| COMMITMENTS AND CONTINGENCIES | NOTE
10 – COMMITMENTS AND CONTINGENCIES Legal
matters From
time to time, we may be involved in litigation relating to claims arising out of our operation in the normal course of business. TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE
30, 2021 Disputes
Between Prime EFS, ELRAC LLC, and Enterprise Leasing Company of Philadelphia, LLC On
or about January 10, 2020, Prime EFS was named as sole defendant in a civil action captioned ELRAC LLC v. Prime EFS, filed in the United
States District Court for the Eastern District of New York, assigned Case No. 1 :20-cv-00211 (the “ ELRAC Action ELRAC 382,000 58,000 ELRAC
subsequently moved for a default judgment against Prime EFS. By letter to the court dated March 9, 2020, Prime EFS opposed entry of a
default judgment and contended that all claims in the ELRAC Action were subject to mandatory arbitration clauses found in the individual
lease agreements. On March 19, 2020, ELRAC filed a stipulation dismissing the ELRAC Action without prejudice and advised Prime EFS that
it intends to file an arbitration at the American Arbitration Association alleging essentially identical claims. During
the period it was leasing vans and trucks from ELRAC and its affiliate, Enterprise Leasing Company of Philadelphia, LLC (“ Enterprise
PA Enterprise 387,392 Arbitration 327,000 On
October 9, 2020, Enterprise filed its Answer and Counterclaims in the Arbitration. In its Answer, Enterprise denies liability to Prime
for $ 327,000 382,000 256,000 62,000 Prime
EFS believes the Enterprise Answer and Counterclaims lack merit and intends to defend its position in the Arbitration vigorously. Nevertheless,
given the amount of the Counterclaim and the documentation which Enterprise has submitted in the arbitration in support thereof, the
Company continues to reflect a liability of $ 440,000 While
it believes it has meritorious defenses to this action, out of an abundance of caution and without prejudice to its position in the matter,
as of June 30, 2021, Prime EFS had accrued a contingency liability of $ 440,000 Bellridge
Capital, L.P. v. TLSS and John Mercadante After
discontinuing a prior action in federal court, on April 23, 2021, Bellridge Capital, L.P. (“ Bellridge Bellridge Action The
complaint in the Bellridge Action asserts 11 causes of action: (1) against TLSI, allegedly for breach of a convertible promissory note
issued June 18, 2018 (the “ June 2018 Note 539,114 343,000 December 2018 Note 196,699 Exchange Agreement 3,337,500 447,500 447,500 th 31,500 57,960 The
purchase price stated in the June 2018 Note is $ 1,664,995 2,413,999 33.33 10 ab initio The
purchase price stated in the December 2018 Note is $ 300,000 330,000 10 10 90 days 30 90 days TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE
30, 2021 When
Bellridge offered to engage in the Exchange Agreement, Bellridge was able to dictate terms and extract concessions from TLSI that were
commercially unreasonable and unconscionable. It was able to do so solely because of its violations of N.Y. Penal Law § 190.40 Bellridge
in July 2018. As such, TLSI believes the Exchange Agreement is null and void under N.Y. Penal Law § 190.40 and cannot be enforced
in this action. On
June 4, 2021, TLSI and Mercadante moved to dismiss this action for failure to state a claim and, as to Mercadante, lack of jurisdiction.
