the future price of the Company’s common
stock, default provisions and payment of amortization payments in stock. The number of shares of common stock to be issued is based on
the future price of the Company’s common stock. The number of shares of common stock issuable upon conversion of each promissory
note is indeterminate. Due to the fact that the number of shares of common stock issuable may exceed the Company’s authorized share
limit, effective January 30, 2020, the equity environment was tainted, and all convertible debentures and warrants were included in the
value of the derivative. Pursuant to ASC 815-15 Embedded Derivatives, the fair values of the variable conversion option and warrants
and shares to be issued were recorded as derivative liabilities. On January 30, 2020, the Company evaluated all outstanding warrants
to determine whether these instruments are tainted and, due to reasons discussed above, all warrants outstanding were considered tainted.
Accordingly, the Company recorded a reclassification from paid-in capital to derivative liabilities of $11,381,885 for warrants becoming
tainted. On January 30, 2020, the fair value of the warrants to be reclassified to derivative liabilities was determined using the Binomial
valuation model.
In
connection with the issuance of the Q1/Q2 2020 Notes and the warrants issued in February, March and April 2020, the Company determined
that various terms of the Q1/Q2 2020 Notes and Q1/Q2 2020 Warrants, including the default provisions in the Q1/Q2 2020 Notes discussed
above, caused derivative treatment of the embedded conversion options and warrants.
Accordingly, under the provisions of ASC 815-40 - Derivatives and Hedging – Contracts in an Entity’s Own Stock, the
embedded conversion option contained in the Q1/Q2 2020 Notes and certain warrants were accounted for as derivative liabilities at the
date of issuance and shall be adjusted to fair value through earnings at each reporting date. The fair value of the embedded conversion
option derivatives and warrants was determined using the Binomial valuation model. At the end of each period and on the date that
the Q1/Q2 2020 Notes are converted into common shares, the Company revalues the embedded conversion option derivative liabilities. During
the year ended December 31, 2020, on the initial measurement dates, the fair values of the embedded conversion option and warrant derivatives
of $8,817,568
was recorded as derivative liabilities
and was allocated as a debt discount up to the net proceeds of the Q1/Q2 2020 Notes of $1,287,473,
with the remainder of $7,530,095
charged to current period operations as
initial derivative expense.
In
connection with the issuance of the April 20 Note, the Company determined that various terms of the April 20 Note, including the default
provisions in the April 20 Note discussed above, caused derivative treatment of the embedded conversion options and warrants.
Accordingly, under the provisions of ASC 815-40 - Derivatives and Hedging – Contracts in an Entity’s Own Stock, the
embedded conversion option contained in the April 20 Note were accounted for as derivative liabilities at the date of issuance and shall
be adjusted to fair value through earnings at each reporting date. The fair value of the embedded conversion option derivative was determined
using the Binomial valuation model. At the end of each period and on the date that the April 20 Note are converted into common shares,
the Company revalues the embedded conversion option derivative liabilities. During the year ended December 31, 2020, on the initial
measurement dates, the fair values of the embedded conversion option of $1,436,725
was recorded as derivative liability and
was allocated as a debt discount up to the net proceeds of the April 20 Note of $415,000,
with the remainder of $1,021,725
charged to current period operations as
initial derivative expense.
In
connection with the period end revaluations and the initial derivative expense recorded, the Company recorded aggregate derivative expense
of $34,692,503
for the year ended December 31, 2020.
During
the year ended December 31, 2020, in connection with the conversion or repayment of various debts as discussed above, the Company reversed
the value of the respective derivative liability and recorded a gain on extinguishment of debt of $45,731,614
(Note 11).
During
the years ended December 31, 2021 and 2020, the
fair value of the derivative liabilities, warrants and conversion option was estimated using the Binomial valuation model with the following
assumptions:
SCHEDULE OF FAIR VALUE OF DERIVATIVE LIABILITIES ESTIMATED USING BLACK-SHOLES VALUATION MODEL
| | |
2021 | | |
2020 | |
| Expected dividend rate | |
| - | | |
| - | |
| Expected term (in years) | |
| 0.75
to
5.00
| | |
| 0.75
to
5.00
| |
| Volatility | |
| 169.7%
to 367.0
% | | |
| 154.2%
to 372.3
% | |
| Risk-free interest rate | |
| 0.04%
to 0.87
% | | |
| 0.09%
to 1.62
% | |
On
December 31, 2021 and 2020, convertible promissory notes are as follows:
SCHEDULE OF CONVERTIBLE PROMISSORY NOTES
| | |
December
31, 2021 | | |
December
31, 2020 | |
| Principal and default penalty
amount | |
$ | - | | |
$ | 1,062,764 | |
| Less: unamortized
debt discount | |
| - | | |
| (83,548 | ) |
| Convertible notes payable, net | |
| - | | |
| 979,216 | |
| Less: current portion
of convertible notes payable | |
| - | | |
| (979,216 | ) |
| Convertible notes
payable, net – long-term | |
$ | - | | |
$ | - | |
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2021 AND 2020
On
December 31, 2020, the principal and default penalty amount due of $1,062,764 consisted of promissory note principal balances due of
$351,000 and default penalty amounts due of $711,764.
For
the years ended December 31, 2021 and 2020, amortization of debt discounts related to convertible notes amounted to $83,548
and $4,322,247,
respectively, which has been included in interest expense on the accompanying consolidated statements of operations. The weighted
average interest rate during the year ended December 31, 2020 was approximately 18.0%.
NOTE
8 – NOTES PAYABLE
Promissory
notes
On
January 15, 2021, in connection with the acquisition of DDTI, the Company issued a promissory note in the amount of $400,000.
The
principal amount of $400,000
is
payable in four installments of $100,000
plus
accrued interest as follows: $100,000 plus accrued interest was due and paid on April 15, 2021, $100,000 plus accrued interest was due
and paid on July 15, 2021, $100,000 plus accrued interest is due and pad on October 15, 2021 and $100,000 plus all remaining accrued
interest was due and paid on January 15, 2022. Interest
accrues at 4%
per annum. On December 31, 2021, the principal amount related to this note was $100,000.
On
March 24, 2021, in connection with the acquisition of Cougar Express, the Company issued a promissory note in the amount of $350,000.
The
principal amount of $350,000
is
payable in two installments of $175,000
plus
accrued interest as follows: $175,000 plus accrued interest was due and paid on September 23, 2021 and $175,000 plus all remaining
accrued interest was due and paid on March 23, 2022. Interest
accrues at 6%
per annum. On December 31, 2021, the principal amount related to this note was $175,000.
Equipment
and auto notes payable
In
November 2019, the Company entered into a promissory note for the purchase of five trucks in the amount of $460,510.
The note is due in sixty
monthly installments of $9,304.
The first payment was paid in December 2019 and the remaining fifty-nine payments were due monthly commencing on January
27, 2020. The note was secured by the
trucks and was personally guaranteed by the Company’s former chief executive officer. On December 31, 2021 and 2020,
equipment note payable to this entity amounted to $0
and $375,422,
respectively.
In
connection with the acquisition of DDTI, the Company assumed several truck notes payable liabilities due to entities. On December
31, 2021, truck notes payable to these entities amounted to $17,985.
In
connection with the acquisition of Cougar Express, the Company assumed several equipment notes payable liabilities due to entities. On
December 31, 2021, equipment notes payable to these entities amounted to $2,611.
Paycheck
Protection Program Promissory Note
During
2020, prior to the acquisition of Cougar Express by the Company, Cougar Express entered into a Paycheck Protection Program promissory
note (the “Cougar PPP Loan”) in the amount of $622,240 under the SBA Paycheck Protection Program of the CARES Act.
Pursuant to the Cougar Stock Purchase Agreement, the Company did not assume and shall not be responsible to pay the Cougar PPP loan.
The prior shareholder of Cougar Express agreed to indemnify and hold the Buyer (and its directors, officers, employees and affiliates)
harmless from and with respect to any and all claims, liabilities, losses, damages, costs and expenses, including, without limitation,
the reasonable fees and expenses of counsel (collectively, the “Losses”), related to or arising directly or indirectly out
of, among other items, any claim that any portion or all of the Cougar PPP loan secured by Cougar Express is to be repaid to the lender.
Since the Cougar PPP Loan was not forgiven as of March 31, 2021, the Company has reflected the Cougar PPP loan of $622,240 as outstanding
on March 31, 2021 and the Company recorded a note receivable of $622,240 which was due from the prior shareholder of Cougar Express if
the Cougar PPP Loan is not forgiven. Cougar Express filed for forgiveness of this loan and on June 10, 2021, Cougar Express received
a Notice of Paycheck Protection Program Forgiveness Payment from the SBA. Accordingly, the note payable and related note receivable were
reversed and no gain or loss was recorded.
Line
of credit
Through
December 2021, the Company’s subsidiary, Cougar
Express, maintained a $5,000
line of credit with the bank. This line of credit
was closed in December 2021 and was payable of demand. On December 31, 2021, principal amount outstanding under
the line of credit amounted to $0.
On
December 31, 2021 and 2020, notes payable consisted of the following:
SCHEDULE OF NOTES PAYABLE
| | |
December
31, 2021 | | |
December 31, 2020 | |
| Principal amounts | |
$ | 295,596 | | |
$ | 375,422 | |
| Less: current portion
of notes payable | |
| (283,141 | ) | |
| (85,207 | ) |
| Notes payable –
long-term | |
$ | 12,455 | | |
$ | 290,215 | |
For
the years ended December 31, 2021 and 2020, amortization of debt discounts related to notes payable amounted to $0
and $605,763,
respectively, which has been included in interest expense on the accompanying consolidated statements of operations.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2021 AND 2020
NOTE
9– SHAREHOLDERS’ EQUITY (DEFICIT)
Preferred
stock
Series
A preferred stock
On
April 9, 2019, the Company entered into agreements
with all holders of its Series A Convertible Preferred Stock to exchange all 4,000,000
outstanding shares of preferred stock
for an aggregate of 2,600,000
shares of restricted common stock. Upon
conversion, pursuant to Section 9(i) of the Certificate of Designation, the Series A Convertible Preferred Stock became undesignated
upon their return to the Company. In July 2020, the Company filed a Certificate of Withdrawal of the Series A
designation.
Series
B preferred shares
In
August 2019, the Company designated Series B Preferred Shares consisting of
1,700,000
shares with a par value of $0.001
and a stated value of $0.001.
The Series B preferred shares have no voting rights and are not redeemable. Each share of Series B Preferred stock is convertible
into one share of common stock at the option of the holder subject to beneficial ownership limitation.
On
August 16, 2019, the Company issued 1,000,000 Series B preferred shares for services rendered to the former member of Prime EFS who was
considered a related party. On July 24, 2020, the Company issued 1,000,000 shares of its common stock upon conversion of 1,000,000 shares
of Series B Preferred shares.
On August 16, 2019, the Company issued 700,000 shares
of Series B Preferred shares to Bellridge Capital, L.P. upon settlement of 700,000 shares of issuable common shares.
Series
C preferred shares
Pursuant
to the August 2019 Purchase Agreement (see Note 7), by and among the Company and the investors named therein (the “August 2019
Investors”), the Company is required to keep reserved for issuance to the August 2019 Investors three times the number of shares
of common stock issuable to the August 2019 Investors upon conversion or exercise, as applicable, of convertible notes and warrants held
by the August 2019 Investors (the “August 2019 Reserve Requirement”). If the Company fails to meet the August 2019
Reserve Requirement within 45 days after written notice from an August 2019 Investor, the Company must, inter alia, sell to the
Lead Investor (as defined in the August 2019 Purchase Agreement) for $100 a series of preferred stock which holds voting power equal
to 51%
of the number of votes eligible to vote at any special or annual meeting of the Company’s stockholders (with the power to take
action by written consent in lieu of a stockholders meeting) for the sole purpose of amending the Company’s Amended and Restated
Articles of Incorporation to increase the number of shares of common stock that the Company is authorized to issue, which such preferred
stock will be automatically cancelled upon the effectiveness of the resulting increase in the Company’s authorized stock. By letter
agreement dated, June 4, 2020, the Lead Investor assigned this contract right to John Mercadante, the chief executive officer of the
Company.
On
June 5, 2020, the
Company sold to John Mercadante, for $100, one share of Series C Preferred Stock which has voting power equal to 51%
of the number of votes eligible to vote at any special or annual meeting of the Company’s stockholders (with the power to take
action by written consent in lieu of a stockholders meeting) for the sole purpose of amending the Company’s Amended and Restated
Articles of Incorporation to increase the number of shares of common stock that the Company is authorized to issue. Upon the effectiveness
of the amendment on July 20, 2020, the Series C Preferred Stock was automatically cancelled. The
Series C Preferred Stock was not entitled to vote on any other matter, was not entitled to dividends, was not convertible into any other
security of the Company and was not entitled to any distributions upon liquidation of the Company.
Series
D preferred shares
The
Board of Directors (the “Board”) created the Series D pursuant to the authority vested in the Board by the Company’s
Amended and Restated Articles of Incorporation to issue up to 10,000,000
shares of preferred stock, $0.001
par value per share. The Company’s Amended
and Restated Articles of Incorporation explicitly authorize the Board to issue any or all of such shares of preferred stock in one (1)
or more classes or series and to fix the designations, powers, preferences and rights, the qualifications, limitations or restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any class or series, without further vote or action by the stockholders.
On
July 20, 2020, the Board filed the Certificate of Designation of Preferences (“COD”), Rights and Limitations of Series D
Preferred Stock (the “Series D COD”) with the Secretary of State of the State of Nevada designating 1,250,000
shares of preferred stock as Series D.
The Series D does not have the right to vote. The Series D has a stated value of $6.00
per share (the “Stated Value”).
Subject only to the liquidation rights of the holders of Series B Preferred Stock that is currently issued and outstanding, upon the
liquidation, dissolution or winding up of the business of the Company, whether voluntary or involuntary, the Series D is entitled to
receive an amount per share equal to the Stated Value and then receive a pro-rata portion of the remaining assets available for distribution
to the holders of common stock on an as-converted to common stock basis. Until July 20, 2021, the holders of Series D have the right
to participate, pro rata, in each subsequent financing in an amount up to 25%
of the total proceeds of such financing on the same terms, conditions and price otherwise available in such subsequent financing.
Subject
to a beneficial ownership limitation and customary adjustments for stock dividends and stock splits, each share of Series D is convertible
into 1,000
shares
of common stock. A holder of Series D may not convert any shares of Series D into common stock if the holder (together with the holder’s
affiliates and any persons acting as a group together with the holder or any of the holder’s affiliates) would beneficially own
in excess of 4.99%
of the number of shares of common stock outstanding immediately after giving effect to the conversion, as such percentage ownership is
determined in accordance with the terms of the Series D COD. However, upon notice from the holder to the Company, the holder may decrease
or increase the beneficial ownership limitation, which may not exceed 9.99% of the number of shares of common stock outstanding immediately
after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Series D COD, provided
that any such increase or decrease in the beneficial ownership limitation will not take effect until 61 days following notice to the
Company.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2021 AND 2020
Approval
of at least a majority of the outstanding Series D is required to: (a) amend or repeal any provision of, or add any provision to, the
Company’s Articles of Incorporation or bylaws, or file any Certificate of Designation (however such document is named) or articles
of amendment to create any class or any series of preferred stock, if such action would adversely alter or change in any respect the
preferences, rights, privileges or powers, or restrictions provided for the benefit, of the Series D, regardless of whether any such
action shall be by means of amendment to the Articles of Incorporation or bylaws or by merger, consolidation or otherwise or filing any
Certificate of Designation, it being understood that the creation of a new security having rights, preferences or privileges senior to
or on parity with the Series D in a future financing will not constitute an amendment, addition, alteration, filing, waiver or repeal
for these purposes; (b) increase or decrease (other than by conversion) the authorized number of Series D; (c) issue any Series D, other
than to the Investors; or (d) without limiting any provision hereunder, whether or not prohibited by the terms of the Series D, circumvent
a right of the Series D.
On
July 20, 2020 and July 22, 2020, the Company entered Exchange Agreements with two Investors to exchange outstanding August 2019 Notes
and August 2019 Warrants for a newly created series of preferred stock designated the Series D Convertible Preferred Stock. Pursuant
to the Exchange Agreements, the Investors exchanged August 2019 Notes with an aggregate remaining principal amount outstanding of $500,184,
accrued interest payable of $85,827,
and Warrants to purchase 423,159,293
shares of Common Stock for 522,726
shares of Series D (the “Exchange”).
The Series D shares issued in the exchange had an equivalent fair value as if the investors had converted their debt to common stock
at the contractual rate in the convertible notes and therefore, there was no gain or loss on the exchange. In connection with the issuance
of the Series D shares, the Company recorded a loss on debt extinguishment of $239,678
which is associated with the fair market
value of the excess shares issued upon conversion of other settlement amounts.
During
the period from July 1, 2020 to December 31, 2020, the Company issued 522,726,000
shares of its common stock in connection
with the conversion of 522,726
shares of Series D. The
conversion ratio was 1,000 shares of common stock for each share of Series D based on the Series D COD. Accordingly,
as of December 31, 2021 and 2020, no
shares of Series D were outstanding.
These
Series D preferred share issuances which were not redeemable were evaluated to determine whether temporary or permanent equity classification
on the consolidated balance sheet was appropriate. As per the terms of the Series D preferred stock agreements, Series D preferred stock
was not redeemable. As such, since Series D preferred stock was not redeemable, the Series D preferred stock was classified as permanent
equity. The Company also concluded that the conversion rights under the Series D Preferred Stock were clearly and closely related to
the equity host instrument. Accordingly, the conversion rights feature on the Series D Preferred Stock were not considered an embedded
derivative that required bifurcation.
