UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20172022
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 000-54218
EVO Transportation & Energy Services, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 37-1615850 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
2075 West Pinnacle Peak Rd.Suite 130
Phoenix, AZ85027
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: 877-973-9191
Securities registered pursuant to Section 12(b) of the Act: None.
|
| Trading Symbol(s) | Name of each exchange on which registered | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☐ No☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☒ | Smaller reporting company | ☒ | |||
Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the issuerregistrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 14, 2017,August 22, 2023, there were 693,581435,200,219 shares of the registrant’s common stock, par value $0.0001, outstanding.
Explanatory Note
We have been delayed in filing this Quarterly Report on Form 10-Q (this “Q3 2022 Quarterly Report”). Immediately following the filing of this Q3 2022 Quarterly Report, we expect to file our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 10-K”). Unless otherwise noted, the disclosures in this Q3 2022 Quarterly Report speak as of September 30, 2022 and for the three-month and nine-month periods then ended.
EVO TRANSPORTATION & ENERGY SERVICES, INC.
INDEX
Page No. | |
2 | |
Item 1. Condensed Consolidated Financial | 2 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 41 |
Item 3. Quantitative and Qualitative Disclosures About Market | 50 |
50 | |
53 | |
53 | |
53 | |
Item 2. Unregistered Sales of Equity Securities and Use of | 53 |
53 | |
53 | |
53 | |
53 | |
54 | |
56 |
i
EVO TRANSPORTATION & ENERGY SERVICES, INC.
PART I – FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited)
2
Condensed Consolidated Balance Sheets (unaudited)
(Unaudited) | ||||||||
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 90,768 | $ | 24,944 | ||||
Accounts receivable | 369,271 | 15,214 | ||||||
Inventory | 1,212 | - | ||||||
Prepaids | 41,269 | 11,576 | ||||||
Total current assets | 502,520 | 51,734 | ||||||
Non-current assets | ||||||||
Property, equipment and land, net | 8,272,210 | 1,102,249 | ||||||
Assets available for sale | 394,575 | - | ||||||
Construction in progress | 363,424 | 79,354 | ||||||
Goodwill and other intangibles | 1,482,837 | - | ||||||
Deposits and other long-term assets | 244,968 | 39,646 | ||||||
Total non-current assets | 10,758,014 | 1,221,249 | ||||||
Total assets | $ | 11,260,534 | $ | 1,272,983 | ||||
Liabilities and Stockholders' Deficit | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 1,572,260 | $ | 822,829 | ||||
Accounts payable - related party | 410,336 | 261,060 | ||||||
Advances from stockholders | 107,758 | 37,500 | ||||||
Accrued interest - related party | 461,655 | 164,368 | ||||||
Accrued expenses | 177,855 | 127,596 | ||||||
Derivative liability | 21,669 | - | ||||||
Current portion of subordinated senior notes payable to stockholders | 1,421,556 | 1,021,556 | ||||||
Promissory notes - related party | 4,038,315 | - | ||||||
Current portion of long-term debt | 1,124,470 | 121,299 | ||||||
Total current liabilities | 9,335,874 | 2,556,208 | ||||||
Non-current liabilities | ||||||||
Long term subordinated convertible notes payable to stockholders | 1,166,373 | 1,166,373 | ||||||
Promissory notes - stockholders, net unamortized discount of $3,063,653 (2017) and $0 (2016) | 6,853,712 | 405,103 | ||||||
Long term debt, less current portion | - | 1,073,690 | ||||||
Derivative liability, less current portion | 13,753 | - | ||||||
Deferred rent | 18,747 | 15,439 | ||||||
Deferred income tax liability | 71,294 | 71,294 | ||||||
Total non-current liabilities | 8,123,879 | 2,731,899 | ||||||
Total liabilities | 17,459,753 | 5,288,107 | ||||||
Commitments and contingencies | ||||||||
Stockholders' deficit | ||||||||
Preferred stock, $.0001 par value; 10,000,000 shares authorized, no shares issued and outstanding | - | - | ||||||
Common stock, $.0001 par value; 100,000,000 shares authorized; 420,804 (2017) and 317,207 (2016) shares issued and outstanding | 42 | 32 | ||||||
Additional paid-in capital | 1,299,981 | 899,304 | ||||||
Accumulated deficit | (7,499,242 | ) | (4,914,460 | ) | ||||
Total stockholders' deficit | (6,199,219 | ) | (4,015,124 | ) | ||||
Total liabilities and stockholders' deficit | $ | 11,260,534 | $ | 1,272,983 |
|
| September 30, |
|
| December 31, |
| ||
($ in thousands, except share and per share data) |
|
|
|
|
|
| ||
Assets |
|
|
|
|
|
| ||
Current assets |
|
|
|
|
|
| ||
Cash |
| $ | 15,487 |
|
| $ | 6,325 |
|
Accounts receivable - trade, net |
|
| 6,452 |
|
|
| 22,697 |
|
Alternative fuels tax credit receivable |
|
| 425 |
|
|
| 287 |
|
Due from related party |
|
| 10 |
|
|
| 10 |
|
Prepaids and other current assets |
|
| 4,574 |
|
|
| 2,150 |
|
Total current assets |
|
| 26,948 |
|
|
| 31,469 |
|
Non-current assets |
|
|
|
|
|
| ||
Property and equipment, net |
|
| 22,178 |
|
|
| 27,962 |
|
Goodwill |
|
| 23,837 |
|
|
| 23,837 |
|
Intangible assets, net |
|
| 3,512 |
|
|
| 4,180 |
|
Operating lease right-of-use assets, net |
|
| 6,202 |
|
|
| 7,155 |
|
Finance lease right-of-use assets, net |
|
| 27,290 |
|
|
| 24,391 |
|
Deposits and other long-term assets |
|
| 6,969 |
|
|
| 7,520 |
|
Total non-current assets |
|
| 89,988 |
|
|
| 95,045 |
|
Total assets |
| $ | 116,936 |
|
| $ | 126,514 |
|
Liabilities, Temporary Equity and Stockholders’ Deficit |
|
|
|
|
|
| ||
Current liabilities |
|
|
|
|
|
| ||
Accounts payable |
| $ | 14,956 |
|
| $ | 16,245 |
|
Accrued expenses and other current liabilities |
|
| 13,335 |
|
|
| 19,744 |
|
Accrued interest - related party |
|
| 782 |
|
|
| 2,743 |
|
Embedded derivative liability |
|
| 1,501 |
|
|
| 1,513 |
|
Warrant liabilities |
|
| 20,495 |
|
|
| 13,784 |
|
Advances under factoring arrangements, current portion |
|
| 1,715 |
|
|
| 9,073 |
|
Current portion of long-term debt |
|
| 21,477 |
|
|
| 22,135 |
|
Current portion of long-term debt - related party |
|
| 30,686 |
|
|
| 33,164 |
|
Operating lease liabilities, current portion |
|
| 2,285 |
|
|
| 3,045 |
|
Finance lease liabilities, current portion |
|
| 8,283 |
|
|
| 4,448 |
|
Total current liabilities |
|
| 115,515 |
|
|
| 125,894 |
|
Non-current liabilities |
|
|
|
|
|
| ||
Advances under factoring arrangements, less current portion |
|
| 4,016 |
|
|
| 5,202 |
|
Long-term debt, less current portion |
|
| 4,777 |
|
|
| 7,455 |
|
Long-term debt, less current portion - related party |
|
| 4,484 |
|
|
| 4,023 |
|
Operating lease liabilities, less current portion |
|
| 3,977 |
|
|
| 4,114 |
|
Finance lease liabilities, less current portion |
|
| 19,961 |
|
|
| 21,790 |
|
Deferred tax liability |
|
| 230 |
|
|
| 97 |
|
Total non-current liabilities |
|
| 37,445 |
|
|
| 42,681 |
|
Total liabilities |
|
| 152,960 |
|
|
| 168,575 |
|
Commitments and contingencies (Note 11) |
|
|
|
|
|
| ||
Temporary Equity |
|
|
|
|
|
| ||
Series A Redeemable Convertible Preferred stock, $0.0001 par value; 10,000,000 shares authorized, |
|
| — |
|
|
| 434 |
|
Series B Redeemable Convertible Preferred stock, $0.0001 par value; 3,075,000 shares authorized, |
|
| — |
|
|
| 7,240 |
|
Series C Redeemable Preferred stock, $0.0001 par value; 1 (September 30, 2022) and 0 (December 31, 2021) share authorized, issued and outstanding, includes accrued dividends of $0 (September 30, 2022) and liquidation preference of $0 (September 30, 2022 and December 31, 2021) |
|
| — |
|
|
| — |
|
Redeemable common stock, at redemption value; 0 (September 30, 2022) and 2,240,000 (December 31, 2021) |
|
| — |
|
|
| 1,200 |
|
Stockholders’ deficit |
|
|
|
|
|
| ||
Series D Non-Redeemable Preferred stock, $0.0001 par value; 1 (September 30, 2022) and 0 (December 31, 2021) share authorized, issued and outstanding, includes liquidation preference of $0 (September 30, 2022 and December 31, 2021) |
|
| — |
|
|
| — |
|
Common stock, $0.0001 par value; 600,000,000 (September 30, 2022 ) and 100,000,000 (December 31, 2021) shares authorized; 22,553,583 (September 30, 2022) and 15,213,145 (December 31, 2021) shares issued and outstanding |
|
| 2 |
|
|
| 2 |
|
Common stock issuable |
|
| 3,474 |
|
|
| 4,390 |
|
Additional paid-in capital |
|
| 65,744 |
|
|
| 32,039 |
|
Accumulated deficit |
|
| (105,244 | ) |
|
| (87,366 | ) |
Total stockholders’ deficit |
|
| (36,024 | ) |
|
| (50,935 | ) |
Total liabilities, temporary equity and stockholders’ deficit |
| $ | 116,936 |
|
| $ | 126,514 |
|
See notes to unaudited condensed consolidated financial statements
1
statements.
3
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenue | ||||||||||||||||
CNG sales | 622,073 | 133,353 | 1,692,787 | 295,452 | ||||||||||||
Volumetric excises tax credit | - | - | - | 60,263 | ||||||||||||
Total revenue | 622,073 | 133,353 | 1,692,787 | 355,715 | ||||||||||||
- | - | |||||||||||||||
CNG cost of sales | 316,433 | 46,936 | 870,517 | 139,468 | ||||||||||||
- | - | |||||||||||||||
Gross profit | 305,640 | 86,417 | 822,270 | 216,247 | ||||||||||||
Operating expenses | ||||||||||||||||
General and administrative | 356,666 | 598,977 | 1,317,993 | 1,157,528 | ||||||||||||
Depreciation and amortization | 148,353 | 51,312 | 499,639 | 153,936 | ||||||||||||
Loss on impairment of fixed assets | 679,535 | - | 679,535 | - | ||||||||||||
Total operating expenses | 1,184,554 | 650,289 | 2,497,167 | 1,311,464 | ||||||||||||
Other expense | ||||||||||||||||
Interest expense | (244,721 | ) | (96,246 | ) | (879,595 | ) | (264,444 | ) | ||||||||
Loss on acquisition of El Toro | - | - | - | (717,011 | ) | |||||||||||
Realized and unrealized gain on derivative liability, net | (30,125 | ) | - | 47,210 | - | |||||||||||
Warrant expense | (77,500 | ) | - | (77,500 | ) | - | ||||||||||
Other expense | - | 4,480 | - | - | ||||||||||||
Total other expense | (352,346 | ) | (91,766 | ) | (909,885 | ) | (981,455 | ) | ||||||||
Loss before income taxes | (1,231,260 | ) | (655,638 | ) | (2,584,782 | ) | (2,076,672 | ) | ||||||||
Income tax expense | - | |||||||||||||||
Deferred federal | - | - | - | - | ||||||||||||
Total provision for income taxes | - | - | - | - | ||||||||||||
Net loss | (1,231,260 | ) | (655,638 | ) | (2,584,782 | ) | (2,076,672 | ) | ||||||||
Basic weighed average common shares outstanding | 420,804 | 142,787 | 420,804 | 142,787 | ||||||||||||
Basic loss per common share | $ | (2.93 | ) | $ | (4.59 | ) | $ | (6.14 | ) | $ | (14.54 | ) | ||||
Diluted weighed average common shares outstanding | 420,804 | 142,787 | 420,804 | 142,787 | ||||||||||||
Diluted loss per common share | $ | (2.50 | ) | $ | (4.59 | ) | $ | (4.93 | ) | $ | (14.54 | ) |
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
($ in thousands, except share and per share data) |
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Trucking |
| $ | 75,251 |
|
| $ | 68,769 |
|
| $ | 222,795 |
|
| $ | 179,160 |
|
Other |
|
| 109 |
|
|
| 91 |
|
|
| 227 |
|
|
| 35,039 |
|
Total revenue |
|
| 75,360 |
|
|
| 68,860 |
|
|
| 223,022 |
|
|
| 214,199 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Payroll, benefits and related |
|
| 33,378 |
|
|
| 27,923 |
|
|
| 97,486 |
|
|
| 74,639 |
|
Purchased transportation |
|
| 8,320 |
|
|
| 17,303 |
|
|
| 30,678 |
|
|
| 38,024 |
|
Fuel |
|
| 11,549 |
|
|
| 7,278 |
|
|
| 36,154 |
|
|
| 19,131 |
|
Equipment rent |
|
| 3,261 |
|
|
| 3,736 |
|
|
| 11,666 |
|
|
| 9,275 |
|
Maintenance and supplies |
|
| 3,880 |
|
|
| 2,642 |
|
|
| 11,491 |
|
|
| 7,357 |
|
General and administrative |
|
| 6,415 |
|
|
| 4,101 |
|
|
| 14,670 |
|
|
| 11,876 |
|
Operating supplies and expenses |
|
| 4,112 |
|
|
| 3,748 |
|
|
| 10,472 |
|
|
| 11,308 |
|
Depreciation and amortization |
|
| 3,976 |
|
|
| 4,009 |
|
|
| 12,115 |
|
|
| 11,371 |
|
Insurance and claims |
|
| 1,423 |
|
|
| 1,918 |
|
|
| 4,840 |
|
|
| 6,881 |
|
(Gain) loss on sale of fixed assets |
|
| (13 | ) |
|
| 41 |
|
|
| 29 |
|
|
| 78 |
|
CNG expenses |
|
| 41 |
|
|
| 24 |
|
|
| 114 |
|
|
| 218 |
|
Total operating expenses |
|
| 76,342 |
|
|
| 72,723 |
|
|
| 229,715 |
|
|
| 190,158 |
|
Operating income (loss) |
|
| (982 | ) |
|
| (3,863 | ) |
|
| (6,693 | ) |
|
| 24,041 |
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest expense |
|
| (10,787 | ) |
|
| (2,784 | ) |
|
| (30,890 | ) |
|
| (9,686 | ) |
Change in fair value of embedded derivative liability |
|
| 5,934 |
|
|
| 1,311 |
|
|
| 12 |
|
|
| 1,407 |
|
Change in fair value of warrant liabilities |
|
| 6,946 |
|
|
| 481 |
|
|
| 25,296 |
|
|
| 2,243 |
|
Gain (loss) on extinguishment of debt |
|
| — |
|
|
| 10,163 |
|
|
| (5,318 | ) |
|
| 10,953 |
|
Other miscellaneous income |
|
| 236 |
|
|
| 10 |
|
|
| 236 |
|
|
| 14 |
|
Total other expense |
|
| 2,329 |
|
|
| 9,181 |
|
|
| (10,664 | ) |
|
| 4,931 |
|
Income (loss) before income taxes |
|
| 1,347 |
|
|
| 5,318 |
|
|
| (17,357 | ) |
|
| 28,972 |
|
(Provision) benefit for income taxes |
|
| 881 |
|
|
| 11 |
|
|
| (521 | ) |
|
| (1,574 | ) |
Net (loss) income |
| $ | 2,228 |
|
| $ | 5,329 |
|
| $ | (17,878 | ) |
| $ | 27,398 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic |
| $ | 0.01 |
|
| $ | 0.17 |
|
| $ | (0.23 | ) |
| $ | 0.89 |
|
Diluted |
| $ | 0.01 |
|
| $ | 0.16 |
|
| $ | (0.23 | ) |
| $ | 0.83 |
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic |
|
| 146,316,155 |
|
|
| 30,891,398 |
|
|
| 78,165,201 |
|
|
| 30,377,872 |
|
Diluted |
|
| 146,335,920 |
|
|
| 33,536,838 |
|
|
| 78,165,201 |
|
|
| 33,358,162 |
|
See notes to unaudited condensed consolidated financial statements statements.
4
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Condensed Consolidated Statements of Changes in Stockholders’ Deficit (Unaudited)
For the Nine Months Ended September 30, 2022
|
| Preferred Stock |
|
| Common Stock |
|
| Common Stock |
|
| Additional |
|
| Accumulated |
|
| Total |
| ||||||||||||||
($ in thousands, except share data) |
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Issuable |
|
| Capital |
|
| Deficit |
|
| Deficit |
| ||||||||
Balance - December 31, 2021 |
|
| — |
|
| $ | — |
|
|
| 15,213,145 |
|
| $ | 2 |
|
| $ | 4,390 |
|
| $ | 32,039 |
|
| $ | (87,366 | ) |
| $ | (50,935 | ) |
Issuance of common stock - related party |
|
| — |
|
|
| — |
|
|
| 1,174,800 |
|
|
| — |
|
|
| (916 | ) |
|
| 916 |
|
|
| — |
|
|
| — |
|
Conversion of convertible notes into warrants |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 9,708 |
|
|
| — |
|
|
| 9,708 |
|
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 31 |
|
|
| — |
|
|
| 31 |
|
Series A Redeemable Preferred stock dividend |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (9 | ) |
|
| — |
|
|
| (9 | ) |
Series B Redeemable Preferred stock dividend |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (152 | ) |
|
| — |
|
|
| (152 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (12,763 | ) |
|
| (12,763 | ) |
Balance - March 31, 2022 |
|
| — |
|
|
| — |
|
|
| 16,387,945 |
|
|
| 2 |
|
|
| 3,474 |
|
|
| 42,533 |
|
|
| (100,129 | ) |
|
| (54,120 | ) |
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 34 |
|
|
| — | �� |
|
| 34 |
|
Series A Redeemable Preferred stock dividend |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (9 | ) |
|
| — |
|
|
| (9 | ) |
Series B Redeemable Preferred stock dividend |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (153 | ) |
|
| — |
|
|
| (153 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (7,343 | ) |
|
| (7,343 | ) |
Balance - June 30, 2022 |
|
| — |
|
|
| — |
|
|
| 16,387,945 |
|
|
| 2 |
|
|
| 3,474 |
|
|
| 42,405 |
|
|
| (107,472 | ) |
|
| (61,591 | ) |
Reclassification of warrants from liability classified to equity classified |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,258 |
|
|
| — |
|
|
| 1,258 |
|
Issuance of Series D Non-Redeemable Preferred stock |
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 750 |
|
|
| — |
|
|
| 750 |
|
Exercise of warrants into common stock |
|
| — |
|
|
| — |
|
|
| 3,500,000 |
|
|
| — |
|
|
|
|
|
| 69 |
|
|
| — |
|
|
| 69 |
| |
Issuance of equity classified warrants |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,074 |
|
|
| — |
|
|
| 3,074 |
|
Restructuring gain from related parties |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 8,954 |
|
|
| — |
|
|
| 8,954 |
|
Reclassification of redeemable common stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,200 |
|
|
|
|
|
| 1,200 |
| |
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 37 |
|
|
| — |
|
|
| 37 |
|
Conversion of Series A Redeemable Preferred stock into common stock |
|
| — |
|
|
| — |
|
|
| 150,597 |
|
|
| — |
|
|
| — |
|
|
| 452 |
|
|
| — |
|
|
| 452 |
|
Conversion of Series B Redeemable Preferred stock into common stock |
|
| — |
|
|
| — |
|
|
| 2,515,041 |
|
|
| — |
|
|
| — |
|
|
| 7,545 |
|
|
| — |
|
|
| 7,545 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,228 |
|
|
| 2,228 |
|
Balance - September 30, 2022 |
|
| 1 |
|
| $ | — |
|
|
| 22,553,583 |
|
| $ | 2 |
|
| $ | 3,474 |
|
| $ | 65,744 |
|
| $ | (105,244 | ) |
| $ | (36,024 | ) |
See notes to unaudited condensed consolidated financial statements.