On July 7, 2021, Bellridge filed opposition papers and on July 21, 2021, the defendants filed reply papers on this motion. The motion
is scheduled to be argued to the assigned judge on October 20, 2021. In its reply papers, TLSI asserted, inter alia 500,000
on an investment of $ 1.92
million. The
defendants believe they have good defenses to all claims alleged in the matter, including without limitation the defense of usury as
outlined above. Both the Company and Mr. Mercadante intend to defend this case vigorously. Based
on the early stage of this matter, it is not possible to evaluate the likelihood of a favorable or unfavorable outcome, nor is it possible
to estimate the amount or range of any potential loss in the matter. SCS,
LLC v. Transportation and Logistics Systems, Inc. On
January 14, 2021, a civil action was filed against the Company in the Circuit Court of the 15 th SCS, LLC v. Transportation and Logistics Systems, Inc The
plaintiff in the case, SCS, LLC (“ SCS 42,000 On
February 9, 2021, the Company filed its answer, defenses and counterclaims to this action. Among other things, the Company avers that
SCS’s claims are barred by its unclean hands and breaches of its duties under the consulting agreement. SCS filed a motion to strike
TLSI’s defenses and counterclaims and TLSI has opposed that application. Those motions remain sub judice. The
Company believes it has substantial defenses to all claims alleged in SCS’s complaint. The Company therefore intends to defend
this case vigorously. Based
on the early stage of this matter, it is not possible to evaluate the likelihood of a favorable or unfavorable outcome, nor is it possible
to estimate the amount or range of any potential loss in the matter. Shareholder
Derivative Action On
June 25, 2020, the Company was served with a putative shareholder derivative action filed in the Circuit Court of the 15 th SCS, LLC, derivatively on behalf of Transportation
and Logistics Systems, Inc. v. John Mercadante, Jr., Douglas Cerny, Sebastian Giordano, Ascentaur LLC and Transportation and Logistics
Systems, Inc The
plaintiff in this action, SCS, alleges it is a limited liability company formed by a former chief executive officer and director of the
Company, Lawrence Sands. The complaint alleges that between April 2019 and June 2020, the current chairman and chief executive officer
of the Company, the current chief development officer of the Company and, since February 2020, the Company’s restructuring consultant,
breached fiduciary duties owed to the Company. The Company’s restructuring consultant, defendant Sebastian Giordano, renders his
services through another defendant in the action, Ascentaur LLC. Briefly,
the complaint alleges that the Company’s chief executive officer breached duties to the Company by, among other things, requesting,
in mid-2019, that certain preferred equity holders, including SCS, convert their preferred shares into Company common stock in order
to facilitate an equity offering by the Company and then not consummating an equity offering. The complaint also alleges that current
management caused the Company to engage in purportedly wasteful and unnecessary transactions such as taking merchant cash advances (MCA)
on disadvantageous terms. The complaint further alleges that current management “issued themselves over two million shares of common
stock without consideration.” The complaint seeks unspecified compensatory and punitive damages on behalf of the Company for breach
of fiduciary duty, negligent breach of fiduciary duty, constructive fraud, and civil conspiracy and the appointment of a receiver or
custodian for the Company. The
Company’s current management has tendered the complaint to its directors’ and officers’ liability carrier for defense
and indemnity purposes, which coverage is subject to a $ 250,000 On
August 5, 2020, all defendants in this action moved to dismiss the complaint for failure to state a claim upon which relief can be granted.