Series
E preferred shares
To
consummate the Series E Offering, the Company’s Board of Directors (the “Board”) created the Series E Convertible
Preferred Stock (the “Series E”) pursuant to the authority vested in the Board by the Company’s Amended and
Restated Articles of Incorporation to issue up to 10,000,000
shares of preferred stock, $0.001
par value per share, of which 7,049,999
are unissued and undesignated. The
Company’s Amended and Restated Articles of Incorporation explicitly authorize the
Board to issue any or all of such shares of preferred stock in one (1) or more classes or series and to fix the designations, powers,
preferences and rights, the qualifications, limitations or restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any class
or series, without further vote or action by the stockholders.
On
October 6, 2020, the Board filed the Certificate of Designation of Preferences, Rights and Limitations of Series E Convertible Preferred
Stock (the “Series E COD”) with the Secretary of State of the State of Nevada designating 562,250 shares of preferred
stock as Series E. On December 28, 2020, the Board filed an Amended and Restated Certificate of Designation of Preferences, Rights and
Limitations of Series E Convertible Preferred Stock (the “Amended Series E COD”) with the Secretary of State of the
State of Nevada. The Series E has a stated value of $13.34 per share (the “Stated Value”). Pursuant with the Amended
Series E COD,
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● |
Each
holder of Series E has the right to cast the number of votes equal to the number of whole shares of Common Stock into which the shares
of Series E held by such holder are convertible as of the applicable record date. |
| |
|
|
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● |
Unless
prohibited by Nevada law governing distributions to stockholders, for a period of one-year beginning with the Original Issuance Date,
as defined, the Corporation shall have the right but not the obligation to redeem all outstanding Series E (and not any part of the
Series E) at a price equal to 115% of (i) the Stated Value per share plus (ii) all unpaid dividends thereon. If the Company fails
to redeem all outstanding Series E on the redemption date, it shall be deemed to have waived its redemption right. |
Subject
to a beneficial ownership limitation and customary adjustments for stock dividends and stock splits, each share of Series E shall be
convertible into that number of shares of Common Stock calculated by dividing the Stated Value of each share of Series E being converted
by the Conversion Price. The initial Conversion Price shall be $0.01 which shall be subject to adjustment as provided below. In addition,
the Company shall issue the Holder converting all or any portion of Series E an additional sum (the “Make Good Amount”) equal
to $210 for each $1,000 of Stated Value of the Series E converted pro-rated for amounts more or less than $1,000, increasing to $310
for each $1,000 of Stated Value during the Triggering Event Period (the “Extra Amount”). Subject to the Beneficial
Ownership Limitation, the Make Good Amount shall be paid in Shares of Common Stock, as follows: The number of shares of Common Stock
issuable as the Make Good Amount shall be calculated by dividing the Extra Amount by the product of 80% times the average VWAP
for the five Trading Days prior to the date a Holder delivered a notice of conversion to the Company (the “Conversion Date”).
During the Triggering Event Period, the number of shares of Common Stock issuable as the Make Good Amount shall be calculated by dividing
the Extra Amount by the product of 70% times the average VWAP for the five Trading Days prior to the Conversion Date.
Subject
to the Beneficial Ownership Limitation, at any time during the period commencing on the date of the occurrence of a Triggering Event
and ending on the date of the cure of such Triggering Event (the “Triggering Event Period”), a Holder may, at such Holder’s
option, by delivery of a conversion notice to the Company to convert all, or any number of Series E (such conversion amount of the Series
E to be converted pursuant to this Section 6(b) (the “Triggering Event Conversion Amount”), into shares of Common
Stock at the Triggering Event Conversion Price. The “Triggering Event Conversion Amount” means 125%
of the Stated Value and the “Triggering Event Conversion Price” means $0.006.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2021 AND 2020
Triggering
events include, but are not limited to, (1) failure to satisfy Rule 144 current public information requirements; (2) ceasing to be a
reporting company under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or failing to comply
with the reporting requirements of a reporting company under the Exchange Act; (3) suspension from or termination of trading; (4) failure
to reserve sufficient shares of Common Stock (after cure periods and subject to certain extensions); (5) various insolvency proceedings
(subject to certain carveouts); (6) material breach of the Series E Offering transaction documents; and (7) failure to comply with conversion
of any Series E shares when requested by the holder thereof.
If
and whenever on or after the Initial Issuance Date but not after two years from the Original Issuance Date, the Company issues or sells,
or is deemed to have issued or sold, additional shares of common stock, options, warrants of convertible instruments, other than an Exempt
Issuance, for a consideration per share (the “Base Share Price”) less than a price equal to the Conversion Price in
effect immediately prior to such issuance or sale or deemed issuance or sale (such Conversion Price then in effect is reflected to herein
as the “Applicable Price”) (the foregoing a “Dilutive Issuance”), then immediately after such Dilutive
Issuance, the conversion price then in effect shall be reduced to an amount equal to the Base Share Price.
From
and after the Original Issuance Date, cumulative dividends on each share of Series E shall accrue, whether or not declared by the Board
of Directors and whether or not there are funds legally available for the payment of dividends, on a daily basis in arrears at the rate
of 6%
per annum based on a 360-day year on the Stated Value plus all unpaid accrued and accumulated dividends thereon. During the year
ended December 31, 2021, the Company accrued dividends of $140,872
which has been included in accrued expenses on
the accompanying consolidated balance sheet.
On
a pari passu basis with the holders of Series D Convertible Preferred Stock that was issued and outstanding, upon the liquidation, dissolution
or winding up of the business of the Company, whether voluntary or involuntary, the Series E is entitled to receive an amount per share
equal to the Stated Value and then receive a pro-rata portion of the remaining assets available for distribution to the holders of Common
Stock on an as-converted to Common Stock basis. Until the date that such Series E shareholder no longer owns at least 50% of the Series
E, the holders of Series E have the right to participate, pro rata, in each subsequent financing in an amount up to 25% of the total
proceeds of such financing on the same terms, conditions and price otherwise available in such subsequent financing.
A
holder of Series E may not convert any shares of Series E into Common Stock if the holder (together with the holder’s affiliates
and any persons acting as a group together with the holder or any of the holder’s affiliates) would beneficially own in excess
of 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to the conversion, as such percentage ownership
is determined in accordance with the terms of the Series E COD. However, upon notice from the holder to the Company, the holder may decrease
or increase the beneficial ownership limitation, which may not exceed 9.99% of the number of shares of Common Stock outstanding immediately
after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Amended Series E
COD, provided that any such increase or decrease in the beneficial ownership limitation will not take effect until 61 days following
notice to the Company.
Approval
of at least a majority of the outstanding Series E is required to: (a) amend or repeal any provision of, or add any provision to, the
Company’s Articles of Incorporation or bylaws, or file any Certificate of Designation (however such document is named) or articles
of amendment to create any class or any series of preferred stock, if such action would adversely alter or change in any respect the
preferences, rights, privileges or powers, or restrictions provided for the benefit, of the Series E, regardless of whether any such
action shall be by means of amendment to the Articles of Incorporation or bylaws or by merger, consolidation or otherwise or filing any
Certificate of Designation, but the creation of a new security having rights, preferences or privileges senior to or on parity with the
Series E in a future financing will not constitute an amendment, addition, alteration, filing, waiver or repeal for these purposes; (b)
increase or decrease (other than by conversion) the authorized number of Series E; (c) issue any Series D Convertible Preferred Stock,
(d) issue any Series E in excess of 562,250 or (e) without limiting any provision under the Series E COD, whether or not prohibited by
the terms of the Series E, circumvent a right of the Series E.
On
October 8, 2020, the Company entered into a Securities Purchase Agreement with the investors party thereto (collectively the “Investors”)
pursuant to which the Investors agreed to purchase units, severally and not jointly, which consisted of an aggregate of (i) 47,977
shares of Series E Convertible Preferred Stock
(the “Series E”) and (ii) warrants (the “Warrants”) to purchase 23,988,500
shares of the Company’s common stock which
are equal to 50%
of the shares of common stock issuable upon conversion of the Series E if the Series E were converted on October 8, 2020 (the “October
2020 Series E Offering”). The gross proceeds to the Company were $640,000,
or $13.34
per unit which is the stated value of each Series
E share. The Company paid fees of $35,000
and received net proceeds of $605,000.
The initial exercise price of the Warrants related to the October 2020 Series E Offering is $0.04
per share, subject to adjustment. Due
to down-round provisions in the Warrants, the number of warrants was increased from 23,988,500
warrants to 95,954,000
warrants, and the exercise price was reduced
to $0.01
per share.
On
December 28, 2020 and December 30, 2020, the Company entered into Securities Purchase Agreements with investors pursuant to which the
Investors agreed to purchase units, severally and not jointly, which consisted of an aggregate of (i) 57,400 shares of Series E and (ii)
Warrants to purchase 76,571,429 shares of the Company’s common stock which are equal to 1,334 warrants for each share
of Series E purchased (the “December 2020 Series E Offering”). The gross proceeds to the Company were $670,000, or $11.67
per unit. The Company paid fees of $112,000 and received net proceeds of $558,000. The initial exercise price of the Warrants related
to the December 2020 Series E Offering is $0.01 per share, subject to adjustment. In connection with the issuance of the Series E and
related warrants, the Company recorded a deemed dividend of $527,230 related to the beneficial conversion features of the Series E.
During
the three months ended March 31, 2021, the Company
entered into Securities Purchase Agreements with investors pursuant to which the Investors agreed to purchase units, severally and not
jointly, which consisted of an aggregate of (i) 310,992
shares of Series E and (ii) Warrants to purchase
414,857,146
shares of the Company’s common stock
which are equal to 1,334
warrants for each for each share of Series E
purchased (the “Q1 2021 Series E Offering”). The gross proceeds to the Company were $3,630,000,
or $11.67
per unit. The Company paid fees of $372,000
and received net proceeds of $3,258,000.
The initial exercise price of the Warrants related to the Q1 2021 Series E Offering is $0.01
per share, subject to adjustment. Additionally,
the Company issued 82,971,429
warrants to the placement agent at an initial
exercise price of $0.01
per share. In connection with the issuance of
the Series E and related warrants, during the three months ended March 31, 2021, the Company recorded a deemed dividend of $777,510
related to the beneficial conversion features
of the Series E.
During
April 2021, the Company entered into Securities Purchase Agreements with investors pursuant to which the Investors agreed to purchase
units, severally and not jointly, which consisted of an aggregate of (i) 32,126
shares of Series E and (ii) Warrants to
purchase 42,857,143
shares of the Company’s common stock
which are equal to 1,334
warrants for each for each share of Series
E purchased (the “April 2021 Series E Offering”). The gross proceeds to the Company were $375,000,
or $11.67
per unit. The Company paid fees of $42,500
and received net proceeds of $332,500.
The initial exercise price of the Warrants related to the April 2021 Series E Offering is $0.01
per share, subject to adjustment. Additionally,
the Company issued 8,571,429
warrants to the placement agent at an
initial exercise price of $0.01
per share. In connection with the issuance
of the Series E and related warrants, on April 9, 2021, the Company recorded a deemed dividend of $104,533
related to the beneficial conversion features
of the Series E.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2021 AND 2020
In
connection with the Series E Offerings, the Company entered into Registration Rights Agreements (the “Series E Registration
Rights Agreements”) pursuant to which the Company agreed to file a registration statement on Form S-1 to register the resale
of the shares of Common Stock issuable to the Investors upon conversion of the Series E Preferred Stock and exercise of the Warrants.
Pursuant to the Series E Registration Rights Agreements, if a registration statement registering for resale all of the shares of common
stock issuable under Series E Convertible Preferred Stock and Warrants (i) is not filed with the Commission by the Company within 30
days of the closing dates or any other registration statement, (ii) is not declared effective by the Commission by the Effectiveness
Date of the initial registration statement (90 days following the closing date) or any other registration statement, or (iii) after the
effective date of a registration statement, such registration statement ceases for any reason to remain continuously effective as to
all registrable securities included in such registration statement for more than 30 calendar days during any 12-month period (any such
failure or breach being referred to as an “Event”, and the date on which such Event occurs, being referred to as “Event
Date”), then, in addition to any other rights the Holders may have under the Series E Registration Rights Agreements or under
applicable law, on each such Event Date and on each monthly anniversary of each such Event Date (if the applicable Event shall not have
been cured by such date) until the applicable Event is cured, the Company is obligated to pay to each Holder an amount in cash, as partial
liquidated damages and not as a penalty, equal to 1% of the purchase price paid by such Holder pursuant to the Series E Purchase Agreement,
during which such Event continues uncured. Also pursuant to the Series E Registration Rights Agreements, the partial liquidated damages
provisions summarized above apply on a daily pro rata basis for any portion of a month prior to the cure of an Event. The Company did
not file its initial registration statement within 30 days of the closing date of certain of the Registration Rights Agreements (the
“Filing Events”) and such registration statement was not declared effective by the Commission by the Effectiveness
Date of certain of the Registration Rights Agreements (the “Effectiveness Events”). The Company filed a registration
statement on Form S-1 for the shares of Common Stock issuable to the Investors upon conversion of the Series E Preferred Stock and exercise
of the Warrants (the “S-1 Registration Statement”) on April 22, 2021 (the “Filing Date”), which
was declared effective by the Commission on May 5, 2021 (the “Effective Date”). The filing of the S-1 Registration
Statement cured the Filing Events as of the Filing Date. The declaration of effectiveness of the S-1 Registration Statement cured the
Effectiveness Events as of the Effective Date.
These
Series E preferred share issuances with redemption provisions that permit the issuer to settle in either cash or common stock, at the
option of the issuer, were evaluated to determine whether temporary or permanent equity classification on the consolidated balance sheet
was appropriate. As per the terms of the Series E preferred stock agreements, the Company shall have the right but not the obligation
to redeem all outstanding Series E (and not any part of the Series E) at a price equal to 115% of (i) the Stated Value per share plus
(ii) all unpaid dividends thereon. As such, since Series E preferred stock is redeemable upon the occurrence of an event that is within
the Company’s control, the Series E preferred stock is classified as permanent equity.
The
Company concluded that the Series E Preferred Stock represented an equity host and, therefore, the redemption feature of the Series E
Preferred Stock was considered to be clearly and closely related to the associated equity host instrument. The redemption features did
not meet the net settlement criteria of a derivative and, therefore, were not considered embedded derivatives that required bifurcation.
The Company also concluded that the conversion rights under the Series E Preferred Stock were clearly and closely related to the equity
host instrument. Accordingly, the conversion rights feature on the Series E Preferred Stock were not considered an embedded derivative
that required bifurcation.
On
December 8, 2020 the Company entered into an Engagement Agreement (the “Engagement Agreement”) with a placement agent to
act as an exclusive selling/placement agent for the Company to assist in a financing for the Company. In connection with the engagement
letter, the Company agreed to pay to the placement agent at each full or incremental closing of any equity financing, convertible debt
financing, debt conversion or any instrument convertible or exercisable into the Company’s common stock (the “Securities
Financing”) during the Exclusive Period which is for a period of 90 days from the date of execution of this Letter Agreement; (i)
a cash transaction fee in the amount of 10% of the amount of the Securities Financing; and (ii) warrants (the “Warrants”)
with a 5 year term and cashless exercise, equal to 10% of the amount of securities sold (on an as converted basis) in the Securities
Financing, at an exercise price equal to the investor’s warrant exercise price of the Securities Financing.
In connection with this Engagement Agreement, through December 31, 2020, the Company paid the placement agent cash of $67,000
and
issued 15,314,285
warrants
to the placement agent at an initial exercise price of $0.01
per
share. Additionally, during the year ended December 31, 2021, the Company paid the placement agent cash of $385,500
and
issued 91,542,858
warrants
to the placement agent at an initial exercise price of $0.01
per
share. The cash fee of $400,500
was
charged against the proceeds of the offering in additional paid-in capital and there is no effect on equity for the placement agent warrants.
During
the three months ended June 30, 2021, the Company issued 571,296,287 shares of its common stock in connection with the conversion of
340,346 shares of Series E. The conversion ratio was based on the Series E certificate of designation, as amended.
During
the three months ended September 30, 2021, the Company issued 25,725,519
shares of its common stock in connection with
the conversion of 17,135
shares of Series E. The conversion ratio was
based on the Series E certificate of designation, as amended.
During
the three months ended December 31, 2021, the Company issued 60,758,228
shares of its common stock in connection
with the conversion of 39,410
shares of Series E. The conversion ratio
was based on the Series E certificate of designation, as amended.
Series
F preferred share
Pursuant
to the terms of the Securities Purchase Agreements entered in connection with the Series E Offering by and among the Company and the
investors named therein (the “Series E Investors”), the Company is required to keep reserved for issuance to the Series E
Investors three times the number of shares of common stock issuable to the Series E Investors upon conversion or exercise, as applicable,
of convertible notes and warrants held by the Series E Investors (the “Series E Reserve Requirement”). If the Company fails
to meet the Series E Reserve Requirement within 45 days after written notice from a Series E Investor, the Company must, inter alia,
sell to Company’s chief executive officer (or such other officer as the board of directors may designate) a series of preferred
stock which holds voting power equal to 51% of the number of votes eligible to vote at any special or annual meeting of the Company’s
stockholders (with the power to take action by written consent in lieu of a stockholders meeting) for the sole purpose of amending the
Company’s Amended and Restated Articles of Incorporation to increase the number of shares of common stock that the Company is authorized
to issue, which such preferred stock will be automatically cancelled upon the effectiveness of the resulting increase in the Company’s
authorized stock.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2021 AND 2020
On
February 22, 2021, the Company sold to John Mercadante, for $10, one share of Series F Preferred Stock which has voting power equal to
51% of the number of votes eligible to vote at any special or annual meeting of the Company’s stockholders (with the power to take
action by written consent in lieu of a stockholders meeting) for the sole purpose of amending the Company’s Amended and Restated
Articles of Incorporation to increase the number of shares of common stock that the Company is authorized to issue. Upon the effectiveness
of the amendment on April 15, 2021, the Series F Preferred Stock was automatically cancelled. The Series F Preferred Stock was not entitled
to vote on any other matter, was not entitled to dividends, was not convertible into any other security of the Company and was not entitled
to any distributions upon liquidation of the Company.
