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TRANSPORTATION AND LOGISTICS SYSTEMS, INC.
FORM 10-K
December 31, 2022
INDEX
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For purposes of this report, unless otherwise indicated or the context otherwise requires, all references herein to “Transportation and Logistics Systems, Inc.”, “the Company”, “we”, “us”, “TLSS” and “our”, refer to Transportation and Logistics Systems, Inc., a Nevada corporation and its wholly owned subsidiaries, Shyp FX, Inc. (“Shyp FX”), Cougar Express, Inc. (“Cougar Express”), TLSS Acquisition, Inc. (“TLSSA”), Shyp CX, Inc. (“Shyp CX”), TLSS-FC, Inc. (“TLSS-FC”), TLSS-STI, Inc. (“TLSS-STI”). JFK Cartage, Inc. (“JFK Cartage”) and Freight Connections, Inc. (“Freight Connections”) and its deconsolidated former subsidiaries, Prime EFS, LLC (“Prime EFS”) and Shypdirect, LLC (“Shypdirect”) whose results of operations for the year ended December 31, 2021 are included in the results of the Company prior to the September 7, 2021 filing of executed Deeds of Assignment for the Benefit of Creditors with the State of New Jersey.
Forward-Looking Statements
Statements made in this Annual Report on Form 10-K (the “Annual Report”) that are not historical facts are forward-looking statements and are subject to risks and uncertainties that could cause actual future events or results to differ materially from such statements. Any such forward-looking statements, including, but not limited to, financial guidance, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not directly or exclusively relate to historical facts. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “intend,” “plan,” “goal,” “seek,” “strategy,” “future,” “likely,” “believes,” “estimates,” “projects,” “forecasts,” “predicts,” “potential,” or the negative of those terms, and similar expressions and comparable terminology. These include, but are not limited to, statements relating to future events or our future financial and operating results, plans, objectives, expectations, and intentions. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these expectations may not be achieved. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they represent our intentions, plans, expectations, assumptions, and beliefs about future events and are subject to known and unknown risks, uncertainties, and other factors outside of our control that could cause our actual results, performance or achievement to differ materially from those expressed or implied by these forward-looking statements. In addition to the risks described above and the risks set forth in Part I, Item 1A, “Risk Factors” in this Annual Report, these risks and uncertainties include: our ability to successfully execute our business strategies, including integration of acquisitions and the future acquisition of other businesses to grow our company; customers’ cancellation on short notice of master service agreements from which we derive a significant portion of our revenue or our failure to renew such master service agreements on favorable terms or at all; our ability to attract and retain key personnel and skilled labor to meet the requirements of our labor-intensive business or labor difficulties which could have an effect on our ability to bid for and successfully complete contracts; the ultimate geographic spread, duration and severity of the coronavirus outbreak and the effectiveness of actions taken, or actions that may be taken, by governmental authorities to contain the outbreak or ameliorate its effects; our failure to compete effectively in our highly competitive industry could reduce the number of new contracts awarded to us or adversely affect our market share and harm our financial performance; our ability to adopt and master new technologies and adjust certain fixed costs and expenses to adapt to our industry’s and customers’ evolving demands; our history of losses, deficiency in working capital and a stockholders’ deficit and inability to achieve sustained profitability; our need to procure substantial additional financing to fund ongoing losses and the growth of our business; adverse or unanticipated events in the litigation to which we are currently a party (or as to which we may become a party in the future); adverse or unanticipated decisions by insurance companies and/or by courts construing third-party liability insurance policies to which the Company and/or its subsidiaries is a party; a failure to obtain adequate liability insurance coverage in the future; material weaknesses in our internal control over financial reporting and our ability to maintain effective controls over financial reporting in the future; financial condition and results of operations and our ability to meet our payment obligations; the impact of new or changed laws, regulations or other industry standards that could adversely affect our ability to conduct our business; and changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from natural or man-made disasters.
These forward-looking statements represent our estimates and assumptions only as of the date of this Annual Report and, except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this letter. Given these uncertainties, you should not place undue reliance on these forward-looking statements and should consider various factors, including the risks described herein, and, among other places, in our Annual Report on Form 10-K, as well as any amendments hereto or thereto, filed with the Securities and Exchange Commission.
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PART I
Item 1. Description of Business.
Overview
Transportation and Logistics Systems, Inc. (“TLSS” or the “Company”) is a publicly-traded holding company. Its active wholly-owned operating subsidiaries, Cougar Express, Freight Connections, JFK Cartage, and Severance Trucking Co., Inc. (acquired in 2023, along with Severance Warehousing, Inc. and McGrath Leasing, Inc., together Severance Trucking), together provide a full suite of logistics and transportation services, specializing in ecommerce fulfillment, last mile deliveries, two-person home delivery, mid-mile, and long-haul services. Such entities operate several warehouse locations located in New York, New Jersey, Connecticut and Massachusetts. Inactive subsidiaries include: TLSSA, Shyp CX, Shyp FX, TLSS-FC, TLSS-STI.
We are primarily an asset-based point-to-point delivery company. An asset-based delivery company, as compared to a non-asset-based delivery company, owns its own transportation equipment and employs its own drivers. As of December 31, 2022, through our active subsidiaries, we owned approximately 32 vehicles consisting of trucks, box trucks and vans, 14 trailers, and 15 forklifts, while employing approximately 23 drivers.
In addition, our operations utilize the services of independent contractors, who generally use their own vehicles, on an as needed basis.
Since exiting the Amazon business (see below), we have pursued a growth by acquisitions strategy as set forth below and, as such, continue to pursue potential acquisition opportunities.
On November 13, 2020, we formed a wholly-owned subsidiary, Shyp FX, under the laws of the State of New Jersey. On January 15, 2021, through Shyp FX, we simultaneously executed an asset purchase agreement and closed a transaction to acquire substantially all the assets and certain liabilities of Double D Trucking, Inc., a northern New Jersey-based logistics provider specializing in servicing Federal Express over the past 25 years (“DDTI”). On June 21, 2022, we sold substantially all the assets of Shyp FX in an all-cash transaction. See details below under “Acquisitions”.
On November 16, 2020, we formed a wholly owned subsidiary, TLSSA, a company incorporated under the laws of the State of Delaware. On March 24, 2021, TLSSA, acquired all the issued and outstanding shares of capital stock of Cougar Express, a New York-based full-service logistics provider specializing in pickup, warehousing, and delivery services in the New York City tri-state area. See details below under “Acquisitions”.
On February 21, 2021, we formed a wholly owned subsidiary, Shyp CX, a company incorporated under the laws of the State of New York. Shyp CX does not engage in any revenue-generating operations and is currently inactive.
On August 4, 2022, our wholly-owned subsidiary, Cougar Express, closed on its acquisition of all outstanding stock of JFK Cartage., a New York-based full-service logistics provider specializing in pickup, warehousing and delivery services in the tri-state area. See details below under “Acquisitions”.
Effective September 16, 2022, our newly formed wholly-owned subsidiary, TLSS-FC, closed on an acquisition of all outstanding stock of Freight Connections, a New Jersey-based company offering an array of transportation, warehousing, consolidating, distribution, and local cartage services throughout the New York tri-state area. See details below under “Acquisitions”.
Effective February 3, 2023, our newly formed wholly-owned subsidiary, TLSS-STI, closed on an acquisition of all outstanding stock of Severance Trucking, which offers less-than-truckload (LTL) trucking services throughout New England, with an effective date as of the close of business on January 31 2023. See details below under “Acquisitions”.
One of the Sellers also entered into a consulting agreement, including non-competition and non-solicitation provisions, to continue with Severance after the acquisition for a period of no less than three (3) months and no more than one (1) year.
We have a highly experienced and dedicated senior management team, which is currently evaluating various opportunities, whether by acquisition or otherwise, for the Company to augment its current business and/or enter into new line(s) of business. While the Company is hopeful that it will be able to announce a plan in this regard shortly, there can be no assurance that we will in fact be able to augment our current business and/or enter into new line(s) of business or to do so profitably.
Corporate History
TLSS was incorporated under the name “PetroTerra Corp.” in the State of Nevada on July 25, 2008. Prior to March 2017, TLSS was an independent oil or gas exploration and development company focused on the acquisition or lease of properties that potentially contained extractable oil or gas. However, at that time, we had not generated any revenues and, due to a decline of the oil and gas markets, elected to seek other business opportunities.
On March 30, 2017, TLSS entered into a Share Exchange Agreement, dated as of the same date, with Save on Transport Inc., a Florida-based non-asset provider of integrated transportation management solutions, including brokerage and logistics services related to the transportation of automobiles and other freight (“Save on Transport”), pursuant to which we acquired Save on Transport as a wholly owned subsidiary. TLSS’s acquisition of Save on Transport was treated as a reverse merger and recapitalization of Save on Transport for financial reporting purposes because the Save on Transport shareholders retained an approximate 80% controlling interest in our consolidated company. Save on Transport was considered the acquirer for accounting purposes, and our historical financial statements before the acquisition transaction were replaced with the historical financial statements of Save on Transport before such acquisition. The balance sheets at their historical cost basis of both entities were combined at the acquisition date and the results of operations from the acquisition date forward included the historical results of Save on Transport and our combined results of operations from the acquisition date forward. On May 1, 2019, we 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.
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On June 18, 2018, TLSS completed the acquisition of 100% of the issued and outstanding membership interests of 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.
On July 24, 2018, TLSS formed Shypdirect LLC, a company organized under the laws of New Jersey. Since its inception, Shypdirect generated substantially all of its revenues from Amazon.
Between June 18, 2018 and September 30, 2020, we operated through Prime EFS and Shypdirect. The great bulk of Prime EFS’s business prior to September 30, 2020 was conducted pursuant to the Delivery Service Provider program (the “Prime EFS DSP Program”) of Amazon Logistics, Inc., a subsidiary of Amazon.com, Inc. (“Amazon”). In June 2020, Amazon gave notice to Prime EFS that Amazon would not be renewing the Prime EFS DSP Program agreement when that agreement terminated effective September 30, 2020. Prime EFS ceased operations on September 30, 2020 due to Amazon’s non-renewal of the Prime EFS DSP Program. Shypdirect conducted its business as a carrier under a relay program service agreement with Amazon (the “Program Agreement”). On July 17, 2020, Amazon notified Shypdirect that Amazon had elected to terminate the Program Agreement, effective as of November 14, 2020 (the “Shypdirect Termination Notice”). On August 3, 2020, Amazon offered to withdraw the Shypdirect Termination Notice and extend the term of the Program Agreement to and including May 14, 2021 (the “Aug. 3 Proposal”). On August 4, 2020, the Company, Prime EFS and Shypdirect accepted the Aug. 3 Proposal. The Program Agreement expired on May 14, 2021. In June 2021, Shypdirect ceased its tractor trailer and box truck delivery services to Amazon, and in July 2021, Shypdirect ceased all operations.
Approximately 28.5% of our revenue of $5,495,146 for the year ended December 31, 2021 was attributable to Shypdirect’s now terminated mid-mile and long-haul business with Amazon. The termination of the Prime EFS last-mile business with Amazon on September 30, 2020 had a material adverse impact on the operations of Prime EFS beginning in the 4th fiscal quarter of 2020 and the termination of Shypdirect’s Amazon mid-mile and long-haul business, which was effective on or about May 14, 2021, had a material adverse impact on operations of Shypdirect beginning in the 2nd fiscal quarter of 2021. This impact caused Prime EFS and Shypdirect to become insolvent and to cease operations.
On August 16, 2021, 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 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 an ABC, debtor companies, here Prime EFS and Shypdirect, together referred to as the “Assignors”, executed Deeds of Assignment, assigning all 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 ABCs were filed with the Bergen County Clerk in Bergen County, New Jersey and filed with the Surrogate Court, Bergen County, 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, we 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, we deconsolidated Prime EFS and Shypdirect effective with the filing of executed Deeds of Assignment for the Benefit of Creditors in September 2021. Our results of operations for the years ended December 31, 2021 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.
On November 13, 2020, TLSS formed a wholly-owned subsidiary, Shyp FX, under the laws of the State of New Jersey. On January 15, 2021, through Shyp FX, we executed an asset purchase agreement (“APA”) and closed a transaction to acquire substantially all the assets and certain liabilities of DDTI. On April 28, 2022, we entered into an Asset Purchase Agreement (the “Asset Purchase Agreement” with an unrelated third party. Pursuant to the Asset Purchase Agreement, Shyp FX sold substantially all its asset and specific liabilities. The Asset Purchase Agreement closed in June 2022
On November 16, 2020, we formed a wholly-owned subsidiary, TLSSA, under the laws of the State of Delaware. On March 24, 2021, TLSSA acquired all the issued and outstanding shares of capital stock of Cougar Express.
On February 21, 2021, the Company formed a wholly-owned subsidiary, Shyp CX, under the laws of the State of New York. Shyp CX does not engage in any revenue-generating operations and is currently inactive.
On August 17, 2022, the Company formed a wholly-owned subsidiary, TLSS-FC, under the laws of the State of Delaware. On September 16, 2022, TLSS-FC acquired all the issued and outstanding shares of capital stock of Freight Connections. TLSS-FC does not engage in any revenue-generating operations and is currently inactive.
On January 27, 2023, the Company formed a wholly-owned subsidiary, TLSS-STI, under the laws of the State of Delaware. On January 31, 2023, TLSS-STI acquired all the issued and outstanding shares of capital stock of Severance Trucking. TLSS-STI does not engage in any revenue-generating operations and is currently inactive.
Our principal executive offices are located in the United States at 5500 Military Trail, Suite 22-357, Jupiter, Florida 33458, and our telephone number is (833) 764-1443. The Company’s website is www.tlss-inc.com.
Company Overview
E-Commerce Fulfillment Solutions
The rapid growth of e-commerce and the online retailing segment of e-commerce is well documented. Online retail companies have logistics needs that differ from those of traditional businesses. Unlike traditional inventory management, e-commerce companies need to ship items directly to customers, who expect their orders to arrive on time and as described. We have built our delivery services to perform effectively in the “on demand” shipping environment that is part of the e-commerce fulfillment solutions system. We are currently looking to offer the expertise and knowledge we have in this area to new customers.
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Our Strategy and Competitive Strengths
As a result of the termination of Prime EFS’s involvement with Amazon’s DSP Program and the termination of Shypdirect’s involvement with Amazon’s Relay Carrier Terms of Service, we began the process of diversifying our business primarily starting with the acquisition of Cougar Express and the assets of DDTI. In 2022, we acquired the businesses of JFK Cartage and Freight Connections. Most recently, in 2023, we acquired Severance Trucking. Our strategy is to be a leader in the transportation industry by providing on-time, high-quality pick-up, transportation, and long-haul, mid-mile and last-mile delivery services.
Market Knowledge and Understanding. While we have been operating our current business for only a few years, our senior management personnel collectively have more than 40 years of experience in the transportation industry and broad knowledge in providing transportation services. These solutions are in high demand, and we hope to grow our business more profitably than was experienced in prior periods. Members of our senior management team have operational experience both within and without the transportation and logistics industry together with extensive experience in business growth and acquisitions. We believe we understand the various segments of the end-to-end solutions required to deliver goods rapidly and accurately between the various pick-up and delivery points in the delivery chain.
Unwavering Focus on Relationships and Superior Service. We aim to be the premier platform and partner of choice for our customers. We believe we offer superior services and solutions due to our company-wide commitment to customer service.
Experienced and Proven Management Team. We believe our management team is among the most experienced in the industry. Our senior management team brings experience in transportation and logistics, mergers and acquisitions, information technology, e-commerce retailing and fulfillment.
We hope to leverage our competitive strengths to increase shareholder value through the following core strategies.
Pursue Value-Enhancing Strategic Acquisitions. We intend to pursue strategic acquisitions as a means of adding new markets in the United States, expanding our transportation and logistics service offerings, adding talented management and operational employees, expanding, and upgrading our technology platform and developing operational best practices. We are currently at various stages of reviewing several potential acquisition targets and believe we have significant opportunities to grow our business through our knowledge of our industry and possible acquisition targets.
Build Upon Strong Customer Relationships to Expand Organically. We intend to utilize our strategic acquisitions to facilitate organic growth through leveraging our product and service capabilities, expanding the size of our service area, and adding higher margin services to our service offerings.
Expand Our Operations to Other Regions of the U.S. Our mid-mile and long-haul delivery services are currently provided in the eastern United States. As we continue to expand our marketing and customer relationships, we anticipate expanding our geographic footprint to provide such services, and to capture market share, in other regions of the U.S. by opening our own operations centers and warehouses, acquiring existing regional transportation and logistics companies operating in other areas and partnering with local operators in other regions. We believe the expansion of our business in other regions of the U.S. will also allow us to expand our relationships with existing customers who operate in those regions.
Enhance Our Operating Margins. We hope to enhance our operating margins through a combination of increased operational efficiencies, leveraging our existing assets and distribution facilities and increasing our usage of technology to help us better plan, execute and monitor the performance of our services and transportation assets.
Technology
An integral part of our operating philosophy is the utilization of technology to support our transportation services and provide our employees with real time information on the status of our operations. We believe our focus on technology as a support to our operations allows our employees to focus on performing at high levels for the benefit of our customers.
We are also exploring technology-based acquisition opportunities that can provide higher margin solution-based products and services.
Customers and Markets
For the year ended December 31, 2022, two customers accounted for 22.8% of the Company’s total net revenues (11.9% and 10.9%, respectively). For the year ended December 31, 2021, four customers represented 74.5% of the Company’s total net revenues (28.5%, 21.6%, 12.5% and 11.9%, respectively).
Accordingly, we continue to have customer concentration risk, which we hope to address by expanding our organic growth through the addition of new customers and through the acquisition of businesses that provide transportation services for new customer bases.
Acquisitions
On January 15, 2021, through Shyp FX, we simultaneously executed an asset purchase agreement (“APA”) and closed a transaction to acquire substantially all the assets and certain liabilities of DDTI. DDTI’s annual revenues in 2020 exceeded $1 million. The purchase price under the APA was $100,000 of cash and a promissory note of $400,000. The principal assets involved in the acquisition were vehicles for cargo transport, system equipment for vehicle tracking and navigation of vehicles, and delivery route rights together with assumption of associated customer relationships. The acquisition of DDTI made the Company an approved contracted service provider of FedEx, which, we believe, fits in well with our current geographic coverage area and may lead to additional expansion opportunities within the FedEx network. On June 21, 2022, we sold substantially all the assets of Shyp FX in an all-cash transaction. The purchaser was Farhoud Logistics Inc., a New Jersey corporation, an unrelated party. Under the terms of the sale, The Company sold the assets of Shyp FX consisting of transportation equipment and other equipment and the business of Shyp FX for $825,000. We received net proceeds of $748,500 which is net of a broker commission of $75,000 and other expenses of $4,214. $25,000 was held in escrow, pending bulk sale tax clearance from the State of New Jersey and to cover the estimated cost of a vehicle repair. We received the escrowed funds during the fourth quarter of 2022. In connection with the sale of these assets, for the year ended December 31, 2021, we recorded a gain on the sale of $293,975.
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On November 11 2020, our wholly owned subsidiary, TLSSA, entered into an asset purchase agreement dated as of November 6, 2020 (“APA”), to acquire substantially all the assets and certain liabilities of Cougar Express. Cougar Express was a family-owned full-service transportation business that has been in operation for more than 30 years providing one-to-four person deliveries and offering white glove services. It utilizes its own fleet of trucks, warehouse/driver/office personnel and on-call subcontractors from its convenient and secure New York JFK airport area location, allowing it to pick-up and deliver throughout the New York tri-state area. Cougar Express serves a diverse base of 50 commercial accounts, which are freight forwarders that work with some of the most notable retail businesses in the country. Some of Cougar Express’s accounts have been customers of Cougar Express for more than 20 years. On March 24, 2021, TLSS Acquisition acquired all the issued and outstanding shares of capital stock of Cougar Express. The purchase price was $2,000,000 of cash plus cash for the acquisition of security deposits, a cash payment equal to 50% of the difference between cash and accounts receivable acquired and accounts payable assumed, less the assumption of truck loans and leases, and a promissory note of $350,000. The previous owner of Cougar Express is barred from competing with the Cougar Express business through March 24, 2026.
On August 4, 2022, the Company’s wholly-owned subsidiary, Cougar Express, closed on its acquisition of all outstanding stock of JFK Cartage, a New York-based full-service logistics provider specializing in pickup, warehousing and delivery services in the tri-state area. Ms. Joan Ton, the sole shareholder of JFK Cartage, from whom the shares were acquired, is an unrelated party (the “JFK Cartage Seller”). The effective date of the acquisition was July 31, 2022. JFK Cartage operates from a 30,000 square foot warehouse with ten drive-in doors and is strategically located approximately six miles from JFK International Airport. JFK Cartage has been in business since 2008 and has been providing warehousing, cross-dock services, pickup and deliveries, and general trucking, handling airfreight, trade show freight, expedited and hotshot demand work, LTL/cartage as well as FTL, reverse logistics, white glove and residential delivery services to a broad base of over 95 commercial accounts and residential customers. JFK Cartage operates a wide-ranging fleet of specialty vehicles, from its Sprinter vans to full 53-ft. tractor trailers. JFK Cartage, with its assets, fleet and warehouse is believed to be one of the largest leading cartage agents serving the New York Tri-State area. Pursuant to the Stock Purchase and Sale Agreement with Cougar Express and JFK Cartage dated May 24, 2022, the purchase price was $1,700,000, subject to certain adjustments. The Company: (i) paid $405,712 in cash at closing; and (ii) JFK Cartage entered into a $696,935 promissory note with the JFK Cartage Seller, $98,448 of which was payable weekly, in the amount of 25% of accounts receivable collected, but in any event, no later than October 4, 2022, with the remaining balance of $598,487, payable in three annual installments of $199,496, with interest at 5.0% percent per annum on July 31, 2023, July 31, 2024 and July 31, 2025, respectively. Additionally, Cougar Express agreed to pay the $503,065 Small Business Administration (“SBA”) loan that existed on the books of JFK Cartage, which was paid in August 2022; and (iv) agreed to pay certain accrued liabilities and other notes payable that existed on the books of JFK Cartage. For accounting purposes, the total purchase consideration paid, after closing adjustments, was deemed to be $1,102,647, which includes cash of $405,712 plus the $696,935 promissory note that is in the name of JFK Cartage. The purchase consideration amount did not include the SBA loan of $503,065, and accrued liabilities and other notes payable, which were treated as assumed liabilities in the purchase price allocation.
Effective September 16, 2022, the Company’s newly formed wholly-owned subsidiary, TLSS-FC, closed on an acquisition of all outstanding stock of Freight Connections, a company offering an array of transportation, warehousing, consolidating, distribution, and local cartage services throughout the New York tri-state area. Joseph Corbisiero, the sole shareholder of Freight Connections, from whom the shares were acquired (the “Freight Connections Seller”), is an unrelated party. Freight Connections was founded in 2016 and is a transportation and logistics carrier headquartered in Ridgefield Park, New Jersey. Freight Connections currently operates with 30 power units and 50 trailers, including dry vans, pups, flatbeds, step decks, and double drop trailers, out of three buildings in the area with 200,000 square feet of warehouse and cross dock space, strategically located within one mile of each other. Freight Connections offers customers an array of services including truckload, LTL, and consolidating of cartage, construction-trade, air, and rail freight, as well as warehousing and distribution services. Prior to the closing, the Company, TLSSA and Freight Connections Seller entered into an amendment to their Stock Purchase and Sale Agreement, dated as of May 23, 2022 (the “Amended SPA”), and TLSS Acquisition assigned its interest in the Amended SPA to TLSS-FC. Pursuant to the Amended SPA, the total purchase price was $9,365,000, subject to certain adjustment. TLSS-FC: (i) paid $1,525,000 in cash at closing, (ii) Freight Connections entered into a $4,544,671 secured promissory note with the Freight Connections Seller, with interest accruing at the rate of 5% per annum and then 10% per annum as of March 1, 2023 (The entire unpaid principal under the note, together with all accrued and unpaid interest thereon and all other amounts payable thereunder, shall be due and payable in one balloon payment on December 31, 2023, unless paid sooner. The promissory note is secured solely by the assets of Freight Connections), and (iii) assumed certain debt. The Company issued to the Freight Connections Seller 178,911,844 shares of the Company’s common stock and 32,374 shares of the Company’s Series H preferred stock, which is convertible into an aggregate of 323,740,000 shares of the Company’s common stock based on a conversion of 10,000 shares of common stock for each share of Series H preferred stock outstanding. The common stock and the as if converted number of Series H preferred stock were valued at $0.0059 per share based on the quoted closing price of the Company’s common stock on the measurement date, for an aggregate fair value of $2,965,646. The number of shares was calculated as follows: (a) shares of common stock of the Company equal to no more than 4.99% of the number of shares of common stock outstanding immediately after such issuance, and (b) the balance of the shares in Series H Convertible Preferred Stock, a new series of non-voting, convertible preferred stock issuable to sellers in connection with acquisitions or strategic transactions approved by a majority of the directors of the Company. TLSS-FC agreed to pay certain accrued liabilities and other notes payable that existed on the books of Freight Connections and agreed to pay the $4,544,671 secured promissory note, which was assumed by Freight Connections. For accounting purposes, the total purchase consideration paid, after closing adjustments, was deemed to be $9,035,317, which includes (i) cash paid of $1,525,000, (ii) the aggregate fair value of common shares and Series H preferred shares issued to Freight Connections Seller of $2,965,646, and (iii) the $4,544,671 secured promissory note in the name of Freight Connections. The purchase consideration amount does not include accrued liabilities and other notes payable, which were treated as assumed liabilities in the purchase price allocation.
Effective February 3, 2023, our newly formed wholly-owned subsidiary, TLSS-STI, closed on an acquisition of all outstanding stock of Severance Trucking Co., Inc., Severance Warehousing, Inc. and McGrath Trailer Leasing, Inc., which together offer LTL trucking services throughout New England (collectively, “Severance Trucking”), with an effective date as of the close of business on January 31, 2023. The sellers of the stock of each entity were Kathryn Boyd, Clyde Severance, and Robert Severance, all individuals (the “Sellers”). None of the Sellers is affiliated with the Company or its affiliates. Severance is a privately-owned full-service transportation carrier and logistics business that has been in operation for over 100 years specializing in LTL trucking that provides next day service to major cities in New England and New York, with cartage and interline agreements with respected carriers that ensure reliable deliveries anywhere in the United States and Canada. With annual revenues of over $13.0 million in 2022, Severance currently operates with over 120 power units and trailers and has two locations, comprising approximately 18,000 square feet of warehouse and cross dock space, 9,000 square feet of office and 5,750 square feet of repair facilities located in Dracut, Massachusetts and approximately 16,000 square feet of warehouse space in North Haven, Connecticut. The total purchase price was $2,250,000. TLSS-STI: (i) paid $365,613 in cash at closing and paid closing expenses of $158,700; (ii) assumed and paid off $152,748 in vehicle debt; and (iii) entered into a $1,572,939 secured promissory note with the Sellers, with interest accruing at the rate of 12% per annum. The entire unpaid principal under the note, shall be due and payable in three (3) equal payments on August 1, 2023, February 1, 2024, and August 1, 2024, together with all accrued and unpaid interest thereunder, unless paid sooner. The promissory note is secured solely by the assets of Severance and a corporate guaranty from TLSS. The purchase price is subject to a post-closing adjustment, up or down, determined by the amount by which Severance working capital as of the close of business on January 31, 2023, exceeds or falls short of the target working capital, as of September 30, 2022, on which the purchase price was calculated.
One of the Sellers also entered into a consulting agreement, including non-competition and non-solicitation provisions, to continue with Severance after the acquisition for a period of no less than three (3) months and no more than one (1) year.
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Consistent with our primary strategy to become a leader in the transportation industry in providing on-time, high-quality pick-up, transportation and delivery services, we expect to accomplish this goal, in part, by pursuing strategic acquisitions as a means of adding new markets in the United States, expanding our transportation and logistics service offerings, adding talented management and operational employees, expanding and upgrading our technology platform and developing operational best practices. Moreover, one factor in assessing acquisition opportunities is the potential for subsequent organic growth post-acquisition.
We believe that the acquisitions of Cougar Express, JFK Cartage, Freight Connections, and Severance Trucking fits our current business plan, given their geographic location, services offered, and diversified customer base, and given that they would provide us with long-standing, well-run operations.
Competition
The transportation services industry is highly competitive and composed of fragmented marketplaces, with multiple companies competing in the geographic region in which we provide services. We compete on service, reliability, scope and scale of operations, technological capabilities, and price. Our competitors include local, regional, and national companies that offer the same services we provide — some with larger customer bases, significantly more resources and more experience than we have. Additionally, some of our customers have internal resources that can perform services we offer. Due in part to the fragmented nature of the industry, we must strive daily to retain existing business relationships and forge new relationships.
The health of the transportation industry will continue to be a function of domestic economic growth, particularly in the e-commerce marketplace. We believe that we have positioned the Company to grow with and benefit from the e-commerce expansion. Together with our scale, technology, and company-specific initiatives, we believe that our positioning should keep us growing faster than the macro environment.
Seasonality
All of our revenues are subject to seasonal variations which are common in the trucking industry. Generally, most of the first quarter and the latter part of the fourth quarter are the seasonally weakest while the second and third quarters are the seasonally strongest, as customers tend to reduce shipments prior to and after the winter holiday season.
Economic Factors
Our business is subject to a number of general economic factors that may have a material effect on the results of our operations, many of which are largely out of our control. These include supply chain interruptions, the impact of recessionary economic cycles, as well as downturns in our customers’ business cycles, particularly in market segments and industries, such as retail and manufacturing, where we have a significant concentration of customers. Economic conditions may materially affect our customers’ business levels, the amount of transportation services they need and their ability to pay for our services. We operate in a highly price-sensitive and competitive industry, making industry pricing actions, quality of customer service, effective asset utilization and cost control major competitive factors.
Regulation
Our operations are regulated and licensed by various governmental agencies. These regulations impact us directly and indirectly by regulating third-party transportation providers we use to transport freight for our customers.
Regulation Affecting Motor Carriers, Owner-Operators and Transportation Brokers. In the United States, our subsidiaries that operate as motor carriers have motor carrier licenses issued by the Federal Motor Carrier Safety Administration (“FMCSA”) of the U.S. Department of Transportation (“DOT”). In addition, our subsidiaries acting as property brokers have property broker licenses issued by the FMCSA. Our motor carrier subsidiaries and the third-party motor carriers must comply with the safety and fitness regulations of the DOT, including those related to drug-testing, alcohol-testing, hours-of-service, records retention, vehicle inspection, driver qualification and minimum insurance requirements. Weight and equipment dimensions also are subject to government regulations. We also may become subject to new or more restrictive regulations relating to emissions, drivers’ hours-of-service, independent contractor eligibility requirements, onboard reporting of operations, air cargo security and other matters affecting safety or operating methods. Other agencies, such as the U.S. Environmental Protection Agency (“EPA”), the Food and Drug Administration (“FDA”), and the U.S. Department of Homeland Security (“DHS”), also regulate our equipment, operations and independent contractor drivers. Like our third-party support carriers, we are subject to a variety of vehicle registration and licensing requirements in certain states and local jurisdictions where we operate. In foreign jurisdictions where we operate, our operations are regulated by the appropriate governmental authorities.
In 2010, the FMCSA introduced the Compliance Safety Accountability program (“CSA”), which uses a Safety Management System (“SMS”) to rank motor carriers on seven categories of safety-related data, known as Behavioral Analysis and Safety Improvement Categories, or “BASICs.”
Although the CSA scores are not currently publicly available, we believe such scores will be made public in the future. Our fleet could be ranked worse or better than our competitors, and the safety ratings of our motor carrier operations could be impacted. Our network of third-party transportation providers may experience a similar result. A reduction in safety and fitness ratings may result in difficulty attracting and retaining qualified independent contractors and could cause our customers to direct their business away from the Company and to carriers with more favorable CSA scores, which would adversely affect our results of operations.
Classification of Independent Contractors. Tax and other federal and state regulatory authorities, as well as private litigants, continue to assert that independent contractor drivers in the trucking industry are employees rather than independent contractors. Federal legislators have introduced legislation in the past to make it easier for tax and other authorities to reclassify independent contractors as employees, including legislation to increase the recordkeeping requirements and heighten the penalties for companies who misclassify workers and are found to have violated overtime and/or wage requirements. Additionally, federal legislators have sought to abolish the current safe harbor allowing taxpayers that meet certain criteria to treat individuals as independent contractors if they are following a longstanding, recognized practice. Federal legislators also sought to expand the Fair Labor Standards Act to cover “non-employees” who perform labor or services for businesses, even if said non-employees are properly classified as independent contractors; require taxpayers to provide written notice to workers based upon their classification as either an employee or a non-employee; and impose penalties and fines for violations of the notice requirement and/or for misclassifications. Some states have launched initiatives to increase revenues from items such as unemployment, workers’ compensation and income taxes, and the reclassification of independent contractors as employees could help states with those initiatives. Taxing and other regulatory authorities and courts apply a variety of standards in their determinations of independent contractor status. If our independent contractor drivers are determined to be employees, we would incur additional exposure under some or all the following: federal and state tax, workers’ compensation, unemployment benefits, and labor, employment, and tort laws, including for prior periods, as well as potential liability for employee benefits and tax withholdings.
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Environmental Regulations. Our facilities and operations and our independent contractors are subject to various environmental laws and regulations dealing with the hauling, handling and disposal of hazardous materials, emissions from vehicles, engine-idling, fuel tanks and related fuel spillage and seepage, discharge and retention of storm water, and other environmental matters that involve inherent environmental risks. Similar laws and regulations may apply in many of the foreign jurisdictions in which we operate. We have instituted programs to monitor and control environmental risks and maintain compliance with applicable environmental laws and regulations. We may be responsible for the cleanup of any spill or other incident involving hazardous materials caused by our operations or business. In the past, we have been responsible for the costs of cleanup of diesel fuel spills caused by traffic accidents or other events, and none of these incidents materially affected our business or operations. We generally transport only hazardous materials rated as low-to-medium-risk, and a small percentage of our total shipments contain hazardous materials. We believe that our operations are in substantial compliance with current laws and regulations, and we do not know of any existing environmental condition that reasonably would be expected to have a material adverse effect on our business or operating results. Future changes in environmental regulations or liabilities from newly discovered environmental conditions or violations (and any associated fines and penalties) could have a material adverse effect on our business, competitive position, results of operations, financial condition or cash flows. U.S. federal and state governments, as well as governments in certain foreign jurisdictions where we operate, have also proposed environmental legislation that could, among other things, potentially limit carbon, exhaust and greenhouse gas emissions. If enacted, such legislation could result in higher costs for new tractors and trailers, reduced productivity and efficiency, and increased operating expenses, all of which could adversely affect our results of operations.
Employees
As of the date of this annual report, employed individuals providing services to Transportation and Logistics Systems, Inc. are its chief executive officer, its chief financial officer, its chief operating officer, and four other employees. Other professional and executive services are procured by TLSS through independent contractors.
As of the date of this annual report, TLSS has approximately 7 employees, all of whom are full-time.
As of the date of this annual report, Cougar Express and JFK Cartage have approximately 25 employees, all of whom are full-time.