Among other things, all defendants allege in their motion that, through this lawsuit, SCS is improperly attempting to second-guess business
decisions made by the Company’s Board of Directors, based solely on hindsight (as opposed to any well-pleaded facts demonstrating
a lack of care or good faith). All defendants also assert that the majority of the claims are governed by Nevada law because they concern
the internal affairs of the Company. Defendants further assert that, under Nevada law, each of the business decisions challenged by SCS
is protected by the business judgment rule. Defendants further assert that, even if SCS could rebut the presumption that the business
judgment rule applies to all such transactions, SCS has failed to allege facts demonstrating that intentional misconduct, fraud, or a
knowing violation of the law occurred—a requirement under Nevada law in order for director or officer liability to arise. Defendants
further assert that, because SCS’s constructive fraud claim simply repackages Plaintiff’s claims for breach of fiduciary
duty, it too must fail. Defendants also contend that in the absence of an adequately-alleged independent cause of action—let alone
an unlawful agreement between the defendants entered into for the purpose of harming the Company, SCS’s claim for civil conspiracy
must also be dismissed. Finally, defendants contend that SCS’s extraordinary request that a receiver or custodian be appointed
to manage and supervise the Company’s activities and affairs throughout the duration of this unfounded action is without merit
because SCS does not allege the Company is subject to loss so serious and significant that the appointment of a receiver or custodian
is “absolutely necessary to do complete justice.” TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE
30, 2021 SCS
has a right to file court papers opposing the above motion and thereafter the defendants intend to file reply papers in further support
of the motion (the “MTD”) While
they hope to prevail on the motion, win or lose, current Company management, Mr. Giordano and Ascentaur LLC advise that they intend to
mount a vigorous defense to this action, as they believe the action to be entirely bereft of merit. It
is not possible to evaluate the likelihood of a favorable or unfavorable outcome, nor is it possible to estimate the amount or range
of any potential loss in the matter. Frank
Mazzola v. Prime EFS, et al. On
July 24, 2020, Prime EFS terminated the employment of Frank Mazzola effective that day. On July 27, 2020, Mr. Mazzola filed a Complaint
and Jury Demand in the United States District Court for the Southern District of New York in which he named as defendants Prime EFS,
the Company, John Mercadante and Douglas Cerny. The case was assigned # 1:20-CV-5788-VM. In this action, Mr. Mazzola alleges that he
had an employment agreement with Prime EFS and that Prime EFS breached the alleged employment agreement through two alleged pay reductions
and by terminating his employment. The Complaint contains eight counts: (1) breach of contract against Prime EFS; (2) breach of the covenant
of good faith and fair dealing against Prime EFS; (3) intentional misrepresentation against Prime EFS, the Company and Mr. Mercadante;
(4) negligent misrepresentation against Prime EFS, the Company and Mr. Mercadante; (5) tortious interference with contract against the
Company, Mr. Mercadante and Mr. Cerny; (6) tortious interference with prospective economic advantage against the Company, Mr. Mercadante
and Mr. Cerny; (7) conversion against all defendants; and (8) unjust enrichment against all defendants. Mr. Mazzola seeks specific performance
of the alleged employment agreement and damages of not less than $3 million. Without
Answering the Complaint, on August 14, 2020, the defendants objected to the Complaint on the grounds of lack of personal jurisdiction,
improper venue and because the Complaint failed to state a claim upon which relief could be granted. On August 25, 2020, the Court ordered
Mr. Mazzola to respond to the defendant’s objections within three days. On August 28, 2020, Mr. Mazzola voluntarily withdrew the
action. On
September 1, 2020, Mr. Mazzola served the defendants with a Complaint and Jury Demand that Mr. Mazzola filed in the Superior Court of
New Jersey, Law Division, Bergen County, docket number BER-L-004967-20. The Complaint alleged the same claims as those set forth in the
