FORWARD LOOKING STATEMENTS
Statements made in this Form 10-Q that are not historical or current facts are
"forward-looking statements" made pursuant to the safe harbor provisions of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and
Section 21E of the Exchange Act. These statements often can be identified by the
use of terms such as "may," "will," "expect," "believe," "anticipate,"
"estimate," "approximate" or "continue," or the negative thereof. We intend that
such forward-looking statements be subject to the safe harbors for such
statements. We wish to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. Any
forward-looking statements represent management's best judgment as to what may
occur in the future. However, forward-looking statements are subject to risks,
uncertainties and important factors beyond our control that could cause actual
results and events to differ materially from historical results of operations
and events and those presently anticipated or projected. We disclaim any
obligation subsequently to revise any forward-looking statements to reflect
events or circumstances after the date of such statement or to reflect the
occurrence of anticipated or unanticipated events.
Effects of COVID-19
The COVID-19 pandemic and resulting global disruptions have affected our
businesses, as well as those of our customers and their third-party suppliers
and sellers. To serve our customers while also providing for the safety of our
employees and service providers, we have adapted numerous aspects of our
logistics and transportation processes. We continue to monitor the rapidly
evolving situation and expect to continue to adapt our operations to address
federal, state, and local standards as well as to implement standards or
processes that we determine to be in the best interests of our employees,
customers, and communities.
As reflected in the discussion below, the impact of the pandemic and actions
taken in response to it had minimal effects on our results of operations. We are
experiencing higher net sales which reflects increased demand, particularly as
more people are staying at home, for household staples and other essential
products, partially offset by decreased demand for discretionary consumer
products, delayed procurement and shipment of non-priority products, and supply
chain interruptions. Other effects include increased fulfillment 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. We expect
to continue to be affected by possible procurement and shipping delays, supply
chain interruptions, higher product demand in certain categories, lower product
demand in other categories, and increased fulfillment costs and cost of sales as
a percentage of net sales through at least Q3 2020, although it is not possible
to determine the duration and spread of the pandemic or such actions, the
ultimate impact on our results of operations during 2020, or whether other
currently unanticipated consequences of the pandemic are reasonably likely to
materially affect our results of operations.
Overview
Transportation and Logistics Systems, Inc. ("TLSS" or the "Company"), formerly
PetroTerra Corp., was incorporated under the laws of the State of Nevada, on
July 25, 2008. The Company operates through its subsidiaries as a leading
logistics and transportation company specializing in ecommerce fulfillment, last
mile deliveries, two-person home delivery and line haul services for
predominantly online retailers.
On March 30, 2017 (the "Closing Date"), TLSS and Save On Transport Inc. ("Save
On") entered into a Share Exchange Agreement, dated as of the same date (the
"Share Exchange Agreement"). Pursuant to the terms of the Share Exchange
Agreement, on the Closing Date, Save On became a wholly-owned subsidiary of TLSS
(the "Reverse Merger"). Save On was incorporated in the state of Florida and
started business on July 12, 2016. This transaction was treated as a reverse
merger and recapitalization of Save On for financial reporting purposes because
the Save On shareholders retained an approximate 80% controlling interest in the
post-merger consolidated entity. Save On was considered the acquirer for
accounting purposes, and the Company's historical financial statements before
the Reverse Merger were replaced with the historical financial statements of
Save On before the Reverse Merger. The balance sheets at their historical cost
basis of both entities were combined at the Closing Date and the results of
operations from the Closing Date forward include the historical results of Save
On and results of TLSS from the Closing Date forward. On May 1, 2019, the
Company entered into a share exchange agreement with Save On and Steven Yariv,
whereby the Company returned all of the stock of Save On to Steven Yariv in
exchange for Mr. Yariv conveying 1,000,000 shares of common stock of the Company
back to the Company. In addition, the Company granted an aggregate of 80,000
options to certain employees of Save On April 16, 2019, Mr. Yariv ceased to be
an officer or director of the Company.
On June 18, 2018 (the "Acquisition Date"), the Company completed the acquisition
of 100% of the issued and outstanding membership interests of Prime EFS, LLC, a
New Jersey limited liability company ("Prime EFS"), from its members pursuant to
the terms and conditions of a Stock Purchase Agreement entered into among the
Company and the Prime EFS members on the Acquisition Date (the "SPA"). Prime EFS
is a New Jersey based transportation company with a focus on deliveries for
on-line retailers in New York, New Jersey and Pennsylvania.
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On July 24, 2018, we formed Shypdirect LLC ("Shypdirect"), a company organized
under the laws of New Jersey. Shypdirect is a transportation company with a
focus on tractor trailer and box truck deliveries of product on the east coast
of the United States from one distributor's warehouse to another warehouse or
from a distributor's warehouse to the post office.
The following discussion highlights the results of our operations and the
principal factors that have affected the Company's consolidated financial
condition as well as its liquidity and capital resources for the periods
described, and provides information that management believes is relevant for an
assessment and understanding of the consolidated financial condition and results
of operations presented herein. The following discussion and analysis are based
on the condensed consolidated financial statements contained in this Quarterly
Report, which have been prepared in accordance with generally accepted
accounting principles in the United States. You should read the discussion and
analysis together with such consolidated financial statements and the related
notes thereto.
Basis of Presentation
The condensed consolidated financial statements for the periods ended March 31,
2020 and 2019 include a summary of our significant accounting policies and
should be read in conjunction with the discussion below.
Critical Accounting Policies and Significant Accounting Estimates
The methods, estimates, and judgments that we use in applying our accounting
policies have a significant impact on the results that we report in our
condensed consolidated financial statements. Some of our accounting policies
require us to make difficult and subjective judgments, often as a result of the
need to make estimates regarding matters that are inherently uncertain.
Significant estimates included in the accompanying condensed consolidated
financial statements and footnotes include the valuation of accounts receivable,
the useful life of property and equipment, the valuation of intangible assets,
assumptions used in assessing impairment of long-lived assets, estimates of
current and deferred income taxes and deferred tax valuation allowances, the
fair value of non-cash equity transactions, the valuation of derivative
liabilities, and the fair value of assets acquired and liabilities assumed in
the business acquisition.
We have identified the accounting policies below as critical to our business
operation:
Accounts receivable
Accounts receivable are presented net of an allowance for doubtful accounts. The
Company maintains allowances for doubtful accounts for estimated losses. The
Company reviews the accounts receivable on a periodic basis and makes general
and specific allowances when there is doubt as to the collectability of
individual balances. In evaluating the collectability of individual receivable
balances, the Company considers many factors, including the age of the balance,
a customer's historical payment history, its current credit-worthiness and
current economic trends. Accounts are written off after exhaustive efforts at
collection.
