NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August
31, 2022
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Business
Unique
Logistics International, Inc. (the “Company” or “Unique”) is a global logistics and freight forwarding company.
The Company currently operates via its wholly owned subsidiaries, Unique Logistics International (NYC), LLC, a Delaware limited liability
company (“UL NYC”) and Unique Logistics International (BOS) Inc, a Massachusetts corporation (“UL BOS”) and (collectively
the “UL US Entities”). The Company provides a range of international logistics services that enable its customers to outsource
sections of their supply chain process. This range of services can be categorized as follows:
| |
● |
Air Freight |
| |
● |
Ocean Freight |
| |
● |
Customs Brokerage and Compliance |
| |
● |
Warehousing and Distribution |
| |
● |
Order Management |
Liquidity
The
accompanying condensed consolidated financial statements have been prepared on a going concern basis. Substantial doubt about an entity’s
ability to continue as a going concern exists when conditions and events, considered in the aggregate, indicate that it is probable that
the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are
issued.
As
of August 31, 2022, the Company reported working capital of approximately $6.5 million compared with $4.2 million working capital as
of May 31, 2022. The Company’s Earnings Before Interest, Tax, Depreciation and Amortization (“EBITDA”) contribution to working capital was $5.1 million and cash flow from operations $0.3 million during the quarter ended August 31, 2022. The Company has adequate cash availability through the TBK Facility.
Since
its inception, the Company has experienced significant business growth. To fund such growth, operating capital was initially
provided by third party investors through the sale of Convertible Notes which were subsequently exchanged into convertible securities. Preferred
shares are more beneficial to the Company because they do not require cash repayments. Due to the antidilution provision imbedded in the
certain of the convertible securities, these provisions resulted in an embedded derivative and the Company recorded a long-term liability.
As of the quarter ended August 31, 2022, and the year ended May 31, 2022, this liability was $11.8
million and $12.4
million, respectively. This liability is recorded as a long-term liability due to its future settlement in common stock on the
balance sheet and is being adjusted to market on each of the subsequent reporting periods.
While
we continue to execute our strategic plan, management is focused on managing cash and monitoring our liquidity position. We have
implemented a number of initiatives to conserve our liquidity position including activities such as increasing credit facilities,
when needed, reducing cost of debt, controlling general and administrative expenditures and improving collection processes.
Many of the aspects of the plan involve management’s judgments and estimates that include factors that could be beyond our
control and actual results could differ from our estimates. These and other factors could cause the strategic plan to be
unsuccessful which could have a material adverse effect on our operating results, financial condition, and liquidity. Use of
operating cash is an indicator that there could be a going concern issue, but based on our evaluation of the Company’s
projected cash flows and business performance as of and subsequent to the balance sheet date, management has concluded that the
Company’s current cash and cash availability under the TBK Facility as of August 31, 2022, would be sufficient to fund its planned operations for at least one year from the date these consolidated financial statements are issued.
COVID-19
Covid-19
remains a threat and certain countries, such as China, are still subject to restrictions related to Covid-19. While the threat level
has declined to a significant extent in the USA and globally, any resurgence could have a material adverse effect on our business operations,
results of operations, cash flows and financial position.
Basis
of Presentation
The
condensed consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted
in the United States of America (“US GAAP”) and include the accounts of the Company and its wholly owned subsidiaries. All
intercompany balances and transactions have been eliminated in consolidation.
The
unaudited interim financial information furnished herein reflects all adjustments, consisting solely of normal recurring items, which
in the opinion of management are necessary to fairly state the financial position of the Company and the results of its operations for
the periods presented. This report should be read in conjunction with the Company’s consolidated financial statements and notes
thereto included in the Company’s Form 10-K for the year ended May 31, 2022. The Company assumes that the users of the interim
financial information herein have read or have access to the audited financial statements for the preceding fiscal year and that the
adequacy of additional disclosure needed for a fair presentation may be determined in that context. The condensed consolidated balance
sheet on May 31, 2022 was derived from audited financial statements but does not include all disclosures required by accounting principles
generally accepted in the United States of America.
Principles
of Consolidation
The
consolidated financial statements of the Company include the accounts of the Company and its majority owned subsidiaries stated in U.S.
dollars, the Company’s functional currency. All intercompany transactions and balances have been eliminated in the consolidated
financial statements.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from those estimates.
Significant
estimates inherent in the preparation of the consolidated financial statements include determinations of the useful lives and expected
future cash flows of long-lived assets, including intangibles, valuation of assets and liabilities acquired in business combinations,
and estimates and assumptions in valuation of debt and equity instruments, including derivative liabilities. In addition, the Company
makes significant judgments to recognize revenue – see policy note “Revenue Recognition” below.
Fair
Value Measurement
The
Company follows the authoritative guidance that establishes a formal framework for measuring fair values of assets and liabilities in
the consolidated financial statements that are already required by generally accepted accounting principles to be measured at fair value.
The guidance 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 (exit price). The transaction is based on a hypothetical transaction in the principal
or most advantageous market considered from the perspective of the market participant that holds the asset or owes the liability.
The
Company utilizes market data or assumptions that market participants who are independent, knowledgeable, and willing and able to transact
would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique.
These inputs can be readily observable, market corroborated or generally unobservable. The Company attempts to utilize valuation techniques
that maximize the use of observable inputs and minimize the use of unobservable inputs.