Complaint that Mr. Mazzola had filed in the now withdrawn New York federal lawsuit. On September 28, 2020, the defendants removed the
New Jersey state court lawsuit to the United States District Court for the District of New Jersey, which has been assigned civil action
number 2:20-cv-13387-BRM-ESK. On October 5, 2020, all defendants filed a motion to dismiss each and every claim asserted against them
in the New Jersey federal action. On
December 7, 2020, Mr. Mazzola filed an amended complaint in this action (the “AC”) alleging three (3) claims for relief:
one for Breach of Contract against Prime EFS; one for “Piercing the Corporate Veil” against the Company; and one for “Fraudulent
Inducement” against Messrs. Mercadante and Cerny. The
damages sought by each claim are identical: “approximately $ 2,000,000 1,040,000 759,038 On
January 11, 2021, Prime EFS filed an answer to the AC, denying, under the faithless servant doctrine and otherwise, that it has any liability
to Mr. Mazzola for any of the amounts sought. Prime EFS also filed counterclaims against Mr. Mazzola seeking recoupment of not less than
$ 925,492 168,750 500,000 On
January 27, 2021, Prime EFS filed an amended answer to the AC, increasing the amount sought on its counterclaim for recoupment of income
paid to Mr. Mazzola from $ 925,492 1,111,833 Valesky The
motions to dismiss are currently sub judice. The case is currently in discovery. Owing
to the early stage of this matter, it is not possible to evaluate the likelihood of a favorable or unfavorable outcome, nor is it possible
to estimate the amount or range of any potential loss in the matter. Rosemary
Mazzola v. TLSS and Douglas Cerny On
September 19, 2020, attorneys for Frank Mazzola’s mother, Rosemary Mazzola, filed an action in the United States District Court
for the Southern District of New York against the Company and Douglas Cerny. The case was assigned docket number 1:20-cv-7582 and assigned
to USDJ Gregory H. Woods. In this action, Ms. Mazzola claims that the Company entered into and breached an unspecified contract by failing
to pay her $ 94,000 94,000 94,000 On
November 23, 2020, counsel for Ms. Mazzola filed an Amended Complaint in this action, dropping Mr. Cerny and adding Prime EFS, LLC as
a party. The new pleading demands $ 209,000 94,000 TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE
30, 2021 On
January 29, 2021, both TLSI and Prime EFS, LLC timely moved to the dismiss the Amended Complaint. Opposition and reply papers on this
motion were filed in February 2021. Meanwhile, on March 11, 2021, the court entered an order in the case requiring all fact discovery
to be concluded by September 9, 2021. As
of June 30, 2021 and December 31, 2020, out of an abundance of caution and without prejudice to its position in this matter, a $ 94,000 168,750 Owing
to the early stage of this matter, it is not possible for us to evaluate the likelihood of a favorable or unfavorable outcome, nor is
it possible to estimate the amount or range of any potential loss in the matter. Jose
R. Mercedes-Mejia v. Shypdirect LLC, Prime EFS LLC et al. On
August 4, 2020, an action was filed against Shypdirect, Prime EFS and others in the Superior Court of New Jersey for Bergen County captioned
Jose R. Mercedes-Mejia v. Shypdirect LLC, Prime EFS LLC et al 789,000 inter alia On
November 9, 2020, Prime EFS and Shypdirect filed their answer to the complaint in this action and also filed a third-party action against
the insurance company in an effort to obtain defense and indemnity for this action. We intend to vigorously defend against this claim
and to pursue the coverage action. However, we cannot evaluate the likelihood of an adverse outcome or estimate our liability, if any,
in connection with this claim. Valesky
v. Prime EFS, Shypdirect and TLSI Plaintiff,
an ex-dispatcher for Prime EFS, brought this action in the U.S. District Court for the District of New Jersey under the Family and Medical
Leave Act of 1993 and the New Jersey Law Against Discrimination seeking unspecified compensatory and punitive damages. In April 2021,
we settled this matter for a payment of $ 35,000 Ynes
Accilien v. Prime EFS This
action was brought on April 27, 2020 in the Superior Court of New Jersey for Bergen County by the plaintiff alleging injuries from a
May 12, 2019 collision with a van leased by Prime EFS and operated by Prime EFS employees. The plaintiff has also filed a workers’