As of the date of this annual report, Freight Connections has approximately 32 employees, all of whom are full-time.
As of the date of this annual report, Severance Trucking has approximately 85 employees, all of whom are full-time.
Prior to the hiring Sebastian Giordano as to our Chief Executive Officer, we 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”). Mr. Giordano was and is the sole principal of Ascentaur. Under the Consulting Agreement, Ascentaur provided restructuring and management services to the Company under direction of the Board. The Consulting Agreement terminated on January 4, 2022, the date that Mr. Giordano became Chief Executive Officer, President and Chairman of the Board of the Company. Between February 21, 2020 and January 3, 2022, Mr. Giordano devoted the majority of his business attention to the Company but spent time on other business ventures as well.
As consideration for Mr. Giordano’s services, through January 4, 2022, 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 $217,187 based on certain Company revenue, EBITDA, market capitalization or capital raise milestone sand reimbursement of $25,812 for health benefits. In addition, upon approval by the Board, in 2020, Ascentaur received nonqualified stock options to purchase up to 25,000,000 shares of Common Stock of the Company at an exercise price of $0.06 per share.
On January 4, 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. On March 11, 2022, pursuant to this employment agreement, 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 through January 3, 2025.
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 was appointed the Company’s Treasurer. Previously, Mr. James Giordano served as Chief Financial Officer and consultant to Freight Connections, Inc., an 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. On July 6, 2022, the Company entered into a definitive Employment Agreement with James Giordano for Mr. Giordano to serve as the Company’s Chief Financial Officer. The term of such Employment agreement is for a period of two and one-half years through December 31, 2025, which term may not be terminated early by the Company except for “cause” as defined in such agreement. Annual base compensation is $250,000, with an annual bonus for 2022 in total up to a maximum of $125,000 per year conditioned on the achievement of specified milestones, and future annual bonuses to be conditioned on achievement of milestones to be negotiated based on the circumstances of the Company at such time. On March 11, 2022 and effective January 4, 2022, we agreed to grant restricted stock awards to Mr. James Giordano 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 vested 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.
On September 12, 2022, the Company retained the services of Mr. Justin Frey has joined the Company as its Chief Operating Officer. Mr. Justin Frey started his career in transportation and logistics in 1989 with Consolidated Freightways, when it was the nation’s largest long-haul trucking company, as a customer service representative and held various positions there, including dispatcher, dock supervisor, sales executive and terminal manager. In the years from 2013 to 2018, he worked for FFE Transportation, one of the largest temperature-controlled National LTL transportation companies with revenues of more than $150 million, serving as terminal manager in California and Illinois before being promoted to Eastern Region Director of Operations. From 2018 through 2019, Mr. Frey worked as Director of Operations with Dicom/Eastern Connection, a $40 million regional overnight small package carrier. From 2019 to 2020, he was Director of Freight Operations for Freeman Company, one of the world’s largest event companies with revenues of $2.9 billion worldwide. He most recently held the position of Vice President of Operations with LandAir, the largest privately held LTL carrier in New England, along with PDS, LandAir’s TL subsidiary, with revenues of $40 million. He will receive annual compensation of $225,000 as well as annual discretionary bonuses and equity grants, business expense reimbursement and benefits as generally made available to the Company’s executives. On January 3, 2023, we agreed to grant restricted stock awards to Mr. Justin Frey for 21,634,615 common shares of the Company which were valued at $90,865, or $0.0042 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 5,408,653 shares vesting on March 31, 2023, and 5,408,654 common shares vesting each quarter through December 31, 2023.
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We believe that a diverse workforce is important to our success. We will continue to focus on the hiring, retention and advancement of women and underrepresented populations, and to cultivate an inclusive and diverse corporate culture. In the future, we intend to continue to evaluate our use of human capital measures or objectives in managing our business such as the factors we employ or seek to employ in the development, attraction and retention of personnel and maintenance of diversity in our workforce.
The success of our business is fundamentally connected to the well-being of our people. Accordingly, we are committed to the health, safety and wellness of our employees. We provide our employees and their families with access to a variety of innovative, flexible and convenient health and wellness programs, including benefits that provide protection and security so they can have peace of mind concerning events that may require time away from work or that impact their financial well-being; that support their physical and mental health by providing tools and resources to help them improve or maintain their health status and encourage engagement in healthy behaviors; and that offer choice where possible so they can customize their benefits to meet their needs and the needs of their families.
We also provide robust compensation and benefits programs to help meet the needs of our employees. We believe that we maintain a satisfactory working relationship with our employees and have not experienced any labor disputes.
Information Systems
Cougar Express. JFK Cartage, Freight Connections and Severance Trucking use a suite of non-proprietary software programs and other technologies to manage dispatching of vehicles, employees, DOT compliance, vehicle maintenance, and scheduling.
How to Obtain our SEC Filings
We file annual, quarterly, and special reports, proxy statements, and other information with the Securities and Exchange Commission (SEC). Reports, proxy statements and other information filed with the SEC can be inspected and copied at the public reference facilities of the SEC at 100 F Street N.E., Washington, DC 20549. Such material may also be accessed electronically by means of the SEC’s website at www.sec.gov. You may also obtain our recent filings with the Securities and Exchange Commission from the “Investors—Regulatory Filings” section of our website www.tlss-inc.com.
Item 1A. Risk Factors.
Investing in our common stock involves a high degree of risk. You should not invest in our stock unless you are able to bear the complete loss of your investment. You should carefully consider the risks described below, as well as other information provided to you in this annual report on Form 10-K, including information in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Cautionary Note Regarding Forward-Looking Information and Factors That May Affect Future Results” before making an investment decision. The risks and uncertainties described below are not the only ones facing TLSS. Additional risks and uncertainties not presently known to us or that we currently believe are immaterial may also impair our business operations. If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected, the value of our common stock could decline, and you may lose all or part of your investment.
RISKS ASSOCIATED WITH OUR BUSINESS AND INDUSTRY
We lack an established operating history on which to evaluate our business and determine if we will be able to execute our business plan and can give no assurance that operations will result in profits.
We have been engaged in our current continuing and proposed business operations since June 2018. As a result, we have a limited operating history upon which you may evaluate our proposed business and prospects. Our proposed business operations are subject to numerous risks, uncertainties, expenses and difficulties associated with early-stage enterprises. You should consider an investment in our Company considering these risks, uncertainties, expenses and difficulties. Such risks include:
| ● | the absence of a significant operating history; | |
| ● | our ability to raise capital to develop our business and fund our operations; | |
| ● | expected continual losses for the foreseeable future; | |
| ● | our ability to anticipate and adapt to a developing market(s); | |
| ● | acceptance by customers; | |
| ● | limited marketing experience; | |
| ● | competition from internet-based logistics and freight companies; | |
| ● | competitors with substantially greater financial resources and assets than ours; | |
| ● | the ability to identify, attract and retain qualified personnel; | |
| ● | our ability to provide superior customer service; and | |
| ● | reliance on key personnel. |
Because we are subject to these risks, you may have a difficult time evaluating our business and your investment in our Company. We may be unable to successfully overcome these risks which could harm our business.
Our business strategy may be unsuccessful, and we may be unable to address the risks we face in a cost-effective manner, if at all. If we are unable to successfully address these risks our business will be harmed.
We may not successfully manage our growth.
We intend to focus on rapid growth, including organic growth and additional acquisitions. We may experience difficulties and higher-than-expected expenses in executing this strategy because of unfamiliarity with new markets, changes in revenue and business models, entering into new geographic areas and increased pressure on our existing infrastructure and information technology systems.
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We will need to continually improve existing procedures and controls, as well as implement new transaction processing, operational and financial systems, and procedures and controls to expand, train and manage our employee base. Our working capital needs will continue to increase as our operations grow. Failure to manage our growth effectively, or obtain necessary working capital, could have a material adverse effect on our business, results of operations, cash flows, stock price and financial condition.
We may be unable to successfully consummate and integrate acquisitions.
We have acquired and, in the future, we may seek to acquire other carriers as well as other complementary businesses. Exploration of potential acquisitions requires significant attention from our management team. In addition, we expect to compete for acquisition opportunities with other companies, some of which may have greater financial and other resources than we do. We cannot ensure that we will have sufficient cash to consummate an acquisition or otherwise be able to obtain financing under acceptable terms - or obtain financing at all - for an acquisition. If we are unable to access sufficient funding for potential acquisitions, we may not be able to complete transactions that we otherwise find advantageous.
Any subsequent acquisition will entail numerous risks, including:
● we may not achieve anticipated levels of revenue, efficiency, cash flows and profitability;
● we may experience difficulties managing businesses that are outside our historical core competency and markets;
● we may underestimate the resources required to support acquisitions, which could disrupt our ongoing business and distract our management;
● we may incur unanticipated costs to our infrastructure to support new business lines or separate legal entities;
● we may be required to temporarily match existing customer pricing in the acquiree’s markets, which may be lower than the rates that we would
typically charge for our services;
● liabilities we assume could be greater than our original estimates or may not be disclosed to us at the time of acquisition;
● we may incur additional indebtedness or we may issue additional equity to finance future acquisitions, which could be dilutive to our shareholders;
● potential loss of key employees and customers of the acquired company; and
● an inability to recognize projected cost savings and economies of scale.
In addition, we may have difficulty integrating any acquired business and its operations, services and personnel into our existing operations, and such integration may require a significant amount of time and effort by our management team. To the extent we do not successfully avoid or overcome the risks or problems resulting from any acquisitions we undertake, there could be a material adverse effect on our business, financial condition and results of operations.
Economic recessions and other factors that reduce freight volumes could have a material adverse impact on our business.
The transportation industry historically has experienced cyclical fluctuations in financial results due to economic recession, downturns in business cycles of our customers, increases in prices charged by third-party carriers, interest rate fluctuations and other U.S. and global economic factors beyond our control. During economic downturns, reduced overall demand for transportation services will likely reduce demand for our services and exert downward pressures on rates and margins. In periods of strong economic growth, demand for limited transportation resources can result in increased network congestion and resulting operating inefficiencies. In addition, deterioration in the economic environment subjects our business to various risks that may have a material impact on our operating results and cause us to not reach our long-term growth goals. These risks may include the following:
● A reduction in overall freight volumes in the marketplace reduces our opportunities for growth.
● A downturn in our customers’ business cycles causes a reduction in the volume of freight shipped by those customers.
● Some of our customers may face economic difficulties and may not be able to pay us, and some may go out of business.
● Some of our customers may not pay us as quickly as they have in the past, causing our working capital needs to increase.
● A significant number of our transportation providers may go out of business, and we may be unable to secure sufficient equipment or other transportation services to meet our commitments to our customers.
● We may not be able to appropriately adjust our expenses to changing market demands.
We have ongoing capital requirements that necessitate sufficient cash flow from operations and/or obtaining financing on favorable terms.
We have depended primarily on short term borrowings and cash from operations to expand the size of our operations and upgrade and expand the size of our delivery fleet. In the future, we may be unable to generate sufficient cash from operations to support or grow our operations or to obtain sufficient financing on favorable terms for such purposes. If any of these events occur, then we may face liquidity constraints or be forced to enter into less than favorable financing arrangements. Additionally, such events could adversely impact our ability to provide services to our customers.
We may not be profitable.
There can be no assurance that we will be able to implement our business plan, generate sustainable revenue or ever achieve consistently profitable operations. We cannot assure you that we can achieve or sustain profitability on a quarterly or annual basis in the future.
Changes in our relationships with our significant customers, including the loss or reduction in business from one or more of them, could have an adverse impact on us.
For the year ended December 31, 2022, two customers represented 22.8% of the Company’s total net revenues (11.9% and 10.9%, respectively). 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. Approximately 28.5% of the Company’s revenue of $5,495,146 for the year ended December 31, 2021 was attributable to Shypdirect’s now terminated mid-mile and long-haul business with Amazon. The termination of the Prime EFS last-mile business with Amazon on September 30, 2020 had a material adverse impact on the operations of Prime EFS beginning in the 4th fiscal quarter of 2020 and the termination of Shypdirect’s Amazon mid-mile and long-haul businesses, which was effective on or about May 14, 2021, had a material adverse impact on operations of Shypdirect beginning in the 2nd fiscal quarter of 2021. This impact caused Prime EFS and Shypdirect to become insolvent and to cease operations. In 2021, we began to acquire other business and diversified our customer base and added additional customers. Our contractual relationships with customers, including Amazon, generally are terminable at will by the customers on short notice and do not require the customer to provide any minimum commitment. Our customers could choose to divert all or a portion of their business with us to one of our competitors, demand rate reductions for our services, require us to assume greater liability that increases our costs, or develop their own logistics capabilities. Failure to retain our existing customers or enter into relationships with new customers could materially impact the growth in our business and the ability to meet our current and long-term financial forecasts.
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We may depend on third parties in the operation of our business.
As required, we may depend on third parties to provide truck and other transportation services and to report certain events to us, including delivery information and claims. This reliance could cause delays in reporting certain events, including recognizing revenue and claims. Our inability to maintain positive relationships with our vendors could significantly limit our ability to serve our customers on competitive terms. If we are unable to secure sufficient equipment or other transportation services to meet our commitments to our customers or provide our services on competitive terms, our operating results could be materially and adversely effected, and our customers could switch to our competitors temporarily or permanently. Many of these risks are beyond our control, including the following:
● equipment shortages in the transportation industry, particularly among contracted truckload carriers and truck leasing companies.
● interruptions in service or stoppages in transportation as a result of labor disputes, network congestion, weather-related issues, “Acts of God,” or acts of terrorism.
● changes in regulations impacting transportation.
● increases in operating expenses for carriers, such as fuel costs, insurance premiums and licensing expenses, that result in a reduction in available carriers; and
● changes in transportation rates.
Any shortage of supply of vehicles available to the Company could have a material adverse effect on our business, financial condition, and results of operations.
Increases in independent contractor driver compensation or other difficulties attracting and retaining qualified independent contractor drivers could adversely affect our profitability and ability to maintain or grow our independent contractor driver fleet.
Our business operates with a combination of employed drivers and through fleets of vehicles that are owned and operated by independent contractors. In the case of independent contractors, they are responsible for maintaining and operating their own equipment and paying their own fuel, insurance, licenses, and other operating costs. Turnover and bankruptcy among independent contractor drivers often limit the pool of qualified independent contractor drivers and increase competition for their services. In addition, regulations such as the FMCSA Compliance Safety Accountability program may further reduce the pool of qualified independent contractor drivers. Thus, our continued reliance on independent contractor drivers could limit our ability to grow our ground transportation fleet.
In the future, we may experience difficulty in attracting and retaining sufficient numbers of qualified independent contractor drivers. Additionally, our agreements with independent contractor drivers are terminable by either party upon short notice without penalty. Consequently, we regularly need to recruit qualified independent contractor drivers to replace those who have left our fleet. If we are unable to retain our existing independent contractor drivers or recruit new independent contractor drivers, our business and results of operations could be adversely affected.
The compensation we offer our independent contractor drivers is subject to market conditions and we may find it necessary to continue to increase independent contractor drivers’ compensation in future periods. If we are unable to continue to attract and retain a sufficient number of independent contractor drivers, we could be required to increase our mileage rates and accessorial pay or operate with fewer trucks and face difficulty meeting shipper demands, all of which would adversely affect our profitability and ability to maintain our size or to pursue our growth strategy.
The COVID-19 pandemic may negatively affect our financial condition and results of operations.
Our financial condition and results of operations for fiscal year 2022 and beyond may be materially adversely affected by COVID-19.
The full extent to which COVID-19 will impact our financial condition and operating results will depend on future developments that are highly uncertain and cannot be accurately predicted, including new medical and other information that may emerge concerning COVID-19 and the actions by governmental entities or others to address it, contain it or treat its impact.
COVID-19 poses the risk that we or our employees, suppliers, professional advisors, customers, and others may be restricted or prevented from conducting business activities for indefinite or intermittent periods of time, including as a result of employee health and safety concerns, shutdowns, travel restrictions and other actions and restrictions that may be prudent or required by governmental authorities. Even after governmental entities have lifted current restrictions, there is a risk that such orders will be reinstated in jurisdictions in the short and long term, making it difficult to predict the longer-term financial impact of this virus on the Company.
We have modified our business practices for the continued health and safety of our employees - including, among other things, implementing a work-from-home policy to the fullest extent possible, a limited travel policy and a social distancing policy - and we may take further actions, or be required to take further actions, that are in the best interests of our employees. Our suppliers, professional advisors and customers have also implemented such measures, which has resulted in, and we expect will continue to result in, disruptions or delays and higher costs. The implementation of health and safety practices could impact customer demand, supplier deliveries, our productivity, and costs, which could have a material adverse impact on our business, financial condition, or results of operations.
Further, the impacts of COVID-19 have caused significant uncertainty and volatility in the credit markets. If our liquidity or access to capital becomes further constrained, or if costs of capital increase significantly due to the impact of COVID-19 because of volatility in the capital markets or other factors, then our financial condition, results of operations and cash flows could be materially adversely affected.
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Our management of the impact of COVID-19 has and will continue to require significant investment of time from our management and employees, as well as resources across the Company. The focus on managing and mitigating the impacts of COVID-19 on our business may cause us to divert or delay the application of our resources toward existing or new initiatives or investments, which could have a material adverse impact on our results of operations.
We hold our cash and cash equivalents that we use to meet our working capital and operating expense needs in deposit accounts that could be adversely affected if the financial institution holding such funds fail.
We hold our cash and cash equivalents that we use to meet our working capital and operating expense needs in deposit accounts at one financial institution. On December 31, 2022, cash in bank in excess of FDIC insured levels amounted to approximately $1,143,000. On March 12, 2023, Signature Bank, our financial institution, was closed by its state chartering authority, the New York State Department of Financial Services. On that same date the FDIC was appointed as receiver and transferred all the deposits and substantially all of the assets of Signature Bank to Signature Bridge Bank, N.A., a full-service bank that is being operated by the FDIC. At the time of closing, we had all of our cash at Signature Bank. We did not lose access to our accounts or experience interruptions in banking services, and we suffered no losses with respect to our deposits at Signature Bank as a result of the bank’s closure. Normal banking activities resumed on Monday, March 13, 2023. On March 19, 2023 Signature Bridge Bank N.A. was acquired by New York community Bancorp Inc., which is the parent of Flagship Bank, N.A. We are currently looking at additional banking options to ensure that our exposure is limited or reduced to the FDIC protection limits. If the financial institution in which we hold such funds fails or is subject to significant adverse conditions in the financial or credit markets, we could be subject to a risk of loss of all or a portion of such uninsured funds or be subject to a delay in accessing all or a portion of such uninsured funds. Any such loss or lack of access to these funds could adversely impact our short-term liquidity and ability to meet our operating expense obligations, including payroll obligations. If the financial institution in which we hold funds for working capital and operating expenses were to fail, we cannot provide any assurances that such governmental agencies would take action to continue to protect our uninsured deposits or investments in a similar manner.
GENERAL OPERATING RISK
We will incur significant costs as a result of operating as a public company, and our management may be required to devote substantial time to compliance initiatives.
As a public company, we incur significant legal, accounting, and other expenses. In addition, the Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC, have imposed various requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls as well as mandating certain corporate governance practices. Our management and other personnel will devote a substantial amount of time and financial resources to these compliance initiatives.
If we fail to staff our accounting and finance function adequately or maintain internal control systems adequate to meet the demands that are placed upon us as a public company, we may be unable to report our financial results accurately or in a timely manner and our business and stock price, assuming that a market for our stock develops, may suffer. The costs of being a public company, as well as diversion of management’s time and attention, may have a material adverse effect on our future business, financial condition and results of operations.
We may have insufficient funds to fully develop our business, which may adversely affect our future growth.
Until we can generate a sufficient amount of revenue, if ever, we expect to finance our anticipated future growth and possibly future strategic acquisitions through public or private equity offerings or debt financings. Additional funds may not be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available, we may be required to delay, reduce the scope of, our plans to grow our revenues or to consummate one or more strategic acquisitions or otherwise to scale back our business plans. In addition, we could be forced to reduce or forego attractive business opportunities. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. In addition, debt financing, if available, may involve restrictive covenants. We may seek to access the public or private capital markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time. Our access to the financial markets and the pricing and terms we receive in the financial markets could be adversely impacted by various factors, including changes in financial markets and interest rates.
Our forecasts regarding the sufficiency of our financial resources to support our current and planned operations are forward-looking statements and involve significant risks and uncertainties, and actual results could vary because of a number of factors, including the factors discussed elsewhere in this “Risk Factors” section. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Our future capital requirements may be substantial and will depend on many factors including:
| ● | marketing and developing expenses; | |
| ● | revenue received from sales and operations, if any, in the future; | |
| ● | the cost of maintaining and replacing our revenue producing equipment; | |
| ● | the expenses needed to attract and retain skilled personnel; and | |
| ● | the costs associated with being a public company. |
Raising capital in the future could cause dilution to our existing shareholders and may restrict our operations or require us to relinquish rights.
In the future, we may seek additional capital through a combination of private and public equity offerings, debt financings and collaborations and strategic and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a shareholder. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring debt, making capital expenditures or declaring dividends. If we raise additional funds through collaboration or strategic alliance arrangements with third parties, we may have to relinquish valuable rights to our future revenue streams or product candidates on terms that are not favorable to us.
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Our operating results may fluctuate due to factors that are difficult to forecast and not within our control.
Our past operating results may not be accurate indicators of future performance, and you should not rely on such results to predict our future performance. Our operating results have fluctuated significantly in the past and could fluctuate in the future. Factors that may contribute to fluctuations include:
| ● | changes in aggregate capital spending, cyclicality and other economic conditions, or domestic and international demand for the products we deliver; | |
| ● | our ability to effectively manage our working capital; | |
| ● | our ability to satisfy consumer demands in a timely and cost-effective manner; | |
| ● | pricing and availability of labor and revenue producing equipment; | |
| ● | our inability to adjust certain fixed costs and expenses for changes in demand; | |
| ● | shifts in geographic concentration of customers, supplies and labor pools; and | |
| ● | seasonal fluctuations in demand and our revenue. |
If we are unable to attract and retain qualified executive officers and managers, we will be unable to operate efficiently, which could adversely affect our business, financial condition, results of operations and prospects.
We depend on the continued efforts and abilities of our executive officer, particularly Sebastian Giordano, as well as the senior management of our subsidiaries to establish and maintain our customer relationships and identify strategic opportunities. The loss of any one of them could negatively affect our ability to execute our business strategy and adversely affect our business, financial condition, results of operations and prospects. Competition for managerial talent with significant industry experience is high and we may lose access to executive officers for a variety of reasons, including more attractive compensation packages offered by our competitors. Although we have entered into an employment agreement with a key employee, we cannot guarantee that any of our officers or other key management personnel will remain employed by us for any length of time. Our inability to adequately fill vacancies in our senior executive positions on a timely basis could negatively affect our ability to implement our business strategy, which could adversely impact our results of operations and prospects.
Risks Related to Our Financial Results and Financing Plans
We have a history of losses and may continue to incur losses in the future.
The accompanying consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the ordinary course of business.
Historically, we have primarily funded our operations with proceeds from sales of convertible debt and convertible preferred stock. Since our inception, we have incurred recurring losses, including a loss from operations of $8,037,864 and $6,445,024 for the years ended December 31, 2022 and 2021, respectively. Until such time that we implement our growth through acquisition strategy, we expect to continue to generate operating losses in the foreseeable future, mostly due to corporate overhead and costs of being a public company. These losses may increase, and we may never achieve profitability for a variety of reasons, including increased competition, decreased growth in the e-commerce and the transportation and logistics industries and other factors described elsewhere in this “Risk Factors” section.
During the year ended December 31, 2021, we issued an aggregate of 343,118 shares of our Series E preferred stock for net proceeds of $3,590,500 and issued an aggregate of 615,000 shares of our Series G preferred stock for net proceeds of $5,479,560. On January 25, 2022, we 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 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. The proceeds were used for the acquisition of Cougar Express, JFK Cartage, and Freight Connections, the repayment of debt, and for working capital purposes. Additionally, during the year ended December 31, 2021 and during the three months ended March 31, 2022, we received proceeds of $4,226,383 and $245,714 from the exercise of stock warrants, respectively.
Our cash as of December 31, 2022 will not be sufficient to fund our operations for at least the next twelve months from the date of the issuance of the consolidated financial statements and we will need to raise additional working capital.
We could determine that our goodwill and other intangible assets are impaired, thus recognizing a related loss.
As a result of the acquisitions of JFK Cartage and Freight Connections, during the year ended December 31, 2022, there was a $7,750,835 increase in the gross intangible assets made up of $5,644,956 of finite lived intangible assets and $2,105,879 of goodwill. The increase in gross finite lived intangible assets is associated with customer relationships and covenants not to compete and have finite lives.
As a result of the acquisitions of Shyp FX and Cougar Express, during the year ended December 31, 2021, there was a $2,647,217 increase in the gross intangible assets made up of $2,647,217 of finite lived intangible assets. The increase in gross finite lived intangible assets is associated with customer relationships and covenants not to compete and have finite lives.
Based on the Company’s impairment analysis, management determined that an intangible impairment charge was required for the year ended December 31, 2022 and accordingly, the Company recorded an impairment loss of $2,090,567.
As of December 31, 2022, we had goodwill of $2,105,879 and other intangible assets, net of $4,601,677. We evaluate our goodwill and other intangible assets for impairment. We could recognize impairments in the future, and we may never realize the full value of our intangible assets. If these events occur, our profitability and financial condition will suffer.
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We have identified material weaknesses in our internal control over financial reporting, and we cannot assure you that additional material weaknesses or significant deficiencies will not occur in the future. If our internal control over financial reporting or our disclosure controls and procedures are not effective, we may not be able to accurately report our financial results or prevent fraud, which may cause investors to lose confidence in our reported financial information and may lead to a decline in our stock price.
We have historically had a small internal accounting and finance staff with limited experience in public reporting. This lack of adequate accounting resources has resulted in the identification of material weaknesses in our internal controls over financial reporting. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our consolidated financial statements will not be prevented or detected on a timely basis. In connection with the preparation of our consolidated financial statements for the years ended December 31, 2022 and 2021, our management team identified material weaknesses relating to, among other matters:
| ● | In 2021, we lacked a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures. In an effort to address this material weakness, in January 2022, we expanded our Board of Directors by three independent and outside members to a total of four directors. Further, we established the requisite board committees for audit, compensation, and nominating. The Audit Committee Chairman has current and prior experience in this role with other public companies listed on the OTC and NASDAQ. | |
| ● | Our overall lack of segregation of duties among our management team and our lack of segregation of duties and monitoring controls regarding our accounting staff because we have a limited staff of accountants maintaining our books and records. This is a common area of weakness for smaller companies with back-office operations with less than 5 people. We have made significant steps to mitigating this material weakness. We started with the hiring of a new, operational experienced CFO to provide oversight and drive immediate improvement in this area. To address this issue, we have begun implementation or implemented the following policies or processes: |
| ● | Implementation of cash management and banking policy which includes increasing the controls related to individuals banking capabilities, utilization of a daily cash model and forecast, and policy to move cash receipts from customers to ACH. | |
| ● | Implementation of formalized payment and accounting transaction review and sign-off by the CFO. | |
| ● | Centralization of A/P and cash control at the corporate level including the receipt of invoices to a newly created email address and process to get authorized approval for invoices prior to input into system. | |
| ● | Implementation and completion of a formal and detailed 2022 budget and forecast for the consolidated Company. | |
| ● | Implemented a formal monthly business review process to discuss budget vs actual variances, and other operational issues to be presented to the Company’s CEO and Board of Directors. |
| ● | We lacked supervision of outside consultants who may negotiate transactions on behalf of our company. As we started the new year in 2022, Sebastian Giordano, who in his capacity as outside consultant, played a large role in the Company’s financial turnaround from March 2020 onward, transitioned to take the formal role of CEO. His first action was to hire a new CFO and bring in three new independent and outside board members to strengthen the management controls of the organization. We currently outsource our financial reporting and certain accounting functions to an experienced outsourced accounting and consulting firm who has been engaged by the Company for the past five years. The short-term plan is to keep the financial reporting and certain accounting functions outsourced with this outsourced accounting and consulting firm until the Company is large enough to insource it. In the meantime, the new CFO of the Company is in the process of reviewing and making changes to the current accounting processes and methodologies as discussed above. |
As discussed above, we have taken steps and plan to continue to take additional steps, to seek to remediate these material weaknesses and to improve our financial reporting systems and implement new policies, procedures, and controls. If we do not successfully remediate the material weaknesses described above, or if other material weaknesses or other deficiencies arise in the future, we may be unable to accurately report our financial results on a timely basis, which could cause our reported financial results to be materially misstated and require restatement which could result in the loss of investor confidence, delisting and/or cause the market price of our common stock to decline.
Our preferred stock securities purchase agreements impose restrictions on us that may prevent us from engaging in beneficial transactions.
We have entered into preferred stock securities purchase agreements that contain covenants that restrict our ability to, among other things:
| ● | make certain payments, including the payment of dividends; | |
| ● | redeem or repurchase our capital stock; | |
| ● | incur additional indebtedness and issue additional preferred stock; | |
| ● | make investments or create liens; | |
| ● | merge or consolidate with another entity; | |
| ● | sell certain assets; and | |
| ● | enter into transactions with affiliates. |
Actual results could differ from the estimates and assumptions that we use to prepare our consolidated financial statements.
To prepare consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions as of the date of the consolidated financial statements that affect the reported values of assets and liabilities, revenues and expenses, and disclosures of contingent assets and liabilities. Areas requiring significant estimates by our management include:
| ● | the valuation of accounts receivable; | |
| ● | the useful life of property and equipment; the valuation of intangible assets; | |
| ● | the valuation of right of use asset and related liability; | |
| ● | the valuation of assets acquired and liabilities assumed; | |
| ● | 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 value of claims against the Company. |
At the time the estimates and assumptions are made, we believe they are accurate based on the information available. However, our actual results could differ from, and could require adjustments to, those estimates.
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Risks Related to Our Industry
The transportation industry in which we compete is affected by general economic and business risks that are largely beyond our control.
The point-to-point transportation industry is highly cyclical, and our business is dependent on several factors, many of which are beyond our control. We believe that some of the most significant of these factors are economic changes that affect supply and demand in transportation markets in general, such as:
| ● | downturns in customers’ business cycles; | |
| ● | recessionary economic cycles; | |
| ● | changes in customers’ inventory levels and in the availability of funding for their working capital; | |
| ● | commercial driver shortages and increases in driver compensation; | |
| ● | industry compliance with a constantly changing regulatory environment; | |
| ● | excess delivery vehicle capacity in comparison with shipping demand; and | |
| ● | changes in government policies, tariffs, and taxes. |
The risks associated with these factors are heightened when the United States and/or global economy is weakened. Some of the principal risks during such times are as follows:
| ● | we may experience low overall freight levels, which may impair our asset utilization, because our customers’ demand for our services generally correlates with the strength of the United States and, to a lesser extent, global economy; | |
| ● | certain of our customers may face credit issues and cash flow problems, particularly if they encounter increased financing costs or decreased access to the capital markets, and such issues and problems may affect their ability to pay for our services; | |
| ● | freight patterns may change as supply chains are redesigned, resulting in an imbalance between our capacity and our customers’ demands; and | |
| ● | customers may bid out freight or select competitors that offer lower rates from among existing choices in an attempt to lower their costs, and we might be forced to lower our rates or lose freight. |
We also are subject to cost increases outside of our control that could materially reduce our profitability if we are unable to increase our rates sufficiently. Such cost increases include, but are not limited to, increases in fuel prices, driver wages, owner-operator contracted rates, interest rates, taxes, tolls, license and registration fees, insurance, trucks and other transportation equipment and healthcare for our employees.
Our suppliers’ business levels also may be negatively affected by adverse economic conditions or financial constraints, which could lead to disruptions in the supply and availability of equipment, parts, and services critical to our operations. A significant interruption in our normal supply chain could disrupt our operations, increase our costs and negatively impact our ability to serve our customers.
In addition, events outside our control, such as strikes or other work stoppages at our facilities or at customer, port, border or other shipping locations, or actual or threatened armed conflicts or terrorist attacks, efforts to combat terrorism, military action and economic sanctions against a foreign state or individuals or groups located in or citizens of a foreign state, heightened security requirements, outbreaks of contagious disease including COVID-19 or other adverse public health developments could lead to reduced economic demand, reduced availability of credit or temporary closing of the shipping locations or United States borders. Such events or enhanced security measures in connection with such events could impair our operating efficiency and productivity and result in higher operating costs.
Our industry is highly competitive and fragmented, and our business and results of operations may suffer if we are unable to adequately address downward pricing and other competitive pressures.
We compete with many carriers of varying sizes, including some that may have greater access to equipment, a wider range of services, greater capital resources, less indebtedness or other competitive advantages and including smaller, regional service providers that cover specific shipping lanes with specific customers or that offer niche services. We also compete, to a lesser extent, with some less-than-truckload carriers, railroads, and third-party logistics, brokerage, freight forwarding and other transportation companies. Numerous competitive factors could impair our ability to maintain or improve our profitability. These factors include the following:
| ● | many of our competitors periodically reduce their freight rates to gain business, especially during times of reduced growth or a downturn in the economy, which may limit our ability to maintain or increase freight rates, may require us to reduce our freight rates or may limit our ability to maintain or expand our business; | |
| ● | some shippers have reduced or may reduce the number of carriers they use by selecting core carriers as approved service providers and in some instances, we may not be selected; | |
| ● | many customers periodically solicit bids from multiple carriers for their shipping needs, which may depress freight rates or result in a loss of business to competitors; | |
| ● | the continuing trend toward consolidation in the trucking industry may result in more large carriers with greater financial resources and other competitive advantages, and we may have difficulty competing with them; | |
| ● | advances in technology may require us to increase investments in order to remain competitive, and our customers may not be willing to accept higher freight rates to cover the cost of these investments; | |
| ● | higher fuel prices and, in turn, higher fuel surcharges to our customers may cause some of our customers to consider freight transportation alternatives, including rail transportation; | |
| ● | competition from freight logistics and brokerage companies may negatively impact our customer relationships and freight rates; | |
| ● | we may have higher exposure to litigation risks as compared to other carriers; and | |
| ● | smaller carriers may build economies of scale with procurement aggregation providers, which may improve the smaller carriers’ abilities to compete with us. |
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Driver shortages and increases in driver compensation or owner-operator contracted rates could adversely affect our profitability and ability to maintain or grow our business.
Driver shortages in our industry have required, and could continue to require, us to spend more money to locate and retain company and owner-operator drivers. Our challenge with attracting and retaining qualified drivers primarily stems from intense market competition, which may subject us to increased payments for driver compensation and owner-operator contracted rates. Also, because of the intense competition for drivers, we may face difficulty maintaining or increasing our number of company and owner-operator drivers. Compliance and enforcement with initiatives included in the CSA program implemented by the FMCSA and regulations adopted by the DOT relating to driver time and safety and fitness could also reduce the availability of qualified drivers. In addition, like most in our industry, we suffer from a high turnover rate of drivers, especially, with respect to company drivers, in the first 180 days of employment. The high turnover rate requires us to continually recruit a substantial number of drivers to operate existing delivery vehicles. Further, with respect to owner-operator drivers, shortages can result from contractual terms or company policies that make contracting with us less desirable to certain owner-operator drivers. Due to the absence of long-term personal services contracts, owner-operators can quickly terminate their business relationships with us. If we are unable to continue to attract and retain a sufficient number of company and owner-operator drivers, we could be required to operate with fewer trucks and face difficulty meeting shipper demands or be forced to forego business that would otherwise be available to us, which developments could adversely affect our profitability and ability to maintain or grow our business.