Impairment of long-lived assets
In accordance with ASC Topic 360, we review long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be fully recoverable, or at least annually. We recognize an
impairment loss when the sum of expected undiscounted future cash flows is less
than the carrying amount of the asset. The amount of impairment is measured as
the difference between the asset's estimated fair value and its book value.
Derivative financial instruments
We have certain financial instruments that are embedded derivatives associated
with capital raises. We evaluate all our financial instruments to determine if
those contracts or any potential embedded components of those contracts qualify
as derivatives to be separately accounted for in accordance with ASC 810-10-05-4
and 815-40. This accounting treatment requires that the carrying amount of any
embedded derivatives be recorded at fair value at issuance and marked-to-market
at each balance sheet date. In the event that the fair value is recorded as a
liability, as is the case with the Company, the change in the fair value during
the period is recorded as either other income or expense. Upon conversion,
exercise or repayment, the respective derivative liability is marked to fair
value at the conversion, repayment or exercise date and then the related fair
value amount is reclassified to other income or expense as part of gain or loss
on extinguishment.
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In July 2017, FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260);
Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging
(Topic 815): (Part I) Accounting for Certain Financial Instruments with Down
Round Features. These amendments simplify the accounting for certain financial
instruments with down-round features. The amendments require companies to
disregard the down-round feature when assessing whether the instrument is
indexed to its own stock, for purposes of determining liability or equity
classification. The guidance was adopted as of January 1, 2019 and we elected to
record the effect of this adoption retrospectively to outstanding financial
instruments with a down round feature by means of a cumulative-effect adjustment
to the condensed consolidated balance sheet as of the beginning of 2019, the
period which the amendment is effective. In accordance with the guidance
presented in ASU 2017-11, the fair value of derivative liabilities associated
with certain convertible notes as of December 31, 2018 of $838,471 and the
offsetting effect of reclassifying such debt to stock-settled debt for which we
recorded a put premium liability of $385,385 was reclassified by means of a
cumulative-effect adjustment to opening accumulated deficit as of January 1,
2019 in the amount of $453,086.
Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The updated
guidance requires lessees to recognize lease assets and lease liabilities for
most operating leases. In addition, the updated guidance requires that lessors
separate lease and non-lease components in a contract in accordance with the new
revenue guidance in ASC 606. The updated guidance is effective for interim and
annual periods beginning after December 15, 2018.
On January 1, 2019, we adopted ASU No. 2016-02, applying the package of
practical expedients to leases that commenced before the effective date whereby
the Company elected to not reassess the following: (i) whether any expired or
existing contracts contain leases and; (ii) initial direct costs for any
existing leases. For contracts entered into on or after the effective date, at
the inception of a contract the Company assessed whether the contract is, or
contains, a lease. The Company's assessment is based on: (1) whether the
contract involves the use of a distinct identified asset, (2) whether we obtain
the right to substantially all the economic benefit from the use of the asset
throughout the period, and (3) whether it has the right to direct the use of the
asset. We will allocate the consideration in the contract to each lease
component based on its relative stand-alone price to determine the lease
payments. We have elected not to recognize right-of-use assets and lease
liabilities for short-term leases that have a term of 12 months or less.
Operating lease ROU assets represents the right to use the leased asset for the
lease term and operating lease liabilities are recognized based on the present
value of the future minimum lease payments over the lease term at commencement
date. As most leases do not provide an implicit rate, we use an incremental
borrowing rate based on the information available at the adoption date in
determining the present value of future payments. Lease expense for minimum
lease payments is amortized on a straight-line basis over the lease term and is
included in general and administrative expenses in the condensed consolidated
statements of operations.
Revenue recognition and cost of revenue
The Company adopted ASC 606, Revenue from Contracts with Customers (Topic 606),
which supersedes the revenue recognition requirements in ASC Topic 605, Revenue
Recognition. This ASC is based on the principle that revenue is recognized to
depict the transfer of goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for
those goods or services. This ASC also requires additional disclosure about the
nature, amount, timing, and uncertainty of revenue and cash flows arising from
customer service orders, including significant judgments.
For the Company's Prime EFS and Shypdirect business activities, we recognize
revenues and the related direct costs of such revenue which generally include
compensation and related benefits, gas costs, insurance, parking and tolls,
truck rental fees, and maintenance fees as of the date the freight is delivered
which is when the performance obligation is satisfied. In accordance with ASC
Topic 606, we recognize revenue on a gross basis. Our payment terms are net
seven days from acceptance of delivery. We do not incur incremental costs
obtaining service orders from our Prime EFS and Shypdirect customers, however,
if we did, because all of Prime EFS and Shypdirect's customer contracts are less
than a year in duration, any contract costs incurred would be expensed rather
than capitalized. The revenue that we recognize arises from deliveries of
packages on behalf of the Company's customers. Primarily, our performance
obligations under these service orders correspond to each delivery of packages
that we make under the service agreements. Control of the delivery transfers to
the recipient upon delivery. Once this occurs, we have satisfied our performance
obligation and we recognize revenue.
Management has reviewed the revenue disaggregation disclosure requirements
pursuant to ASC 606 and determined that no further disaggregation disclosure is
required to be presented.
Stock-based compensation
Stock-based compensation is accounted for based on the requirements of ASC 718 -
"Compensation -Stock Compensation", which requires recognition in the financial
statements of the cost of employee, director, and non-employee services received
in exchange for an award of equity instruments over the period the employee,
director, or non-employee is required to perform the services in exchange for
the award (presumptively, the vesting period). The ASC also requires measurement
of the cost of employee, director, and non-employee services received in
exchange for an award based on the grant-date fair value of the award. We have
elected to recognize forfeitures as they occur as permitted under ASU 2016-09
Improvements to Employee Share-Based Payment.
39
RESULTS OF OPERATIONS
Our condensed consolidated financial statements have been prepared assuming that
we will continue as a going concern and, accordingly, do not include adjustments
relating to the recoverability and realization of assets and classification of
liabilities that might be necessary should we be unable to continue our
operation.
We expect we will require additional capital to meet our long-term operating
requirements. We expect to raise additional capital through, among other things,
the sale of equity or debt securities.
For the three months ended March 31, 2020 compared with the three months ended
March 31, 2019
The following table sets forth our revenues, expenses and net loss for the three
months ended March 31, 2020 and 2019. The financial information below is derived
from our condensed consolidated financial statements included in this Quarterly
Report.