5
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Condensed Consolidated Statements of Changes in Stockholders’ Deficit (Unaudited)
For the Nine Months Ended September 30, 2021
|
| Common Stock |
|
| Common Stock Subscribed |
|
| Common Stock |
|
| Additional |
|
| Accumulated |
|
| Total |
| ||||||||||||||
($ in thousands) |
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Issuable |
|
| Capital |
|
| Deficit |
|
| Deficit |
| ||||||||
Balance - December 31, 2020 |
|
| 15,212,815 |
|
| $ | 2 |
|
|
| 80 |
|
| $ | — |
|
| $ | 3,474 |
|
| $ | 30,821 |
|
| $ | (101,619 | ) |
| $ | (67,322 | ) |
Obligation to issue common stock - related party |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 916 |
|
|
| — |
|
|
| — |
|
|
| 916 |
|
Issuance of warrants to extinguish debt |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,224 |
|
|
| — |
|
|
| 1,224 |
|
Common stock issued for services - related party |
|
| — |
|
|
| — |
|
|
| 250 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 232 |
|
|
| — |
|
|
| 232 |
|
Series A Redeemable Preferred stock dividend |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (9 | ) |
|
| — |
|
|
| (9 | ) |
Series B Redeemable Preferred stock dividend |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (152 | ) |
|
| — |
|
|
| (152 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 31,223 |
|
|
| 31,223 |
|
Balance - March 31, 2021 |
|
| 15,212,815 |
|
|
| 2 |
|
|
| 330 |
|
|
| — |
|
|
| 4,390 |
|
|
| 32,116 |
|
|
| (70,396 | ) |
|
| (33,888 | ) |
Issuance of warrants to extinguish debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 68 |
|
|
|
|
|
| 68 |
| ||||||
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 117 |
|
|
| — |
|
|
| 117 |
|
Series A Redeemable Preferred stock dividend |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (9 | ) |
|
| — |
|
|
| (9 | ) |
Series B Redeemable Preferred stock dividend |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (153 | ) |
|
| — |
|
|
| (153 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (9,154 | ) |
|
| (9,154 | ) |
Balance - June 30, 2021 |
|
| 15,212,815 |
|
|
| 2 |
|
|
| 330 |
|
|
| — |
|
|
| 4,390 |
|
|
| 32,139 |
|
|
| (79,550 | ) |
|
| (43,019 | ) |
Stock-based compensation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 178 |
|
|
| — |
|
|
| 178 |
|
Series A Redeemable Preferred stock dividend |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (9 | ) |
|
| — |
|
|
| (9 | ) |
Series B Redeemable Preferred stock dividend |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (155 | ) |
|
| — |
|
|
| (155 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5,329 |
|
|
| 5,329 |
|
Balance - September 30, 2021 |
|
| 15,212,815 |
|
| $ | 2 |
|
|
| 330 |
|
| $ | — |
|
|
| 4,390 |
|
| $ | 32,153 |
|
| $ | (74,221 | ) |
| $ | (37,676 | ) |
See notes to unaudited condensed consolidated financial statements
6
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended | ||||||||
September 30, | ||||||||
2017 | 2016 | |||||||
Cash flows from operating activities | ||||||||
Net loss | $ | (2,584,782 | ) | $ | (2,076,672 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
Depreciation and amortization | 499,639 | 153,936 | ||||||
Deferred rent | 3,308 | - | ||||||
Gain on derivative liability | 23,677 | - | ||||||
Realized loss on derivative liability | (70,887 | ) | - | |||||
Common stock issued with debt | 13,187 | - | ||||||
Loss on impairment of fixed assets | 679,535 | - | ||||||
Warrant expense | 77,500 | - | ||||||
Loss on acquisition of El Toro | - | 717,011 | ||||||
Accretion of debt discount | 231,094 | 13,905 | ||||||
Amortization of deferred financing costs | - | 4,782 | ||||||
Changes in assets and liabilities | ||||||||
Accounts receivable | (367,057 | ) | - | |||||
Volumetric excise tax credit receivable | 13,000 | - | ||||||
Inventory | (1,212 | ) | - | |||||
Prepaids | 2,425 | (80,000 | ) | |||||
Other current assets | - | (5,127 | ) | |||||
Other long-term assets | - | 34,020 | ||||||
Deposits and other long-term assets | (6,571 | ) | - | |||||
Accounts payable | 502,919 | 309,033 | ||||||
Accounts payable - related party | 149,276 | 49,406 | ||||||
Accrued interest related party | 297,287 | 195,581 | ||||||
Accrued expenses | 50,259 | 133,874 | ||||||
Deferred rent | - | (4,215 | ) | |||||
2,097,379 | 1,522,206 | |||||||
Net cash used in operating activities | (487,403 | ) | (554,466 | ) | ||||
Cash flows from investing activities | ||||||||
Purchase of equipment | - | (94,712 | ) | |||||
Construction in progress | (144,827 | ) | - | |||||
Cash from acquisition | - | (3,434 | ) | |||||
Net cash used in investing activities | (144,827 | ) | (98,146 | ) | ||||
Cash flows from financing activities | ||||||||
Line-of-credit | - | (150,000 | ) | |||||
Promissory note - related party | (11,685 | ) | - | |||||
Proceeds from sale of common stock and issuance of warrants | 310,000 | - | ||||||
Subordinated convertible senior notes payable to members | 400,000 | 850,000 | ||||||
Proceeds from note payable to member | - | 35,500 | ||||||
Payments of principal on long-term debt | (70,519 | ) | (75,520 | ) | ||||
Advances from related party | 70,258 | 21,986 | ||||||
Net cash provided by financing activities | 698,054 | 681,966 | ||||||
Net increase in cash | 65,824 | 29,354 | ||||||
Cash and cash equivalents - beginning of year | 24,944 | 358 | ||||||
Cash and cash equivalents - end of year | $ | 90,768 | $ | 29,712 |
|
| For the Nine Months |
| |||||
($ in thousands) |
| 2022 |
|
| 2021 |
| ||
Cash flows from operating activities |
|
|
|
|
|
| ||
Net income (loss) |
| $ | (17,878 | ) |
| $ | 27,398 |
|
Adjustments to reconcile net loss to net cash used in operating activities |
|
|
|
|
|
| ||
Depreciation and amortization |
|
| 12,115 |
|
|
| 11,371 |
|
Non-cash lease expense |
|
| 2,905 |
|
|
| 2,903 |
|
Loss on sale of fixed assets |
|
| 29 |
|
|
| 78 |
|
Amortization of debt discount and debt issuance costs |
|
| 10,148 |
|
|
| 793 |
|
Deferred income taxes |
|
| 133 |
|
|
| 43 |
|
Stock-based compensation expense |
|
| 102 |
|
|
| 527 |
|
Non-cash interest expense |
|
| 14,117 |
|
|
| 4,768 |
|
Bad debt expense |
|
| 504 |
|
|
| 1 |
|
Change in fair value of embedded derivative liability |
|
| (12 | ) |
|
| (1,407 | ) |
Change in fair value of warrant liabilities |
|
| (25,296 | ) |
|
| (2,243 | ) |
(Gain) loss on extinguishment of debt |
|
| 5,318 |
|
|
| (10,953 | ) |
Restructuring gain from Recapitalization Transactions |
|
| (214 | ) |
|
| — |
|
Changes in assets and liabilities |
|
|
|
|
|
| ||
Accounts receivable - trade |
|
| 15,741 |
|
|
| (14,162 | ) |
Alternative fuels tax credit receivable |
|
| (138 | ) |
|
| 742 |
|
Due from related party |
|
| — |
|
|
| 30 |
|
Other assets |
|
| (1,874 | ) |
|
| (2,502 | ) |
Accounts payable |
|
| (1,791 | ) |
|
| (721 | ) |
Accrued expenses and other current liabilities |
|
| (5,988 | ) |
|
| (2,924 | ) |
Accrued interest - related party |
|
| 1,244 |
|
|
| 357 |
|
Operating lease liabilities |
|
| (3,359 | ) |
|
| (4,092 | ) |
Net cash provided by (used in) operating activities |
|
| 5,806 |
|
|
| 10,007 |
|
Cash flows from investing activities |
|
|
|
|
|
| ||
Purchases of equipment |
|
| (48 | ) |
|
| (7,132 | ) |
Proceeds from sale of assets |
|
| 22 |
|
|
| 315 |
|
Net cash provided by (used in) investing activities |
|
| (26 | ) |
|
| (6,817 | ) |
Cash flows from financing activities |
|
|
|
|
|
| ||
Proceeds from sale of common stock, preferred stock and warrants |
|
| 13,557 |
|
|
| — |
|
Proceeds from issuance of debt |
|
| — |
|
|
| 5,749 |
|
Payments of principal on debt |
|
| (3,588 | ) |
|
| (4,306 | ) |
Proceeds from issuance of debt - related party |
|
| 9,625 |
|
|
| — |
|
Payments of principal on debt - related party |
|
| (261 | ) |
|
| (18,513 | ) |
Payment of prepayment penalty fees - related party |
|
| — |
|
|
| (777 | ) |
Advances from factoring arrangements |
|
| 181,350 |
|
|
| 147,233 |
|
Payments on factoring arrangements |
|
| (191,030 | ) |
|
| (149,451 | ) |
Debt extinguishment costs |
|
| (225 | ) |
|
| — |
|
Payments on finance lease liabilities |
|
| (6,047 | ) |
|
| (3,056 | ) |
Net cash provided by (used in) financing activities |
|
| 3,381 |
|
|
| (23,121 | ) |
Net increase (decrease) in cash and restricted cash |
|
| 9,161 |
|
|
| (19,931 | ) |
Cash and restricted cash - beginning of year |
|
| 7,329 |
|
|
| 26,644 |
|
Cash and restricted cash - end of year |
| $ | 16,490 |
|
| $ | 6,713 |
|
|
|
|
|
|
| |||
Supplemental disclosures of cash flow information: |
|
|
|
|
|
| ||
Income tax paid |
| $ | 1,852 |
|
| $ | 783 |
|
Interest paid |
| $ | 2,680 |
|
| $ | 471 |
|
|
|
|
|
|
| |||
Supplemental schedule of non-cash investing and financing activities: |
|
|
|
|
|
| ||
Right-of-use assets obtained in exchange for finance lease liabilities |
| $ | 6,300 |
|
| $ | 1,636 |
|
Right-of-use assets obtained in exchange for operating lease liabilities |
| $ | 3,677 |
|
| $ | 1,507 |
|
Restructuring gain from Recapitalization Transactions in additional paid-in capital |
| $ | 8,954 |
|
| $ | — |
|
Fair value of warrants and common stock issued in connection with financing arrangements |
| $ | 12,782 |
|
| $ | 2,208 |
|
Supplemental disclosure of cash flow information:
Cash paid for interest for the nine months ended September 30, 2017 and 2016 was $363,476 and $47,316, respectively.
Supplemental disclosure of non-cash activity:
During the nine months ended September 30, 2017 and 2016 the Company had $247,512 of construction in progress purchases in accounts payable.
See notes to unaudited condensed consolidated financial statements statements.
7
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
On February 1, 2017, the Company acquired EVO to further its business relationship alignment with the Company’s business model to acquire existing CNG stations. The following is the allocation of the assets and liabilities as of February 1, 2017:
Prepaid | $ | 32,118 | ||
Trademarks | 164,000 | |||
Customer list | 466,000 | |||
Goodwill | 936,837 | |||
Property, equipment and land | 8,552,441 | |||
Deposits and other long-term assets | 198,751 | |||
Derivative liability | (5,821 | ) | ||
Derivative liability, less current portion | (76,811 | ) | ||
Convertible promissory note - related party | (13,550,000 | ) | ||
Debt discount | 3,282,485 |
During the nine months ended September 30, 2016, the Company converted $99,235 of consulting expense into subordinated notes payable to members.
During the nine months ended September 30, 2016, the Company converted $127,108 of accounts payable - related party into subordinated notes payable to members.
During the nine months ended September 30, 2016, the Company converted $85,599 of long term notes payable related party into $21,556 and $64,043 of subordinated convertible senior notes payable to members and subordinated notes payable to members, respectively.
During the nine months ended September 30, 2016, the Company had $247,512 of construction in progress purchases in accounts payable.
The Company acquired the remaining 80% of Titan El Toro LLC to further its business relationship alignment with the Company’s business model to acquire existing CNG stations. The following is the allocation of the 80% interest of the assets and liabilities as of January 1, 2016:
Prepaid rent | $ | 11,576 | ||
Property and equipment | 1,271,617 | |||
Deposits | 38,669 | |||
1,321,862 | ||||
Checks written in excess of bank balance | 3,434 | |||
Accounts payable | 45,434 | |||
Accounts payable - related party | 55,249 | |||
Deferred rent | 24,147 | |||
Accrued expenses | 1,566 | |||
Accrued interest - related party | 122,582 | |||
Subordinated notes payable to members | 700,826 | |||
Long-term debt | 1,300,000 | |||
Net liabilities acquired | $ | (931,376 | ) |
See notes to unaudited consolidated financial statements
Basis of Presentation and Securities Exchange
These financial statements represent the consolidated financial statements of EVO Transportation & Energy Services, Inc., formerly Minn Shares Inc. (“EVO Inc.” or the “Company”), its wholly owned subsidiaries, Titan CNG LLC (“Titan”) and Environmental Alternative Fuels, LLC (“EAF”), Titan’s wholly-owned subsidiaries, Titan El Toro LLC (“El Toro”), Titan Diamond Bar LLC (“Diamond Bar”), and Titan Blaine, LLC (“Blaine”), and EAF’s wholly-owned subsidiary, EVO CNG, LLC (“EVO CNG”).
On November 22, 2016, Titan and its members entered into an Agreement and Plan of Securities Exchange with EVO Inc. whereby EVO Inc. acquired all of the equity interests of Titan and Titan became a wholly-owned subsidiary of EVO Inc. (the “Titan Securities Exchange”). The Company issued 248,481 shares of common stock, par value $0.0001 per share (“Common Stock”), to acquire Titan, which resulted in the former Titan equity holders owning approximately 91.25% of the outstanding shares of the Company’s Common Stock after the consummation of the Titan Securities Exchange.
At the closing of the Titan Securities Exchange, all of the issued and outstanding units of Titan immediately prior to the closing of the Titan Securities Exchange were converted into 248,481 shares of the Company’s Common Stock. The Company did not have any stock options or warrants to purchase shares of its capital stock outstanding at the time of the Titan Securities Exchange.
Cash and cash equivalents | $ | 3,377 | ||
Accounts payable | (54,036 | ) | ||
Convertible promissory note - related party | (405,103 | ) | ||
Reverse acquisition | $ | (455,762 | ) |
Because the former members of Titan owned approximately 91.25% of the combined company on completion of the Titan Securities Exchange, the transaction was accounted for as a recapitalization through a reverse acquisition, with no goodwill or other intangibles recorded. As such, the financial information reflects the historical financial information of Titan, Diamond Bar and Blaine and the remaining assets and liabilities of EVO Inc. brought over at historical cost. EVO Inc.’s results of operations, which were de minimis, are included in the Company’s consolidated financial statements from the date of acquisition, November 22, 2016. Costs of the transaction have been charged to operations. The capital structure of the Company has been retroactively adjusted to reflect that of EVO Inc. with all shares being adjusted based on the exchange ratio of equity interest in connection with the Titan Securities Exchange.
As a result of the Titan Securities Exchange, EVO Inc. acquired the business of Titan and its subsidiaries Diamond Bar, Blaine and El Toro as of November 22, 2016, and will continue the existing business operations of Titan, Diamond Bar, Blaine and possibly El Toro as a publicly traded company under the name EVO Transportation & Energy Services, Inc.
Effective August 31, 2017, the Company amended its certificate of incorporation to change its name from “Minn Shares Inc.” to “EVO Transportation & Energy Services, Inc.” by the filing an amendment to the certificate of incorporation of the Company (the “Charter Amendment”). In connection with the name change, the Company changed its ticker symbol on the OTC Pink Marketplace from “MSHS” to “EVOA.”
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for completed financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the consolidated financial statements of the Company as of September 30, 2017. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the operating results for the full year. It is recommended that these consolidated financial statements be read in conjunction with the consolidated financial statements and related disclosures for the year ended December 31, 2016 filed with the Securities and Exchange Commission on April 18, 2017.
On February 1, 2017, EVO Inc., EAF, EVO CNG, and Danny R. Cuzick (“Danny Cuzick”), Damon R. Cuzick (“Damon Cuzick”), Theril H. Lund and Thomas J. Kiley (together with Danny Cuzick and Damon Cuzick, the “EAF Members”) consummated the transactions contemplated by that certain Agreement and Plan of Securities Exchange dated January 11, 2017 (the “EAF Exchange Agreement”). Pursuant to the EAF Exchange Agreement, EVO Inc. acquired all of the membership interests in EAF (the “EAF Interests”) from the EAF Members. EAF, together with EVO CNG, is a compressed natural gas fueling station company with six fueling stations in California, Texas, Arizona and Wisconsin.
In determining the accounting acquirer in the transactions contemplated by the EAF Exchange Agreement, management considered the Financial Accounting Standards Board’s Accounting Standard Codification (“ASC”) 805—Business Combinations. Specifically, management considered the guidance in ASC 810-10, which generally provides that the acquirer in a business combination transaction is determined by identifying the existence of a controlling financial interest, which can typically be determined by the ownership of a majority voting interest. Because the EVO, Inc. stockholders continued to own all of the outstanding shares of Common Stock on completion of the transactions contemplated by the EAF Exchange Agreement, management determined that EVO Inc. was the accounting acquirer in the EAF transaction. However, because the Convertible Notes issued as consideration pursuant to the EAF Exchange Agreement could convert to a majority of the issued and outstanding Common Stock, management will continue to evaluate the accounting treatment for the EAF transaction.
On April 6, 2017, the Company effected a 50-for-1 reverse stock split of its Common Stock pursuant to which each 50 shares of issued and outstanding Common Stock became one share of Common Stock (the “Reverse Split”). No fractional shares were issued as a result of the Reverse Split. All references to numbers of shares of Common Stock and per share amounts give retroactive effect to the Reverse Split for all periods presented.
Going Concern
The Company is an early stage company in the process of acquiring several businesses in the transportation and vehicle fuels industry. As of September 30, 2017 the Company acquired EAF, which was financed through approximately $13.6 million of debt, of which $3.8 million is contemplated to be repaid through a successful secondary offering before the December 31, 2017 due date. As of September 30, 2017, the Company has a working capital deficit of approximately $8.4 million which management anticipates rectifying with additional public or private offerings. Also, the Company is evaluating certain cash flow improvement measures. However, there can be no assurance that the Company will be successful in these efforts.
The accompanying unaudited financial statements have been prepared assuming that the Company will continue as a going concern; however, the above conditions raise doubt about the Company’s ability to do so. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.
Note 1 -– Description of Business and Summary of Significant Accounting Policies
Description of Business
The CompanyEVO Transportation & Energy Services, Inc. (“EVO” and, together with its direct and indirect subsidiaries, the “Company”) is a holding company based in Peoria, Arizonatransportation provider serving the United States Postal Service (“USPS”) and other customers. We believe EVO is one of the largest surface transportation companies serving the USPS, with a diversified fleet of tractors, straight trucks and other vehicles that owns two operating subsidiaries, Titan and EAF, that compete in thecurrently operate on either diesel fuel, gasoline, or compressed natural gas (“CNG”) service business. Titan. In connection with providing our mail transportation and delivery services to the USPS and our freight services to other corporate customers, we outsource the transportation of certain loads to third-party carriers. We operate from our headquarters in Phoenix, Arizona and from numerous terminals throughout the United States.
Historically, we have grown primarily through acquisitions and have also grown organically by obtaining new contracts from the USPS and other customers.
Securities Purchase Agreement
On September 8, 2022, EVO, EVO Holding Company, LLC (“EVO Holding”), a subsidiary of EVO, and Antara Capital Master Fund LP (“Antara Capital”) entered into a Securities Purchase Agreement (the “SPA”) and consummated certain transactions involving the recapitalization of the Company (collectively the “Recapitalization Transactions”). This included the following:
Amended and Restated Limited Liability Company Operating Agreement
In connection with the SPA, EVO, Antara Capital and EVO Holding entered into an Amended and Restated Limited Liability Company Operating Agreement (the “A&R LLC Agreement”) for EVO Holding. Pursuant to the A&R LLC Agreement and the SPA, EVO
8
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Holding issued one convertible preferred membership interest in EVO Holding (the “Preferred Interest”) to Antara Capital. The Preferred Interest is convertible at Antara Capital’s election during the Conversion Period into 99% of the common membership interests of EVO Holding. The Conversion Period is defined as each date of determination on which (i) Consolidated EBITDA for EVO and its subsidiaries for the most recently completed fiscal quarter that is the management companyfirst, second or third fiscal quarter is less than $6.0 million, with such determination initially being made with respect to the second fiscal quarter of 2023, (ii) Consolidated EBITDA for EVO and its subsidiaries for the most recent fourth fiscal quarter that oversees operationsis one of the El Toro, Diamond Bar, and Blaine CNG service stations. El Toro was formed during 2013 and began operations during 2015. El Toro, locatedtwo most recently completed fiscal quarters is less than $9.0 million, (iii) EVO or any of its subsidiaries fails to pay any principal or interest due in Lake Forest, California, is a comprehensive natural gas vehicle solutions provider that offers products and servicesrespect of any debt with an outstanding aggregate principal amount in excess of $1.0 million when due, subject to corporate and municipal fleet operators as well as individual consumers. certain cure rights, (iv) any debt of EVO or any of its subsidiaries with an outstanding aggregate principal amount in excess of $1.0 million becomes due prior to its stated maturity, (v) EVO has failed to deliver unaudited quarterly financial statements with certain prescribed time periods, or (vi) EVO has failed to deliver audited annual financial statements within certain prescribed time periods.
Going Concern
As of JuneSeptember 30, 2017, El Toro ceased operations. Blaine2022, the Company had a cash balance of $15.5 million, a working capital deficit of $88.6 million, stockholders’ deficit of $36.0 million, and Diamond Bar were formed in 2015. In March 2016, Diamond Bar began operationsmaterial debt and lease obligations of its CNG station$101.7 million, which include term loan borrowings under a leasefinancing agreement with Antara Capital. During the nine months ended September 30, 2022, the Company reported cash provided by operating activities of $5.8 million and a net loss of $17.9 million.
The following significant transactions and events affecting the Company’s liquidity occurred during the nine months ended September 30, 2022:
The Company was incorporated in the State of Delaware, which authorized EVO to issue up to
Under the Series C Certificate of Designations, prior to a payment default under the Bridge Loan (a "Bridge Loan Triggering Event") and following the date on Octoberwhich all principal and accrued interest (including default interest) payable under the Bridge Loan has been paid-in-full (the date of such payment-in-full, the "Bridge Loan Discharge Date"), the holder of Series C Preferred Stock will have no voting rights except as otherwise required by law. Under the Series C Certificate of Designations, upon the occurrence of a Bridge Loan Triggering Event through and including the Bridge Loan Discharge Date, the holder of Series C Preferred Stock will vote together with the holders of EVO's common stock as a single class on any matter presented to the holders of EVO's common stock for their action or consideration at any meeting of stockholders of the Company (or by written consent of stockholders in lieu of meeting) or on which such holders of common stock are otherwise entitled to act (each, a "Series C Shareholder Matter"), and the holder of Series C Preferred Stock will be entitled to cast a number of votes on any Series C Shareholder Matter equal to the total number of votes of all non-holders of Series C Preferred Stock entitled to vote on any such Series C Shareholder Matter plus 10. In addition, the Series C Certificate of Designations provides that governance mechanisms that could have the effect of limiting, reducing or adversely affecting the Series C Preferred Stockholders’ voting or board-appointment rights under the Series C Certificate of Designations will require the consent of the holders holding majority of the issued and outstanding shares of Series C (the “Series C Majority”).
In addition, the Series C Certificate of Designations grants the Series C Majority the exclusive right, voting separately as a class, to elect or appoint (i) prior to a Bridge Loan Triggering Event, one director to the Board (who shall, unless the majority of the Series C Preferred Stock elects otherwise in its sole discretion, also serve as a member of each Board committee) and
9
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
(ii) upon the occurrence of a Bridge Loan Triggering Event through and including the Bridge Loan Discharge Date, a majority of the members of the Board.
The issuance of one share of Series D Non-Participating Preferred Stock to Antara Capital on July 13, 2022 resulted in a change of control of the Company, with Antara Capital having voting control on Series D Shareholder Matters. The consideration for the issuance of Series D Non-Participating Preferred Stock to Antara Capital was Antara Capital's agreement to enter into the Third Extension Agreement, and the Company did not receive any cash consideration.
10
EVO TRANSPORTATION & ENERGY SERVICES, INC.
PrinciplesNotes to Unaudited Condensed Consolidated Financial Statements
In evaluating the Company’s ability to continue as a going concern and its potential need to seek additional financing from outside sources, management also considered the following conditions:
As a result of the circumstances described above, the Company may not have sufficient liquidity to make the required payments on its debt, factoring or leasing obligations; to satisfy future operating expenses; to make capital expenditures; or to provide for other cash needs.
Management’s plans to mitigate the Company’s current conditions include:
Notwithstanding management’s plans, there can be no assurance that the Company will be successful in its efforts to address its current liquidity and capital resource constraints. These conditions raise substantial doubt about the Company's ability to continue as a going concern for the next 12 months from the issuance of these consolidated financial statements. The accompanying consolidated financial statements do not include any adjustments to reflect the accountspossible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result if the Company is unable to continue as a going concern.
Refer to Notes 4 and 5 for further information regarding the Company’s factoring and debt obligations. Refer to Note 12, Subsequent Events, for further information regarding changes in the Company’s debt obligations and liquidity subsequent to September 30, 2022.
Seasonality
During the fourth quarter, the Company typically experiences surges pertaining to online holiday shopping, the length of the holiday season (shopping days between Thanksgiving and Christmas) and holiday surge pricing on USPS contracts. The Company’s freight trucking operations and, in general, the transportation industry, experience seasonal impacts in the first quarter. Freight revenues in the first quarter are typically lower due to less consumer demand, lower revenue days, consumers reducing shipments following the holiday season and inclement weather. At the same time, operating costs generally increase, and tractor productivity decreases during the winter months due to decreased fuel efficiency, increased cold weather-related equipment maintenance and repairs, and increased insurance claims and costs due to higher accident frequency from harsh weather.
11
EVO Inc., its subsidiaries, Titan and EAF, Titan’s wholly owned subsidiaries, El Toro, Diamond Bar and Blaine, and EAF’s wholly owned subsidiary, EVO CNG. All intercompany accounts and transactionsTRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been eliminatedprepared in consolidation.
Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformityaccordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of Americathe information and footnotes required by U.S. GAAP for complete financial statements and therefore should be read in conjunction with the Company’s December 31, 2021 Annual Report on Form 10-K. In the opinion of management, all adjustments considered necessary for a fair presentation, consisting of normal recurring adjustments, have been included. Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. The balance sheet at December 31, 2021 has been derived from the audited consolidated financial statements at that date, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
PushdownAccounting
As described in Note 5, Debt, on July 13, 2022, Antara Capital was issued one share of Series D Non-Participating Preferred Stock of EVO. With the issuance of Series D Non-Participating Preferred Stock, Antara Capital obtained voting control on shareholder matters, resulting in a change of control of the Company. Antara Capital elected to not apply pushdown accounting.
Reclassifications
Certain reclassifications have been made to prior period's financial information to conform to the current period presentation.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. 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 revenues and expenses during the reporting period. Actual results could differ from those estimates.
The consolidated financial statements include some amounts that are based on management’s best estimates and judgments. The most significant estimates relate to recognitiongoodwill and measurement of identifiable assets acquired and liabilities assumed inlong-lived asset valuations, purchase price allocations related to the Company’s business combinations, accounts receivable, estimated useful livesvaluation allowance on deferred income tax assets, and impairmentthe valuation of our common stock, preferred stock, warrants and stock-based awards.
Earnings (Loss) per Share of Common Stock
Basic earnings (loss) per share of common stock attributable to common stockholders is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average shares of common stock outstanding for the period. Potentially dilutive shares, which are based on property, equipmentthe weighted-average shares of common stock underlying outstanding stock-based awards, warrants and land,convertible notes payable and contingencies. These estimates may be adjustedpreferred stock using the treasury stock method or the if-converted method, as more current information becomes available,applicable, are included when calculating diluted net loss per share of common stock attributable to common stockholders when their effect is dilutive.