Seasonality and the impact of weather and other catastrophic events adversely affect our operations and profitability.
Our operations are affected by the winter season because inclement weather impedes operations. At the same time, operating expenses increase due to, among other things, a decline in fuel efficiency because of engine idling and harsh weather that creates higher accident frequency, increased claims, and higher equipment repair expenditures. We also may suffer from weather-related or other events, such as tornadoes, hurricanes, blizzards, ice storms, floods, fires, earthquakes and explosions, which may disrupt fuel supplies, increase fuel costs, disrupt freight shipments or routes, affect regional economies, destroy our assets or the assets of our customers or otherwise adversely affect the business or financial condition of our customers, any of which developments could adversely affect our results or make our results more volatile.
We may be adversely affected by fluctuations in the price or availability of diesel fuel.
Fuel is one of our largest operating expenses. Diesel fuel prices fluctuate greatly due to factors beyond our control, such as political events, price and supply decisions by oil producing countries and cartels, terrorist activities, environmental laws and regulations, armed conflicts, depreciation of the dollar against other currencies, world supply and demand imbalances or imposition of tariffs and economic sanctions, and hurricanes and other natural or man-made disasters, each of which may lead to an increase in the cost of fuel. Such events may lead not only to increases in fuel prices, but also to fuel shortages and disruptions in the fuel supply chain. Because our operations are dependent upon diesel fuel, significant diesel fuel cost increases, shortages or supply disruptions could materially and adversely affect our results of operations and financial condition. We have not used derivatives as a hedge against higher fuel costs in the past but continue to evaluate this possibility.
Increases in fuel costs, to the extent not offset by rate per mile increases or fuel surcharges, have an adverse effect on our operations and profitability. We incur certain fuel costs that cannot be recovered even with respect to customers with which we maintain fuel surcharge programs, such as those associated with empty miles or the time when our engines are idling. Because our fuel surcharge recovery lags behind changes in fuel prices, our fuel surcharge recovery may not capture in any particular period the increased costs we pay for fuel, especially when prices are rising. Further, during periods of low freight volumes, shippers can use their negotiating leverage to impose less compensatory fuel surcharge policies. There can be no assurance that our fuel surcharge program will be maintained indefinitely or will be sufficiently effective.
Increased prices for, or decreases in the availability of, new trucks and delivery vehicles and decreases in the value of used trucks and delivery vehicles could adversely affect our results of operations and cash flows.
Investment in new and used equipment is a significant part of our annual capital expenditures, and we require an available supply of trucks and other delivery vehicles from equipment manufacturers to operate and grow our business. In recent years, manufacturers have raised the prices of new trucks and other vehicles and equipment significantly due to increased costs of materials and, in part, to offset their costs of compliance with new tractor engine and emission system design requirements mandated by the EPA and various state agencies, which are intended to reduce emissions. For example, more restrictive EPA engine and emissions system design requirements became effective for engines built on or after January 1, 2010. In 2011, the EPA and the NHTSA established Phase 1 of a national program to reduce greenhouse gas emissions and establish new fuel efficiency standards for medium- and heavy-duty vehicles beginning for model year 2014 and extending through model year 2018. In October 2016, the EPA and NHTSA jointly published final Phase 2 standards for improving fuel efficiency and reducing greenhouse gas emissions from new on-road medium- and heavy-duty vehicles beginning for model year 2019 and extending to model year 2027. The Phase 2 standards build upon the Phase 1 standards, encouraging wider application of currently available technologies and the development of new and advanced cost-effective technologies through model year 2027. In addition, greenhouse gas emissions limits and fuel efficiency standards will be imposed on new trailers. Greenhouse gas emissions regulations are likely to affect equipment design and cost. More recently, in November 2018, the EPA announced the Cleaner Trucks Initiative (CTI), pursuant to which it plans to propose and finalize a rulemaking updating standards for nitrogen oxide emissions from highway heavy-duty trucks and engines. The EPA is expected to issue a proposed rulemaking to implement the CTI program in 2020. Notwithstanding the federal standards, a number of states have mandated, and states may continue to individually mandate, additional emission-control requirements for equipment that could increase equipment or other costs for entire fleets. Further equipment price increases may result from these federal and state requirements. If new equipment prices increase more than anticipated, we could incur higher depreciation and rental expenses than anticipated. If we are unable to fully offset any such increases in expenses with freight rate increases and/or improved fuel economy, our results of operations and cash flows could be adversely affected.
We may face difficulty in purchasing or leasing new equipment due to decreased supply. From time to time, some original equipment manufacturers (OEM) of tractors, trailers and other delivery vehicles may reduce their manufacturing output due to lower demand for their products in economic downturns or a shortage of component parts. Uncertainty as to future federal emission standards or possible future inconsistencies between federal and state emission standards may also serve to decrease such manufacturing output. Component suppliers may either reduce production or be unable to increase production to meet OEM demand, creating periodic difficulty for OEMs to react in a timely manner to increased demand for new equipment and/or increased demand for replacement components as economic conditions change. At times, market forces may create market situations in which demand outstrips supply. In those situations, we may face reduced supply levels and/or increased acquisition or lease costs. An inability to continue to obtain an adequate supply of new or used tractors or trailers for our operations could have a material adverse effect on our business, results of operations and financial condition.
During prolonged periods of decreased tonnage levels, we and other trucking companies may make strategic fleet reductions, which could result in an increase in the supply of used equipment. When the supply exceeds the demand for used trucks or other delivery vehicles, the general market value of such used equipment decreases. Used equipment prices are also subject to substantial fluctuations based on availability of financing and commodity prices for scrap metal. A depressed market for used equipment could require us to trade our truck or other delivery vehicles at depressed values or to record losses on disposal or an impairment of the carrying values of our equipment that is not protected by residual value arrangements. Trades at depressed values and decreases in proceeds under equipment disposals and impairment of the carrying values of our equipment could adversely affect our results of operations and financial condition.
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We operate in a highly regulated industry, and changes in existing laws or regulations, or liability under existing or future laws or regulations, could have a material adverse effect on our results of operations and profitability.
We operate in the United States pursuant to operating authority granted by the DOT. We, as well as our Company and owner-operator drivers, must also comply with governmental regulations regarding safety, equipment, environmental protection, and operating methods. Examples include regulation of equipment weight, equipment dimensions, fuel emissions, driver hours-of-service, driver eligibility requirements, on-board reporting of operations and ergonomics. We may become subject to new, or amendment of existing, laws and regulations, reinterpretation of legal requirements or increased governmental enforcement that may impose more restrictive regulations relating to such matters that may require changes in our operating practices, influence the demand for transportation services or require us to incur significant additional costs. Possible changes to laws and regulations include:
| ● | increasingly stringent environmental laws and regulations, including changes intended to address NOx emissions as well as fuel efficiency and greenhouse gas emissions that are attributed to climate change; | |
| ● | restrictions, taxes, or other controls on emissions; | |
| ● | regulation specific to the energy market and logistics providers to the industry; | |
| ● | changes in the hours-of-service regulations, which govern the amount of time a driver may drive in any specific period; | |
| ● | driver and vehicle ELD requirements; | |
| ● | requirements leading to accelerated purchases of new trailers; | |
| ● | mandatory limits on vehicle weight and size; | |
| ● | driver hiring or retention restrictions; | |
| ● | increased bonding or insurance requirements; and | |
| ● | security requirements imposed by the DHS. |
From time to time, various legislative proposals are introduced, including proposals to increase federal, state or local taxes, including taxes on motor fuels and emissions, which may increase our or our independent affiliates’ operating costs, require capital expenditures or adversely impact the recruitment of drivers.
Restrictions on greenhouse gas emissions or climate change laws or regulations could also affect our customers that use significant amounts of energy or burn fossil fuels in producing or delivering the products we carry, which, in turn, could adversely impact the demand for our services as well as our operations. Additionally, recent activism directed at shifting funding away from companies with energy-related assets could result in limitations or restrictions on certain sources of funding for the energy sector, which also could adversely impact the demand for our services and our operations. We also could lose revenue if our customers divert business from us because we have not complied with customer sustainability requirements. See “Item 1. Business - Regulation” for information regarding several governmental regulations that could significantly impact our business and operations.
Safety-related evaluations and rankings under the CSA program could adversely impact our relationships with our customers and our ability to maintain or grow our fleet, each of which could have a material adverse effect on our results of operations and profitability.
The CSA includes compliance and enforcement initiatives designed to monitor and improve commercial motor vehicle safety by measuring the safety record of both the motor carrier and the driver. These measurements are scored and used by the FMCSA to identify potential safety risks and to direct enforcement action. Certain measurements and scores collected by the CSA from transportation companies are available to the general public on the FMCSA’s website.
Our CSA scores are dependent upon our safety and compliance experience, which could change at any time. In addition, the safety standards prescribed in the CSA program or the underlying methodology used by the FMCSA to determine a carrier’s safety rating could change and, as a result, our ability to maintain an acceptable score could be adversely impacted. For example, pursuant to a 2015 federal statutory mandate, the FMCSA commissioned the National Academy of Sciences (NAS) to conduct a study and report upon the CSA program and its underlying Safety Measurement System (SMS), which is the FMCSA’s process for identifying patterns of non-compliance and issuing safety-fitness determinations for motor carriers. In June 2017, the NAS published a report on the subject providing specific recommendations and concluding, among other things, that the FMCSA should explore a more formal statistical model to replace the current SMS process. In June 2018, the FMCSA posted its response to the NAS study in a report to Congress, concluding, among other things, that it would develop and test a new model, the Item Response Theory (IRT), which would replace the SMS process currently used. The FMCSA was expected to commence small scale testing of the IRT model as early as September 2018, with full-scale testing expected to occur in April 2019 and possible program roll-out expected to occur in late 2019 but the testing schedule has been delayed. The FMCSA’s June 2018 response is under audit by the DOT Inspector General to assess consistency with the NAS recommendations, and the audit findings will guide the agency’s actions and timing with respect to testing of the IRT model as a potential replacement for the SMS. In the event and to the extent that the FMCSA adopts the IRT model in replacement of the SMS or otherwise pursues rulemakings in the future that revise the methodology used to determine a carrier’s safety rating in a manner that incorporates more stringent standards, then it is possible that we and other motor carriers could be adversely affected, as compared to consideration of the current standards. If we receive an unacceptable CSA score, whether under the current SMS process, the IRT model, should it be finalized and adopted, or because of some other safety-fitness determination, our relationships with customers could be damaged, which could result in a loss of business.
Additionally, the requirements of CSA could shrink the industry’s pool of drivers as those with unfavorable scores could leave the industry. As a result, the costs to attract, train and retain qualified drivers could increase. In addition, a shortage of qualified drivers could increase driver turnover, decrease asset utilization, limit growth, and adversely impact our results of operations and profitability.
We are subject to environmental and worker health and safety laws and regulations that may expose us to significant costs and liabilities and have a material adverse effect on our results of operations, competitive position and financial condition.
We are subject to stringent and comprehensive federal, state and local environmental and worker health and safety laws and regulations governing, among other matters, the operation of fuel storage tanks, release of emissions from our vehicles (including engine idling) and facilities, the health and safety of our workers in conducting operations, and adverse impacts to the environment. Under certain environmental laws, we could be subject to strict joint and several liability, without regard to fault or legality of conduct, for costs relating to contamination at facilities we own or operate or previously owned or operated and at third-party sites where we disposed of waste, as well as costs associated with the clean-up of releases arising from accidents involving our vehicles. We often operate in industrial areas, where truck terminals and other industrial activities are located, and where soil, groundwater or other forms of environmental contamination have occurred from historical or recent releases and for which we have incurred and may, in the future, incur remedial or other environmental liabilities. We also maintain above ground and underground bulk fuel storage tanks and fueling islands at some of our facilities and vehicle maintenance operations at certain of our facilities. Our operations involve the risks of fuel spillage or seepage into the environment, environmental damage and unauthorized hazardous material spills, releases or disposal actions, among others.
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Increasing efforts to control air emissions, including greenhouse gases, may have an adverse effect on us. Federal and state lawmakers have implemented, and are considering, a variety of new climate-change initiatives and greenhouse gas regulations that could increase the cost of new tractors, impair productivity and increase our operating expenses. For example, in 2011, the NHTSA and the EPA adopted final Phase 1 rules that established the first-ever fuel economy and greenhouse gas standards for medium- and heavy-duty vehicles, including certain combination tractors’ model years 2014 to 2018 and, in October 2016, the EPA and NHTSA jointly published final Phase 2 standards for improving fuel efficiency and reducing greenhouse gas emissions from new on-road medium- and heavy-duty vehicles beginning for model year 2019 through model year 2027. In addition, greenhouse gas emissions limits and fuel efficiency standards will be imposed on new trailers. More recently, in November 2018, the EPA announced the CTI, pursuant to which it plans to propose and finalize a rulemaking updating standards for nitrogen oxide emissions from highway heavy-duty trucks and engines. The EPA is expected to issue a proposed rulemaking to implement the CTI program in 2020.
Compliance with environmental laws and regulations may also increase the price of our delivery equipment and otherwise affect the economics of our industry by requiring changes in operating practices or by influencing the demand for, or the costs of providing, transportation services. For example, regulations issued by the EPA and various state agencies that require progressive reductions in exhaust emissions from diesel engines have resulted in higher prices for tractors and diesel engines and increased operating and maintenance costs. Also, in order to reduce exhaust emissions, some states and municipalities have begun to restrict the locations and amount of time where diesel-powered tractors, such as ours, may idle. These restrictions could force us to alter our drivers’ behavior, purchase on-board power units that do not require the engine to idle and/or face a decrease in productivity. We are also subject to potentially stringent rulemaking related to sustainability practices, including conservation of resources by decreasing fuel consumption. This increased focus on sustainability practices may result in new regulations and/or customer requirements that could adversely impact our business.
If we have operational spills or accidents or if we are found to be in violation of, or otherwise liable under, environmental or worker health or safety laws or regulations, we could incur significant costs and liabilities. Those costs and liabilities may include the assessment of sanctions, including administrative, civil and criminal penalties, the imposition of investigatory, remedial or corrective action obligations, the occurrence of delays in permitting or performance of projects, and the issuance of orders enjoining performance of some or all of our operations in a particular area. The occurrence of any one or more of these developments could have a material adverse effect on our results of operations, competitive position, and financial condition. Environmental and worker health and safety laws are becoming increasingly more stringent and there can be no assurances that compliance with, or liabilities under, existing or future environmental and worker health or safety laws or regulations will not have a material adverse effect on our business, financial condition, results of operations, cash flows or prospects. See “Item 1. Business - Regulation” for information regarding several governmental regulations that could significantly affect our business and operations.
Our contractual agreements with our owner-operators expose us to risks that we do not face with our company drivers.
From time to time, we have relied upon independent contractor owner-operators to perform the services for which we contract with customers. While our use of independent contractors has to date been limited, we may increase our usage of independent contractor owner-operators if we are unable to meet demand for our transportation services with our own delivery vehicles and drivers. Our reliance on independent contractor owner-operators creates numerous risks for our business. For example, if our independent contractor owner-operators fail to meet our contractual obligations or otherwise fail to perform in a manner consistent with our requirements, we may be required to utilize alternative service providers at potentially higher prices or with some degree of disruption of the services that we provide to customers. If we fail to deliver on time, if our contractual obligations are not otherwise met, or if the costs of our services increase, then our profitability and customer relationships could be harmed.
The financial condition and operating costs of our independent contractor owner-operators are affected by conditions and events that are beyond our control and may also be beyond their control. Adverse changes in the financial condition of our independent contractor owner-operators or increases in their equipment or operating costs could cause them to seek higher revenues or to cease their business relationships with our company. The prices we charge our customers could be impacted by such issues, which may in turn limit pricing flexibility with customers, resulting in fewer customer contracts and decreasing our revenues.
Independent contractor owner-operators may use tractors, trailers and other equipment bearing our trade names and trademarks. If one of our independent contractor owner-operators is subject to negative publicity, it could reflect on us and have a material adverse effect on our business, brand and financial performance. Under certain laws, we could also be subject to allegations of liability for the activities of our independent contractor owner-operators.
Owner-operators are third-party service providers, as compared to company drivers who are employed by us. As independent business owners, our owner-operators may make business or personal decisions that conflict with our best interests. For example, if a load is unprofitable, route distance is too far from home or personal scheduling conflicts arise, an owner-operator may deny loads of freight from time to time. In these circumstances, we must be able to timely deliver the freight in order to maintain relationships with customers.
If our owner-operators are deemed by regulators or judicial process to be employees, our business and results of operations could be adversely affected.
Tax and other regulatory authorities have in the past sought to assert that owner-operators in the trucking industry are employees rather than independent contractors. Taxing and other regulatory authorities and courts apply a variety of standards in their determination of independent contractor status. If our owner-operators are determined to be its employees, we would incur additional exposure under federal and state tax, workers’ compensation, unemployment benefits, labor, employment, and tort laws, including for prior periods, as well as potential liability for employee benefits and tax withholdings.
We are dependent on computer and communications systems, and a systems failure or data breach could cause a significant disruption to our business.
Our business depends on the efficient and uninterrupted operation of our computer and communications hardware systems and infrastructure, including operating and financial reporting systems. Our computer and communications systems are critical in meeting customer expectations, effectively tracking, maintaining and operating our trucks and other delivery vehicles, directing and compensating our employees, and interfacing with our financial reporting system. Our financial reporting system receives, processes, controls, and reports information for operating our business and for tabulation into our financial statements. We currently maintain our computer systems at multiple locations, including several of our offices and terminals and third-party data centers, along with computer equipment at each of our terminals. Our operations and those of our technology and communications service providers are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure, terrorist attacks, Internet failures, computer viruses, data breaches (including cyber-attacks or cyber intrusions over the Internet, malware and the like) and other events generally beyond our control. Although we believe that we have robust information security procedures and other safeguards in place, as cyber threats continue to evolve, we may be required to expend additional resources to continue to enhance our information security measures and investigate and remediate any information security vulnerabilities. A significant natural disaster or cyber-attack incident, including system failure, security breach, disruption by malware or other damage, could interrupt or delay our operations, damage our reputation, cause a loss of customers, agents or third-party capacity providers, expose us to a risk of loss or litigation, or cause us to incur significant time and expense to remedy such an event, any of which could have a material adverse impact on our results of operations and financial position.
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Our business may be harmed by terrorist attacks, future wars, or anti-terrorism measures.
In the aftermath of the terrorist attacks of September 11, 2001, federal, state and municipal authorities have implemented and are implementing various security measures, including checkpoints and travel restrictions on large trucks and fingerprinting of drivers in connection with new hazardous materials endorsements on their licenses. Such existing measures and future measures may have significant costs associated with them which a motor carrier is forced to bear. Moreover, large trucks carrying large freight are potential terrorist targets, and we may be obligated to take measures, including possible capital expenditures, intended to protect our trucks. In addition, the insurance premiums charged for some, or all of the coverage currently maintained by us could continue to increase dramatically or such coverage could be unavailable in the future.
If our employees were to unionize, our operating costs could increase and our ability to compete could be impaired.
None of our employees are currently represented under a collective bargaining agreement; however, we always face the risk that our employees will try to unionize, and if our owner-operators were ever re-classified as employees, the magnitude of this risk would increase. Further, Congress or one or more states could approve legislation and/or the National Labor Relations Board (the “NLRB”) could render decisions or implement rule changes that could significantly affect our business and our relationship with employees, including actions that could substantially liberalize the procedures for union organization. For example, in December 2014, the NLRB implemented a final rule amending the agency’s representation-case proceedings that govern the procedures for union representation. Pursuant to this amendment, union elections can now be held within 10 to 21 days after the union requests a vote, which makes it easier for unions to successfully organize all employers, in all industries. In addition, we can offer no assurance that the Department of Labor will not adopt new regulations or interpret existing regulations in a manner that would favor the agenda of unions.
Any attempt to organize by our employees could result in increased legal and other associated costs and divert management attention, and if we entered into a collective bargaining agreement, the terms could negatively affect our costs, efficiency and ability to generate acceptable returns on the affected operations. In particular, the unionization of our employees could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects because:
| ● | restrictive work rules could hamper our efforts to improve and sustain operating efficiency and could impair our service reputation and limit our ability to provide same-day or next-day services; | |
| ● | a strike or work stoppage could negatively impact our profitability and could damage customer and employee relationships, and some shippers may limit their use of unionized trucking companies because of the threat of strikes and other work stoppages; and | |
| ● | an election and bargaining process could divert management’s time and attention from our overall objectives and impose significant expenses. |
RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK
Conversion and/or exercise of our preferred stock and/or warrants, has, and is likely to continue to dilute the ownership interest of our existing stockholders, including holders who had previously converted their notes and preferred stock or exercised their warrants, and has and may continue to depress the price of our common stock, and may impede our ability to raise funds in the future.
In conjunction with capital raising efforts during 2022 and 2021, the Company made commitments to shareholders, preferred stockholders, and warrant holders to issue, or keep available for issuance, additional shares of common stock of the Company. On December 31, 2022 and 2021, the closing trading price as quoted on OTCQB market or OTC Pink market was $0.004 and $0.0133, respectively. Anti-dilution protection features contained in our preferred stock securities purchase agreements and warrants only provide for one-way adjustment. If we issue or sell, or are deemed to have issued or sold, additional shares of common stock, options, warrants of convertible instruments, other than certain exempt issuances, 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 (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. As a result, the existing stockholders, including holders who earlier converted their notes or preferred stock, or exercised their warrants, will continue to be subject to substantial dilution.
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 to 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 “First Authorized Share Increase Amendment”). The Company filed a preliminary information statement on Schedule 14C regarding the stockholders’ consent to the First Authorized Share Increase Amendment with the SEC on June 8, 2020. The Company filed a definitive information statement on Schedule 14C on June 30, 2020 and first mailed that information statement to stockholders on June 30, 2020. The First Authorized Share Increase Amendment became effective on July 20, 2020.
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 “Second Authorized Share Increase Amendment”). The Company filed a preliminary information statement on Schedule 14C regarding the stockholders’ consent to the Second Authorized Share Increase Amendment with the SEC on March 5, 2021. The Company filed a definitive information statement on Schedule 14C on March 15, 2021 and first mailed that information statement to stockholders promptly after filing. The Second Authorized Share Increase Amendment became effective on April 15, 2021.
The past and potential future dilution, and the potential lack of sufficient authorized shares, could make it more difficult for us to raise funds through future offerings of common stock, warrants or convertible securities, and could adversely impact the terms under which we could obtain additional capital. In addition, the existence of our convertible notes may encourage short selling by market participants because the conversion our convertible notes could be used to satisfy short positions.
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Our shares of common stock are quoted on the OTC Pink Market and there is a limited trading market for our common stock.
On September 1, 2021, we were upgraded to the OTCQB Market. On May 23, 2022, we received notice from OTC Markets Group that as our bid price has closed below $0.01 for more than 30 consecutive calendar days, we no longer met the Standards for Continued Eligibility for OTCQB as per the OTCQB Standards, Section 2.3(2), which states that we must “maintain proprietary priced quotations published by a Market Maker in OTC Link with a minimum closing bid price of $.01 per share on at least one of the prior thirty consecutive calendar days.” We were informed further that, as per Section 4.1 of the OTCQB Standards, we were granted a cure period of 90 calendar days during which the minimum closing bid price for the Company’s common stock must be $.01 or greater for ten consecutive trading days in order to continue trading on the OTCQB marketplace. Since this requirement was not met by August 21, 2022, on August 21, 2022, we were removed from the OTCQB Marketplace and our common stock is quoted on the OTC Pink Tier.
There is currently an active trading market for our common stock, but our common stock has traded in recent years only on a limited basis. Although there is an active trading market for our common stock, there are no assurances that trading activity will be sustained.
The public market for our common stock may be volatile. This may affect the ability of our investors to sell their shares as well as the price at which they sell their shares.
The market price for shares of our common stock may be significantly affected by factors such as variations in quarterly and yearly operating results, general trends in the transportation and logistics industry, and changes in state or federal regulations affecting us and our industry. Furthermore, in recent years the stock market has experienced extreme price and volume fluctuations that are unrelated or disproportionate to the operating performance of the affected companies. Such broad market fluctuations may adversely affect the market price of our common stock if a market for it develops.
Our common stock price has fluctuated in recent years, and the trading price of our common stock is likely to continue to reflect changes, which could result in losses to investors and litigation.
In addition to changes to market prices based on our results of operations and the factors discussed elsewhere in this “Risk Factors” section, the market price of and trading volume for our common stock may change for a variety of other reasons, not necessarily related to our actual operating performance. The capital markets have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. In addition, the average daily trading volume of the securities of small companies can be very low, which may contribute to future volatility. Factors that could cause the market price of our common stock to fluctuate significantly include:
| ● | the results of operating and financial performance and prospects of other companies in our industry; | |
| ● | strategic actions by us or our competitors, such as acquisitions or restructurings; | |
| ● | announcements of innovations, increased service capabilities, new or terminated customers or new, amended or terminated contracts by our competitors; | |
| ● | the public’s reaction to our press releases, media coverage and other public announcements, and filings with the SEC; | |
| ● | lack of securities analyst coverage or speculation in the press or investment community about us or opportunities in the markets in which we compete; | |
| ● | changes in government policies in the United States; | |
| ● | changes in earnings estimates or recommendations by securities or research analysts who track our common stock or failure of our actual results of operations to meet those expectations; | |
| ● | dilution caused by the conversion into common stock of preferred shares and exercise of warrants; | |
| ● | market and industry perception of our success, or lack thereof, in pursuing our growth strategy; | |
| ● | changes in accounting standards, policies, guidance, interpretations, or principles; | |
| ● | any lawsuit involving us or our services; | |
| ● | arrival and departure of key personnel; | |
| ● | sales of common stock by us, our investors, or members of our management team; and | |
| ● | changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from natural or man-made disasters and armed conflicts. |
Any of these factors, as well as broader market and industry factors, may result in large and sudden changes in the trading volume of our common stock and could seriously harm the market price of our common stock, regardless of our operating performance. This may prevent stockholders from being able to sell their shares at or above the price they paid for shares of our common stock, if at all. In addition, following periods of volatility in the market price of a company’s securities, stockholders often institute securities class action litigation against that company. Our involvement in any class action suit or other legal proceeding, including the existing lawsuits filed against us and described elsewhere in this report, could divert our senior management’s attention, and could adversely affect our business, financial condition, results of operations and prospects.
If we do not meet the listing standards of a national securities exchange, our investors’ ability to make transactions in our securities will be limited and we will be subject to additional trading restrictions.
Our common stock currently is traded over-the-counter on the OTC Pink Tier market and is not qualified to be listed on a national securities exchange, such as NASDAQ. Accordingly, we face significant material adverse consequences, including:
| ● | a limited availability of market quotations for our securities; | |
| ● | reduced liquidity with respect to our securities; | |
| ● | a limited amount of news and analyst coverage for our company; and | |
| ● | a decreased ability to issue additional securities or obtain additional financing in the future. |
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FINRA sales practice requirements may also limit a stockholder’s ability to buy and sell our common stock.
The Financial Industry Regulatory Authority (known as “FINRA”) has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
We do not intend to pay cash dividends in the foreseeable future.
We have never paid dividends on our common stock and do not presently intend to pay any dividends in the foreseeable future. We anticipate that any funds available for payment of dividends will be re-invested into our company to further its business strategy. Because we do not anticipate paying dividends in the future, the only opportunity for our stockholders to realize value in our common stock will likely be through a sale of those shares.
Future sales of our securities could adversely affect the market price of our common stock and our future capital-raising activities could involve the issuance of equity securities, which would dilute your investment and could result in a decline in the trading price of our common stock.
We may sell securities in the public or private equity markets if and when conditions are favorable, or at prices per share below the current market price of our common stock, even if we do not have an immediate need for additional capital at that time. Sales of substantial amounts of shares of our common stock, or the perception that such sales could occur, could adversely affect the prevailing market price of our shares and our ability to raise capital. We may issue additional shares of common stock in future financing transactions or as incentive compensation for our executive management and other key personnel, consultants and advisors. Issuing any equity securities would be dilutive to the equity interests represented by our then-outstanding shares of common stock. Moreover, sales of substantial amounts of shares in the public market, or the perception that such sales could occur, may adversely affect the prevailing market price of our common stock and make it more difficult for us to raise additional capital.
On October 8, 2020, we entered into Securities Purchase Agreements with investors (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. We 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, we 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 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. We 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.
During the three months ended March 31, 2021, we 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. We 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.
During April 2021, we 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. We 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.
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, we 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.
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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.
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.
On December 31, 2021, we entered into Securities Purchase Agreements with investors (the “Series G SPA”). Pursuant to Series G SPA; (A) on December 31, 2021, 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; (B) on January 15, 2022, 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; and (C) on March 4, 2022, an 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 gross proceeds to the Company were $7,100,000, or $10.00 per unit. We paid fees of $710,507, paid cash of $54,933 for the settlement of disputed penalties related the Series E and received net proceeds of $6,334,560. The initial exercise price of the Warrants related to the Series G purchases is $0.01 per share, subject to adjustment.
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.
Item 1B. Unresolved Staff Comments.
As of the filing of this Annual Report on Form 10-K, there were no unresolved comments from the staff of the SEC.
Item 2. Properties.
Our principal executive offices are located in the United States at 5500 Military Trail, Suite 22-357, Jupiter, Florida 33458.
Due to a reduction in the Company’s revenues and the loss of its Amazon revenues, during the second and third quarter of 2021, we abandoned the all leases associated with Shypdirect and Prime EFS. Accordingly, during the year ended December 31, 2021, we wrote the remaining balance of these right of use assets and recorded a loss on lease abandonment of $1,223,628.
The lease of our subsidiary, Cougar Express, expired on December 31, 2021. On February 16, 2022, the landlord for the leased premises from which Cougar Express previously conducted its Valley Stream New York business, Airport Park LLC (“Airport”), filed an action to evict and for unpaid holdover rent against Cougar Express and TLSS. The case was No. LT-000550-22/NA, filed in Landlord Tenant Court in Nassau County District Court. In the case, Airport sought to evict Cougar Express forthwith and to collect $51,080 for each month of holdover occupancy starting January 1, 2022 through the month of any eviction, plus statutory interest, costs and attorneys’ fees. $51,080 was 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. By stipulation filed with the Court on May 19, 2022, this matter was settled and terminated. Pursuant to the settlement, Cougar agreed to pay, and paid, certain unpaid common charges of $8,016.25 and monthly rent at a rate of $33,275 per month until Cougar vacated the premises. Cougar also agreed to vacate the Valley Stream premises by September 30, 2022. Following Cougar’s acquisition of JFK Cartage, Cougar was able to vacate, and vacated the Valley Stream location by September 30, 2022 and moved its operations to the JFK Cartage property.
As a result of the acquisition of JFK Cartage and Freight Connection, the Company assumed several non-cancelable operating leases for the lease of office, warehouse spaces, and parking spaces.
JFK Cartage leases approximately 30,797 square feet of office and warehouse space and parking area in Inwood, New York under a non-cancelable operating lease through November 2024. Monthly base rent is $45,801 and is subject to a 4% annual increase.
Freight Connections leases an aggregate of approximately 186,000 square feet of office and warehouse space and parking areas in Ridgefield and Englewood, New Jersey under several non-cancelable operating leases through June 2027. Aggregate monthly base rent is approximately $133,000 plus common area and other charges and is subject to annual increases.
Severance Trucking leases an aggregate of approximately 43,000 square feet of office and warehouse space and parking areas in North Haven, Connecticut and Dracut, Massachusetts under two non-cancelable operating leases through February 2028. Aggregate monthly base rent is approximately $128,000 plus common area and other charges and is subject to annual increases.
Item 3. Legal Proceedings
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. 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.
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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, effective March 31, 2022, TLSS and Prime EFS, on the one hand, and ERLAC and ELC, on the other hand, settled the above matter for a single payment, by TLSS, to ERLAC and ELC, of $30,000. Pursuant to the settlement, TLSS 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 TLSS, Prime EFS and their affiliates, on the one hand, and ERLAC, ELC and their affiliates, on the other hand. As of December 31, 2021, the Company accrued the settlement amount ($30,00) and included same in accrued expenses on the Company’s consolidated balance sheets.
As a result of the March 2022 settlement, and since we have not received any further communications concerning this matter, we consider the matter to be closed and terminated.
Bellridge Capital, L.P. v. TLSS et al.
On September 11, 2020, a prior lender to the Company, Bellridge Capital, L.P., filed a civil action against TLSS and others in the United States District Court for the Southern District of New York. The case was assigned Case No. 20-cv-7485.
After discontinuing the foregoing federal action voluntarily and without prejudice, on April 23, 2021, Bellridge filed a substantially similar civil action in New York Supreme Court, New York County, which was assigned index number 652728/2021.
In May 2022, all parties to the Bellridge state court action settled the case and exchanged mutual general releases for a cash payment by the Company to Bellridge of $250,000.
In partial consideration for the settlement, the Company and Bellridge also cancelled the 700,000 shares of Series B Preferred Stock previously held by Bellridge, as reflected on the Company’s balance sheet as of December 31, 2021. In connection with this settlement, during the year ended December 31, 2022, the Company recorded settlement expense of $227,811.
As a result of the May 2022 settlement, and since we have not received any further communications concerning this matter, we consider the matter to be closed and terminated.
SCS, LLC v. TLSS
On January 14, 2021, a former financial consultant to the Company, SCS, LLC, filed an action against TLSS in the Circuit Court of the 15th Judicial Circuit, Palm Beach County, Florida, captioned SCS, LLC v. Transportation and Logistics Systems, Inc. The case was assigned Case No. 50-2020-CA-012684.
In this action, SCS alleges that it entered into a renewable six-month consulting agreement with TLSS dated September 5, 2019 and that TLSS failed to make certain monthly payments due thereunder for the months of October 2019 through March 2020, summing to $42,000. The complaint alleges claims for breach of contract, quantum meruit, unjust enrichment and account stated.
On February 9, 2021, TLSS filed an answer, defenses and counterclaims in this action. Among other things, TLSS avers that SCS’s claims are 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 TLSS’s interests, not in furtherance of SCS’s own, and conflicting, interests. TLSS also avers, in its counterclaims, that SCS owes TLSS damages in excess of the $42,000 sought in the main action because SCS was at least grossly negligent in any due diligence it undertook before recommending that TLSS acquire Prime EFS LLC in June 2018. SCS filed a motion to strike TLSS’s defenses and counterclaims, and TLSS opposed that application. Those motions remain sub judice.
A two-day non-jury trial was held in this action in Palm Beach County, Florida, on April 20-21, 2022. However, at the end of the second day a mistrial was declared because SCS had not withdrawn its motion to strike and answered the counterclaims. Since the mistrial, there have been no further filings or proceedings in this case.