For the Three Months Ended
March 31,
2020 2019
Revenues $ 8,635,060 $ 5,803,207
Cost of revenues 7,855,749 5,549,702
Gross profit 779,311 253,505
Operating expenses 1,566,488 5,377,547
Loss from operations (787,177 ) (5,124,042 )
Other expenses (2,666,161 ) (14,537,342 )
Loss from continuing operations (3,453,338 ) (19,661,384 )
Income from discontinued operations - 13,661
Net loss $ (3,453,338 ) $ (19,647,723 )
Results of Operations
Revenues
For the three months ended March 31, 2020, our revenues from continuing
operations were $8,635,060 as compared to $5,803,207 for the three months ended
March 31, 2019, an increase of $2,831,853, or 48.8%. This increase was primarily
a result of an increase in revenue of approximately $3,023,161 from box truck
and tractor truck delivery services where we transport product from a
distribution center to the post office offset by a decrease in last-mile
deliveries performed of $191,308.
On May 1, 2019, we entered into a Share Exchange Agreement with Save On and
Steven Yariv, whereby we returned all of the stock of Save On to Steven Yariv in
exchange for Mr. Yariv conveying 1,000,000 shares of common stock of the Company
back to us. Accordingly, for all periods presented, all revenues from Save On
have been reflected as part of discontinued operations and we will not reflect
any revenues from Save On in future periods.
Cost of Revenue
For the three months ended March 31, 2020, our cost of revenues from continuing
operations were $7,855,749 compared to $5,549,702 for the three months ended
March 31, 2019, an increase of $2,306,047, or 41.6%.Cost of revenues relating to
our Prime EFS and Shypdirect segments consists of truck and van rental fees,
insurance, gas, maintenance, parking and tolls, and compensation and related
benefits. The increase was a direct result of an increase in routes serviced.
Gross Profit
For the three months ended March 31, 2020, our gross profit was $779,311, or
9.0% of revenue, as compared to $253,505, or 4.4% of revenue, for the three
months ended March 31, 2019, an increase of $525,806. The increase in gross
profit primarily resulted from an increase in operational efficiencies in both
Prime EFS and Shypdirect.
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Operating Expenses
For the three months ended March 31, 2020, total operating expenses amounted to
$1,566,488 as compared to $5,377,547 for the three months ended March 31, 2019,
a decrease of $3,811,059, or 70.9%. For the three months ended March 31, 2020
and 2019, operating expenses consisted of the following:
For the Three months Ended
March 31,
2020 2019
Compensation and related benefits $ 742,045 $ 4,108,544
Legal and professional Fees 414,810 504,840
Rent 164,350 98,831
General and administrative expenses 245,283 665,332
Total Operating Expense $ 1,566,488 $ 5,377,547Compensation and related benefits
For the three months ended March 31, 2020, compensation and related benefits
amounted to $742,045 compared to $4,108,544 for the three months ended March 31,
2019, a decrease of $3,366,499. Compensation and related benefits for the three
months ended March 31, 2020 and 2019 included stock-based compensation of $0 and
$2,750,808 respectively, a decrease of $2,750,808, from the granting of shares
of our common stock to employees, our former chief executive officer, and our
new chief executive officer for services rendered. Additionally, during the
three months ended March 31, 2020, compensation and related benefits amounted to
$742,045 as compared to $1,357,736 for the three months ended March 31, 2019, a
decrease of $615,691. The overall decrease in compensation and related benefits
was attributable to a decrease in stock-based compensation, a decrease in
compensation paid to significant employees and the reduction of staff.
Legal and professional fees
For the three months ended March 31, 2020, legal and professional fees were
$414,810 as compared to $504,840 for the three months ended March 31, 2019, a
decrease of $90,030, or 17.8%. During the three months ended March 31, 2020 and
2019, we incurred stock-based consulting fees of $31,250 and $0, respectively,
from the issuance of our common shares to consultants for business development
services rendered, an increase of $31,250. This increase was offset by a
decrease in accounting fees attributable to a decrease in auditing and
third-party accountant fees and legal fees offset by an increase in consulting
fees.
Rent expense
For the three months ended March 31, 2020, rent expense was $164,350 as compared
to $98,831 for the three months ended March 31, 2019, an increase of $65,519.
This increase was attributable to a significant expansion in office, warehouse
and parking spaces pursuant to short and long-term operating leases related to
the Prime EFS and Shypdirect businesses.
General and administrative expenses
For the three months ended March 31, 2020, general and administrative expenses
were $245,283 as compared to $665,332 for the three months ended March 31, 2019,
a decrease of $420,049, or 63.1%. This decrease is primarily attributable to a
decrease in general administrative expenses of $125,421 and a decrease in
depreciation and amortization of $294,628. The decrease in depreciation and
amortization expense was related to a decrease in amortization of intangible
assets of $261,776 and a decrease in depreciation expense of $32,852. In 2020,
we cut our overall general and administrative expenses due to cost-cutting
measures taken.
Loss from Operations
For the three months ended March 31, 2020, loss from operations amounted to
$787,177 as compared to $5,124,042 for the three months ended March 31, 2019, a
decrease of $4,336,865, or 84.6%.
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Other Expenses (Income)
Total other expenses (income) include interest expense, derivative expense, loan
fees, gain on debt extinguishment, and other income. For the three months ended
March 31, 2020 and 2019, other expenses (income) consisted of the following:
For the Three months Ended
March 31,
2020 2019
Interest expense $ 3,046,727 $ 707,065
Interest expense - related parties 107,138 539,888
Gain on extinguishment of debt (275,034 ) (93,871 )
Other income (67,831 ) -
Derivative (gain) expense (144,839 ) 13,384,260
Total Other Expense, net $ 2,666,161 $ 14,537,342For the three months ended March 31, 2020 and 2019, aggregate interest expense
was $3,153,865 and $1,246,953, respectively, an increase of $1,906,912. The
increase in interest expense resulted from an increase in the interest rate on
interest-bearing loans due to default provisions, an increase in the
amortization of original issue discount, and an increase in interest paid to
related parties. Additionally, during the three months ended March 31, 2020, we
incurred a 30% default interest penalty of $1,387,785 which was included in
interest expense. We did not incur this expense during the 2019 period.
For the three months ended March 31, 2020, gain on extinguishment of debt was
$275,304 as compared to $93,871 for the three months ended March 31, 2019, an
increase of $181,163 that was primarily attributable to the settlement of
secured merchant loans in March 2020.
For the three months ended March 31, 2020 and 2019, derivative income (expense)
was $144,839 and $(13,384,260), respectively, a change of $13,529,099. During
the three months ended March 31, 2020 and 2019, we adjusted our derivative
liabilities to fair value and recorded derivative expense or income. This
significant change was attributable to a high quoted stock price during the 2019
period as compared to the 2020 period.