The following table presents the computation of basic and any adjustment could be significant. diluted earnings (loss) per share (amounts in thousands, except share data):
Accounts Receivable12
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) |
| $ | 2,228 |
|
| $ | 5,329 |
|
| $ | (17,878 | ) |
| $ | 27,398 |
|
Accrued and undeclared preferred stock dividends in arrears |
|
| — |
|
|
| (164 | ) |
|
| (323 | ) |
|
| (487 | ) |
Inducement to convert preferred stock into common stock |
|
| (153 | ) |
|
| — |
|
|
| (153 | ) |
|
| — |
|
Net income (loss) available to common stockholders - numerator for basic EPS |
|
| 2,075 |
|
|
| 5,165 |
|
|
| (18,354 | ) |
|
| 26,911 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
$4.0 million Secured Convertible Promissory Notes |
|
| — |
|
|
| 27 |
|
|
| — |
|
|
| 258 |
|
Series A Redeemable Convertible Preferred stock |
|
| — |
|
|
| 9 |
|
|
| — |
|
|
| 27 |
|
Series B Redeemable Convertible Preferred stock |
|
| — |
|
|
| 155 |
|
|
| — |
|
|
| 460 |
|
Subtotal |
|
| — |
|
|
| 191 |
|
|
| — |
|
|
| 745 |
|
Adjusted net income (loss) available to common stockholders - numerator for diluted EPS |
| $ | 2,075 |
|
| $ | 5,356 |
|
| $ | (18,354 | ) |
| $ | 27,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Denominator for basic EPS - weighted average common shares outstanding |
|
| 146,316,155 |
|
|
| 30,891,398 |
|
|
| 78,165,201 |
|
|
| 30,377,872 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
$4.0 million Secured Convertible Promissory Notes |
|
| 19,765 |
|
|
| 196,802 |
|
|
| — |
|
|
| 639,259 |
|
Series A Redeemable Convertible Preferred stock |
|
| — |
|
|
| 138,597 |
|
|
| — |
|
|
| 132,647 |
|
Series B Redeemable Convertible Preferred stock |
|
| — |
|
|
| 2,310,041 |
|
|
| — |
|
|
| 2,208,384 |
|
Subtotal |
|
| 19,765 |
|
|
| 2,645,440 |
|
|
| — |
|
|
| 2,980,290 |
|
Denominator for diluted EPS - adjusted weighted average common shares outstanding |
|
| 146,335,920 |
|
|
| 33,536,838 |
|
|
| 78,165,201 |
|
|
| 33,358,162 |
|
Basic EPS |
| $ | 0.01 |
|
| $ | 0.17 |
|
| $ | (0.23 | ) |
| $ | 0.89 |
|
Diluted EPS |
| $ | 0.01 |
|
| $ | 0.16 |
|
| $ | (0.23 | ) |
| $ | 0.83 |
|
The following table presents the potentially dilutive shares that were excluded from the computation of diluted earnings (loss) per share of common stock attributable to common stockholders, because either their effect was anti-dilutive or they are contingently issuable shares that were not issuable assuming the end of the reporting period was the end of the contingency period:
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
Stock options |
|
| 10,945,711 |
|
|
| 10,420,249 |
|
|
| 10,945,711 |
|
|
| 10,420,249 |
|
Warrants |
|
| 72,011,885 |
|
|
| 12,606,255 |
|
|
| 72,011,885 |
|
|
| 12,606,255 |
|
Common stock to be issued upon conversion of |
|
| — |
|
|
| 7,490,000 |
|
|
| — |
|
|
| 7,490,000 |
|
Common stock and warrant to be issued for purchase |
|
| 2,348,000 |
|
|
| 2,348,000 |
|
|
| 2,348,000 |
|
|
| 2,348,000 |
|
Total |
|
| 85,305,596 |
|
|
| 32,864,504 |
|
|
| 85,305,596 |
|
|
| 32,864,504 |
|
Revenue Recognition
In accordance with Accounting Standards Codification ("ASC") 606-10-50, the Company disaggregates Trucking revenue from contracts with its customers between USPS revenue and Freight revenue as follows:
13
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
($ in thousands) |
| For the Three Months |
|
| For the Nine Months |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2022 |
|
| 2021 |
| ||||
USPS revenue |
| $ | 67,414 |
|
| $ | 59,546 |
|
| $ | 200,274 |
|
| $ | 155,849 |
|
Freight revenue |
|
| 6,917 |
|
|
| 6,976 |
|
|
| 18,671 |
|
|
| 20,098 |
|
Other revenue |
|
| 920 |
|
|
| 2,247 |
|
|
| 3,850 |
|
|
| 3,213 |
|
Total Trucking revenue |
| $ | 75,251 |
|
| $ | 68,769 |
|
| $ | 222,795 |
|
| $ | 179,160 |
|
United States Postal Service Settlement
On January 19, 2021, the Company and the USPS entered into a settlement agreement whereby the USPS agreed to pay approximately $7.1 million to one of EVO’s subsidiaries as additional compensation for transportation services provided to the USPS under certain Dynamic Route Optimization (“DRO”) contracts. Subsequently, on February 19, 2021, the Company and the USPS entered into an additional settlement agreement whereby the USPS agreed to pay approximately $17.5 million to certain other Company subsidiaries as additional compensation for transportation services provided to the USPS under other DRO contracts. In connection with the settlement agreements, the Company and the USPS agreed to make certain adjustments to the Company’s DRO contracts, including rate adjustments effective for the fourth quarter of 2020 and future periods. As a result of those adjustments, the USPS agreed to pay an additional $3.8 million to the Company for transportation services provided in the fourth quarter of 2020. The USPS has made all payments associated with these settlement agreements and they were received by the Factor (as defined in Note 4, Factoring Arrangements) on behalf of the Company during the first quarter of 2021. In addition, amounts totaling $6.3 million that were previously paid by the USPS to the Company during 2020 became subject to the terms of the settlement agreements and were recognized as a deferred gain as of December 31, 2020. All aforementioned amounts totaling $34.8 million were recognized as other revenue during the first quarter of 2021 in the consolidated statement of operations. Such amounts are for transportation services provided during 2020 and prior years, are not subject to refund and are not contingent upon the Company providing future transportation services.
Segment Reporting
The Company provides an allowance for doubtful accounts equaluses the "management approach" to determine its operating and reportable segments. The management approach focuses on the financial information that the Company's chief operating decision maker uses to evaluate performance and allocate resources to the estimated uncollectible amounts. The Company’s estimate is based on historical collection experience and a review of the current status of trade accounts receivable. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change and that losses ultimately incurred could differ materially from the amounts estimated in determining the allowance. No allowance for doubtful accounts was recorded for the nine months ended September 30, 2017.
Concentrations of Credit Risk
During the nine months ended September 30, 2017 and 2016, four and one customers accounted for 84% and 13%, respectively, of total revenues. At September 30, 2017, four customers accounted for 84% of total accounts receivable.
Property, Equipment and Land
Property and equipment are stated at cost. Depreciation is provided utilizing the straight-line method over the estimated useful lives for owned assets, ranging from five to 40 years, and the shorter of the estimated economic life or related lease terms for leasehold improvements.
Construction in process represents the accumulated costs of assets not yet placed in service and primarily relates to equipment purchases and architectural fees for a CNG station being constructed by Blaine.
Based on management's assessment, we recorded a $679,535 fixed asset impairment charge related to closing of the El Toro station. A significant portion of the asstes were land improvements and could not be sold or conveyed to another property.
Goodwill and Intangible Assets
Goodwill represents the excess of fair value over the net assets of the business acquired. Goodwill is evaluated for impairment annually or when a triggering event indicates it is more likely than not that an impairment may be necessary. Definite-lived intangible assets are amortized over their estimated useful lives. In addition, amortized intangible assets are reviewed for impairment annually or when indicators of impairment exist. No impairment expense was recognized during the nine months ended September 30, 2017.
Long-Lived Assets
The Company evaluates the recoverability of long-lived assets whenever events or changes in circumstances indicate that an asset’s carrying amount may not be recoverable. Such circumstances could include, but are not limited to (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset. The Company measures the carrying amount of the asset against the estimated undiscounted future cash flows associated with it. Should the sum of the expected future net cash flows be less than the carrying value of the asset being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying value of the asset exceeds its fair value. The fair value is measured based on quoted market prices, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including the discounted value of estimated future cash flows. The evaluation of asset impairment requiresCompany's operations. Historically, the Company to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgmenthad two reportable segments—Trucking and actual results may differ from assumed and estimated amounts. During the nine months ended September 30, 2017,CNG Fueling Stations. Effective January 1, 2022, the Company determined that fixed assetsits business operates as one reportable segment because: (i) the Company measures profit and construction in progress were impaired, recording a loss of $679,535 due to impairment of assets related to the Company’s El Toro station ceasing operations.
Assets Held for Sale
The Company classifies assets as being held for sale when the following criteria are met: management has committed to a plan to sell the asset; the asset is available for immediate sale in its present condition; an active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated; the sale of the asset is highly probable, and transfer of the asset is expected to qualify for recognition as a completed sale, within one year;whole; (ii) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
Net Loss per Share of Common Stock
Basic loss per share is computed by dividing net loss available to holders of the Company’s Common Stock by the weighted average number of shares of Common Stock outstanding for the period. Diluted loss per share reflects the potential dilution that would occur if securities or other contracts to issue Common Stock were exercised or converted into Common Stock.
Securities totaling 103,333 and 0 for the three and nine months ended September 30, 2017 and 2016, respectively, have been excluded from loss per share because their effect would have been anti-dilutive.
Revenue Recognition
The Company’s revenues primarily consist of CNG fuel sales. These revenues are recognized in accordance with GAAP, which requires that the following four criteria must be met before revenue can be recognized:
(i) persuasive evidence of an arrangement exists:
(ii) delivery has occurred and title and the risks and rewards of ownership have been transferred to the customer or services have been rendered;
principal decision makers do not review information based on any operating segment; (iii) the price is fixed or determinable;Company has not chosen to organize its business around different products and
services; (iv) collectability is reasonably assured.
Applying these factors, the Company typically recognizes revenue fromhas not chosen to organize its business around geographic areas; and (v) the sale of natural gas fuel at the time the fuel is dispensed.
Income Taxes
The Company recognizes deferred tax liabilities and assets based on the differences between the tax basis ofrevenues, profits, assets and liabilities of the CNG Fueling Stations are immaterial for all periods presented.
Restricted Cash
We had restricted cash of $1.0 million as of September 30, 2022 and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. The Company’s temporary differences result primarily from depreciation.
The Company evaluates its tax positions taken or expectedDecember 31, 2021 which represents cash required to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions will more likely than not be sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold are not recorded as a tax benefit or expense in the current year. Interest and penalties, if applicable, are recorded in the period assessed as general and administrative expenses. However, no interest or penalties have been assessed for the nine months ended September 30, 2017 and 2016.
Deferred income taxes are provided for temporary differences between the financial reporting and tax basis of assets and liabilities. Deferred taxes are reducedset aside by a valuation allowance when,standby letters of credit related to workers’ compensation and general liabilities accrued in our condensed consolidated financials. Restricted cash is included in deposits and other long-term assets on our condensed consolidated balance sheet. See Note 10, Commitments and Contingencies, for further details around the opinionletter of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of the enactment.credit.
In evaluating the ultimate realization of deferred income tax assets, management considers whether it is more likely than not that the deferred income tax assets will be realized. Management establishes a valuation allowance if it is more likely than not that all or a portion of the deferred income tax assets will not be utilized. The ultimate realization of deferred income tax assets is dependent on the generation of future taxable income, which must occur prior to the expiration of the net operating loss carryforwards.
Recently Issued Accounting Pronouncements
Accounting Pronouncements Adopted
In January 2017,May 2021, the Financial Accounting Standards Board (“FASB”(“FASB”) issued Accounting Standards Update (“ASU”) 2017-04, IntangiblesASU 2021-04, Earnings Per Share (Topic 260), Debt - GoodwillModifications and OtherExtinguishments (Topic 350) (“ASU 2017-04”)470-50), Simplifying the TestCompensation - Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40), which clarifies existing guidance for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the amendments eliminate Step 2 from the goodwill impairment test.freestanding written call options which are equity classified and remain so after they are modified or exchanged in order to reduce diversity in practice. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The guidancestandard is effective for annual or anyfiscal years beginning after December 15, 2021, including interim goodwill impairment testsperiods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The adoption of this guidance on January 1, 2022 did not have a material impact on the Company’s consolidated financial statements.
Accounting Pronouncements to be Adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326). The new guidance changes the accounting for estimated credit losses pertaining to certain types of financial instruments including, but not limited to, trade and lease
14
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
receivables. This pronouncement will be effective for fiscal years beginning after December 15, 2019 and early2022. Early adoption of the guidance is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not expect the adoption of ASU 2017-04 will have a material impact on our consolidated financial statements.
In June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) (“ASU 2016-13”), Measurement of Credit Losses on Financial Instruments. The standard significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For available-for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. It also simplifies the accounting model for purchased credit-impaired debt securities and loans. This ASU is effective for annual periods beginning after December 15, 2019, and interim periods therein. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. We do not expect the adoption of ASU 2016-13 will have a material impact on our consolidated financial statements.
In March 2016, FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718) (“ASU 2016-09”), Improvements to Employee Share-Based Payment Accounting. The amendments in ASU 2016-09 address multiple aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liability, and classification on the statements of cash flows. This ASU is effective for annual periods beginning after December 15, 2017, and interim periods within annual periodsfiscal years beginning after December 15, 2018. Early adoption is permitted in any interim or annual period. An entity that elects early adoption must adopt all the amendments in the same period, and any adjustments should be reflected as of the beginning of the fiscal year that includes the interim period. We do not expect the adoption of ASU 2016-09 will have a material impact on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The amendments in this ASU are effective for reporting periods beginning after December 15, 2016; however, in July 2015, the FASB agreed to delay the effective date by one year. The proposed deferral may permit early adoption, but would not allow adoption any earlier than the original effective date of the standard. The Company is stillcurrently evaluating and assessing the impact of the amendments in this ASU; however, the disclosure will be significant to the Company.
In February 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”), which will require lessees to recognize a right-of-use asset and a lease liability for all leases that are not short-term in nature. For a lessor, the accounting applied is also largely unchanged from previous guidance. The new rules will be effective for the Company in the first quarter of 2019. The Company is in the process of evaluating the impact the amendmentguidance will have on its consolidated financial positionstatements.
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. Under ASU 2020-06, the embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, or results of operations.
11
Note 2 - Acquisitions
EAF
On February 1, 2017, pursuant tothat do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. The new guidance also requires the EAF Exchange Agreement, EVO, Inc. acquiredif-converted method be applied for all convertible instruments. ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, with early adoption permitted. Adoption of the membership interests of EAF. EAF, together with EVO, is a compressed natural gas fueling station company with six fueling stations in California, Texas, Arizona and Wisconsin.
In determiningstandard requires using either the accounting acquirer inmodified retrospective or the transactions contemplated by the EAF Exchange Agreement, management considered the Financial Accounting Standards Board’s Accounting Standard Codification (“ASC”) 805—Business Combinations. Specifically, management considered the guidance in ASC 810-10, which generally provides that the acquirer in a business combination transaction is determined by identifying the existence of a controlling financial interest, which can typically be determined by the ownership of a majority voting interest. Because the EVO Inc. stockholders continued to own all of the outstanding shares of Common Stock on completion of the transactions contemplated by the EAF Exchange Agreement, management determined that EVO, Inc. was the accounting acquirer in the EAF transaction. However, because the Convertible Notes issued as consideration pursuant to the EAF Exchange Agreement could convert to a majority of the issued and outstanding Common Stock, management will continue to evaluate the accounting treatment for the EAF transaction.
The following unaudited table summarizes the preliminary fair value allocation of the assets acquired and liabilities assumed at the acquisition date, which were based on the best information available at the time the financial statements were issued and is subject to change.
Prepaid | $ | 32,118 | ||
Trademarks | 164,000 | |||
Customer lists | 466,000 | |||
Goodwill | 936,837 | |||
Property, equipment and land | 8,552,441 | |||
Deposits and other long-term assets | 198,751 | |||
Derivative liability | (5,821 | ) | ||
Derivative liability, less current portion | (76,811 | ) | ||
Convertible promissory note - related party | (13,550,000 | ) | ||
Debt discount | 3,282,485 |
The following table summarizes the unaudited pro forma results of the Company giving effect to the acquisition as if it had occurred on January 1, 2016. The unaudited pro forma information is not necessarily indicative of the results of operations of the Company had this acquisition occurred at the beginning of the years presented, nor is it necessarily indicative of future results.
For the Nine Months Ended | ||||||||
September 30, (Unaudited) | ||||||||
2017 | 2016 | |||||||
Revenue | $ | 1,904,385 | $ | 1,779,093 | ||||
Net loss | $ | (2,373,189 | ) | $ | (2,692,046 | ) | ||
Basic weighted average common shares outstanding | 420,804 | 142,787 | ||||||
Basic loss per common stock | $ | (5.63 | ) | $ | (18.85 | ) |
retrospective approach. The Company is currently evaluating and assessing the allocation of intangible assets as required under ASC 805-10-50-2 because the accounting forimpact this business combination was incomplete at the time theguidance will have on its consolidated financial statements were issued.
As consideration for the EAF Interests, EVO, Inc. issued a promissory note to an EAF Member in the principal amount of $3.8 million (the “Senior Promissory Note”) that bears interest at 7.5% per year, with a default interest rate of 12.5% per year, and has a maturity date of the earlier of (a) the date that is ten days after the initial closing of a private offering of capital stock of EVO, Inc. in an amount not less than $10 million (a “Private Offering”); (b) December 31, 2017 or a (c) declaration by the noteholder of an event of default under the Senior Promissory Note.
Also as consideration for the EAF Interests, EVO, Inc. issued convertible promissory notes to the EAF Members in the aggregate principal amount of $9.5 million (the “Convertible Notes”). The Convertible Notes bear interest at 1.5% per year and have a maturity date of February 1, 2026. The Convertible Notes are convertible into 1,400,000 shares (the “Transaction Shares”) of the Company’s Common Stock, subject to adjustment for any stock splits, combinations or similar transactions, representing approximately 81.1% of the Company’s total outstanding shares of Common Stock on a post-transaction basis. Accordingly, the conversion of the Convertible Notes would result in a change in control of the Company. The number of Transaction Shares will be increased to equal 70% of the issued and outstanding Common Stock if the issuance of Common Stock pursuant to a private offering of Common Stock of up to $2 million and the conversion into Common Stock of the Company’s subordinated notes payable to members, Senior Bridge Notes, convertible promissory notes, and certain accounts payable would otherwise cause the Transaction Shares to represent less than 70% of the issued and outstanding Common Stock. Pursuant to the terms of the EAF Exchange Agreement, the EAF Members are entitled to demand registration rights and piggyback registration rights with respect to the Transaction Shares upon customary terms, limitations, exceptions and conditions. The Convertible Notes are secured by all of the assets of EAF and the EAF Interests, which the Company pledged to the EAF Members as security for the Convertible Notes.
Each Convertible Note is convertible at the applicable holder’s option beginning on the first anniversary of the date of issuance of the Convertible Notes, including at any time within 90 days after the holder’s receipt of notice of consummation of (1) a reorganization, merger or similar transaction where EVO, Inc. is not the surviving or resulting entity or (2) the sale of all or substantially all of EVO, Inc. assets, subject to customary restrictions. Each holder’s conversion option is subject to a monthly limit of the number of shares of Common Stock equal to 10% of the thirty day average trading volume of shares of Common Stock during the prior calendar month. The Convertible Notes are also subject to mandatory conversion at the Company’s option beginning on the first anniversary of the date of issuance of the Convertible Notes if: (i) the closing price of the Common Stock is greater than (A) 150% of the price at which a share of Common Stock is sold in a Private Offering or (B) $10.00 if a Private Offering has not occurred by December 31, 2017 and (ii) the average daily trading volume of shares of Common Stock has equaled 100,000 or more for the 30 days prior to the applicable date. Upon a conversion of the Convertible Notes, accrued interest may also be converted at the greater of (i) the amount of interest to be converted divided by the exchange ratio of 0.1357, subject to adjustment for stock splits or combinations, or (ii) the amount of interest to be converted divided by the closing price of the Common Stock on the trading day preceding the conversion date.
In connection with the closing of the EAF Exchange Agreement, on February 1, 2017, the Company issued promissory notes to the EAF Members in the aggregate principal amount of $250,000 that bear interest at 6% per annum with a default rate of 11% per annum and a maturity date of the earlier of (a) the closing of a Private Offering; (b) 180 days from the date of the notes and (c) declaration by a holder of an event of default under the holder’s note (the “Working Capital Notes”). The Company failed to pay the outstanding balance on these notes by July 31, 2017, and as a result these notes are in default. However, the Company is in negotiations with the noteholders of these notes to extend the maturity date of these notes.
In connection with the closing of the EAF Exchange Agreement, on February 1, 2017, the Company guaranteed a note from an EAF member to EAF dated January 30, 2017 in the principal amount of $4 million (the “EAF Note”). The EAF Note is secured by all assets of EAF and is guaranteed by EAF. The EAF Note bears interest at 7.5% per annum with a default rate of 12.5% per annum and has a maturity date of the earlier of (a) February 1, 2020 and (b) declaration by the noteholder of an event of default under the EAF Note.
13statements.
Note 32 - Balance Sheet Disclosures
Goodwill consists of the following:
($ in thousands) |
| September 30, |
|
| December 31, |
| ||
Beginning balance |
| $ | 23,837 |
|
| $ | 23,837 |
|
Acquisitions |
|
| — |
|
|
| — |
|
Impairment |
|
| — |
|
|
| — |
|
| $ | 23,837 |
|
| $ | 23,837 |
|
Intangible assets consist of the following:
Property and equipment are summarized as follows:
|
| September 30, 2022 |
|
| December 31, 2021 |
| ||||||||||||||||||
($ in thousands) |
| Gross |
|
| Accumulated Amortization |
|
| Net |
|
| Gross |
|
| Accumulated Amortization |
|
| Net |
| ||||||
Customer relationships |
| $ | 4,604 |
|
| $ | (2,485 | ) |
| $ | 2,119 |
|
| $ | 4,604 |
|
| $ | (2,063 | ) |
| $ | 2,541 |
|
Trade names |
|
| 2,416 |
|
|
| (1,115 | ) |
|
| 1,301 |
|
|
| 2,416 |
|
|
| (917 | ) |
|
| 1,499 |
|
Non-competition agreements |
|
| 325 |
|
|
| (233 | ) |
|
| 92 |
|
|
| 325 |
|
|
| (185 | ) |
|
| 140 |
|
| $ | 7,345 |
|
| $ | (3,833 | ) |
| $ | 3,512 |
|
| $ | 7,345 |
|
| $ | (3,165 | ) |
| $ | 4,180 |
|
September 30, 2017 | December 31, | |||||||
(Unaudited) | 2016 | |||||||
Buildings | $ | 4,054,806 | $ | 664,276 | ||||
Equipment | 3,521,738 | 401,462 | ||||||
Land | 975,899 | - | ||||||
Site development | - | 161,467 | ||||||
Leasehold improvements | - | 46,728 | ||||||
Computer equipment | 40,528 | 42,109 | ||||||
8,592,971 | 1,316,042 | |||||||
Less Property and equipment - accumulated depreciation | (320,761 | ) | (213,793 | ) | ||||
$ | 8,272,210 | $ | 1,102,249 |
DepreciationAmortization expense for the ninethree months ended September 30, 20172022 and 20162021 was $415,639$0.2 million and $153,936,$0.2 million, respectively.
Construction in process contains amounts paid or accrued for construction of the Blaine CNG station that has not been placed into service as of September 30, 2017.
Intangible assets and goodwill consist of the following:
September 30, 2017 | December 31, | |||||||
(Unaudited) | 2016 | |||||||
Trademarks | $ | 164,000 | $ | - | ||||
Customer lists | 466,000 | - | ||||||
Goodwill | 936,837 | - | ||||||
$ | 1,566,837 | $ | - | |||||
Less intangible assets – accumulated amortization | (84,000 | ) | - | |||||
$ | 1,482,837, | $ | - |
Amortization expense for the nine months ended September 30, 20172022 and 20162021 was $84,000$0.7 million and $0,$0.7 million, respectively.
Amortization expense The weighted-average remaining useful life of the finite-lived intangible assets was 7.8 years as of September 30, 2022, of which the weighted-average remaining useful life for the intangibles will be approximately $126,000 annually through 2022customer relationships was 7.9 years, for the trade names was 8.0 years and $21,000 in 2023.
Accrued expenses consist offor the following:non-competition agreements was 1.6 years.