Series
G preferred share
On
December 28, 2021, the Company’s Board of Directors (the “Board”) Board filed the Certificate of Designation of Preferences,
Rights and Limitations of Series G Convertible Preferred Stock (the “Series G COD”) with the Secretary of State of the State
of Nevada designating 1,000,000
shares of preferred stock as Series G.
The Series E has a stated value of $10.00
per share (the “Series G Stated
Value”). Pursuant with the Series G COD,
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Each
holder of Series G has the right to cast the number of votes equal to the number of whole shares of Common Stock into which the shares
of Series G held by such holder are convertible as of the applicable record date. |
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|
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● |
Unless
prohibited by Nevada law governing distributions to stockholders, for a period of one-year beginning with the Original Issuance Date,
as defined, the Corporation shall have the right but not the obligation to redeem all outstanding Series G (and not any part of the
Series G) at a price equal to 115%
of (i) the Stated Value per share plus (ii) all unpaid dividends thereon. If the Company fails to redeem all outstanding Series G
on the redemption date, it shall be deemed to have waived its redemption right. |
Subject
to a beneficial ownership limitation and customary adjustments for stock dividends and stock splits, each share of Series G shall be
convertible into that number of shares of Common Stock calculated by dividing the Stated Value of each share of Series G being converted
by the Conversion Price. The initial Conversion Price shall be $0.01 which shall be subject to adjustment as provided below. In addition,
the Company shall issue the Holder converting all or any portion of Series G an additional sum (the “Series G Make Good Amount”)
equal to $210 for each $1,000 of Stated Value of the Series G converted pro-rated for amounts more or less than $1,000 (the “Series
G Extra Amount”). Subject to the Beneficial Ownership Limitation, the Make Good Amount shall be paid in Shares of Common Stock,
as follows: The number of shares of Common Stock issuable as the Make Good Amount shall be calculated by dividing the Series G Extra
Amount by the product of 80% times the average VWAP for the five Trading Days prior to the date a Holder delivered a notice of conversion
to the Company (the “Conversion Date”), subject to beneficial ownership limitations.
If
and whenever on or after the Initial Issuance Date but not after two years from the Original Issuance Date, the Company issues or sells,
or is deemed to have issued or sold, additional shares of common stock, options, warrants of convertible instruments, other than an Exempt
Issuance, for a consideration per share (the “Base Share Price”) less than a price equal to the Conversion Price in
effect immediately prior to such issuance or sale or deemed issuance or sale (such Conversion Price then in effect is reflected to herein
as the “Applicable Price”) (the foregoing a “Dilutive Issuance”), then immediately after such Dilutive
Issuance, the conversion price then in effect shall be reduced to an amount equal to the Base Share Price.
From
and after the Original Issuance Date, cumulative dividends on each share of Series G shall accrue, whether or not declared by the Board
of Directors and whether or not there are funds legally available for the payment of dividends, on a daily basis in arrears at the rate
of 6%
per annum based on a 360-day year on the Stated Value plus all unpaid accrued and accumulated dividends thereon.
On
a pari passu basis with the holders of Series E Convertible Preferred Stock that was issued and outstanding, upon the liquidation, dissolution
or winding up of the business of the Company, whether voluntary or involuntary, the Series G is entitled to receive an amount per share
equal to the Stated Value and then receive a pro-rata portion of the remaining assets available for distribution to the holders of Common
Stock on an as-converted to Common Stock basis. The holders of Series G have the right to participate, pro rata, in each subsequent financing
in an amount up to 40%
of the total proceeds of such financing on the same terms, conditions and price otherwise available in such subsequent financing.
A
holder of Series G may not convert any shares of Series G into Common Stock if the holder (together with the holder’s affiliates
and any persons acting as a group together with the holder or any of the holder’s affiliates) would beneficially own in excess
of 4.99%
of the number of shares of Common Stock outstanding immediately after giving effect to the conversion, as such percentage ownership is
determined in accordance with the terms of the Series G COD. However, upon notice from the holder to the Company, the holder may decrease
or increase the beneficial ownership limitation, which may not exceed 9.99% of the number of shares of Common Stock outstanding immediately
after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the Series G COD, provided
that any such increase or decrease in the beneficial ownership limitation will not take effect until 61 days following notice to the
Company.
Approval
of at least two-thirds of the outstanding Series G is required to: (a) amend or repeal any provision of, or add any provision to, the
Company’s Articles of Incorporation or bylaws, or file any Certificate of Designation (however such document is named) or articles
of amendment to create any class or any series of preferred stock, if such action would adversely alter or change in any respect the
preferences, rights, privileges or powers, or restrictions provided for the benefit, of the Series G, regardless of whether any such
action shall be by means of amendment to the Articles of Incorporation or bylaws or by merger, consolidation or otherwise or filing any
Certificate of Designation, but the creation of a new security having rights, preferences or privileges senior to or on parity with the
Series G in a future financing will not constitute an amendment, addition, alteration, filing, waiver or repeal for these purposes; (b)
increase or decrease (other than by conversion) the authorized number of Series G; (c) issue any Series E or Series D Convertible Preferred
Stock, (d) issue any Series G in excess of 1,000,000
or (e) without limiting any provision
under the Series G COD, whether or not prohibited by the terms of the Series G, circumvent a right of the Series G.
On
December 31, 2021, the Company entered into Securities Purchase Agreements with investors pursuant to which the Investors agreed to purchase
units, severally and not jointly, which consisted of an aggregate of (i) 615,000
shares of Series G and (ii) Warrants to
purchase 615,000,000
shares of the Company’s common stock
which are equal to 1,000 warrants for each for each share of Series G purchased (the “December 2021 Series G Offering”).
The gross proceeds to the Company were $6,150,000,
or $10.00
per unit. The Company paid fees of $615,507,
paid cash of $54,933
for the settlement of disputed penalties
related the Series E, and received net proceeds of $5,479,560
The initial exercise price of the Warrants
related to the December 2021 Series G Offering is $0.01
per share, subject to adjustment. In connection
with the issuance of the Series G and related warrants, the Company recorded a deemed dividend of $2,041,802
related to the beneficial conversion features
of the Series G.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2021 AND 2020
In
connection with the Series G Offerings, the Company entered into Registration Rights Agreements (the “Series G Registration
Rights Agreements”) pursuant to which the Company agreed to file a registration statement on Form S-1 to register the resale
of the shares of Common Stock issuable to the Investors upon conversion of the Series G Preferred Stock and exercise of the Warrants.
Pursuant to the Series G Registration Rights Agreements, if a registration statement registering for resale all of the shares of common
stock issuable under Series G Convertible Preferred Stock and Warrants (i) is not filed with the Commission by the Company within 45
days of the closing dates or any other registration statement, (ii) is not declared effective by the Commission by the Effectiveness
Date of the initial registration statement (90 days following the closing date) or any other registration statement, or (iii) after the
effective date of a registration statement, such registration statement ceases for any reason to remain continuously effective as to
all registrable securities included in such registration statement for more than 30 calendar days during any 12-month period (any such
failure or breach being referred to as an “Event”, and the date on which such Event occurs, being referred to as “Event
Date”), then, in addition to any other rights the Holders may have under the Series G Registration Rights Agreements or under
applicable law, on each such Event Date and on each monthly anniversary of each such Event Date (if the applicable Event shall not have
been cured by such date) until the applicable Event is cured, the Company is obligated to pay to each Holder an amount in cash, as partial
liquidated damages and not as a penalty, equal to 1% of the purchase price paid by such Holder pursuant to the Series G Purchase Agreement,
during which such Event continues uncured. Also pursuant to the Series G Registration Rights Agreements, the partial liquidated damages
provisions summarized above apply on a daily pro rata basis for any portion of a month prior to the cure of an Event.
These
Series G preferred share issuances with redemption provisions that permit the issuer to settle in either cash or common stock, at the
option of the issuer, were evaluated to determine whether temporary or permanent equity classification on the consolidated balance sheet
was appropriate. As per the terms of the Series G preferred stock agreements, the Company shall have the right but not the obligation
to redeem all outstanding Series G (and not any part of the Series E) at a price equal to 115% of (i) the Stated Value per share plus
(ii) all unpaid dividends thereon. As such, since Series G preferred stock is redeemable upon the occurrence of an event that is within
the Company’s control, the Series G preferred stock is classified as permanent equity.
The
Company concluded that the Series G Preferred Stock represented an equity host and, therefore, the redemption feature of the Series G
Preferred Stock was considered to be clearly and closely related to the associated equity host instrument. The redemption features did
not meet the net settlement criteria of a derivative and, therefore, were not considered embedded derivatives that required bifurcation.
The Company also concluded that the conversion rights under the Series G Preferred Stock were clearly and closely related to the equity
host instrument. Accordingly, the conversion rights feature on the Series G Preferred Stock were not considered an embedded derivative
that required bifurcation.
In
connection with issuance of the Series G, on December 31, 2021, the Company paid the placement agent cash of $609,507
and issued 123,000,000
warrants to the placement agent at an
initial exercise price of $0.01
per share. The cash fee of $609,507
was charged against the proceeds of the
offering in additional paid-in capital and there is no effect on equity for the placement agent warrants.
Common
stock
On
February 23, 2021, stockholders holding at least 51% of the voting power of the stock of the Company entitled to vote thereon consented,
in writing, to amend the Company’s Amended and Restated Articles of Incorporation, by adoption of the Certificate of Amendment
to the Amended and Restated Articles of Incorporation of the Company to authorize an increase of the number of shares of common stock
that the Company may issue to 10,000,000,000 shares, par value $0.001 (the “2021 Amendment”). The increase in the number
of authorized shares was needed to meet the share reserve requirements under the Series E.
The
Company filed a preliminary information statement on Schedule 14C regarding the stockholders’ consent to the Authorized Share Increase
Amendment with the SEC on March 3, 2021. This consent was sufficient to approve the 2021 Amendment under Nevada law. The Company filed
a definitive information statement on Schedule 14C on March 15, 2021 and first mailed that information statement to stockholders on March
15, 2021.
Shares
issued in connection with conversion of convertible debt and interest
During
the six months ended June 30, 2020, the Company issued 417,863,999 shares of its common stock upon the partial conversion of a convertible
note which had bifurcated embedded conversion option derivatives including the conversion of principal and default interest balances
due of $2,844,979, accrued interest payable due of $218,600, and fees of $8,180, at the contractual conversion price. The Company accounted
for the partial conversion of these convertible notes pursuant to the guidance of ASC 470-20, Debt with Conversion and Other Options.
Under ASC 470-20, the Company recognized an aggregate loss on debt extinguishment upon conversion in the amount of $15,704,425 which
is associated with the difference between the fair market value of the shares issued upon conversion and the amount of principal balances
converted at the conversion price.
During
the three months ended September 30, 2020, the Company issued 477,682,407
shares of its common stock in connection with
the conversion of convertible notes payable and default interest of $4,215,651,
accrued interest of $82,852,
and fees of $900.
The conversion price was based on contractual terms of the related debt.
In connection with the issuance of these shares, the Company recorded a loss on debt extinguishment of $19,700,260
which is associated with the fair market
value of the excess shares issued upon conversion of the principal balances converted at the conversion price.
In
October 2020, the Company issued 53,255,583
shares of its common stock in connection
with the conversion of a convertible note payable and default interest of $293,150
and accrued interest of $26,383.
The conversion price was based on contractual terms of the related debt.
In
October and December 2020, the Company issued 9,606,099
shares of its common stock in connection
with the conversion of accrued interest of $58,317.
The conversion price was based on contractual terms of the related debt.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2021 AND 2020
On
December 17, 2020, the Company issued 55,000,000
shares of its common stock in connection
with the conversion of convertible notes payable of $500,000
and accrued interest of $81,616.
The conversion price was based on contractual terms of the related debt.
During
the three months ended December 31, 2020, under ASC 470-20, the Company recognized an aggregate loss on debt extinguishment upon conversion
in the amount of $866,452
which is associated with the difference
between the fair market value of the shares issued upon conversion and the amounts of principal balances converted at the conversion
price.
During
2020, the aggregate loss on debt extinguishment upon conversions associated with the difference between the fair market value of the
shares issued upon conversion and the amounts of principal balances converted at the conversion price amounted to $36,271,137
consisting of $15,704,425,
$19,700,260
and $866,452
as discussed above (See Note 11).
On
January 11, 2021, the Company issued 15,454,545 shares of its common stock in connection with the conversion of a convertible note payable
of $170,000. The conversion price was based on contractual terms of the related debt.
During
the three months ended June 30, 2021, the Company and each Q1/Q2 2020 Note investor entered into a letter agreement whereby the investor
waived its right to any Mandatory Default Payment. Accordingly, during the three months ended June 30, 2021, the Company reversed the
accrued Mandatory Penalty amount due of $664,400 and recorded a gain on debt extinguishment of $664,400. Additionally, during the three
months ended June 30, 2021, the Company issued 28,358,841 shares of its common stock upon the conversion of all remaining Q1/Q2 2020
Note principal and interest balances due aggregating $277,916.
During
the three months ended June 30, 2021, the Company issued 15,923,322 shares of its common stock upon the conversion of all remaining April
20 Note principal and interest balances due aggregating $95,540. The Company accounted for the conversion of these convertible notes
pursuant to the guidance of ASC 470-20, Debt with Conversion and Other Options. Under ASC 470-20, the Company recognized an aggregate
loss on debt extinguishment upon conversion in the amount of $143,872 which is associated with the difference between the fair market
value of the shares issued upon conversion and the conversion price and is equal to the fair value of the shares of common stock transferred
upon conversion.
Shares
issued in connection with conversion of Series E preferred shares
During
the three months ended June 30, 2021, the Company issued 571,296,287 shares of its common stock in connection with the conversion of
340,346 shares of Series E. The conversion ratio was based on the Series E certificate of designation, as amended.
During
the three months ended September 30, 2021, the Company issued 25,725,519 shares of its common stock in connection with the conversion
of 17,135 shares of Series E. The conversion ratio was based on the Series E certificate of designation, as amended.
During
the three months ended December 31, 2021, the Company issued 60,758,228
shares of its common stock in connection
with the conversion of 39,410
shares of Series E. The conversion ratio
was based on the Series E certificate of designation, as amended.
Shares
issued upon exercise of warrants
During
the six months ended June 30, 2020, the Company issued 70,203,889
shares of its common stock in connection with
the cashless exercise of 73,635,000
warrants. The exercise price was based on
contractual terms of the related warrant.
During
the three months ended September 30, 2020, the Company issued 85,710,419 shares of its common stock in connection with the cashless exercise
of 83,662,448 warrants. The exercise price was based on contractual terms of the related warrant. In connection with the cashless exercise
of warrants, the Company recorded a loss on debt extinguishment of $237,664 which is associated with the fair market value of the excess
common shares issued upon the cashless exercise of warrants over the number of shares issuable using the warrant exercise price.
During
the three months ended June 30, 2021, the Company issued 52,482,141 shares of its common stock in connection with the cashless exercise
of 98,557,429 warrants. The exercise price was based on contractual terms of the related warrant.
In
May and June 2021, the Company issued 68,571,429 shares of its common stock and received proceeds of $685,714 from the exercise of 68,571,429
warrants at $0.01 per share.
During
the three months ended September 30, 2021, the Company issued 325,539,430 shares of its common stock and received proceeds of $3,254,955
from the exercise of 325,539,430 warrants at $0.01 per share.
During
the three months ended December 31, 2021, the Company issued 28,571,429
shares of its common stock and received
proceeds of $285,714
from the exercise of 28,571,429
warrants at $0.01
per share.
Common
shares issued settlement
On
July 20, 2020, in connection with the parties’ recent settlement, the Company issued 10,281,018
shares to Bellridge to settle certain claims
of Bellridge (see Note 12 under legal matters). These shares were valued at $502,742,
or $0.049 per
share, based on the quoted trading price on the date of grant. In connection with these shares, the Company recorded a loss on debt extinguishment
of $502,742.
On
December 17, 2020, the Company issued 18,685,477 common shares to certain August 2019 equity and debt purchasers as settlement related
to the difference between $2.50, the purchase price, and $0.40. These shares were valued at $545,616, or $0.029 per share, based on the
quoted trading price on the date of grant. In connection with these shares, the Company recorded settlement expense of $545,616.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2021 AND 2020
Common
shares issued conversion of Series B preferred shares
On
July 24, 2020, the Company issued 1,000,000 shares to its common stock upon the conversion of 1,000,000 shares of Series B preferred
shares.
Common
shares issued conversion of Series D preferred shares
During
the three months ended September 30, 2020, the Company issued 398,350,000
shares of its common stock in connection with
the conversion of 398,350
shares of Series D. The
conversion ratio was 1,000 shares of common stock for each share of Series D based on the Series D COD.
During
the three months ended December 31, 2020, the Company issued 124,376,000
shares of its common stock in connection
with the conversion of 124,376
shares of Series D.
The
conversion ratio was 1,000 shares of common stock for each share of Series D based on the Series D COD.
Warrants
Warrants
issued in connection with convertible debt
During
the year ended December 31, 2020, the Company issued Q1/Q2 2020 Warrants to purchase up to 827,200
shares of the Company’s common stock
(See Note 7). The Q1/Q2 2020 Warrants are exercisable at any time on or after the date of the issuance and entitle the investors to purchase
shares of the Company’s common stock for a period of five
years from the initial date the Q1/Q2 2020
Warrants become exercisable. Under the terms of the Q1/Q2 2020 Warrants, the investors are entitled to exercise the Q1/Q2 2020 Warrants
to purchase up to 827,200
shares of the Company’s common stock
at an initial exercise price of $0.40,
subject to adjustment as detailed in the respective Q1/Q2 2020 Warrant. In connection with the 374,000
warrants issued in January 2020, the Company
calculated the relative fair value of these warrants in the amount of $262,872
which was added to debt discount and will
be amortized over the term of the notes (see Note 7). In connection with the 453,200
warrants issued in February, March 2020
and April 2020, the Company determined that various terms of these Q1/Q2 2020 Notes and Q1/Q2 2020 Warrants, including the default provisions
in the Q1/Q2 2020 Notes discussed in Note 7, caused derivative treatment of the warrants. During the year ended December 31, 2020, on
the initial measurement dates, the fair value of the warrant derivatives of $456,858
was recorded as derivative liabilities
and was allocated as a debt discount up to the net proceeds of the Q1/Q2 2020 Notes of $456,858.