Loss from Continuing Operations
For the three months ended March 31, 2020, loss from continuing operations
amounted to $3,453,338 as compared to $19,661,384 for the three months ended
March 31, 2019, a decrease of $16,208,046, or 82.4%.
Discontinued Operations
On May 1, 2019, the Company entered into a Share Exchange Agreement with Save On
and Steven Yariv, whereby the Company returned all of the stock of Save On to
Steven Yariv in exchange for Mr. Yariv conveying 1,000,000 shares of common
stock of the Company back to the Company. In addition, the Company granted an
aggregate of 80,000 options to certain employees of Save On. Accordingly, we
reflected Save On as a discontinued operations beginning in the second quarter
of 2019, the period that Save On was disposed of and retroactively for all
periods presented in the accompanying condensed consolidated financial
statements. The businesses of Save On are considered discontinued operations
because: (a) the operations and cash flows of Save On were eliminated from the
Company's operations; and (b) the Company has no interest in the divested
operations. For the three months ended March 31, 2020 and 2019, income from
discontinued operations amounted to $0 and $13,661, respectively.
Net Loss
Due to factors discussed above, for the three months ended March 31, 2020 and
2019, net loss amounted to $3,453,338 and $19,647,723, respectively. For the
three months ended March 31, 2020 and 2019, net loss attributable to common
shareholders which included a deemed dividend related to price protection of
$18,696,012 and $0, amounted to $22,149,350, or $(1.79) per basic and diluted
common share, and $19,647,723, or $(3.76) per basic and diluted common share,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of a company to generate funds to support its current
and future operations, satisfy its obligations, and otherwise operate on an
ongoing basis. At March 31, 2020, we had a cash balance of $32,626. Our working
capital deficit was $27,678,817 at March 31, 2020. We reported a net decrease in
cash for the three months ended March 31, 2020 of $17,400.
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We do not believe that our existing working capital and our future cash flows
from operating activities will provide sufficient cash to enable us to meet our
operating needs and debt requirements for the next twelve months. We are seeking
to raise capital through additional debt and/or equity financings to fund our
operations in the future. Although we have historically raised capital from
sales of shares of common stock and from the issuance of convertible promissory
notes and notes payable, there is no assurance that we will be able to continue
to do so. If we are unable to raise additional capital or secure additional
lending in the near future, management expects that we will need to curtail our
operations.
Company financing activities
On March 13, 2019, we entered into a convertible note agreement with Wendy
Cabral, an individual, who is affiliated with the Company's chief executive
officer, in the amount of $500,000. Commencing on April 11, 2019, and continuing
on the eleventh day of each month thereafter, payments of interest only on the
outstanding principal balance of this note of $7,500 was due and payable.
Interest was to accrue with respect to the unpaid principal sum identified above
until such principal was paid or converted as provided below at a rate equal to
18% per annum compounded annually. This note was convertible by the holder at
any time in principal amounts of $100,000 in accordance with its terms by
delivery of written notice to the Company, into that number of shares of common
stock equal to the amount obtained by dividing the portion of the aggregate
principal amount that is being converted by $1.37. On July 12, 2019, we entered
into a Note Conversion Agreement with Ms. Cabral. In connection with this Note
Conversion Agreement, we issued 203,000 shares of our common stock at $2.50 per
share for the full conversion of convertible note payable of $500,000 and
accrued interest payable of $7,500, and we also issued Ms. Cabral warrants to
purchase 203,000 shares of the Company's common stock at an exercise price of
$1.81 per share for a period of five years.
On April 9, 2019 (the "Bellridge Modification Date"), the Company entered into
an agreement with Bellridge (the "Bellridge Modification Agreement") that
modified its existing obligations to Bellridge as follows:
? the overall principal amount of the Bellridge Note was reduced from the
original principal amount of $2,497,502 (principal amount was $2,223,918 at
April 9, 2019) to $1,800,000, in exchange for the issuance to Bellridge of
800,000 shares of restricted common stock, to be delivered to Bellridge,
either in whole or in part, at such time or times as when the beneficial
ownership of such shares by Bellridge will not result in Bellridge's
beneficial ownership of more than the Beneficial Ownership Limitation and such
shares are to be issued within three business days of the date the Bellridge
has represented to the Company that it is below the Beneficial Ownership
Limitation. Such issuances will occur in increments of no fewer than the
lesser of (i) 50,000 shares and (ii) the balance of the 800,000 shares owed.
The "Beneficial Ownership Limitation" is 4.99% of the number of shares of the
Company's common stock outstanding immediately after giving effect to the
issuance of shares of common stock issuable pursuant to the Bellridge
Modification Agreement. In connection with these shares, the Company recorded
a loss on debt extinguishment of $10,248,000 in April 2019. As of August 19,
2019, 100,000 of these shares have been issued and on August 16, 2019, the
Company issued 700,000 shares of Series B Preferred shares upon settlement of
700,000 shares of issuable common stock;
? the maturity date of the Bellridge Note was extended to August 31, 2020;
? the interest rate was reduced from 10% to 5% per annum;
? 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, then the Company will use a portion of the proceeds
thereof to repay not less than half of the obligations then outstanding
pursuant to the Bellridge Note;
? if the Company completes an offering of debt which results in gross proceeds
to the Company of at least $3,000,000, then the Company will use a portion of
the proceeds thereof to repay any remaining obligations then outstanding
pursuant to the Bellridge Note;
? the convertibility of the Bellridge Note was amended such that the Bellridge
Note is only convertible at a conversion price to be mutually agreed upon
between the Company and the holder. As of the date of this report, the Company
and holder have not mutually agreed on a conversion price, Since the
conversion terms are unknown, the Company will account for this conversion
feature when the contingency is resolved;
? the registration rights previously granted to Bellridge were eliminated; and
? The First Bellridge Warrant and the Second Bellridge Warrant were cancelled
and of no further force or effect as of the Bellridge Modification Date. In
exchange, the Company issued Bellridge 360,000 shares of restricted common
stock.
In addition, on April 9, 2019, in addition, the Bellridge Note PA Warrants that
were exercisable into an aggregate of 4.75% of the outstanding common stock of
the Company all agreed to exercise such warrants for an aggregate of 240,000
shares of common stock of the Company.
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On April 9, 2019, the Company entered into agreements (the "RedDiamond
Amendments") with RedDiamond Partners LLC 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.
On April 9, 2019, we entered into agreements with all holders of their Series A
Convertible Preferred Stock to exchange all 4,000,000 outstanding shares of
preferred stock for an aggregate of 2.6 million shares of common stock.
