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 $ 6,532,027Compensation 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 ) $ 12,699,814For 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.
33
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.
34
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.
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TRANSPORTATION AND LOGISTICS SYSTEMS, INC. 