compensation claim. Prime EFS’s insurer has been defending this matter without charging Prime EFS, and the Company and Prime EFS
expect that the insurer will ultimately indemnify Prime EFS for any damages assessed. Default
by Prime EFS on June 4, 2020 Settlement with Creditors On
June 4, 2020, Prime EFS LLC (“ Prime EFS Creditors Payment Plan 2,038,556 Outstanding Balance Pursuant
to the Payment Plan, Prime EFS was obligated to pay $ 75,000 75,000 Thereafter,
under the Payment Plan, beginning on June 19, 2020, Prime EFS was obligated to make weekly payments of $15,000 to the Creditors each
Friday for 125 weeks ending with a final payment of $13,556 on November 18, 2022. Under
the Payment Plan, Prime EFS also agreed that, if it fails to make a scheduled payment or otherwise defaults on its obligations, the remaining
Outstanding Balance would be accelerated and due, in full, within five business days after receipt by Prime EFS of a notice of default
from the Creditors. Under
the Payment Plan, Prime EFS also agreed that, if Prime EFS does not pay the remaining Outstanding Balance within five business days after
receipt of a notice of default, then the Creditors will be entitled to 9 Prime
EFS made the $ 75,000 Prime
EFS also made each of the weekly payments due through Friday, September 18, 2020. However, Prime EFS did not make the payment due Friday,
September 25, 2020, did not make any further weekly payment due under the Payment Plan, and has no present plan or intention to make
any further payments under the Payment Plan because it lacks the cash-on-hand to do so. By
letter dated October 16, 2020, attorneys for the Creditors gave Prime EFS notice of default (the “ Notice of Default 1,678,556 9 TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE
30, 2021 To
date, Prime EFS has not responded to the Notice of Default and has no present plan or intention to respond. Dispute
between Patrick Nicholson and Prime EFS By
letter dated October 9, 2020, attorneys representing Patrick Nicholson allege that Prime EFS is in default of its payment obligations
under a “10% Senior Secured Demand Promissory Note” issued February 13, 2019, in the principal amount of $ 165,000 55,000 In
the demand, the attorneys for Mr. Nicholson allege the total balance owed, including interest, is $ 332,702 In
the demand, the attorneys for Mr. Nicholson also contend that the Company is jointly and severally liable with Prime EFS for this balance. If,
as threatened, Mr. Nicholson files suit for non-payment under either or both promissory notes, it is anticipated that the defendants
will mount a vigorous defense to the action. Among other things, it is Prime EFS’s position that Mr. Nicholson knew or should have
known that the promissory notes dated February 13, 2019, and April 24, 2019 were invalid and unenforceable, since they were signed by
Rosemary Mazzola, as owner or managing member of Prime, and it was public information that, after June 18, 2018, Ms. Mazzola was no longer
an owner or managing member of Prime EFS. Nevertheless,
out of an abundance of caution and without prejudice to its position in this matter, as of June 30, 2021, Prime EFS recorded notes payable
due of $ 220,000 66,297
Ryder
Truck Rental, Inc. Demand Letter On
March 2, 2021, Shypdirect received a demand letter from Ryder Truck Rental, Inc. (“Ryder”) related to a breach of the Truck
Lease and Service Agreement between Shypdirect and Ryder, dated October 9, 2018. Pursuant to the letter, Ryder terminated the Truck Lease
and Service Agreement for failure to pay invoices due. Pursuant to the letter, Ryder also elected to require Shypdirect to purchase all
of the terminated Vehicle(s) in accordance with the agreement for $ 2,871,272 164,565 2,871,272 3,035,837 Other
than discussed above, as of June 30, 2021, and as of the date of this filing, there were no pending or threatened lawsuits that could
reasonably be expected to have a material effect on results of our operations. Consulting
Agreement The
Company retained the services of a consultant, Ascentaur, LLC (“Ascentaur”), pursuant to a Consulting Agreement between the
Company and Ascentaur dated February 21, 2020, as amended (the “Consulting Agreement”). Under the Consulting Agreement, Sebastian
Giordano, the CEO and principal of Ascentaur, provides management services to the Company in the role of chief executive under direction
of the Board. Mr. Giordano devotes the majority of his business attention to the Company, but he may spend time on other business ventures.