The Company believes it has substantial defenses to all claims alleged in SCS’s complaint. The Company therefore intends to defend this case vigorously. Because there have been no further filings or proceedings on this case since April 2022, 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. However, SCS’s demand in the case remains $42,000.
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 TLSS, Lawrence Sands. The complaint alleges that between April 2019 and June 2020, the immediately prior chairman and chief executive officer of TLSS, Mercadante, the former chief development officer of TLSS, Cerny, and, since February 2020, TLSS’s then restructuring consultant who is now chairman and chief executive officer of TLSS, Giordano, breached fiduciary duties owed to the Company. Prior to becoming CEO, Giordano rendered his services to TLSS through defendant Ascentaur LLC.
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Briefly, the complaint alleges that Mercadante breached duties to TLSS 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.
By order dated and issued September 15, 2022, the Circuit Judge assigned to this case dismissed the original Complaint in the matter, finding (a) that SCS had failed to adequately allege it has standing and (b) that the complaint fails to adequately allege a cognizable claim. The dismissal was without prejudice, meaning SCS could attempt to replead its claims.
On October 5, 2022, SCS filed an Amended Complaint in this action. By order dated and issued December 19, 2022, the Circuit Judge assigned to this case once again dismissed the case, finding (a) that SCS still failed to adequately allege it has standing and (b) that the complaint still fails to adequately allege a cognizable claim. Once again, however, the dismissal was without prejudice.
On January 18, 2023, SCS filed a Second Amended Complaint in this action. All defendants once again moved to dismiss the pleading or in the alternative for summary judgment on it in their favor. The Court heard argument on that motion on March 9, 2023. As of this writing, the parties are awaiting a ruling by the Court on the motion heard March 9, 2023.
While they hope to prevail on the March 9, 2023, motion, win or lose, defendants in this action advise that they believe the action to be frivolous (a position with which we agree) and intend to mount a vigorous defense to this action.
Owing to the fact that no discovery has occurred in the case, 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. In a derivative case, any recovery is to be paid to the corporation; however, the individual defendants in this case are fully indemnified by the Company unless a final judgment is entered against them for deliberate or intentional misconduct.
Jose R. Mercedes-Mejia v. Shypdirect 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 subleased to Shypdirect 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 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 an action in the Supreme Court, State of New York, Suffolk County (the “Suffolk County Action”), seeking defense and indemnity for this claim from the insurance brokerage, TCE/Acrisure LLC, which sold the County Hall insurance policy to Shypdirect.
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 – TLSS, Shyp CX, Inc., Shyp FX, Inc. and Cougar Express, Inc. In the claim against TLSS, Plaintiff seeks to “pierce the corporate veil” and hold TLSS responsible for the alleged liabilities of Prime and/or Shypdirect as the supposed alter ego of these subsidiaries. In the claims against Shyp CX, Inc., Shyp FX, Inc. and Cougar Express, Inc., Plaintiff seeks to hold these entities responsible for the alleged liabilities of Prime and/or Shypdirect on a successor liability theory.
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, thus adding TLSS, 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.
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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 TCI/Acrisure in the Bergen County action. On December 23, 2021, Acrisure filed its Answer to the Third-Party Complaint, denying its material allegations.
On March 2, 2022, Plaintiff sought and was granted leave to file a Second Amended Complaint, bringing claims against Prime and Shypdirect’s vehicle liability carrier, County Hall (for discovery) as well as the producing broker, TCE/Acrisure. Plaintiff also asserted additional alter ego allegations against TLSS.
On February 15, 2023, Plaintiff filed a motion for leave to file a Third Amended Complaint in this action, seeking to assert claims against TLSS’s former CEO, John Mercadante, also on a “pierce the corporate veil” theory. On March 9, 2023, TLSS, Prime and Shypdirect opposed the motion for leave to add Mercadante, arguing that any claim against Mercadante would be both futile and time-barred. As of this writing, defendants are awaiting Plaintiff’s reply papers and an argument date from the Court on this motion.
Under the currently operative pre-trial order, entered October 4, 2022, all discovery in this case must be concluded by June 30, 2023. In January and February, 2023, numerous depositions were taken in the case, including those of Messrs. Giordano and Mercadante.
TLSS intends to vigorously defend itself in this action and to pursue the third-party actions, in the name and right of Prime and Shypdirect, against both County Hall and TCE/ Acrisure.
Under a so-called MCS-90 reimbursement endorsement to the County Hall policy, TLSS believes that Prime and Shypdirect may have up to $750,000 in coverage under a 1980 federal law under which County Hall is “require[d] to pay damages for certain claims or ‘suits’ that are not covered by the policy.” (See Endorsement CHI – 290 (02/19) to County Hall policy effective May 31, 2019.)
Under New Jersey law, it is well established that a corporation is a separate entity from its shareholder(s) and a primary reason for incorporation is the insulation of shareholders from the liabilities of the corporate enterprise.
The New Jersey Supreme Court in Richard A. Pulaski Const. Co. v. Air Frame Hangars, Inc., 195 N.J. 457, 472–73 (2008) held that, in light of the fundamental propositions that a corporation is a separate entity from its shareholders, and “that a primary reason for incorporation is the insulation of shareholders from the liabilities of the corporate enterprise,” courts will not pierce a corporate veil “[e]xcept in cases of fraud, injustice, or the like...’” (citations omitted). The New Jersey Supreme Court further held that:
The limitations placed on a claimant’s ability to reach behind a corporate structure are intentional, as “[t]he purpose of the doctrine of piercing the corporate veil is to prevent an independent corporation from being used to defeat the ends of justice, to perpetrate fraud, to accomplish a crime, or otherwise to evade the law[.]” (citations omitted). Hence, to invoke that form of relief, “the party seeking an exception to the fundamental principle that a corporation is a separate entity from its principal bears the burden of proving that the court should disregard the corporate entity.” ….
The purpose of piercing the corporate veil is thus to prevent an independent corporation from being used to defeat the ends of justice, perpetrate fraud, to accomplish a crime, or otherwise to evade the law.
To pierce the corporate veil and impute alter ego liability on TLSS for the alleged torts of Prime, Shypdirect and/or their agents, employees and servants, the Plaintiff herein would have to establish: (1) that Prime and Shypdirect were “utterly dominated” by TLSS and (2) that respecting the separate corporate existences of the subsidiaries would perpetrate a fraud or injustice, or otherwise circumvent the law. FDASmart, Inc. v. Dishman Pharmaceuticals and Chemicals, Ltd., et al., 448 N.J. Super. 195, 204 (App. Div. 2016). A plaintiff must satisfy this burden by clear and convincing evidence.
To determine whether the first element has been satisfied, courts consider whether the parent company so dominated the subsidiary that the latter had no separate existence but was merely a conduit for the parent. In considering the level of dominance exercised by the parent over the subsidiary, the court will consider factors such as common ownership, financial dependency, interference with a subsidiary’s selection of personnel, disregard of corporate formalities, and control over a subsidiary’s marketing and operational policies.
To date, to the best of the undersigned’s knowledge, information and belief, no discovery has been taken in this action which would permit the imposition of alter ego liability on TLSS for the subject accident.
To date, to the best of the undersigned’s knowledge, information and belief, no discovery has been taken in this action which would permit the imposition of successor liability on Shyp CX, Inc., Shyp FX, Inc. and/or Cougar Express, Inc. for the subject accident.
However, owing to the early stage of this heavily litigated action, we cannot evaluate the likelihood of an adverse outcome or estimate the Company’s liability, if any, in connection with this claim.
Holdover Proceeding
On February 16, 2022, the landlord for the leased premises from which Cougar Express previously conducted its Valley Stream New York business, Airport Park LLC (“Airport”), filed an action to evict and for unpaid holdover rent against Cougar Express and TLSS. The case was No. LT-000550-22/NA, filed in Landlord Tenant Court in Nassau County District Court.
In the case, Airport sought to evict Cougar Express 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 was computed correctly under the holdover provision in the expired lease.
By stipulation filed with the Court on May 19, 2022, this matter was settled and terminated. Pursuant to the settlement, Cougar agreed to pay, and paid, certain unpaid common charges of $8,016.25 and monthly rent at a rate of $33,275 per month until Cougar vacated the premises. Cougar also agreed to vacate the Valley Stream premises by September 30, 2022. Following Cougar’s acquisition of JFK Cartage, Cougar was able to vacate, and vacated, the Valley Stream location by September 30, 2022.
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Since the May 2022 settlement and Cougar’s vacating the subject premises in timely fashion, we have not received any further communications concerning this matter. We therefore view the matter as closed and terminated.
COR Holdings, LLC
In the second quarter of 2022, COR Holdings LLC, a lender to the Company’s former Prime EFS subsidiary, made an informal (email) demand that it be issued 3,882,480 shares of Company common stock in exchange for an alleged $97,062 balance due. The Company had, pursuant to a debt conversion rights agreement dated August 28, 2020, granted COR a one-year option to exchange the debt at $0.025 per share of Company common stock; however, COR never exercised that option prior to its expiration on August 28, 2021. The Company believes, on advice of counsel, that COR’s sole remedy for the unpaid debt is through Prime EFS’s Assignment for Benefit of Creditors proceeding in New Jersey. Therefore, if COR chooses to pursue this claim against the Company, the Company intends to oppose it vigorously. However, because no formal claim has been filed, we cannot evaluate the likelihood of an adverse outcome or estimate the Company’s liability, if any, in connection with this claim.
Ryder Truck Rental, Inc.
In the first quarter of 2022, an attorney representing Ryder Truck Rental issued a letter to certain former officers and employees of the Company’s former Shypdirect subsidiary, demanding payment of $308,240.65 under certain open invoices for trucks leased by Shypdirect, $1,141,211.55 in certain additional charges under a 2018 contract, and $434,835.66 in attorney’s fees. Solely to avoid the expense and distraction of litigation, including without limitation, certain alter ego and derivative liability claims alleged by Ryder, on August 5, 2022, the Company, pursuant to a Settlement Agreement and Mutual General Releases dated August 2, 2022, paid Ryder $6,500 in full and final settlement. The release of claims executed by Ryder covers, among others, TLSS and all its former and current subsidiaries, directors, officers and employees as well as all former members and managers of Shypdirect.
Since the August 2022 settlement, we have not received any further communications concerning this matter. We therefore view the matter as closed and terminated.
Maria Lugo v. JFK Cartage
The Company’s JFK Cartage, Inc. subsidiary is one of three (3) defendants in an action captioned Maria Lugo v. JFK Cartage, Inc. d/b/a Fifth Dimension Logistix, Joan Ton, individually, and Chris Bartley, individually. The case is pending in Supreme Court, State of New York, Queens County, Index No. 704862/2022.
In this action, which was filed March 4, 2022, a former employee of JFK Cartage alleges that she suffered discrimination and retaliation in violation of the New York City Human Rights Law and the New York State Human Rights Law. The former employee alleges that on December 28, 2021, she had Covid-19 symptoms, advised the defendants she was feeling ill and went home early to take a home test. She further alleges that on December 30, 2021, she tested positive for Covid-19 and informed defendants she had to isolate for ten (10) days. Plaintiff alleges that she returned to work on January 7, 2022, but that her employment was terminated later that day by defendant Bartley who “questioned the authenticity of the at-home test, accusing her of fraud.” Plaintiff claims her employment “was terminated due to her disability (a Covid-19 infection) and in retaliation for her requesting reasonable accommodation for the illness she suffered.” She seeks unspecified compensatory damages, including lost pay and benefits, punitive damages and attorneys’ fees.
On December 16, 2022, all defendants filed an answer and affirmative defenses, denying all claims for statutory violations. The case is currently in discovery. The conduct alleged in the complaint occurred prior to the Company’s July 31, 2022, acquisition of JFK Cartage, Inc. The Company believes that, in relation to this action, it has a right to full indemnification from the selling stockholder (including for attorneys’ fees) as well as set-off rights against notes payable to the selling stockholder.
Owing to (among other things) the fact that discovery in this action has just begun, 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.
Elaine Pryor v. Rocio Perez, et al.
The Company’s Freight Connections, Inc. subsidiary (“FCI”) is one of three (3) named defendants in an action captioned Elaine Pryor v. Rocio Perez, North Trucking & Logistics, LLC and Freight Connections, Inc. The case is pending in Superior Court of New Jersey, Essex County, Docket No. ESX-L-5147-18.
In this action, which was filed in 2018, plaintiff alleges that on February 1, 2017, she suffered personal injuries in a collision between her motor vehicle and a truck operated by a then employee of FCI. Plaintiff alleges that the truck was owned by FCI and leased to North Trucking & Logistics at the time.
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At present, there are two other actions pending related to insurance coverage for the accident. They are Acceptance Indemnity Insurance Company v. Freight Connections, LLC (Superior Court of New Jersey, Essex County, Docket No. ESX-L-7144-19) and New Jersey Manufacturers Insurance Company, as subrogee of Elaine Pryor v. Acceptance Indemnity Insurance Company (Superior Court of New Jersey, Essex County, Docket No. ESX-L-5120). These two actions involving insurance coverage questions have been consolidated with the Pryor personal injury claim.
In an opinion issued November 16, 2022, the court denied all parties’ motions for summary judgment on the insurance coverage issues.
The conduct alleged in the Pryor complaint occurred prior to the Company’s September 16, 2022 acquisition of FCI. The selling stockholder of FCI has advised the Company that the truck in question was not owned by FCI at the time of the accident. The Company is currently investigating this issue as well as who the driver’s employer was at the time of the accident.
Owing to (among other things) the above uncertainties, 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.
Other than discussed above, as of December 31, 2022, 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.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our Common Stock was quoted on the OTC Pink market under the symbol “PTRA” through August 13, 2018 and “TLSS” beginning on August 14, 2018. On September 1, 2021, the Company was upgraded to the OTCQB Market. On May 23, 2022, we received notice from OTC Markets Group that as the Company’s bid price has closed below $0.01 for more than 30 consecutive calendar days, it no longer meets the Standards for Continued Eligibility for OTCQB as per the OTCQB Standards, Section 2.3(2), which states that the Company must “maintain proprietary priced quotations published by a Market Maker in OTC Link with a minimum closing bid price of $.01 per share on at least one of the prior thirty consecutive calendar days.” We were informed further that, as per Section 4.1 of the OTCQB Standards, the Company will be granted a cure period of 90 calendar days during which the minimum closing bid price for the Company’s common stock must be $.01 or greater for ten consecutive trading days in order to continue trading on the OTCQB marketplace. Since this requirement was not met by August 21, 2022, on August 21, 2022, we were removed from the OTCQB Marketplace and our common stock is quoted on the OTC Pink Tier. We chose not to reverse split our common stock and, instead, to await the results of the achievement of our business plan for acquisitions and financings, which, if successful, may result in an increase in the share price of our common stock, enabling us to reapply for re-listing on the OTCQB.
Trading in OTC Pink Tier stocks can be volatile, sporadic, and risky, as thinly traded stocks tend to move more rapidly in price than more liquid securities. Such trading may also depress the market price of our common stock and make it difficult for our stockholders to resell their common stock. The following table reflects the high and low bid price for our common stock for the period indicated. The bid information, during the period that our Common Stock was quoted on the OTC Pink market, was obtained from the OTC Markets Group, Inc. and reflects inter-dealer prices, without retail mark-up, markdown, or commission, and may not necessarily represent actual transactions.
| Quarter | High | Low | ||||||||
| Fiscal year ended December 31, 2022 | First | $ | 0.0180 | $ | 0.0102 | |||||
| Second | $ | 0.0112 | $ | 0.0042 | ||||||
| Third | $ | 0.0085 | $ | 0.0051 | ||||||
| Fourth | $ | 0.0060 | $ | 0.0033 | ||||||
| Quarter | High | Low | ||||||||
| Fiscal year ended December 31, 2021 | First | $ | 0.095 | $ | 0.030 | |||||
| Second | $ | 0.035 | $ | 0.013 | ||||||
| Third | $ | 0.035 | $ | 0.014 | ||||||
| Fourth | $ | 0.029 | $ | 0.013 | ||||||
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Holders
As of March 29, 2023, there were 100 record holders of our common stock, and there were 3,664,518,950 shares of our common stock outstanding.
Dividends
We have not previously declared or paid any dividends on our common stock and do not anticipate declaring any dividends in the foreseeable future. The payment of dividends on our common stock is within the discretion of our board of directors. We intend to retain any earnings for use in our operations and the expansion of our business. Payment of dividends in the future will depend on our future earnings, future capital needs and our operating and financial condition, among other factors that our board of directors may deem relevant. We are not under any contractual restriction as to our present or future ability to pay dividends.
Securities Authorized for Issuance Under Equity Compensation Plans
The Company does not currently have any equity compensation plans.
Recent Sales of Unregistered Securities
On January 3, 2023, the Company’s Board of Directors granted the chief operating officer 21,634,615 shares of its common stock which were valued at $90,865, or $0.0042 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 5,408,653 shares vesting on March 31, 2023, and 5,408,654 common shares vesting each quarter through December 31, 2023. In connection with these shares, the Company valued these common shares at a fair value of $90,865 and will record stock-based compensation expense over the one year vesting period.
The securities described in this section were issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Item 6. Selected Financial Data.
A smaller reporting company is not required to provide the information in this Item.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
FORWARD LOOKING STATEMENTS
Statements made in this Form 10-K that are not historical or current facts are “forward-looking statements” made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements often can be identified using 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. Factors that may affect the results of our operations include, among others: our ability to successfully execute our business strategies, including integration of acquisitions and the future acquisition of other businesses to grow our Company; customers’ cancellation on short notice of master service agreements from which we derive a significant portion of our revenue or our failure to renew such master service agreements on favorable terms or at all; our ability to attract and retain key personnel and skilled labor to meet the requirements of our labor-intensive business or labor difficulties which could have an effect on our ability to bid for and successfully complete contracts; the ultimate geographic spread, duration and severity of the coronavirus outbreak and the effectiveness of actions taken, or actions that may be taken, by governmental authorities to contain the outbreak or ameliorate its effects; our failure to compete effectively in our highly competitive industry, which could reduce the number of new contracts awarded to us or adversely affect our market share and harm our financial performance; our ability to adopt and master new technologies and adjust certain fixed costs and expenses to adapt to our industry’s and customers’ evolving demands; our history of losses, deficiency in working capital and a stockholders’ deficit and our inability to achieve sustained profitability; material weaknesses in our internal control over financial reporting and our ability to maintain effective controls over financial reporting in the future; our substantial indebtedness, which could adversely affect our business, financial condition and results of operations and our ability to meet our payment obligations; the impact of new or changed laws, regulations or other industry standards that could adversely affect our ability to conduct our business; and changes in general market, economic, social and political conditions in the United States and global economies or financial markets, including those resulting from natural or man-made disasters.
Other important factors which could cause our actual results to differ materially from the forward-looking statements in this document include, but are not limited to, those discussed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as those discussed elsewhere in this report and as set forth from time to time in our other public filings and public statements. You should read this report in its entirety and with the understanding that our actual future results may be materially different from what we expect. We may not update these forward-looking statements, even in the event that our situation changes in the future, except as required by law. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.
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Risks and uncertainties
We maintain our cash in bank and financial institution deposits that at times may exceed federally insured limits. On December 31, 2022, cash in bank in excess of FDIC insured levels amounted to approximately $1,143,000. On March 12, 2023, Signature Bank, our financial institution, was closed by its state chartering authority, the New York State Department of Financial Services. On that same date the FDIC was appointed as receiver and transferred all the deposits and substantially all of the assets of Signature Bank to Signature Bridge Bank, N.A., a full-service bank that is being operated by the FDIC. At the time of closing, the Company had all of its cash at Signature Bank. Based upon the announcement on March 12, 2023, from the U.S. Department of the Treasury, the U.S. Federal Reserve and the FDIC, the Company expected to have access to all of its deposits at Signature Bank. We did not lose access to our accounts or experience interruptions in banking services, and we suffered no losses with respect to our deposits at Signature Bank as a result of the bank’s closure. Normal banking activities resumed on Monday, March 13, 2023. We are currently looking at additional banking options to ensure that our exposure is limited or reduced to the FDIC protection limits.
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.
The impact of the pandemic and actions taken in response to it had some effects on our results of operations. Effects of the pandemic have included increased fulfillment costs, 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 and 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 2022, 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”) is a publicly-traded holding company. Our active wholly-owned operating subsidiaries, Cougar Express, Freight Connections, JFK Cartage, and Severance Trucking Co., Inc. (acquired in 2023, along with Severance Warehousing, Inc. and McGrath Leasing, Inc., together Severance Trucking), together provide a full suite of logistics and transportation services, specializing in ecommerce fulfillment, last mile deliveries, two-person home delivery, mid-mile, and long-haul services. Such entities operate several warehouse locations located in New York, New Jersey, Connecticut and Massachusetts. Inactive subsidiaries include: TLSSA, Shyp CX, Shyp FX, TLSS-FC, TLSS-STI.
Between June 18, 2018 and September 30, 2020, we operated through two New Jersey-based subsidiaries. Those subsidiaries were Prime EFS, LLC, which conducted a last-mile business focused on deliveries to retail consumers for our primary customer in New York, New Jersey and Pennsylvania (“Prime EFS”), and Shypdirect, LLC (“Shypdirect”), which formed in July 2018 and focused on, and conducted, our long-haul and mid-mile delivery businesses.
We are primarily an asset-based point-to-point delivery company. An asset-based delivery company, as compared to a non-asset-based delivery company, owns its own transportation equipment and employs its own drivers. As of December 31, 2022, through our active subsidiaries, we owned approximately 32 vehicles consisting of trucks, box trucks and vans, 14 trailers, and 15 forklifts, while employing approximately 23 drivers.
In addition, our operations utilize the services of independent contractors, who generally use their own vehicles, on an as needed basis.
Since exiting the Amazon business, we have pursued a growth by acquisitions strategy as set forth below and as such, continues to pursue potential acquisition opportunities.
Between June 18, 2018 and September 30, 2020, we operated through Prime EFS and Shypdirect. The great bulk of Prime EFS’s business prior to September 30, 2020 was conducted pursuant to the Delivery Service Provider program (the “Prime EFS DSP Program”) of Amazon Logistics, Inc., a subsidiary of Amazon.com, Inc. (“Amazon”). In June 2020, Amazon gave notice to Prime EFS that Amazon would not be renewing the Prime EFS DSP Program agreement when that agreement terminated effective September 30, 2020. Prime EFS ceased operations on September 30, 2020 due to Amazon’s non-renewal of the Prime EFS DSP Program. Shypdirect conducted its business as a carrier under a relay program service agreement with Amazon (the “Program Agreement”). On July 17, 2020, Amazon notified Shypdirect that Amazon had elected to terminate the Program Agreement, effective as of November 14, 2020 (the “Shypdirect Termination Notice”). On August 3, 2020, Amazon offered to withdraw the Shypdirect Termination Notice and extend the term of the Program Agreement to and including May 14, 2021 (the “Aug. 3 Proposal”). On August 4, 2020, the Company, Prime EFS and Shypdirect accepted the Aug. 3 Proposal. The Program Agreement expired on May 14, 2021. In June 2021, Shypdirect ceased its tractor trailer and box truck delivery services to Amazon, and in July 2021, Shypdirect ceased all operations.
For the year ended December 31, 2022, two customers represented 22.8% of the Company’s total net revenues (11.9% and 10.9%, respectively). 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. Approximately 28.5% of our revenue of $5,495,146 for the year ended December 31, 2021 was attributable to Shypdirect’s now terminated mid-mile and long-haul business with Amazon. The termination of the Prime EFS last-mile business with Amazon on September 30, 2020 had a material adverse impact on the operations of Prime EFS beginning in the 4th fiscal quarter of 2020 and the termination of Shypdirect’s Amazon mid-mile and long-haul business, which was effective on or about May 14, 2021, had a material adverse impact on operations of Shypdirect beginning in the 2nd fiscal quarter of 2021. This impact caused Prime EFS and Shypdirect to become insolvent and to cease operations.
On August 16, 2021, 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 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 an ABC, debtor companies, here Prime EFS and Shypdirect, together referred to as the “Assignors,” execute 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 ABCs were filed with the Bergen County Clerk in Bergen County, New Jersey and filed with the Surrogate Court in the appropriate county, 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.
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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, we relinquished control of Prime EFS and Shypdirect. Therefore, we 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. Our results of operations for the year ended December 31, 2021 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.
On November 13, 2020, we formed a wholly owned subsidiary, Shyp FX, a company incorporated under the laws of the State of New Jersey. On January 15, 2021, through Shyp FX, we executed an APA and closed a transaction to acquire substantially all of the assets and certain liabilities of DDTI, a northern New Jersey-based logistics provider specializing in servicing Federal Express over the past 25 years, including last-mile delivery services using vans and box trucks. The purchase price was $100,000 of cash and a promissory note of $400,000. The principal assets involved in the acquisition were vehicles for cargo transport, system equipment for vehicle tracking and navigation of vehicles, and delivery route rights together with assumption of associated customer relationships. We concluded that the operations of Shyp FX, which is exclusively dedicated to servicing Federal Express routes in northern New Jersey, no longer fit into our long-term growth plans. Shyp FX sold substantially all its asset and specific liabilities in a transaction that closed in June 2022.
On November 16, 2020, we formed a wholly owned subsidiary, TLSSA, a company incorporated under the laws of the State of Delaware. On March 24, 2021, TLSSA acquired all the issued and outstanding shares of capital stock of Cougar Express, a New York-based full-service logistics provider specializing in pickup, warehousing, and delivery services in the tri-state area. The purchase price was $2,000,000 of cash plus cash for the acquisition of security deposits, a cash payment equal to 50% of the difference between cash and accounts receivable acquired and accounts payable assumed, less the assumption of truck loans and leases, and a promissory note of $350,000. The previous owner of Cougar Express is barred from competing with the Cougar Express business for five years. Cougar Express was a family-owned full-service transportation business that has been in operation for more than 30 years providing one-to-four person deliveries and offering white glove services. It utilizes its own fleet of trucks, warehouse/driver/office personnel and on-call subcontractors from its convenient and secure New York JFK airport area location, allowing it to pick-up and deliver throughout the New York tri-state area. Cougar Express serves a diverse base of approximately 50 commercial accounts, which are freight forwarders that work with some of the most notable retail businesses in the country. We believe that the acquisition of Cougar Express fits our current business plan, given Cougar Express’s demographic location, services offered, and diversified customer base, and given that it would provide us with a long-standing, well-run profitable operation as a step to begin replacing the revenue it lost as a result of Amazon terminating its delivery service provider business. Furthermore, we believe that, because Cougar Express is strategically based in New York and serves the tri-state area, organic growth opportunities will be available for expanding its footprint into our primary base of operations in New Jersey, as well as efficiencies that could be derived by leveraging Shypdirect’s operational capabilities.
On February 21, 2021, the Company formed a wholly owned subsidiary, Shyp CX, a company incorporated under the laws of the State of New York. Shyp CX does not engage in any revenue-generating operations and is currently inactive.
On August 4, 2022, the Company’s wholly-owned subsidiary, Cougar Express, closed on its acquisition of all outstanding stock of JFK Cartage, a New York-based full-service logistics provider specializing in pickup, warehousing and delivery services in the tri-state area. Joan Ton, the sole shareholder of JFK Cartage, from whom the shares were acquired, is an unrelated party (the “JFK Cartage Seller”). The effective date of the acquisition was July 31, 2022. JFK Cartage operates from a 31,000 square foot warehouse with ten drive-in doors and is strategically located approximately six miles from JFK International Airport. JFK Cartage has been in business since 2008 and has been providing warehousing, cross-dock services, pickup and deliveries, and general trucking, handling airfreight, trade show freight, expedited and hotshot demand work, LTL/cartage as well as FTL, reverse logistics, white glove and residential delivery services to a broad base of over 95 commercial accounts and residential customers. JFK Cartage operates a wide-ranging fleet of specialty vehicles, from its Sprinter vans to full 53-ft. tractor trailers. JFK Cartage, with its assets, fleet and warehouse is believed to be one of the largest leading cartage agents serving the New York Tri-State area. Pursuant to the Stock Purchase and Sale Agreement with Cougar Express and JFK Cartage dated May 24, 2022, the purchase price was $1,700,000, subject to certain adjustments. The Company: (i) paid $405,712 in cash at closing; and (ii) JFK Cartage entered into a $696,935 promissory note with the JFK Cartage Seller, $98,448 of which is payable weekly, in the amount of 25% of accounts receivable collected, but in any event, no later than October 4, 2022, with the remaining balance of $598,487, payable in three annual installments of $199,496, with interest at 5.0% percent per annum on July 31, 2023, July 31, 2024 and July 31, 2025, respectively. As of the date of this report, the $98,448 has not been paid. Additionally, Cougar Express agreed to pay the $503,065 Small Business Administration (“SBA”) loan that existed on the books of JFK Cartage, which was paid in August 2022; and (iv) agreed to pay certain accrued liabilities and other notes payable that exists on the books of JFK Cartage. For accounting purposes, the total purchase consideration paid, after closing adjustments, was deemed to be $1,102,647, which includes cash of $405,712 plus the $696,935 promissory note that is in the name of JFK Cartage. The purchase consideration amount did not include the SBA loan of $503,065 and accrued liabilities and other notes payable which were treated as assumed liabilities in the purchase price allocation.
Effective September 16, 2022, the Company’s newly formed wholly-owned subsidiary, TLSS-FC, closed on an acquisition of all outstanding stock of Freight Connections, a company offering an array of transportation, warehousing, consolidating, distribution, and local cartage services throughout the New York tri-state area. Joseph Corbisiero, the sole shareholder of Freight Connections, from whom the shares were acquired (the “Freight Connections Seller”), is an unrelated party. Freight Connections was founded in 2016 and is a transportation and logistics carrier headquartered in Ridgefield Park, New Jersey. Freight Connections currently operates with 30 power units and 50 trailers, including dry vans, pups, flatbeds, step decks, and double drop trailers out of three buildings in the area with 200,000 square feet of warehouse and cross dock space, strategically located within one mile of each other. Freight Connections offers customers an array of services including truckload, LTL, and consolidating of cartage, construction-trade, air, and rail freight, as well as warehousing and distribution services. Prior to the closing, the Company, TLSSA and Freight Connections Seller entered into an amendment to their Stock Purchase and Sale Agreement, dated as of May 23, 2022 (the “Amended SPA”), and TLSSA assigned its interest in the Amended SPA to TLSS-FC. Pursuant to the Amended SPA, the total purchase price was $9,365,000, subject to certain adjustments. TLSS-FC: (i) paid $1,525,000 in cash at closing, (ii) Freight Connections entered into a $4,544,671 secured promissory note with the Freight Connections Seller, with interest accruing at the rate of 5% per annum and then 10% per annum as of March 1, 2023 (The entire unpaid principal under the note, together with all accrued and unpaid interest thereon and all other amounts payable thereunder, shall be due and payable in one balloon payment on December 31, 2023, unless paid sooner. The promissory note is secured solely by the assets of Freight Connections), and (iii) assumed certain debt. The Company issued to the Freight Connections Seller 178,911,844 shares of the Company’s common stock and 32,374 shares of the Company’s Series H preferred stock which is convertible into an aggregate of 323,740,000 shares of the Company’s common stock based on a conversion of 10,000 shares of common stock for each share of Series H preferred stock outstanding. The common stock and the as if converted number of Series H preferred stock were valued at $0.0059 per share based on the quoted closing price of the Company’s common stock on the measurement date, for an aggregate fair value of $2,965,646. The number of shares was calculated as follows: (a) shares of common stock of the Company equal to no more than 4.99% of the number of shares of common stock outstanding immediately after such issuance, and (b) the balance of the shares in Series H Convertible Preferred Stock, a new series of non-voting, convertible preferred stock issuable to sellers in connection with acquisitions or strategic transactions approved by a majority of the directors of the Company. TLSS-FC agreed to pay certain accrued liabilities and other notes payable that exists on the books of Freight Connections and agreed to pay the $4,544,671 secured promissory note which is in the name of Freight Connections. For accounting purposes, the total purchase consideration paid, after closing adjustments, was deemed to be $9,035,317 which includes (i) cash paid of $1,525,000, (ii) the aggregate fair value of common shares and Series H preferred shares issued to Freight Connections Seller of $2,965,646, and (iii) the $4,544,671 secured promissory note in the name of Freight Connections. The purchase consideration amount does not include accrued liabilities and other notes payable which were treated as assumed liabilities in the purchase price allocation.
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Effective February 3, 2023, our newly formed wholly-owned subsidiary, TLSS-STI, closed on an acquisition of all outstanding stock of Severance Trucking Co., Inc., Severance Warehousing, Inc. and McGrath Trailer Leasing, Inc., which together, offer LTL trucking services throughout New England (collectively, “Severance Trucking”), with an effective date as of the close of business on January 31 2023. The sellers of the stock of each entity were Kathryn Boyd, Clyde Severance, and Robert Severance, all individuals (the “Sellers”). None of the Sellers are affiliated with the Company or its affiliates. Severance is a privately-owned full-service transportation carrier and logistics business that has been in operation for over 100 years specializing in LTL trucking that provides next day service to major cities in New England and New York, with cartage and interline agreements with respected carriers that ensure reliable deliveries anywhere in the United States and Canada. With annual revenues of over $13.0 million in 2022, Severance currently operates with over 120 power units and trailers and has two locations, comprised of approximately 18,000 square feet of warehouse and cross dock space, 9,000 square feet of office and 5,750 square feet of repair facilities located in Dracut, Massachusetts and approximately 16,000 square feet of warehouse space in North Haven, Connecticut. The total purchase price was $2,250,000. TLSS-STI: (i) paid $365,613 in cash at closing and paid closing expenses of $158,700; (ii) assumed and paid off $152,748 in vehicle debt; and (iii) entered into a $1,572,939 secured promissory note with the Seller, with interest accruing at the rate of 12% per annum. The entire unpaid principal under the note, shall be due and payable in three (3) equal payments on August 1, 2023, February 1, 2024, and August 1, 2024, respectively, together with all accrued and unpaid interest thereunder, unless paid sooner. The promissory note is secured solely by the assets of Severance and a corporate guaranty from TLSS. The purchase price is subject to a post-closing adjustment, up or down, determined by the amount by which Severance working capital as of the close of business on January 31, 2023, exceeds or falls short of the target working capital, as of September 30, 2022, on which the purchase price was calculated.
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 consolidated financial statements contained in this Annual 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.
Critical Accounting Policies and Significant Accounting Estimates
The methods, estimates, and judgments that we use in applying our accounting policies have a significant impact on the results that we report in our consolidated financial statements. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. Significant estimates included in the accompanying consolidated financial statements and footnotes include the valuation of accounts receivable, the useful life of property and equipment, the valuation of intangible assets, the valuation of assets acquired and liabilities assumed, the valuation of right of use assets and related liabilities, assumptions used in assessing impairment of long-lived assets, estimates of current and deferred income taxes and deferred tax valuation allowances, the fair value of non-cash equity transactions, the valuation of derivative liabilities, the valuation of beneficial conversion features, and the value of claims against the Company.
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.