On April 11, 2019, we entered into a convertible note agreement with Westmount
Financial Limited Partnership, an entity affiliated with the Company's chief
executive officer in the amount of $2,000,000. Commencing on May 11, 2019, and
continuing on the eleventh day of each month thereafter, payments of interest
only in the amount of $30,000 on the outstanding principal balance of this note
was due and payable. Interest was to accrue with respect to the unpaid principal
sum identified above until such principal is paid or converted as provided below
at a rate equal to 18% per annum compounded annually. This note was convertible
by the holder at any time in principal amounts of $100,000 in accordance with
the terms by delivery of written notice to the Company, into that number of
shares of common stock equal to the amount obtained by dividing the portion of
the aggregate principal amount of this note that is being converted by $11.81.
On July 12, 2019, we entered into a Note Conversion Agreement with Westmount
Financial Limited Partnership. In connection with this Note Conversion
Agreement, we issued 812,000 shares of our common stock at $2.50 per share for
the full conversion of convertible note payable of $2,000,000 and accrued
interest payable of $30,000. In connection with the conversion of this
convertible note, we also issued to Westmount Financial Limited Partnership
warrants to purchase 812,000 shares of the Company's common stock at an exercise
price of $2.50 per share for a period of five years.
On August 30, 2019, we issued and sold to investors convertible promissory notes
in the aggregate principal amount of $2,469,840 (the "August 2019 Notes"), and
warrants to purchase up to 987,940 shares of our common stock (the "August 2019
Warrants") pursuant to a Securities Purchase Agreement (the "August 2019
Purchase Agreement") with accredited investors. We received net proceeds of
$295,534, which is net of a 10% original issue discounts of $246,984 and
origination fees of $61,101, and is net of $1,643,367 for the repayment of notes
payable, and net of $222,854 related to the conversion of existing notes payable
already outstanding to these lenders into these August 2019 Notes. The August
2019 Notes bear interest at 10% per annum and become due and payable on November
30, 2020. During the existence of an Event of Default (as defined in the August
2019 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 four month
anniversary of these August 2019 Notes, monthly payments of interest and monthly
principal payments, based on a 12 month amortization schedule (each, an "August
2019 Note Amortization Payment"), are due and payable, until November 30, 2020,
at which time all outstanding principal, accrued and unpaid interest and all
other amounts due and payable under the August 2019 Notes will be immediately
due and payable. The August 2019 Note Amortization Payments are made in cash
unless the investor requests it to be issued in our common stock in lieu of a
cash payment (each, an "August 2019 Note Stock Payment"). If the investor
requests an August 2019 Note Stock Payment, the number of shares of common stock
issued is based on the amount of the applicable August 2019 Note Amortization
Payment divided by 80% of the lowest VWAP (as defined in the August 2019 Notes)
during the five Trading Day (as defined in the August 2019 Notes) period prior
to the due date of the August 2019 Note Amortization Payment.
The August 2019 Notes may be prepaid, provided that Equity Conditions, as
defined in the August 2019 Notes, have been met (or any such failure to meet the
Equity Conditions has been waived): (i) from August 30, 2019 until and through
November 30, 2019 at an amount equal to 105% of the aggregate of the outstanding
principal balance of the August 2019 Notes and accrued and unpaid interest, and
(ii) after August 30, 2019 at an amount equal to 115% of the aggregate of the
outstanding principal balance of the August 2019 Notes and accrued and unpaid
interest. In the event that the Company closes a registered public offering of
securities for its own account (a "Public Offering"), the holders may elect to:
(x) have their principal and accrued interest prepaid directly from the proceeds
of the Public Offering at the prices set forth above, or (y) exchange their
August 2019 Notes 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 their August 2019 Notes. Except for a Public Offering and August 2019
Amortization Payments, in order to prepay the August 2019 Notes, the Company
must provide at least 20 days' prior written notice to the holders, during which
time the holders may convert their August 2019 Notes in whole or in part at the
then-applicable conversion price. For avoidance of doubt, the August 2019
Amortization Payments are prepayments and are subject to prepayment penalties
equal to 115% of the August 2019 Amortization Payment. In the event the Company
consummates a Public Offering while the August 2019 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 August 2019 Notes.
From the original issue date until the August 2019 Notes are no longer
outstanding, the August 2019 Notes are 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 initial conversion price of the August 2019 Notes was the lower
of: (i) $3.50 per share and (ii) the price per share paid by investors in the
contemplated equity offering of up to $1,000,000. If an Event of Default (as
defined in the August 2019 Notes) has occurred, regardless of whether it has
been cured or remains ongoing, the August 2019 Notes were initially convertible
at the lower of: (i) $3.50 and (ii) 70% of the second lowest closing price of
the common stock as reported on the Trading Market (as defined in the August
2019 Notes) during the 20 consecutive Trading Day (as defined in the August 2019
Notes) period ending and including the Trading Day (as defined in the August
2019 Notes) immediately preceding the delivery or deemed delivery of the
applicable notice of conversion (the "August 2019 Notes Default Conversion
Price").
In January 2020, we defaulted on our August 30, 2019 convertible debt due to
non-payment of the required amortization payment due. Accordingly, the
outstanding principal balance on date of default increased by 30% amounting to
approximately $724,000, default interest accrues at 18%, and the default
conversion terms now apply as described above. 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. These August 2019 Notes
and related August 2019 Warrants include a down-round provision under which the
August 2019 Note conversion price and August 2019 Warrant exercise price were
reduced, on a full-ratchet basis, to a fraction of a penny due to the default on
the August 2019 Notes triggering the default conversion price. See Note 6 to the
condensed consolidated financial statements for additional details.
44
On October 3, 2019, the Company closed on a securities purchase agreement (the
"October 3 Purchase Agreement") with an accredited investor. Pursuant to the
terms of the October 3, 2019 Purchase Agreement, 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 discounts of $16,667.
The October 3 Note initially bore interest at 10% per annum and becomes due and
payable on January 3, 2021. During the existence of an Event of Default,
interest accrues at the lesser of (i) the rate of 18% per annum, or (ii) the
maximum amount permitted by law. Commencing on the four month anniversary of the
October 3 Note, monthly payments of interest and monthly principal payments,
based on a 12 month amortization schedule (each, an "October 3 Note Amortization
Payment"), are due and payable, until the Maturity Date, at which time all
outstanding principal, accrued and unpaid interest and all other amounts due and
payable under the October 3 Note will be immediately due and payable. The
October 3 Note Amortization Payments are made in cash unless the investor
requests it to be issued in the Company's common stock in lieu of a cash payment
(each, an "October 3 Note Stock Payment"). If the investor requests a October 3
Note Stock Payment, the number of shares of common stock issued is based on the
amount of the applicable October 3 Note Amortization Payment divided by 80% of
the lowest VWAP (as defined in the October 3 Note) during the five Trading Day
(as defined in the October 3 Note) period prior to the due date of the October 3
Note Amortization Payment.