The
Company is able to classify fair value balances based on the observability of those inputs. The guidance establishes a formal fair value
hierarchy based on the inputs used to measure fair value. The hierarchy gives the highest priority to Level 1 measurements and the lowest
priority to level 3 measurements, and accordingly, Level 1 measurement should be used whenever possible.
The
hierarchy is broken down into three levels based on the reliability of inputs as follows:
Level
1 – Quoted prices in active markets for identical assets or liabilities or published net asset value for alternative investments
with characteristics similar to a mutual fund.
Level
2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or
indirectly.
Level
3 – Unobservable inputs for the asset or liability.
The
methods used may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values.
Furthermore, while management believes its valuation methods are appropriate, the fair value of certain financial instruments could result
in a difference fair value measurement at the reporting date. There were no changes in the Company’s valuation methodologies from
the prior year.
For
purpose of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced sale or liquidation. The carrying amounts for financial assets and liabilities
such as cash and cash equivalents, accounts receivable - trade, contract assets, factoring reserve, other prepaid expenses and current
assets, accounts payable – trade and other current liabilities, including contract liabilities, convertible notes, promissory notes,
all approximate fair value due to their short-term nature as of August 31, 2022 and May 31, 2022. The carrying amount of the long-term
debt approximates fair value because the interest rates on these instruments approximate the interest rate on debt with similar terms
available to the Company. Lease liabilities approximate fair value based on the incremental borrowing rate used to discount future cash
flows. The Company had Level 3 liabilities (See Derivative Liabilities note) as of August 31, 2022. On August 31, 2021, Level 3 derivative
liability balances were insignificant. There were no transfers between levels during the reporting period.
Accounts
Receivable
Accounts
receivable from revenue transactions are based on invoiced prices which the Company expects to collect. In the normal course
of business, the Company extends credit to customers that satisfy pre-defined credit criteria. The Company generally does not require
collateral to support customer receivables. Accounts receivable - trade, as shown on the consolidated balance sheets, is net of allowances
when applicable. An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable at the date of
the consolidated financial statements, assessments of collectability based on an evaluation of historic and anticipated trends, the financial
condition of the Company’s customers, and an evaluation of the impact of economic conditions. The maximum accounting loss from
the credit risk associated with accounts receivable is the amount of the receivable recorded, net of allowance for doubtful accounts.
As of August 31, 2022 and May 31, 2022, the Company recorded an allowance for doubtful accounts of approximately $2.7 million.
Concentrations
Three
major customers represented approximately 23.0%
of all accounts receivable as of August 31, 2022 and no single customer represented more than 10.0% of total accounts receivable. Revenue
from these three major customers as a percentage of the Company’s total revenue was 20.0%
for the three months ended August 31, 2022, and no single customer represented more than 10.0% of total revenue.
Three
major customers represented approximately 21.0% of all accounts receivable as of May 31, 2022 and no single customer represented
more than 10.0% of total accounts receivable. Same three customers accounted for 32.0%
of total revenue for the three months ended August 31, 2021 with only customer A at 15.0
%, and customers B and C were less than 10.0% each.
Off
Balance Sheet Arrangements
On
August 30, 2021, the Company terminated its agreement with an unrelated third party (the “Factor”) for factoring of specific
accounts receivable. The factoring under this agreement was treated as a sale in accordance with FASB ASC 860, Transfers and Servicing,
and is accounted for as an off-balance sheet arrangement. Proceeds from the transfers reflected the face value of the account less a
fee, which is presented in costs and operating expenses on the Company’s consolidated statements of operations in the period the
sale occurs. Net funds received are recorded as an increase to cash and a reduction to accounts receivable outstanding in the consolidated
balance sheets. The Company reported the cash flows attributable to the sale of receivables to third parties and the cash receipts from
collections made on behalf of and paid to third parties, on a net basis as trade accounts receivables in cash flows from operating activities
in the Company’s consolidated statements of cash flows. The net principal balance of trade accounts receivable outstanding in the
books of the factor under the factoring agreement was $31.7 million as of May 31, 2021. On June 2, 2021 and on August 30, 2021, the Company
repurchased all of its factored trade accounts receivables from the Factor, in the amounts of $31.6 million and $1.4 million, respectively,
utilizing its TBK Facility.
During
the factoring agreement in place, the Company acted as the agent on behalf of the Factor for the arrangements and had no significant
retained interests or servicing liabilities related to the accounts receivable sold. The agreement provided the Factor with security
interests in purchased accounts until the accounts have been repurchased by the Company or paid by the customer. In order to mitigate
credit risk related to the Company’s factoring of accounts receivable, the Company may purchase credit insurance, from time to
time, for certain factored accounts receivable, resulting in risk of loss being limited to the factored accounts receivable not covered
by credit insurance, which the Company does not believe to be significant.
During
the three months ended August 31, 2022 and 2021, the Company factored accounts receivable invoices totaling approximately none and $4.3
million, respectively, pursuant to the Company’s factoring agreement, representing the face value of the invoices. The Company
recognizes factoring costs upon disbursement of funds. The Company did not incur expenses pursuant to the agreements for the three months
ended August 31, 2022. The Company incurred expenses totaling approximately $27,000 pursuant to the agreements for the three months ended
August 31, 2021. The Company recognizes factoring costs upon disbursement of funds. Factoring expenses are presented in costs and operating
expenses on the consolidated statements of operations.