The fair value of these warrants was estimated using the Binomial valuation model with the assumptions as outlined in Note 7.
Warrants
issued in connection with Series E preferred
shares
In
connection with the sale of Series E preferred shares, in 2020, the Company issued warrants to purchase 100,559,929
shares of the Company’s common stock
at an initial exercise price of $0.01
per share. Additionally, the Company issued
15,314,285
warrants to the placement agent at an
initial exercise price of $0.01
per share.
In
connection with certain down-round provisions on the Series E warrants issued in October 2020, in January 2021, the Company increased
the number of warrants by 71,965,500.
In
connection with the sale of Series E preferred shares, during the year ended December 31, 2021, the Company issued warrants
to purchase 457,714,289
shares of the Company’s common stock at
an initial exercise price of $0.01
per share. Additionally, the Company issued 91,542,858
warrants to the placement agent at an initial
exercise price of $0.01
per share. (See Series E preferred shares above).
During
the three months ended June 30, 2021, the Company issued 52,482,141 shares of its common stock in connection with the cashless exercise
of 98,557,429 warrants. The exercise price was based on contractual terms of the related warrant.
In
May and June 2021, the Company issued 68,571,429 shares of its common stock and received proceeds of $685,714 from the exercise of 68,571,429
warrants at $0.01 per share.
During
the three months ended September 30, 2021, the Company issued 325,539,430 shares of its common stock and received proceeds of $3,254,955
from the exercise of 325,539,430 warrants at $0.01 per share.
During
the three months ended December 31, 2021, the Company issued 28,571,429
shares of its common stock and received
proceeds of $285,714
from the exercise of 28,571,429
warrants at $0.01
per share.
During
the year ended December 31, 2021, the Company entered
into Securities Purchase Agreements with certain of the holders of its existing Series E preferred warrants (“Exercising Warrants
Holders”). Pursuant to the Securities Purchase Agreements, the Exercising Warrants Holders and the Company agreed that the Exercising
Warrants Holders would cash exercise their existing warrants, into shares of common stock underlying such existing warrants Shares. In
order to induce the Exercising Warrant Holders to cash exercise their existing Warrants, the Securities Purchase Agreements provided
for the issuance of new warrants (“New Warrants”) with such New Warrants to be issued in an amount equal to 50% of the number
of shares acquired by the Existing Warrant Holder through the exercise of existing warrants for cash. The New Warrants are exercisable
upon issuance and terminate five years following the initial exercise date. The New Warrants have an exercise price per share of $0.01.
During the year ended December 31, 2021, of the 422,682,288
warrants exercised for cash, a total of 411,253,716
existing warrants were exercised for cash contemporaneously
with the execution of the Securities Purchase Agreements resulting in total proceeds to the Company of $4,112,537.
In connection with the exercise of these existing warrants for cash, the Company issued an aggregate of 205,626,862
New Warrants. The New Warrants issued in connection
with the Securities Purchase Agreements were considered inducement warrants and are classified in equity. The fair value of the New Warrants
issued was $4,431,853
and were expensed as warrant exercise inducement
expense on the accompanying consolidated statement of operations.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2021 AND 2020
Warrants
issued in connection with Series G preferred shares
In
connection with the sale of Series G preferred shares, on December 31, 2021, the Company issued warrants to purchase 615,000,000
shares of the Company’s common stock
at an initial exercise price of $0.01
per share. Additionally, the Company issued
123,000,000
warrants to the placement agent at an
initial exercise price of $0.01
per share.
Warrant
price protection
On
August 30, 2019, pursuant to the terms of the August 2019 Purchase Agreements with accredited investors, the Company issued August 2019
Warrants to purchase up to 987,940
shares of the Company’s common stock
(See Note 7). The August 2019 Warrants are exercisable at any time on or after the date of the issuance and entitle the investors to
purchase shares of the Company’s common stock for a period of five years from the initial date the August 2019 Warrants become
exercisable. Under the terms of the August 2019 Warrants, the investors were entitled to exercise the August 2019 Warrants to purchase
up to 987,940
shares of the Company’s common stock
at an initial exercise price of $3.50,
subject to adjustment as detailed in the August 2019 Warrants. On September 6, 2019, the Company sold its common shares at $2.50
per share and accordingly, the August
2019 Warrant down-round provisions were triggered. As a result, the number of shares issuable upon exercise of the warrants was increased
by 395,176
to 1,383,116
and the exercise price was lowered to
$2.50.
On January 7, 2020, the Company issued new convertible debt with an initial conversion price of $0.40
per share and warrants exercisable at
$0.40
per share and accordingly, the conversion price and warrant
down-round provisions were triggered. As a result, the number of shares issuable upon exercise of the warrants was increased to 8,644,474
and the exercise price was lowered to
$0.40.
As a result of the January 7, 2020 trigger of the down-round provisions, on January 7, 2020, the Company recorded a deemed dividend of
$17,836,244
which represents the fair value transferred
to the warrant holders from the down-round feature being triggered. The Company calculated the difference between the August 2019 Warrants’
fair value on January 7, 2020, the date the down-round feature was triggered using the current exercise price and the new exercise price
and the new number of shares issuable upon exercise of the warrants. The deemed dividend was recorded as an increase in accumulated deficit
and increase in paid-in capital and increased the net loss to common shareholders by the same amount. Subsequent to January 7, 2020,
additional down-round protection was triggered and the exercise price of the August 2019 Warrants was lowered to $0.006
per share, and the number of shares issuable
upon exercise of the warrants was increased.
In
August 2019, in connection with the sale of common stock, the Company issued 585,000
five-year warrants to purchase common
shares for an exercise price of $2.50
per common share to investors. These warrants
include down-round provisions under which the warrant exercise price could be affected by future equity offerings undertaken by the Company.
During the year ended December 31, 2020, down-round provisions were triggered. As of December 31, 2020, the exercise price of these warrants
was lowered to $0.006
per share.
In
October 2019, pursuant to the terms of the October 3 Purchase Agreement with an accredited investor, the Company issued the October 3
Warrant to purchase up to 66,401
shares of the Company’s common stock
(See Note 7). The October 3 Warrant is exercisable at any time on or after the date of the issuance and entitles the investor to purchase
shares of the Company’s common stock for a period of five years from the initial date the October 3 Warrant becomes exercisable.
Under the terms of the October 3 Warrant, the investor is entitled to exercise the October 3 Warrant to purchase up to 66,401
shares of the Company’s common stock
at an initial exercise price of $3.51,
subject to adjustment as detailed in the October 3 Warrant. The October 3 Warrant includes a down-round provision under which the October
3 Warrant exercise price could be affected, on a full-ratchet basis, by future equity offerings undertaken by the Company. Subsequent
to October 3, 2019, the Company issued convertible debt with a conversion price of $2.50
per share and accordingly, the October
3 Warrant down-round provisions were triggered. As a result, the October 3 Warrant exercise price was lowered to $2.50
and the number of shares issuable upon
exercise of warrants was increased to 66,667.
On January 7, 2020, the Company issued new convertible debt with an initial conversion price of $0.40
per share and warrants exercisable at
$0.40
per share and accordingly, the conversion
price and warrant down-round provisions were triggered. As a result, the number of shares issuable upon exercise of the warrants was
increased to 416,669
and the exercise price was lowered to
$0.40.
As a result of the January 7, 2020 trigger of the down-round provisions, on January 7, 2020, the Company recorded a deemed dividend of
$859,768
which represents the fair value transferred
to the warrant holders from the down-round feature being triggered. The Company calculated the difference between October 3 Warrant’s
fair value on January 7, 2020, the date the down-round feature was triggered using the current exercise price and the new exercise price
and the new number of shares issuable upon exercise of the warrants. The deemed dividend was recorded as an increase in accumulated deficit
and increase in paid-in capital and increased the net loss to common shareholders by the same amount. Subsequent to January 7, 2020,
additional down-round protection was triggered. As of December 31, 2020, the exercise price of the October 3 Warrant was lowered to $0.006
per share, and the number of shares issuable
upon exercise of the October 3 Warrant was increased.
Subsequent
to January 30, 2020, the Company issued shares of its common stock upon conversion of debt at price lower than $0.40.
Accordingly, the exercise prices of the August 2019 Warrants and October 3 Warrant discussed above were lowered to $0.006
and the aggregate number of shares issuable
upon exercise of the warrants was increased from 9,061,143
shares to 604,076,186
shares. Since these warrants were treated
as derivative liabilities, no additional deemed dividend was recorded.
Other
As
discussed in Note 7 above, the Company issued debt that consists of the issuance of convertible notes with variable conversion provisions.
The conversion terms of the convertible notes are variable based on certain factors, such as the future price of the Company’s
common stock, default provisions and payment of amortization Payments in stock. The number of shares of common stock to be issued is
based on the future price of the Company’s common stock. The number of shares of common stock issuable upon conversion of the promissory
note is indeterminate. Due to the fact that the number of shares of common stock issuable exceed the Company’s authorized share
limit, effective January 30, 2020, the equity environment was tainted and all convertible debentures and warrants were included in the
value of the derivative. Pursuant to ASC 815-15 Embedded Derivatives, the fair values of the warrants were recorded as derivative liabilities
on the issuance date. On January 30, 2020, the Company evaluated all outstanding warrants to determine whether these instruments are
tainted and, due to reasons discussed above, all warrants outstanding were considered tainted. Accordingly, the Company recorded a reclassification
from paid-in capital to derivative liabilities of $11,381,885
for warrants becoming tainted. Upon the
increase of the Company’s authorized shares, the warrants were no longer considered tainted and accordingly, the derivative liability
was reduced by $81,384.
On January 30, 2020, the fair value of the warrants reclassified to derivative liabilities was determined using the Binomial valuation
model.
During
the period from June 1, 2020 to June 29, 2020, the Company issued 70,203,889
shares of its common stock in connection
with the cashless exercise of 73,635,000
warrants. The exercise price was based
on contractual terms of the related debt. Additionally, during the three months ended September 30, 2020, the Company issued 85,710,419
shares of its common stock in connection
with the cashless exercise of 83,662,448
warrants. The exercise price was based
on contractual terms of the related debt.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2021 AND 2020
On
June 16, 2020, the Company issued an aggregate of 28,100,000
five-year
warrants to purchase 28,100,000
shares of the Company’s common stock
at an exercise price of $0.06
per share, subject to adjustment as defined
in the respective warrant to two consultants for services rendered. On June 16, 2020, the Company calculated the fair value of these
warrants of $1,963,291
which was calculated using the Binomial
valuation model with the following assumptions: expected dividend rate, 0%;
expected term of 5
years; volatility of 298.8%
and risk-free interest rate of 0.33%.
During the year ended December 31, 2020, the Company recorded stock-based professional fees of $1,963,291
related to these warrants which has been
included in professional fees on the accompanying consolidated statement of operations.
On
July 20, 2020 and July 22, 2020, the Company entered Exchange Agreements (see Note 7) with two Investors to exchange outstanding August
2019 Notes and August 2019 Warrants for a newly created series of preferred stock designated the Series D (See above). Pursuant to the
Exchange Agreements, the Investors exchanged August 2019 Notes with an aggregate remaining principal amount outstanding of $500,184,
accrued interest payable of $85,828,
and Warrants to purchase 423,159,293
shares of Common Stock for 522,726
shares of Series D. In connection with
the issuance of these shares, the Company recorded a loss on debt extinguishment of $239,678
which is associated with the fair market
value of the excess shares issued upon conversion of the principal balances and accrued interest converted at the conversion price.
Warrant
activities for the years ended December 31, 2021 and 2020 are summarized as follows:
SUMMARY OF WARRANT ACTIVITIES
| | |
Number
of Shares
Issuable Upon
Exercise of
Warrants | | |
Weighted
Average Exercise
Price | | |
Weighted
Average
Remaining
Contractual Term
(Years) | | |
Aggregate
Intrinsic Value | |
| Balance Outstanding December
31, 2019 | |
| 3,649,861 | | |
| 2.410 | | |
| | | |
| | |
| Granted | |
| 144,801,414 | | |
| 0.027 | | |
| | | |
| | |
| Cancellations | |
| (23,508,334 | ) | |
| 0.006 | | |
| | | |
| | |
| Increase in warrants related to price
protection | |
| 602,626,403 | | |
| 0.006 | | |
| | | |
| | |
| Cashless exercise of warrants for Series
D preferred | |
| (423,159,293 | ) | |
| 0.006 | | |
| | | |
| | |
| Cashless exercise
of warrants for common stock | |
| (157,297,448 | ) | |
| 0.006 | | |
| | | |
| | |
| Balance Outstanding December 31, 2020 | |
| 147,112,603 | | |
| 0.052 | | |
| 4.83 | | |
$ | 1,780,356 | |
| Granted | |
| 1,287,257,147 | | |
| 0.010 | | |
| | | |
| | |
| Inducement warrants granted | |
| 205,626,862 | | |
| 0.010 | | |
| | | |
| | |
| Increase in warrants related to price protection | |
| 71,965,500 | | |
| 0.010 | | |
| | | |
| | |
| Exercises | |
| (521,239,717 | ) | |
| 0.010 | | |
| | | |
| | |
| Balance Outstanding
December 31, 2021 | |
| 1,190,722,395 | | |
$ | 0.015 | | |
| 4.74 | | |
$ | 3,831,380 | |
| Exercisable, December
31, 2021 | |
| 1,190,722,395 | | |
$ | 0.015 | | |
| 4.74 | | |
$ | 3,831,380 | |
Stock
options
Stock
option activities for the years ended December 31, 2021 and 2020 are summarized as follows:
SUMMARY OF STOCK OPTION ACTIVITIES
| | |
Number
of Options | | |
Weighted
Average Exercise Price | | |
Weighted
Average Remaining Contractual Term (Years) | | |
Aggregate
Intrinsic Value | |
| Balance Outstanding December 31, 2019 | |
| 80,000 | | |
| $ | | |
| | | |
$ | - | |
| Granted/Cancelled | |
| - | | |
| | | |
| | | |
| | |
| Balance Outstanding December 31, 2021 | |
| 80,000 | | |
| 8.84 | | |
| 3.33 | | |
| - | |
| Granted/Cancelled | |
| - | | |
| - | | |
| | | |
| | |
| Balance Outstanding December 31,
2021 | |
| 80,000 | | |
$ | 8.84 | | |
| 2.33 | | |
$ | - | |
| Exercisable, December 31, 2021 | |
| 40,000 | | |
$ | 8.84 | | |
| 2.33 | | |
$ | - | |
NOTE
10 – ASSIGNMENT FOR THE BENEFIT OF CREDITORS
On August 19, 2021, the Company’s subsidiaries,
Prime EFS and Shypdirect, executed Deeds of Assignments for the Benefit of Creditors in the State of New Jersey pursuant to N.J.S.A.
§2A:19-1, et seq. (the “ABC Statute”), assigning all Prime EFS and Shypdirect assets to Terri Jane Freedman as Assignee
for the Benefit of Creditors (the “Assignee”) and filing for dissolution. An “Assignment for the Benefit of Creditors,”
“general assignment” or “ABC” in New Jersey is a state-law, voluntary, judicially-supervised corporate liquidation
and unwinding similar to the Chapter 7 bankruptcy process found in the United States Bankruptcy Code. In the subject ABC, the
debtor companies, here Prime EFS and Shypdirect, together referred to as the “assignors”, executed Deeds of
Assignment, assigning all of their assets to an Assignee chosen by the Company, who acts as a fiduciary similar to a Chapter 7 trustee
in bankruptcy. Due to the termination of their respective agreements with Amazon, Prime EFS and Shypdirect became insolvent and
unable to pay their debts when they became due. Accordingly, the Company deemed it to be desirable and in the best interest of
Prime EFS and Shypdirect and its creditors to make an assignment of all of Prime EFS and Shypdirect’s assets for the benefit of
the Prime EFS and Shypdirect’s creditors in accordance with the ABC Statute.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2021 AND 2020
On September 7, 2021, the ABC’s were filed
with the Bergen County Clerk in Bergen County, New Jersey and filed with the Bergen County Surrogate Court, initiating a judicial
proceeding. The Assignee has been charged with liquidating the assets for the benefit of the Prime EFS and Shypdirect creditors pursuant
to the provisions of the ABC Statute. The Company’s results of operations for the three and nine months ended September 30, 2021
and 2020 include the results of Prime EFS and Shypdirect prior to the September 7, 2021 filing of the executed Deeds of Assignment for
the Benefit of Creditors with the State of New Jersey. As a result of Prime EFS and Shypdirect’s filing of the executed Deeds of
Assignment for the Benefit of Creditors on September 7, 2021, the Assignee assumed all authority to manage Prime EFS or
Shypdirect. Additionally, Prime EFS and Shypdirect no longer conduct any business and are not permitted by the Assignee
and ABC Statute to conduct any business. For these reasons, effective September 7, 2021, the Company relinquished control
of Prime EFS and Shypdirect. Further, on October 13, 2021, Prime EFS and Shypdirect filed for dissolution with the Secretary of State
of New Jersey. Therefore, the Company deconsolidated Prime EFS and Shypdirect effective with the filing of executed Deeds of Assignment
for the Benefit of Creditors in September 2021.