The October 3 Note may be prepaid, provided that certain Equity Conditions, as
defined in the October 3 Note, have been met (or any such failure to meet the
Equity Conditions has been waived): (i) from October 3, 2019 until and through
January 3, 2020, at an amount equal to 105% of the aggregate of the outstanding
principal balance of the October 3 Note and accrued and unpaid interest, and
(ii) after January 3, 2020, at an amount equal to 115% of the aggregate of the
outstanding principal balance of the October 3 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, or (y) exchange
its October 3 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 October 3 Note. Except for a Public Offering and October 3 Note
Amortization Payments, in order to prepay the October 3 Note, the Company must
provide at least 20 days' prior written notice to the holder, during which time
the holder may convert the October 3 Note in whole or in part at the conversion
price. For avoidance of doubt, the October 3 Note Amortization Payments are
prepayments and are subject to prepayment penalties equal to 115% of the October
3 Note Amortization Payment. In the event the Company consummates a Public
Offering while the October 3 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
October 3 Note.
On the original issue date until the October 3 Note is no longer outstanding,
the October 3 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 investor. The
"Conversion Price" in effect on any Conversion Date means, as of any Conversion
Date (as defined in the October 3 Note) or other date of determination, the
lower of: (i) $2.51 per share and (ii) the price per share paid by investors in
the contemplated equity offering of up to $1,000,000. If an Event of Default (as
defined in the October 3 Note) has occurred, regardless of whether such Event of
Default (as defined in the October 3 Note) has been cured or remains ongoing,
the October 3 Note are convertible at the lower of: (i) $2.51 and (ii) 70% of
the second lowest closing price of the common stock as reported on the Trading
Market (as defined in the October 3 Note) during the 20 consecutive Trading Day
(as defined in the October 3 Note) period ending and including the Trading Day
(as defined in the October 3 Note) immediately preceding the delivery or deemed
delivery of the applicable Notice of Conversion (the "October 3 Note Default
Conversion Price"). 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.
This October 3 Note and the related October 3 Warrant include down-round
provisions under which the October 3 Note conversion price and October 3 Warrant
exercise price were reduced on a full-ratchet basis, to a fraction of a penny
due to the adjusted conversion price of certain other convertible notes issued
by the Company. See Note 8 to the consolidated financial statements for
additional details.
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
became 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.
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 approximately $50,000, default interest accrues at 18%, and the default
conversion terms apply as described above. See Note 6 to the condensed
consolidated financial statements for additional details.
45
On October 14, 2019 and November 7, 2019, we entered into convertible note
agreements with an accredited investor. Pursuant to the terms of these
convertible note agreements, we issued and sold to an investor convertible
promissory notes in the aggregate principal amount of $500,000 (the "Fall 2019
Notes") and we received cash proceeds of $500,000. The Fall 2019 Notes bear
interest at 10% per annum. The October 14, 2019 convertible promissory note of
$300,000 becomes due and payable on October 14, 2020 and the November 7, 2019
convertible promissory note of $200,000 becomes due and payable on November 7,
2020. Commencing on the respective seven-month anniversaries of issuance, and
continuing each month thereafter through the respective maturity date, payments
of principal and interest will be made in accordance with the respective
amortization schedule. During the existence of an Event of Default (as defined
in the Fall 2019 Notes), interest will accrue at the lesser of (i) the rate of
18% per annum, or (ii) the maximum amount permitted by law. Commencing on the
seventh month anniversary of each respective note, monthly payments of interest
and monthly principal payments are due and payable, until the respective
maturity dates, at which time all outstanding principal, accrued and unpaid
interest and all other amounts due and payable under such Fall 2019 Note will be
immediately due and payable.
The Company has the right to prepay in cash all or a portion of the outstanding
principal due under the Fall 2019 Notes. The Company must provide the holders
with written notice at least twenty business days prior to the date on which the
Company will deliver payment of accrued interest and all or a portion, in
$100,000 increments, of the principal.
Each Fall 2019 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 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 do not contain anti-dilutive
provisions. In May 2020, due to the default of a May 2020 Amortization Payment,
the October 14, 2019 convertible note was deemed in default. Accordingly,
default interest accrues at 18% and the October 14, 2019 convertible note became
due on the date of default.
From August 2019 to October 2019, we issued 619,000 shares of our common stock
and 619,000 five-year warrants to purchase common shares for an exercise price
of $2.50 per common share to investors for cash proceeds of $1,547,500, or $2.50
per share, pursuant to unit subscription agreements. These issuances have no
anti-dilution protection.
From November 22, 2019 to December 31, 2019, we entered into several secured
merchant loans in the aggregate amount of $2,283,540. We 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, we were 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, we repaid an
aggregate of $464,344 of the loans. At December 31, 2019, notes payable related
to these secured merchant loans amounted to $1,057,074, which consists of
$1,819,196 of principal balance due and is net of unamortized debt discount of
$762,122. Subsequent to December 31, 2019, we settled and repaid substantially
all of these notes.
Beginning in January 2020 and continuing through April 1, 2020, we have closed
on a series of Securities Purchase Agreements with several accredited investors
(the "2020 Purchase Agreements"). Pursuant to the terms of these 2020 Purchase
Agreements, we have issued and sold to investors convertible promissory notes in
the aggregate principal amount of $2,095,500 (the "2020 Notes"), and warrants to
purchase up to 838,200 shares of the Company's common stock (the "2020
Warrants"). We received net proceeds of $1,905,000, which is net of a 10%
original issue discounts of $190,500. The 2020 Notes bear interest at 6% per
annum and becomes due and payable on the date that is the 24-month anniversary
of the original issue date of the respective 2020 Note. During the existence of
an Event of Default (as defined in the applicable 2020 Note), 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 each 2020
Note, monthly payments of interest and monthly principal payments, based on a 12
month amortization schedule (each, a "2020 Note Amortization Payment"), will be
due and payable, until the Maturity Date (as defined in the applicable 2020
Note), at which time all outstanding principal, accrued and unpaid interest and
all other amounts due and payable under the 2020 Notes will be immediately due
and payable. The 2020 Note Amortization Payments will be made in cash unless the
investor requests it to be issued in the Company's common stock in lieu of a
cash payment (each, a "2020 Note Stock Payment"). If a holder of a 2020 Note
requests a 2020 Note Stock Payment, the number of shares of common stock issued
will be based on the amount of the applicable 2020 Note Amortization Payment
divided by 80% of the lowest VWAP (as defined in the applicable 2020 Note)
during the five Trading Day (as defined in the applicable 2020 Note) period
prior to the due date of such 2020 Note Amortization Payment.