Factoring
Reserve
When
an invoice is sold to Factor, the amount received from the Factor is credited to accounts receivable and a reserve is retained,
less a fee, by Factor which is debited to “factoring reserve” on the condensed consolidated balance sheets. As of August
31, 2022 and May 31, 2022, the Company did not record a factoring reserve.
Factor
Recovery
In
certain instances, the Company receives payment for a factored reserve directly from the customer. In these cases, until the funds are
paid to the factor, the Company records the payment as “factor recovery” which is in accrued expenses and other current liabilities
on the consolidated balance sheets. As of August 31, 2022 and May 31, 2022, the Company did not record a factor recovery.
Recourse
Liability
Company
policy is to do a collectability review of uncollected factored receivables in conjunction with the Factor at each reporting date and
assess the need to provide for risk of potential non-collection and resulting recourse.
Derivative
Liability
On
December 10, 2021, the Company entered into an amended securities exchange agreement with the holders of convertible notes to exchange
all Convertible Notes of the Company into shares of the newly created Convertible Preferred Stock Series C and D. For additional information
on the exchange agreement see Note 5, Financing Arrangements.
Similar
to the existing Convertible Preferred Stock Series A, these preferred stocks featured anti-dilution provision that expire on a certain
date. Management has determined the anti-dilution provision embedded in preferred stock Series A, C and D is required to be accounted
for separately from the preferred stock as a derivative liability and recorded at fair value. Separation of the anti-dilution option
as a derivative liability is required because its economic characteristics are considered more akin to an equity instrument and therefore
the anti-dilution option is not considered to be clearly and closely related to the economic characteristics of the preferred stock.
The
Company has identified and recorded derivative instruments arising from an anti-dilution provision in the Company’s Series A, C
and D Preferred Stock. An embedded derivative liability is representing the rights of holders of Convertible Preferred Stock Series A,
C and D to receive additional common stock of the Company upon issuance of any additional common stock by the Company prior to qualified
financing event as defined in the agreement. Each reporting period, the embedded derivative liability, if material, would be adjusted
to reflect fair value at each period end with changes in fair value recorded in the “Change in fair value of embedded derivative
liability” financial statement line item of the company’s statements of operations. During the three months ended August
31, 2022, the Company recorded a change in fair value of $618,948 in the condensed consolidated statements of operations.
SCHEDULE OF DERIVATIVE LIABILITIES
| | |
| | | |
| | | |
| | |
| | |
Level 1 | | |
Level 2 | | |
Level 3 | |
| Derivative liabilities as June 1, 2022 | |
$ | - | | |
$ | - | | |
$ | 12,437,994 | |
| Addition | |
| - | | |
| - | | |
| - | |
| Change in fair value | |
| - | | |
| - | | |
| 618,948 | |
| Derivative liabilities as August 31, 2022 | |
$ | - | | |
$ | - | | |
$ | 11,819,046 | |
The
underlying value of the anti-dilution provision is calculated from estimating the probability and value of the provision assuming
a near term financing event. For the period ended May 31, 2022, the model used estimates the potential that the company completes a capital
raise prior to the expiration of the anti-dilution feature and determines the value of the anti-dilution feature given these assumptions.
The model required the use of certain assumptions. These assumptions include probability a raise is completed, probability certain anti-dilution
features are extended, estimated raise amount, term to a raise, and an appropriate risk-free interest rate. For the period ended August
31, 2022, due to changes in the way antidilutive shares of Convertible Preferred Series A, C and D would be exchanged in the near future
for common stock, and the fact that the antidilution provision of these shares was extended through March 31, 2023, the assumptions were
changed to include probability of the financing event, estimated value of common stock at the exchange point and estimated time to financing
event.
The
key inputs into the model were as follows:
SCHEDULE OF FAIR VALUE ASSUMPTION
| | |
August
31, 2022 | |
|
May
31, 2022 | |
| Risk-free interest
rate | |
| 3.3 | %
|
|
| 1.6 | %
|
| Probability
of financing event or capital raise | |
| 90.0 | %
|
|
| 53.9 | %
|
| Estimated capital raise | |
| - | |
|
$ | 39.0
million | |
| Estimated value of common stock | |
$ | 10.0
per share | |
|
| - | |
| Estimated time to financing
event | |
| 0.5
years | | |
| 0.5
years | |
Revenue
Recognition
The
Company adopted ASC 606, Revenue from Contracts with Customers. Under ASC 606, revenue is recognized when control of the promised
goods or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to
receive in exchange for services. The Company recognizes revenue upon meeting each performance obligation based on the allocated amount
of the total consideration of the contract to each specific performance obligation.