The Consulting Agreement runs until January 31, 2023 300,000 12,500 25,000,000 0.06 Leases See
Note 12. On
March 2, 2021, Shypdirect received a demand letter from Ryder Truck Rental, Inc. (“Ryder”) related to a breach of the Truck
Lease and Service Agreement between Shypdirect and Ryder, dated October 9, 2018. Pursuant to the letter, Ryder terminated the Truck Lease
and Service Agreement for failure to pay invoices due. Pursuant to the letter, Ryder elected to require Shypdirect to purchase all of
the terminated Vehicle(s) in accordance with the agreement for $ 2,871,272 164,565 2,871,272 3,035,837 On
June 30, 2021 and December 31, 2020, contingency liability related to the Ryder termination amounted to $ 2,871,272 TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE
30, 2021 Potential
acquisition On
June 15, 2021, the Company entered into a Securities Purchase and Sale Agreement (the “SPSA”) with Anthony Berritto (“Berritto,”
who is the sole shareholder of SalSon Logistics, Inc., a Georgia corporation (“SalSon”)), for the Company to purchase 100 SalSon, which is strategically
located in the heart of Port of Newark, with additional locations in Florida, Georgia, New York, South Carolina, Texas, and Virginia,
offers a range of services including warehousing, transload services, dedicated contract carriage, dray management, and store delivery
servicing the retail, food and beverage, and industrial sectors. With more than 1,200 associates, over 1 million square feet of warehousing
and a dedicated fleet of 550 tractors and 1,500 trailers, SalSon’s capabilities include cross dock, regional and local truckload,
intermodal, vendor consolidation and deconsolidation, pool distribution, and unattended store delivery. Consideration
for the purchase of the shares of SalSon shall be $ 90 The
Purchase Price shall be paid by delivery at closing of: 1)
An amount of the Company’s common stock equal to 19.9 2)
$ 50 3)
A secured promissory note (the “Note”) in the principal amount of $ 20 60 months 1.07 monthly basis 25 20 Mr.
Berritto is expected to stay on to oversee the operation of SalSon and the Company’s existing fulfillment services subsidiaries.
It is a condition to the closing of the transaction that Mr. Berritto enter into an employment agreement with SalSon. Mr. Berritto has
agreed in principle to do so, but if the parties do not reach an agreement on employment terms, the Company does not intend to complete
the transaction. The
transaction is contingent upon the Company’s ability to secure debt financing for the cash portion of the purchase price. The financing
will be secured by the assets of SalSon, and it will likely rely exclusively on SalSon’s assets and financial performance. SalSon
currently is profitable with almost $ 100 The
Company expects that it will need to raise the aggregate of approximately $ 60 The
Company has experienced losses in its recent years of operations, and currently has a negative net worth, and has not received any proposed
terms for such financing. Therefore, no assurance can be provided that the Company will be able obtain such financing. If the contemplated
additional equity financing cannot be obtained, the Company will not have adequate cash available to fully fund the acquisition and transaction
costs, the operations of SalSon and its other subsidiaries and investment banking fees. Such inability could also impair the Company’s
ability to raise the necessary debt financing, or, if. such inability is first encountered after the Company procures a commitment for
the debt financing and the contingency period for terminating the stock purchase agreement lapses, then it could also result in the Company’s
default under the stock purchase agreement, since the closing of the transaction is not conditioned upon the Company securing such additional
equity financing. The
closing of the transaction under the SPSA (the “Closing”) is to occur within 90 days of the SPSA agreement date (on or before
September 13, 2021), provided all conditions shall have been met or waived. The Company shall have the one time right to extend the Closing
for period of 15 days, provided the Company provides written evidence of loan approval for the Financing. The
closing shall be further contingent on satisfaction of the Company’s due diligence review of SalSon and the absence of the occurrence
of any material adverse effect on SalSon or its business. The transaction does not include any deposit, breakup or termination fee in
the event that it does not close due to a failure to meet any of the contingencies, including that the Company cannot reach terms with
Mr. Berritto for his employment or the Company cannot obtain the financing needed to close the acquisition. TRANSPORTATION
AND LOGISTICS SYSTEMS, INC. AND SUBSIDIARIES NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE
30, 2021 |
