Delivery firm got PPP loan even as demand rose during pandemic

Florida’s TLSS says loan was a lifesaver, but some question if companies that didn’t suffer should have debt forgiven

WASHINGTON -- John Mercadante's e-commerce delivery business was burning cash, missing debt payments and struggling to raise capital, regulatory filings show, before two events brightened his company's fortunes.

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First the coronavirus pandemic hit, leading to increased delivery orders for his Transportation and Logistics Systems Inc. of Jupiter, Fla. And even as the business got busier, two of its subsidiaries qualified for forgivable loans totaling $3.4 million under the federal government's Paycheck Protection Program.

The publicly traded company, known by its ticker symbol TLSS, hasn't been accused of impropriety. But its financial situation and those of other public companies that received PPP loans are expected to come under scrutiny as the Treasury Department and Small Business Administration determine whether PPP loans qualify for forgiveness.

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In April, Treasury asked publicly traded companies that received loans to return the money, and updated its guidance to make it clear that borrowers must take into account "their current business activity," including their ability to access cash to support ongoing operations.

David Bamberger, a lawyer representing TLSS, said the company's request for a loan was appropriate, and it plans to seek to have the loan forgiven.

"The federal government offered a lifesaver, we qualified and we were kept afloat. As a result, so were our employees," Mr. Bamberger said in response to emailed questions.

But others say that companies that haven't suffered during the crisis should have to pay back the loans, which were designed to help small companies -- generally defined as having 500 or fewer full-time employees -- maintain their payroll through the pandemic.

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"In terms of loan forgiveness, I'm concerned about circumstances where businesses applied for a loan, received money, but actually saw no reduction in revenues at all," said Sen. Mitt Romney (R., Utah) at a recent Senate hearing. "It should not qualify for forgiveness."

In its 2019 annual report dated May 29, Transportation and Logistics Systems said the pandemic "had minimal effects on our results of operations." The company has yet to report its 2020 revenue.

President Donald Trump and Jovita Carranza, administrator of the Small Business Administration, listen as Trea speaks about the coronavirus in the James Brady Press Briefing Room of the White House, Thursday, April 2, 2020, in Washington. (AP Photo/A

Spokesmen for the Treasury Department and the Small Business Administration, the two agencies running the program, declined to comment on TLSS.

Under the federal stimulus legislation, companies that meet the requirements for eligibility and spending of PPP loans can have both principal and interest forgiven. PPP loans now total more than $514 billion to more than 4.6 million borrowers.

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Joshua French, a partner at Boston-based law firm Nutter McClennen & Fish LLP who has been advising PPP borrowers, noted that legislation simply requires PPP borrowers to certify that "the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient."

"My immediate first reaction when the statute first came out was, 'You can drive a truck through that,'" he said.

After Mr. Romney raised his concern at the June 10 hearing, Sen. Marco Rubio (R., Fla.), one of the key drafters of the PPP, told him there was a reason Congress didn't explicitly force companies to demonstrate they lost revenue to get their loans forgiven. Doing so would create paperwork burdens and might even punish entrepreneurs who found creative new ways to make money during the crisis, Mr. Rubio said.

The government's loan forgiveness application asks businesses to provide information about payroll costs and other expenses. It doesn't ask about revenue.

TLSS does 99% of its business with Amazon.com Inc., with a fleet of about 250 trucks carrying packages, according to public filings.

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Revenue more than doubled last year, the company says, but so did operational costs. Interest on its debt more than tripled. It reported a $14.5 million loss in 2018 and a $44.9 million loss last year.

Early in 2020, before the pandemic took hold, TLSS was "virtually insolvent," said Mr. Bamberger. "The situation was so dire the company was actively considering closing some of its locations and terminating drivers."

Two TLSS subsidiaries, Prime EFS and ShypDirect, applied for PPP loans with M&T Bank Corp. on April 8, attesting that the loans were necessary because of economic uncertainty.

The day after sending in the application, Mr. Mercadante wrote a letter to shareholders. "Shipping has been classified as an 'essential business, '" the chairman and CEO said. "Consumers have been increasing their online purchases due to sequestering, leading to growing demand for our services."

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Mr. Bamberger said increased demand for shipping didn't necessarily translate into profits for TLSS, given the intense competition in the delivery sector. He also said the pandemic created uncertainty about many aspects of the business, such as the health or availability of drivers.

Without the PPP loan, "the company would likely have had to cut staff, reduce or eliminate certain operations, and possibly even file for bankruptcy protection. We likely would not have been able to survive," he said.

The bank approved both loans by late April, sending $2,941,212.50 to Prime EFS and $504,940 to ShypDirect. An M&T spokesman had no immediate comment.

Write to Ryan Tracy at ryan.tracy@wsj.com

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