To
determine revenue recognition, the Company applies the following five steps:
| |
1. |
Identify the contract(s)
with a customer; |
| |
2. |
Identify the performance
obligations in the contract; |
| |
3. |
Determine the transaction
price; |
| |
4. |
Allocate the transaction
price to the performance obligations in the contract; and |
| |
5. |
Recognize revenue as or
when the performance obligation is satisfied. |
Revenue
is recognized as follows:
| |
i. |
Freight income - export
sales |
| |
|
|
| |
|
Freight income from the
provision of air, ocean, and land freight forwarding services are recognized over time based on a relative transit time basis thru
the sail or departure from origin port. The Company is the principal in these transactions and recognizes revenue on a gross basis. |
| |
|
|
| |
ii. |
Freight income - import
sales |
| |
|
|
| |
|
Freight income from the
provision of air, ocean, and land freight forwarding services are recognized over time based on a relative transit time basis thru
the delivery to the customer’s designated location. The Company is the principal in these transactions and recognizes revenue
on a gross basis. |
| |
|
|
| |
iii. |
Customs brokerage and other
service income |
| |
|
|
| |
|
Customs brokerage and other
service income from the provision of other services are recognized at the point in time the performance obligation is met. |
The
Company’s business practices require, for accurate and meaningful disclosure, that it recognizes revenue over time. The “over
time” policy is the period from point of origin to arrival of the shipment at US Port of entry (or in the case when the customer
requires delivery to a designated point, the arrival at that delivery point). This over time policy requires the Company to make significant
judgements to recognize revenue over the estimated duration of time from port of origin to arrival at port of entry. The point in the
process when the Company meets its obligation in the port of entry and the subsequent transfer of the goods to the customer is when the
customer has the obligation to pay, has taken physical possession, has legal title, risk and awards (ownership) and has accepted the
goods. The Company has elected to not disclose the aggregate amount of the transaction price allocated to performance obligations that
are unsatisfied as of the end of the period as the Company’s contracts with its customers have an expected duration of one year
or less.
The
Company uses independent contractors and third-party carriers in the performance of its transportation services. The Company evaluates
who controls the transportation services to determine whether its performance obligation is to transfer services to the customer or to
arrange for services to be provided by another party. The Company determined it acts as the principal for its transportation services
performance obligation since it is in control of establishing the prices for the specified services, managing all aspects of the shipments
process and assuming the risk of loss for delivery and collection.
Revenue
billed prior to realization is recorded as contract liabilities on the consolidated balance sheets and contract costs incurred prior
to revenue recognition are recorded as contract assets on the consolidated balance sheets.
Contract
Assets
Contract
assets represent amounts for which the Company has the right to consideration for the services provided while a shipment is still in-transit
but for which it has not yet completed the performance obligation and has not yet invoiced the customer. Upon completion of the performance
obligations, which can vary in duration based upon the method of transport and billing the customer, these amounts become classified
within accounts receivable.
Contract
Liabilities
Contract
liabilities represent the amount of obligation to transfer goods or services to a customer for which consideration has been received.
Significant
Changes in Contract Asset and Contract Liability Balances for the three months ended August 31, 2022:
SCHEDULE OF CHANGES IN CONTRACT ASSET AND CONTRACT LIABILITY
| |
|
Contract
Assets
Increase
(Decrease) |
|
|
Contract
Liabilities
(Increase)
Decrease |
|
| |
|
|
|
|
|
|
| Reclassification
of the beginning contract liabilities to revenue, as the result of performance obligation satisfied |
|
$ |
- |
|
|
$ |
468,209 |
|
| Cash
Received in advance and not recognized as revenue |
|
|
- |
|
|
|
- |
|
| Reclassification
of the beginning contract assets to receivables, as the result of rights to consideration becoming unconditional |
|
|
(24,048,346 |
) |
|
|
- |
|
| Contract
assets recognized |
|
|
21,257,202 |
|
|
|
- |
|
| Net Change |
|
$ |
(2,791,145 |
) |
|
$ |
468,209 |
|
There
were no changes in contract assets or liabilities as of August 31, 2021.
Disaggregation
of Revenue from Contracts with Customers
The
following table disaggregates gross revenue from our clients (all US based) by significant geographic area for the three months ended
August 31, 2022 and 2021, based on origin of shipment (imports) or destination of shipment (exports):
SCHEDULE OF DISAGGREGATION OF REVENUE
| | |
| | |
| |
| | |
For the three months Ended August 31, 2022 | | |
For the three months Ended August 31, 2021 | |
| China, Hong Kong & Taiwan | |
$ | 64,058,155 | | |
$ | 78,105,308 | |
| Southeast Asia | |
| 41,981,433 | | |
| 75,376,620 | |
| United States | |
| 10,399,422 | | |
| 7,191,202 | |
| India Sub-continent | |
| 18,796,708 | | |
| 20,648,314 | |
| Other | |
| 1,273,154 | | |
| 8,450,415 | |
| Total revenue | |
$ | 136,508,872 | | |
$ | 189,771,860 | |
Segment
Reporting
Based
on the guidance provided by ASC Topic 280, Segment Reporting, management has determined that the Company currently operates in
one geographical segment and consists of a single reporting unit given the similarities in economic characteristics between its operations
and the common nature of its products, services and customers.
Earnings
per Share
The
Company adopted ASC 260, Earnings per share, guidance from the inception. Earnings per share (“EPS”) is the amount
of earnings attributable to each share of common stock. For convenience, the term is used to refer to either earnings or loss per share.
Basic EPS is computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares
outstanding, including warrants exercisable for less than a penny, (the denominator) during the period. Income available to common stockholders
shall be computed by deducting both the dividends declared in the period on preferred stock (whether or not paid) and the dividends accumulated
for the period on cumulative preferred stock (whether or not earned) from income from continuing operations (if that amount appears in
the consolidated statements of operations) and also from net income. The computation of diluted EPS is similar to the computation of
basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding
if the dilutive potential common shares had been issued during the period to reflect the potential dilution that could occur from common
shares issuable through contingent shares issuance arrangement, stock options or warrants.
The
following table provides a reconciliation of the numerator and denominator used in computing basic and diluted net income attributable
to common stockholders per common share.
The
following table provides a reconciliation of the numerator and denominator used in computing basic and diluted net income attributable
to common stockholders per common share.