The 2020 Notes may be prepaid, provided that Equity Conditions, as defined in
the 2020 Notes, have been met (or any such failure to meet the Equity Conditions
has been waived): (i) from each 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 "2020 Note 3 Month Anniversary") at an amount equal
to 105% of the aggregate of the outstanding principal balance of the 2020 Note
and accrued and unpaid interest, and (ii) after the applicable 2020 Note 3 Month
Anniversary at an amount equal to 115% of the aggregate of the outstanding
principal balance of the 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, or (y) exchange its 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 2020 Note(s).
Except for a Public Offering and 2020 Note Amortization Payments, in order to
prepay a 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 2020
Note in whole or in part at the applicable conversion price. The 2020 Note
Amortization Payments are prepayments and are subject to prepayment penalties
equal to 115% of the 2020 Note Amortization Payment. In the event the Company
consummates a Public Offering while the 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 2020 Notes.
46
After the original issue date of a 2020 Note until such 2020 Note is no longer
outstanding, such 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
applicable 2020 Note) means, as of any date of determination, $0.40 per share,
subject to adjustment as provided herein. If an Event of Default (as defined in
the 2020 Notes) has occurred, regardless of whether it has been cured or remains
ongoing, the 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 applicable 2020 Note) during the 20
consecutive Trading Day (as defined in the applicable 2020 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. The 2020 Notes contain down-round protection under which the
2020 Note conversion price was reduced on a full-ratchet basis, to a fraction of
a penny due to the adjusted conversion price of certain other convertible notes
issued by the Company.
The 2020 Warrants are exercisable at any time on or after the date of the
issuance and entitles the investors to purchase shares of the Company's common
stock for a period of five years from the initial date the 2020 Warrants become
exercisable. Under the terms of the 2020 Warrants, the investors are entitled to
exercise the 2020 Warrants to purchase up to 838,200 shares of the Company's
common stock at an initial exercise price of $0.40, subject to adjustment as
detailed in the respective 2020 Warrants.
Due to the default of August 2019 Amortization Payments due on our August 2019
Notes and other notes, these convertible 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.
Conversions of Convertible Notes
The Company's trading price quoted on OTC Pink market fell from $3.50 per share
on January 8, 2020 to $0.01 on April 21, 2020. This drop, together with
anti-dilution protection features contained in the August 2019 Notes and August
2019 Warrants that were triggered upon the issuance of convertible debt
beginning in January 2020, caused the conversion prices of most of the Company's
outstanding notes and the exercise price of many of the Company's outstanding
warrants, to fall to a fraction of a penny. Beginning in February 2020, note
holders began converting the outstanding principal of their notes into
substantial quantities of shares of the Company's common stock. During the
period from February 25, 2020 to June 22, 2020, we issued 417,363,999 shares of
our common stock in connection with the conversion of convertible notes payable
of $2,068,131, accrued interest and default interest of $473,402, and fees of
$5,000. The conversion price was based on contractual terms of the related debt.
Additionally, the Company issued 70,203,889 shares of its common stock upon the
cash-less exercise of warrants. Consequently, the total number of shares of
common stock outstanding has increased from 11,832,603 on December 31, 2019, to
499,900,491 on June 26, 2020.
These anti-dilution protection features only provide for one-way adjustment,
therefore, even if the Company cures any events of default, and the trading
price increases, the conversion and exercise prices of the affected notes and
warrants will remain a fraction of a penny. As a result, the Company has made
commitments to shareholders, convertible note holders and warrant holders to
issue, or keep available for issuance, large quantities of additional shares of
common stock. The Company does not currently have sufficient authorized common
stock to satisfy all of such commitments.
47
The Company is currently authorized to issue up to 500,000,000 shares of its
common stock. As a result of anti-dilution adjustment provisions in the
Company's convertible notes and warrants and the reserve rights of certain
noteholders and warrant holders, as of June 28, 2020 TLSS has 499,900,491 shares
issued and outstanding, 99,509 shares that are reserved for conversions of
specified note and warrant holders and no shares that are reserved for
unspecified note and warrant holders.
On June 26, 2020, 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, which will authorize an increase of the number of shares of
common stock that the Company may issue to 4,000,000,000 shares, par value
$0.001 (the "Certificate of Amendment").
Upon effectiveness of the Certificate of Amendment and resulting increase in the
number of authorized shares, the Company will cause all committed shares to be
issued or reserved for issuance, as applicable. After completing such issuances
and reservations, the Company intends to assess its options for optimizing its
capital structure so that it can pursue and secure the financing required to
execute its plans to grow its business through organic means of geographic and
service line expansion and through the acquisition of selected businesses or
properties.
The Company filed a preliminary information statement on Schedule 14C regarding
the stockholders' consent to the Certificate of Amendment with the SEC on June
8, 2020. The Company plans to file a definitive information statement on
Schedule 14C on or before June 30, 2020 and to first mail that information
statement to stockholders on or before June 30, 2020. The Certificate of
Amendment is expected to take effect on July 20, 2020.
Paycheck Protection Program Promissory Notes
On April 15, 2020, our subsidiary, Prime EFS, entered into a Paycheck Protection
promissory note (the "Prime EFS PPP Loan") with M&T Bank in the amount of
$2,941,212 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 15, 2020,
the Prime EFS PPP Loan was approved and Prime EFS received the loan proceeds on
April 22, 2020. Prime EFS has used and plans to continue to use 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), will commence on November 16, 2020.
On April 2, 2020, our subsidiary, Shypdirect, entered into a Paycheck Protection
promissory note (the "Shypdirect PPP Loan" and together with the Prime EFS PPP
Loan, the "PPP Loans") with M&T Bank in the amount of $504,940 under the SBA
Paycheck Protection Program of the CARES Act. On April 28, 2020, the Shypdirect
PPP Loan was approved and Shypdirect received the Shypdirect PPP Loan proceeds
on May 1, 2020. Shypdirect has used and plans to continue to use 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), will commence on November 28, 2020.
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
respective loan proceeds are used for covered payroll costs, rent and utilities,
provided that such amounts are incurred during the eight-week period that
commenced on the date the proceeds of each loan were received and at least 60%
of any forgiven amount has been used for covered payroll costs. Any forgiveness
of these PPP Loans will be subject to approval by the SBA and M&T Bank and will
require Prime EFS and Shypdirect to apply for such treatment in the future.
Amazon Logistics Delivery Service Partner Agreement
On June 19, 2020, Amazon Logistics, Inc. ("Amazon") notified Prime EFS in
writing, that Amazon does not intend to renew its Delivery Service Partner (DSP)
Agreement with Prime EFS when that agreement (the "In-Force Agreement") expires.