In
order to deconsolidate Prime EFS and Shypdirect, the carrying values of the assets and liabilities of Prime EFS and Shypdirect were removed
from the Company’s consolidated balance sheet as of September 7, 2021. In connection with the deconsolidation, the Company recognized
a gain on deconsolidation of subsidiaries of $12,363,449
which is included in “Gain on deconsolidation
of subsidiaries” within other income (expenses) during the year ended December 31, 2021 and consisted of the
following:
SCHEDULE
OF THE ASSIGNMENT OF GAIN ON DECONSOLIDATION OF SUBSIDIARIES
| | |
| | |
| | |
September
7, 2021 | |
| Liabilities deconsolidated: | |
| | |
| Notes payable
(a) | |
$ | 3,908,050 | |
| Accounts payable | |
| 1,242,421 | |
| Accrued expenses | |
| 314,927 | |
| Insurance payable | |
| 1,678,556 | |
| Contingency liabilities | |
| 3,311,272 | |
| Lease liabilities, current
portion | |
| 1,263,494 | |
| Accrued
compensation and related benefits | |
| 827,753 | |
| Total
liabilities deconsolidated | |
| 12,546,473 | |
| Assets deconsolidated: | |
| | |
| Cash | |
| 21,679 | |
| Accounts receivable | |
| 1,078 | |
| Property
and equipment, net | |
| 96,496 | |
| Total
assets deconsolidated | |
| 119,253 | |
| Gain on deconsolidation
of subsidiaries | |
| 12,427,220 | |
| Less: additional cash payments made on behalf of deconsolidated subsidiaries | |
| (63,771 | ) |
| Gain on deconsolidation of subsidiaries | |
$ | 12,363,449 | |
As
of December 31, 2020, the assets and liabilities of Prime EFS and Shypdirect subject to assignment for the benefit of creditors have
been reflected as “Assets subject to assignment for benefit of creditors” and “Liabilities subject to assignment for
benefit of creditors” on the accompanying consolidated balance sheets and consisted of the following:
SCHEDULE
OF THE ASSIGNMENT FOR BENEFIT OF ASSET AND LIABILITIES OF CREDITORS
| | |
December 31, 2020 | |
| Assets: | |
| | |
| Current assets: | |
| | |
| Accounts
receivable, net | |
$ | 372,922 | |
| Prepaid
expenses and other | |
| 367,459 | |
| Total current assets
subject to assignment for benefit of creditors | |
| 740,381 | |
| Other Assets: | |
| | |
| Security deposit | |
| 94,000 | |
| Property and equipment,
net | |
| 126,137 | |
| Right
of use assets, net | |
| 1,445,274 | |
| Total other assets
subject to assignment for benefit of creditors | |
| 1,665,411 | |
| Total assets subject
to assignment for benefit of creditors | |
$ | 2,405,792 | |
| Liabilities: | |
| | |
| Current liabilities: | |
| | |
| Notes payable (a) | |
$ | 3,834,337 | |
| Accounts payable | |
| 638,682 | |
| Accrued expenses | |
| 170,500 | |
| Insurance payable | |
| 1,959,099 | |
| Contingency liabilities | |
| 3,311,272 | |
| Lease liabilities, current
portion | |
| 380,843 | |
| Due to related parties | |
| 124,000 | |
| Accrued
compensation and related benefits | |
| 919,726 | |
| Total current liabilities
subject to assignment for benefit of creditors | |
| 11,338,459 | |
| Long-term liabilities: | |
| | |
| Notes payable, net of
current portion (a) | |
| 147,379 | |
| Lease
liabilities, net of current portion | |
| 1,102,617 | |
| Total long-term liabilities
subject to assignment for benefit of creditors | |
| 1,249,996 | |
| Total liabilities
subject to assignment for benefit of creditors | |
$ | 12,588,455 | |
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2021 AND 2020
| (a) |
Notes
payable subject to assignment for benefit of creditors |
On
December 31, 2020, notes payable subject to assignment for benefit of creditors consisted of the following:
SCHEDULE
OF NOTES PAYABLE SUBJECT TO ASSIGNMENT FOR BENEFITS OF CREDITORS
| | |
December 31, 2020 | |
| Principal amounts | |
$ | 3,981,716 | |
| Less: current portion
of notes payable | |
| (3,834,337 | ) |
| Notes payable subject
to assignment for benefit of creditors – long-term | |
$ | 147,379 | |
From
November 22, 2019 to December 31, 2019, the Company entered into several secured merchant loans in the aggregate amount of $2,283,540.
The Company received net proceeds of $1,355,986,
net of original issue discounts and origination fees of $927,554.
Pursuant to these several secured merchant loans, the Company was required to pay the noteholders by making daily and/or weekly payments
on each business day or week until the loan amounts were paid in full. Each payment was deducted from the Company’s bank account.
During the year ended December 31, 2019, the Company repaid an aggregate of $464,344
of the loans. During the three months
ended March 31, 2020, the Company entered into a new secured merchant loan in the aggregate amount of $1,274,150,
which consisted of $670,700
of principal transferred to this new loan
by two of these secured merchants. The Company received net proceeds of $150,000,
net of original issue discounts and origination fees of $453,450.
During the year ended December 31, 2020, the Company repaid an aggregate of $1,954,930
of these loans, which includes payments
pursuant to settlement agreements as discussed below.
| |
● |
In
connection with a settlement agreement dated March 4, 2020, the Company paid off a merchant loan with a principal balance of $936,410
for a payment of $600,000
which was made by the Company in March
2020. |
| |
|
|
| |
● |
In
connection with a settlement agreement dated March 9, 2020, the Company agreed to pay $233,434
in full settlement for a merchant
loan of with a principal balance of $364,740.
The payment was due on March
11, 2020. During the year ended December
31, 2020, the Company paid $233,434
of this settlement. |
| |
|
|
| |
● |
In
connection with a settlement agreement dated March 9, 2020, the Company agreed to pay $275,000
in full settlement for a merchant
loan with a principal balance of $272,700
and a senior secured convertible debt
in the amount of $95,874
and cancellation of 40,300
warrants held by the same creditor.
The settlement payment was due, in full, on March
12, 2020; however, due to cash constraints
at the time, the Company paid the $275,000
in weekly installments, which the
creditor accepted, with its final payment on May 12, 2020. The Company paid $275,000
during the year ended December 31,
2020. While the Company never received a default or demand letter, the creditor verbally told the Company on May 12, 2020, that the
original full amount should be paid, although the creditor has not made any formal demand or commenced any action. The Company believes
any such claim, if made, would be without merit. |
In
connection with these settlement agreements, in 2020, the Company recorded a loss on debt extinguishment of $76,777
which consisted of the payment of cash
of $67,548
and the write off of debt of remaining
debt discount of $614,809,
offset by the reduction of principal balance of $596,390
and accrued interest payable of $9,190.
On
December 31, 2021 and 2020, there were no secured merchant loans due and outstanding.
On
December 31, 2020, notes payable related to a promissory note amounted to $80,490 and is due on demand and is included in liabilities
subject to assignment for benefit of creditors on the Company’s consolidated balance sheet. Effective with the filing of executed
Deeds of Assignment for the Benefit of Creditors in September 2021, this liability of $80,490 was deconsolidated and removed from the
Company’s consolidated balance sheet.
In
connection with the acquisition of Prime EFS, the Company assumed several notes payable liabilities due to entities or individuals. These
notes have effective interest rates ranging from 7% to 10% and are unsecured. On December 31, 2020, Prime EFS remaining notes payable
to an entity amounted to $40,000 and is included in liabilities subject to assignment for benefit of creditors on the Company’s
consolidated balance sheet. Effective with the filing of executed Deeds of Assignment for the Benefit of Creditors in September 2021,
this liability of $40,000 was deconsolidated and removed from the Company’s consolidated balance sheet.
During
the year ended December 31, 2019, the Company entered into separate promissory notes with several individuals totaling $2,517,150, including
$40,000 of a previous note rolled into these new notes, and received net proceeds of $2,238,900, net of original issue discounts of $238,250.
These notes were due between 45 and 273 days from the respective note issuance date. During the year ended December 31, 2019, the Company
repaid $1,118,400 of these notes. Additionally, during the year ended December 31, 2019, the Company issued 439,623 shares of its common
stock and 439,623 five year warrants exercisable at $2.50 per share upon conversion of notes payable of $978,750 and accrued interest
of $120,307 at a conversion price of $2.50 per share. Since the conversion price of $2.50 was equal to the fair value of the shares as
determined by recent sales of the Company’s common shares, no beneficial feature conversion was recorded. During the year ended
December 31, 2020, the Company borrowed additional fund from individuals of $443,000, and received net proceeds of $423,000, net of original
issue discount of $20,000, the Company repaid $320,500 of these funds, and a note with a principal balance of $195,000 was transferred
into the April 20, 2020 convertible note discussed above. Furthermore, on June 30, 2020, one of these notes with a principal balance
due of $150,000 and accrued interest payable of $82,274 was settled and a new note was entered into with a principal balance of $200,000.
This new note bore no interest and was payable in monthly payments of $7,500 commencing on July 1, 2020 until paid in full. The Company
repaid $15,000 of such note. On August 28, 2020, this note payable with a principal balance due of $185,000 was cancelled and a new convertible
note was entered into with a principal balance of $185,000 (See Note 7). On December 31, 2020, Prime EFS notes payable related to one
remaining individual amounted to $220,000 and is included in liabilities subject to assignment for benefit of creditors on the Company’s
consolidated balance sheet. Effective with the filing of executed Deeds of Assignment for the Benefit of Creditors in September 2021,
this liability of $220,000 was deconsolidated and removed from the Company’s consolidated balance sheet.
In
connection with the acquisition of Prime EFS, the Company assumed several equipment notes payable liabilities due to entities. On and
December 31, 2020, Prime EFS equipment notes payable to these entities amounted to $43,364 and is included in liabilities subject to
assignment for benefit of creditors on the Company’s consolidated balance sheet. Effective with the filing of executed Deeds of
Assignment for the Benefit of Creditors in September 2021, the remaining liability of $36,233 was deconsolidated and removed from the
Company’s consolidated balance sheet.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2021 AND 2020
During
the years ended December 31, 2019 and 2018, the Company entered into auto financing agreements in the amount of $44,905 and $162,868,
respectively. On December 31, 2020, Prime EFS auto notes payable to these entities amounted to $151,710 and is included in liabilities
subject to assignment for benefit of creditors on the Company’s consolidated balance sheet. Effective with the filing of executed
Deeds of Assignment for the Benefit of Creditors in September 2021, the remaining liability of $85,175 was deconsolidated and removed
from the Company’s consolidated balance sheet.
On
April 2, 2020, the Company’s subsidiary, Shypdirect, entered into a Paycheck Protection Program promissory note (the “Shypdirect
PPP Loan”) with M&T Bank in the amount of $504,940 under the Small Business Administration (the “SBA”)
Paycheck Protection Program (the “Paycheck Protection Program”) of the Coronavirus Aid, Relief and Economic Security
Act of 2020 (the “CARES Act”). On April 28, 2020, the Shypdirect PPP Loan was approved and Shypdirect received the
loan proceeds on May 1, 2020. Shypdirect used the proceeds for covered payroll costs, rent and utilities in accordance with the relevant
terms and conditions of the CARES Act. The Shypdirect PPP Loan has a two-year term, matures on April 28, 2022, and bears interest at
a rate of 1.00% per annum. Monthly principal and interest payments, less the amount of any potential forgiveness (discussed below), was
to commence on November 28, 2020. On December 31, 2020, Shypdirect PPP Loan amounted to $504,940 and is included in liabilities subject
to assignment for benefit of creditors on the Company’s consolidated balance sheet. Effective with the filing of executed Deeds
of Assignment for the Benefit of Creditors in September 2021, this liability of $504,940 was deconsolidated and removed from the Company’s
consolidated balance sheet.
On
April 15, 2020, the Company’s subsidiary, Prime EFS, entered into a Paycheck Protection promissory note (the “Prime EFS
PPP Loan” and together with the Shypdirect PPP Loan, the “PPP Loans”) with M&T Bank in the amount of
$2,941,212 under the SBA Paycheck Protection Program of the CARES Act. On April 15, 2020, the Prime EFS PPP Loan was approved and Prime
EFS received the loan proceeds on April 22, 2020. Prime EFS used the proceeds for covered payroll costs, rent and utilities in accordance
with the relevant terms and conditions of the CARES Act. The Prime EFS PPP Loan has a two-year term, matures on April 16, 2022, and bears
interest at a rate of 1.00% per annum. Monthly principal and interest payments, less the amount of any potential forgiveness (discussed
below), was to commence on November 16, 2020. On December 31, 2020, Prime EFS PPP Loan amounted to $2,941,212 and is included in liabilities
subject to assignment for benefit of creditors on the Company’s consolidated balance sheet. Effective with the filing of executed
Deeds of Assignment for the Benefit of Creditors in September 2021, this liability of $2,941,212 was deconsolidated and removed from
the Company’s consolidated balance sheet.
Neither
Prime EFS nor Shypdirect provided any collateral or guarantees for these PPP Loans, nor did they pay any facility charge to obtain the
PPP Loans. These promissory notes provide for customary events of default, including, among others, those relating to failure to make
payment, bankruptcy, breaches of representations and material adverse effects. Prime EFS and Shypdirect may prepay the principal of the
PPP Loans at any time without incurring any prepayment charges. These PPP Loans may be forgiven partially or fully if the loan proceeds
are used for covered payroll costs, rent and utilities, provided that such amounts are incurred during
the
twenty-four-week period that commenced on May 1, 2020 and at least 60% of any forgiven amount has been used for covered payroll costs.
The Company exhausted such funds in the third quarter of 2020. In the fourth quarter of 2020, Shypdirect applied for full forgiveness
of the Shypdirect PPP Loan. In the second quarter of 2021, Prime EFS applied for partial loan forgiveness on the Prime EFS PPP Loan in
the amount of $2,691,884.
However, any forgiveness of these PPP Loans is subject to approval by the SBA and M&T Bank and there is no guarantee that such forgiveness
will be granted.
NOTE
11 – DEBT EXTINGUISHMENT
Gain
on debt extinguishment
In
connections with the conversion of debt and other debt settlements discussed elsewhere, on the settlement dates, conversion date or repayment
dates, for the year ended December 31, 2021, the Company recorded an aggregate gain on debt extinguishment of $1,564,941
which consists of the following:
SCHEDULE
OF GAIN ON DEBT EXTINGUISHMENT
| | |
| | |
| | |
Total
gain (loss)
on debt
extinguishment | |
| Loss upon conversion of debt
related to difference between conversion price and market price on shares issued (note 9) | |
$ | (143,872 | ) |
| Gain from settlement of debt | |
| 1,648,960 | |
| Gain from settlement
of accounts payable | |
| 59,853 | |
| Gain on debt extinguishment,
net | |
$ | 1,564,941 | |
In
connections with the conversion of debt and other debt settlements discussed elsewhere, on the Modification Dates, conversion date or
repayment dates, for the year ended December 31, 2020, the Company recorded an aggregate gain on debt extinguishment of $7,847,073
which consists of the following.
| | |
| | |
| | |
Total
gain (loss)
on debt
extinguishment | |
| Gain from reversal of derivative
liabilities on conversion date or repayment date (note 7) | |
$ | 45,731,614 | |
| Loss upon conversion of debt related to
difference between conversion price and market price on shares issued (note 9) | |
| (36,271,137 | ) |
| Fair value of shares related to settlement
of debt and warrants (note 9) | |
| (1,252,772 | ) |
| Loss from conversion of debt and warrants
to Series D preferred stock (note 7 and 9) | |
| (239,678 | ) |
| Loss from settlement of debt (note 9) | |
| (259,587 | ) |
| Gain from settlement
of accounts payable | |
| 138,633 | |
| Gain on debt extinguishment,
net | |
$ | 7,847,073 | |
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2021 AND 2020
NOTE
12 – COMMITMENTS AND CONTINGENCIES
Legal
matters
From
time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. Other
than discussed below, we are not currently a party to any other legal proceeding that we believe would have a material adverse effect
on our business, financial condition, or operating results.
Disputes
Between ELRAC LLC and Enterprise Leasing Company of Philadelphia, LLC on the one hand, and Prime EFS, LLC on the other hand
In
2021 and as of December 31, 2021, the Company’s prior subsidiary, Prime EFS, LLC (“Prime EFS”), was a party to an arbitration
with two companies, ELRAC LLC (“ELRAC”), and Enterprise Leasing Company of Philadelphia, LLC (“ELC”).
As
previously disclosed, since the Company deconsolidated Prime EFS effective with the filing of executed Deeds of Assignment for the Benefit
of Creditors in September 2021, as of December 31, 2021, the Company’s consolidated balance sheet no longer included an accrual
for this matter.
Solely
to avoid the expense and distraction of the matter, on February 15, 2022, the Company and Prime EFS, on the one hand, and ERLAC and ELC,
on the other hand, agreed in principle to settle the above matter for a single payment, by TLSI, to ERLAC and ELC, in an immaterial amount.
Pursuant to the settlement, on March 31, 2022, the Company and Prime, on the one hand, and ERLAC and ELC, on the other hand, exchanged
mutual general releases, thereby releasing and discharging any and all claims between the Company, Prime EFS and their affiliates, on
the one hand, and ERLAC, ELC and their affiliates, on the other hand. In connection with this settlement, the Company shall pay $30,000
to ERLAC, ELC and their affiliates which
as December 31, 2021 has been accrued and included in accrued expenses on the accompanying consolidated balance sheets.
Bellridge
Capital, L.P. v. TLSI and Mercadante
By
letter dated April 28, 2020, a prior investor in the Company, Bellridge Capital, L.P. (“Bellridge”), claimed that the Company
was in breach of its obligations under an August 29, 2019 letter agreement to issue a confession of judgment and to pay Bellridge $150,000
per month against the amounts due under,
inter alia, a June 2018 promissory note, as amended. In the April 28, 2020 letter, Bellridge contended that TLSI owed Bellridge
$1,978,557.76
with interest accruing daily.