SCHEDULE OF EARNING PER SHARE
| | |
August 31, 2022 | | |
August 31, 2021 | |
| | |
For the three months Ended | |
| | |
August 31, 2022 | | |
August 31, 2021 | |
| Numerator: | |
| | |
| |
| Net income available for common shareholders | |
$ | 3,321,341 | | |
| 2,023,416 | |
| Effect of dilutive securities: | |
| - | | |
| 385,480 | |
| | |
| | | |
| | |
| Diluted net income available for common shareholders | |
$ | 3,321,341 | | |
$ | 2,408,896 | |
| | |
| | | |
| | |
| Denominator: | |
| | | |
| | |
| Weighted average common shares outstanding – basic | |
| 744,224,695 | | |
| 1,611,146,398 | |
| | |
| | | |
| | |
| Dilutive securities: | |
| | | |
| | |
| Series A Preferred | |
| 1,233,209,295 | | |
| 1,316,157,000 | |
| Series B Preferred | |
| 5,373,342,576 | | |
| 5,373,342,576 | |
| Convertible notes | |
| - | | |
| 1,806,230,539 | |
| Series C Preferred | |
| 1,206,351,359 | | |
| - | |
| Series D Preferred | |
| 1,130,954,399 | | |
| - | |
| | |
| | | |
| | |
| Weighted average common shares outstanding and assumed conversion – diluted | |
| 9,688,082,324 | | |
| 10,106,876,513 | |
| | |
| | | |
| | |
| Basic net income available for common shareholders per common share | |
$ | 0.00 | | |
$ | 0.00 | |
| | |
| | | |
| | |
| Diluted net income available for common shareholders per common share | |
$ | 0.00 | | |
$ | 0.00 | |
Leases
The Company recognizes a right of use (“ROU”)
asset and liability in the consolidated balance sheet primarily related to its operating leases of office space, warehouse space and equipment.
Right-of-use assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent
the Company’s obligation to make lease payments arising from the lease. All ROU assets and lease liabilities are recognized at the
commencement date at the present value of lease payments over the lease term. ROU assets are adjusted for lease incentives and initial
direct costs. The lease term includes renewal options exercisable at the Company’s sole discretion when the Company is reasonably
certain to exercise that option. As the Company’s leases generally do not have an implicit rate, the Company uses an estimated incremental
borrowing rate based on borrowing rates available to them at the commencement date to determine the present value. Certain of our leases
include variable payments, which may vary based upon changes in facts or circumstances after the start of the lease. The Company excludes
variable payments from ROU assets and lease liabilities to the extent not considered fixed, and instead expenses variable payments as
incurred. Lease expense is recognized on a straight-line basis over the lease term and is included in rent and occupancy expenses in the
consolidated statements of operations.
Recently
Issued 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”. This ASU amends the guidance on convertible instruments and the derivatives
scope exception for contracts in an entity’s own equity, and also improves and amends the related EPS guidance for both
Subtopics. ASU 2020-06 is effective for public business entities, other than smaller reporting companies as defined by the SEC
starting January 1, 2022. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023,
including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the potential
impact of this standard on its consolidated financial statements.
2.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued
expenses and other current liabilities consisted of the following at August 31, 2022 and May 31, 2022:
SCHEDULE OF ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
| | |
August 31, 2022 | | |
May 31, 2022 | |
| | |
| | |
| |
| Accrued salaries and related expenses | |
$ | 848,374 | | |
$ | 625,000 | |
| Accrued sales and marketing expense | |
| 890,461 | | |
| 2,383,500 | |
| Accrued professional fees | |
| 1,695,259 | | |
| 1,350,170 | |
| Accrued income tax | |
| 1,223,417 | | |
| 559,544 | |
| Accrued overdraft liabilities | |
| 520,274 | | |
| 681,058 | |
| Other accrued expenses and current liabilities | |
| 23,030 | | |
| 66,887 | |
| Accrued expenses and
other current liabilities | |
$ | 5,200,815 | | |
$ | 5,666,159 | |
3. FINANCING ARRANGEMENTS
Financing
arrangements on the consolidated balance sheets consists of :
SCHEDULE OF FINANCING ARRANGEMENT
| | |
August 31, 2022 | | |
May 31, 2022 | |
| | |
| | |
| |
| Revolving Credit Facility | |
$ | 36,785,256 | | |
$ | 38,141,451 | |
| Notes payable | |
| 608,333 | | |
| 608,333 | |
| Notes payable, gross | |
| 37,393,589 | | |
| 38,749,784 | |
| Less: current portion | |
| (37,393,589 | ) | |
| (38,749,784 | ) |
| Long term, notes payable | |
$ | - | | |
$ | - | |
Revolving
Credit Facility
On June 1, 2021, the Company entered into a Revolving Purchase, Loan and
Security Agreement (the “TBK Agreement”) with TBK BANK, SSB, a Texas State Savings Bank (“TBK”), for a facility
under which TBK will, from time to time, buy approved receivables from the Company. This line was subject to periodic increases and on
April 14, 2022, the parties entered into a Fourth Amendment to temporarily increase the credit facility from $47.5 million to $57.5 million through October 31, 2022.
Notes
Payable
On
May 29, 2020, as part of the acquisition related to UL ATL the Company entered into a $1,825,000 note payable with a former shareholder.