Business acquisitions
We account for business acquisitions using the acquisition method of accounting where the assets acquired and liabilities assumed are recognized based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Determining the fair value of certain acquired assets and liabilities is subjective in nature and often involves the use of significant estimates and assumptions, including, but not limited to, the selection of appropriate valuation methodology, projected revenue, expenses, and cash flows, weighted average cost of capital, discount rates, and estimates of terminal values. Business acquisitions are included in our consolidated financial statements as of the date of the acquisition.
Property and equipment
Property and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives of one to twenty years. Leasehold improvements are depreciated over the shorter of the useful life or lease term including scheduled renewal terms. Revenue equipment acquired through acquisitions is generally revalued to current market values as of the acquisition date. Assets obtained more than a year prior to the acquisition by the acquired company are depreciated on a straight-line basis aligned with the remaining period of expected use, whereas those obtained less than a year prior are depreciated consistent with newly purchased assets. In addition to purchasing new revenue equipment, the Company may rebuild the engines of its tractors. Because rebuilding an engine increases its useful life, the Company capitalizes these costs and depreciates the cost over the remaining useful life of the unit. Maintenance and repairs are charged to expense as incurred. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases in the value of these assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.
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Goodwill and other intangible assets
Intangible assets are carried at cost less accumulated amortization, computed using the straight-line method over the estimated useful life, less any impairment charges.
The Company’s business acquisitions typically result in the recording of goodwill and other intangible assets, which affect the amount of amortization expense and possibly impairment write-downs that the Company may incur in future periods.
Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired in business acquisitions. Goodwill is subject to impairment tests at least annually. The Company reviews the carrying amounts of goodwill by reporting unit at least annually, or when indicators of impairment are present, to determine if goodwill may be impaired. The Company includes assumptions about the expected future operating performance as part of a discounted cash flow analysis to estimate fair value. If the carrying value of these assets is not recoverable, based on the discounted cash flow analysis, management compares the fair value of the assets to the carrying value. Goodwill is considered impaired if the recorded value exceeds the fair value. The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of goodwill is less than its carrying value. The Company would not be required to quantitatively determine the fair value of goodwill unless it determines, based on the qualitative assessment, that it is more likely than not that its fair value is less than the carrying value. Future cash flows of the individual indefinite-lived intangible assets are used to measure their fair value after consideration of certain assumptions, such as forecasted growth rates and cost of capital, which are derived from internal projection and operating plans. The Company performs its annual testing for goodwill during the fourth quarter of each fiscal year.
Other intangibles, net consists of covenants not to compete and customer relationships. All intangible assets determined to have finite lives are amortized over their estimated useful lives. The useful life of an intangible asset is the period over which the asset is expected to contribute directly or indirectly to future cash flows. The Company periodically evaluates both finite and indefinite lived intangible assets for impairment upon occurrence of events or changes in circumstances that indicate the carrying amount of intangible assets may not be recoverable.
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.
Leases
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 the 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 unaudited condensed consolidated statements of operations.
Revenue recognition and cost of revenue
We adopted Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. This ASC is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASC also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer service orders, including significant judgments.
We recognize revenues 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 generally net 30 days from acceptance of delivery. We do not incur incremental costs obtaining service orders from our customers, however, if we did, because all of our customer contracts are less than a year in duration, any contract costs incurred would be expensed rather than capitalized. The revenue that we recognize arises from deliveries of freight on behalf of the Company’s customers. Primarily, our performance obligations under these service orders correspond to each delivery of freight that we make under the service agreements. Control of the freight transfers to the recipient upon delivery. Once this occurs, we have satisfied its performance obligation and we recognize revenue.
We cover a 100-mile radius around each of our terminals and each individual shipment accepted by the Company is considered a separate contract with the performance obligation being the delivery of the freight. Our average length of haul for each load of freight generally equals less than one week of continuous transit time.
Our revenues are primarily derived from the transportation services we provide through the delivery of goods over the duration of a shipment. The bill of lading is a legally enforceable agreement between two parties, and where collectability is probable this document serves as the contract as our basis to recognized revenue under ASC 606- Revenue Recognition. We have elected to expense initial direct costs as incurred because the average shipment cycle is less five days. We recognize revenue and substantially all the purchased transportation expenses on a gross basis. Direct costs of such revenue generally include compensation and related benefits, gas costs, insurance, parking and tolls, truck rental fees, and maintenance fees. We direct the use of the transportation service provided and remain responsible for the complete and proper shipment. We recognize revenue for our performance obligations under our customer contracts over time, as our customers receive the benefits of the services in accordance with ASC 606- Revenue Recognition.
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Inherent within the Company’s revenue recognition practices are estimates for revenue associated with shipments in transit. For shipments in transit, we record revenue based on the percentage of service completed as of the period end and recognize delivery costs as incurred. The percentage of service completed for each shipment is based on how far along in the shipment cycle each shipment is in relation to standard transit days. The estimated portion of revenue for all shipments in transit is accumulated at period end and recognized as operating revenue. The significance of in transit shipments to the consolidated financial statements is limited due to the short duration, generally less than five days, of the average shipment cycle. On December 31, 2022 and 2021, any reductions to operating revenue and accounts receivable to reflect in transit shipments were insignificant.
Revenue generated from warehousing services is generally recognized as the service is performed, based upon a monthly or weekly rate.
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.
Deconsolidation of subsidiaries
The Company accounts for a gain or loss on deconsolidation of a subsidiary or derecognition of a group of assets in accordance with ASC 810-10-40-5. The Company measures the gain or loss as the difference between (a) the aggregate of fair value of any consideration received, the fair value of any retained noncontrolling investment and the carrying amount of any noncontrolling interest in the former subsidiary at the date the subsidiary is deconsolidated and (b) the carrying amount of the former subsidiary’s assets and liabilities or the carrying amount of the group of assets.
RESULTS OF OPERATIONS
Our consolidated financial statements have been prepared assuming that we will continue as a going concern and, accordingly, do not include adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should we be unable to continue our operation.
We 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 year ended December 31, 2022 compared with the year ended December 31, 2021
The following table sets forth our revenues, expenses and net loss for the years ended December 31, 2022 and 2021. The financial information below is derived from our consolidated financial statements included in this Annual Report.
For the Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenues | $ | 7,744,477 | $ | 5,495,146 | ||||
| Cost of revenues | 5,216,839 | 5,408,143 | ||||||
| Gross profit | 2,527,638 | 87,003 | ||||||
| Operating expenses | 10,565,502 | 6,532,027 | ||||||
| Loss from operations | (8,037,864 | ) | (6,445,024 | ) | ||||
| Other income (expenses), net | (38,202 | ) | 12,699,814 | |||||
| Net income (loss) | (8,076,066 | ) | 6,254,790 | |||||
| Deemed dividend related to beneficial conversion features and accrued dividends | (417,546 | ) | (2,650,217 | ) | ||||
| Net income (loss) attributable to common shareholders | $ | (8,493,612 | ) | $ | 3,604,573 | |||
Results of Operations
Revenues
For the year ended December 31, 2022, our revenues were $7,744,477 as compared to $5,495,146 for the year ended December 31, 2021, an increase of $2,249,331, or 40.9%. This increase was primarily a result of revenues generated from our newly acquired companies, JFK Cartage and Freight Connections, of $679,798 and $2,942,004, respectively, and an increase in revenues from other customers of $855,604. These increases in revenues were offset by a decrease in revenue attributable to Shypdirect’s terminated mid-mile and long-haul business with Amazon of $1,567,927, and a decrease in revenues generated by Shyp FX of $660,148 due to the sale of substantially all the assets and business of Shyp FX in June 2022.
As discussed above, approximately 28.5% of our aggregate revenue of $5,495,146 for the year ended December 31, 2021 was attributable to Shypdirect’s now terminated mid-mile and long-haul business with Amazon. The termination of Shypdirect’s Amazon mid-mile and long-haul business, which was effective on or about May 14, 2021, had a material adverse impact on our consolidated revenues beginning in the second quarter of 2021. This impact has caused Shypdirect to become insolvent and to cease operations.
On June 21, 2022, we sold substantially all the assets of Shyp FX in an all-cash transaction. For the years ended December 31, 2022 and 2021, we generated revenues from our Shyp FX operation of $528,488 and $1,188,636, respectively. Subsequent to June 21, 2022, we will no longer being generating this revenue.
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We continue to: (i) seek to replace the lost Amazon business with other, non-Amazon, customers; (ii) explore other strategic relationships; and (iii) identify potential acquisition opportunities, while continuing to execute our restructuring plan. In 2021, we completed the acquisition of DDTI and Cougar Express and in 2022, we completed the acquisition of JFK Cartage and Freight Connections, as discussed elsewhere. In 2023, we acquired Severance Trucking.
Cost of Revenues
For the year ended December 31, 2022, our cost of revenues was $5,216,839 as compared to $5,408,143 for the year ended December 31, 2021, a decrease of $191,304, or 3.5%. Cost of revenues consists of truck and van rental fees, insurance, gas, maintenance, parking and tolls, and compensation and related benefits. In the first quarter of 2021, Prime EFS received a bill for approximately $304,000 for excess wear and tear on trucks that were rented for its last-mile DSP business that terminated in September 2020, which is included in cost of sales. Subsequent to the acquisition of JFK Cartage on July 31, 2022, we began consolidating the operations of Cougar and JFK which has lowered our costs.
Gross Profit
For the year ended December 31, 2022, we had a gross profit of $2,527,638, or 32.6% of revenues, as compared to gross profit of $87,003, or 1.6% of revenues, for the year ended December 31, 2021, an increase of $2,440,635, or 2,805%. The increase in gross profit for the year ended December 31, 2022 as compared to the year ended December 31, 2021 primarily resulted from the acquisitions of Freight Connections and JFK Cartage during 2022 which generate aggregate gross profit of $1,503,614. Additionally, in 2021, we recognized a gross loss of $803,369 from our terminated Shypdirect and Prime EFS business. As discussed above, during the year ended December 31, 2021, Prime EFS received a bill for approximately $304,000 for excess wear and tear on trucks that were rented for its last-mile DSP business that terminated in September 2020. In 2023, we expect our gross profit to increase since we will have owned JFK Cartage and Freight Connections for a full year and as we continue to consolidate the operations of Cougar and JFK which has lowered our costs .
Operating Expenses
For the year ended December 31, 2022, total operating expenses amounted to $10,565,502 as compared to $6,532,027 for the year ended December 31, 2021, an increase of $4,033,475, or 61.7%. For the years ended December 31, 2022 and 2021, operating expenses consisted of the following:
For the Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Compensation and related benefits | $ | 3,742,676 | $ | 1,403,311 | ||||
| Legal and professional fees | 1,327,172 | 2,160,081 | ||||||
| Rent | 1,398,401 | 599,820 | ||||||
| General and administrative expenses | 1,806,686 | 1,115,187 | ||||||
| Contingency loss | 200,000 | 30,000 | ||||||
| Loss on lease abandonment | - | 1,223,628 | ||||||
| Impairment loss | 2,090,567 | - | ||||||
| Total Operating Expenses | $ | 10,565,502 | $ | 6,532,027 | ||||
Compensation and related benefits
For the year ended December 31, 2022, compensation and related benefits amounted to $3,742,676 as compared to $1,403,311 for the year ended December 31, 2021, an increase of $2,339,365, or 166.7%. During the year ended December 31, 2022, the overall increase in compensation and related benefits as compared to the year ended December 31, 2021 was attributable to an increase in compensation paid to significant employees, including the hiring of our chief executive officer and chief financial officer in January 2022, an increase in staff due to increased operations, and an increase in stock-based compensation of $1,386,570. Additionally, in connection with the acquisition of JFK Cartage and Freight Connections in 2022, we incurred aggregate compensation and related benefits of $513,313. These increases were offset by a decrease in compensation and related benefits incurred in 2021 related to the operations of Shypdirect which ceased operations in 2021.
Legal and professional fees
For the year ended December 31, 2022, legal and professional fees were $1,327,172 as compared to $2,160,081 for the year ended December 31, 2021, a decrease of $832,909, or 38.6%. During the year ended December 31, 2022, we had a decrease in legal fees of $165,917 related to a decrease in activities on ongoing legal matters, a decrease in consulting fees of $397,564 primarily attributable to the hiring of our chief executive officer in 2022 who was a consultant during 2021, a decrease in accounting fees of $178,757, and a decrease in other professional fees of $100,671 which primarily consisted of a decrease in fees for the mailing of proxy and shareholder information, offset by an increase in stock-based consulting fees of $10,000.
Rent expense
For the year ended December 31, 2022, rent expense was $1,398,401 as compared to $599,820 for the year ended December 31, 2021, an increase of $798,581, or 133.1%. This increase was attributable to the acquisition of JFK Cartage and Freight Connections in July 2022 and September 2022, respectively. From the respective acquisition date to December 31, 2022, we incurred aggregate rent expense $1,081,472 related to these acquired companies. This increase was offset by a reduction of rent expense due to the abandonment of our leased properties which were vacated due to the cessation of the operations of Shypdirect. As of December 31, 2021, we abandoned all our leased properties, except for the Cougar Express premises. The lease of our subsidiary, Cougar Express, expired on December 31, 2021 and we occupied the facility on a month-to-month basis through September 30, 2022 at which time we vacated the premises and moved the Cougar Express operations into the JFK Cartage facility.
General and administrative expenses
General and administrative expenses include depreciation and amortization expense, bad debt expense and other general and administrative expenses. For the year ended December 31, 2022, general and administrative expenses were $1,806,686 as compared to $1,115,187 for the year ended December 31, 2021, an increase of $691,499, or 62.0%. These increases were primarily attributable to the acquisition of JFK Cartage and Freight Connections in 2022, which incurred general and administrative expenses of $739,143 (including depreciation and amortization of $484,238 and bad debt expense of $103,000). These increases were offset by decreases in general and administrative expenses due to cost-cutting measures taken and the sale of Shyp FX of $47,644.
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Contingency loss
For the year ended December 31, 2022, contingency loss amounted to $200,000 as compared to $30,000 for the year ended December 31, 2021, an increase of $170,000, or 566.70%. In connection with the finalization of the ABC, the Assignee has demanded at one time payment of $200,000 to close out the estates of Prime EFS and Shypdirect. We are currently negotiating this amount and cannot predict the outcome of this demanded amount. Accordingly, during the year ended December 31, 2022, we recorded a contingency loss of $200,000 and as of December 31, 2022, we accrued the potential settlement amount of $200,000 which is included in accrued expenses on the accompanying consolidated balance sheet. For the year ended December 31, 2021, contingency loss amounted to $30,000 which is related to the accrual of an estimated legal settlement.
Impairment loss
Based on the Company’s impairment analysis, management determined that an intangible impairment charge was required for the year ended December 31, 2022 and accordingly, we recorded an impairment loss of $2,090,567. We did not incur any impairment loss during the 2021 period.
Loss from lease abandonment
Due to a reduction in our revenues and the loss of its Amazon revenues, during the second and third quarter of 2021, we abandoned our leased premises related to the ceased operations of Prime EFS and Shypdirect. Accordingly, during the year ended December 31, 2021, we wrote off the remaining balances of the right of use assets and recorded a loss on lease abandonment of $1,223,628.
Loss from operations
For the year ended December 31, 2022, loss from operations amounted to $8,037,864 as compared to $6,445,024 for the year ended December 31, 2021, an increase of $1,592,840, or 24.7%.
Other income (expenses)
Total other income (expenses) includes interest income, interest expense, derivative expense, warrant exercise inducement expense, gain on debt extinguishment, settlement expense, gain on deconsolidation of subsidiaries, and other income. For the years ended December 31, 2022 and 2021, other (expenses) income consisted of the following:
| For the Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Interest income | $ | 31,166 | $ | - | ||||
| Interest expense | (125,382 | ) | (349,544 | ) | ||||
| Interest expense – related parties | - | (74,959 | ) | |||||
| Warrant exercise inducement expense | - | (4,431,853 | ) | |||||
| Gain on debt extinguishment | - | 1,564,941 | ||||||
| Gain on debt extinguishment – related party | - | 148,651 | ||||||
| Gain on sale of subsidiary | 293,975 | - | ||||||
| Settlement expense | (237,961 | ) | - | |||||
| Other income | - | 194,823 | ||||||
| Gain on deconsolidation of subsidiaries | - | 12,363,449 | ||||||
| Derivative income (expense), net | - | 3,284,306 | ||||||
| Total Other (Expenses) Income, net | $ | (38,202 | ) | $ | 12,699,814 | |||
For the year ended December 31, 2022 and 2021, interest income was $31,166 and $0, respectively, an increase of $31,166, or 100.0%.
For the year ended December 31, 2022 and 2021, aggregate interest expense was $125,382 and $424,503, respectively, a decrease of 299,121, or 70.5%. The decrease in interest expense was attributable to a decrease in average interest-bearing loans outstanding due to the conversion of debt to equity, and a decrease in the amortization of original issue discount. In July 2022 and September 2022, in connection with the acquisitions of JFK Cartage and Freight Connections, note payable balances increased by $5,241,606 related to secured promissory notes entered into with the former owners of JFK Cartage and Freight Connections, and we assumed notes payable aggregating $1,113,982 primarily consisting of equipment notes assumed. Accordingly, we expect interest expense to increase in 2023.
During the year ended December 31, 2021, we entered into Securities Purchase Agreements with certain of the holders of its existing Series E preferred warrants (“Exercising Warrant Holders”). Pursuant to the Securities Purchase Agreements, the Exercising Warrant Holders and we agreed that the Exercising Warrant 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. 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. During the year ended December 31, 2021, 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.
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For the year ended December 31, 2021, the aggregate net gain on extinguishment of debt was $1,713,592. The gains on debt extinguishment were attributable to the settlement of convertible debt and warrants, the settlement of secured merchant loans, the conversion of convertible debt, the settlement of a note payable – related party, and the settlement of other payables. We did not record any gain on debt extinguishment during the year ended December 31, 2022.
During the year ended December 31, 2022, we recorded settlement expense of $237,961 as compared to $0 for the year ended December 31, 2021.
During the year ended December 31, 2022, we recorded a gain from the sale of assets of our subsidiary, Shyp FX, of $293,975.
During the year ended December 31, 2021, we recorded other income of $194,823. Other income was primarily related to the collection of rental income from the sublease of excess office, warehouse, and parking spaces. As of December 31, 2021, the Company abandoned substantially all its leased properties that generated sublease rental income and we no longer receive sublease income.
For the year ended December 31, 2021, we recognized a gain on deconsolidation of subsidiaries of $12,363,449. We did not recognize this gain during the 2022 period.
For the year ended December 31, 2021, derivative income was $3,284,306. During the year ended December 31, 2021, we recorded derivative income related to the calculated derivative fair value of conversion options and warrants. We did not have any derivative instruments during the 2022 period.
Net (Loss) Income
Due to factors discussed above, for the year ended December 31, 2022 and 2021, net (loss) income amounted to $(8,076,066) and $6,254,790, respectively. For the year ended December 31, 2022, net loss attributable to common shareholders, which included a deemed dividend related to dividends accrued on Series E and Series G preferred stock of $417,546, amounted to $(8,493,612), or $(0.00) per basic and diluted common share. For the year ended December 31, 2021, net income attributable to common shareholders, which included a deemed dividend related to beneficial conversion features on preferred stock and the dividends accrued on Series E and Series G preferred stock of $2,650,217, amounted to $3,604,573, or $0.00 per basic and diluted common share.
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. On December 31, 2022 and 2021, we had a cash balance of $1,470,807 and $6,067,692, respectively. Our working capital deficit was $4,403,460 on December 31, 2022. We reported a net decrease in cash for the year ended December 31, 2022 as compared to December 31, 2021 of $4,596,885 primarily as a result of the use of cash used for the repayment of notes payable of $975,002, cash used to purchase property and equipment of $143,948, cash used for investment in note receivable of $255,000, cash used in operations of $3,422,359 cash used for the payment of liquidated damages on Series E preferred shares of $24,000, and cash used for acquisitions of $1,930,712, offset by net cash proceeds received from the sale of Series G preferred stock units of $855,000, cash proceeds from the exercise of warrants of $245,714, proceeds from notes payable of $108,395, cash acquired in acquisitions of $196,527, and net cash proceeds received from the sale of the assets of Shyp FX of $748,500.
Additionally, 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, the sale of Series E and Series G preferred 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 future, management expects that we will need to curtail our operations ad new may not be able to meet our debt obligations.
Recent Financing Activities
Sale of Series E Preferred Stock
On October 8, 2020, we 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. We 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, we 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. We 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.
During the three months ended March 31, 2021, we 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. We 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, we issued 82,971,429 warrants to the placement agent at an initial exercise price of $0.01 per share.
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) 32,127 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. We 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 8,571,4293 warrants to the placement agent at an initial exercise price of $0.01 per share.
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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.
During the three months ended March 31, 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.
During the three months ended June 30, 2022, the Company issued 38,500,868 shares of its common stock in connection with the conversion of 10,240 shares of Series E and paid liquidating damages of $24,000. The conversion ratio was based on the Series E certificate of designation, as amended.
Sale of Series G Preferred Stock
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. Additionally, the Company issued 123,000,000 warrants to the placement agent at an initial exercise price of $0.01 per share.
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 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 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.
During the three months ended June 30, 2022, the Company issued 129,272,885 shares of its common stock in connection with the conversion of 92,500 shares of Series G and accrued dividends payable of $21,134. The conversion ratio was based on the Series G certificate of designation, as amended.
During the three months ended September 30, 2022, the Company issued 61,178,746 shares of its common stock in connection with the conversion of 42,500 shares of Series G and accrued dividends payable of $18,183. The conversion ratio was based on the Series G certificate of designation, as amended.
Cash Flows
Operating activities
Net cash flows used in operating activities for the year ended December 31, 2022 amounted to $3422,359. During the year ended December 31, 2022, net cash used in operating activities was primarily attributable to net loss of $8,076,066, adjusted for the add back (reduction) of non-cash items such as depreciation and amortization expense of $1,134,037, stock-based compensation of $1,386,570, stock-based professional fees of $10,000, impairment loss of $2,090,567, related to the impairment of intangible assets, bad debt expense of $162,400, and a non-cash gain from the sale of the assets of Shyp FX of $296,689, and changes in operating assets and liabilities such as a decrease in accounts receivable of $450,715, a decrease in prepaid expenses and other current assets of $110,606, a decrease in security deposit of $20,185, a decrease in accounts payable and accrued expenses of $218,364, a decrease in insurance payable of $130,590, and a decrease in accrued compensation and related benefits of $102,983.
Net cash flows used in operating activities for the year ended December 31, 2021 amounted to $4,085,687. During the year ended December 31, 2021, net cash used in operating activities was primarily attributable to net income of $6,254,790, adjusted for the add back (reduction) of non-cash items such as depreciation and amortization expense of $685,644, derivative income of $3,284,306, amortization of debt discount of $83,548, non-cash gain on debt extinguishment of $1,564,941, non-cash gain on extinguishment of debt - related party of $148,651, warrant exercise inducement expense of $4,431,853, a non-cash gain from the deconsolidation of subsidiaries of $12,448,899 and loss on lease abandonment of $1,223,628, and changes in operating assets and liabilities such as a decrease in accounts receivable of $166,486, a decrease in prepaid expenses and other current assets of $253,608, a decrease in security deposit of $94,000, an increase in accounts payable and accrued expenses of $393,641, a decrease in insurance payable of $209,082, and an increase in accrued compensation and related benefits of $4,321.
Investing activities
Net cash used in investing activities for the year ended December 31, 2022 amounted to $1,384,633, which consisted of cash used for acquisitions of $1,930,712, cash used for the purchase of property and equipment of $143,948, and cash used for investment on note receivable of $255,000, offset by net proceeds received from the sale of the assets of Shyp FX of $748,500 and cash acquired in acquisitions of $196,527.
| 35 |
Net cash used in investing activities for the year ended December 31, 2021 amounted to $2,175,838 and consisted of net cash used for the acquisition of DDTI and Cougar Express of $2,123,115, and cash used for the purchase on transportation equipment offset by cash proceeds from the sale of property and equipment of $3,451.
Financing activities
For the year ended December 31, 2022, net cash provided by financing activities totaled $210,107. During the year ended December 31, 2022, we received proceeds from the sale of Series G preferred shares of $855,000, cash proceeds of $245,714 from the exercise of warrants, and cash from notes payable of $108,395, offset by the repayment of notes payable of $975,002 and the payment of liquidating damages of $24,000.
For the year ended December 31, 2021, net cash provided by financing activities totaled $11,749,934. During the year ended December 31, 2021, we received proceeds from the sale of Series E preferred shares of $3,590,500, proceeds from the sale of Series G preferred shares of $5,479,560, and cash proceeds of $4,226,383 from the exercise of warrants, offset by the repayment of notes payable of $991,468, the repayment of note payable – related party of $500,000, and the net repayment of related party advances of $55,041.
Risks and Uncertainties
Our consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying consolidated financial statements, we had a loss from operations of $8,037,864 and $6,445,024 for the years ended December 31, 2022 and 2021, respectively. The net cash used in operations was $3,422,359 and $4,085,687 for the years ended December 31, 2022 and 2021, respectively. Additionally, we had an accumulated deficit and working capital deficit of $127,510,099 and $4,403,460, respectively, on December 31, 2022. Furthermore, we incurred debt in connection with the acquisition of JFK Cartage and Freight Connections. These factors raise substantial doubt about our ability to continue as a going concern for a period of twelve months from the issuance date of this report.
Management cannot provide assurance that we will ultimately achieve profitable operations or become cash flow positive or raise additional debt and/or equity capital. We are seeking to raise capital through additional debt and/or equity financings to fund our operations in the future and to pay our debt obligations. Although we have historically raised capital from sales of preferred shares, and from the issuance of promissory notes and convertible promissory notes, there is no assurance that it will be able to continue to do so. If the Company is unable to raise additional capital or secure additional lending in the near future, management expects that the Company will need to curtail its operations. Our 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.
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, lower 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.
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 consolidated financial statements filed with this Annual Report.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
A smaller reporting company is not required to provide the information in this Item.
Item 8. Financial Statements and Supplementary Data.
| 36 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2022 AND 2021
| 37 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 AND 2021
| F-1 |
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of:
Transportation and Logistics Systems, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Transportation and Logistics Systems, Inc. and Subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, changes in shareholders’ equity and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2022 and 2021, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company had a net loss and cash used in operations of $8,076,066 and $3,422,359, respectively for the year ended December 31, 2022. Additionally, the Company had an accumulated deficit and working capital deficit of $127,510,099 and $4,403,460, respectively, on December 31, 2022. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
2295 NW Corporate Blvd., Suite 240 • Boca Raton, FL 33431
Phone: (561) 995-8270 • Toll Free: (866) CPA-8500 • Fax: (561) 995-1920
www.salbergco.com • info@salbergco.com
Member National Association of Certified Valuation Analysts • Registered with the PCAOB
Member CPAConnect with Affiliated Offices Worldwide • Member Center for Public Company Audit Firms
| F-2 |
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Business Acquisitions
As described in footnote 2 “Business Acquisitions” and in footnote 3 “Acquisitions and Disposition”, to the consolidated financial statements, the Company closed on two separate business acquisitions in 2022. The determination of fair values for assets acquired and liabilities assumed, and equity portions of purchase consideration required management to make significant estimates and assumptions such as those related to forecasts of future revenues, gross margins, operating expenses, discount rates and equity values. Changes in these assumptions could have a significant impact on the fair values.
We identified business combinations as a critical audit matter. Auditing management’s judgments regarding the above estimates involved a high degree of subjectivity.
The primary procedures we performed to address this critical audit matter included (a) gained an understanding of management’s process to determine the valuations, (b) assessed the competence, independence, qualifications, experience, and capabilities of the third-party valuation specialist, (c) evaluated if the valuation methods used by management was appropriate (d) evaluated the reasonableness of management’s forecasts by comparing them to historical information, year to date current information and/or other supporting contracts or information, (e) assessed the reasonableness of the discount rates used by evaluating each component, (f) tested the reasonableness of the estimated value of equity purchase consideration, and (g) recomputed the valuation estimates. We agreed with management’s valuations.
Goodwill and Intangible Assets Impairment Assessment
As described in footnote 2 “Goodwill and other intangible assets” and “Impairment of long-lived assets” and footnote 6 “Intangible Assets and Goodwill”, to the consolidated financial statements, the Company is required to test the carrying amount of goodwill at least annually, or more frequently upon the occurrence of certain events. The Company is also required to assess the recoverability of its intangible assets whenever certain events occur, or circumstances change that may be indicators of impairment, but at least annually.
We identified Goodwill and Intangible Assets Impairment Assessment as a critical audit matter because auditing the annual goodwill impairment test and the evaluation of the recovery and fair value of intangible assets required significant judgment regarding the evaluation of qualitative and/or quantitative factors, including estimates.
The primary audit procedures we performed to address these critical audit matters included, among others, (a) gained an understanding of management’s process to determine the valuations, (b) evaluated if the valuation methods used by management were appropriate, (c) analyzed the various assumptions utilized in management’s qualitative goodwill analysis, (d) agreed managements qualitative goodwill analysis to authoritative literature, (e) evaluated the reasonableness of management’s forecasts used in the income method approach by comparing them to historical information, year to date current information and other supporting contracts or information, (f) assessed the reasonableness of the discount rate assumption used in the income method approach by evaluating each component, (g) recomputed the valuation amounts and impairment computations, as applicable. We agreed with management’s impairment assessments in fiscal year 2022.
/s/ Salberg & Company, P.A.
We have served as the Company’s auditor since 2017.
March 31, 2023
| F-3 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total Current Assets | ||||||||
| OTHER ASSETS: | ||||||||
| Security deposits | ||||||||
| Property and equipment, net | ||||||||
| Right of use assets, net | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Total Other Assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Notes payable, current portion | $ | $ | ||||||
| Accounts payable | ||||||||
| Accrued expenses | ||||||||
| Insurance payable | ||||||||
| Lease liabilities, current portion | ||||||||
| Accrued compensation and related benefits | ||||||||
| Total Current Liabilities | ||||||||
| LONG-TERM LIABILITIES: | ||||||||
| Notes payable, net of current portion | ||||||||
| Lease liabilities, net of current portion | ||||||||
| Total Long-term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (See Note 11) | ||||||||
| SHAREHOLDERS’ EQUITY: | ||||||||
| Preferred stock, par value $; authorized shares: | ||||||||
| Series B convertible preferred
stock, par value $ per share; shares designated; and shares issued and outstanding at December 31, 2022
and 2021, respectively (Liquidation value $ | ||||||||
| Series D convertible
preferred stock, par value $
per share;
shares designated;
shares issued and outstanding at December 31, 2022 and 2021, respectively ($ | ||||||||
| Series E convertible
preferred stock, par value $
per share;
shares designated;
and
shares issued and outstanding at December 31, 2022 and 2021, respectively ($ | ||||||||
| Series G convertible
preferred stock, par value $
per share;
shares designated;
and
shares issued and outstanding at December 31, 2022 and 2021, respectively ($ | ||||||||
| Series H convertible
preferred stock, par value $
per share;
shares designated;
and
shares issued and outstanding at December 31, 2022 and 2021, respectively ( | ||||||||
| Common stock, par value $ per share; shares authorized; and shares issued and outstanding at December 31, 2022 and 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Shareholders’ Equity | ||||||||
| Total Liabilities and Shareholders’ Equity | $ | $ | ||||||
See accompanying notes to consolidated financial statements.
| F-4 |
TRANSPORTATION AND LOGISTICS SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| For the Year Ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| REVENUES | $ | $ | ||||||
| COST OF REVENUES | ||||||||
| GROSS PROFIT | ||||||||
| OPERATING EXPENSES: | ||||||||
| Compensation and related benefits | ||||||||
| Legal and professional fees | ||||||||
| Rent | ||||||||
| General and administrative expenses | ||||||||
| Contingency loss | ||||||||
| Impairment loss | ||||||||
| Loss on lease abandonment | ||||||||
| Total Operating Expenses | ||||||||
| LOSS FROM OPERATIONS | ( | ) | ( | ) | ||||
| OTHER INCOME (EXPENSES): | ||||||||
| Interest income | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Interest expense - related parties | ( | ) | ||||||
| Warrant exercise inducement expense | ( | ) | ||||||
| Gain on debt extinguishment, net | ||||||||
| Gain on debt extinguishment - related party | ||||||||
| Gain on sale of subsidiary | ||||||||
| Gain on deconsolidation of subsidiaries | ||||||||
| Settlement expense | ( | ) | ||||||
| Other income | ||||||||
| Derivative income | ||||||||
| Total Other Income (Expenses) | ( | ) | ||||||
| (LOSS) INCOME BEFORE INCOME TAXES | ( | ) | ||||||
| Provision for income taxes | ||||||||
| NET (LOSS) INCOME | ( | ) | ||||||
| Deemed dividends related to beneficial conversion features, and accrued dividends | ( | ) | ( | ) | ||||
| NET (LOSS) INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | ( | ) | $ | ||||
| NET (LOSS) INCOME PER COMMON SHARE - BASIC AND DILUTED | ||||||||
| Basic | $ | ( | ) | $ | ||||
| Diluted | $ | ( | ) | $ | ||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
See accompanying notes to consolidated financial statements.
| F-5 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021
| Preferred Stock Series B | Preferred Stock Series E | Preferred Stock Series G | Preferred Stock Series H | Common Stock | Additional Paid-in | Accumulated | Total Shareholders’ | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Common stock issued for debt conversion | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||
| Sales of Series E preferred share units | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||
| Sales of Series E preferred share units | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series E preferred shares | ( | ) | ( | ) | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for warrant exercises | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||
| Warrant exercise inducement expense | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||
| Beneficial conversion effect related to beneficial conversions | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||
| Deemed dividend related to beneficial conversion features and accrued dividends | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for warrant exercise | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for services and future services | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||
| Accretion of stock-based compensation | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||
| Sales of Series G preferred share units | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series E preferred shares | ( | ) | ( | ) | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of Series G preferred shares | - | - | ( | ) | ( | ) | - | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| Series H preferred and common stock issued in connection with acquisition | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Cancellation of Series B preferred in connection with settlement | ( | ) | ( | ) | - | - | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
| Dividends accrued | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
| F-6 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Year Ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Adjustments to reconcile net (loss) income to net cash used in operating activities: | ||||||||
| Depreciation and amortization expense | ||||||||
| Amortization of debt discount to interest expense | ||||||||
| Stock-based compensation | ||||||||
| Stock-based professional fees | ||||||||
| Impairment loss | ||||||||
| Non-cash gain from sale of subsidiary | ( | ) | ||||||
| Non-cash gain from deconsolidation of subsidiaries | ( | ) | ||||||
| Derivative income, net | ( | ) | ||||||
| Non-cash portion of gain on extinguishment of debt, net | ( | ) | ||||||
| Non-cash portion of gain on extinguishment of debt - related party | ( | ) | ||||||
| Non-cash portion of gain on settlement | ( | ) | ||||||
| Loss on lease abandonment | ||||||||
| Warrant exercise inducement expense | ||||||||
| Rent expense | ||||||||
| Bad debt expense (recovery) | ( | ) | ||||||
| Other non- cash gain | ( | ) | ||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Security deposit | ||||||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Insurance payable | ( | ) | ( | ) | ||||
| Accrued compensation and related benefits | ( | ) | ||||||
| NET CASH USED IN OPERATING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Proceeds from sale of property and equipment | ||||||||
| Increase in note receivable | ( | ) | ||||||
| Cash acquired in acquisitions | ||||||||
| Cash used for acquisitions | ( | ) | ( | ) | ||||
| Cash proceeds from sale of subsidiary | ||||||||
| NET CASH USED IN INVESTING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Net proceeds from sale of series E preferred share units | ||||||||
| Net proceeds from sale of series G preferred share units | ||||||||
| Payment of liquidated damages on Series E preferred shares | ( | ) | ||||||
| Proceeds from exercise of warrants | ||||||||
| Proceeds from notes payable | ||||||||
| Repayment of notes payable | ( | ) | ( | ) | ||||
| Repayment of note payable - related party | ( | ) | ||||||
| Net proceeds (payments) of related party advances | ( | ) | ||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | ||||||||
| NET (DECREASE) INCREASE IN CASH | ( | ) | ||||||
| CASH, beginning of year | ||||||||
| CASH, end of year | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Conversion of debt and accrued interest for common stock | $ | $ | ||||||
| Reclassification of due to related parties to accrued expenses | $ | $ | ||||||
| Deemed dividend related to price protection and beneficial conversion features | $ | $ | ||||||
| Decrease in property and equipment and notes payable, net | $ | $ | ||||||
| Conversion of Series E preferred stock to common stock | $ | $ | ||||||
| Conversion of Series G preferred stock and accrued dividends to common stock | $ | $ | ||||||
| Accrual of preferred stock dividends | $ | $ | ||||||
| Issuance of common stock for future services | $ | $ | ||||||
| ACQUISITIONS: | ||||||||
| Assets acquired: | ||||||||
| Accounts receivable | $ | $ | ||||||
| Prepaid expenses | ||||||||
| Property and equipment | ||||||||
| Right of use assets | ||||||||
| Other receivable | ||||||||
| Security deposits | ||||||||
| Total assets acquired | ||||||||
| Less: liabilities assumed: | ||||||||
| Accounts payable | ||||||||
| Accrued expenses | ||||||||
| Insurance payable | ||||||||
| Accrued compensation and related benefits | ||||||||
| Notes payable | ||||||||
| Lease liabilities | ||||||||
| Total liabilities assumed | ||||||||
| Fair value of shares for acquisitions | ||||||||
| Increase in intangible assets - non-cash | $ | $ | ||||||
See accompanying notes to consolidated financial statements.
| F-7 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 and 2021
NOTE 1 – ORGANIZATION AND BUSINESS OPERATIONS
Transportation and Logistics Systems, Inc. (“TLSS” or the “Company”) is a holding company incorporated under the laws of the State of Nevada, on July 25, 2008. Its active wholly-owned operating subsidiaries, Cougar Express, Inc., Freight Connections, Inc., JFK Cartage, Inc. and Severance Trucking Co., Inc. (acquired in 2023, along with Severance Warehousing, Inc. and McGrath Leasing, Inc., together Severance Trucking, Inc.), together provide a full suite of logistics and transportation services, specializing in ecommerce fulfillment, last mile deliveries, two-person home delivery, mid-mile, and long-haul services. Such entities operate several warehouse locations located in New York, New Jersey, Connecticut and Massachusetts. Inactive subsidiaries include: TLSS Acquisition, Inc. (“TLSSA”), Shyp CX, Inc. (“Shyp CX”), Shyp FX, Inc. (“Shyp FX”), TLSS-FC, Inc. (“TLSS-FC”) and TLSS-STI, Inc. (“TLSS-STI”).