TLSI
contends that in an agreement dated August 3, 2020, Bellridge and the Company resolved many of the disputes between them. Among other
provisions, Bellridge and the Company agreed upon the balance of all indebtedness owed to Bellridge as of August 3, 2020 under any and
all convertible and nonconvertible indebtedness ($2,150,000),
a new maturity date on the indebtedness (April
30, 2021), and a price of $0.02
for the conversion of all Bellridge indebtedness
into shares of Company Common Stock.
On
September 11, 2020, Bellridge nevertheless filed a civil action against TLSI, John Mercadante and Douglas Cerny in the U.S. District
Court for the Southern District of New York, captioned Bellridge Capital, L.P. v. Transportation and Logistics Systems, Inc., John
Mercadante and Douglas Cerny. The case was assigned Case No. 20-cv-7485. The complaint alleged two separate claims (the first and
second claims for relief) for purported violations of section 10(b) of the Securities and Exchange Act of 1934, as amended (the “Exchange
Act”), and SEC Rule 10b-5 promulgated thereunder, against the Company, Mr. Mercadante and/or Mr. Cerny; a claim (the third claim
for relief) purportedly for control person liability under section 20(a) of the Exchange Act against Messrs. Mercadante and Cerny; a
claim (the fourth claim for relief) purportedly for fraudulent inducement against the Company; a claim (the fifth claim for relief) purportedly
for breach of an exchange agreement between Bellridge and the Company allegedly dated April 13, 2019 (the “Exchange Agreement”);
a claim (the sixth claim for relief) against the Company purportedly for specific performance of the Exchange Agreement; a claim against
the Company (the seventh claim for relief) for purported non-payment of a promissory note dated December 26, 2018 pursuant to which the
Company borrowed $300,000
and committed to pay Bellridge $330,000
on or by March
15, 2019 plus 10%
interest per annum (the “December
2018 Note”); a claim (the eighth claim for relief) purportedly for a declaratory judgment that the Company allegedly failed to
comply with a condition precedent to the effectiveness of a subordination agreement (the “Subordination Agreement”) executed
and delivered in August 2019; and a claim (the ninth claim for relief) for breach of an assignment agreement, executed on or about July
20, 2018 (the “Partial Assignment Agreement”) in connection with a purchase of 50,000
shares of Company Series A convertible
preferred stock, by Bellridge, from third parties.
After
discontinuing the foregoing federal action voluntarily and without prejudice, on April 23, 2021, Bellridge filed a civil
action in New York Supreme Court, New York County, against TLSI and Mercadante. This mater, the “Bellridge State Court
Action,” was assigned civil action number 652728/2021.
The
original complaint in the Bellridge State Court
Action asserted 11 causes of action: (1) against TLSI, allegedly for breach of a convertible promissory note issued June 18,
2018 (the “June 2018 Note”), seeking $539,114.06
in
allegedly unpaid principal plus interest, costs and expenses; (2) against TLSI, also allegedly for breach of the June 2018 Note,
seeking $343,000
plus interest, costs and expenses allegedly
for TLSI’s purported failure to honor certain conversion notices in timely fashion; (3) against TLSI, allegedly for
breach of the December 2018 Note, seeking $196,699
plus interest, costs and expenses; (4) against
TLSI, allegedly for breach of a purported obligation to deliver shares of Common Stock under the Exchange Agreement,
seeking $3,337,500
plus costs and interest; (5) against TLSI and
Mercadante, allegedly for fraud in connection with the Exchange Agreement, seeking $447,500
plus costs and interest; (6) in the alternative
to the 5th claim against TLSI and Mercadante, allegedly for negligent misrepresentation in connection with the Exchange
Agreement, seeking $447,500
plus costs and interest; (7) against TLSI, allegedly
for breach of certain terms relating to the conversion of 31,500
series A preferred shares, seeking not
less than $57,960;
(8) against TLSI and Mercadante, allegedly for fraudulent inducement of an August 30, 2019 subordination agreement (the “Subordination
Agreement”), seeking a declaration annulling the Subordination Agreement; (9) against TLSI, allegedly for failing to
provide all consideration recited in a purported side letter allegedly relating to and modifying the Subordination Agreement, seeking
a declaration that Bellridge is discharged from its obligations under the Subordination Agreement; (10) against TLSI, allegedly
for failing to honor a condition precedent to the subordination side letter, seeking a declaration that Bellridge is discharged
from any obligations under the Subordination Agreement; and (11) against TLSI, allegedly for breach of the Subordination Agreement
and/or the side letter, seeking damages in an amount to be determined at trial.
It
is uncontested (a) that the purchase price under
the June 2018 Note was $1,665,000
and (b) that the
principal amount of the June 2018 Note was $2,497,503.
Hence the June 2018 Note was issued at a 33.33%
discount (OID). The June 2018 Note called for the payment of interest computed at the rate of 10%
per annum prior to any default. The term of the June 2018 Note was one year. The June 2018 Note calls for the application of New
York law. TLSI contends that, since the total interest payable under the Note at issuance (including OID) was more than
40% per annum, for a period of one year, the June 2018 Note was void ab initio under N.Y. Penal Law § 190.40 and cannot
be enforced in this action.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2021 AND 2020
It
is also uncontested (a) that the purchase price
under the December 2018 Note was $300,000
and (b) that the
principal amount of the December 2018 Note was $330,000.
Hence the December 2018 Note was issued at a 10%
discount (OID). The Note called for the payment of interest computed at the rate of 10%
per annum prior to any default. The term of the Note was under 90
days; that is, it was made payable, in full,
on March 15, 2019, after which the principal amount increases “by 30%”
and default interest is due under the instrument at a rate of 18% per annum (§ 7(b)). The December 2018 Note, by its terms, is governed
by New York law. TLSI contends that, since the total interest payable under the Note, over its term of under 90
days, including OID, was more than 40%
per annum, the December 2018 Note, like the June 2018 Note, is void under N.Y. Penal Law § 190.40 and cannot be enforced in this
action.
TLSI
also alleges that, in the Exchange Agreement, Bellridge
was able to dictate terms and extract concessions from TLSI that were commercially unreasonable and unconscionable. TLSI alleges that
Bellridge was able to do so solely because of Bellridge’s violations of N.Y. Penal Law § 190.40 in July 2018. As
such, TLSI believes the Exchange Agreement is null and void under N.Y. Penal Law § 190.40 and cannot be enforced in this action.
TLSI further alleges (a) that Bellridge has no damages under the two promissory notes because, giving effect to its conversions and
cash payments by TLSI, Bellridge had no out-of-pocket losses and made upward of $500,000
on an investment of $1.92
million; (b) that Bellridge exchanged
all its series A preferred for 32,500
shares of TLSI common stock and that TLSI
fully honored a notice of conversion regarding the series A shares; (c) that Bellridge exchanged 700,000
of the 1,160,000
shares of Company Common Stock to which
it was entitled under the Exchange Agreement into series B preferred; (d) that Bellridge has no actionable claim for breach of the Exchange
Agreement inter alia because Bellridge did not even de-legend and seek to sell the 492,500
shares of Company Common Stock which Bellridge
concedes were delivered; and (e) that Bellridge has no actionable claim for breach of the Subordination Agreement inter alia because
the subordination side letter was merged into the Subordination Agreement and because
Bellridge converted all TLSI indebtedness held in July-August 2020 profitably.
On
June 4, 2021, TLSI and Mercadante moved to dismiss this action for failure to state a claim and, as to Mercadante, for lack of
jurisdiction. On October 20, 2021, the Court decided the MTD, dismissing all claims in the case against both Defendants predicated on
fraud and negligent misrepresentation. The Court thereby dismissed the Complaint insofar as alleged against Mercadante. On October 29,
2021, the Company filed its Answer in this case. On November 18, 2021, Bellridge filed an Amended Complaint purporting to revive its
claims for fraud and negligent misrepresentation against both Defendants. Both Defendants filed objections to the Amended Complaint as
procedurally improper. On December 17, 2021, the Defendants filed a renewed motion to dismiss the Amended Complaint with prejudice. That
motion was fully briefed. In February 2022, all proceedings in this action were stayed 60 days to facilitate a mediation.
The
Defendants believe they have good defenses to all claims alleged in the matter, including without limitation the defense of usury as
outlined above. Based on the early stage of this matter, however, it is not possible to evaluate the likelihood of a favorable or unfavorable
outcome, nor is it possible to estimate the amount or range of any potential loss in the matter. If the mediation is unsuccessful,
the Company intends to defend this case vigorously.
SCS,
LLC v. TLSI
On
May 26, 2020, a civil action was filed against the Company in the Supreme Court of the State of New York, New York
County, captioned SCS, LLC v. Transportation and Logistics Systems, Inc. The case was assigned Index No. 154433/2020.
The
plaintiff in this action, SCS, LLC (“SCS”), alleged it is a limited liability company that entered into a renewable
six-month consulting agreement with the Company dated September 5, 2019 and that the Company failed to make certain monthly payments
due thereunder for the months of October 2019 through March 2020, summing to $42,000.
The complaint alleged claims for breach of contract, quantum meruit, unjust enrichment and account stated.
On
July 22, 2020, the Company filed its answer, defenses and counterclaims in this action. Among other allegations, the Company averred
that SCS’s claims were barred by its unclean hands and other inequitable conduct, including breach of its duties (i) to maintain
the confidentiality of information provided to SCS and (ii) to work only in furtherance of the Company’s interests, not in furtherance
of SCS’s own, and conflicting, interests. The Company also averred that SCS’s alleged damages must be reduced by the compensation
and other benefits received by Lawrence Sands, founder of SCS, as a W-2 employee of the Company. The Company also averred that the New
York Supreme Court lacked subject matter jurisdiction of the action because SCS conceded it is a Florida LLC based in Florida and that
the Company is a Nevada corporation based in Florida.
On
July 31, 2020, SCS moved for summary judgment in this action. On August 18, 2020, the Company moved to dismiss this action for lack of
subject matter jurisdiction. In its motion, among other arguments, the Company asserted that the New York court lacks subject matter
jurisdiction because neither party was formed under New York law; neither party maintains an office in the State of New York; the consulting
agreement between the parties dated September 5, 2019 was not performed in the State of New York; and the parties anticipated, at the
time of contracting, that the bulk of SCS’s consulting services thereunder would be rendered in Florida, not New York.
On
November 4, 2020, the Supreme Court, New York County, heard argument on the Company’s motion to dismiss, granted the motion, and
denied SCS’s motion for summary judgment as moot (the “Decision”). SCS did not seek reconsideration and/or appeal from
the Decision within the prescribed time periods. However, on or about January 14, 2021, SCS refiled this action in the state court in
Florida, seeking the same $42,000
in damages.
On
February 9, 2021, the Company filed its answer, defenses and counterclaims to the Florida action. Among other things, the Company
avers that SCS’s claims are barred by its unclean hands and breaches of its duties under the consulting agreement. SCS filed a
motion to strike TLSI’s defenses and counterclaims, and TLSI opposed that application. Those motions remain sub judice.
The
Company believes it has substantial defenses to all claims alleged in SCS’s complaint. The Company therefore intends to defend
this case vigorously. Trial has been tentatively set for some time in 2022.
Based
on the early stage of this matter, it is not possible to evaluate the likelihood of a favorable or unfavorable outcome, nor is it possible
to estimate the amount or range of any potential loss in the matter.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2021 AND 2020
Shareholder
Derivative Action
On
June 25, 2020, the Company was served with a putative shareholder derivative action filed in the Circuit Court of the 15th
Judicial Circuit in and for Palm Beach County, Florida (the “Court”) captioned SCS, LLC, derivatively on behalf of Transportation
and Logistics Systems, Inc. v. John Mercadante, Jr., Douglas Cerny, Sebastian Giordano, Ascentaur LLC and Transportation and Logistics
Systems, Inc. The action has been assigned Case No. 2020-CA-006581.
The
plaintiff in this action, SCS, alleges it is a limited liability company formed by a former chief executive officer and director of the
Company, Lawrence Sands. The complaint alleges that
between April 2019 and June 2020, the immediately prior chairman and chief executive officer of the Company, Mercadante,
the former chief development officer of the Company, Cerny, and, since February 2020, the Company’s then restructuring
consultant who is now chairman and chief executive officer of the Company, Giordano, breached fiduciary duties owed to the Company.
Prior to becoming CEO, Giordano rendered his services to the Company through the final named defendant in the action,
Ascentaur LLC.
Briefly,
the complaint alleges that Mercadante breached duties to the Company by, among other things, requesting, in mid-2019, that certain
preferred equity holders, including SCS, convert their preferred shares into Company Common Stock in order to facilitate an equity
offering by the Company and then not consummating that offering. The complaint also alleges that Mercadante and Cerny caused
the Company to engage in purportedly wasteful and unnecessary transactions such as taking merchant cash advances (MCA) on disadvantageous
terms. The complaint further alleges that Mercadante and Cerny “issued themselves over two million shares of common stock
without consideration.” The complaint seeks unspecified compensatory and punitive damages on behalf of the Company for breach of
fiduciary duty, negligent breach of fiduciary duty, constructive fraud, and civil conspiracy and the appointment of a receiver or custodian
for the Company.
Company
management tendered the complaint to the Company’s
directors’ and officers’ liability carrier for defense and indemnity purposes, which coverage is subject to a $250,000
self-insured retention. Each of the individual
defendants and Ascentaur LLC has advised that they vigorously deny each and every allegation of wrongdoing alleged
in the complaint. Among other things, Mercadante asserts that he made every effort to consummate an equity offering in
late 2019 and early 2020 and could not do so solely because of the Company’s precarious financial condition. Mercadante
also asserts that he made clear to SCS and other preferred equity holders, before they converted their shares into common stock,
that there was no guarantee the Company would be able to consummate an equity offering in late 2019 or early 2020. In addition, Mercadante
and Cerny assert that they received equity in the Company on terms that were entirely fair to the Company and entered into
MCA transactions solely because no other financing was available to the Company.
On
August 5, 2020, all defendants moved to dismiss the complaint for failure to state a claim upon which relief can be granted. Among other
things, movants assert that, through this lawsuit, SCS is improperly attempting to second-guess business decisions made by the
Company’s Board of Directors, based solely on hindsight (as opposed to any well-pleaded facts demonstrating a lack of care or good
faith). Movants also assert that the majority of the claims are governed by Nevada law because they concern the internal affairs
of the Company. Movants further assert that, under Nevada law, each of the business decisions challenged by SCS is protected by
the business judgment rule. Movants further assert that, even if SCS could rebut the presumption that the business judgment rule
applies to all such transactions, SCS has failed to allege facts demonstrating that intentional misconduct, fraud, or a knowing violation
of the law occurred, a requirement under Nevada law in order for director or officer liability to arise. Movants further
assert that, because SCS’s constructive fraud claim simply repackages Plaintiff’s claims for breach of fiduciary duty, it
too must fail. Movants also contend that in the absence of an adequately-alleged independent cause of action, let alone
an unlawful agreement between the defendants entered into for the purpose of harming the Company, SCS’s claim for civil conspiracy
must also be dismissed. Finally, movants contend that SCS’s extraordinary request that a receiver or custodian be appointed
to manage and supervise the Company’s activities and affairs throughout the duration of this unfounded action is without merit
inter alia because SCS does not allege the Company is subject to loss so serious and significant that the appointment
of a receiver or custodian is “absolutely necessary to do complete justice.”
SCS
has a right to file court papers opposing the above motion and thereafter the defendants intend to file reply papers in further support
of the motion (the “MTD”). To date, the court has not entered an order scheduling these filings or a hearing on the
MTD.
While
they hope to prevail on the motion, win or lose, Company management and Ascentaur LLC advise that they intend to mount a vigorous
defense to this action, as they believe the action to be entirely bereft of merit.
It
is not possible to evaluate the likelihood of a favorable or unfavorable outcome, nor is it possible to estimate the amount or range
of any potential loss in the matter.
Frank
Mazzola v. TLSI, Prime EFS, et al.
On
July 24, 2020, Prime EFS terminated the employment of Frank Mazzola effective that day. On July 27, 2020, Mr. Mazzola filed a Complaint
and Jury Demand in the United States District Court for the Southern District of New York in which he named as defendants Prime EFS,
the Company, John Mercadante and Douglas Cerny. The case was assigned # 1:20-CV-5788-VM.
On
September 1, 2020, Mr. Mazzola served the defendants with a Complaint and Jury Demand that Mr. Mazzola filed in the Superior Court of
New Jersey, Law Division, Bergen County, docket number BER-L-004967-20. The Complaint alleged the same claims as those set forth in the
Complaint that Mr. Mazzola had filed in the now withdrawn New York federal lawsuit. On September 28, 2020, the defendants removed the
New Jersey state court lawsuit to the United States District Court for the District of New Jersey, which has been assigned civil action
number 2:20-cv-13387-BRM-ESK. On October 5, 2020, all defendants filed a motion to dismiss each and every claim asserted against them
in the New Jersey federal action.
On
December 7, 2020, Mr. Mazzola filed an amended complaint in this action (the “AC”) alleging three (3) claims for relief:
one for Breach of Contract against Prime EFS; one for “Piercing the Corporate Veil” against the Company; and one for “Fraudulent
Inducement” against Messrs. Mercadante and Cerny.
The
damages sought by each claim were identical: “approximately $2,000,000,
representing $1,040,000
in [alleged] severance”; $759,038.41
in alleged “accrued but unpaid salary”;
and non-cash benefits under the alleged executive employment agreement.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2021 AND 2020
On
November 2, 2021, without any payment of money by any party to any other party, all claims and counterclaims in this action were dismissed
with prejudice (meaning permanently) and all parties exchanged general releases.