The loan bears a zero percent interest rate and has a maturity of three years, or May 29, 2023. The agreement calls for six semi-annual
payments of $304,166.67, for which the first payment was due on November 29, 2020. As of August 31, 2022 and May 31, 2022, the outstanding
balance due under the note was $608,333.
4.
RELATED PARTY TRANSACTIONS
The
Company has the following debt due to related parties:
SCHEDULE OF RELATED PARTY TRANSACTIONS
| | |
August 31, 2022 | | |
May 31, 2022 | |
| | |
| | |
| |
| Due to Frangipani Trade Services (1) | |
$ | 602,618 | | |
$ | 602,618 | |
| Due to employee (2) | |
| 22,500 | | |
| 30,000 | |
| Due to employee (3) | |
| 46,169 | | |
| 66,658 | |
| Due to related parties, gross | |
| 671,287 | | |
| 699,276 | |
| Less: current portion | |
| (369,979 | ) | |
| (301,308 | ) |
| Long term, due to related
parties | |
$ | 301,308 | | |
$ | 397,968 | |
| |
(1) |
Due
to Frangipani Trade Services (“FTS”), an entity owned by the Company’s CEO, is due on demand and is non-interest
bearing. The principal amount of this Promissory Note bears no interest; provided that any amount due under this Note which is not
paid when due shall bear interest at an interest rate equal to six percent (6%) per annum. The principal amount is due and payable
in six payments of $150,655 the first payment due on November 30, 2021, with each succeeding payment to be made six months after
the preceding payment. |
| |
|
|
| |
(2) |
On
May 29, 2020, the Company entered into a $90,000 payable with an employee for the acquisition of UL BOS common stock from a previous
owner. The payment terms consist of thirty-six monthly non-interest-bearing payments of $2,500 from the date of closing. |
| |
|
|
| |
(3) |
On
May 29, 2020, the Company entered into a $200,000 payable with an employee for the acquisition of UL BOS common stock from a previous
owner. The payment terms consist of thirty-six monthly non-interest-bearing payments of $5,556 from the date of closing. |
Consulting
Agreements
Unique
entered into a Consulting Services Agreement on May 29, 2020 for a term of three years with Great Eagle Freight Limited (“Great
Eagle” or “GEFD”), a Hong Kong Company (the “Consulting Services Agreement”) where the Company pays $500,000
per year until the expiration of the agreement on May 28, 2023. The fair value of the services was determined to be less than the cash
payments and the difference was recorded as Other Long Term Liabilities line item on the condensed consolidated balance sheets and amortized
over the life of the agreement. The unamortized balances were $211,998 and $282,666 as of August 31, 2022 and May 31, 2022, respectively.
The
Company utilizes financial reporting services from the firm owned and controlled by David Briones, a member of the Board of Directors.
The service fees are $5,000 per month. Total fees were $15,000 for three months ended August 31, 2022 and 2021.
Accounts
Receivable and Payable
Transactions
with related parties account for $3.3 million and $19.7 million of accounts receivable and accounts payable as of August 31, 2022, respectively
compared to $3.0 million and $15.2 million of accounts receivable and accounts payable as of May 31, 2022.
Revenue
and Expenses
Revenue
from related party transactions is for export services from related parties or for delivery at place imports nominated by such related
parties. For the three months ended August 31, 2022, these transactions represented approximately $ 0.7 million of revenue. For the three
months ended August 31, 2021, these transactions represented $0.3 million of revenue.
Direct
costs are services billed to the Company by related parties for shipping activities. For the three months ended August 31, 2022, these
transactions represented approximately $25.8 million of total direct costs. For the three months ended August 31, 2021, these transactions
represented $29.3 million of total direct costs.
5.
STOCKHOLDERS’ EQUITY
Common
Stock
The
Company is authorized to issue 800,000,000 shares of stock, a par value of $0.001 per share.
During
the three months ended August 31, 2021 noteholders converted $150,558 in convertible notes (principal and interest) into 83,811,872 shares of the Company’s
common stock at a rate of $0.00179638 per share.
During
the three months ended August 31, 2022, a shareholder converted 7 shares of Series D Convertible Preferred Stock into 43,981,559
shares of the Company’s common stock.
Preferred
Shares
The
Company authorized to issue 5,000,000 shares of preferred stock, $0.001 par value per share.
Series
A Convertible Preferred
The
holders of Series A Preferred. subject to the rights of holders of shares of the Company’s Series B Preferred stock which shares
will be pari passu with Series B Preferred in terms of liquidation preference and dividend rights and are subject to an anti-dilution
provision, making the holders subject to an adjustment necessary to maintain their agreed upon fully diluted ownership percentage.
During the three months ended August 31, 2022, a shareholder
converted 9,935 shares of Series A Convertible Preferred Stock into 67,963,732 shares of the Company’s common stock.
Series
B Convertible Preferred
The
holders of Series B Preferred, subject to the rights of holders of shares of the Company’s Series A Preferred Stock which shares
will be pari passu with the Series B Preferred in terms of liquidation preference and dividend rights, shall be entitled to receive,
at their option, immediately prior an in preference to any distribution to the holders of the Company’s common stock.
During
the three months ended August 31, 2021, the Company issued 125,692,224 shares of the Company’s common stock pursuant to the non-cash
conversion of 19,200 shares of Series B Convertible Preferred Stock held by Frangipani Trade Services Inc, an entity 100% owned by the
Company’s Chief Executive Officer.