On
June 18, 2018, the Company completed the acquisition of
On July 24, 2018, the Company formed Shypdirect LLC (“Shypdirect”), a company organized under the laws of New Jersey. Since its inception, Shypdirect generated substantially all of its revenues from Amazon, Inc. As described below, Amazon elected to terminate its Amazon Relay Carrier Terms of Service with Shypdirect. Accordingly, in June 2021, Shypdirect ceased its tractor trailer and box truck delivery services to Amazon, and in July 2021, Shypdirect ceased all operations.
On June 19, 2020, Amazon notified Prime EFS in writing (the “Prime EFS Termination Notice”), that Amazon would not renew its Delivery Service Partner (DSP) Agreement with Prime EFS when that agreement (the “In-Force Agreement”) expired on September 30, 2020 and such In-Force Agreement, in fact, expired on September 30, 2020. Additionally, on July 17, 2020, Amazon notified Shypdirect that Amazon had elected to terminate the Amazon Relay Carrier Terms of Service (the “Program Agreement”) between Amazon and Shypdirect effective as of November 14, 2020 (the “Shypdirect Termination Notice”). On August 3, 2020, Amazon offered to withdraw the Shypdirect Termination Notice and extend the term of the Program Agreement to and including May 14, 2021, conditioned on Prime EFS executing, for nominal consideration, a separation agreement with Amazon under which Prime EFS agrees to cooperate in an orderly transition of its Amazon last-mile delivery business to other service providers, Prime EFS released any and all claims it may have against Amazon, and Prime EFS covenanted not to sue Amazon (the “Aug. 3 Proposal”). On August 4, 2020, the Company, Prime EFS and Shypdirect accepted the Aug. 3 Proposal.
During
the year ended December 31, 2022, two customers accounted for
Since exiting the Amazon business, the Company has pursued an initial growth by acquisitions strategy as set forth below and as such, continues to pursue potential acquisition opportunities.
On November 13, 2020, the Company formed a wholly owned subsidiary, Shyp FX, Inc., a company incorporated under the laws of the State of New Jersey (“Shyp FX”). On January 15, 2021, through Shyp FX, the Company executed an asset purchase agreement (“APA”) and closed a transaction to acquire substantially all of the assets and certain liabilities of Double D Trucking, Inc., a northern New Jersey-based logistics provider specializing in servicing Federal Express over the past 25 years (“DDTI”), including last-mile delivery services using vans and box trucks (See Note 3). On April 28, 2022, the Company entered into an Asset Purchase Agreement (the “Asset Purchase Agreement” with an unrelated third party. Pursuant to the Asset Purchase Agreement, Shyp FX sold substantially all its asset and specific liabilities. The Asset Purchase Agreement closed in June 2022 (See Note 3).
On November 16, 2020, the Company formed a wholly owned subsidiary, TLSSA, a company incorporated under the laws of the State of Delaware. On March 24, 2021, TLSS acquired all of the issued and outstanding shares of capital stock of Cougar Express, Inc., a New York-based full-service logistics provider specializing in pickup, warehousing, and delivery services in the tri-state area (“Cougar Express”). Cougar Express was a family-owned full-service transportation business that has been in operation for more than 30 years providing one-to-four person deliveries and offering white glove services. It utilizes its own fleet of trucks, warehouse/driver/office personnel and on-call subcontractors from its convenient and secure New York JFK airport area location, allowing it to pick-up and deliver throughout the New York tri-state area. Cougar Express serves a diverse base of commercial accounts, which are freight forwarders that work with some of the most notable retail businesses in the country (See Note 3).
On February 21, 2021, the Company formed a wholly owned subsidiary, Shyp CX, a company incorporated under the laws of the State of New York. Shyp CX does not engage in any revenue-generating operations.
On
August 4, 2022, the Company’s wholly-owned subsidiary, Cougar Express, closed on its acquisition of all outstanding stock of JFK
Cartage, Inc., a New York-based full-service logistics provider specializing in pickup, warehousing and delivery services in the tri-state
area (“JFK Cartage”). Joan Ton, the sole shareholder of JFK Cartage, from whom the shares were acquired, is an unrelated
party. The effective date of the acquisition was
Effective
September 16, 2022, the Company’s newly formed wholly-owned subsidiary, TLSS-FC, closed on an acquisition of all outstanding stock
of Freight Connections, Inc., a New Jersey-based company offering an array of transportation, warehousing, consolidating, distribution,
and local cartage services throughout the New York tri-state area (“Freight Connections”). Joseph Corbisiero, the sole shareholder
of Freight Connections, from whom the shares were acquired. Freight Connections was founded in 2016 and is a privately
held transportation and logistics carrier headquartered in Ridgefield Park, New Jersey. Freight Connections currently operates with 30
power units and 50 trailers, including dry vans, pups, flatbeds, step decks, and double drop trailers out of three buildings in the area
with
| F-8 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 and 2021
On August 19, 2021, the Company’s former 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 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). The Company has been advised that the Assignee anticipates that she will be able to conclude her work, make final distributions to creditors, and close out the estates of Prime EFS and Shypdirect on or before June 30, 2023.
The Company’s results of operations for the year ended December 31, 2021 include the results of Prime EFS and Shypdirect prior to the September 7, 2021, the filing of the executed Deeds of Assignment for the Benefit of Creditors with the State of New Jersey.
Unless the context otherwise requires, TLSS and its wholly owned subsidiaries, TLSSA, TLSS-FC, Cougar Express, Shyp FX, Shyp CX, JFK Cartage, and Freight Connections, and its deconsolidated former subsidiaries, Prime EFS and Shypdirect, whose results of operations for the year ended December 31, 2021 are included in the results of the Company prior to the September 7, 2021 filing of the executed Deeds of Assignment for the Benefit of Creditors with the State of New Jersey, are hereafter referred to as the “Company”. References herein to a “Company liability” may be to a liability which is owed solely by a subsidiary and not by TLSS.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis of presentation and principles of consolidation
The consolidated financial statements of the Company include the accounts of TLSS and its wholly owned subsidiaries, TLSSA, TLSS-FC, Cougar Express, Shyp FX and Shyp CX, JFK Cartage since its acquisition on July 31, 2022, and Freight Connection since its acquisition on September 16, 2022, and Prime EFS and Shypdirect through the date of deconsolidation (September 7, 2021). All intercompany accounts and transactions have been eliminated in consolidation. References below to a “Company liability” may be to a liability which is owed solely by a subsidiary and not by TLSS.
Going concern
These
consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business. As reflected in the accompanying consolidated financial statements,
the Company had a loss from operations of $
Risks and uncertainties
The
Company maintains its cash in bank and financial institution deposits that at times may exceed federally insured limits. On December
31, 2022, cash in bank in excess of FDIC insured levels amounted to approximately $
| F-9 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 and 2021
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, 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 2023, or whether other currently unanticipated consequences of the pandemic are reasonably likely to materially affect the Company’s results of operations. The Company plan on diversifying is bank and financial institution deposits to other banks to mitigate such risk.
Use of estimates
The preparation of the consolidated financial statements, in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Significant estimates included in the accompanying consolidated financial statements and footnotes include the valuation of accounts receivable, the useful life of property and equipment, the valuation of intangible assets, the valuation of assets acquired and liabilities assumed, the valuation of right of use assets and related liabilities, assumptions used in assessing impairment of long-lived assets, estimates of current and deferred income taxes and deferred tax valuation allowances, the fair value of non-cash equity transactions, the valuation of derivative liabilities, the valuation of beneficial conversion features, and the value of claims against the Company.
Fair value of financial instruments
The Financial Accounting Standards Board (“FASB”) issued ASC 820 — Fair Value Measurements and Disclosures, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 requires disclosures about the fair value of all financial instruments, whether or not recognized, for financial statement purposes. Disclosures about the fair value of financial instruments are based on pertinent information available to the Company on December 31, 2022. Accordingly, the estimates presented in these consolidated financial statements are not necessarily indicative of the amounts that could be realized on disposition of the financial instruments. ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).
The three levels of the fair value hierarchy are as follows:
| ● | Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date. | |
| ● | Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data. | |
| ● | Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information. |
The Company measures certain financial instruments at fair value on a recurring basis. As of December 31, 2022 and 2021, the Company had no assets and liabilities measured at fair value on a recurring basis.
A roll-forward of the level 3 valuation financial instruments is as follows:
| For
the Year Ended December 31, 2022 | For
the Year Ended December 31, 2021 | |||||||
| Balance at beginning of period | $ | $ | ||||||
| Gain on extinguishment of debt related to repayment or conversion of debt | ( | ) | ||||||
| Change in fair value included in derivative gain | ( | ) | ||||||
| Balance at end of period | $ | $ | ||||||
The Company accounted for its derivative financial instruments, which consisted of certain conversion options embedded in convertible instruments and warrants, at fair value using level 3 inputs. The Company determined the fair value of these derivative liabilities using the binomial lattice models, or other accepted valuation practices. When determining the fair value of its financial assets and liabilities using these methods, the Company is required to use various estimates and unobservable inputs, including, among other things, expected terms of the instruments, expected volatility of its stock price, expected dividends, and the risk-free interest rate. Changes in any of the assumptions related to the unobservable inputs identified above may change the fair value of the instrument. Increases in expected term, anticipated volatility and expected dividends generally result in increases in fair value, while decreases in the unobservable inputs generally result in decreases in fair value.
| F-10 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 and 2021
ASC 825-10 “Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.
The carrying amounts reported in the consolidated balance sheets for cash, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses, insurance payable, and other payables approximate their fair values based on the short-term maturity of these instruments. The carrying amount of the Company’s promissory note obligations approximate fair value, as the terms of these instruments are consistent with terms available in the market for instruments with similar risk.
Business acquisitions
The Company accounted for business acquisitions using the acquisition method of accounting where the assets acquired and liabilities assumed are recognized based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Determining the fair value of certain acquired assets and liabilities is subjective in nature and often involves the use of significant estimates and assumptions, including, but not limited to, the selection of appropriate valuation methodology, projected revenue, expenses, and cash flows, weighted average cost of capital, discount rates, and estimates of terminal values. Business acquisitions are included in the Company’s consolidated financial statements as of the date of the acquisition.
Cash and cash equivalents
For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less at the purchase date and money market accounts to be cash equivalents. On December 31, 2022, the Company did not have any cash equivalents.
Accounts receivable
Accounts receivable are presented net of an allowance for doubtful accounts. The Company maintains allowances for doubtful accounts for estimated losses. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, a customer’s historical payment history, its current credit-worthiness and current economic trends. Accounts are written off after exhaustive efforts at collection.
Property and equipment
Property
and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives of to
Goodwill and other intangible assets
Intangible assets are carried at cost less accumulated amortization, computed using the straight-line method over the estimated useful life, less any impairment charges.
The Company’s business acquisitions typically result in the recording of goodwill and other intangible assets, which affect the amount of amortization expense and possibly impairment write-downs that the Company may incur in future periods.
Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired in business acquisitions. Goodwill is subject to impairment tests at least annually. The Company reviews the carrying amounts of goodwill by reporting unit at least annually, or when indicators of impairment are present, to determine if goodwill may be impaired. The Company includes assumptions about the expected future operating performance as part of a discounted cash flow analysis to estimate fair value. If the carrying value of these assets is not recoverable, based on the discounted cash flow analysis, management compares the fair value of the assets to the carrying value. Goodwill is considered impaired if the recorded value exceeds the fair value. The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of goodwill is less than its carrying value. The Company would not be required to quantitatively determine the fair value of goodwill unless it determines, based on the qualitative assessment, that it is more likely than not that its fair value is less than the carrying value. Future cash flows of the individual indefinite-lived intangible assets are used to measure their fair value after consideration of certain assumptions, such as forecasted growth rates and cost of capital, which are derived from internal projection and operating plans. The Company performs its annual testing for goodwill during the fourth quarter of each fiscal year.
Other intangibles, net consists of covenants not to compete and customer relationships. All intangible assets determined to have finite lives are amortized over their estimated useful lives. The useful life of an intangible asset is the period over which the asset is expected to contribute directly or indirectly to future cash flows. The Company periodically evaluates both finite and indefinite lived intangible assets for impairment upon occurrence of events or changes in circumstances that indicate the carrying amount of intangible assets may not be recoverable.
Based
on the Company’s impairment analysis, management determined that an intangible impairment charge was required for the year ended
December 31, 2022 and accordingly, recorded an impairment loss of $
| F-11 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 and 2021
Leases
On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 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 Company applied 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 it obtains the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether it has the right to direct the use of the asset. The Company will allocate the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments. The Company has elected not to recognize right-of-use assets and lease liabilities for short-term leases that have a term of 12 months or less.
Operating lease ROU assets represents the right to use the leased asset for the lease term and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, the Company uses 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 consolidated statements of operations.
Impairment of long-lived assets
In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value.
Deconsolidation of subsidiaries
The Company accounts for a gain or loss on deconsolidation of a subsidiary or derecognition of a group of assets in accordance with ASC 810-10-40-5. The Company measures the gain or loss as the difference between (a) the aggregate of fair value of any consideration received, the fair value of any retained noncontrolling investment and the carrying amount of any noncontrolling interest in the former subsidiary at the date the subsidiary is deconsolidated and (b) the carrying amount of the former subsidiary’s assets and liabilities or the carrying amount of the group of assets.
Segment reporting
The Company uses “the management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. The Company’s chief operating decision maker is the chief executive officer of the Company, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. During the year ended December 31, 2022 and 2021, the Company believes that it operates in one operating segment related to its full suite of logistics and transportation services, specializing in last mile deliveries, two-person home and commercial deliveries, mid-mile, and long-haul services.
Derivative financial instruments
The Company had certain financial instruments that are embedded derivatives associated with capital raises. The Company evaluated all of its financial instruments to determine if those contracts or any potential embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with ASC 815-10-05-4, Derivatives and Hedging and 815-40, Contracts in Entity’s Own Equity. This accounting treatment requires that the carrying amount of any embedded derivatives be recorded at fair value at issuance and marked-to-market at each balance sheet date. In the event that the fair value is recorded as a liability, as is the case with the Company, the change in the fair value during the period is recorded as either other income or expense. Upon conversion, exercise or repayment, the respective derivative liability is marked to fair value at the conversion, repayment, or exercise date and then the related fair value amount is reclassified to other income or expense as part of gain or loss on extinguishment.
In July 2017, FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features. These amendments simplify the accounting for certain financial instruments with down-round features. The amendments require companies to disregard the down-round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining liability or equity classification.
Revenue recognition and cost of revenue
The Company adopted Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers. 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.
The Company recognizes revenues and the related direct costs of such revenue which generally include compensation and related benefits, gas costs, insurance, parking and tolls, truck rental fees, and maintenance fees, as of the date the freight is delivered which is when the performance obligation is satisfied. In accordance with ASC Topic 606, the Company recognizes revenue on a gross basis. Our payment terms are generally net 30 days from acceptance of delivery. The Company does not incur incremental costs obtaining service orders from its customers, however, if the Company did, because all of the Company’s customer contracts are less than a year in duration, any contract costs incurred would be expensed rather than capitalized. The revenue that the Company recognizes arises from deliveries of freight on behalf of the Company’s customers. Primarily, the Company’s performance obligations under these service orders correspond to each delivery of freight that the Company makes under the service agreements. Control of the freight transfers to the recipient upon delivery. Once this occurs, the Company has satisfied its performance obligation and the Company recognizes revenue.
| F-12 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 and 2021
The Company covers a 100-mile radius around each of its terminals and each individual shipment accepted by the Company is considered a separate contract with the performance obligation being the delivery of the freight. Our average length of haul for each load of freight generally equals less than one week of continuous transit time.
The Company’s revenues are primarily derived from the transportation services we provide through the delivery of goods over the duration of a shipment. The bill of lading is a legally enforceable agreement between two parties, and where collectability is probable this document serves as the contract as our basis to recognized revenue under ASC 606- Revenue Recognition. The Company has elected to expense initial direct costs as incurred because the average shipment cycle is less five days. The Company recognizes revenue and substantially all the purchased transportation expenses on a gross basis. Direct costs of such revenue generally include compensation and related benefits, gas costs, insurance, parking and tolls, truck rental fees, and maintenance fees. The Company directs the use of the transportation service provided and remain responsible for the complete and proper shipment. The Company recognize revenue for its performance obligations under its customer contracts over time, as its customers receive the benefits of the services in accordance with ASC 606- Revenue Recognition.
Inherent within the Company’s revenue recognition practices are estimates for revenue associated with shipments in transit. For shipments in transit, the Company records revenue based on the percentage of service completed as of the period end and recognize delivery costs as incurred. The percentage of service completed for each shipment is based on how far along in the shipment cycle each shipment is in relation to standard transit days. The estimated portion of revenue for all shipments in transit is accumulated at period end and recognized as operating revenue. The significance of in transit shipments to the consolidated financial statements is limited due to the short duration, generally less than five days, of the average shipment cycle. On December 31, 2022 and 2021, any reductions to operating revenue and accounts receivable to reflect in transit shipments were insignificant.
Revenue generated from warehousing services is generally recognized as the service is performed, based upon a monthly or weekly rate.
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. The Company has elected to recognize forfeitures as they occur as permitted under ASU 2016-09 Improvements to Employee Share-Based Payment.
Pursuant to ASC 260-10-45, basic (loss) income per common share is computed by dividing net (loss) income attributable to common shareholders by the weighted average number of shares of common stock outstanding for the periods presented. Diluted (loss) income per share is computed by dividing net (loss) income attributable to common shareholders by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period. Potentially dilutive common shares consist of common stock issuable for stock options and warrants (using the treasury stock method) and shares issuable for convertible debt and Series B, E, G and H preferred shares (using the as-if converted method). These common stock equivalents may be dilutive in the future.
| Year
Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Income (loss) per common share - basic: | ||||||||
| Net income (loss) | $ | ( | ) | $ | ||||
| Less: deemed dividends | ( | ) | ( | ) | ||||
| Net income (loss) attributable to common stockholders | $ | ( | ) | $ | ||||
| Weighted average common shares outstanding – basic | ||||||||
| Net income (loss) per common share – basic | $ | ( | ) | $ | ||||
| Income (loss) per common share - diluted: | ||||||||
| Net income (loss) attributable to common shareholders – basic | $ | ( | ) | $ | ||||
| Add: Preferred Series E and G dividends | ||||||||
| Numerator for income (loss) per common share – diluted | $ | ( | ) | $ | ||||
| Weighted average common shares outstanding – basic | ||||||||
| Add: dilutive shares related to: | ||||||||
| Warrants | ||||||||
| Series B preferred stock | ||||||||
| Series E preferred stock | ||||||||
| Series G preferred stock | ||||||||
| Weighted average common shares outstanding – diluted | ||||||||
| Net income (loss) per common share – diluted | $ | ( | ) | $ | ||||
| F-13 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 and 2021
| December 31, 2022 | December 31, 2021 | |||||||
| Stock warrants | ||||||||
| Stock options | ||||||||
| Series E convertible preferred stock | ||||||||
| Series G convertible preferred stock | ||||||||
| Series H convertible preferred stock | ||||||||
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40)—Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The ASU simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for the exception. The ASU also simplifies the diluted net income per share calculation in certain areas. The new guidance is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the impact of the adoption of the standard on the consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which significantly changes how entities will measure credit losses for most financial assets, including accounts receivable. ASU No. 2016-13 will replace today’s “incurred loss” approach with an “expected loss” model, under which companies will recognize allowances based on expected rather than incurred losses. On November 15, 2019, the FASB delayed the effective date of Topic 326 for certain small public companies and other private companies until fiscal years beginning after December 15, 2022 for SEC filers that are eligible to be smaller reporting companies under the SEC’s definition, as well as private companies and not-for-profit entities. The Company is currently evaluating the new guidance and has not yet determined whether the adoption of the new standard will have a material impact on its consolidated financial statements or the method of adoption.
In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The guidance was issued as improvements to ASU No. 2016-13 described above. The vintage disclosure changes require an entity to disclose current-period gross write-offs by year of origination for financing receivables. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The amendments should be applied prospectively. Early adoption of the amendments is permitted, including adoption in an interim period. The amendments will impact our disclosures but will not otherwise impact the consolidated financial statements. The Company is currently evaluating the new guidance.
There are currently no other accounting standards that have been issued but not yet adopted that we believe will have a significant impact on our consolidated financial position, results of operations or cash flows upon adoption.
NOTE 3 – ACQUISITIONS AND DISPOSITION
Acquisitions
2022
On
August 4, 2022, the Company’s wholly-owned subsidiary, Cougar Express, closed on its acquisition of all outstanding stock of JFK
Cartage, a New York-based full-service logistics provider specializing in pickup, warehousing and delivery services in the tri-state
area. Joan Ton, the sole shareholder of JFK Cartage, from whom the shares were acquired, is an unrelated party (the “JFK Cartage
Seller”). The effective date of the acquisition was
Effective
September 16, 2022, the Company’s newly formed wholly-owned subsidiary, TLSS-FC, closed on an acquisition of all outstanding stock
of Freight Connections, a company offering an array of transportation, warehousing, consolidating, distribution, and local cartage services
throughout the New York tri-state area. Joseph Corbisiero, the sole shareholder of Freight Connections, from whom the shares were acquired
(the “Freight Connections Seller”). Freight Connections was founded in 2016 and is a transportation
and logistics carrier headquartered in Ridgefield Park, New Jersey. Freight Connections currently operates with 30 power units and 50
trailers, including dry vans, pups, flatbeds, step decks, and double drop trailers out of three buildings in the area with
| F-14 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 and 2021
The Freight Connections Seller also entered into an employment agreement, including non-competition provisions, to continue with Freight Connections after the acquisition.
The assets acquired and liabilities assumed were recorded at their estimated fair values on the respective acquisition date, subject to adjustment during the measurement period with subsequent changes recognized in earnings or loss. These estimates are inherently uncertain and are subject to refinement. Management develops estimates based on assumptions as a part of the purchase price allocation process to value the assets acquired and liabilities assumed as of the business acquisition date. As a result, during the purchase price measurement period, which may be up to one year from the business acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed based on completion of valuations, with the corresponding offset to intangible assets. After the purchase price measurement period, the Company may record any adjustments to assets acquired or liabilities assumed in operating expenses in the period in which the adjustments may have been determined. Based upon the adjusted purchase price allocations, the following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of the respective 2022 acquisition:
| JFK Cartage | Freight Connections | Total | ||||||||||
| Assets acquired: | ||||||||||||
| Cash | $ | $ | $ | |||||||||
| Accounts receivable, net | ||||||||||||
| Other assets | ||||||||||||
| Property and equipment | ||||||||||||
| Right of use assets | ||||||||||||
| Other intangible assets | ||||||||||||
| Goodwill | ||||||||||||
| Total assets acquired at fair value | ||||||||||||
| Liabilities assumed: | ||||||||||||
| Notes payable | ( | ) | ( | ) | ( | ) | ||||||
| Accounts payable | ( | ) | ( | ) | ( | ) | ||||||
| Accrued expenses | ( | ) | ( | ) | ( | ) | ||||||
| Lease liabilities | ( | ) | ( | ) | ( | ) | ||||||
| Total liabilities assumed | ( | ) | ( | ) | ( | ) | ||||||
| Net asset acquired | $ | $ | $ | |||||||||
| Purchase consideration paid: | ||||||||||||
| Cash paid | $ | $ | $ | |||||||||
| Notes payable | ||||||||||||
| Common shares and Series H preferred shares issued | ||||||||||||
| Total purchase consideration paid | $ | $ | $ | |||||||||
2021
On
January 15, 2021, through Shyp FX, the Company executed an asset purchase agreement (“APA”) and closed a transaction to acquire
substantially all of the assets and certain liabilities of Double D Trucking, Inc., a northern New Jersey-based logistics provider specializing
in servicing Federal Express over the past 25 years (“DDTI”), including last-mile delivery services using vans and box trucks.
The purchase price was $
On
March 24, 2021, TLSSA acquired all issued and outstanding shares of capital stock of Cougar Express, a New York-based full-service logistics
provider specializing in pickup, warehousing, and delivery services in the New York tri-state area. The purchase price was $
| F-15 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 and 2021
The
assets acquired and liabilities assumed were recorded at their estimated fair values on the acquisition date, subject to adjustment during
the measurement period with subsequent changes recognized in earnings or loss. These estimates are inherently uncertain and are subject
to refinement. Management develops estimates based on assumptions as a part of the purchase price allocation process to value the assets
acquired and liabilities assumed as of the business acquisition date. As a result, during the purchase price measurement period, which
may be up to one year from the business acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed
based on completion of valuations, with the corresponding offset to intangible assets. After the purchase price measurement period, the
Company may record any adjustments to assets acquired or liabilities assumed in operating expenses in the period in which the adjustments
may have been determined. During the three months ended September 30, 2021, the Company increased the customer relations intangible asset
acquired and accrued expenses by $
Based upon the purchase price allocation, the following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of the respective 2021 acquisition:
| DDTI | Cougar Express | Total | ||||||||||
| Assets acquired: | ||||||||||||
| Cash | $ | $ | $ | |||||||||
| Accounts receivable | ||||||||||||
| Other assets | ||||||||||||
| Transportation vehicles | ||||||||||||
| Equipment | ||||||||||||
| Right of use assets | ||||||||||||
| Other receivable | ||||||||||||
| Non-compete agreement | ||||||||||||
| Customer relations | ||||||||||||
| Total assets acquired at fair value | ||||||||||||
| Liabilities assumed: | ||||||||||||
| Notes payable | ( | ) | ( | ) | ( | ) | ||||||
| PPP loan payable | ( | ) | ( | ) | ||||||||
| Accounts payable | ( | ) | ( | ) | ||||||||
| Accrued expenses | ( | ) | ( | ) | ||||||||
| Lease liabilities | ( | ) | ( | ) | ||||||||
| Total liabilities assumed | ( | ) | ( | ) | ( | ) | ||||||
| Net asset acquired | $ | $ | $ | |||||||||
Purchase consideration paid: | ||||||||||||
| Cash paid | $ | $ | $ | |||||||||
| Acquisition payable | ||||||||||||
| Promissory notes | ||||||||||||
| Total purchase consideration paid | $ | $ | $ | |||||||||
The
Company shall record acquisition and transaction related expenses in the period in which they are incurred. During the year ended December
31, 2021, acquisition and transaction related expenses primarily consisted of legal fees of approximately $
The following unaudited pro forma consolidated results of operations have been prepared as if the acquisition of JFK Cartage and Freight Connections had occurred as of the beginning of the following periods:
| For
the Year Ended December 31, 2022 | For
the Year Ended December 31, 2021 | |||||||
| Net Revenues | $ | $ | ||||||
| Net (Loss) Income | $ | ( | ) | $ | ||||
| Net Income (Loss) Attributable to Common Shareholders | $ | ( | ) | $ | ||||
| Net (Loss) Income per Share | $ | ( | ) | $ | ||||
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.
| F-16 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 and 2021
Disposition
Sale of Shyp FX assets
On
June 21, 2022, the Company sold substantially all of the assets of Shyp FX in an all-cash transaction. The purchaser was Farhoud Logistics
Inc., a New Jersey corporation, an unrelated party. Under the terms of the sale, The Company sold the assets of Shyp FX consisting of
transportation equipment and other equipment and the business of Shyp FX for $
| Amount | ||||
| Total sale price consideration received | $ | |||
| Less: | ||||
| Commissions and other fees paid | ||||
| Write-off of unamortized intangible assets | ||||
| Net book value of property and equipment sold | ||||
| Gain on sale of subsidiaries assets | $ | |||
NOTE 4 – ACCOUNTS RECEIVABLE AND NOTE RECEIVABLE
Accounts receivable
On December 31, 2022 and 2021, accounts receivable, net consisted of the following:
| December 31, 2022 | December 31, 2021 | |||||||
| Accounts receivable | $ | $ | ||||||
| Allowance for doubtful accounts | ( | ) | ||||||
| Accounts receivable, net | $ | $ | ||||||
During
the year ended December 31, 2022 and 2021, the Company recorded bad debt expense (recovery) of $
Note receivable
On
October 31, 2022, the Company entered into a promissory note receivable with Recommerce Group, Inc (“Recommerce”), a third
party, in the amount of $
NOTE 5 - PROPERTY AND EQUIPMENT
On December 31, 2022 and 2021, property and equipment consisted of the following:
| Useful Life | December 31, 2022 | December 31, 2021 | ||||||||
| Revenue equipment | $ | $ | ||||||||
| Machinery and equipment | ||||||||||
| Office equipment and furniture | ||||||||||
| Leasehold improvements | ||||||||||
| Subtotal | ||||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||||
| Property and equipment, net | $ | $ | ||||||||
During
the year ended December 31, 2021, the Company sold vehicles with a cost basis of $
On
June 21, 2022, in connection with the sale of net assets of Shyp FX, the Company sold delivery trucks and equipment with a net book value
of $
For
the years ended December 31, 2022 and 2021, depreciation expense is included in general and administrative expenses and amounted to $
| F-17 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 and 2021
NOTE 6 – INTANGIBLE ASSETS AND GOODWILL
As
a result of the acquisitions of JFK Cartage and Freight Connections, during the year ended December 31, 2022, there was a $
As
a result of the acquisitions of Shyp FX and Cougar Express, during the year ended December 31, 2021, there was a $
On December 31, 2022, intangible assets subject to amortization consisted of the following:
| 2022 | ||||||||||||||||
| Amortization period (years) | Gross Amount | Accumulated Amortization | Net finite intangible assets | |||||||||||||
| Customer relationships | $ | $ | $ | |||||||||||||
| Covenants not to compete | ||||||||||||||||
| Other intangible assets | ||||||||||||||||
| $ | $ | $ | ||||||||||||||
On December 31, 2021, intangible assets subject to amortization consisted of the following:
| 2021 | ||||||||||||||||
| Amortization period (years) | Gross Amount | Accumulated Amortization | Net finite intangible assets | |||||||||||||
| Customer relationships | $ | $ | $ | |||||||||||||
| Covenants not to compete | ||||||||||||||||
| $ | $ | $ | ||||||||||||||
On December 31, 2022 and 2021, goodwill consisted of the following:
| Useful life | December 31, 2022 | December 31, 2021 | ||||||||||
| Goodwill (1) | $ | $ | ||||||||||
| $ | $ | |||||||||||
| (1) |
On
June 21, 2022, in connection with the sale of net assets of Shyp FX, the Company wrote off the remaining net book value of intangible
assets related to the acquisition of Shyp FX of $
Based
on the Company’s impairment analysis, management determined that an intangible impairment charge was required for the year ended
December 31, 2022 and accordingly, the Company recorded an impairment loss of $
For
the years ended December 31, 2022 and 2021, amortization of intangible assets amounted to $
Amortization of intangible assets attributable to future periods is as follows:
| Year ending December 31: | Amount | |||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Total | $ | |||
| F-18 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 and 2021
NOTE 7 – CONVERTIBLE PROMISSORY NOTES PAYABLE
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 $
From
the original issue date of a Q1/Q2 2020 Note until such Q1/Q2 2020 Note was no longer outstanding, such Q1/Q2 2020 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 holder.
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
Due
to the default of amortization payments due on our August 2019 Notes and other notes, in 2020, the Q1/Q2 2020 Notes were deemed in default.
Accordingly, in 2020, the outstanding principal balance on date of default increased by
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 $
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 $
Until
the April 20 Note was no longer outstanding, it 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.