Rosemary
Mazzola v. TLSS and Douglas Cerny
On
September 19, 2020, attorneys for Frank Mazzola’s mother, Rosemary Mazzola, filed an action in the United States District Court
for the Southern District of New York against the Company and Douglas Cerny. The case was assigned docket number 1:20-cv-7582 and assigned
to USDJ Gregory H. Woods. In this action, Ms. Mazzola claims that the Company entered into and breached an unspecified contract by failing
to pay her $94,000.
In addition, the complaint claims that, although he was not a party to the unspecified contract, Mr. Cerny falsely represented that the
Company intended to “repay” Ms. Mazzola $94,000
plus interest. The complaint seeks $94,000
from each defendant, plus late fees, costs,
prejudgment interest and attorneys’ fees and, from Mr. Cerny, punitive damages in an unspecified amount. The complaint also alleges
claims for account stated and breach of implied warranty of good faith and fair dealing, allegedly premised on the same indebtedness.
On
November 23, 2020, counsel for Ms. Mazzola filed an Amended Complaint in this action, dropping Mr. Cerny and adding Prime EFS, LLC as
a party. The new pleading demanded $209,000
rather than the $94,000
in damages previously alleged.
On
November 2, 2021, without any payment of money by any party to any other party, all claims and counterclaims in this action were dismissed
with prejudice (meaning permanently) and all parties exchanged general releases.
Jose
R. Mercedes-Mejia v. Shypdirect LLC, Prime EFS LLC et al.
On
August 4, 2020, an action was filed against Shypdirect, Prime EFS and others in the Superior Court of New Jersey for Bergen County captioned
Jose R. Mercedes-Mejia v. Shypdirect LLC, Prime EFS LLC et al. The case was assigned docket number BER-L-004534-20. In this action,
the plaintiff seeks reimbursement of his medical expenses and damages for personal injuries following an accident with a box truck leased
by Prime EFS and being driven by a Prime EFS employee, in which the plaintiff’s ankle was injured. Plaintiff has thus far transmitted
medical bills exceeding $789,000.
Prime EFS and Shypdirect have demanded their vehicle liability carrier assume the defense of this action.
To date, the carrier has not done so, allegedly inter alia because the box truck was not on the list of insured vehicles at the
time of the accident.
On
November 9, 2020, Prime EFS and Shypdirect filed their answer to the complaint in this action and also filed a third-party action against
the insurance company in an effort to obtain defense and indemnity for this action.
On
May 21, 2021, Prime EFS and Shypdirect also filed in action in the Supreme Court, State of New York, Suffolk County (the “Suffolk
County Action”), seeking defense and indemnity for the Mercedes-Mejia action from the insurance brokerage, Acrisure LLC, which
sold the County Hall insurance policy to Prime.
On
August 19, 2021, the Plaintiff filed a motion for leave to file a first amended complaint to name four (4) additional parties as defendants
– TLSI, Shyp CX, Inc., Shyp FX, Inc. and Cougar Express, Inc. On September 16, 2021, each of these entities filed
papers in opposition to this motion.
On
September 24, 2021, the Court granted Plaintiff’s motion for leave to amend the complaint herein, thus adding TLSI, Shyp CX,
Inc., Shyp FX, Inc. and Cougar Express, Inc. as Defendants. On October 22, 2021, Acrisure stipulated to consolidate the Suffolk County
Action into and with the Bergen County action. On November 22, 2021, all Defendants filed their Answer to the First Amended Complaint.
On November 3, 2021, Prime EFS and Shypdirect refiled their Third-Party Complaint against Acrisure in the Bergen County action. On December
23, 2021, Acrisure filed its Answer to the Third-Party Complaint, denying its material allegations.
Under the currently operative pre-trial order,
the discovery period in this action has been extended to August 5, 2022. All Defendants in this action intend to vigorously defend
themselves in this action and to pursue the third-party actions against both County Hall and Acrisure. However, owing to the early stage
of this action, we cannot evaluate the likelihood of an adverse outcome or estimate the Company’s liability, if any, in
connection with this claim.
Valesky
v. Prime EFS, Shypdirect and TLSS
Plaintiff,
an ex-dispatcher for Prime EFS, brought this action in the U.S. District Court for the District of New Jersey under the Family and Medical
Leave Act of 1993 and the New Jersey Law Against Discrimination seeking unspecified compensatory and punitive damages. Plaintiff alleged
that she was fired while still in a neck brace. On December 22, 2020, the plaintiff filed an amended complaint in this action adding
the Company and Shypdirect as defendants on joint employer and/or alter ego theories. In April 2021, the Company settled this matter
with prejudice in April 2021 for a cash payment of $35,000.
Dispute
between Patrick Nicholson and Prime EFS
As
previously reported, by letter dated October 9,
2020, attorneys representing Patrick Nicholson alleged that Prime EFS is in default of its payment obligations under a “10%
Senior Secured Demand Promissory Note” issued February 13, 2019, in the principal amount of $165,000,
and under a second promissory note issued April 24, 2019 in the principal amount of $55,000.
In
the demand, the attorneys for Mr. Nicholson allege the total balance owed, including interest, is $332,702.84 and that interest is continuing
to accrue on each promissory note.
In
the demand, the attorneys for Mr. Nicholson also contend that TLSI is jointly and severally liable with Prime EFS for this balance.
If,
as threatened, Mr. Nicholson files suit for non-payment under either or both promissory notes, it is anticipated that the defendants
would mount a vigorous defense to the action. Among
other things, Prime EFS’s position is that Mr. Nicholson knew or should have known that the promissory notes dated February
13, 2019, and April 24, 2019 were invalid and unenforceable, since they were signed by Rosemary Mazzola, as owner or managing member
of Prime, and it was public information that, after June 18, 2018, Ms. Mazzola was no longer an owner or managing member of Prime EFS.
TLSI’s position is also that any and all amounts that may be owed to Mr. Nicholson are owed by Prime EFS and not TLSI.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2021 AND 2020
Since
Mr. Nicholson has not, to our knowledge, filed a lawsuit on his now 17-18 month old claim, against either Prime EFS or TLSI, we cannot
evaluate the likelihood of an adverse outcome in such litigation or reasonably estimate the Company’s liability, if any, if such
a lawsuit were filed.
Holdover
Proceeding
On
February 16, 2022, the landlord for the leased premises from which Cougar Express conducts its Valley Stream New York business, Airport
Park LLC (“Airport”), filed an action to evict and for unpaid holdover rent against Cougar Express and TLSI. The case
is No. LT-000550-22/NA, filed in Landlord Tenant Court in Nassau County District Court.
In
the case, Airport seeks to evict the tenants forthwith and to collect $51,079.78
for each month of holdover occupancy starting
January 1, 2022 through the month of any eviction, plus statutory interest, costs and attorneys’ fees. $51,079.78
is twice the monthly rent collected in
the last year of the expired lease and is computed correctly under the holdover provision in the expired lease. TLSI does not believe
it can be held liable in this case because, unlike its subsidiary Cougar Express, TLSI was not tenant in the subject premises nor has
it ever conducted business there.
In
March 2022, Cougar Express and Airport began discussions in hopes of settling this matter. To facilitate those discussions, on or about
March 9, 2022, Cougar paid rent to Airport at a rate of $33,275
per month for January-March, 2022, inclusive,
expects to pay rent for the month of April 2022 at the same rate ($33,275),
and may need to pay rent at the same rate in future months. In consideration for this interim arrangement, Airport adjourned the hearing
date on its petition to vacate from March 10, 2022 to April 7, 2022.
While
Cougar Express intends, among various options, to continue to discuss with Airport a possible lease extension for the Valley Stream premises,
there can be no assurance that those discussions will, in fact, result in a lease extension on terms Cougar Express finds acceptable.
In
the event Cougar Express does not sign a lease extension with Airport, it is likely that Airport will continue to press its lawsuit for
holdover rent of $51,079.78 per month for each month of occupancy until Cougar Express exits the premises, plus statutory interest, costs
and attorneys’ fees, while giving Cougar a credit for any and all rent paid in CY 2022.
Other
than discussed above, as of December 31, 2021, and as of the date of this filing, there were no pending or threatened lawsuits
that could reasonably be expected to have a material effect on results of our operations.
Consulting
Agreement
Prior
to January 4, 2022, the Company retained the services
of a consultant, Ascentaur, LLC (“Ascentaur”), pursuant to a Consulting Agreement between the Company and Ascentaur dated
February 21, 2020, as amended (the “Consulting Agreement”). Under the Consulting Agreement, prior to January 4, 2022,
Sebastian Giordano, the CEO and principal of Ascentaur, provided management services to the Company in the role of chief executive
under direction of the Board. Prior to the termination of this agreement, Ascentaur received a base consulting fee of $300,000
annually, payable in installments of $12,500
twice a month and during 2021, received
eligible bonuses of $184,621
based on certain Company revenue, EBITDA,
market capitalization or capital raise milestones. In addition, upon approval by the Board, Ascentaur received stock warrants to purchase
up to 25,000,000
shares of common stock of the Company at an exercise
price of $0.06
per share. In addition, during 2021, Mr. Giordano
received reimbursement of $25,812
for health benefits. The Company terminated
this Consulting Agreement effective January 4, 2022, when Mr. Giordano became Chair, President and CEO of the Company.
Leases
See
Note 14.
On
March 2, 2021, Shypdirect received a demand letter from Ryder Truck Rental, Inc. (“Ryder”) related to a breach of the Truck
Lease and Service Agreement between Shypdirect and Ryder, dated October 9, 2018. Pursuant to the letter, Ryder terminated the Truck Lease
and Service Agreement for failure to pay invoices due. Pursuant to the letter, Ryder elected to require Shypdirect to purchase all of
the terminated Vehicle(s) in accordance with the agreement for $2,871,272. In connection with this breach, as of December 31, 2020, the
Company wrote off security deposits of $164,565 and has a recorded contingent liability of $2,871,272 which is related to the default
on truck leases for non-payment of monthly lease payments and the lessor’s demand for payment of the trucks for an aggregate contingency
loss of $3,035,837. The Company intends to dispute this demand and has returned all of the trucks to Ryder as Shypdirect is no longer
using the trucks and accordingly, the trucks are not included as assets in the accompanying consolidated balance sheet.
On
December 31, 2020, contingency liability related to the Ryder termination amounted to $2,871,272 and is included in liabilities subject
to assignment for benefit of creditors on the accompanying consolidated balance sheet. Effective with the filing of executed Deeds of
Assignment for the Benefit of Creditors in September 2021, this liability of $2,871,272 was deconsolidated and removed from the Company’s
consolidated balance sheet.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2021 AND 2020
NOTE
13– RELATED PARTY TRANSACTIONS AND BALANCES
Due
to related parties
In
connection with the acquisition of Prime EFS, the Company acquired a balance of $14,019 that was due from the former majority owner of
Prime EFS, Rosemary Mazzola. Pursuant to the terms of the SPA, the Company agreed to pay $489,174 in cash to the former majority owner
of Prime EFS who then advanced back the $489,174 to Prime EFS. During the period from Acquisition Date of Prime EFS (June 18, 2018) to
December 31, 2018, the Company repaid $216,155 of this advance. During the year ended December 31, 2019, the Company repaid $130,000
of this advance. During the year ended December 31, 2020, the Company repaid $35,000 of this advance. This advance is non-interest bearing
and is due on demand. On December 31, 2020, amount due to this former majority owner of Prime amounted to $94,000, and have been included
in liabilities subject to assignment for benefit of creditors on the accompanying consolidated balance sheet. Effective with the filing
of executed Deeds of Assignment for the Benefit of Creditors in September 2021, this liability of $94,000 was deconsolidated and removed
from the Company’s consolidated balance sheet.
During
the year ended December 31, 2019, a former employee of Prime EFS who exerted significant influence over the business of Prime EFS and
Shypdirect, Frank Mazzola, advanced the Company $88,000.
Additionally, during the year ended December 31, 2020, this employee advanced the Company $75,000
and was repaid $163,000.
During the year ended December 31, 2020, the Company paid this employee interest of $57,200
related to these working capital advances. On
December 31, 2021 and 2020, amounts due to this former related party employee amounted to $0.
During
the year ended December 31, 2019, an entity which is controlled by a former employee of Prime EFS who exerted significant influence over
the business of Prime EFS and Shypdirect, Frank Mazzola, advanced the Company $25,000.
In January 2020, this advance was repaid. During the year ended December 31, 2020, the Company paid this entity interest expense of $27,500
related to 2019 working capital advances
made. On December 31, 2021 and 2020, amounts due to this former related party entity amounted to $0.
On
December 22, 2020, the Company’s former chief executive officer advanced the Company $30,000.
The advance is non-interest bearing and payable on demand. On December 31, 2020, amount due to the former chief executive officer
amounted to $30,000
and has been included in due to related parties
on the accompanying consolidated balance sheet. On January 29, 2021, the Company repaid this advance.
Notes
payable – related party
On
July 3, 2019, the Company entered into a note agreement with an entity that is controlled by the Company’s former chief
executive officer’s significant other, in the amount of $500,000.
Commencing on September 3, 2019 and continuing on the third day of each month thereafter, payments of interest only on the outstanding
principal balance of this note was due and payable. Commencing on January 3, 2020 and continuing on the third day of each month
thereafter through January 3, 2021, equal payments of principal and interest should have been made. The principal amount of this
note and all accrued, but unpaid interest under this note was due and payable on the earlier to occur of (i) January
3, 2021 (the “CEO Note Maturity Date”),
or (ii) an Event of Default (as defined in the note agreement). Interest accrued with respect to the unpaid principal sum identified
above until such principal was paid at a rate equal to 18%
per annum. On December 31, 2020, interest payable to related parties amounted to $173,692
and is included in due to related parties on
the accompanying consolidated balance sheets, respectively. On March 17, 2021, the Company and the noteholder entered into a forbearance
agreement whereby the Holder agreed to forbear from prosecuting any enforcement efforts in respect of the Note and extended the payment
of the note until December 31, 2021. On October 31, 2021, the Company and this related party note holder entered into a confidential
settlement agreement and mutual release. The Parties have agreed to adjust, settle and compromise the principal balance of the Note
of $500,000 and
unpaid accrued interest thereon of $240,822,
for a discounted amount of $600,000,
in full settlement of any and all amounts outstanding. The settlement amount was paid in November 2021. In connection with this settlement
agreement, the Company recorded a gain on debt extinguishment - related party of $148,651.
On December 31, 2021 and 2020, notes payable – related party amounted to $0
and $500,000,
respectively.
During
the year ended December 31, 2021 and 2020, interest expense associated with advances from related parties and related
party notes payable amounted to $74,959
and $174,947
and is included in interest expense –
related parties on the accompanying consolidated statement of operations.
NOTE
14 – OPERATING LEASE RIGHT-OF-USE (“ROU”) ASSETS AND OPERATING LEASE LIABILITIES
In
December 2018, the Company entered into a lease agreement for the lease of office and warehouse space and parking spaces under a non-cancelable
operating lease through December 2023. From the lease commencement date until the last day of the second lease year, monthly rent will
be $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. In January 2019, the Company paid a security deposit of $28,000. During 2021, this security deposit was applied
against rent due.
In
July 2019, the Company entered into a 4.5-year lease agreement for the lease of office and warehouse space and parking spaces under a
non-cancelable operating lease through February 2024. From the lease commencement date until the last day of the second lease year, monthly
rent will be $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. In July 2019, the Company paid a security deposit of $20,000. During 2021, this security deposit
was applied against rent due.
In
July 2019, the Company entered into a five-year lease agreement for the lease of office and warehouse space and parking spaces under
a non-cancelable operating lease through August 2024. During the first year on the lease term, the base monthly rent will be $18,000
and will increase by 3% each lease year. Additionally, the Company will pay its portion of operating expenses. As of December 31, 2019,
the Company paid a security deposit of $18,000. During 2021, this security deposit was applied against rent due.
Due
to a reduction in the Company’s revenues and the loss of its Amazon revenues, during the second and third quarter of 2021, the
Company abandoned the above properties. Accordingly, during the year ended December 31, 2021, the Company wrote the remaining
balance of these right of use assets and recorded a loss on lease abandonment of $1,223,628.
As of and December 31, 2020, the remaining lease liabilities related to these abandoned properties of $1,483,460
have been included in liabilities subject to
assignment for benefit of creditors on the accompanying consolidated balance sheets (see Note 10). As of December 31, 2020, the remaining
right of use assets aggregating totaling $1,445,274
have been included in assets subject to assignment
for benefit of creditors on the accompanying consolidated balance sheets (see Note 10).
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2021 AND 2020
In
adopting ASC Topic 842, Leases (Topic 842), the Company has elected the ‘package of practical expedients’, which permit it
not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs
(see Note 2). In addition, the Company elected not to apply ASC Topic 842 to arrangements with lease terms of 12 month or less.
During
the year ended December 31, 2021 and 2020, in connection with these operating leases, other miscellaneous rental payments
and common area maintenance costs, the Company recorded rent expense of $599,820
and $651,806,
respectively, which is expensed during the period
and included in operating expenses on the accompanying consolidated statements of operations.
Cougar Express’s lease of the Valley Stream,
New York facility from which it conducts business expired on December
31, 2021. Cougar Express is holding over in the facility while it attempts to negotiate a lease renewal with its landlord.
The holdover rent is 200%
of the base rental rate Cougar Express paid in 2021. Alternatively, Cougar Express is exploring options to move its operations
to another facility. The Company expects that, whether Cougar Express renegotiates with its existing landlord or finds new space, it
will pay materially higher rent in 2022 and future years.
During
the years ended December 31, 2021 and 2020, the Company recognized sublease income of $194,823
and $376,750
which is included in other income on the
accompanying consolidated statement of operations, respectively.
The
significant assumption used to determine the present value of the lease liability was a discount rate of 10% to 12% which was based on
the Company’s estimated incremental borrowing rate.