Series
C & D Convertible Preferred
The
holders of the Preferred Stock shall be entitled to receive, upon liquidation, dissolution or winding up of the Company, the amount of
cash, securities or other property to which such holder would be entitled to receive with respect to such shares of Preferred Stock if
such shares had been converted to common stock immediately prior to such liquidation.
6.
COMMITMENTS AND CONTINGENCIES
Pending
acquisitions
On
April 28, 2022, Unique Logistics International, Inc. (the “Company”) entered into a stock purchase agreement (the “Purchase
Agreement”), by and between the Company and Unique Logistics Holdings Limited, a Hong Kong corporation (the “Seller”),
whereby the Company acquired from the Seller all of Seller’s share capital (the “Purchased Shares”) in nine (9) of
Seller’s subsidiaries (collectively the “Subsidiaries”) as listed in Schedule I of the Purchase Agreement. As consideration
for the Purchased Shares, the Company agreed to (i) pay the Seller $21,000,000 (the “Cash Consideration”); and (ii) issue
to the Seller a $1,000,000 promissory note (the “Note” and, together with the Cash Consideration, the “Purchase Price”).
The Purchase Price is subject to certain adjustments set forth in the Purchase Agreement.
The
transactions contemplated by the Purchase Agreement shall be contingent upon and subject to successful Financing and shell be completed
prior to December 31, 2022. If the Company is unable to obtain the Financing, the Company may provide written notice to Seller stating
that the Company has been unable to obtain the Financing and notify Seller that the Company has elected to either (i) waive the condition
of the Financing, in which event the Purchase Agreement will continue as if the Financing had been obtained or (ii) terminate the Purchase
Agreement.
Litigation
From
time to time, the Company may become involved in litigation relating to claims arising in the ordinary course of the business. There
are no claims or actions pending or threatened against the Company that, if adversely determined, would in the Company’s management’s
judgment have a material adverse effect on the Company.
Leases
The
Company leases office space, warehouse facilities and equipment under non-cancellable lease agreements expiring on various dates through
October 2028. Office leases contain provisions for future rent increases. The Company adopted ASC 842 from inception, requiring the Company
to recognize an asset and liability on the consolidated balance sheets for lease arrangements with terms longer than 12 months. The Company
has elected the practical expedient to not apply the recognition requirement to leases with a term of less than one year (short term
leases). The Company uses its incremental borrowing rate to discount lease payments to present value. The incremental borrowing rate
is based on the estimated interest rate the Company could obtain for borrowing over a similar term of the lease at commencement date.
Rental escalations, renewal options and termination options, when applicable, have been factored into the Company’s determination
of lease payments when appropriate. The Company does not separate lease and non-lease components of contracts. Variable payments related
to pass-through costs for maintenance, taxes and insurance or adjustments based on an index such as Consumer Price Index are not included
in the measurement of the lease liability or asset and are expensed as incurred.
The
components of lease expense were as follows:
SCHEDULE OF COMPONENTS OF LEASE EXPENSE
| | |
For the Three Months Ended August 31, 2022 | | |
For the Three Months Ended August 31, 2021 | |
| Operating lease | |
$ | 409,354 | | |
$ | 362,201 | |
| Interest on operating lease liabilities | |
| 59,100 | | |
| 52,384 | |
| Total net lease cost | |
$ | 468,454 | | |
$ | 414,585 | |
Supplemental
balance sheet information related to leases was as follows:
SCHEDULE OF SUPPLEMENTAL BALANCE SHEET INFORMATION
| | |
August 31, 2022 | | |
May 31, 2022 | |
| | |
| | |
| |
| Operating leases: | |
| | | |
| | |
| Operating lease ROU assets – net | |
$ | 2,421,792 | | |
$ | 2,408,098 | |
| | |
| | | |
| | |
| Current operating lease liabilities, included in current liabilities | |
$ | 720,096 | | |
$ | 912,618 | |
| Noncurrent operating lease liabilities, included in long-term liabilities | |
| 1,809,283 | | |
| 1,593,873 | |
| Total operating lease liabilities | |
$ | 2,529,379 | | |
$ | 2,506,491 | |
Supplemental
cash flow and other information related to leases was as follows:
SCHEDULE OF SUPPLEMENTAL CASH FLOW AND OTHER INFORMATION
| | |
For the Three Months Ended August 31, 2022 | | |
For the Three Months Ended August 31, 2021 | |
| | |
| | |
| |
| ROU assets obtained in exchange for lease liabilities: | |
| | | |
| | |
| Operating leases | |
$ | 318,607 | | |
$ | - | |
| Weighted average remaining lease term (in years): | |
| | | |
| | |
| Operating leases | |
| 4.13 | | |
| 3.95 | |
| Weighted average discount rate: | |
| | | |
| | |
| Operating leases | |
| 7.75 | % | |
| 4.25 | % |
As
of August 31, 2022, future minimum lease payments under noncancelable operating leases are as follows:
SCHEDULE OF MINIMUM LEASE PAYMENTS
| Future Minimum Payments for the Twelve Months Ending August 31, | |
| |
| 2023 | |
$ | 807,902 | |
| 2024 | |
| 628,217 | |
| 2025 | |
| 527,792 | |
| 2026 | |
| 304,759 | |
| 2027 | |
| 268,902 | |
| Thereafter | |
| 229,216 | |
| Total lease payments | |
| 2,766,788 | |
| Less: imputed interest | |
| (237,409 | ) |
| Total lease obligations | |
$ | 2,529,379 | |
7.