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, in 2020, the outstanding principal balance on date of default increased by 30% which amounted to approximately
$
During
the three months ended June 30, 2021, the Company issued shares of its common stock upon the conversion of all remaining principal
and interest balances due aggregating $
| F-19 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 and 2021
Other convertible debt
On
August 28, 2020, a note payable with a principal balance due of $
Summary of derivative liabilities
During the year ended December 31, 2021, the fair value of the derivative liabilities, warrants and conversion option was estimated using the Binomial valuation model with the following assumptions:
| 2021 | ||||
| Expected dividend rate | ||||
| Expected term (in years) | ||||
| Volatility | % | |||
| Risk-free interest rate | % |
For
the year ended December 31, 2022 and 2021, amortization of debt discounts related to convertible notes amounted to $
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 $
On
March 24, 2021, in connection with the acquisition of Cougar Express, the Company issued a promissory note in the amount of $
On
July 31, 2022, in connection with the acquisition of JFK Cartage, JFK Cartage issued a promissory note in the amount of $
In
connection with the acquisition of JFK Cartage, on July 31, 2022, the Company assumed an SBA loan that existed on the books of JFK Cartage
in the amount of $
On
September 16, 2022, in connection with the acquisition of Freight Connections, Freight Connections issued a promissory note in the
amount of $
In
connection with the acquisition of Freight Connections, on September 16, 2022, the Company assumed a merchant loan with Paypal in the
amount of $
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 $
In
connection with the acquisition of DDTI, the Company assumed several truck notes payable liabilities due to entities. On December 31,
2022 and 2021, truck notes payable to these entities amounted to $
In
connection with the acquisition of Cougar Express, the Company assumed several equipment notes payable liabilities due to entities. On
December 31, 2022 and 2021, equipment notes payable to these entities amounted to $
| F-20 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 and 2021
In
connection with the acquisition of JFK Cartage, on July 31, 2022, the Company assumed several equipment notes payable due to entities
amounting to $
On
July 7, 2022, Cougar Express entered into a promissory note for the purchase of a truck in the amount of $
In
connection with the acquisition of Freight Connections, on September 16, 2022, the Company assumed several equipment notes payable due
to entities amounting to $
On
September 22, 2022, JFK Cartage entered into a promissory note for the purchase of a truck in the amount of $
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 $
Line of credit
Through
December 2021, the Company’s subsidiary, Cougar Express, maintained a $
On December 31, 2022 and 2021, notes payable consisted of the following:
| December 31, 2022 | December 31, 2021 | |||||||
| Principal amounts | $ | $ | ||||||
| Less: current portion of notes payable | ( | ) | ( | ) | ||||
| Notes payable – long-term | $ | $ | ||||||
As of December 31, 2022, future maturities of notes payable is as follows:
| Year ending December 31: | Amount | |||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| $ | ||||
NOTE 9– SHAREHOLDERS’ EQUITY
Preferred stock
The Company has authorized shares of preferred stock, $ 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.
Series B preferred shares
In
August 2019, the Company designated Series B Preferred Shares consisting of shares with a par value of $ and a stated
value of $
On
August 16, 2019, the Company issued shares of Series B Preferred shares to Bellridge Capital, L.P. upon settlement of
shares of issuable common shares. In April 2022, the Company and Bellridge entered into a settlement agreement pursuant to which the
shares of Series B preferred shares were cancelled and the Company recorded settlement income of $
| F-21 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 and 2021
Series D preferred shares
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 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 $ 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 had the right to
participate, pro rata, in each subsequent financing in an amount up to
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.
As of December 31, 2022 and 2021, shares of Series D were outstanding.
Series E preferred shares
To consummate the Series E Offerings described below, 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 shares of preferred stock, $ par value per share, of which are unissued and undesignated.
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 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 $ per share (the “Stated Value”). Pursuant with the Amended Series E COD,
| ● | 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. | |
| ● | 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 |
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
| F-22 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 and 2021
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 Offerings 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
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.
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 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.
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) shares of Series E and (ii) Warrants
to purchase
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) shares of Series E and (ii) Warrants to purchase
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.
| F-23 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 and 2021
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.
During the three months ended June 30, 2021, the Company issued shares of its common stock in connection with the conversion of 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 shares of its common stock in connection with the conversion of 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 shares of its common stock in connection with the conversion of shares of Series E. The conversion ratio was based on the Series E certificate of designation, as amended.
During the three months ended March 31, 2022, the Company issued shares of its common stock in connection with the conversion of shares of Series E. The conversion ratio was based on the Series E certificate of designation, as amended.
During
the three months ended June 30, 2022, the Company issued shares of its common stock in connection with the conversion of
shares of Series E and paid liquidating damages of $
Series F preferred share
Pursuant
to the terms of the Securities Purchase Agreements entered in connection with the Series E Offerings 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
| F-24 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 and 2021
Series G preferred shares
On
December 28, 2021, the Company’s Board of Directors (the “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 shares of preferred stock as Series G. The Series G has a stated value of $
| ● | 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. | |
| ● | 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 |
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
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
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 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) shares of Series G and (ii) Warrants to purchase
| F-25 |
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) shares of Series G and (ii) Warrants to purchase
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. 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 G Preferred Stock and exercise of the Warrants (the “S-1 Registration Statement”) on January 28, 2022 (the “Filing Date”), which was declared effective by the Commission om\n May 13, 2022. 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 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 $
In
connection with issuance of the Series G, during the year ended December 31, 2022, the Company paid the placement agent cash of $
During
the three months ended June 30, 2022, the Company issued shares of its common stock in connection with the conversion of
shares of Series G and accrued dividends payable of $
During
the three months ended September 30, 2022, the Company issued shares of its common stock in connection with the conversion
of shares of Series G and accrued dividends payable of $
Series H preferred shares
On September 20, 2022, the Company’s Board of Directors (the “Board”) Board filed the Certificate of Designation of Preferences, Rights and Limitations of Series H Convertible Preferred Stock (the “Series H COD”) with the Secretary of State of the State of Nevada designating shares of preferred stock as Series H. The Series H has no stated value. Pursuant with the Series H COD,
| ● | Each holder of Series H shall have no voting rights. |
| F-26 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 and 2021
| ● | Each
share of Series H shall be convertible into shares of the Company’s common stock, subject to beneficial ownership limitations.
| |
| ● | Upon the liquidation, dissolution or winding up of the business of the Company, whether voluntary or involuntary, each holder of Series H preferred stock shall be entitled to receive out of assets of the Company legally available therefor the same amount that a holder of the Company’s common stock would receive on an as-converted basis (without regard to the beneficial ownership limitation or any other conversion limitations hereunder). The right of a Series H Holder to receive such payment shall be preferential to the right of holders of common stock but shall be subordinate to the rights of the holder of any other series of preferred stock of the Company. |
In
connection with the acquisitions of Freight Connections, on September 16, 2022, the Company issued shares of Series H preferred
stock. These shares were value in the amount of $
Common stock
On
February 23, 2021, stockholders holding at least
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
On January 11, 2021, the Company issued shares of its common stock in connection with the conversion of a convertible note payable of $. 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 $
During
the three months ended June 30, 2021, the Company issued shares of its common stock upon the conversion of all remaining April
20 Note principal and interest balances due aggregating $
Shares issued in connection with conversion of Series E preferred shares
During the three months ended June 30, 2021, the Company issued shares of its common stock in connection with the conversion of 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 shares of its common stock in connection with the conversion of 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 shares of its common stock in connection with the conversion of shares of Series E. The conversion ratio was based on the Series E certificate of designation, as amended.
On January 19, 2022, the Company issued shares of its common stock in connection with the conversion of shares of Series E. The conversion ratio was based on the Series E certificate of designation, as amended.
On April 13, 2022, the Company issued shares of its common stock in connection with the conversion of shares of Series E preferred shares and paid liquidating damages of $. The conversion ratio was based on the Series E certificate of designation, as amended.
Shares issued in connection with conversion of Series G preferred shares
During
the three months ended June 30, 2022, the Company issued shares of its common stock in connection with the conversion of
shares of Series G and accrued dividends payable of $
During
the three months ended September 30, 2022, the Company issued shares of its common stock in connection with the conversion
of shares of Series G and accrued dividends payable of $
| F-27 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 and 2021
Shares issued upon exercise of warrants
During the three months ended June 30, 2021, the Company issued shares of its common stock in connection with the cashless exercise of warrants. The exercise price was based on contractual terms of the related warrant.
In May and June 2021, the Company issued shares of its common stock and received proceeds of $ from the exercise of warrants at $ per share.
During
the three months ended September 30, 2021, the Company issued shares of its common stock and received proceeds of $
During
the three months ended December 31, 2021, the Company issued shares of its common stock and received proceeds of $
During
the three months ended March 31, 2022, the Company issued shares of its common stock and received proceeds of $
During the three months ended June 30, 2022, the Company issued shares of its common stock in connection with the cashless exercise of warrants. The exercise price was based on contractual terms of the related warrant.
Shares issued in connection with acquisition
In connection with the acquisition of Freight Connections, as part of the purchase price consideration, the Company issued shares of its common stock. The Company valued these common shares at a fair value of $, or $ per common share, based on the quoted closing price of the Company’s common stock on the measurement date.
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 shares of its common stock which were valued at $, or $ 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 shares vesting on January 3, 2022, and common shares vesting each year through January 3, 2025. In connection with these shares, the Company valued these common shares at a fair value of $ and will record stock-based compensation expense over the vesting period which is included in the aggregate accretion of stock-based compensation reflected below.
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 common shares of the Company which were valued at $
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 common shares of the Company which were valued at $
During the year ended December 31, 2022 and 2021, aggregate accretion of stock-based compensation expense on the above granted shares amounted to $ and $, respectively. Total unrecognized compensation expense related to these vested and unvested common shares on December 31, 2022 amounted to $ which will be amortized over the remaining vesting period of approximately years.
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 common shares of the Company which were valued at $
On
February 1, 2022 and amended on May 1, 2022, the Company issued an aggregate of of its common shares pursuant to a consulting
agreement. These shares were valued at $
| F-28 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 and 2021
The following table summarizes activity related to non-vested shares:
| Number
of Non-Vested Shares | Weighted Average Grant Date Fair Value | |||||||
| Non-vested, December 31, 2021 | $ | |||||||
| Granted | ||||||||
| Shares vested | ( | ) | ( | ) | ||||
| Non-vested, December 31, 2022 | $ | |||||||
Warrants
Warrants issued and exercised in connection with Series E preferred shares
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
In
connection with the sale of Series E preferred shares, during the year ended December 31, 2021, the Company issued warrants to purchase
During the three months ended June 30, 2021, the Company issued shares of its common stock in connection with the cashless exercise of warrants. The exercise price was based on contractual terms of the related warrant.
In
May and June 2021, the Company issued shares of its common stock and received proceeds of $
During
the three months ended September 30, 2021, the Company issued shares of its common stock and received proceeds of $
During
the three months ended December 31, 2021, the Company issued shares of its common stock and received proceeds of $
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 $
During the three months ended March 31, 2022, the Company issued shares of its common stock and received proceeds of $ from the exercise of warrants at $ per share.
During the three months ended June 30, 2022, the Company issued shares of its common stock in connection with the cashless exercise of warrants. The exercise price was based on contractual terms of the related warrant.
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
In
connection with the sale of Series G preferred shares, during the year ended December 31, 2022, the Company issued warrants to purchase
Warrant activities for the years ended December 31, 2022 and 2021 are summarized as follows:
| 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, 2020 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Inducement warrants granted | ||||||||||||||||
| Increase in warrants related to price protection | ||||||||||||||||
| Exercises | ( | ) | ||||||||||||||
| Balance Outstanding December 31, 2021 | ||||||||||||||||
| Granted | ||||||||||||||||
| Exercises | ( | ) | ||||||||||||||
| Balance Outstanding December 31, 2022 | $ | $ | ||||||||||||||
| Exercisable, December 31, 2022 | $ | $ | ||||||||||||||
| F-29 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 and 2021
Stock options
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Balance Outstanding December 31, 2020 | $ | $ | ||||||||||||||
| Granted/cancelled | ||||||||||||||||
| Balance Outstanding December 31, 2021 | ||||||||||||||||
| Granted/Cancelled | ||||||||||||||||
| Balance Outstanding December 31, 2022 | $ | $ | ||||||||||||||
| Exercisable, December 31, 2022 | $ | $ | ||||||||||||||
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.
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 year ended December 31, 2021 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. The Company has been advised that the Assignee anticipates that she will be able to conclude her work, make final distributions to creditors, and close out the estates of Prime EFS and Shypdirect on or before June 30, 2023.
In
connection with the finalization of the ABC, the Assignee has demanded a one time payment of $
| F-30 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 and 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 $
| September 7, 2021 | ||||
| Liabilities deconsolidated: | ||||
| Notes payable (a) | $ | |||
| Accounts payable | ||||
| Accrued expenses | ||||
| Insurance payable | ||||
| Contingency liabilities | ||||
| Lease liabilities, current portion | ||||
| Accrued compensation and related benefits | ||||
| Total liabilities deconsolidated | ||||
| Assets deconsolidated: | ||||
| Cash | ||||
| Accounts receivable | ||||
| Property and equipment, net | ||||
| Total assets deconsolidated | ||||
| Gain on deconsolidation of subsidiaries | ||||
| Less: additional cash payments made on behalf of deconsolidated subsidiaries | ( | ) | ||
| Gain on deconsolidation of subsidiaries | $ | |||
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Legal matters
From time to time, we may be involved in litigation or received 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 or are aware of claims that we believe would, if decided adversely, have a material adverse effect on our business, financial condition, or operating results. We also disclose any recent settlements and accruals taken in connection therewith, whether material or not.
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, effective March 31, 2022, the Company and Prime EFS, on the one hand, and ERLAC and
ELC, on the other hand, settled the above matter for a single payment, by TLSS, to ERLAC and ELC, in an immaterial amount. Pursuant to
the settlement, 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, in April 2022, the Company paid ERLAC and ELC $
As a result of the March 2022 settlement, and since the Company has not received any further communications concerning this matter, the Company considers the matter to be closed and terminated.
Bellridge Capital, L.P. v. TLSS and Mercadante
On September 11, 2020, a prior lender to the Company, Bellridge Capital, L.P., filed a civil action against TLSS and others in the United States District Court for the Southern District of New York. The case was assigned Case No. 20-cv-7485.
After discontinuing the foregoing federal action voluntarily and without prejudice, on April 23, 2021, Bellridge filed a substantially similar civil action in New York Supreme Court, New York County, which was assigned index number 652728/2021.
On
April 29, 2022, all parties to the Bellridge State Court Action agreed to settle the case and exchange mutual general releases for a
cash payment by the Company to Bellridge of $
SCS, LLC v. TLSS
On January 14, 2021, a former financial consultant to the Company, SCS, LLC, filed an action against the Company in the Circuit Court of the 15th Judicial Circuit, Palm Beach County, Florida, captioned SCS, LLC v. Transportation and Logistics Systems, Inc. The case was assigned Case No. 50-2020-CA-012684.
In
this action, SCS alleges that it 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
$
On
February 9, 2021, the Company filed its answer, defenses and counterclaims in this action. Among other things, the Company avers that
SCS’s claims are 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 avers, in its counterclaims, that SLS owes the Company damages in excess
of the $
| F-31 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 and 2021
A two-day non-jury trial was held in this action in Palm Beach County, Florida, on April 20-21, 2022. However, at the end of the second day a mistrial was declared because SCS had not withdrawn its motion to strike and answered the counterclaims. Since the mistrial, there have been no further filings or proceedings in this case.
The Company believes it has substantial defenses to all claims alleged in SCS’s complaint. The Company therefore intends to defend this case vigorously.
Because
there have been no further filings or proceedings on this case since April 2022, 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. However, the demand remains
$
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 $
By order dated and issued September 15, 2022, the Circuit Judge assigned to this case dismissed the original Complaint in the matter, finding (a) that SCS had failed to adequately allege it has standing and (b) that the complaint fails to adequately allege a cognizable claim. The dismissal was without prejudice, meaning SCS could attempt to replead its claims.
On October 5, 2022, SCS filed an Amended Complaint in this action. By order dated and issued December 19, 2022, the Circuit Judge assigned to this case once again dismissed the case, finding (a) that SCS still failed to adequately allege it has standing and (b) that the complaint still fails to adequately allege a cognizable claim. Once again, however, the dismissal was without prejudice.
On January 18, 2023, SCS filed a Second Amended Complaint in this action. All defendants once again moved to dismiss the pleading or in the alternative for summary judgment on it in their favor. The Court heard argument on that motion on March 9, 2023. As of this writing, the parties are awaiting a ruling by the Court on the motion heard March 9, 2023.
While they hope to prevail on the March 9, 2023, motion, win or lose, defendants in this action advise that they believe the action to be frivolous (a position with which we agree) and intend to mount a vigorous defense to this action.
Owing to the fact that no discovery has occurred in the case, 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. In a derivative case, any recovery is to be paid to the corporation; however, the individual defendants in this case are fully indemnified by the Company unless a final judgment is entered against them for deliberate or intentional misconduct.
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 subleased to Shypdirect and being driven by a Prime EFS employee, in which the plaintiff’s ankle
was injured. Plaintiff has thus far transmitted medical bills exceeding $
| F-32 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 and 2021
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 an action in the Supreme Court, State of New York, Suffolk County (the “Suffolk County Action”), seeking defense and indemnity for this claim from the insurance brokerage, TCE/Acrisure LLC, which sold the County Hall insurance policy to Shypdirect.
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 – TLSS, Shyp CX, Inc., Shyp FX, Inc. and Cougar Express, Inc. In the claim against TLSS, Plaintiff seeks to “pierce the corporate veil” and hold TLSS responsible for the alleged liabilities of Prime and/or Shypdirect as the supposed alter ego of these subsidiaries. In the claims against Shyp CX, Inc., Shyp FX, Inc. and Cougar Express, Inc., Plaintiff seeks to hold these entities responsible for the alleged liabilities of Prime and/or Shypdirect on a successor liability theory.
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, thus adding TLSS, 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 TCI/Acrisure in the Bergen County action. On December 23, 2021, Acrisure filed its Answer to the Third-Party Complaint, denying its material allegations.
On March 2, 2022, Plaintiff sought and was granted leave to file a Second Amended Complaint, bringing claims against Prime and Shypdirect’s vehicle liability carrier, County Hall (for discovery) as well as the producing broker, TCE/Acrisure. Plaintiff also asserted additional alter ego allegations against TLSS.
On February 15, 2023, Plaintiff filed a motion for leave to file a Third Amended Complaint in this action, seeking to assert claims against TLSS’s former CEO, John Mercadante, also on a “pierce the corporate veil” theory. On March 9, 2023, TLSS, Prime and Shypdirect opposed the motion for leave to add Mercadante, arguing that any claim against Mercadante would be both futile and time-barred. As of this writing, defendants are awaiting Plaintiff’s reply papers and an argument date from the Court on this motion.
Under the currently operative pre-trial order, entered October 4, 2022, all discovery in this case must be concluded by June 30, 2023. In January and February, 2023, numerous depositions were taken in the case, including those of Messrs. Giordano and Mercadante.
TLSS intends to vigorously defend itself in this action and to pursue the third-party actions, in the name and right of Prime and Shypdirect, against both County Hall and TCE/ Acrisure.
Under
a so-called MCS-90 reimbursement endorsement to the County Hall policy, TLSS believes that Prime and Shypdirect may have up to $
Under New Jersey law, it is well established that a corporation is a separate entity from its shareholder(s) and a primary reason for incorporation is the insulation of shareholders from the liabilities of the corporate enterprise.
The New Jersey Supreme Court in Richard A. Pulaski Const. Co. v. Air Frame Hangars, Inc., 195 N.J. 457, 472–73 (2008) held that, in light of the fundamental propositions that a corporation is a separate entity from its shareholders, and “that a primary reason for incorporation is the insulation of shareholders from the liabilities of the corporate enterprise,” courts will not pierce a corporate veil “[e]xcept in cases of fraud, injustice, or the like...’” (citations omitted). The New Jersey Supreme Court further held that:
The limitations placed on a claimant’s ability to reach behind a corporate structure are intentional, as “[t]he purpose of the doctrine of piercing the corporate veil is to prevent an independent corporation from being used to defeat the ends of justice, to perpetrate fraud, to accomplish a crime, or otherwise to evade the law[.]” (citations omitted). Hence, to invoke that form of relief, “the party seeking an exception to the fundamental principle that a corporation is a separate entity from its principal bears the burden of proving that the court should disregard the corporate entity.” ….
The purpose of piercing the corporate veil is thus to prevent an independent corporation from being used to defeat the ends of justice, perpetrate fraud, to accomplish a crime, or otherwise to evade the law.
To pierce the corporate veil and impute alter ego liability on TLSS for the alleged torts of Prime, Shypdirect and/or their agents, employees and servants, the Plaintiff herein would have to establish: (1) that Prime and Shypdirect were “utterly dominated” by TLSS and (2) that respecting the separate corporate existences of the subsidiaries would perpetrate a fraud or injustice, or otherwise circumvent the law. FDASmart, Inc. v. Dishman Pharmaceuticals and Chemicals, Ltd., et al., 448 N.J. Super. 195, 204 (App. Div. 2016). A plaintiff must satisfy this burden by clear and convincing evidence.
To determine whether the first element has been satisfied, courts consider whether the parent company so dominated the subsidiary that the latter had no separate existence but was merely a conduit for the parent. In considering the level of dominance exercised by the parent over the subsidiary, the court will consider factors such as common ownership, financial dependency, interference with a subsidiary’s selection of personnel, disregard of corporate formalities, and control over a subsidiary’s marketing and operational policies.
| F-33 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 and 2021
To date, to the best of the undersigned’s knowledge, information and belief, no discovery has been taken in this action which would permit the imposition of alter ego liability on TLSS for the subject accident.
To date, to the best of the undersigned’s knowledge, information and belief, no discovery has been taken in this action which would permit the imposition of successor liability on Shyp CX, Inc., Shyp FX, Inc. and/or Cougar Express, Inc. for the subject accident.
However, owing to the early stage of this heavily litigated action, we cannot evaluate the likelihood of an adverse outcome or estimate the Company’s liability, if any, in connection with this claim.
Holdover Proceeding
On February 16, 2022, the landlord for the leased premises from which Cougar Express previously conducted its Valley Stream New York business, Airport Park LLC (“Airport”), filed an action to evict and for unpaid holdover rent against Cougar Express and TLSS. The case was No. LT-000550-22/NA, filed in Landlord Tenant Court in Nassau County District Court.
In
the case, Airport sought to evict Cougar Express forthwith and to collect $
By
stipulation filed with the Court on May 19, 2022, this matter was settled and terminated. Pursuant to the settlement, Cougar Express
agreed to pay, and paid, certain unpaid common charges of $
Since the May 2022 settlement and Cougar’s vacating the subject premises in timely fashion, the Company has not received any further communications concerning this matter. The Company therefore views the matter as closed and terminated.
COR Holdings, LLC
In
the second quarter of 2022, COR Holdings LLC, a lender to the Company’s former Prime EFS subsidiary, made an informal (email) demand
that it be issued shares of Company common stock in exchange for an alleged $
Ryder Truck Rental, Inc.
In
the first quarter of 2022, an attorney representing Ryder Truck Rental issued a letter to certain former officers and employees of the
Company’s former Shypdirect subsidiary, demand payment of $
Maria Lugo v. JFK Cartage
The Company’s JFK Cartage, Inc. subsidiary is one of three (3) defendants in an action captioned Maria Lugo v. JFK Cartage, Inc. d/b/a Fifth Dimension Logistix, Joan Ton, individually, and Chris Bartley, individually. The case is pending in Supreme Court, State of New York, Queens County, Index No. 704862/2022.
In this action, which was filed March 4, 2022, a former employee of JFK Cartage alleges that she suffered discrimination and retaliation in violation of the New York City Human Rights Law and the New York State Human Rights Law. The former employee alleges that on December 28, 2021, she had Covid-19 symptoms, advised the defendants she was feeling ill and went home early to take a home test. She further alleges that on December 30, 2021, she tested positive for Covid-19 and informed defendants she had to isolate for ten (10) days. Plaintiff alleges that she returned to work on January 7, 2022, but that her employment was terminated later that day by defendant Bartley who “questioned the authenticity of the at-home test, accusing her of fraud.” Plaintiff claims her employment “was terminated due to her disability (a Covid-19 infection) and in retaliation for her requesting reasonable accommodation for the illness she suffered.” She seeks unspecified compensatory damages, including lost pay and benefits, punitive damages and attorneys’ fees.
On December 16, 2022, all defendants filed an answer and affirmative defenses, denying all claims for statutory violations. The case is currently in discovery. The conduct alleged in the complaint occurred prior to the Company’s July 31, 2022, acquisition of JFK Cartage, Inc. The Company believes that, in relation to this action, it has a right to full indemnification from the selling stockholder (including for attorneys’ fees) as well as set-off rights against notes payable to the selling stockholder.
Owing to (among other things) the fact that discovery in this action has just begun, 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.
| F-34 |
Elaine Pryor v. Rocio Perez, et al.
The Company’s Freight Connections, Inc. subsidiary (“FCI”) is one of three (3) named defendants in an action captioned Elaine Pryor v. Rocio Perez, North Trucking & Logistics, LLC and Freight Connections, Inc. The case is pending in Superior Court of New Jersey, Essex County, Docket No. ESX-L-5147-18.
In this action, which was filed in 2018, plaintiff alleges that on February 1, 2017, she suffered personal injuries in a collision between her motor vehicle and a truck operated by a then employee of FCI. Plaintiff alleges that the truck was owned by FCI and leased to North Trucking & Logistics at the time.
At present, there are two other actions pending related to insurance coverage for the accident. They are Acceptance Indemnity Insurance Company v. Freight Connections, LLC (Superior Court of New Jersey, Essex County, Docket No. ESX-L-7144-19) and New Jersey Manufacturers Insurance Company, as subrogee of Elaine Pryor v. Acceptance Indemnity Insurance Company (Superior Court of New Jersey, Essex County, Docket No. ESX-L-5120). These two actions involving insurance coverage questions have been consolidated with the Pryor personal injury claim.
In an opinion issued November 16, 2022, the court denied all parties’ motions for summary judgment on the insurance coverage issues.
The conduct alleged in the Pryor complaint occurred prior to the Company’s September 16, 2022 acquisition of FCI. The selling stockholder of FCI has advised the Company that the truck in question was not owned by FCI at the time of the accident. The Company is currently investigating this issue as well as who the driver’s employer was at the time of the accident.
Owing to (among other things) the above uncertainties, 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.
Other than discussed above, as of December 31, 2022, 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 $
Employment agreements
On
January 3, 2022,
| F-35 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 and 2021
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 $
On
July 6, 2022, the Company entered into a definitive Employment Agreement with James Giordano for Mr. Giordano to serve as the Company’s
Chief Financial Officer. The term of such Employment agreement is for a period of two and one-half years through December 31, 2025, which
term may not be terminated early by the Company except for “cause” as defined in such agreement. Annual base compensation
is $
On
September 16, 2022, in connection with the acquisition of Freight Connections, Freight Connection and Mr. Joseph Corbisiero entered into
an employment agreement to act as Freight Connections chief executive officer with a term extending through September 16, 2025, which
provides for initial annual compensation of $
NOTE 12– RELATED PARTY TRANSACTIONS AND BALANCES
Due to related parties
On
December 22, 2020, the Company’s former chief executive officer advanced the Company $
During the period from September 17, 2022 to December
31, 2022, Freight Connections incurred outside trucking costs with companies owned by the Freight Connections Seller, who is currently
Freight Connection’s chief executive officer. In connection with the outside trucking services, Freight Connections recorded aggregate
outside trucking expense of $
Notes payable – related parties
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 $
During
the year ended December 31, 2021, interest expense associated with advances from related parties and related party notes payable amounted
to $
On
September 16, 2022, in connection with the acquisition of Freight Connections, Freight Connections issued a promissory note in the amount
of $
NOTE 13 – CONCENTRATIONS
For
the year ended December 31, 2022, two customers represented
On
December 31, 2022, three customers represented
All revenues are derived from customers in the United States.
| F-36 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 and 2021
NOTE 14 – OPERATING LEASE RIGHT-OF-USE (“ROU”) ASSETS AND OPERATING LEASE LIABILITIES
As a result of the acquisition of JFK Cartage and Freight Connection, the Company assumed several non-cancelable operating leases for the lease of office, warehouse spaces, and parking spaces.
In adopting ASC Topic 842, Leases (Topic 842) on January 1, 2019, the Company had elected the ‘package of practical expedients’, which permitted 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. Upon signing of new leases or the assumption of leases for property, the Company analyzed the new or assumed leases and determined it is required to record a lease liability and a right of use asset on its consolidated balance sheets, at fair value.
During
the year ended December 31, 2022 and 2021, in connection with its property operating leases, the Company recorded rent expense of $
The significant assumption used to determine the present value of the lease liabilities was discount rates of 9% which was based on the Company’s estimated average incremental borrowing rate.
On December 31, 2022 and 2021, right-of-use asset (“ROU”) is summarized as follows:
| December
31, 2022 | December
31, 2021 | |||||||
| Office leases and office equipment right of use assets | $ | $ | ||||||
| Less: accumulated amortization | ( | ) | ||||||
| Balance of ROU assets | $ | $ | ||||||
On December 31, 2022 and 2021, operating lease liabilities related to the ROU assets are summarized as follows:
| December
31, 2022 | December
31, 2021 | |||||||
| Lease liabilities related to office leases right of use assets | $ | $ | ||||||
| Less: current portion of lease liabilities | ( | ) | ||||||
| Lease liabilities – long-term | $ | $ | ||||||
On December 31, 2022, future minimum base lease payments due under non-cancelable operating leases are as follows:
| Twelve months ended December 31, | Amount | |||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Total minimum non-cancelable operating lease payments | ||||
| Less: discount to fair value | ( | ) | ||
| Total lease liability on December 31, 2022 | $ | |||
NOTE 15 – 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, 2022 and 2021 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, 2022 and 2021 were as follows:
Year Ended December 31, 2022 | Year Ended December 31, 2021 | |||||||
| Income tax benefit at U.S. statutory rate | ( | )% | % | |||||
| Income tax benefit – State | ( | )% | % | |||||
| Permanent items | % | ( | )% | |||||
| Effect of change in valuation allowance | ( | )% | % | |||||
| Effective income tax rate | % | % | ||||||
| F-37 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 and 2021
The Company’s approximate net deferred tax asset as of December 31, 2022 and 2021 was as follows:
| December 31, 2022 | December 31, 2021 | |||||||
| Deferred Tax Asset: | ||||||||
| Net operating loss carryover | $ | $ | ||||||
| Less: valuation allowance | ( | ) | ( | ) | ||||
| Net deferred tax asset | $ | $ | ||||||
The
net operating loss carryforward was approximately $
The Company does not have any uncertain tax positions or events leading to uncertainty in a tax position. The Company’s 2019 to 2022 Corporate Income Tax Returns are subject to Internal Revenue Service examination.
NOTE 16 – SUBSEQUENT EVENTS
Shares issued in connection with conversion of Series G preferred shares
On
January 31, 2023, the Company issued shares of its common stock in connection with the conversion of shares of Series
G and accrued dividends payable of $
Shares issued for compensation
On January 3, 2023, the Company’s Board of Directors granted the chief operating officer shares of its common stock which were valued at $, or $ 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 shares vesting on March 31, 2023, and common shares vesting each quarter through December 31, 2023. In connection with these shares, the Company valued these common shares at a fair value of $ and will record stock-based compensation expense over the one year vesting period.
Credit risk
On March 12, 2023, Signature Bank was closed by its state chartering authority, the New York State Department of Financial Services. On the same date the Federal Deposit Insurance Corporation (“FDIC”) was appointed as receiver and transferred all customer deposits and substantially all of the assets of Signature Bank to Signature Bridge Bank, N.A., a full-service bank that is being operated by the FDIC. The Company automatically became a customer of Signature Bridge Bank, N.A. as part of this action. Normal banking activities resumed on Monday, March 13, 2023. The Company is currently looking at additional banking options to ensure that its exposure is limited or reduced to the FDIC protection limits.
Note receivable
In January 2023, Recommerce repaid the note receivable plus all interest due to the Company (See Note 4).
Acquisition
Effective February 3, 2023, the Company’s newly formed wholly-owned subsidiary, TLSS-STI, closed on an acquisition of all outstanding stock of Severance Trucking, Inc., which together, offer LTL trucking services throughout New England, with an effective date as of the close of business on January 31 2023. The sellers of the stock of each entity were Kathryn Boyd, Clyde Severance, and Robert Severance, all individuals (the “Sellers”). None of the Sellers are affiliated with the Company or its affiliates.
The
total purchase price was $
| F-38 |
TRANSPORTATION AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022 and 2021
One of the Sellers also entered into a consulting agreement, including non-competition and non-solicitation provisions, to continue with Severance Trucking, Inc. after the acquisition for a period of no less than three (3) months and no more than one (1) year.
The assets acquired and liabilities assumed were recorded at their estimated fair values on the acquisition date, subject to adjustment during the measurement period with subsequent changes recognized in earnings or loss. These estimates are inherently uncertain and are subject to refinement. Management develops estimates based on assumptions as a part of the purchase price allocation process to value the assets acquired and liabilities assumed as of the business acquisition date. As a result, during the purchase price measurement period, which may be up to one year from the business acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed based on completion of valuations, with the corresponding offset to intangible assets. After the purchase price measurement period, the Company may record any adjustments to assets acquired or liabilities assumed in operating expenses in the period in which the adjustments may have been determined. Based upon the preliminary purchase price allocation, the following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of the acquisition:
| Severance Trucking, Inc. | ||||
| Assets acquired: | ||||
| Cash | $ | |||
| Accounts receivable | ||||
| Property and equipment, net | ||||
| Prepaid expenses and other assets | ||||
| Intangible assets | ||||
| Total assets acquired at fair value | ||||
| Liabilities assumed: | ||||
| Notes payable | ||||
| Accounts payable and accrued expenses | ||||
| Due to related party | ||||
| Total liabilities assumed | ||||
| Net assets acquired | $ | |||
| Purchase consideration paid: | ||||
| Cash paid | $ | |||
| Fees paid | ||||
| Note payoffs | ||||
| Promissory note | ||||
| Total purchase consideration paid | $ | |||
| F-39 |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not Applicable
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including Sebastian Giordano, our Chief Executive Officer (“CEO”) and James Giordano, our Principal Accounting Officer (“PAO”), we carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Rule 13a-15(e)) for the year ended December 31, 2022. Based upon that evaluation, out CEO and PAO concluded that our disclosure controls and procedures were not effective as of December 31, 2022 because of the items set forth below under “Management’s Report on Internal Control over Financial Reporting”:
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our CEO and PAO, the Company conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (b) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorizations of the our management and directors; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Based on our evaluation under the framework in Internal Control—Integrated Framework (2013), our management concluded that our internal control over financial reporting was not effective as of December 31, 2022 due to the following material weaknesses:
| 1) | The Company lacks segregation of duties; | |
| 2) | There is a lack of segregation of duties and monitoring controls regarding accounting because there are only a few accountants maintaining the books and records; | |
| 3) | We lack control over the books and records of our recently acquired subsidiaries due to a lack of accounting staff and lack of existing accounting controls. We have hired additional accounting staff and have begun to institute accounting controls at these subsidiaries |
We do not believe the material weaknesses described above caused any significant misreporting of our consolidated financial condition and results of operations for the year ended December 31, 2022.