September 30, 2017 | December 31, | |||||||
(Unaudited) | 2016 | |||||||
Professional fees | $ | 119,319 | $ | 82,386 | ||||
Credit cards | 25,508 | 32,061 | ||||||
FET taxes | 23,187 | 0 | ||||||
Deferred rent | 9,841 | 13,149 | ||||||
$ | 177,855 | $ | 127,596 |
Note 43 - Related Party Transactions
Accounts Payable – Related Party
On February 15, 2019, the Company entered into an agreement to lease software technology for operations from a company owned by one of the Company’s officers. Under the agreement, the Company pays a monthly fee for this technology based on the number of devices installed across the Company’s fleet. The agreement was terminated in September 2022. During the three and nine months ended September 30, 2022, the Company did not recognize expense related to this software technology, and there was $0 and $0.1 million owed as of September 30, 2022 and December 31, 2021, respectively. During the three and nine months ended September 30, 2021, the Company recognized expense of approximately $0.1 million and $0.5 million related to this software technology, respectively.
Accrued Interest - Related Party
The Company’s accounts payablesaccrued interest - related party consistconsists of guaranteedthe accrued interest payments on stockholders’ and expense reimbursement to members. Accounts payablerelated party debt. Accrued interest - related party was $410,336$0.8 million and $261,060$2.7 million as of September 30, 20172022 and December 31, 2016,2021, respectively.
15
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Sheehy Settlement Agreement
On September 27, 2022, the Company, Sheehy Mail Contractors, Inc. ("Sheehy"), Sheehy Enterprises, Inc. (“SEI”), North American Dispatch Systems, LLC (“NADS”), John Sheehy (“J. Sheehy”), Robert Sheehy (“R. Sheehy” and, together with SEI, NADS and J. Sheehy, the “Sheehy Parties”) entered into a Settlement Agreement (the “Sheehy Settlement Agreement”) which consummated the following: (i) terminated the services agreement with NADS with the receipt of $0.1 million over multiple installments through August 31, 2023; (ii) Sheehy agreed to pledge $0.8 million in cash collateral held in the SEI captive insurance member account, under the CSPA, on or before March 1, 2024; (iii) modified an equipment lease between Sheehy and SEI; and (iv) SEI waived and agreed to not exercise the $1.2 million put right with the receipt of $0.1 million over multiple installments through December 31, 2023. Accordingly, EVO is no longer obligated to redeem the common stock held by SEI. As of September 30, 2022 and December 31, 2021, redeemable common stock was $0 and $1.2 million, respectively.
Off Balance Sheet Arrangements - Collateral Security Pledge Agreement
On January 2, 2019 the Company acquired all of the outstanding equity interests in Sheehy. Sheehy is engaged in the business of fulfilling government contracts for freight trucking services, as well as providing freight trucking services to non-government entities. On January 31, 2019, the Company entered into a letter agreement with SEI, to satisfy the Sheehy captive insurance security deposit requirement for 2019 (see Note 10, Commitments and Contingencies – Off Balance Sheet Arrangements – Captive Insurance). The letter agreement references a Collateral Security Pledge Agreement among SEI, Sheehy and the insurance captive (“CSPA”). In connection with the Sheehy Settlement Agreement, Sheehy pledged $0.8 million in cash collateral held in the SEI captive insurance member account, under the CSPA, on or before March 1, 2024, and SEI agreed to continue its collateral pledge until that time.
Creditor Exchange Agreements
As noted in Note 5, Debt, Danny Cuzick, John and Ursula Lampsa and Billy (Trey) Peck Jr. exchanged historical promissory notes issued by EVO and its subsidiaries for (i) warrants to purchase shares of EVO common stock; (ii) a $75,000 payment and (iii) the Takeback Notes resulting in a restructuring gain of approximately $9.0 million recorded within additional paid-in-capital as of September 30, 2022.
Amendments to Leases
In connection with the Recapitalization Transactions, Ursa Major Corporation, a wholly-owned subsidiary of the Company (“Ursa”), entered into two separate lease amendments with Ursa Oak Creek LLC and Ursa Group LLC. The amendments provided that the monthly “offset payments” under Ursa’s leases will continue until the earliest of (i) September 8, 2027, (ii) the date that the Takeback Note issued to John and Ursula Lampsa is satisfied in full, and (iii) the date the lease is terminated other than for Ursa’s breach. See Note 5, Debt, for further information regarding the Takeback Notes.
Purchase of Fixed Assets
On October 15, 2019, the Company entered into an agreement with an existing stockholder to purchase used CNG tractors in exchange for 1,174,800 shares of EVO’s common stock and a warrant to purchase 1,174,800 shares of EVO’s common stock at an exercise price of $2.50 per share. Although the Company has taken possession of the tractors, the issuance of the common stock and the warrant has not yet occurred. Accordingly, the Company has recorded $3.5 million related to the tractors within property and equipment, net on its consolidated balance sheets, with an associated $3.5 million related to EVO’s obligation to issue the common stock and the warrant to purchase common stock within common stock issuable.
For information regarding additional related party transactions, see Note 5, Debt, and Note 6, Stockholders’ Deficit and Warrants.
Note 4 – Factoring Arrangements
Certain of EVO’s wholly-owned subsidiaries have entered into accounts receivable factoring arrangements with Triumph Business Capital (the “Factor”) with termination dates that started in September 2021 but automatically renew for successive one-year periods (absent either party's written election to terminate, which has not occurred). Pursuant to the terms of the agreements, each factoring subsidiary, from time to time, sells to the Factor certain of its accounts receivable balances on a recourse basis for credit-approved accounts. The Factor remits 95% of the contracted accounts receivable balance for a given month to the factoring subsidiary (the “Advance Amount”) with the remaining balance, less fees, to be forwarded once the Factor collects the full accounts receivable balance from the factoring customer.
16
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
On March 9, 2021, the Company and the Factor entered into a Letter-of-Intent and Memo of Understanding related to the application of certain proceeds received from the USPS in the first quarter of 2021, arising out of the settlement agreements described in Note 1, Description of Business and Summary of Significant Accounting Policies. Pursuant to the agreement, the parties agreed that the Factor would retain and apply approximately $6.9 million of net proceeds plus funds held in reserve to the outstanding principal amount of the overadvances. The parties further agreed that the Company will repay the remaining overadvances balance of approximately $6.9 million in 48 equal monthly installments beginning January 1, 2022 and that the Factor would apply funds held in reserve against the approximately $0.8 million remaining balance of advances made to the Company during September 2020. Components included in Advances from the factoring arrangements are as follows:
($ in thousands) |
| September 30, |
|
| December 31, |
| ||
Purchased accounts receivable |
| $ | 137 |
|
| $ | 7,390 |
|
Overadvances |
|
| 5,594 |
|
|
| 6,885 |
|
Total |
| $ | 5,731 |
|
| $ | 14,275 |
|
The Factor may require, at its discretion at any time, the Company to repay unearned future contract advances or purchased accounts receivable that have not been paid by the customer. Financing costs are primarily comprised of an interest rate of Prime (subject to a 4% floor) plus 2.0% (resulting in rate of 8.25% and 6% as of September 30, 2022 and December 31, 2021, respectively). There is also a factor fee of 0.25% of the face amount of the invoice factored and an associated penalty increase for purchased accounts that remain unpaid for 31 days. Total interest and financing fees for factored receivables for the three and nine months ended September 30, 2022 were $0.3 million and $1.1 million, respectively. Total interest and financing fees for factored receivables for the three and nine months ended September 30, 2021 were $0.4 million and $0.9 million, respectively. The fees are included in interest expense in the condensed consolidated statements of operations.
Note 5 - Debt
Antara Financing Agreement
On September 16, 2019, EVO entered into a $24.5 million financing agreement (the “Financing Agreement”) among EVO, each subsidiary of EVO, various lenders from time to time party thereto and Cortland Capital Market Services LLC, as administrative agent and collateral agent. Pursuant to the Financing Agreement, the Company initially borrowed $22.4 million and borrowed the remaining $2.1 million during October 2019 (the “Term Loan”). All of EVO’s subsidiaries were originally guarantors under the Financing Agreement. The Term Loan is secured by all assets of EVO and its subsidiaries, including pledges of all equity in EVO’s subsidiaries and is not subject to registration rights. The Financing Agreement contains covenants, subject to specific exceptions, that limit (i) the making of investments, (ii) the incurrence of additional indebtedness, (iii) the incurrence of liens, (iv) payments and asset transfers with restricted junior loan parties or subsidiaries, including dividends, (v) transactions with stockholders and affiliates and (vi) asset dispositions and acquisitions, among others. The Term Loan bears interest at 12% per annum and had an original maturity date of September 16, 2022. Until December 31, 2019, interest on the Term Loan was paid in kind and capitalized as additional principal, and the Company had the option to pay interest on the capitalized interest in cash or in kind. After December 31, 2019, monthly interest payments were due in cash, and all outstanding principal and interest will be due on the maturity date. The Term Loan may be prepaid at any time, subject to payment of a prepayment premium of (1) 7% for each early payment made or coming due on or prior to September 16, 2020, (2) after September 16, 2020, 5% for each early payment made or coming due on or prior to September 16, 2021, and (3) thereafter, no premium shall be due. Proceeds were used (i) to effect the Ritter acquisition, (ii) to refinance and retire existing indebtedness and (iii) for general working capital needs.
Concurrently, and in connection with the Financing Agreement, EVO issued two warrants (the “$0.01 Warrant” and the “$2.50 Warrant” and collectively, the “Antara Warrants”) to Antara Capital to purchase an aggregate of 4,375,000 shares of EVO's common stock (the “Antara Warrant Shares”). The $0.01 Warrant grants Antara Capital the right to purchase up to 3,350,000 Antara Warrant Shares at an exercise price of $0.01 per share and is exercisable for five years from the date of issuance. The $2.50 Warrant grants Antara Capital the right to purchase up to 1,025,000 Antara Warrant Shares at an exercise price of $2.50 per share, subject to adjustment for certain distributions, stock splits and issuances of common stock, and is exercisable for ten years from the date of issuance. If the fair market value of the Antara Warrant Shares is greater than the related exercise price at the end of the exercise period (the Antara Warrant Shares are “in the money”), then any outstanding Antara Warrants that are in the money will be automatically deemed to be exercised immediately prior to the end of the exercise period. Pursuant to the Antara Warrants, EVO granted Antara Capital preemptive rights to purchase its pro rata share, determined based on the number of shares held by Antara Capital or into which Antara Capital’s Antara
17
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Warrants are exercisable, of capital stock issued by EVO after the issuance date of the Antara Warrants, subject to certain excepted issuances.
EVO issued a warrant for 1,500,000 shares of EVO's common stock to Antara Capital at an exercise price of $0.01 per share (the “Side Letter Warrant”) subject to the Company's potential acquisition of LoadTrek, a GPS system designed for the trucking industry, owned by a related party. Had the Company successfully completed an acquisition of certain assets of LoadTrek or met financial performance metrics set forth in the warrant agreement, all or a portion of the shares underlying the Side Letter Warrant were subject to cancellation. The Company did not acquire the LoadTrek assets and the Side Letter Warrant was subsequently amended to remove the cancellation provision and, therefore, none of the shares underlying the warrant were cancelled.
Since the Term Loan, Antara Warrants and Side Letter Warrant were negotiated in contemplation of each other and executed within a short period of time, the Company evaluated the debt and warrants as a combined arrangement. Since the Antara Warrants and Side Letter Warrants are liability classified we recorded these items at their fair value and the residual proceeds were allocated to the Term Loan. The non-lender fees incurred to establish the financing arrangement were allocated to the Term Loan and capitalized on the Company’s balance sheet as debt issuance costs, which are amortized using the effective interest method into interest expense over the term of the Term Loan.
The Term Loan was further evaluated for the existence of embedded features to be bifurcated from the amount allocated to the debt component. The Term Loan agreement contains a mandatory prepayment feature that was determined to be an embedded derivative, requiring bifurcation and fair value recognition for the derivative liability. The fair value of this derivative liability is remeasured at each reporting period, with changes in fair value recognized in the consolidated statement of operations. Any changes in the assumptions used in measuring the fair value of the derivative liability could result in a material increase or decrease in its carrying value. The allocation of the proceeds to the debt component and the bifurcation of the embedded derivative liability resulted in a $9.0 million debt discount that is amortized to interest expense over the term of the Term Loan.
Forbearance Agreement and Incremental Amendment to Financing Agreement
During February 2020, the Company entered into a Forbearance Agreement and Incremental Amendment to Financing Agreement (the “Incremental Amendment”), pursuant to which the Company obtained an additional $3.2 million of term loan commitments (the “Incremental Term Loans”) and borrowed $3.2 million from Antara Capital on the same terms as its existing term loan commitments provided under the Financing Agreement. The Incremental Term Loans bear interest at 12% per annum, with monthly interest payments due in cash and all outstanding principal and interest due on the maturity date. The Incremental Term Loans may be prepaid at any time, subject to payment of a prepayment premium equal to (i) 7% of each prepayment made on or prior to September 16, 2020, and (ii) 5% of each prepayment made after September 16, 2020, but on or prior to September 16, 2021, with no premium due after September 16, 2021. Pursuant to the Incremental Amendment, the collateral agent and other lenders agreed to forbear from exercising certain rights, remedies, powers, privileges, and defenses under the Financing Agreement and the other related loan documents during the forbearance period with respect to certain events of default and/or expected or anticipated events of default arising under the Financing Agreement. The Incremental Amendment also suspended the accrual of interest at the post-default rate until the end of the forbearance period. The Company paid a 2% financing fee in connection with its entry into the Incremental Amendment. The Company also reimbursed the Collateral Agent for $0.1 million of fees, costs and expenses previously accrued under the Financing Agreement and in addition paid fees, costs and expenses of the Collateral Agent and the lenders newly incurred in connection with the Incremental Amendment.
In connection with the Incremental Amendment, EVO issued a warrant (the “Antara Warrant 2020”) to Antara Capital to purchase 3,650,000 shares (the “Antara Warrant Shares 2020”) of EVO’s common stock at an exercise price of $2.50 per share, subject to adjustment for certain distributions, stock splits and issuances of common stock, as an incentive. The issuance of this warrant results in an additional debt discount that is amortized to interest expense over the term of the debt using the effective interest method. The Antara Warrant 2020 is exercisable for ten years from the date of issuance. If the fair market value of the Antara Warrant Shares 2020 is greater than $2.50 at the end of the exercise period, then the Antara Warrant 2020 will be deemed to be exercised automatically and immediately prior to the end of the exercise period. Pursuant to the Antara Warrant 2020, EVO granted Antara Capital preemptive rights to purchase its pro rata share, determined based on the number of shares held by Antara Capital or into which warrants held by Antara Capital (including the Antara Warrant 2020) are exercisable, of capital stock issued by EVO after the issuance date of the Antara Warrant 2020, subject to certain excepted issuances.
The Company accounted for the Incremental Amendment as a modification of the Financing Agreement. The Company capitalized the estimated fair value of the Antara Warrant 2020 and fees paid to Antara Capital on its balance sheet as a discount on the Incremental Term Loans, which is amortized using the effective interest method into interest expense over the term of the Incremental Term Loans.
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EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Amendment to Forbearance Agreement and Second Incremental Amendment to Financing Agreement
During March 2020, the Company entered into an amendment to forbearance agreement and second incremental amendment to financing agreement (the “Second Incremental Amendment”), pursuant to which the Company obtained an additional $3.1 million in term loan commitments (the “Second Incremental Term Loans” and together with the Term Loan and the Incremental Term Loans, the "EVO Term Loans") and borrowed $3.1 million from Antara Capital on the same terms as its existing term loan commitments provided under the Financing Agreement. The Second Incremental Term Loans bear interest at 12% per annum, with monthly interest payments due in cash and all outstanding principal and interest due on the maturity date. The Second Incremental Term Loans may be prepaid at any time, subject to payment of a prepayment premium equal to (i) 7% of each prepayment made on or prior to September 16, 2020 and (ii) 5% of each prepayment made after September 16, 2020 but on or prior to September 16, 2021, with no premium due after September 16, 2021. The Second Incremental Amendment also suspends the accrual of interest at the post-default rate until the end of the forbearance period. The forbearance period was scheduled to terminate on the earliest of (a) September 30, 2020, (b) the occurrence of any event of default other than the specified defaults, or (c) the date on which any breach of any of the conditions or agreements, including without limitation the affirmative covenants, provided in the Incremental Amendment or Second Incremental Amendment occurs. The Company paid all fees, costs and expenses of the collateral agent and the lenders incurred in connection with the Incremental Amendment and the Second Incremental Amendment.
The Company accounted for the Second Incremental Amendment as a modification of the Financing Agreement. The Company capitalized the fees paid to Antara Capital on its balance sheet as a discount on the Second Incremental Term Loans, which is amortized using the effective interest method into interest expense over the term of the Second Incremental Term Loans.
Waiver and Agreement to Issue Warrant
Effective March 31, 2020, the Company entered into a Waiver and Agreement to Issue Warrant (the “Waiver Agreement”) with Antara Capital and the collateral agent, which modified a certain affirmative covenant and waived another affirmative covenant in the Financing Agreement and, in exchange, the Company agreed to issue to Antara Capital a warrant to purchase up to 3,250,000 shares of EVO’s common stock at an exercise price of $2.50 per share as an incentive. The Company accounted for this issuance to Antara Capital as an extinguishment of the existing debt and the execution of a new debt instrument.
Second Amendment to Forbearance Agreement and Omnibus Amendment to Loan Agreement
During October 2020, the Company entered into a second amendment to forbearance agreement and omnibus amendment to loan documents (the “Omnibus Amendment”). The Omnibus Amendment (i) extended the forbearance period until December 31, 2020, (ii) added EVO Holding as a borrower under the Financing Agreement, (iii) authorized EVO and/or its subsidiaries to incur unsecured indebtedness of up to $10,000,000 under the Paycheck Protection Program of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and (iv) extended the timelines under which EVO and its subsidiaries are required to comply with certain affirmative covenants set forth in the Financing Agreement, Incremental Amendment and Second Incremental Amendment.
The Omnibus Amendment contained the following additional covenants:
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EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
The Company accounted for the Omnibus Amendment as a modification of the Financing Agreement. The Company capitalized the estimated fair value of the warrants to purchase 500,000 shares of EVO's common stock at the price of $0.01 per share, the change in fair value resulting from the warrant exchange, and the fees paid to Antara Capital on its balance sheet as an additional discount on the Financing Agreement, which is amortized using the effective interest method into interest expense over the term of the Financing Agreement. The Company recognized the estimated fair value of the 1,174,800 shares of EVO's common stock as interest expense during the first quarter of 2021.
The Paycheck Protection Program loan (the “PPP Loan”) was forgiven by the Small Business Administration (the “SBA”) in July 2021, which resulted in a $10.1 million gain on extinguishment of debt in July 2021.
Second Omnibus Amendment to Loan Documents
On December 14, 2020, the Company entered into a second omnibus amendment to loan documents (the “Second Omnibus Amendment”) to, among other things, authorize EVO Holding, Ritter Transport, Inc., John W. Ritter Trucking, Inc., Johmar Leasing Company, LLC, and Ritter Transportation Systems, Inc., each of which is a subsidiary owned directly or indirectly by the Company, to obtain a Main Street Loan in the amount of up to $17.0 million under the Main Street Priority Loan Program authorized by Section 13(3) of the Federal Reserve Act. Pursuant to the Second Omnibus Amendment, the forbearance period was terminated and the collateral agent and other lenders agreed to waive all existing defaults or events of default under the Financing Agreement that occurred and were continuing as of the date of the Second Omnibus Amendment. The Second Omnibus Amendment also removed or revised certain covenants contained in the Financing Agreement and prior amendments to the Financing Agreement, including the EBITDA-based financial covenant included in the Financing Agreement, and extended the maturity date of the term loans under the Financing Agreement to the earlier of (1) March 15, 2026 or (2) the date that is ninety-one days after the date of payment in full in cash of all obligations in respect of the Main Street Loan. Under the Second Omnibus Amendment, interest on the term loans under the Financing Agreement is payable in kind at the rate of 14.5% per annum for the first eight full or partial calendar quarters following the effective date of the Second Omnibus Amendment and is payable in cash, subject to satisfaction of certain unrestricted cash availability requirements, at the rate of 12.0% per annum commencing with the ninth calendar quarter following the effective date. As a result of the Main Street Loan, the Second Omnibus Amendment and related agreements, payment of the principal balance of the EVO Term Loans is subject and subordinate to the prior payment in full of all obligations under the Main Street Loan. The Company accounted for the Second Omnibus Amendment as a modification of the Financing Agreement.
Main Street Priority Loan Program Facility with Commerce Bank of Arizona, Inc.
On December 29, 2020, EVO Holding, Ritter Transport, Inc., John W. Ritter Trucking, Inc., Johmar Leasing Company, LLC, and Ritter Transportation Systems, Inc. (collectively, the “Borrowers”), each of which is a subsidiary owned directly or indirectly by the Company, entered into a Loan Agreement dated December 14, 2020 (the “Loan Agreement”) and related documents (together with the Loan Agreement, the “Loan Documents”) for a loan in the amount of up to $17.0 million (the “Main Street Loan”) serviced by Commerce Bank of Arizona, Inc. (the “Bank”) as lender under the Main Street Priority Loan Program authorized by Section 13(3) of the Federal Reserve Act. The Borrowers and the Bank subsequently entered into a Modification Agreement to the Loan Agreement dated December 22, 2020 (the “Modification Agreement”) and a Second Modification Agreement to the Loan Agreement dated December 23, 2020 (the “Second Modification Agreement”). During the first quarter of 2021, the Borrowers used all of the net proceeds of the Main Street Loan to refinance a portion of the amount outstanding under the Financing Agreement discussed above under the caption “Forbearance Agreement and Incremental Amendment to Financing Agreement” and to pay related prepayment premiums.
The Main Street Loan has a five-year term and bears interest at a rate equal to the sum of (i) 3% percent per year plus (ii) the rates per year quoted by Bank as Bank’s three month LIBOR rate based upon quotes of the London Interbank Offered Rate, as quoted for U.S. Dollars by Bloomberg, or other comparable services selected by the Bank (the “LIBOR Index”). Such interest rate will change once every third month on the fifth day of the month and will be the LIBOR Index on the day which is two banking days prior to the date the change becomes effective.
Accrued but unpaid interest on the Main Street Loan for loan year one (i.e., the period of December 14, 2020 to December 14, 2021) will be added to the principal amount of the Main Street Loan on December 14, 2021. Following the end of loan year one, interest on the Main Street Loan will be payable quarterly on the 14th day of the last month of each calendar quarter (i.e., March 14, June 14, September 14 and December 14 of each year), with the first interest payment due on March 14, 2022. In addition, on December 14, 2023 and December 14, 2024, the Borrowers must make an annual payment of principal plus accrued but unpaid interest with the
20
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
principal amount equal to fifteen percent (15%) of the Main Street Loan amount plus capitalized interest. The entire outstanding principal balance of the Main Street Loan, together with all accrued and unpaid interest, is due and payable in full on December 14, 2025. The Borrowers may prepay the Main Street Loan at any time without incurring any prepayment penalties.
The Loan Documents contain customary events of default, including, among others, those relating to a failure to make payment, bankruptcy, cross default under other credit facilities, breaches of representations and covenants, and the occurrence of certain events. The Loan Documents also contain customary remedies for a facility of this type, exercisable following the occurrence of an event of default, including, among others, the rights to terminate the Bank’s commitment under Loan Agreement, accelerate the maturity date, foreclose the liens and security interests securing the Main Street Loan, and all other rights and remedies available under the Loan Documents and applicable law. As security for the Main Street Loan, the Borrowers granted the Bank a security interest in and to substantially all of their respective properties, and the Company guaranteed the payment and performance of the Borrower’s obligations under the Loan Documents.
In connection with the Main Street Loan, the Company contributed 100% of the issued and outstanding equity of Environmental Alternative Fuels, LLC (“EAF”) to EVO Holding with the consent of Danny Cuzick as the holder of certain previously disclosed promissory notes that are secured in part by the assets of EAF. In consideration of Danny Cuzick’s consent to the contribution, the Company agreed to (a) indemnify Danny Cuzick for up to $0.5 million in connection with Danny Cuzick’s guaranty of certain obligations of the Company and its subsidiaries to Mercedes-Benz Financial Services USA LLC and (b) issue to Danny Cuzick a warrant (the “Cuzick Warrant”) to purchase up to 1,000,000 shares of EVO's common stock at the cost of $0.01 per share. Danny Cuzick is a former member of EVO’s Board. The Company capitalized the estimated fair value of the Cuzick Warrant on its balance sheet as a discount on the Main Street Loan, which is amortized using the effective interest method into interest expense over the term of the Main Street Loan.