INCOME TAX PROVISION
The
income tax provision consists of the following:
SCHEDULE OF INCOME TAX EXPENSE
| | |
For the Three Months Ended August 31, 2022 | | |
For the Three Months Ended August 31, 2021 | |
| Federal | |
| | | |
| | |
| Current | |
$ | 562,587 | | |
$ | 457,000 | |
| Deferred | |
| 17,675 | | |
| 65,448 | |
| State and Local | |
| | | |
| | |
| Current | |
| 205,470 | | |
| 102,000 | |
| Deferred | |
| 6,455 | | |
| 10,011 | |
| Income tax expense | |
$ | 792,187 | | |
$ | 634,459 | |
The
Company has no U.S. federal net operating loss carryovers (NOLs) as of August 31 and May 31, 2022, available to offset taxable income.
The Company had California State Net Operating Loss carry over of $0.3 million as of August 31 and May 31, 2022, available to offset
future taxable income.
In
assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon future generation
for taxable income during the periods in which temporary differences representing net future deductible amounts become deductible.
Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies
in making this assessment. For the three months ended August 31, 2022 and 2021, there was no
valuation allowance necessary.
The
Company evaluated the provisions of ASC 740 related to the accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements. ASC 740 prescribes a comprehensive model for how a company should recognize, present, and disclose uncertain positions
that the Company has taken or expects to take in its tax return. For those benefits to be recognized, a tax position must be more-likely-than-not
to be sustained upon examination by taxing authorities. Differences between tax positions taken or expected to be taken in a tax return
and the net benefit recognized and measured pursuant to the interpretation are referred to as “unrecognized benefits.” A
liability is recognized (or amount of net operating loss carry forward or amount of tax refundable is reduced) for unrecognized tax benefit
because it represents an enterprise’s potential future obligation to the taxing authority for a tax position that was not recognized
as a result of applying the provisions of ASC 740.
If
applicable, interest costs related to the unrecognized tax benefits are required to be calculated and would be classified as “Other
expenses – Interest” in the statement of operations. Penalties would be recognized as a component of “General and administrative.”
No
interest or penalties on unpaid tax were recorded during the three months ended August 31, 2022 and no liability for unrecognized tax
benefits was required to be reported. The Company does not expect any significant changes in its unrecognized tax benefits in the next
year.
The
Company’s deferred tax assets (liabilities) consisted of the effects of temporary differences attributable to the following:
SCHEDULE OF DEFERRED TAX ASSETS (LIABILITIES)
| Deferred Tax Assets | |
August 31, 2022 | | |
May 31, 2022 | |
| Allowance for doubtful accounts | |
$ | 693,684 | | |
$ | 733,139 | |
| Contract liability | |
| 217,871 | | |
| 230,263 | |
| Lease liability | |
| 240,926 | | |
| 659,460 | |
| Other | |
| 231,812 | | |
| 238,006 | |
| Total deferred tax assets | |
| 1,384,293 | | |
| 1,860,868 | |
| Valuation allowance | |
| - | | |
| - | |
| Deferred tax asset, net of valuation allowance | |
$ | 1,384,293 | | |
$ | 1,860,868 | |
| | |
| | | |
| | |
| Deferred Tax Liabilities | |
| | | |
| | |
| Operating lease right-of-use assets | |
$ | (214,734 | ) | |
$ | (631,173 | ) |
| Goodwill and intangibles | |
| (215,215 | ) | |
| (256,533 | ) |
| Fixed assets | |
| (35,726 | ) | |
| (30,414 | ) |
| Net deferred tax asset (liability) | |
$ | 918,618 | | |
$ | 942,748 | |
The
expected tax expense (benefit) based on the statutory rate is reconciled with actual tax expense benefit as follows:
SCHEDULE OF EXPECTED TAX EXPENSE (BENEFIT)
| | |
For the Three Months Ended August 31, 2022 | | |
For the Three Months Ended August 31, 2021 | |
| US Federal statutory rate | |
| 21.0 | % | |
| 21.0 | % |
| State income tax, net of federal benefit | |
| 4.6 | % | |
| 7.0 | % |
| FDII deduction | |
| (2.9 | )% | |
| - | |
| Change in valuation allowance | |
| - | | |
| (2.0 | )% |
| Other permanent differences, net | |
| - | | |
| (2.1 | )% |
| Income tax provision | |
| 22.7 | % | |
| 23.9 | % |
8.
SUBSEQUENT EVENTS
The
Company has evaluated subsequent events through the date the consolidated financial statements were available to be issued. Based on
this evaluation, the Company has identified no reportable subsequent events other than those disclosed elsewhere in these consolidated
financial statements.
On
October 4, 2022, the Company filed with the Secretary of State of the State of Nevada certificates of amendments to the Certificates
of Designations, Preferences and Rights of each of its Series A, Series C and Series D Convertible Preferred Stock, amending (i) Section
IV(b)(iii) of the Certificate of Designations, Preferences and Rights of its Series A Convertible Preferred Stock, (ii) Section 7(a)(ii)
of the Certificate of Designations, Preferences and Rights of its Series C Convertible Preferred Stock, and (iii) Section 7(a)(ii) of
the Certificate of Designations, Preferences and Rights of its Series D Convertible Preferred Stock in order to extend the Anti-dilution
Termination Date to the earlier of (i) March 31, 2023 or (ii) a Qualified Financing event (as defined in the Certificates of Designations).