Amazon stated that it believes the In-Force Agreement expires on September 30,
2020. Prime EFS, however, strongly disagrees with Amazon's position in this
regard and believes it has a strong argument that the In-Force Agreement does
not expire, by its specific terms, until March 31, 2021, at the earliest. If
Amazon disagrees with the forgoing, Prime EFS intends to arbitrate this issue
through the American Arbitration Association; however, the Company cannot give
any assurances as to the success of its position.
48
Approximately 74% of the Company's approximately $32 million of revenue reported
in its recent Form 10-K Annual Report for the calendar year ended December 31,
2019 was attributable to Prime EFS's last-mile DSP business with Amazon. Even if
it lost the Amazon last-mile business, the Company intends to generate
significant revenues from its mid-mile and long-haul business. While a
termination of the Amazon last-mile business will have a material adverse impact
on the Company's business, the Company will continue to: (i) seek to expand its
last-mile business with other non-Amazon customers, which includes having
recently begun making deliveries for one of the largest carriers in the world;
(ii) explore other strategic relationships; and (iii) identify potential
acquisition opportunities, while continuing to execute our restructuring plan,
commenced in February 2020.
Cash Flows
Operating activities
Net cash flows used in operating activities for the three months ended March 31,
2020 amounted to $110,074. During the three months ended March 31, 2020, net
cash used in operating activities was primarily attributable to a net loss of
$3,453,338, adjusted for the add back (reduction) of non-cash items such as
depreciation and amortization expense of $14,188, derivative income of
$(144,839), amortization of debt discount of $1,359,388, interest expense
related to debt default of $1,387,785, stock-based compensation of $31,250, a
non-cash gain on debt extinguishment of $(327,584), and changes in operating
assets and liabilities such as an increase in accounts receivable of $99,454, a
decrease in prepaid expenses and other current assets of $819,161, an increase
in accounts payable and accrued expenses of $796,036, a decrease in insurance
payable of $661,668, and an increase in accrued compensation and benefits of
$288,180.
Net cash flows used in operating activities for the three months ended March 31,
2019 amounted to $1,983,978. During the three months ended March 31, 2019, net
cash used in operating activities was primarily attributable to a net loss of
$19,647,723 adjusted for the add back (reduction) of non-cash items such as
depreciation and amortization expense of $308,816, derivative expense of
$13,384,260, amortization of debt discount of $1,071,272, stock-based
compensation of $2,750,808, and a gain on debt extinguishment of $(93,871), and
changes in operating assets and liabilities such as an increase in accounts
receivable of $429,650 and an increase in prepaid expense and other current
assets of $90,449, offset by an increase in accounts payable and accrued
expenses of $526,330 and an increase in accrued compensation and related
benefits of $243,466.
Investing activities
Net cash used in investing activities for the three months ended March 31, 2020
amounted to $460,510 and consisted of cash paid for the purchase of five box
trucks of $460,510.
Net cash provided by investing activities for the three months ended March 31,
2019 amounted to $29,744 and consisted of cash received from the disposal of
trucks and vans of $81,000 offset by cash paid for the purchase of property and
equipment of $51,256.
Financing activities
For the three months ended March 31, 2020, net cash provided by financing
activities totaled $553,184. For the three months ended March 31, 2020, we
received proceeds from convertible debt of $1,860,000 and proceeds from notes
payable of $1,033,510, offset by the repayment of convertible notes of $159,988,
the repayment of related party advances of $55,561, and the repayment of notes
payable of $2,124,777.
For the three months ended March 31, 2019, net cash provided by financing
activities totaled $1,722,377. For the three months ended March 31, 2019, we
received gross proceeds from related party convertible notes of $500,000,
proceeds from notes payable of $3,521,120, proceeds from related party notes of
$200,000, and net cash proceeds from related party advances of $28,815 offset by
the repayment of convertible notes of $273,585, the repayment of related party
notes of $220,000, and the repayment of notes payable of $2,033,973.
Going Concern Consideration
Our accompanying condensed consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and
satisfaction of liabilities and commitments in the normal course of business. As
reflected in the accompanying condensed consolidated financial statements, for
the three months ended March 31, 2020 and 2019, we had a net loss of $3,453,338
and $19,661,384 and net cash used in operations was $110,074 and $1,983,978,
respectively. Additionally, we had an accumulated deficit, shareholders'
deficit, and a working capital deficit of $82,765,210, $26,839,561 and
$27,678,817, respectively, at March 31, 2020. Furthermore, the Company failed to
make required payments of principal and interest on certain of its convertible
debt instruments and notes payable. On June 19, 2020, Amazon Logistics, Inc.
("Amazon") notified Prime EFS in writing that Amazon does not intend to renew
its Delivery Service Partner (DSP) Agreement with Prime EFS when that agreement
expires (see above and Note 13 - Subsequent Events). It is management's opinion
that these factors raise substantial doubt about the Company's ability to
continue as a going concern for a period of twelve months from the issuance date
of this report. In April 2020, the Company's subsidiaries, Prime EFS and
Shypdirect, entered into Paycheck Protection Program promissory notes with M&T
Bank in the aggregate amount of $3,446,152. Management cannot provide assurance
that the Company will ultimately achieve profitable operations, become cash flow
positive, or raise additional debt and/or equity capital.
49
We are seeking to raise capital through additional debt and/or equity financings
to fund the Company's operations in the future. Although we have historically
raised capital from sales of common shares and from the issuance of convertible
promissory notes and notes payable, there is no assurance that the Company will
be able to continue to do so. If we are unable to raise additional capital or
secure additional lending in the near future, management expects that we will
need to curtail our operations. The condensed consolidated financial statements
do not include any adjustments related to the recoverability and classification
of assets or the amounts and classification of liabilities that might be
necessary should we be unable to continue as a going concern.
Contractual Obligations
We have certain fixed contractual obligations and commitments that include
future estimated payments. Changes in our business needs, cancellation
provisions, changing interest rates, and other factors may result in actual
payments differing from the estimates. We cannot provide certainty regarding the
timing and amounts of payments.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors.
Effects of Inflation
We do not believe that inflation has had a material impact on our business,
revenues, or operating results during the periods presented.
Recently Enacted Accounting Standards
For a description of accounting changes and recent accounting standards,
including the expected dates of adoption and estimated effects, if any, on our
consolidated financial statements, see "Note 2: Recent Accounting
Pronouncements" in the condensed consolidated financial statements filed with
this Quarterly Report.
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TRANSPORTATION AND LOGISTICS SYSTEMS, INC. 