Bridge Loan and Executive Loans
On March 11, 2022, the Company and certain subsidiary guarantors of the Company entered into the Bridge Loan Agreement with Antara Capital and the Executive Lenders.
Pursuant to the Bridge Loan Agreement, the Company borrowed $9 million from Antara Capital and had the ability to borrow up to an additional $3 million from Antara Capital prior to May 31, 2022, and also borrowed $0.8 million from the Executive Lenders. $0.2 million of the amount the Company borrowed from the Executive Lenders was borrowed in exchange for Batuta's surrender of a Secured Convertible Note in the principal amount of $0.2 million dated August 8, 2018 that Batuta previously purchased from Dane Capital Fund LP. The Bridge Loan bears interest at 14% per annum and had an original maturity date of the earlier of (i) demand by Antara Capital at any time prior to the date on which a collateral agent designated by Antara Capital has been granted a valid and enforceable, perfected, first priority lien on the collateral described in the Bridge Loan Agreement, subject only to permitted liens, on terms reasonably acceptable to Antara Capital, and (ii) May 31, 2022. The Executive Loans bear interest at 14% per annum and had an original maturity date of June 3, 2022 (although all payments in respect of the Executive Loans are subordinated in right and time of payment to all payments in respect of the Bridge Loan). Interest on the Bridge Loan and Executive Loans will accrue until the principal balances are repaid. No principal and interest payments are due until maturity. Refer to Note 12, Subsequent Events, for discussion regarding the subsequent assignment of certain amounts owed to Antara Capital.
In the event of a default, the lenders have the right to terminate their obligations under the Bridge Loan Agreement and to accelerate the payment on any unpaid principal amount of all outstanding loans. As defined in the Bridge Loan Agreement, events of default include, but are not limited to: failure by the Company to pay any amount due under the Bridge Loan Agreement when due; default by EVO or any of its subsidiaries for failure to pay amounts due and payable under any indebtedness in an amount in excess of $0.1 million if the effect of such default is to accelerate the maturity of any such indebtedness; and any representation or warranty made in connection with the Bridge Loan Agreement being materially false.
In connection with the Bridge Loan Agreement, and as a condition to the Company drawing the Bridge Loan pursuant to the Bridge Loan Agreement, on March 11, 2022, the Company granted Antara Capital 11,969,667 warrants to purchase EVO's common stock at an exercise price of $0.01 per share and granted the Executive Lenders an aggregate of 1,097,219 warrants to purchase EVO's common stock at an exercise price of $0.01 per share (collectively, the "Bridge Loan Warrants"), subject to certain adjustments. Each Bridge Loan Warrant may be exercised for cash or on a cashless basis, pursuant to the terms of such warrants, for a period of five years from the date of issuance. The estimated fair value of the liability-classified Bridge Loan Warrants upon issuance was $12.8 million and a) the Company capitalized $9.6 million on its balance sheet as a discount on the Bridge Loan and Executive Loans, which is amortized into interest expense over the term of the Bridge Loan and Executive Loans; b) the Company immediately recorded $2.9 million as
21
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
interest expense, which represents the estimated fair value of the Bridge Loan Warrants in excess of the principal due on the Bridge Loan and Executive Loans; and c) the Company recorded a $0.2 million loss on extinguishment of the Batuta Secured Convertible Note.
Amendments to Bridge Loan and Executive Loans
On June 30, 2022, the Company, Antara Capital and the Executive Lenders entered into a Second Extension Agreement that extended the Bridge Loan maturity date from June 30, 2022 to July 8, 2022 and the Executive Loans maturity date from July 7, 2022 to July 15, 2022.
On July 8, 2022, the Company, Antara Capital and the Executive Lenders entered into a Third Extension Agreement that extended the Bridge Loan maturity date from July 8, 2022 to July 15, 2022 and the Executive Loans maturity date from July 15, 2022 to July 22, 2022. In addition, the Third Extension Agreement stipulated that on or before July 13, 2022, the Board of Directors of the Company shall have duly approved and filed with the Secretary of State of the State of Delaware a Certificate of Designation to evidence the issuance of a new series of Series D Non-Participating Participating Preferred Stock, $0.0001 par value, that will, upon issuance, entitle Antara Capital (in its capacity as sole holder of the Series D Non-Participating Preferred Stock) to vote such number of votes per share that will allow Antara Capital to exercise 51% of the voting capital stock of EVO.
On July 13, 2022, pursuant to the Third Extension Agreement, EVO filed a Certificate of Designations of Series D Non-Participating Preferred Stock with the Secretary of State of the State of Delaware, which authorizes EVO to issue up to one share of Series D Non-Participating Preferred Stock.
Under the Series D Certificate of Designations, prior to a Bridge Loan Triggering Event and on and following the Bridge Loan Discharge Date, the holders of Series D Non-Participating Preferred Stock will vote together with the holders of EVO's common stock as a single class on any Series D Shareholder Matter, and the holders of Series D Non-Participating Preferred Stock will be entitled to cast a number of votes on any Series D Shareholder Matter equal to the total number of votes of all non-holders of Series D Non-Participating Preferred Stock entitled to vote on any such Series D Shareholder Matter plus 10. From the occurrence of a Bridge Loan Triggering Event to (but excluding) the Bridge Loan Discharge Date, the holders of Series D Non-Participating Preferred Stock (in their capacity as such) will have no voting rights except as otherwise required by law. In addition, the Series D Certificate of Designations provides that governance mechanisms that could have the effect of limiting, reducing or adversely affecting the Series D Non-Participating Preferred Stock holders’ voting rights under the Series D Certificate of Designations will require the consent of the Series D Majority. The Series D Majority may elect to waive or decline to exercise any or all voting rights granted under the Certificate of Designations, in whole or in part, on either a revocable or irrevocable basis.
The issuance of one share of Series D Non-Participating Preferred to Antara Capital on July 13, 2022, resulted in a change of control of the Company, with Antara Capital having voting control on Series D Shareholder Matters. The consideration for the issuance of Series D Non-Participating Preferred Stock to Antara Capital was Antara Capital's agreement to enter into the Third Extension Agreement, and the Company did not receive any cash consideration.
On July 15, 2022, the Company, Antara Capital and the Executive Lenders entered into a Fourth Extension Agreement that extended the Bridge Loan maturity date from July 15, 2022 to August 15, 2022 and the Executive Loans maturity date from July 22, 2022 to August 22, 2022.
On August 12, 2022, the Company, Antara Capital and the Executive Lenders entered into a Fifth Extension Agreement that extended the Bridge Loan maturity date from August 15, 2022 to September 15, 2022 and the Executive Loans maturity date from August 22, 2022 to September 22, 2022.
On September 8, 2022, the Company, Antara Capital and the Executive Lenders, in contemplation of the SPA discussed below, entered into a Sixth Extension Agreement that extended the Bridge Loan maturity date from September 15, 2022 to December 29, 2023 and the Executive Loans maturity date from September 22, 2022 to January 5, 2024.
Amendments to and Conversion of Secured Convertible Promissory Notes
On March 11, 2022, the Company entered into amendments (the "Convertible Note Amendments") to certain secured convertible promissory notes (the "Convertible Notes") dated February 1, 2017 with Danny Cuzick, individually and as holders representative on behalf of each of Damon Cuzick, Thomas Kiley and Theril Lund. The Convertible Note Amendments permitted the holder of each note and Danny Cuzick in his capacity as holders representative to convert the full amount of outstanding principal and accrued interest, without limitation related to trading volume of EVO's common stock, into either shares of common stock of the Company or warrants
22
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
to purchase shares of common stock of the Company at an exercise price of $0.01 per share. On March 11, 2022, Danny Cuzick, individually and as holders representative on behalf of each of Damon Cuzick, Thomas Kiley and Theril Lund, exercised the right to convert the Convertible Notes into warrants to purchase shares of common stock of the Company at an exercise price of $0.01 per share. As a result, the Company granted Messrs. Cuzick, Cuzick, Kiley and Lund an aggregate of 7,533,750 warrants to purchase EVO's common stock at $0.01 per share (collectively, the "Convertible Note Warrants"). Each Convertible Note Warrant may be exercised for cash or on a cashless basis, pursuant to the terms of such warrants, for a period of five years from the date of issuance.
The Company accounted for the Convertible Note Amendments as an extinguishment of the existing debt and the execution of a new debt instrument. As a result, the Company recorded a $5.2 million loss on extinguishment of debt, which represents the $9.0 million estimated fair value of the amended Convertible Notes in excess of the $3.8 million carrying value of the original Convertible Notes. The Company accounted for the issuance of the Convertible Note Warrants as an extinguishment of the new debt instrument. As a result, the Company recorded the $9.0 million carrying value of the amended Convertible Notes and the $0.7 million of accrued interest as an increase in additional paid-in capital.
Creditor Exchange Agreements
In connection with the Recapitalization Transactions, EVO and certain of its subsidiaries, EAF and EVO Equipment Leasing, LLC (collectively, the “EVO Parties”), entered into Exchange Agreements with each of Danny Cuzick, John and Ursula Lampsa, Billy (Trey) Peck Jr., Mohsin Meghji, and Robert Mendola (collectively, the “Exchanging Creditors”). The Exchange Agreements permitted the Exchanging Creditors to exchange existing promissory notes issued by EVO and its subsidiaries for the issuance and delivery of (i) warrants to purchase shares of EVO's common stock at an exercise price of $0.0001 per share that will be exercisable following the adoption of the Charter Amendment, (ii) warrants to purchase shares of EVO's common stock at an exercise price of $0.53 per share that will be exercisable following the adoption of the Charter Amendment, (iii) new promissory notes and (iv) to certain Exchanging Creditors, a specified cash payment.. Refer to Note 6, Stockholders’ Deficit and Warrants, for discussion regarding the Charter Amendment.
Pursuant to the Exchange Agreements, the Exchanging Creditors exchanged promissory notes issued by EVO and its subsidiaries in the aggregate amount of principal and accrued interest of approximately $18.3 million for (i) warrants to purchase 47,549,779 shares of EVO's common stock at $0.0001 per share, (ii) warrants to purchase 23,774,891 shares of EVO's common stock at $0.53 per share (collectively, the “Exchanging Creditors Warrants”), (iii) new promissory notes in the aggregate principal amount of approximately $3.7 million (the “Takeback Notes”) and (iv) a cash payment of $0.1 million in cash to certain Exchanging Creditors.
Each warrant issued to the Exchanging Creditors at an exercise price of $0.0001 per share may be exercised for cash or on a cashless basis, pursuant to the terms of such warrants, for a period of thirty days following October 24, 2022, the date EVO’s Board adopted the Charter Amendment. Each warrant issued to the Exchanging Creditors at an exercise price of $0.53 per share may be exercised for cash or on a cashless basis, pursuant to the terms of such warrants, for a period of five years from the date of issuance. The fair value of the warrants, calculated using the Black-Scholes option pricing model, was $2.9 million.
The Takeback Notes bear interest at 3% per annum, are unsecured, and have a maturity date of September 8, 2027. Interest on the Takeback Notes is payable in cash or in kind, at EVO’s option, the first day of each January, April, July and October. If any amount of the Takeback Notes is not paid when due, then all amounts outstanding shall accrue interest at 4% per annum ("default date") and shall be payable on demand. EVO may, at any time and from time to time without premium or penalty, prepay all or any portion of the outstanding principal, including accrued and unpaid interest, on the Takeback Notes ("optional prepayment").
In the event of a default, the Exchanging Creditors have the right to terminate their obligations under the Takeback Notes and to accelerate the payment on any unpaid principal amount of all outstanding loans ("mandatory prepayment"). As defined in the Takeback Notes, events of default include, but are not limited to: failure by EVO to pay any amount due under the Takeback Notes when due; a voluntary or involuntary case or other proceeding commenced by or against EVO seeking liquidation, reorganization or bankruptcy.
The Company concluded that the default interest rate, optional prepayment and mandatory prepayment features do not require bifurcation based on the derivative accounting scope exception in ASC 815 for certain contracts involving an entity’s own equity.
The Creditor Exchange Amendments constitutes as a troubled debt restructuring ("TDR") under ASC 470-60, Troubled Debt Restructuring, because the Company is experiencing financial difficulty and a concession has been granted by each Exchanging Creditor. As the TDR involves a partial settlement of debt through transfer of assets and grant of an equity interest, the carrying amount of the original debt is reduced by the cash paid and the fair value of the equity interests. When the reduced net carrying value of the debt
23
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
exceeds the future undiscounted cash flows, the carrying amount is reduced to the amount of future undiscounted cash flows, including amounts contingently payable. A restructuring gain is recognized and is reduced by any third-party restructuring costs. Future cash payments will be recorded as reductions in the carrying amount of the debt. No further interest expense will be recognized, unless required in connection with contingent payments.
The Company recorded a total restructuring gain of approximately $9.2 million. The Company calculated the restructuring gain by comparing the carrying value of the debt, $18.2 million, reduced by $0.2 million paid in cash and $3.1 million of equity instruments issued to the Exchanging Creditors, with the undiscounted future cash flows of the Takeback Notes. When determining the undiscounted future cash flows of the Takeback Notes, the Company assumed that all interest through the life of the Takeback Notes will be paid in kind, included contingent payments of $0.8 million, and other sweeteners paid to the Exchanging Creditors. The Company reduced the restructuring gain by $0.4 million for legal fees related to the TDR.
As three of the Exchanging Creditors are considered Related Parties, we recorded the restructuring gain associated with these parties as a capital contribution resulting in $9.0 million of the restructuring gain recorded within additional paid-in-capital as of September 30, 2022. The remaining $0.2 million was recorded as a restructuring gain in other miscellaneous income for the three and nine months ended September 30, 2022. The per share effect of the restructuring gain on both basic and diluted earnings per common share was immaterial for the three and nine months ended September 30, 2022. Refer to Note 3, Related Party Transactions, regarding the Exchanging Creditors that are related parties.
Amendment to Loan Agreement (Clean Energy)
On September 2, 2022, the Company, Thunder Ridge Transport, Inc., a wholly-owned subsidiary of the Company (“Thunder Ridge”), Billy (Trey) Peck Jr. and Clean Energy entered into a First Amendment to Loan and Security Agreement (the “Clean Energy Amendment”) that amended the Loan and Security Agreement between Thunder Ridge and Clean Energy dated August 31, 2017. The Clean Energy Amendment extended the maturity date of the loan from Clean Energy to Thunder Ridge from July 31, 2022 to March 31, 2023. Pursuant to the Clean Energy Amendment, Thunder Ridge agreed to pay Clean Energy (i) $0.2 million on or before September 30, 2022, (ii) six payments of $0.1 million on or before each of September 30, 2022, October 31, 2022, November 30, 2022, December 31, 2022, January 31, 2023 and February 28, 2023, (iii) $0.3 million on or before December 31, 2022 and (iv) $0.4 million on or before March 31, 2023.
The amendment with Clean Energy was accounted for as a TDR because the Company is experiencing financial difficulty and the new payment structure results in the effective borrowing rate decreasing after the restructuring, which was determined to be a concession granted by Clean Energy. Since the future undiscounted cash flows of the restructured notes payable exceed the net carrying value of the original note payable due to the maturity date extension, the modification was accounted for prospectively with no gain or loss recorded in the unaudited Condensed Consolidated Statements of Operations.
24
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Debt (with unrelated parties) consists of:
($ in thousands) |
| September 30, |
|
| December 31, |
|
| ||
(a) Main Street Loan |
| $ | 17,552 |
| (1) | $ | 17,552 |
| (2) |
(b) $1.3 million note payable |
|
| 446 |
|
|
| 544 |
|
|
(c) $4.0 million Secured Convertible Promissory Notes (“Secured Convertible Notes”) |
|
| — |
|
|
| 538 |
|
|
(d) $0.3 million note payable |
|
| 18 |
|
|
| 74 |
|
|
(e) Thunder Ridge supplier advance |
|
| 1,066 |
|
|
| 833 |
|
|
(f) Various notes payable acquired from J.B. Lease Corporation ("JB Lease") |
|
| 270 |
|
|
| 564 |
|
|
(g) $0.8 million note payable |
|
| 395 |
|
|
| 604 |
|
|
(h) $3.8 million note payable |
|
| 1,086 |
|
|
| 1,703 |
|
|
(i) Failed sale-leaseback obligations |
|
| 4,190 |
|
|
| 5,131 |
|
|
(j) Notes payable to three financing companies |
|
| 1,353 |
|
|
| 1,704 |
|
|
(k) Finkle equipment notes |
|
| 736 |
|
|
| 1,535 |
|
|
(l) Takeback Notes |
|
| 96 |
|
|
| — |
|
|
Total before debt issuance costs and debt discount |
|
| 27,208 |
|
|
| 30,782 |
|
|
Debt issuance costs |
|
| (736 | ) |
|
| (919 | ) |
|
Debt premiums / (discounts), net |
|
| (218 | ) |
|
| (273 | ) |
|
|
|
| 26,254 |
|
|
| 29,590 |
|
|
Less current portion |
|
| (21,477 | ) |
|
| (22,135 | ) |
|
Long-term debt, less current portion |
| $ | 4,777 |
|
| $ | 7,455 |
|
|
(1) Classified as a current liability as of September 30, 2022 due to the existence of one or more covenant violations.
(2) Classified as a current liability as of December 31, 2021 due to the existence of one or more covenant violations.
The $17.6 million loan bears interest at a rate equal to 3% percent per year plus the LIBOR Index. Beginning March 14, 2022, the Borrowers must make quarterly interest payments, and the Borrowers must make principal payments equal to 15% of the face amount of the Main Street Loan plus capitalized interest on each of December 14, 2023 and December 14, 2024. The entire outstanding principal balance, together with all accrued and unpaid interest, is due and payable in full on December 14, 2025.
The Company classified the $17.6 million unpaid principal balance, which includes $0.6 million of capitalized interest, as a current liability as of September 30, 2022 due to the existence of one or more covenant violations. As of September 30, 2022 and December 31, 2021, the unamortized debt discount was $0.2 million and $0.3 million, respectively, and the unamortized debt issuance costs were $0.8 million and $0.9 million, respectively.
The $1.3 million note payable was issued December 31, 2014, with interest adjusted to the SBA LIBOR base rate, plus 2.35%. The note matures March 2024, is secured by substantially all of Titan’s business assets and is personally guaranteed by certain former members of Titan including a member of our board of directors and certain of his relatives, and other beneficial owners. The note is a co-borrower arrangement between Titan and El Toro with the proceeds received by El Toro. Refer to Note 12, Subsequent Events, for discussion regarding the loan dispute settlement.
The Secured Convertible Notes were issued during August 2018. The Company paid debt issuance costs of $0.5 million in connection with the Secured Convertible Notes. They bear interest at 9%, compounded quarterly, with principal due two years after issuance and are secured by all the assets of the Company. The holder may agree, at its discretion, to add accrued interest in lieu of payment to the principal balance of the Secured Convertible Notes on the first day of each calendar quarter.
The Secured Convertible Notes are convertible into shares (the “Note Shares”) of EVO’s common stock at a conversion rate of $2.50 per share of common stock at the holder’s option: 1) at any time after the first anniversary of the date of issuance or 2) at any time within 90 days after a “triggering event,” including a sale, reorganization, merger or similar transaction where the Company is not the surviving entity. The Secured Convertible Notes are also subject to mandatory conversion at any time after the first anniversary of the date of issuance if the average volume of shares of common stock traded on the Nasdaq Capital Market, NYSE
25
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
American Market or a higher tier of either exchange is 100,000 or more for the 10 trading days prior to the applicable date. Such a mandatory conversion has not occurred.
The Secured Convertible Notes also provide that the Company will prepare and file with the Securities and Exchange Commission (“SEC”), as promptly as reasonably practical following the issuance date of the Secured Convertible Notes, but in no event later than 45 days following the issuance date, a registration statement on Form S-1 (the “Registration Statement”) covering the resale of the common stock and the warrant shares and as soon as reasonably practical thereafter to effect such registration. The Company is required to pay liquidated damages of 1% of the outstanding principal amount of the Secured Convertible Notes each 30 days if the Registration Statement is not declared effective by the SEC within 180 days of the filing date of the Registration Statement. During the nine months ended September 30, 2017, an EAF member advanced $70,2582022 and 2021, the Company incurred $0.1 million and paid $0 in liquidated damages to noteholders.
As additional consideration for the Secured Convertible Notes, the Company issued warrants to the Company.holders to purchase 1,602,000 shares of EVO's common stock at an exercise price of $2.50 per share, exercisable for ten years from the date of issuance. The fair value of the warrants issued determined using the Black-Scholes option pricing model was $0.7 million, calculated with a ten-year term; 65% volatility; 2.89%, 2.85% or 3.00% discount rates and the assumption of no dividends.
During the year ended December 31, 2016, a Titan member advanced $2,000Pursuant to the Company.Bridge Loan Agreement in March 2022, the Company borrowed $9 million from Antara Capital and also borrowed $0.8 million from the Executive Lenders. $0.2 million of the amount the Company borrowed from the Executive Lenders was borrowed in exchange for Batuta's surrender of a Secured Convertible Note in the principal amount of $0.2 million dated August 8, 2018, which the Company accounted for as the extinguishment of the $0.2 million Secured Convertible Note.
During the year ended December 31, 2016 an El Toro member advanced $35,500Pursuant to the Company.
Accrued Interest - Related Party
The Company’sExchange Creditor Agreement, the remaining Secured Convertible Notes in the aggregate amount of principal and accrued interest - related party areof approximately $0.4 million were exchanged for warrants and new promissory notes with a principal amount of approximately $0.1 million. Refer to the accruedheading "Takeback Notes" for further discussion on the new promissory notes resulting from the Exchange Creditor Agreements.
The $0.3 million note payable to Bill and Deborah Graham was issued during November 2018, with interest at 3% and a maturity date of October 2022. The note calls for quarterly principal payments on stockholders’ subordinated convertible seniorJanuary, April, July and October 1st of $18,750 plus the related accrued interest.
Thunder Ridge signed an agreement with a supplier on August 31, 2017, in which $1.0 million was advanced to Thunder Ridge during 2017. The advance bears interest at 8.5%, is collateralized by substantially all of Thunder Ridge’s assets, is guaranteed by a member of management, and has a July 2022 maturity date. On September 2, 2022, the agreement was extended to March 2023.
The various notes payable acquired from JB Lease were issued to multiple lenders with interest rates ranging from 3.9% to 5.1% per annum. The notes have maturity dates ranging from September 2019 to August 2024. These notes are collateralized by transportation equipment and guaranteed by certain stockholders of the Company.
The $0.8 million note payable to First Fidelity Bank was issued February 11, 2019, with interest at 10.2% per annum and a maturity date of February 11, 2023. The note is collateralized by certain equipment. During December 2021, a $0.4 million note payable was issued to the same financing company that is collateralized by the same equipment and guaranteed by a former member of management. Such note payable bears interest at 6% per annum and has a maturity date of November 2025.
The $3.8 million note payable to Commerce Bank of Arizona was issued January 23, 2019, with interest at 10.1% per annum and a maturity date of February 23, 2024. The note is collateralized by certain equipment and guaranteed by a former member of management.
26
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Certain notes payable acquired from Sheehy were payable to a bank with interest rates of 4.35% to 4.375% per annum and were scheduled to mature between September 2020 and December 2021. During September 2020, the Company sold certain assets that are collateral for the notes payable to Equipmrny Leasing Services, LLC ("ELS") for aggregate proceeds of $0.7 million, used such proceeds to extinguish the notes payable, and convertible promissoryentered into a lease agreement with ELS under which the Company agreed to lease back the assets. In addition, during 2021 the Company entered into five sale-leaseback arrangements to provide approximately $5.2 million in cash proceeds for previously purchased equipment. Because these leasebacks are classified as finance leases, the Company determined that it did not relinquish control of the assets to the buyer-lessor. Therefore, the Company accounted for the transactions as failed sale-leasebacks whereby the Company continues to depreciate the assets and recorded financing obligations for the consideration received from the buyer-lessor. No gain or loss was recognized on these transactions.
The Company issued notes payable to stockholders. Accruedthree financing companies in February and October 2019 and the fourth quarter of 2021 with maturity dates in March 2023, October 2024 and the fourth quarter of 2025, respectively. The interest rates range from 4.5% to 8.94%, and the notes are collateralized by certain equipment.
The Company issued equipment notes payable to several financing companies with interest rates ranging from 5.2% to 11.8% and maturity dates between May 2020 and September 2025. The notes are collateralized by equipment.