Management Plan to Remediate Material Weaknesses
Management has already begun the implementation of corrective measures to address the material weaknesses described above. In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, we have initiated, or plan to initiate, the following series of measures:
As we started the new year in 2022, Sebastian Giordano, who was an outside consultant that was responsible for the Company’s financial turnaround the last two years, transitioned to take the formal role of CEO. His first action was to hire a new CFO and bring in three new independent and outside board members to strengthen the management controls of the ○ organization. We currently outsource our financial reporting and other accounting functions to an experienced outsourced accounting and consulting firm who has been engaged by the Company for the past 5 years. The short-term plan is to keep the financial reporting and accounting functions outsourced with this outsourced accounting and consulting firm until the Company is large enough to insource it. In the meantime, the new CFO of the Company is in the process of reviewing and making changes to the current accounting processes and methodologies as discussed below.
As explained above, we have expanded our Board of Directors by three independent and outside members to a total of four directors. Further, we have established the requisite board committees for audit, compensation, and nominating. The Audit Committee Chairman has current and prior experience in this role with other public companies listed on the OTC and NASDAQ.
Segregation of duty issues are a common area of weakness for smaller companies with back-office operations with less than 5 people. We have made significant steps to mitigating this material weakness. We started with the hiring of a new, operational experienced CFO to provide oversight and drive immediate improvement in this area. To address this issue, we have begun implementation or implemented the following policies or processes:
| ○ | Implementation of cash management and banking policy which includes increasing the controls related to individuals banking capabilities, utilization of a daily cash model and forecast, and policy to move cash receipts from customers to ACH. | |
| ○ | Implementation of formalized payment and accounting transaction review and sign-off by the CFO. | |
| ○ | Centralization of accounts payable and cash control at the corporate level including the receipt of invoices to a newly created email address and process to get authorized approval for invoices prior to input into system. | |
| ○ | Implementation and completion of a formal and detailed 2023 and 2022 budgets and forecasts for the consolidated Company. | |
| ○ | Implemented a formal monthly business review process to discuss budget vs actual variances, and other operational issues to be presented to the Company’s CEO and Board of Directors. |
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As discussed above, we have taken steps and plan to continue to take additional steps, to seek to remediate these material weaknesses and to improve our financial reporting systems and implement new policies, procedures, and controls. We plan on implementing other policies and procedures to address and mitigate all remaining or new material weaknesses.
We believe the remediation measures described above will remediate the material weaknesses we had previously identified and disclosed, and will strengthen our internal control over financial reporting. We are committed to continuing to improve our internal control processes and will continue to review our financial reporting controls and procedures diligently and vigorously. As we continue to evaluate and work to improve our internal control over financial reporting, we may determine to take additional measures to address control deficiencies or determine to modify, or in appropriate circumstances not to complete, certain of the remediation measures described above.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting, except as discussed above (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the fourth quarter of 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
This Annual Report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only the management’s report in this Annual Report.
Limitations on the effectiveness of Controls
Management recognizes that any disclosure controls and procedures no matter how well designed and operated, can only provide reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our management has reassessed the effectiveness of our disclosure controls and procedures and based upon that evaluation, our sole officer.
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions That Prevent Inspections.
Not applicable.
PART III
Item 10. Directors, Executive Officers, and Corporate Governance.
Directors and Executive Officers
Below are the names of and certain information regarding the Company’s current executive officers and directors:
| Name | Age | Position | Date Named to Board
of Directors or as Executive Officer | |||
| Sebastian Giordano | 65 | Chief Executive Officer, President, and Chairman of the Board of Directors | January 4, 2022 | |||
| James Giordano | 53 | Chief Financial Officer, Secretary, and Treasurer | January 3, 2022 | |||
| Charles Benton | 72 | Director and Chairman of the Audit Committee | January 20, 2022 | |||
| John Mercadante | 78 | Director and Chairman of the Compensation Committee | April 16, 2019 | |||
| Norman Newton | 56 | Director and Chairman of the Nominating Committee | January 20, 2022 | |||
| Justin Frey | 51 | Chief Operating Officer | September 12, 2022 |
Directors are elected to serve until their successors are elected and qualified. Directors are elected by a plurality of the votes cast at the annual meeting of stockholders and hold office until the expiration of the term for which he or she was elected and until a successor has been elected and qualified.
A majority of the authorized number of directors constitutes a quorum of the Board of Directors for the transaction of business. The directors must be present at the meeting to constitute a quorum. However, any action required or permitted to be taken by the Board of Directors may be taken without a meeting if all members of the Board of Directors individually or collectively consent in writing to the action. Executive officers are appointed by the Board of Directors and serve at its pleasure.
The principal occupation and business experience during at least the past five years for our executive officers and directors is as follows:
Sebastian Giordano - Chief Executive Officer, President, and Chairman of the Board of Directors
For the past twenty years, Mr. Sebastian Giordano, age 65, has been CEO of Ascentaur, LLC (“Ascentaur”), providing C-Level consulting services to a diverse roster of predominantly technology-centric clients, including start-ups, turnarounds, and established businesses across many industries. From 2013 to 2018, he served as Chief Executive Officer of WPCS International Incorporated, a NASDAQ-listed low-voltage contracting company. Mr. Sebastian Giordano is a principal with Ascentaur, LLC, a strategic consulting firm which has provided consulting services to the Company during the preceding two years. Such consulting arrangement has been terminated upon the Company’s employment of Mr. Sebastian Giordano. The Company and Mr. Sebastian Giordano entered into an employment agreement with a term extending through December 31, 2025
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James Giordano – Chief Financial Officer, Secretary and Treasurer
Mr. James Giordano, age 53, previously served as Chief Financial Officer and consultant to Freight Connections, Inc., an 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.
Charles Benton – Director
Mr. Charles Benton, age 72, currently serves as a director and Audit Chairman of Vision Hydrogen Corp. (OTC: VIHD), a company focused on the production, storage and distribution of hydrogen for the green energy economy supply chain. In the past, Mr. Benton has held the positions of Audit Committee Chairman and then Chairman of the Board of WPCS International Incorporated (NASDAQ: WPCS), a design-build engineering firm focused on the deployment of wireless networks and related services including site design, technology integration, electrical contracting, construction and maintenance.
John Mercadante - Director
John Mercadante, age 78. has been the President, Chief Executive Officer and a director of our company since April 16, 2019. For more than the past five years, John has been a consultant and a manager of his personal investments. John co-founded Leisure Line, Inc., a motor coach company serving New York City and Atlantic City, New Jersey, in 1970 and served as its Chief Executive Officer for a ten-year period through the sale of the company to Golden Nugget in 1980. At the time of the sale, Leisure Line was generating approximately $11 million in annual revenues. In 1988, John cofounded Cape Transit, Inc., a motor coach company servicing Atlantic City, Philadelphia and South New Jersey. Under John Mercadante’s leadership as CEO, annual revenues at Cape Transit grew from $2 million to more than $11 million. In May 1996, Cape Transit became one of the founding companies of Coach USA, Inc. and John Mercadante became Coach USA’s president and Chief Operating Officer. John was an integral part of growing Coach’s annual revenues from $100 million to over $1 billion in revenues in just three years. The board of directors has concluded that Mr. Mercadante should serve as a director of the Company because of his extensive management and leadership skills and experience.
Norman Newton - Director
Mr. Norman Newton, age 56, currently is the President and CEO of AmeriCasa Solutions, LLC, a vertically integrated provider of housing to the Hispanic Community in the United States. Mr. Newton is also the Managing Director of Newton Vision Corporation (“NVC”), a privately held investment and consulting company with deep experience in business process reengineering, optimization, and digital transformation.
Justin Frey – Chief Operating Officer
Mr. Justin Frey, age 51, worked for FFE Transportation, one of the largest temperature-controlled National LTL transportation companies with revenues of more than $150 million, serving as terminal manager in California and Illinois before being promoted to Eastern Region Director of Operations during the years from 2013 to 2018. From 2018 through 2019, Mr. Frey worked as Director of Operations with Dicom/Eastern Connection, a $40 million regional overnight small package carrier. From 2019 to 2020, he was Director of Freight Operations for Freeman Company, one of the world’s largest event companies with revenues of $2.9 billion worldwide. He most recently held the position of Vice President of Operations with LandAir, the largest privately held LTL carrier in New England, along with PDS, LandAir’s TL subsidiary, with revenues of $40 million.
Family Relationships
There are no family relationships among our directors and executive officers.
Involvement in Certain Legal Proceedings
Our directors and executive officers have not been involved in any of the following events during the past 10 years:
| 1. | any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; | |
| 2. | any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); | |
| 3. | being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; | |
| 4. | being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; | |
| 5. | being the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of: (i) any federal or state securities or commodities law or regulation; or (ii) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease- and-desist order, or removal or prohibition order; or (iii) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or | |
| 6. | being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
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Code of Ethics
We have not yet adopted a Code of Ethics although we expect to do so as we develop our infrastructure and business. Our board of directors and executive officers have focused on identifying and hiring the personnel required to manage the growth of the Company and will be adopting a Code of Ethics that will be implemented in conjunction with completing the hiring of additional personnel.
Independent Directors
Mr. Charles Benton, Mr. John Mercadante, and Mr. Norman Newton are independent directors under the independence standards applicable to the Company under paragraph (a)(1) of Item 401 of Regulation S-K.
Board of Directors and Board Committees
At a special meeting of its Board of Directors on December 21, 2022, we adopted amendments to our bylaws. The amendments to the bylaws provide for: a) the staggered election of the Board of Directors, such that Directors shall serve terms of 3 years, and each year, 1/3 of the Directors shall stand for election; and b) written consents of the Directors to actions by the Board of Directors or any committee may be executed in counterparts and may be signed and delivered by any electronic media. The effective date of the amendments was December 21, 2022.
Our Board currently has three committees: the Audit Committee, the Compensation Committee, and the Nomination Committee. As of March 24, 2023, the members and Chairs of our standing Board committees were:
| Audit | Compensation | Nominating | ||||
| Independent Directors | ||||||
| Charles Benton | Chair | X | ||||
| John Mercadante | Chair | X | ||||
| Norman Newton | X | Chair | ||||
| Non-Independent Director | ||||||
| Sebastian Giordano |
Audit Committee
All Audit Committee members are “independent” under the NASDAQ listing standards and SEC rules and regulations. Our Board of Directors has determined that one of the members of the Audit Committee, Mr. Benton, meets the definition of an “audit committee financial expert” as established by the SEC, and that Mr. Mercadante and Mr. Newton, the two other members of the Audit Committee, meet the definition of “financially literate” as established by the SEC. The Audit Committee provides assistance to the Board in fulfilling its oversight responsibilities relating to the quality and integrity of the financial reports of the Company. The Audit Committee has the sole authority to appoint, review and discharge our independent accountants, and has established procedures for the receipt, retention, response to and treatment of complaints regarding accounting, internal controls and audit matters. In addition, the Audit Committee is responsible for:
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| ● | reviewing the scope, results, timing and costs of the audit with our independent accountants and reviewing the results of the annual audit examination and any accompanying management letters; | |
| ● | assessing the independence of the outside accountants on an annual basis, including receipt and review of a written report from the independent accountants regarding their independence consistent with the independence standards of the board; | |
| ● | reviewing and approving the services provided by the independent accountants; | |
| ● | overseeing the internal audit function; and | |
| ● | reviewing our significant accounting policies, financial results and earnings releases, and the adequacy of our internal controls and procedures. |
The Audit Committee was established in January 2022.
Compensation Committee
All Compensation Committee members are “independent” under applicable NASDAQ listing standards. The Compensation Committee assists the Board in fulfilling its oversight responsibilities relating to executive compensation, employee compensation and benefit programs and plans, and leadership development and succession planning. In addition, the Compensation Committee is responsible for:
| ● | reviewing the performance of our Chief Executive Officer; | |
| ● | determining the compensation and benefits for our Chief Executive Officer and other executive officers; | |
| ● | establishing our compensation policies and practices; | |
| ● | administering our incentive compensation and stock plans (except for the issuance of securities to non-employee directors for services which is administered by the Board); and | |
| ● | approving the adoption of material changes to or the termination of our benefit plans. |
The Compensation Committee reviews and discusses with management the disclosures regarding executive compensation to be included in our annual proxy statement. The responsibilities of the Compensation Committee are more fully described in the Compensation Committee’s charter.
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The Compensation Committee was established in January 2022.
Nominating Committee
All Nominating Committee members are “independent” under the applicable NASDAQ listing standards. The Nominating Committee considers a number of qualifications relating to management and leadership experience, background and integrity and professionalism in evaluating a person’s candidacy for membership on our board of directors. The Nominating Committee may have required certain skills or attributes, such as financial or accounting experience, to meet specific board needs that may arise from time to time and also considered the overall experience and makeup of its members to obtain a broad and diverse mix of board members. The Nominating Committee does not distinguish among nominees recommended by stockholders and other persons.
The Nominating Committee was established in January 2022.
Options/SAR Grants and Fiscal Year End Option Exercises and Values
We have not had a stock option plan or other similar incentive compensation plan for officers, directors and employees, and no stock options, other than as is discussed in this Annual Report.
Item 11. Executive Compensation.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information concerning the total compensation paid or accrued by us during the last two fiscal years indicated to the named executive officers:
| Name
& Principal Position |
Fiscal Year ended Dec. 31, |
Salary ($) |
Bonus ($) |
Stock ($) (6) |
Option ($) |
Non-Equity Incentive Plan Compensation ($) |
Non-Qualified ($) |
All
Other Compensation ($) |
Total ($) |
|||||||||||||||||||||||||||
| Sebastian Giordano, | ||||||||||||||||||||||||||||||||||||
| Chief Executive Officer, | 2022 | 400,000 | 0 | 1,343,391 | 0 | 0 | 0 | 0 | 1,743,391 | |||||||||||||||||||||||||||
| President and Chairman (1) | 2021 | 0 | 0 | 0 | 0 | 0 | 0 | 542,999 | 542,999 | |||||||||||||||||||||||||||
| James Giordano, | ||||||||||||||||||||||||||||||||||||
| Chief Financial Officer, | 2022 | 250,000 | 0 | 125,000 | 0 | 0 | 0 | 9,600 | 384,600 | |||||||||||||||||||||||||||
| Secretary and Treasurer (2) | ||||||||||||||||||||||||||||||||||||
| Justin Frey, | 2022 | 65,625 | 0 | 0 | 0 | 0 | 0 | 0 | 65,625 | |||||||||||||||||||||||||||
| Chief Operating Officer (5) | ||||||||||||||||||||||||||||||||||||
| John Mercadante, | 2022 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
| Former Chief Executive Officer (3) | 2021 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
| Doug Cerny, Former | 2021 | 0 | 0 | 0 | 0 | 0 | 0 | 20,000 | 20,000 | |||||||||||||||||||||||||||
| Vice President (4) | ||||||||||||||||||||||||||||||||||||
| (1) | Mr. Sebastian Giordano has served as chief executive officer since January 4, 2022. 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 through January 3, 2025. 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, in 2021, Sebastian Giordano, the CEO and principal of Ascentaur, provided management services to the Company. Prior to the termination of this agreement, Ascentaur received a consulting fee of $325,812 and during 2021, received eligible bonuses of $217,187 based on certain Company revenue, EBITDA, market capitalization or capital raise milestones. 2021 consulting are included in other compensation. |
| (2) | Mr. James Giordano has served as chief financial officer since January 3, 2022. On March 11, 2022 and effective January 4, 2022, the Company granted 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 vested quarterly during 2022. Other compensation includes an auto allowance of $9,600. |
| (3) | Mr. Mercadante served as chief executive officer through January 4, 2022. |
| (4) | Mr. Cerny served as Vice President the date of his death in May 2021. |
| (5) | Mr. Frey has served as chief operating officer since September 12, 2022 |
| (6) | As required by SEC rules, the amounts in this column reflect the grant date or modification date fair value as required by FASB ASC Topic 718. |
Narrative Disclosure to Summary Compensation Table
Except as otherwise described below, there are no compensatory plans or arrangements, including payments to be received from the Company with respect to any named executive officer, that would result in payments to such person because of his or her resignation, retirement or other termination of employment with the Company, or our subsidiaries, any change in control, or a change in the person’s responsibilities following a change in control of the Company.
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Employment Agreements
The Company had no executive officer employment agreements in place as of December 31, 2021.
Mr. Sebastian Giordano
Effective January 4, 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. On March 11, 2022, pursuant to this employment agreement, 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 through January 3, 2025.
Mr. James Giordano
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., an 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 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. On July 6, 2022, the Company entered into a definitive Employment Agreement with James Giordano for Mr. Giordano to serve as the Company’s Chief Financial Officer. The term of such Employment agreement is for a period of two and one-half years through December 31, 2025, which term may not be terminated early by the Company except for “cause” as defined in such agreement. Annual base compensation is $250,000, with an annual bonus for 2022 in total up to a maximum of $125,000 per year conditioned on the achievement of specified milestones, and future annual bonuses to be conditioned on achievement of milestones to be negotiated based on the circumstances of the Company at such time. On March 11, 2022 and effective January 4, 2022, we agreed to grant restricted stock awards to Mr. James Giordano 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 vested 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.
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Mr. Justin Frey
On September 12, 2022, the Company retained the services of Mr. Justin Frey as its Chief Operating Officer. Mr. Justin Frey started his career in transportation and logistics in 1989 with Consolidated Freightways, when it was the nation’s largest long-haul trucking company, as a customer service representative and held various positions there, including dispatcher, dock supervisor, sales executive and terminal manager. In the years from 2013 to 2018, he worked for FFE Transportation, one of the largest temperature-controlled National LTL transportation companies with revenues of more than $150 million, serving as terminal manager in California and Illinois before being promoted to Eastern Region Director of Operations. From 2018 through 2019, Mr. Frey worked as Director of Operations with Dicom/Eastern Connection, a $40 million regional overnight small package carrier. From 2019 to 2020, he was Director of Freight Operations for Freeman Company, one of the world’s largest event companies with revenues of $2.9 billion worldwide. He most recently held the position of Vice President of Operations with LandAir, the largest privately held LTL carrier in New England, along with PDS, LandAir’s TL subsidiary, with revenues of $40 million. He will receive annual compensation of $225,000 as well as annual discretionary bonuses and equity grants, business expense reimbursement and benefits as generally made available to the Company’s executives. On January 3, 2023, we agreed to grant restricted stock awards to Mr. Justin Frey for 21,634,615 common shares of the Company, which were valued at $90,865, or $0.0042 per common share, based on the quoted closing price of the Company’s common stock on the measurement date. These shares will vest in equal quarterly installments with the first installment of 5,408,653 shares vesting on March 31, 2023, and 5,408,654 common shares vesting each quarter through December 31, 2023.
We have no plans in place and have never maintained any plans that provide for the payment of retirement benefits or benefits that will be paid primarily following retirement including, but not limited to, tax qualified deferred benefit plans, supplemental executive retirement plans, tax-qualified deferred contribution plans and nonqualified deferred contribution plans. Beginning in 2022, the Company offers health insurance to its employees.
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth information about options and stock awards outstanding on December 31, 2022.
| OUTSTANDING EQUITY AWARDS AT 2022 FISCAL YEAR-END | ||||||||||||||||||||||||||||||||||||
| OPTION AWARDS | STOCK AWARDS | |||||||||||||||||||||||||||||||||||
| Name | Number of Securities Underlying Unexercised options (#) Exercisable | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) Unexercisable | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | Option Exercise Price ($) | Option Expiration Date | Number of Shares or Units of Stock that have not Vested (#) | Market Value of Shares or Units of Stock that Have not Vested ($) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights that have not Vested (#) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or other Rights that have not Vested ($) | |||||||||||||||||||||||||||
| Sebastian Giordano | 25,000,000 | (1) | - | — | 0.06 | 6/16/2025 | 91,594,824 | 366,379 | — | — | ||||||||||||||||||||||||||
| James Giordano | - | - | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| (1) | The options were fully vested on the date of grant (6/16/20). |
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Disclosure of Equity Awards Based on Material Nonpublic Information: None
Pay Versus Performance (PVP)
In accordance with the SEC’s disclosure requirements regarding pay versus performance, or PVP, this section presents the SEC-defined “Compensation Actually Paid,” or CAP of our PEO and NEOs for each of the fiscal years ended December 31, 2022 and 2021, and our financial performance. Also as required by the SEC, this section compares CAP to various measures used to gauge performance at TLSS for each such fiscal year. Also as required by the SEC, this section compares CAP to various measures used to gauge performance at TLSS.
Pay versus Performance Table - Compensation Definitions
Salary, Bonus, Stock Awards, and All Other Compensation are each calculated in the same manner for purposes of both CAP and Summary Compensation Table, or SCT values. The primary difference between the calculation of CAP and SCT total compensation is the calculation of the value of “Stock Awards,” with the table below describing the differences in how these awards are valued for purposes of SCT total and CAP:
| SCT Total | CAP | |||
| Stock Awards | Grant date fair value of stock awards granted during the year | Fair value of stock awards that are unvested as of the end of the year, or vested during the year |
Pay Versus Performance Table
In accordance with the SEC’s new PVP rules, the following table sets forth information concerning the compensation of our NEOs for each of the fiscal years ended December 31, 2022 and 2021, and our financial performance for each such fiscal year:
| Year (1) | Summary Compensation Table Total for PEO | Compensation Actually Paid to PEO (2)(3) | Average Summary Compensation Table Total for Non-PEO NEOs | Average Compensation Actually Paid to Non-PEO NEOs | Value of Initial Fixed $100 Investment Based On Total Shareholder Return | Net Income (Loss) | ||||||||||||||||||
| 2022 | $ | 1,743,391 | $ | 1,102,227 | $ | 225,112 | $ | 174,260 | $ | 13.70 | $ | (8,076,066 | ) | |||||||||||
| 2021 | $ | 0 | $ | 0 | $ | 20,000 | $ | 20,000 | $ | 45.55 | $ | 6,254,790 | ||||||||||||
| (1) | The PEO (CEO) in the 2022 reporting year is Sebastian Giordano. The PEO (CEO) in the 2021 reporting year was John Mercadante. The non-PEO NEOs in the 2022 reporting year are James Giordano (no relationship to Sebastian Giordano) and Justin Frey. The non-PEO NEO in the 2021 reporting year was Doug Cerny. | |
| (2) | The CAP was calculated beginning with the PEO’s and NEO’s SCT total. In 2021, no amounts were deducted from or added to the applicable SCT total compensation since all equity awards, if any, were fully vested prior to 2021, and no reconciliation with respect to equity awards for summary compensation numbers was required. In 2022, the following amounts were deducted from and added to the applicable SCT total compensation: |
| SCT Total (A) | Stock Awards Deducted from SCT (B) | Stock Awards Added to CAP (C) | Stock Option Awards Deducted from SCT (D) | Stock Option Awards Added to CAP (E) | Total CAP A - (B + D) + (C + E) | |||||||||||||||||||
| PEO | ||||||||||||||||||||||||
| 2022 | 1,743,391 | (1,343,391 | ) | 702,227 | - | - | 1,102,227 | |||||||||||||||||
| 2021 | 0 | 0 | 0 | - | - | 0 | ||||||||||||||||||
| Average Non-PEO NEO | ||||||||||||||||||||||||
| 2022 | 225,112 | (125,000 | ) | 74,148 | - | - | 174,260 | |||||||||||||||||
| 2021 | 20,000 | - | - | - | - | 20,000 | ||||||||||||||||||
| (3) | The fair value of stock awards reported for CAP purposes in columns (C) and (E) are based on the quoted closing price of the Company’s common stock on the vesting date or the year end date for unvested stock awards in accordance with the SEC rules. See Note 9, “Stockholder’s Equity” in the Notes to the Company’s Consolidated Financial Statements for the fiscal year ended 2022 included in the Company’s Annual Report on Form 10-K for the year ended 2022 for more information regarding the Company’s accounting for share-based compensation. |
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Director Compensation
The following table sets forth compensation paid, earned or awarded during 2022 to each of our directors, other than Sebastian Giordano, whose compensation is described above in the “2022 Summary Compensation Table”.
2022 Director Compensation
| Name | Fees
Earned or Paid in Cash ($) |
Stock Awards ($) (3) |
All
Other Compensation ($) |
Total ($) |
||||||||||||
| Charles Benton (1) | 30,000 | 20,000 | - | 50,000 | ||||||||||||
| John Mercadante (2) | 30,000 | 270,000 | - | 300,000 | ||||||||||||
| Norman Newton (1) | 30,000 | 20,000 | - | 50,000 | ||||||||||||
| (1) | On March 11, 2022 and effective January 4, 2022, each director listed above received 1,818,182 shares of restricted stock valued at $20,000, or $0.011 per share, based on the quoted closing price of the Company’s common stock on the measurement date. |
| (2) | On March 11, 2022 and effective January 4, 2022, this director listed above received 1,818,182 shares of restricted stock valued at $20,000, or $0.011 per share, based on the quoted closing price of the Company’s common stock on the measurement date. Additionally, on March 11, 2022, the Company agreed to grant restricted stock awards to Mr. Mercadante 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. |
| (3) | As required by SEC rules, the amounts in this column reflect the grant date or modification date fair value as required by FASB ASC Topic 718. See Note 9, “Stockholder’s Equity” in the Notes to the Company’s Consolidated Financial Statements for the fiscal year ended 2022 included in the Company’s Annual Report on Form 10-K for the year ended 2022 for more information regarding the Company’s accounting for share-based compensation plans. |
Director Compensation Program
Our current director compensation program is designed to align our director compensation program with the long-term interests of our stockholders by implementing a program comprised of cash and equity compensation.
In setting director compensation, we consider the amount of time that directors expend in fulfilling their duties to the Company as well as the skill level and experience required by our board of directors. We also consider board compensation practices at similarly situated companies, while keeping in mind the compensation philosophy of us and the stockholders’ interests. The directors also receive reimbursement for expenses, including reasonable travel expenses to attend board and committee meetings, reasonable outside seminar expenses, and other special board related expenses.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Subject to community property laws, where applicable, and except as otherwise noted, the persons or entities named in the tables below have sole voting and investment power with respect to all shares of our Common Stock indicated as beneficially owned by them.
The following table sets forth information with respect to the beneficial ownership of our Common Stock as of March 29, 2023, by (i) each stockholder known by us to be the beneficial owner of more than 5% of our Common Stock (our only class of voting securities), (ii) each of our directors and executive officers, and (iii) all of our directors and executive officers as a group. The percentage ownership information is based on 3,664,518,950 shares of common stock outstanding as of March 29, 2023. Information with respect to beneficial ownership has been furnished by each director, officer or beneficial owner of more than 5% of our common stock. We have determined beneficial ownership in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities. In addition, the rules attribute beneficial ownership of securities as of a particular date to persons who hold convertible preferred stock, options or warrants to purchase shares of common stock and that are exercisable within 60 days of such date. These shares are deemed to be outstanding and beneficially owned by the person holding those convertible preferred stock, options or warrants for the purpose of computing the percentage ownership of that person, but they are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Except as otherwise indicated, the persons named in the table below have sole voting and investment power with respect to all shares beneficially owned, subject to community property laws, where applicable. To the best of our knowledge, except as otherwise indicated, each of the persons named in the table has sole voting and investment power with respect to the shares of our Common Stock beneficially owned by such person, except to the extent such power may be shared with a spouse. To our knowledge, none of the shares listed below are held under a voting trust or similar agreement, except as noted. To our knowledge, there is no arrangement, including any pledge, by any person of securities of the Company or any of its parents, the operation of which may at a subsequent date result in a change of control of the Company.
Unless otherwise indicated in the following table, the address for each person named in the table is 5500 Military Trail, Suite 22-357, Jupiter, FL 33458.
| Name and address of beneficial owner | Amount and nature of beneficial ownership | Percent of class (1) | ||||||
| Directors and Executive Officers | ||||||||
| Sebastian Giordano (2) | 147,126,433 | 2.33 | % | |||||
| James Giordano (3) | 11,363,636 | * | ||||||
| Charles Benton (4) | 1,818,182 | * | ||||||
| John Mercadante (5) | 25,845,455 | * | ||||||
| Norman Newton (4) | 1,818,182 | * | ||||||
| Justin Frey | 21,634,615 | * | ||||||
| All directors and executive officers as a group | 209,606,503 | 5.22 | % | |||||
| Joseph Corbisiero (6) | 502,651,844 |
12.6 |
% | |||||
| * | less than 1%. |
| (1) | Applicable percentage ownership is based on 3,664,518,950 shares of Common Stock outstanding as of March 29, 2023. | |
| (2) | Includes 61,063,217 vested common share and 61,063,216 unvested shares, and 25,000,000 vested stock warrants with an exercise price of $0.06 per shares that were issued to Ascentaur LLC, a company controlled by Mr. Giordano in 2020. | |
| (3) | Consists of 11,363,636 vested common shares. | |
| (4) | Consists of 1,818,182 vested common shares. | |
| (5) | Consists of 25,845,455 vested common shares. | |
| (6) | Mr. Joseph Corbisiero is the chief executive officer of Freight Connections. Includes 178,911,844 vested common share and 32,374 Series H convertible preferred stock which are convertible into 323,740,000 common shares. |
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Securities Authorized for Issuance Under Equity Compensation Plans
The Company does not currently have any securities authorized for issuance under any equity compensation plans.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Director Independence
Three of our four board members are independent. The Board has determined that each of Messrs. Benton, Mercadante, and Newton is an independent director pursuant to the NASDAQ listing standards. Under the NASDAQ rules, no director qualifies as independent unless the Board affirmatively determines that the director has no material relationship with us (directly, or as a partner, stockholder or officer of an organization that has a relationship with us).
In assessing the independence of our directors, the Board considers all the business relationships between the Company and our directors and their respective affiliated companies. This review is based primarily on the Company’s review of its own records and on responses of the directors to questions in a questionnaire regarding employment, business, familial, compensation and other relationships with the Company and our management. Where relationships exist, the Board determines whether the relationship between the Company and the directors or the directors’ affiliated companies impairs the directors’ independence. After consideration of the directors’ relationships with the Company, the Board has affirmatively determined that none of the individuals serving as non-employee directors as of the date of this Annual Report has a material relationship with us and that each of such non-employee directors is independent.
Sebastian Giordano is not considered an independent director because of his employment as our CEO, President, and Chairman of the Board.
Related Party Transactions
Due to related parties
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.
During the period from September 17, 2022 to December 31, 2022, Freight Connections incurred outside trucking costs with companies owned by the Freight Connections Seller, who is currently Freight Connection’s chief executive officer. In connection with the outside trucking services, Freight Connections recorded aggregate outside trucking expense of $759,614, which is included in costs of sales on the accompanying consolidated statement of operations. As of December 31, 2022, the aggregate amount due to these companies amounted to $115,117, which is included in accounts payable on the accompanying consolidated balance sheet.
Notes payable – related parties
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 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 adjusted, settled and compromised 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, during the year ended December 31, 2021, the Company recorded a gain on debt extinguishment - related party of $148,651.
During the year ended December 31, 2021, interest expense associated with advances from related parties and related party notes payable amounted to $74,959 and is included in interest expense – related parties on the accompanying consolidated statement of operations.
On September 16, 2022, in connection with the acquisition of Freight Connections, Freight Connections issued a promissory note in the amount of $4,544,671 to the Freight Connections Seller, who became the chief executive officer of Freight Connection and a beneficial owner of the Company. The secured promissory accrues interest at the rate of 5% per annum and then 10% per annum as of March 1, 2023. The entire unpaid principal under the note, together with all accrued and unpaid interest thereon and all other amounts payable thereunder, shall be due and payable in one balloon payment on December 31, 2023, unless paid sooner. The promissory note is secured solely by the assets of Freight Connections. On December 31, 2022, the principal amount related to this note was $4,544,671.
There are not currently any conflicts of interest by or among the Company’s current officers, directors, key employees, or advisors. The Company has not yet formulated a policy for handling conflicts of interest; however, it intends to do so prior to hiring any additional employees.
Item 14. Principal Accountant Fees and Services.
Aggregate fees billed or incurred related to the following years for professional services rendered by our independent registered public accounting firm, Salberg & Company, P.A. for 2022 and 2021 are set forth below.
| 2022 | 2021 | |||||||
| Audit fees | $ | 265,045 | $ | 158,275 | ||||
| Audit-related fees | 31,255 | 17,900 | ||||||
| Tax fees | - | |||||||
| All other fees | - | - | ||||||
| Total | $ | 296,300 | $ | 176,625 | ||||
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The Audit Committee has reviewed and discussed with management the audited financial statements for the year ended December 31, 2022. The Audit Committee also discussed all the matters required by professional auditing standards to be discussed with the Company’s independent registered public accounting firm, Salberg & Company, P.A., the matters required to be discussed by the applicable requirements of the Public Company Accounting Oversight Board and the Securities and Exchange Commission. In addition, Audit Committee has received from the independent registered public accounting firm written disclosure required by the Public Company Accounting Oversight Board Ethics and Independence Rule 3526 and has discussed with the independent registered public accounting firm its independence from the Company and its management. Based on its review and discussions, including discussions without management or members of the independent registered public accounting firm present, the board of directors has approved, that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
To safeguard the continued independence of the Company’s independent registered public accounting firm, the board of directors requires all audit and non-audit services, subject to a de minimis exception pursuant to SEC Regulation S-X Rule 2-01(c)(7)(i)(C), to be performed by the Company’s independent registered public accounting firm, to be pre-approved by the board of directors prior to such services being performed. All audit services performed by the Company’s independent registered public accounting firm during the year ended December 31, 2022 and 2021 were approved by the board of directors.
Item 15. Exhibits and Financial Statement Schedules.
The following financial information is filed as part of this report:
(a)
| (1) | FINANCIAL STATEMENTS | |
| (2) | SCHEDULES | |
| (3) | EXHIBITS. The following exhibits required by Item 601 to be filed herewith are incorporated by reference to previously filed documents: |
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| 31.2* | Certification of Principal Financial Officer pursuant to Section 302 | |
| 32.1*# | Certification of Principal Executive Officer pursuant to Section 906 | |
| 32.2*# | Certification of Principal Financial Officer pursuant to Section 906 | |
| 101.INS* | Inline XBRL Instances Document | |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* Filed herewith.
| + | Indicates a management contract or any compensatory plan, contract or arrangement. |
# The certifications attached as Exhibit 32.1 and Exhibit 32.2 that accompanies this Form 10-K is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Transportation and Logistics Systems, Inc. under the Securities Act or the Exchange Act, whether made before or after the date of this Form 10-K, irrespective of any general incorporation language contained in such filing.
Item 16. Form 10-K Summary.
None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| TRANSPORTATION AND LOGISTICS SYSTEMS, INC. | ||
| March 31, 2023 | ||
| By: | /s/ Sebastian Giordano | |
| Sebastian Giordano, Principal Executive Officer and Director | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Sebastian Giordano | Chief Executive Officer, President, and Chairman of the Board of Directors | March 31, 2023 | ||
| Sebastian Giordano | (Principal executive officer) | |||
| /s/ James Giordano | Chief Financial Officer (principal financial officer and principal accounting officer) | March 31, 2023 | ||
| James Giordano | ||||
| /s/ Charles Benton | Director | March 31, 2023 | ||
| Charles Benton | ||||
| /s/ John Mercadante | Director | March 31, 2023 | ||
| John Mercadante | ||||
| /s/ Norman Newton | Director | March 31, 2023 | ||
| Norman Newton |
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