On
and December 31, 2021 and 2020, right-of-use asset (“ROU”) is summarized as follows:
SCHEDULE OF RIGHT OF USE ASSET
| | |
December
31, 2021
| | |
December
31, 2020
| |
| Office leases and truck right
of use assets | |
$ | - | | |
$ | - | |
| Less: accumulated
amortization into rent expense or cost of sales | |
| - | | |
| - | |
| Balance of ROU assets as of end of
period | |
$ | - | | |
$ | - | |
On
December 31, 2021 and 2020, operating lease liabilities related to the ROU assets are summarized as follows:
SCHEDULE OF OPERATING LEASE LIABILITY RELATED TO ROU ASSET
| | |
December
31, 2021
| | |
December
31, 2020
| |
| Lease liabilities related to
office and truck leases right of use assets | |
$ | - | | |
$ | - | |
| Less: current portion
of lease liabilities | |
| - | | |
| - | |
| Lease liabilities
– long-term | |
$ | - | | |
$ | - | |
NOTE
15 – CONCENTRATIONS
For
the year ended December 31, 2021, four customers represented 74.5%
(28.5%,
21.6%,
12.5%
and 11.9%,
respectively) of the Company’s total net revenues, respectively. For the year ended December 31, 2020, one customer,
Amazon, represented 96.7%
of the Company’s total net revenues.
On December 31, 2021, four customers, represented 48.4%
of the Company’s accounts receivable
balance (22.7%,
13.0%
and 12.7%,
respectively).
All
revenues are derived from customers in the United States.
NOTE
16 – INCOME TAXES
The
Company accounts for income tax using the liability method prescribed by ASC 740, “Income Taxes”. Under this method, deferred
tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities
using enacted tax rates that will be in effect in the year in which the differences are expected to reverse. The deferred tax assets
on December 31, 2021 and 2020 consist only of net operating loss carryforwards. The net deferred tax asset has been fully offset by a
valuation allowance because of the uncertainty of the attainment of future taxable income.
The
items accounting for the difference between income taxes at the effective statutory rate and the Company’s effective tax rate for
the years ended December 31, 2021 and 2020 were as follows:
SCHEDULE OF RECONCILIATION OF EFFECTIVE INCOME TAX RATE
| | |
| | | |
| | |
| | |
Year
Ended December
31, 2021 | | |
Year
Ended December
31, 2020 | |
| | |
| | |
| |
| Income tax provision (benefit)
at U.S. statutory rate | |
| 21.00 | % | |
| (21.00 | )% |
| Income tax provision (benefit) –
State | |
| 6.50 | % | |
| 3.97 | )% |
| Permanent items | |
| (89.99 | )% | |
| 19.33 | % |
| Effect of change
in valuation allowance | |
| 62.49 | % | |
| 5.64 | % |
| Effective income
tax rate | |
| 0.00 | % | |
| 0.00 | % |
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2021 AND 2020
The
Company’s approximate net deferred tax asset as of December 31, 2021 and 2020 was as follows:
SCHEDULE OF COMPONENTS OF DEFERRED TAX ASSETS
| | |
December
31, 2021 | | |
December
31, 2020 | |
| Deferred Tax Asset: | |
| | | |
| | |
| Net operating loss carryover | |
$ | 12,004,635 | | |
$ | 8,095,756 | |
| Less: valuation
allowance | |
| (12,004,635 | ) | |
| (8,095,756 | ) |
| Net deferred tax
asset | |
$ | - | | |
$ | - | |
The
net operating loss carryforward was approximately $46,159,703
on December 31, 2021. The Company provided
a valuation allowance equal to the net deferred income tax asset as of December 31, 2021 and 2021 because it was not known whether future
taxable income will be sufficient to utilize the loss carryforward. During the year ended December 31, 2021, the valuation allowance
increased by $3,908,879.
Additionally, the future utilization of the net operating loss carryforward to offset future taxable income is subject to an annual limitation
as a result of ownership changes that may occur in the future. The
2017 estimated loss carry forward of $120,600
expires
on December 31, 2037. Subsequent to 2017, all estimated loss carry forwards may be carried forward indefinitely subject
to annual usage limitations.
The
Company does not have any uncertain tax positions or events leading to uncertainty in a tax position. The Company’s 2017 to 2021
Corporate Income Tax Returns are subject to Internal Revenue Service examination.
NOTE
17 – SUBSEQUENT EVENTS
Common
shares issued upon conversion of Series E preferred shares
On
January 19, 2022, the Company issued 75,000,000
shares of its common stock in connection
with the conversion of 19,947
shares of Series E. The conversion ratio
was based on the Series E certificate of designation, as amended.
Series
G preferred shares
On
January 25, 2022, the Company entered into Securities Purchase Agreements with investors pursuant to which the Investors agreed to purchase
units, severally and not jointly, which consisted of an aggregate of (i) 70,000
shares of Series G and (ii) Warrants to
purchase 70,000,000
shares of the Company’s common stock
which are equal to 1,000
warrants for each for each share of Series
G purchased (the “January 2022 Series G Offering”). The gross proceeds to the Company were $700,000,
or $10.00
per unit. The Company paid placement agent
fees of $70,000
and received net proceeds of $630,000.
On March 4, 2022, the Company entered into a Securities Purchase Agreement with an investor pursuant to which the Investor agreed to
purchase units, severally and not jointly, which consisted of an aggregate of (i) 25,000
shares of Series G and (ii) Warrants to
purchase 25,000,000
shares of the Company’s common stock
which are equal to 1,000
warrants for each for each share of Series
G purchased (the “March 2022 Series G Offering”). The gross proceeds to the Company were $250,000,
or $10.00
per unit. The Company paid placement agent
fees of $25,000
and received net proceeds of $225,000.
The initial exercise price of the Warrants related to the January 2022 and March 2022 Series G Offerings is $0.01
per share, subject to adjustment. Additionally,
the Company paid the placement agent was issued 19,000,000
warrants to the placement agent at an
initial exercise price of $0.01
per share. The aggregate cash fees of
$95,000
was charged against the proceeds of the
offering in additional paid-in capital and there is no effect on equity for the placement agent warrants.
Common
shares issued in warrant exercises
During
the period from January 1, 2022 to March 24, 2022, the Company issued 24,571,429
shares of its common stock and received proceeds
of $245,714
from the exercise of 24,571,429
warrants at $0.01
per share.
Employment
agreements
On
January 3, 2022, the
Company and Mr. Sebastian Giordano entered into an employment agreement with a term extending through December 31, 2025, which provides
for annual compensation of $ 400,000
as
well as annual discretionary bonuses based on the Company’s achievement of performance targets, grants of options, restricted stock
or other equity, potentially constituting (with prior grants made to Ascentaur), at the discretion of the Company’s Board of Directors,
up to 5% of the outstanding common stock of the Company, vesting over the term of the employment agreement, business expense reimbursement
and benefits as generally made available to the Company’s executives. Pursuant
to this employment agreement, on March 11, 2022, the Company’s Board of Directors granted the chief executive officer 122,126,433
shares of its common stock (see below).
On
January, 3, 2022, the Company retained the services of Mr. James Giordano (no relation to Mr. Sebastian Giordano) as Chief Financial
Officer. In addition, Mr. James Giordano is appointed the Company’s Treasurer. Previously, Mr. James Giordano served as Chief Financial
Officer and consultant to Freight Connections, Inc., a LTL/line haul transportation services and warehousing provider. Prior to that,
he served as Chief Financial Officer for Farren International, a global supplier of transportation and rigging services. Mr. James Giordano’s
employment with the Company is at will. He will receive annual compensation of $250,000
as well as annual discretionary bonuses
and equity grants, business expense reimbursement and benefits as generally made available to the Company’s executives.
Shares
issued for compensation
On March 11, 2022, pursuant to an employment agreement
with the Company’s chief executive officer dated January 4, 2022, the Company’s Board of Directors granted the chief executive
officer 122,126,433
shares of its common stock which were valued at $1,343,391,
or $0.011
per common share, based on the quoted closing price of the Company’s common stock on the measurement date. These
shares will vest in equal annual installments with the first installment of 30,531,608
shares vesting on January 3, 2022, and 30,531,608
common shares vesting each year quarter through January 3, 2025. In connection with these shares, the Company valued these
common shares at a fair value of $1,343,391
and will record stock-based compensation expense over the vesting period.
TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2021 AND 2020
On
March 11, 2022 and effective January 4, 2022, the Company agreed to grant restricted stock awards to three independent members of the
Company’s board of directors for an aggregate of 5,454,546
common shares of the Company which were
valued at $60,000,
or $0.011
per common share, based on the quoted
closing price of the Company’s common stock on the measurement date. These shares will vest in equal quarterly installments with
the first installment of 1,363,636.50
shares vesting on March 31, 2022, and
1,363,636.50
common shares vesting each quarter through
December 31, 2022. In connection with these shares, the Company valued these common shares at a fair value of $60,000
and will record stock-based compensation
expense over the vesting period.
On
March 11, 2022 and effective January 4, 2022, the Company agreed to grant restricted stock awards to the Company’s chief financial
officer for 11,363,636
common shares of the Company which were
valued at $125,000,
or $0.011
per common share, based on the quoted
closing price of the Company’s common stock on the measurement date. These shares will vest in equal quarterly installments with
the first installment of 2,840,909
shares vesting on March 31, 2022, and
2,840,909
common shares vesting each quarter through
December 31, 2022. In connection with these shares, the Company valued these common shares at a fair value of $125,000
and will record stock-based compensation
expense over the vesting period.
On
March 11, 2022, the Company agreed to grant restricted stock awards to the Company’s former chief executive officer and current
member of the Company’s board of directors for 22,727,273
common shares of the Company which were
valued at $250,000,
or $0.011
per common share, based on the quoted
closing price of the Company’s common stock on the measurement date. These shares will vest immediately. In connection with these
shares, the Company valued these common shares at a fair value of $250,000
and will record stock-based compensation
expense of $250,000.
Legal
matters
See
Note 12.
(2)
EXHIBITS.
| Exhibit
Number |
|
Description |
| |
|
|
| 2.1 |
|
Share Exchange Agreement, dated as of March 30, 2017, by and among the Registrant and Save on Transport Inc. (incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on April 5, 2017). |
| |
|
|
| 3.1 |
|
Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to our Annual Report on Form 10-K for the year ended March 31, 2015 filed with the Securities and Exchange Commission on June 30, 2015). |
| |
|
|
| 3.2 |
|
Certificate of Change filed with the Nevada Secretary of State, dated December 18, 2013 (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on December 24, 2013). |
| |
|
|
| 3.3 |
|
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on December 20, 2011). |
| |
|
|
| 3.4 |
|
Certificate of Amendment to the Certificate of Designation, Preferences and Rights of the Series A Convertible Preferred Stock of PetroTerra Corp., dated August 7, 2017 (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on August 8, 2017). |
| |
|
|
| 3.5 |
|
Certificate of Amendment to Amended and Restated Articles of Incorporation dated July 16, 2018 (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on July 23, 2018). |
| |
|
|
| 3.6 |
|
Certificate of Amendment to the Certificate of Designation, Preferences and Rights of the Series B Convertible Preferred Stock, dated August 16, 2019 (incorporated by reference to Exhibit 4.9 to our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission on May 29, 2020). |
| |
|
|
| 3.7 |
|
Certificate of Withdrawal of Certificate of Designation of Series A Convertible Preferred Stock, filed on July 17, 2020 (incorporated by reference to Exhibit 3.2 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on July 21, 2020). |
| |
|
|
| 3.8 |
|
Certificate of Amendment to the Amended and Restated Articles of Incorporation of Transportation and Logistics Systems, Inc., effective as of July 20, 2020 (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on July 21, 2020). |
| |
|
|
| 3.10 |
|
Certificate of Designation of Preferences, Rights and Limitations of Series E Preferred Stock of the Company, filed on October 6, 2020 (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on October 9, 2020). |
| |
|
|
| 3.11 |
|
Amended and Restated Certificate of Designation of Preferences, Rights and Limitations of Series E Preferred Stock of the Company, filed on December 28, 2020 (incorporated by reference to Exhibit 10.28 to our Form S-1/A dated February 10, 2021). |
| |
|
|
| 3.12 |
|
Certificate of Amendment to the Amended and Restated Articles of Incorporation of Transportation and Logistics Systems, Inc., effective as of April 13, 2021 (incorporated by reference to Exhibit 3.5 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 as filed with the Securities and Exchange Commission on November 15, 2021). |
| |
|
|
| 3.13 |
|
Certificate of Designation of Preferences, Rights and Limitations of Series F Preferred Stock of the Company, filed on February 22, 2021 (incorporated by reference to Exhibit 3.6 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 as filed with the Securities and Exchange Commission on November 15, 2021). |
| |
|
|
| 3.14 |
|
Certificate of Designation of Preferences, Rights and Limitations of Series G Preferred Stock of the Company, filed on December 28, 2021 (incorporated by reference to Exhibit 3.14 to our Form S-1 dated January 28, 2022). |
| |
|
|
| 4.1 |
|
Form of Common Stock Purchase Warrant in Warrant Offering (incorporated by reference to Exhibit 4.1 to our Form S-1 dated January 28, 2022).
|
| 4.2 |
|
Form of Common Stock Purchase Warrant in Series G Offering (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on January 3, 2022). |
| |
|
|
| 4.3* |
|
Description of the Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934. |
| |
|
|
| 5.1* |
|
Opinion of Flangas Law Group, dated 28, 2022. |
| |
|
|
| 10.1 |
|
Promissory Note for $2,941,212.50 executed by Company in favor of M&T Bank, dated April 16, 2020 (incorporated by reference to Exhibit 10.1 to our Form 8-K filed with the Securities and Exchange Commission April 27, 2020). |
| |
|
|
| 10.2 |
|
Promissory Note for $504,940 executed by Company in favor of M&T Bank, dated April 28, 2020 (incorporated by reference to Exhibit 10.1 to our Form 8-K filed with the Securities and Exchange Commission on May 8, 2020).
|
| 10.3 |
|
Stock Purchase Agreement, dated March 24, 2021, between TLSS Acquisition, Inc. (a wholly owned subsidiary of the Company) and Cougar Express, Inc. (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on March 24, 2021).
|
| 10.5 |
|
Form
of Registration Rights Agreement for Warrants. (incorporated by reference to Exhibit 10.5 to our Form S-1 dated January 28, 2022). |
| |
|
|
| 10.6 |
|
Form
of Registration Rights Agreement for Series G Convertible Preferred Stock (incorporated by reference to Exhibit 10.6 to our Form
S-1 dated January 28, 2022). |
| |
|
|
| 10.7 |
|
Offer
Letter, dated November 10, 2021, between TLSS and Mr. James Giordano (incorporated by reference to Exhibit 10.1 to our Current Report
on Form 8-K filed with the Securities and Exchange Commission on January 7, 2022). |
| |
|
|
| 10.8 |
|
Employment
Agreement, dated January 4, 2022, between TLSS and Mr. Sebastian Giordano (incorporated by reference to Exhibit 10.2 to our Current
Report on Form 8-K filed with the Securities and Exchange Commission on January 7, 2022). |
| |
|
|
| 10.9
|
|
Confidential
Settlement Agreement and Mutual Release, dated October 31, 2021, between TLSS and Westmount Financial Limited Partnership (incorporated
by reference to Exhibit 10.9 to our Form S-1 dated January 28, 2022). |
| |
|
|
| 21* |
|
Subsidiaries
of Registrant |
| |
|
|
| 23.1* |
|
Consent
of Flangas Law Group (contained in Exhibit 5.1). |
| |
|
|
| 23.2* |
|
Consent
of Salberg & Company, P.A. |
| |
|
|
| 107* |
|
Filing Fee Table. | |
|
|
| |
|
| |
|
|
| 101.INS |
|
XBRL
Instance Document |
| |
|
|
| 101.CAL |
|
XBRL
Taxonomy Extension Calculation Link base Document |
| |
|
|
| 101.DEF |
|
XBRL
Taxonomy Extension Definition Link base Document |
| |
|
|
| 101.LAB |
|
XBRL
Taxonomy Label Link base Document |
| |
|
|
| 101.PRE |
|
XBRL
Extension Presentation Link base Document |
| |
|
|
| 101.SCH |
|
XBRL
Taxonomy Extension Scheme Document |
| * |
Filed
herewith. |
| ** |
To
be filed by amendment. |
| + |
Pursuant
to Item 601(b)(5) of Regulation S-K, Exhibit G to this document has been omitted and are not filed herewith. The registrant hereby
agrees to furnish a copy of any omitted schedule or exhibits to the SEC upon request. |
| # |
Pursuant
to Item 601(b)(2) of Regulation S-K, certain schedules have been omitted from this exhibit and are not filed herewith. The registrant
hereby agrees to furnish a copy of any omitted schedule or exhibits to the SEC upon request. |
Item
17. Undertakings.
(a)
The undersigned registrant hereby undertakes:
(1)
To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
| (i) |
To
include any prospectus required by section 10(a)(3) of the Securities Act of 1933; |
| (ii) |
To
reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set
forth in the “Calculation of Registration Fee” table in the effective registration statement. |
| |
|
| (iii) |
To
include any material information with respect to the plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement. |
(2)
That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3)
To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4)
That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser:
If
the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to
an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall
be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided,
however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a
document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was
made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately
prior to such date of first use.
(5)
That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution
of the securities:
The
undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration
statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold
to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will
be considered to offer or sell such securities to such purchaser:
| (i) |
Any
preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule
424; |
| |
|
| (ii) |
Any
free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by
the undersigned registrant; |
| |
|
| (iii) |
The
portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant
or its securities provided by or on behalf of the undersigned registrant; and |
| |
|
| (iv) |
Any
other communication that is an offer in the offering made by the undersigned registrant to the purchaser. |
For
the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
(b)
The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing
of the registrant’s annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan’s annual report pursuant to section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering
thereof.
(h)
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication
of such issue.