The Company issued two promissory notes with an aggregate principal amount of $0.1 million in September 2022. The Takeback Notes bear interest at 3% per annum, are unsecured and have a maturity date of September 8, 2027. Interest on the Takeback Notes is payable in cash or in kind, at the Company’s option, the first day of each January, April, July and October. In connection with the Exchange Creditor Agreements, the exchange constituted as a TDR, and future cash payments will be recorded as reductions in the carrying amount of the debt. No further interest expense will be recognized, unless required in connection with contingent payments.
Debt (with related party was $461,655 and $164,368parties) consists of:
($ in thousands) |
| September 30, |
|
| December 31, |
|
| ||
(a) Antara Financing Agreement |
| $ | 20,856 |
| (1) | $ | 18,697 |
| (2) |
(b) Four promissory notes with an aggregate principal amount of $9.5 million |
|
| — |
|
|
| 9,500 |
|
|
(c) Bridge Loan and Executive Loans |
|
| 9,825 |
|
|
| — |
|
|
(d) $3.8 million senior promissory note |
|
| — |
|
|
| 3,800 |
| (2) |
(e) $4.0 million senior promissory note |
|
| — |
|
|
| 4,000 |
| (2) |
(f) $2.5 million promissory note - stockholder |
|
| — |
|
|
| 1,506 |
|
|
(g) $6.4 million promissory note - stockholder |
|
| — |
|
|
| 6,361 |
|
|
(h) Note payable acquired from Ritter |
|
| 365 |
|
|
| 399 |
|
|
(i) Takeback Notes |
|
| 4,997 |
|
|
| — |
|
|
Total before debt issuance costs and debt discount |
|
| 36,043 |
|
|
| 44,263 |
|
|
Debt issuance costs |
|
| (16 | ) |
|
| (18 | ) |
|
Debt premiums / (discounts), net |
|
| (857 | ) |
|
| (7,058 | ) |
|
|
| 35,170 |
|
|
| 37,187 |
|
| |
Less current portion |
|
| (30,686 | ) |
|
| (33,164 | ) |
|
Long-term debt, less current portion - related party |
| $ | 4,484 |
|
| $ | 4,023 |
|
|
(1) Classified as a current liability as of September 30, 2017 and2022 due to the existence of one or more covenant violations.
(2) Classified as a current liability as of December 31, 2016, respectively.2020 due to the probability of recurrence of covenant violations, other than the EBITDA-based covenant, during 2021.
Note 5 - Long-Term DebtThe $20.1 million of EVO Term Loans under the Antara Financing Agreement bear interest at 14.5% per annum. The maturity date is the earlier of (1) March 15, 2026 or (2) the date that is ninety-one days after the date of payment in full in cash of all obligations in respect of the Main Street Loan. Beginning with the Omnibus Amendment and ending on December 14, 2020, interest was paid in kind at a rate of 17% per annum. Beginning December 14, 2020, interest on the EVO Term Loans is payable in kind at 14.5%
27
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Long-term debt consists of:
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
(Unaudited) | ||||||||
$1,300,000 SBA note payable issued December 31, 2014, with interest at 5.50% for the first five years, then adjusted to the SBA LIBOR base rate, plus 2.35% for the remaining five years. The note required interest only payments for the first twelve months and commencing during January 2016 calls for monthly principle and interest payments of $15,288. The note matures March 2024, is secured by substantially all of the Company’s business assets and is personally guaranteed by certain members. The note is a co-borrower arrangement between Titan and El Toro with the proceeds received by El Toro. The Company issued to members 35,491 units (equivalent to 31,203 common shares) in Titan as compensation for the guarantee. The Company was in violation of certain restrictive covenants as of September 30, 2017 and December 31, 2016. | $ | 1,124,470 | $ | 1,194,989 | ||||
Six subordinated senior notes payable to stockholders (“Senior Bridge Loans”) with interest at 12%. In connection with the notes payable, the note holders were issued 25,541 Class A Membership Units (equivalent to 22,455 common shares). In the event of a default the Company is required to pay the holder a stated number of Class A Membership Units on the date of default and each 90 day interval thereafter until all amounts due have been paid in full. Effective July 2016, the maturity date of the Senior Bridge Notes was extended to September 30, 2016 and allowed for an interest rate increase from 12% to 16% effective March 14, 2016. The default interest rate was increased from 15% to 18%. As part of the first amendment, the note holders received 3,359 Class A Membership Units (equivalent to 2,953 common shares) in Titan. In September 2016, the Senior Bridge Notes were amended to extend the due date to April 30, 2017 and the Company paid a fee for the extension of 1% of the outstanding principal balance to the note holders. The Company subsequently extended the maturity date of the notes to October 31, 2017. The Company paid a fee of 1% of the outstanding principal balance on the notes on or around each of January 31, 2017, April 30, 2017, and July 31, 2017 to extend the maturity date of the notes. The notes are secured by a subordinate security interest on substantially all of the Company’s assets and are personally guaranteed by two members. The Senior Bridge Notes contemplate a future conversion into equity but do not contain specific conversion terms. The Senior Bridge Notes were not extended at the maturity. See Note 10 for further discussion. However, the Company is in negotiations with the noteholders to extend the maturity date of the notes. | 1,421,556 | 1,021,556 | ||||||
Nine subordinated notes payable to stockholders with interest at 12%, with maturity at December 2020, secured by a subordinate security interest on substantially all assets of the Company. During October 2017, the notes and related interest were converted to into 272,777 shares of common stock at a price of $5 per share. | 1,166,373 | 1,166,373 | ||||||
Three convertible promissory notes to stockholders with interest at 12%, with maturity on or after November 2019. At the next equity financing the holder at their discretion may elect to convert the principal and interest at a conversion price equal to the price per security issued in such offering. These notes are also subject to mandatory conversion in the event that the Senior Bridge Notes and subordinated notes discussed above convert to equity, and any mandatory conversion will be on the same terms as those received by the holders of the Senior Bridge Notes and subordinated notes. The promissory notes are unsecured. | 417,365 | 405,103 | ||||||
A promissory note to a former EAF member with interest at 7.5%, with maturity during December 2017, ten days after the initial closing of a private offering of capital stock of the Company in an amount not less than $10 million or at discretion of the member. | 3,788,315 | - | ||||||
Four promissory notes to former EAF members with interest at 6%, with maturity upon the earlier of July 2017 or the date of closing a private offering of at least $2 million. These notes are currently in default. However, the Company is in negotiations with the noteholders to extend the maturity date of these notes. | 250,000 | - | ||||||
Four promissory notes to former EAF members with interest at 1.5%, with maturity during February 2026. The promissory notes are convertible into 1,400,000 shares. These convertible promissory notes are secured by substantially all of the assets of EAF. The Company imputed an interest rate of 5.1% on the promissory notes. The discount is accreted over the period from the date of issuance to the date the promissory notes are due using the effective interest rate method. See note 2 above for additional discussion regarding the conversion mechanics of these convertible notes. | 9,500,000 | - | ||||||
Debt discount* | (3,063,653 | ) | - | |||||
14,604,426 | 3,788,021 | |||||||
Less current portion | (6,584,341 | ) | (1,142,855 | ) | ||||
$ | 8,020,085 | $ | 2,645,166 |
Notes to Unaudited Condensed Consolidated Financial Statements
*Of our total indebtedness
per annum for the first eight full or partial calendar quarters following December 14, 2020 and is payable in cash at the rate of approximately $17,668,00012.0% per annum commencing October 1, 2022 if certain conditions relating to prepayment of the Main Street Loan are met. All outstanding principal and interest is due on the maturity date.
The Company classified the $20.1 million and $18.7 million unpaid principal balances, which include capitalized interest, as current liabilities as of September 30, 2017, approximately $6,600,000 is classified as current debt. We are in violation of certain covenants related2022 and December 31, 2021, respectively, due to the SBA loan. We received a waiver with respect to thoseexistence of one or more covenant violations for the year ended December 31, 2016, but have not received a waiver for current violations of these covenants asviolations. As of September 30, 20172022 and throughDecember 31, 2021, the date of filing of this Form 10-Q. On February 1, 2017, pursuant to the EAF Exchange Agreement, EVO Inc. acquired all of the membership interests of EAF. As consideration for the membership interests, EVO Inc. issued convertibleunamortized debt discount was $0.9 million and $1.0 million, respectively.
The Convertible Notesfour promissory notes were issued to the former EAF members on February 1, 2017, bear interest at 1.5%1.5% per yearannum and have a maturitymature February 1, 2026. These convertible promissory notes are secured by substantially all of the assets of EAF. The Company imputed an interest rate of 5.1% on the promissory notes. The discount is accreted over the period from the date of February 1, 2026. The Convertible Notesissuance to the date the promissory notes are due using the effective interest rate method. These promissory notes were convertible into 1,400,0007,000,000 shares (the “Transaction Shares”) of EVO Inc.EVO's common stock, subjectstock. The holder’s conversion option was limited on a monthly basis to adjustment for stock splits, combinations or similar transactions, which represents approximately 81.1%the number of EVO Inc.’s total outstanding shares of common stock on a post-transaction basis. Accordingly, the conversionequal to 10% of the 30 day average trading volume of shares of common stock during the prior calendar month. Further, $35,000 was the minimum amount of principal or capitalized interest the holder must convert per conversion.
Refer to the discussion above regarding the Convertible Notes would resultNote Amendments, dated March 11, 2022, which resulted in a change in controlthe extinguishment of the four promissory notes due to their conversion into the Convertible Note Warrants. As of September 30, 2022 and December 31, 2021, the unamortized debt discount was $0 and $5.8 million, respectively.
On March 11, 2022, the $9 million Bridge Loan was issued to Antara Capital and the $0.8 million Executive Loans were issued to the Executive Lenders. The Bridge Loan bears interest at 14% per annum and has an original maturity date of the earlier of (i) demand by Antara Capital at any time prior to the date on which a collateral agent designated by Antara Capital has been granted a valid and enforceable, perfected, first priority lien on the collateral described in the Bridge Loan Agreement, subject only to permitted liens, on terms reasonably acceptable to Antara Capital, and (ii) May 31, 2022. The Executive Loans bear interest at 14% per annum and had an original maturity date of June 3, 2022 (although all payments in respect of the Executive Loans are subordinated in right and time of payment to all payments in respect of the Bridge Loan). Interest on the Bridge Loan and Executive Loans will accrue until the principal balances are repaid. No principal and interest payments are due until maturity. On September 8, 2022, the maturity dates for the Bridge Loan and the Executive Loans were extended to December 29, 2023 and January 5, 2024, respectively. Refer to Note 12, Subsequent Events, for discussion regarding the amendment and restatement of the Bridge Loan.
The $3.8 million senior promissory note was issued on February 1, 2017 to a former EAF member, with interest at 7.5% per annum and default interest of 12.5% per annum, and had an original maturity date of the earlier of (a) December 2017; (b) ten days after the initial closing of a private offering of capital stock of the Company in an amount not less than $10 million; or (c) an event of default. During April 2018, the senior promissory note’s maturity date was extended to July 2019. The senior promissory note is unsecured. No principal and interest payments are due until maturity.
In connection with the Financing Agreement and the Main Street Loan, amounts due under the senior promissory note were subordinated and extended to the earlier of March 2026 and the payment in full of the Financing Agreement and the Main Street Loan. Additionally, the holder agreed not to receive, accept or demand payment under the subordinated obligation until all obligations under the Financing Agreement have been paid in full, except that the holder may continue to receive regularly scheduled interest payments so long as holder has not been informed that an event of default has occurred and is continuing under the Financing Agreement.
Also in connection with the Financing Agreement and as consideration for the subordination of the $3.8 million senior promissory note and the $4.0 million senior promissory note described below, the Company issued a warrant to the holder to purchase an aggregate of 350,000 shares of common stock of the Company at an exercise price of $0.01 per share. The warrant is exercisable for five years from the date of issuance. The Company calculated the fair value of the warrant using the Black-Scholes option pricing model, and the portion of the fair value attributable to the $3.8 million senior promissory note was $0.2 million.
Pursuant to the Exchange Creditor Agreement, the $3.8 million senior promissory note and the $4.0 million senior promissory note, described below, in the aggregate amount of principal and accrued interest of approximately $9.3 million were exchanged for
28
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
warrants and a new promissory note with a principal amount of approximately $1.9 million. Refer to the heading "Takeback Notes" for further discussion on the new promissory notes resulting from the Exchange Creditor Agreements.
As of September 30, 2022 and December 31, 2021, the remaining unamortized debt discount was $0.0 million and $0.1 million, respectively. The Company classified the $3.8 million unpaid principal balance as a current liability as of December 31, 2021 due to the existence of one or more covenant violations.
The $4.0 million promissory note was issued on February 1, 2017, to a former EAF member with interest at 7.5% per annum and had an original maturity date of February 2020. The note is guaranteed by substantially all the assets of EAF and the Company. No principal and interest payments are due until maturity.
In connection with the Financing Agreement and the Main Street Loan, amounts due under the promissory note were subordinated and extended to the earlier of March 2026 and the payment in full of the Financing Agreement and the Main Street Loan. Additionally, the holder agreed not to receive, accept or demand payment under the subordinated obligation until all obligations under the Financing Agreement have been paid in full, except that the holder may continue to receive regularly scheduled interest payments so long as holder has not been informed that an event of default has occurred and is continuing under the Financing Agreement.
Also in connection with the Financing Agreement and as consideration for the subordination of the $4.0 million senior promissory note and the $3.8 million senior promissory note described above, the Company issued a warrant to the holder to purchase an aggregate of 350,000 shares of EVO's common stock at an exercise price of $0.01 per share. The numberwarrant is exercisable for five years from the date of Transaction Shares will be increasedissuance. The Company calculated the fair value of the warrant using the Black-Scholes option pricing model, and the portion of the fair value attributable to equal 70%the $4.0 million senior promissory note was $0.3 million.
Pursuant to the Exchange Creditor Agreement, the $3.8 and $4.0 million senior promissory notes in the aggregate amount of principal and accrued interest of approximately $9.3 million were exchanged for warrants and a new promissory note with a principal amount of approximately $1.9 million. Refer to the heading "Takeback Notes" for further discussion on the new promissory notes resulting from the Exchange Creditor Agreements.
As of September 30, 2022 and December 31, 2021, the remaining unamortized debt discount was $0.0 million and $0.1 million, respectively. The Company classified the $4.0 million unpaid principal balance as a current liability as of December 31, 2021 due to the existence of one or more covenant violations.
In connection with the Company's June 1, 2018 acquisition of all of the issued and outstanding shares of EVO Inc. commonThunder Ridge, this $2.5 million promissory note was issued to Mr. Peck, with interest at 6% per annum (interest in the event of a default at 9% per annum) and a maturity date of the earlier of (a) the date the Company raises $40.0 million in public or private offerings of debt or equity; (b) December 31, 2018, or (c) termination of Mr. Peck’s employment with the Company by the Company without cause or by Peck for good reason. The note is collateralized by all of the assets of Thunder Ridge and is also secured by the Thunder Ridge Shares (“TR Shares”). The maturity date of the promissory note has been subsequently amended to extend it to November 30, 2022. Effective with the most recent extension in August 2019, the Company paid Peck approximately $0.15 million in principal and increased the monthly principal payments to $20,000. The note calls for monthly principal payments, with all accrued and unpaid interest due and payable on the maturity date. If the Company fails to repay the amounts outstanding under the note on or before November 30, 2022, then at the option of Peck, the Company shall immediately surrender all right, title and interest in all of the outstanding shares of stock ifin Thunder Ridge to Peck.
Pursuant to the issuanceExchange Creditor Agreement, the promissory note in the aggregate amount of common stock pursuantprincipal and accrued interest of approximately $1.9 million was exchanged for warrants and a new promissory note with a principal amount of approximately $0.4 million. Refer to the heading "Takeback Notes" for further discussion on the new promissory note resulting from the Exchange Creditor Agreements.
The $6.4 million promissory note was issued February 2, 2019 to a private offeringstockholder, with interest at 9% per annum and an original maturity date of common stockAugust 31, 2020. The note is collateralized by all of upthe assets of Ursa and JB Lease. Principal and interest payments
29
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to $2Unaudited Condensed Consolidated Financial Statements
commenced June 1, 2019, with a final payment of $6.4 million due at maturity. On August 30, 2019, the note maturity was extended to November 2022.
Pursuant to the Exchange Creditor Agreement, the senior promissory notes in the aggregate amount of principal and accrued interest of approximately $6.4 million were exchanged for warrants and a new promissory note with a principal amount of approximately $1.3 million. Refer to the conversion into common stock of EVO Inc.’s subordinated notesheading "Takeback Notes" for further discussion on the new promissory note resulting from the Exchange Creditor Agreements.
Note payable to members, Senior Bridgea related party were assumed as a liability in the Ritter acquisition. The note has an interest rate of 7.0% and matures in December 2028.
The Company issued three promissory notes with an aggregate principal amount of $3.6 million. The Takeback Notes originally bear interest at 3% per annum, are unsecured and certain accountshave a maturity date of September 8, 2027. Interest on the Takeback Notes is payable would otherwise causein cash or in kind, at the Transaction Shares to represent less than 70%Company’s option, the first day of each January, April, July and October. In connection with the Exchange Creditor Agreements, the exchange constituted as a troubled debt restructuring, future cash payments will be recorded as reductions in the carrying amount of the debt. No further interest expense will be recognized, unless required in connection with contingent payments.
Note 6 - Temporary Equity, Stockholders’ Deficit and Warrants
Charter Amendment
On September 8, 2022, EVO's Board and stockholders holding a majority of the voting power of the issued and outstanding shares of each class of our capital stock approved the amendment of EVO’s Certificate of Incorporation to increase the number of authorized shares of common stock.stock, par value $0.0001, from 100 million to 600 million. The amendment became effective October 25, 2022.
Conversion of Series A Redeemable Convertible Preferred Stock and Series B Redeemable Convertible Preferred Stock
In connection with the SPA, certain holders of EVO's Series A Redeemable Convertible Preferred stock and Series B Redeemable Convertible Preferred stock were issued warrants to purchase shares of common stock of EVO at an exercise price of $0.63 per share and provided other consideration as an inducement to entering the transactions. In consideration for the issuance of the warrants and other consideration, the holders agreed to tender the Series A Redeemable Convertible Preferred stock and Series B Redeemable Convertible Preferred stock for retirement and cancellation by the Company. The holders converted the Series A Redeemable Convertible Preferred stock and Series B Redeemable Convertible Preferred stock into shares of EVO's common stock and subsequently the Series A Redeemable Convertible Preferred stock and Series B Redeemable Convertible Preferred stock were retired and removed from EVO’s articles of incorporation as an authorized class of preferred stock In connection with the conversion, the holders waived the conversion of dividends that would have accrued from June 30, 2022 through September 8, 2022, the date of conversion. The Company engagedrecorded $0.2 million of inducement costs as a third-party financial advisory firmdividend in additional paid-in capital as of September 30, 2022.
Redeemable Common Stock
Pursuant to assistthe Sheehy Agreement, SEI waived and agreed to not exercise the $1.2 million put right in exchange for $0.1 million over multiple installments through December 31, 2023. Accordingly, the Company is no longer obligated to redeem the common stock held by SEI. The waiver resulted in a reclassification of the $1.2 million out of temporary equity into permanent equity. As of September 30, 2022 and December 31, 2021, redeemable common stock was $0 and $1.2 million, respectively. The Sheehy Agreement is further described in Note 3, Related Party Transactions.
Series C Preferred Stock
On March 11, 2022, and pursuant to the Bridge Loan Agreement, EVO filed the Series C Certificate of Designations with the Secretary of State of the State of Delaware, which authorizes EVO to issue up to one share of Series C Preferred Stock, and issued to Antara Capital one share of Series C Preferred Stock.
30
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Dividends
A dividend accrues on the Series C Preferred Stock at a rate of 5% per annum on its liquidation preference. The dividend is payable, if and when declared by the Board of Directors, quarterly in arrears in cash commencing on March 31, 2022. Such dividends begin to accrue as of the date on which the Series C Preferred Stock was issued, and will accrue whether or not declared and whether or not there will be funds legally available for the payment of dividends. The Series C Preferred Stock shall not be entitled to participate in any distributions or payments to the holders of the common stock or any other class of stock of the Company.
Liquidation Preference
The holders of the Series C Preferred Stock are entitled to a liquidation preference of $1.00 per share of Series C Preferred Stock plus any accrued but unpaid dividends upon the liquidation of the Company.
Redemption
The Series C Preferred Stock may be redeemed by the Company on the Bridge Loan Discharge Date at a redemption price equal to $1.00 plus all accrued but unpaid dividends. The redemption rights require the Company to present the Series C Preferred Stock in temporary equity in the determinationaccompanying balance sheet.
Voting Rights
Under the Series C Certificate of Designations, prior to a Bridge Loan Triggering Event and following the purchase price allocation underBridge Loan Discharge Date, the guidanceholder of ASC Topic 805. The advisory firm calculated,Series C Preferred Stock will have no voting rights except as otherwise required by law. Under the Series C Certificate of Designations, upon the occurrence of a Bridge Loan Triggering Event through and including the Bridge Loan Discharge Date, the holder of Series C Preferred Stock will vote together with assistancethe holders of EVO's common stock as a single class on any Series C Shareholder Matter, and collaborationthe holder of management,Series C Preferred Stock will be entitled to cast a number of votes on any Series C Shareholder Matter equal to the valuetotal number of votes of all non-holders of Series C Preferred Stock entitled to vote on any such Series C Shareholder Matter plus 10. In addition, the $9.5 million-dollar debt to be $4,563,389, generating a debt discount $4,936,611; with accretion at September 30, 2017 the remaining discount is $3,063,653.
MaturitiesSeries C Certificate of long-term obligations are as follows:
Year Ending December 31, | Related Party Notes | Other Notes | Total | |||||||||
At September 30, 2017 | $ | 5,459,871 | $ | 1,124,470 | $ | 6,584341 | ||||||
2018 | - | - | - | |||||||||
2019 | 417,365 | - | 417,365 | |||||||||
2020 | 1,166,373 | - | 1,166,373 | |||||||||
2021 | - | - | - | |||||||||
Thereafter | 9,500,000 | - | 9,500,000 | |||||||||
$ | 16,543,609 | $ | 1,124,470 | $ | 17,668,079 |
Note 6 - Derivative Instruments
The Company periodically enters into various commodity hedging instruments to mitigate a portion ofDesignations provides that governance mechanisms that could have the effect of natural gas price fluctuations,limiting, reducing or adversely affecting the Series C Preferred Stock holders’ voting or board-appointment rights under the Series C Certificate of Designations will require the consent of the Series C Majority.
In addition, the Series C Certificate of Designations grants the Series C Majority the exclusive right, voting separately as summarizeda class, to elect or appoint (i) prior to a Bridge Loan Triggering Event, one director to the Board (who shall, unless the majority of the Series C Preferred Stock elects otherwise in its sole discretion, also serve as a member of each Board committee) and (ii) upon the table below. Open derivative positionsoccurrence of a Bridge Loan Triggering Event through and including the Bridge Loan Discharge Date, a majority of the members of the Board.
Series D Preferred Stock
On July 13, 2022, and pursuant to the Bridge Loan Agreement, EVO filed the Series D Certificate of Designations with the Secretary of State of the State of Delaware, which authorizes EVO to issue up to one share of Series D Non-Participating Preferred Stock, and issued to Antara Capital one share of Series D Non-Participating Preferred Stock.
Dividends
A dividend accrues on the Series D Non-Participating Preferred Stock at a rate of 5% per annum on its liquidation preference. The dividend is payable, if and when declared by the Board of Directors, quarterly in arrears in cash commencing on September 30, 2022. Such dividends begin to accrue as of the date on which the Series D Non-Participating Preferred Stock was issued, and will accrue whether or not declared and whether or not there will be funds legally available for the payment of dividends. The Series D Non-Participating Preferred Stock shall not be entitled to participate in any distributions or payments to the holders of the common stock or any other class of stock of the Company.
Liquidation Preference
The holders of the Series D Non-Participating Preferred Stock are accounted forentitled to a liquidation preference of $1.00 per share of Series D Non-Participating Preferred Stock plus any accrued but unpaid dividends upon the liquidation of the Company.
Voting Rights
Under the Series D Certificate of Designations, prior to a Bridge Loan Triggering Event and on and following the Bridge Loan Discharge Date, the holder of Series D Non-Participating Preferred Stock will vote together with the holders of EVO's common stock. Under the
31
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Series D Certificate of Designations, upon the occurrence of a Bridge Loan Triggering Event through and including the Bridge Loan Discharge Date, the holder of Series D Non-Participating Preferred Stock will vote together with the holders of EVO's common stock as a single class on any Series D Shareholder Matter, and the holder of Series D Non-Participating Preferred Stock will be entitled to cast a number of votes on any Series D Shareholder Matter equal to the total number of votes of all non-holders of Series D Non-Participating Preferred Stock entitled to vote on any such Shareholder Matter plus 10. In addition, the Series D Certificate of Designations provides that governance mechanisms that could have the effect of limiting, reducing or adversely affecting the Series D Non-Participating Preferred Stock holders’ voting or board-appointment rights under the Series D Certificate of Designations will require the consent of holders the Series D Majority.
Warrants
As further described in Note 5, Debt, the Company issued the following warrants in connection with the Financing Agreement:
The following table summarizesrecorded the $
Fair Value at September 30, | ||||||||
2017 | ||||||||
Current commodity derivative liability | $ | 21,669 | ||||||
Long-term commodity derivative liability | 13,753 | - | ||||||
Total derivative liability | $ | 35,422 | - |
As of September 30, 2017,further described in Note 5, Debt, in connection with the December 2020 Main Street Loan, the Company was partycontributed 100% of the issued and outstanding equity of EAF to one open derivative positions outstanding summarized below:EVO Holding with the consent of Danny Cuzick as the holder of certain previously disclosed promissory notes that are secured in part by the assets of EAF. In consideration of Danny Cuzick’s consent to the contribution, the Company issued to him the Cuzick Warrant to purchase up to 1,000,000 shares of EVO's common stock at the cost of $0.01 per share. Danny Cuzick is a former member of EVO’s Board.
Type | Term | Volume Hedged (Dth) | Index | Fixed Price ($/Dth) | ||||||||
Swap | March 2015 - February 2019 | 95,000 | NYM-LDS | $ | 3.82 |
As further described in Note 7 - Fair Value Measurements5, Debt, in connection with the March 2022 Bridge Loan Agreement, EVO granted Antara Capital and the Executive Lenders the Bridge Loan Warrants to purchase an aggregate of up to 13,066,886 shares of EVO's common stock at an exercise price of $0.01 per share.
As further described in Note 5 Debt, in connection with the March 2022 Convertible Note Amendments, EVO issued the Convertible Note Warrants to purchase an aggregate of up to 7,533,750 shares of EVO's common stock at an exercise price of $0.01 per share.
The following arewarrants were issued and exercised in connection with the major categoriesSPA:
32
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
A summary of warrants activity for the year ended 2021, and for the nine months ended September 30, 2017, using2022 is as follows:
|
| Number of Warrants |
|
| |||||
|
| Equity Classified |
|
| Liability Classified |
|
| ||
Balance at December 31, 2020 |
|
| 8,856,255 |
|
|
| 16,022,000 |
|
|
Issued in 2021 |
|
| 2,231,453 |
|
|
| — |
|
|
Balance at December 31, 2021 |
|
| 11,087,708 |
|
|
| 16,022,000 |
|
|
Issued in the nine months ended September 30, 2022 |
|
| 119,347,471 |
|
|
| 354,633,725 |
|
|
Reclassified in the nine months ended September 30, 2022 |
|
| 28,377,564 |
|
|
| (28,377,564 | ) |
|
Exercised in the nine months ended September 30, 2022 |
|
| (3,500,000 | ) |
|
| — |
|
|
Forfeited in the nine months ended September 30, 2022 |
|
| (103,334 | ) |
|
| — |
|
|
Balance at September 30, 2022 |
|
| 155,209,409 |
|
|
| 342,278,161 |
|
|
All issued warrants that are not considered indexed to EVO's common stock and, therefore, are required to be classified as liabilities and measured at fair value at each reporting date with the change in fair value being recognized in the Company's results of operations during each reporting period. The following table summarizes such warrants outstanding and exercisable as of September 30, 2022 and December 31, 2021 that are liability-classified. The Company reclassified to equity all of its liability classified warrants with exercise prices greater than $0.01 on September 8, 2022. The warrants were amended to modify certain anti-dilution features and they became indexed to EVO’s common stock.
|
| Number of |
|
| Weighted |
|
| Weighted |
| |||
September 30, 2022 |
|
|
|
|
|
|
|
|
| |||
Outstanding |
|
| 342,278,161 |
|
| $ | 0.0001 |
|
|
| 4.9 |
|
Exercisable |
|
| 342,278,161 |
|
| $ | 0.0001 |
|
|
|
| |
December 31, 2021 |
|
|
|
|
|
|
|
|
| |||
Outstanding |
|
| 16,022,000 |
|
| $ | 0.52 |
|
|
| 4.8 |
|
Exercisable |
|
| 16,022,000 |
|
| $ | 0.52 |
|
|
|
|
In addition to the liability-classified warrants, the Company has issued warrants with different terms that are considered indexed to EVO's common stock and, therefore, are classified in additional paid-in capital and are not required to be measured at fair value at each
33
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
reporting date. The following table summarizes such equity-classified warrants outstanding and exercisable as of September 30, 2022 and December 31, 2021.
|
| Number of |
|
| Weighted |
|
| Weighted |
| |||
September 30, 2022 |
|
|
|
|
|
|
|
|
| |||
Outstanding |
|
| 155,209,409 |
|
| $ | 0.46 |
|
|
| 3.3 |
|
Exercisable |
|
| 155,209,409 |
|
| $ | 0.46 |
|
|
|
| |
December 31, 2021 |
|
|
|
|
|
|
|
|
| |||
Outstanding |
|
| 11,087,708 |
|
| $ | 2.37 |
|
|
| 6.9 |
|
Exercisable |
|
| 11,087,708 |
|
| $ | 2.37 |
|
|
|
|
Note 7 – Stock-Based Compensation
Warrants – Stock-Based Compensation
During the first quarter of 2021, EVO issued to an employee warrants to purchase 750,000 shares of EVO’s common stock. The warrants were issued with a 10-year life and an exercise price equal to the lesser of $2.50 per share and the price at which stock options were to be granted to the Company's officers in 2021. One-third (1/3) of the warrants vested and became exercisable on the grant date, one-third (1/3) vested and became exercisable on March 31, 2021, and one-third (1/3) vested and became exercisable on June 30, 2021. During the six months ended June 30, 2021, the Company recorded stock-based compensation expense of $0.3 million related to these warrants.
Note 8 – Fair Value Measurements
Financial assets and liabilities are initially recorded at fair value. The carrying amounts of certain of the Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued expenses, are carried at cost which approximates fair value due to the short-term maturity of these instruments and are Level 1 assets or liabilities of the fair value hierarchy.
The accounting guidance for fair value provides a framework for measuring fair value, clarifies the definition of fair value and expands disclosures regarding fair value measurements. Fair value is defined as the price that would be received in the sale of an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:
Level 1 ‑ Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 ‑ Inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities (Level 1)in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., significant other observable inputs (Level 2)interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 ‑ Inputs are unobservable and reflect the Company’s assumptions that market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available.
Recurring Fair Value Measurements
The Company’s derivative liability embedded in the Financing Agreement related to the mandatory prepayment feature is measured at fair value using a probability-weighted discounted cash flow model and is classified as a Level 3 liability of the fair value hierarchy due to the use of significant unobservable inputs (Level 3).inputs. The liability is presented as an embedded derivative liability on the consolidated balance sheets and is subject to remeasurement to fair value at the end of each reporting period, with the change in fair value recognized as a component of other income (expense) in its consolidated statements of operations. The assumptions used in the discounted cash flow model include: (1) management's estimates of the probability and timing of future cash flows and related events; (2) the Company's risk-adjusted discount rate that includes a company-specific risk premium; and (3) the Company's cost of debt.
34
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
The following assetsCompany's liability-classified warrants issued with an exercise price of $0.01 per share are measured at fair value using the Black-Scholes option pricing model and are classified as a Level 3 liability of the fair value hierarchy due to the use of significant unobservable inputs. The warrant liabilities are presented as current liabilities on the consolidated balance sheets and are subject to remeasurement to fair value at the end of each reporting period, with the change in fair value recognized as a recurring basis:component of other income (expense) in its consolidated statements of operations. The inputs and assumptions used in the Black-Scholes option pricing model include: (1) the Company's stock price; (2) the exercise price of the warrant; (3) the expected term of the warrant; (4) the Company's expected stock price volatility; (5) the Company's expected dividends; and (6) the risk-free interest rate.
Description | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Liability | ||||||||||||||||
Derivative liability | $ | - | $ | 35,422 | $ | - | $ | 35,422 |
The Company's liability-classified warrants issued with an exercise price of greater than $0.01 per share are measured at fair value using the Monte Carlo simulation model and are classified as a Level 3 liability of the fair value hierarchy due to the use of significant unobservable inputs. The warrant liabilities are presented as current liabilities on the consolidated balance sheets and are subject to remeasurement to fair value at the end of each reporting period, with the change in fair value recognized as a component of other income (expense) or as compensation expense in its consolidated statements of operations. The inputs and assumptions used in the Monte Carlo model include: (1) the Company's stock price; (2) the Company's expected stock price volatility; and (3) the risk-free interest rate. The Company reclassified to equity all of its liability classified warrants with exercise prices greater than $0.01 on September 8, 2022. The warrants were amended to modify certain anti-dilution features and they became indexed to EVO’s common stock.
The following table provides a reconciliation for the opening and closing balances of both liabilities for the periods presented:
($ in thousands) |
| Derivative Liability |
|
| Warrant Liabilities |
| ||
Balance at December 31, 2021 |
| $ | 1,513 |
|
| $ | 13,784 |
|
Issuances |
|
| — |
|
|
| 33,265 |
|
Reclassification of warrants from liability classified to equity classified |
|
| — |
|
|
| (1,258 | ) |
Net change in fair value |
|
| (12 | ) |
|
| (25,296 | ) |
Balance at September 30, 2022 |
| $ | 1,501 |
|
| $ | 20,495 |
|
|
|
|
|
|
|
| ||
Balance at December 31, 2020 |
| $ | 1,021 |
|
| $ | — |
|
Issuances |
|
| — |
|
|
| 11,099 |
|
Net change in fair value |
|
| (661 | ) |
|
| (5,534 | ) |
Balance at September 30, 2021 |
| $ | 360 |
|
| $ | 5,565 |
|
There were no transfers between Level 1, Level 2 and Level 3 during the periods presented.
The Company’s obligations under its debt agreements are carried at amortized cost. The fair value of these derivative swap contracts is based on market prices posted on the New York Mercantile Exchange for natural gas. The Company determinesCompany’s obligations under its convertible notes and the EVO Term Loans are considered Level 3 liabilities of the fair value of its derivative instruments under the income approachhierarchy because fair value was estimated using a discounted cash flow model.significant unobservable inputs. The valuation model requires a variety of inputs, including contractual terms, projected natural gas prices, discount rates, and credit risk adjustments, as appropriate. The Company’s estimates of fair value of derivatives include considerationthe Company’s other debt arrangements are considered Level 2 liabilities of the counterparty’s creditworthiness,fair value hierarchy because fair value is estimated using inputs other than quoted prices that are observable for the liability such as interest rates and yield curves. The estimated fair value of the EVO Term Loans was $10.8 million as of September 30, 2022, and its carrying value was $20.0 million as of September 30, 2022. The estimated fair value of the EVO Term Loans was $9.7 million as of December 31, 2021, and its carrying value was $17.7 million as of December 31, 2021. The carrying value of the Company’s creditworthiness, and the time value of money. The consideration of these factors results in an estimated exit price for each derivative asset or liability under a marketplace participant’s view. All of the significant inputs are observable, either directly or indirectly; therefore, the Company’s derivative instruments are included within the Level 2remaining debt obligations approximates fair value, hierarchy.and was $41.5 million and $49.0 million as of September 30, 2022 and December 31, 2021, respectively.
Note 8 - Stockholders’ Equity9 – Leases
Related Party Leases
On April 6, 2017, theThe Company effected a 50-for-1 reverse stock split of its common stock pursuant to which each 50 shares of issuedhas various lease obligations with related parties for trucks, office space and outstanding common stock became one share of common stock (the “Reverse Split”)terminals expiring at various dates through January 2029. No fractional shares were issued as a result of the Reverse Split. All references to numbers of shares of common stock and per share amounts give retroactive effect to the Reverse Split for all periods presented.
In connection with the completion of the Titan Securities Exchange, 104,179 outstanding Class A units were valued at predecessor cost, which resulted in no value to the units with the resulting liability assumed recorded at a loss in the statement of operations.
During the nine months ended September 30, 2017,2022 and 2021 the Company issued 103,333 units for $3.00 per units, with each unit consistingincurred approximately $1.1 million and $1.1 million of one share of common stock and one equity-classified warrant to purchase one share of common stock.
The fair value ofrelated party lease costs, respectively. During the warrants is estimated on the date of issuance using the Black-Scholes option pricing model, which requires the input of subjective assumptions, including the expected term of the warrant, expected stock price volatility, and expected dividends. These estimates involve inherent uncertainties and the application of management judgment. Expected volatilities used in the valuation model are based on the average volatility of the Company’s stock. The risk-free rate for the expected term of the option is based on the United States Treasury yield curve in effect at the time of grant.
As of September 30, 2017, the authorized share capital of the Company consisted of 100,000,000 shares of common stock with a par value of $0.0001 per share. There were 420,804 and 317,207 shares of common stock issued and outstanding as of September 30, 2017 and December 31, 2016, respectively.
As of September 30, 2017, the authorized share capital of the Company consisted of 10,000,000 shares of preferred stock with a par value of $0.0001 per share. There were no shares of preferred stock issued and outstanding as of September 30, 2017.
Note 9 - Commitments and Contingencies
Operating Leases
The Company leases office space in Minnesota on a month to month basis with payments of $977 per month.
Titan entered into an operating lease agreement which expires in February 2019, with an option to extend to February 2024. In November 2014 the lease was amended to add El Toro as a co-lessee. The monthly payments range from $10,000 to $11,604. The lease calls for rent increases over the term of the lease. The Company records rent expense on a straight line basis using average rent for the term of the lease. The excess of the expense over cash rent paid is shown as deferred rent.
Rent expense for the sixthree months ended September 30, 20172022 and 2016 was2021 the Company incurred approximately $95,000.$0.4 million and $0.4 million of related party lease costs, respectively. At September 30, 2022 and December 31, 2021, the Company had the following balances recorded in the condensed consolidated balance sheets related to its lease arrangements with related parties:
35
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
($ in thousands) |
| Classification |
| September 30, |
|
| December 31, |
| ||
Assets |
|
|
|
|
|
|
|
| ||
Operating leases |
| Right-of-use-asset |
| $ | 1,720 |
|
| $ | 2,107 |
|
|
|
|
|
|
|
|
|
| ||
Liabilities |
|
|
|
|
|
|
|
| ||
Current: |
|
|
|
|
|
|
|
| ||
Operating leases |
| Operating lease liabilities, current portion |
|
| 1,660 |
|
|
| 840 |
|
|
|
|
|
|
|
|
|
| ||
Non-current: |
|
|
|
|
|
|
|
| ||
Operating leases |
| Operating lease liabilities, less current portion |
|
| 409 |
|
|
| 1,125 |
|
Future minimum lease payments under these leases are approximately as follows:
Note 10 – Commitments and Contingencies
Years Ending December 31, | ||||
Nine months ended September 30, 2017 | ||||
Remainder of 2017 | $ | 35,000 | ||
2018 | 139,000 | |||
2019 | 23,000 | |||
$ | 197,000 |
Legal Contingencies
Litigation
In the normal course of business, the Company is party to litigationlegal proceedings from time to time. The Company maintains insurance to cover certain actions and believesit establishes reserves for specific legal proceedings when the Company determines that resolutionthe likelihood of such litigation will not havean unfavorable outcome is probable and the amount of loss can be reasonably estimated. Management has also identified certain other legal matters where we believe an unfavorable outcome is reasonably possible and/or for which no estimate of possible losses can be made.
On March 19, 2018, Whisler Holdings, LLC, Mitesh Kalthia, and Jean M. Noutary, the owners of the property leased by El Toro for the Company’s El Toro station, initiated a material adverse effect onlawsuit in the Company.
Grant Agreement
In 2013, Titan wasSuperior Court of Orange County, California, related to the recipientlease agreement for the El Toro station. The complaint alleges breach of two grantscontract and sought money damages, costs, attorneys’ fees and other appropriate relief. On October 11, 2018, the court issued a default judgement in favor of the plaintiff in the amount of $300,000approximately $0.2 million, which the Company has fully reserved for and $150,000is included in accrued expenses and other current liabilities in the accompanying consolidated balance sheets at September 30, 2022 and December 31, 2021. No payments have been made to date.
See Note 12, Subsequent Events, for descriptions of the legal proceeding relating to Raymond James & Associates, Inc. and the settlement of the legal proceeding relating to Falcon Capital, LLC and Scott Honour.
Except as described above and with respect to claims covered by insurance, there are no other currently pending material legal or governmental proceedings and, as far as we are aware, no governmental authority is contemplating any proceeding to which we are a party or to which any of our properties is subject.
PPP Loan
On May 8, 2020, we received a letter from the California Energy Commission (“CEC”) and SCAQMD. The grant funds were used to complete the construction of a facility on El Toro Road as contemplated in the grant agreements. The grant proceeds are subject to repayment if the Company does not satisfy certain operational metrics contained in the grant agreements, and the Company is not in compliance with those metrics. In addition, the use of TitanSelect Subcommittee on the project could be construed as requiring amendments to the grant agreements or consent from the CEC or SCAQMD, neither of which has been obtained by the Company.During 2016, EVO was the recipient of a grant in the amount of $400,000 from the Texas Commission on Environmental Quality. The grant funds were used to complete the constructionCoronavirus Crisis of the Company’s San Antonio facility as contemplatedU.S. House of Representatives demanding that we return the $10.0 million PPP Loan that we applied for and received under the CARES Act in the grant agreement. The grant proceeds are subject to repayment if the Company doesApril 2020. We elected not satisfy certain operational metrics contained in the grant agreements. The Company believes that it can satisfy these objectives, although it cannot provide assurance that such future events will occur. The grant agreement expires in August 2020. The Company records the grant proceeds as a reduction of the cost of the respective station.
Walters Recycling and Refuse Station
In June 2016 Blaine entered into a compressed natural gas fuel station agreement with Walters, an unrelated third party. Under the agreement Blaine will construct, at its sole expense, a CNG dispensing system (the “System”) on a portion of the property owned by Walters. The System must include certain required elements as defined in the contract and will only be used for the purpose of filling Walters’ vehicles and authorized Blaine vehicles and trailers. Titan was required to have the System fully operational by June 2017. Because the System was not fully operational by June 2017, Walters may terminate the agreement with 30 days written notice to Blaine. Walters has not terminated this agreement, and Blaine continues to discuss construction of the system with Walters. If the agreement is terminated, Blaine will be required to return the propertyPPP Loan proceeds as requested and our PPP Loan was subsequently forgiven in July 2021. Also, the United States Small Business Administration ("SBA") has stated that it intends to its pre-construction condition. Blaine shall retain ownershipaudit the PPP Loan application of all unattached movable componentsany company, like us, that received PPP Loan proceeds of the System. In addition, Blaine is responsible for all costs relatingmore than $2 million. However, we are not currently party to installing the utilities required for the System as well as the costs for all ongoing system and property maintenance. The termor aware of the agreement will be for a period of seven years and will commence on the date the System becomes fully operational and is first used by Walters, as defined in the agreement. Walters has the right to renew the agreement for four additional two year renewal periods. Beginning on the commencement date and through the contract term, Walters agrees to purchase 144,000 GGE, annually, of CNG, as defined, exclusively from Blaine. The rate charged to Walters includes an initial six month rate which is then adjusted as stated in the agreement.
SCAQMD
In December 2015, Diamond Bar entered into a transfer of ownership and lease arrangementany contemplated proceeding with the SCAQMD. This property has an existing CNG station previously owned and operated bySelect Subcommittee, the SCAQMD. Thirty days after the date of the agreement, SCAQMD transferred to Diamond Bar, without charge, all of their rights and interests in the existing assets. The agreement also specifies that Diamond Bar lease the property for $1 and identifies certain commitments agreed to by the parties. Some of the more significant ones are as follows:
* Within 180 days from the contract execution, Diamond Bar, using its best efforts, shall sellSBA, or any surplus assets and provide SCAQMDother governmental authority with 90% of the net proceeds, as defined. To date Diamond Bar has not had any surplus assets to sell.
* Diamond Bar is also required to comply with certain provisions in the agreement with regardsrespect to the operation and maintenance of the station.PPP Loan.
* Diamond Bar, at its expense and upon written consent from SCAQMD, can remodel, redecorate or otherwise make improvements and replacements of and to all or any part of the leased premises.
* Diamond Bar is required to install specific station upgrades, as defined, and is responsible for the cost of these upgrades. All upgrades must be completed within eight months of the execution date. Any improvements made to the premises remain the property of Diamond Bar and can be removed by Diamond Bar.
* The fueling rate charged to the SCAQMD will be based on actual utility costs, taxes and a fee not to exceed $0.50 per GGE. Currently the rate charged is substantially equal to the market rate charged to all other customers.
* The contract ends December 31, 2020. SCAQMD can extend the contract for a period not to exceed five years starting January 1, 2021 at no additional cost. Either party may terminate the contract with sixty days’ notice. If the SCAQMD terminates without cause they will be required to either purchase the property necessary for the operation of the CNG station or reimburse Diamond Bar for the cost of removing the property. If Diamond Bar terminates the contract without cause, the SCAQMD shall have the option to either purchase the property necessary for the operation of the station or require Diamond Bar to remove the property at no cost to SCAQMD.
Contingent Liability
The Company is a guarantor on a $4,000,000 loan from a former EAF member and has pledged the Company’s assets. The note bears interest of 7.5% per annum and has a maturity date of the earlier of (a) February 1, 2020 and (b) declaration by the noteholder of an event of default under the loan.
Long-Term Take-or-Pay Natural Gas Supply Contracts
As of September 30, 2017,2022 and December 31, 2021, the Company had commitments to purchase CNGnatural gas on a take-or-pay basis of approximately $545,000.with three vendors. It is anticipated these are normal purchases that will be necessary for sales, and no cash settlementsthat any penalties for failing to meet minimum volume requirements will be madeimmaterial.As of September 30, 2022 and December 31, 2021, the estimated remaining liability under the take-or-pay arrangements was approximately $0.2 million and $0.2 million, respectively.
Off Balance Sheet Arrangements – Captive Insurance
Prior to the acquisition, Sheehy was insured for certain insurance risks with a captive insurance company under SEI. Upon the acquisition of Sheehy from SEI in January 2019, the Company became a member of the captive and Sheehy was transferred to the EVO member account. As a member of the captive, the Company is required to maintain a collateral deposit. The collateral deposit requirement is
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EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
calculated at the renewal date of March 1st each year and is based on the prior three years of premium experience. The collateral deposit may be satisfied with either cash and/or investment collateral held in the captive or with a letter of credit. The letter agreement between the Company and SEI expired on March 1, 2020, however, in connection with the Sheehy Settlement Agreement, Sheehy has pledged $0.8 million in cash collateral held in the SEI captive insurance member account, under the CSPA, on or before March 1, 2024. See Note 3, Related Parties – Off Balance Sheet Arrangements – Collateral Security Pledge Agreement, for terms of the agreement. The Company is also responsible for providing any additional collateral that may be requested by the captive.
Letters of Credit
EAF entered into an incremental natural gas facilities agreement dated February 24, 2014 with Southwest Gas Corporation (“Southwest Gas”). Under the terms of the agreement, Southwest Gas agreed to install a pipeline connecting an EAF CNG station to its existing infrastructure at no upfront cost to EAF, and EAF agreed to use Southwest Gas to transport natural gas to the station through its infrastructure. The term was originally five years but has since been modified to ten years. Each year of the ten-year term, EAF is required to make a payment to Southwest Gas equal to $0.1 million minus the amount of delivery and demand charges paid by EAF during the applicable contract year. EAF is required to provide financial security in the form of a letter of credit originally in the amount of $0.5 million, which amount may decrease annually during the term of the agreement and was equal to $0.2 million as of September 30, 2022 and December 31, 2021.
As collateral for performance on contracts and as credit guarantees to banks and insurers, we are contingently liable for guarantees of subsidiary obligations under a standby letter of credit. As of September 30, 2022 and December 31, 2021, we had $0.6 million of the standby letter of credit related to workers’ compensation and general liabilities accrued in our condensed consolidated financial statements.
Note 11 - Income Taxes
The Company recognizes deferred tax liabilities and assets for the purchase commitments.expected future tax consequences of events that have been included in the condensed consolidated financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement basis and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company estimates the degree to which tax assets and credit carryforwards will result in a benefit based on expected profitability by tax jurisdiction. A valuation allowance for such tax assets and loss carryforwards is provided when it is determined to be more likely than not that the benefit of such deferred tax asset will not be realized in future periods. Tax benefits of operating loss carryforwards are evaluated on an ongoing basis, including a review of historical and projected future operating results, the eligible carryforward period, and other circumstances. If it becomes more likely than not that a tax asset will be used, the related valuation allowance on such assets would be reduced.
The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. Once this threshold has been met, the Company’s measurement of its expected tax benefits is recognized in its financial statements. The Company accrues interest on unrecognized tax benefits as a component of income tax expense. Penalties, if incurred, would be recognized as a component of income tax expense.
Note 1012 - Subsequent Events
Amended and Restated Bridge Loan
On October 1, 2017,December 23, 2022, Antara Capital, Corbin ERISA Opportunity Fund Ltd ("CEOF") and Hudson Park Capital II LP ("Hudson Park") entered into a Master Assignment and Assumption agreement pursuant to which Antara Capital sold and assigned its rights and obligations in a portion of the Company converted the eight Junior Bridge NotesLoan and related interest totaling $1,363,858 into common stock at awarrants with an exercise price per share of $5.00$0.01 and $0.0001 to CEOF and Hudson Park. On the same date, Antara Capital, the Executive Lenders, CEOF and Hudson Park amended and restated the Bridge Loan to reflect the assigned portions of the Bridge Loan to CEOF and Hudson Park. No changes were made to the Bridge Loan in connection with the assignment to CEOF and Hudson Park and no payments were made to the holders of the debt. This event is a transaction among debt holders.
Warrant Exercises
On November 14, 2022, Antara Capital exercised warrants to purchase 19,317,489 and 341,566,839 shares of EVO common stock at $0.01 and $0.0001 per share, respectively, for $0.2 million.
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EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Loan Dispute Settlement
On April 14, 2023, EVO, Titan CNG LLC, a totalwholly-owned subsidiary of 272,777 shares. EVO (“Titan CNG”), Falcon Capital, LLC (“Falcon”) and Scott Honour (a former member of EVO’s board of directors), entered into a Settlement Agreement (the “Settlement Agreement”) pursuant to which the parties settled the dispute between EVO and Titan, on the one hand, and Falcon and Mr. Honour, on the other hand, relating to that certain Loan Agreement, dated December 31, 2014, among Tradition Capital Bank, Titan El Toro LLC and Titan CNG, certain equipment located in Fort Worth, Texas, and compensation for board service.
Pursuant to the Settlement Agreement, (i) the parties settled all claims relating to the lawsuit by Falcon against Titan CNG and EVO, (ii) EVO agreed to pay Falcon $60,000, (iii) EVO issued Falcon an unsecured promissory note in the principal amount of $250,000 (the “Promissory Note”), (iv) Falcon released all security interests and liens in all physical property of EVO and Titan CNG, (v) the parties agreed on a process by which to sell the equipment and on the distribution of net proceeds from such sale and (vi) Falcon and Honour released all right, title and interest in and to Titan CNG, EVO and EVO’s subsidiaries. Falcon is entitled to file a confession of judgment if EVO fails to timely cure a missed payment to Falcon or makes more than three untimely payments.
The Promissory Note matures on September 30, 2027 and bears interest at a rate of 6.0% per annum. On January 1, 2024, interest only on the outstanding principal amount will be due and payable in arrears. On February 1, 2024, and on the first day of each month thereafter, principal and interest will be due and payable in arrears. The Promissory Note has customary events of default.
Modification Agreements to the Main Street Priority Loan Program Facility
On April 19, 2023, EVO Holding Company, LLC, Ritter Transport, Inc., John W. Ritter Trucking, Inc., Johmar Leasing Company, LLC and Ritter Transportation Systems, Inc. (collectively, the “Borrowers”), EVO, as guarantor, and Commerce Bank of Arizona, Inc. (“Commerce”) entered into the Third Modification Agreement (the “Third Amendment”) of the Loan Agreement. The Third Amendment modifies (i) the financial reporting requirements of the Borrowers and EAF and (ii) permitted investments to include additional intercompany loans so long as the Borrowers’ debt service coverage ratio, as defined in the Third Amendment, is at least 1.20:1.00 as of the relevant date.
On June 15, 2023, the Borrowers, EVO, as guarantor, and Commerce entered into the Fourth Modification Agreement (the “Fourth Amendment”) of the Loan Agreement. The Fourth Amendment modifies the interest rate of the loan to the Prime Rate plus the applicable margin of 25 basis points per annum. Accrual of interest at the modified interest rate commenced on July 1, 2023.
Raymond James Arbitration
On January 22, 2021, EVO and Raymond James & Associates, Inc. (“Raymond James”) entered into a letter agreement (the “RJ Agreement”) pursuant to which Raymond James would provide certain investment banking services to EVO. The RJ Agreement was amended on September 26, 2021 and November 19, 2021. Pursuant to the RJ Agreement, as amended, EVO agreed to pay Raymond James certain fees and expenses upon the closing of certain transactions.
On November 22, 2022, Raymond James filed a demand for arbitration against EVO in which it alleged breach of contract, breach of the implied covenant of good faith and fair dealing, and unjust enrichment. The complaint alleged that EVO failed to pay $3.25 million in fees and $11,142.80 in expenses. The RJ Agreement provides for final and binding arbitration of Raymond James’s claims against EVO in accordance with the commercial rules of the American Arbitration Association.
EVO believes it has meritorious defenses to Raymond James’s claim and intends to defend itself vigorously while exploring other options as appropriate and in EVO’s best interest. We are unable to predict the outcome of this matter or the Company’s ultimate legal and financial liability, if any, and at this time cannot reasonably estimate the possible loss or range of loss for this matter, if any. If, however, EVO does not prevail in the arbitration, management believes that EVO’s legal and financial liability relating to this matter could be material to the Company’s results of operations and financial condition, and could impact the Company’s ability to continue as a going concern.
Annual Incentive Plan
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EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
On May 30, 2023, the compensation committee (the “Compensation Committee”) of the Board approved the Annual Incentive Plan of EVO Transportation & Energy Services, Inc. (the “AIP”), to provide the terms of the Senior Bridge Notes required principal of approximately $1,222,000 and accrued interest of approximately $200,000annual bonus opportunities to be repaid on or before November 7, 2017, which is two business days aftergranted to EVO’s executive officers and other participating employees. The purposes of the fifth calendar day after October 31, 2017,AIP are to provide additional incentives for employees who contribute to the maturity date. The Company did not make these required payments, and this nonpayment by the Company constitutes an eventimprovement of default under the Senior Bridge Notes. The Company and the Senior Bridge Note holders are negotiating extension terms for the Senior Bridge Notes, but there can be no assurance thatoperating results of the Company and to reward outstanding performance on the Senior Bridge Note holderspart of those individuals whose decisions and actions most significantly affect the growth, profitability and efficient operation of the Company. The AIP focuses on achievement of certain Company performance criteria, as determined by the Compensation Committee at the beginning of each calendar year, and provides that the participants may earn a pre-determined percentage of their respective base salaries for the achievement of specified performance goals.
The Compensation Committee approved the following annual bonus opportunities for 2023 under the AIP: (i) to Mr. Bayles, 30% to 65% of annual base salary and (ii) to other executive officers, 15% to 50% of annual base salary. The performance metric for 2023 is adjusted EBITDA, and payment of incentive awards under the AIP is dependent upon achievement of defined goals for the performance metric. The Compensation Committee retains the discretion to adjust any award that becomes payable under the AIP.
Restricted Stock Unit Award Agreements
On May 30, 2023, the Compensation Committee also approved (i) the form of restricted stock unit award agreement for employees (the “Employee RSU Award Agreement”) and (ii) the form of restricted stock unit award agreement for non-employee directors (the “Non-Employee Director RSU Award Agreement” and together with the Employee RSU Award Agreement, the “Award Agreements”), which set forth the terms and conditions for restricted stock unit (“RSU”) awards under the Amended and Restated 2018 Stock Incentive Plan. The RSUs are used to determine the number of shares of common stock of EVO to be issued to participants if such RSUs vest. Each RSU will vest in accordance with the schedule determined at the time of award, subject to the participant’s continued employment or service through the vesting date.
The Compensation Committee approved the following grants of RSUs: (i) to Mr. Bayles, 14,264,934 RSUs, (ii) to other executive officers, 998,545 to 2,377,489 RSUs and (iii) to non-employee directors of EVO, 950,996 to 1,188,744 RSUs.
Asset Purchase and Sale Agreements
On July 20, 2023, EAF, a wholly-owned subsidiary of EVO, entered into the following agreements with Clean Energy, a California corporation: (a) the Asset Purchase and Sale Agreement and Joint Escrow Instructions (Tolleson) (the “Tolleson Agreement”) and (b) the Asset Purchase and Sale Agreement and Joint Escrow Instructions (Oak Creek) (the “Oak Creek Agreement,” and together with the Tolleson Agreement, the “Asset Purchase Agreements”).
The Tolleson Agreement provides for the sale of EAF’s real property in Tolleson, Arizona and the compressed natural gas fuel station located thereon to Clean Energy for a purchase price of $1.2 million. The Oak Creek Agreement provides for the sale of EAF’s real property in Oak Creek, Wisconsin and the compressed natural gas fuel station located thereon to Clean Energy for a purchase price of $1.2 million.
The Asset Purchase Agreements contain customary representations, warranties and covenants by EAF and Clean Energy and are subject to customary closing conditions, including completion of due diligence by Clean Energy. The Company expects the sales under the Asset Purchase Agreements to close in the third quarter of 2023.
The net proceeds from the sales under the Asset Purchase Agreements will be ableused for mandatory pay down of the Main Street Loan.
Equipment Purchase Agreement
On July 20, 2023, EAF also entered into an Equipment Purchase Agreement (“Equipment Agreement”) with California Clean Energy, Inc. (“CCE”), whereby EAF agreed to agree on extension terms.sell certain equipment and other assets located in Fort Worth, Texas for a purchase price of $800,000. The Equipment Agreement contains customary representations, warranties and covenants by EAF and CCE and is subject to customary closing conditions. The Company expects the sale under the Equipment Agreement to occur in the third quarter of 2023.
20The net proceeds from the sale under the Equipment Agreement will be used for mandatory pay down of the Main Street Loan.
Sale of San Antonio, Texas Property
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EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
On June 2, 2023, EAF entered into an agreement (the “San Antonio Agreement”) with Brazos De Santos Partners, Ltd. (“BDSP”) whereby EAF agreed to sell certain of its land located in San Antonio, Texas for a purchase price of $1,180,476. The net proceeds from the sale under the San Antonio Agreement will be used for mandatory pay down of the Main Street Loan.
The San Antonio Agreement contains customary representations, warranties and covenants by EAF and BDSP and is subject to customary closing conditions. The Company expects the sale under the San Antonio Agreement to occur in the third quarter of 2023.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsOperations.
Forward-Looking Statements
The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto included in Item 1 of Part I of this report and the audited consolidated financial statements and related notes thereto and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. Some2021. All statements, other than statements of historical or current fact, are statements that could be deemed forward-looking statements, including without limitation: any projections of earnings, revenues, or other financial items; our growth strategy and potential acquisition candidates; our relationship with the United States Postal Service; gasoline, diesel and natural gas prices; management’s expectations regarding market trends and competition in the transportation industry, government tax credits and other incentives, insurance and environmental and safety considerations; and any statements of belief and any statements of assumptions underlying any of the statements in this report may contain forward-looking statements that reflect management’s current view about future events, future business, industry and other conditions, our future performance, and our plans and expectations for future operations and actions.foregoing. In some cases you canmay identify forward-looking statements by the use of words such as “anticipate,” “will,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan” and similar expressions or the negative of these terms. Many of these forward-looking statements are located in this report under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” but they may appear in other sections as well. The forward-looking statements in this report generally relate to: (i) our growth strategy and potential acquisition candidates; (ii) management’s expectations regarding market trends and competition in the vehicle fuels industry, gasoline, diesel, and natural gas prices, government tax credits and other incentives, and environmental and safety considerations; (iii) our beliefs regarding the sufficiency of working capital and cash flows, and our continued ability to renew or obtain financing on reasonable terms when necessary; (iv) the impact of recently issued accounting pronouncements; (v) our intentions and beliefs relating to our costs, business strategies, and future performance; (vi) our expected financial results; and (vii) our expectations concerning our primary capital and cash flow needs.
Forward-looking statements are based on information available to management at the time the statements are made and involve known and unknown risks, uncertainties and other factors that may cause our results, levels of activity, performance or achievements to be materially different from the information expressed or implied by the forward-looking statements. Such statements reflect the current view of management with respect to future events and are subject to risks, uncertainties, assumptions and other factors (including the risks contained in the section entitled “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016)2021) relating to the Company’s industry, its operations and results of operations, and any businesses that may be acquired by it. These factors include, among other factors:
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Although management believes that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results. We qualify all of our forward-looking statements by these cautionary statements.
Background and Recent Developments
EVO Transportation & Energy Services, Inc., a Delaware corporation formerly named Minn Shares Inc. (“EVO Inc.,” “we,” “us,” “our” orEVO” and, together with its direct and indirect subsidiaries, the “Company”), was incorporated is a transportation provider serving the United States Postal Service (“USPS”) and other customers. We believe EVO is one of the largest surface transportation companies serving the USPS, with a diversified fleet of tractors, straight trucks, and other vehicles that currently operate on October 22, 2010. EVO Inc. was incorporated to effect the redomestication of Minn Shares Inc., a Minnesota corporationeither diesel fuel, gasoline or compressed natural gas (“Minn Shares Minnesota”CNG”),. In connection with providing our mail transportation and delivery services to the StateUSPS and our freight services to other corporate customers, we outsource the transportation of Delaware. Fromcertain loads to third-party carriers. We operate from our headquarters in Phoenix, Arizona and from numerous terminals throughout the United States.
Historically, we have grown primarily through acquisitions and have also grown organically by obtaining new contracts from the USPS and other customers.
Sources of Revenue
Our USPS trucking operations generate revenue from transportation services under multi-year contracts with the USPS
Our freight trucking operations generates revenue by providing both irregular and dedicated route transportation services of various products, goods and materials for a diverse customer base.
Results from Operations
Three Months Ended September 30, 2022, as compared with the Three Months Ended September 30, 2021
Trucking revenue: The majority of Trucking revenue is derived from the USPS. The remainder of the revenue is derived from corporate freight hauling. The USPS contracts are typically four years in duration and include a monthly fuel adjustment. Trucking revenue was $75.3 million and $68.8 million during the three months ended September 30, 2022 and 2021, respectively. The $6.5 million, or 9.4%, increase in Trucking revenue from the three months ended September 30, 2021 to the three months ended September 30, 2022 is primarily due to revenue from new USPS contracts, along with increased fuel surcharge revenue as a result of increased fuel prices.
Payroll, benefits and related: Payroll, benefits and related includes total compensation of driver and non-driver. Included in driver compensation is an incremental hourly rate for benefits. Payroll, benefits and related expense was $33.4 million and $27.9 million during the three months ended September 30, 2022 and 2021, respectively. The $5.5 million, or 19.7%, increase in payroll, benefits and related expense is primarily due to the 9.4% increase in Trucking revenue combined with an increase in use of employee drivers rather than subcontracted third-party company resources.
Purchased transportation: Purchased transportation represents payments to subcontracted third-party companies. These contracts are typically negotiated on a rate per mile basis and the subcontracting company is responsible for supplying all resources to perform the service including, but not limited to, labor, equipment, fuel and associated expenses. Purchased transportation expense was $8.3 million and $17.3 million during the three months ended September 30, 2022 and 2021, respectively. The $9.0 million, or 52.0%, decrease in purchased transportation expense from the three months ended September 30, 2021 to the three months ended September 30, 2022 is primarily due to an increased use of employee drivers rather than subcontracted third-party company resources.
Fuel: Fuel expense is comprised of diesel, gasoline and CNG fuel required to operate the truck fleet. The Company manages fuel cost by negotiating volume discounts from rack fuel rates with select vendors. Fuel expense was $11.5 million and $7.3 million during the three months ended September 30, 2022 and 2021, respectively. The $4.2 million, or 57.5%, increase in fuel expense is due primarily to the 9.4% increase in trucking revenue, 52.0% decrease in purchased transportation and an increase in the average DOE fuel price to $5.16 per gallon for the three months ended September 30, 2022 from $3.36 per gallon for the three months ended September 30, 2021.
Equipment rent: The Company rents and leases a portion of its trucks and trailers through a combination of short-term rental arrangements and long-term lease arrangements. Equipment rent expense was $3.3 million and $3.7 million during the three months
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ended September 30, 2022 and 2021, respectively. The $0.4 million, or 10.8%, decrease is due to an adjustment between equipment rent and amortization expense of finance lease right-of-use asset as a result from a correction of two leases classified as operating leases in the first quarter of 2022 when they were in fact finance leases.
Maintenance and Supplies: Maintenance and supplies expense primarily includes the costs to maintain the fleet. Maintenance and supplies expense was $3.9 million and $2.6 million during the three months ended September 30, 2022 and 2021, respectively. The $1.3 million or 50.0%, increase in maintenance and supplies expense from the three months ended September 30, 2021 to the three months ended September 30, 2022 is primarily due to an increase in the size of the fleet combined with increased maintenance costs for the existing fleet, which the Company is in process of refreshing with newer equipment.
Insurance and claims: Insurance and claims is comprised of auto liability and physical damage expense related to the trucking operations of the business. Insurance and claims expense was $1.4 million and $1.9 million during the three months ended September 30, 2022 and 2021, respectively. The $0.5 million, or 26.3%, decrease in insurance and claims expense from the three months ended September 30, 2021 to the three months ended September 30, 2022 is primarily due to premium adjustments and fewer significant, nonrecurring claims.
Operating supplies and expenses: Operating and supplies expense includes all other direct costs in the trucking operations. Operating supplies and expenses was $4.1 million and $3.7 million during the three months ended September 30, 2022 and 2021, respectively. The $0.4 million, or 10.8%, increase in operating supplies and expenses from the three months ended September 30, 2021 to the three months ended September 30, 2022 is primarily due to an increase in truck center supplies, truck center building and parking, and driver travel expenses to service the new USPS contracts.
General and administrative: General and administrative expense was $6.4 million and $4.1 million for the three months ended September 30, 2022 and 2021, respectively. The $2.3 million, or 56.1%, increase is primarily due to an increase in professional fees.
Depreciation and amortization: Depreciation and amortization expense was $4.0 million and $4.0 million for the three months ended September 30, 2022 and 2021, respectively. An increase in amortization expense of finance lease right-of-use asset was substantially offset by a decrease in depreciation expense.
Interest expense: Interest expense was $10.8 million and $2.8 million for the three months ended September 30, 2022 and 2021, respectively. The $8.0 million, or 285.7%, increase in interest expense from the three months ended September 30, 2021 to the three months ended September 30, 2022 is primarily due to the consummation of certain transactions involving the recapitalization of the company, including EVO and Antara Capital entering into a Securities Purchase Agreement, dated September 8, 2022, whereby Antara Capital purchased from the Company 22,353,696 immediately exercisable warrants to purchase EVO's common stock at an exercise price of $0.0001 per share and an additional 319,213,143 warrants to purchase EVO's common stock at $0.0001 per share. The Company recorded a $7.7 million loss to interest expense in connection with the issuance of the warrants. Refer to Note 6, Temporary Equity, Stockholders’ Deficit and Warrants for further discussion.
Gain (loss) on extinguishment of debt: The $10.2 million gain on extinguishment of debt during the three months ended September 30, 2021 is due to the extinguishment of the outstanding principal and accrued interest on the Paycheck Protection Program Loan, which was forgiven by the SBA in July 2021.
Change in fair value of embedded derivative liability: The Financing Agreement contains a mandatory prepayment feature that was determined to be an embedded derivative, requiring bifurcation and fair value recognition for the derivative liability. The fair value of this derivative liability is remeasured at each reporting period, with changes in fair value recognized in the consolidated statement of operations. Refer to Note 5, Debt, and Note 8, Fair Value Measurements, for further discussion.
Change in fair value of warrant liabilities: EVO previously issued certain warrants that are not considered indexed to EVO's common stock and, therefore, are required to be classified as liabilities and measured at fair value at each reporting date with the change in fair value being recognized in the Company's results of operations during each reporting period. The change in fair value of substantially all of the warrants classified as liabilities is recognized in other income (expense). Refer to Note 6, Stockholders' Deficit and Warrants, and Note 8, Fair Value Measurements, for further discussion.
Nine Months Ended September 30, 2022, as compared with the Nine Months Ended September 30, 2021
Trucking revenue: The majority of Trucking revenue is derived from the USPS. The remainder of the revenue is derived from corporate freight hauling. The USPS contracts are typically four years in duration and include a monthly fuel adjustment. Trucking revenue was $222.8 million and $179.2 million during the nine months ended September 30, 2022 and 2021, respectively. The $43.6 million, or 24.3%, increase in Trucking revenue from the nine months ended September 30, 2021 to the nine months ended September 30, 2022 is primarily due to revenue from new USPS contracts, along with increased fuel surcharge revenue as a result of increased fuel prices.
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Other revenue: During the first quarter of 2021, the Company entered into agreements with the USPS to settle claims submitted by the Company seeking additional compensation for transportation services provided under certain DRO contracts. The Company received a total of $28.5 million related to these claims and also renegotiated the contractual rates per mile for some of its DRO contracts on a prospective basis. In addition, amounts totaling $6.3 million that were previously paid by the USPS to the Company during 2020 became subject to the terms of the settlement agreements and were recognized as a deferred gain as of December 2001 until November 22, 2016,31, 2020. The aforementioned amounts totaling $34.8 million were recognized as other revenue during the first quarter of 2021 in the consolidated statement of operations. Such amounts are for transportation services provided during 2020 and prior years, are not subject to refund, and are not contingent upon the Company providing future transportation services. Refer to Note 1, Description of Business and Summary of Significant Accounting Policies, for further discussion.
Payroll, benefits and related: Payroll, benefits and related includes total compensation of driver and non-driver. Included in driver compensation is an incremental hourly rate for benefits. Payroll, benefits and related expense was $97.5 million and $74.6 million during the nine months ended September 30, 2022 and 2021, respectively. The $22.9 million, or 30.7%, increase in payroll, benefits and related expense is primarily due to the 24.3% increase in Trucking revenue combined with an increase in use of employee drivers rather than subcontracted third-party company resources.
Purchased transportation: Purchased transportation represents payments to subcontracted third-party companies. These contracts are typically negotiated on a rate per mile basis and the subcontracting company is responsible for supplying all resources to perform the service including, but not limited to, labor, equipment, fuel and associated expenses. Purchased transportation expense was $30.7 million and $38.0 million during the nine months ended September 30, 2022 and 2021, respectively. The $7.3 million, or 19.2%, decrease in purchased transportation expense from the nine months ended September 30, 2021 to the nine months ended September 30, 2022 is primarily due to an increased use of employee drivers rather than subcontracted third-party company resources.
Fuel: Fuel expense is comprised of diesel, gasoline and CNG fuel required to operate the truck fleet. The Company manages fuel cost by negotiating volume discounts from rack fuel rates with select vendors. Fuel expense was $36.2 million and $19.1 million during the nine months ended September 30, 2022 and 2021, respectively. The 17.1 million, or 89.5%, increase in fuel expense is due primarily to the 24.3% increase in trucking revenue, 19.2% decrease in purchased transportation and an increase in the average DOE fuel price to $4.98 per gallon for the nine months ended September 30, 2022 from $3.15 per gallon for the nine months ended September 30, 2021.
Equipment rent: The Company rents and leases a portion of its trucks and trailers through a combination of short-term rental arrangements and long-term lease arrangements. Equipment rent expense was $11.7 million and $9.3 million during the nine months ended September 30, 2022 and 2021, respectively. The $2.4 million, or 25.8%, increase in equipment rent expense from the nine months ended September 30, 2021 to the nine months ended September 30, 2022 is primarily due to the need to service new USPS contracts by acquiring additional trucks and trailers via new leasing and rental arrangements.
Maintenance and Supplies: Maintenance and supplies expense primarily includes the costs to maintain the fleet. Maintenance and supplies expense was $11.5 million and $7.4 million during the nine months ended September 30, 2022 and 2021, respectively. The $4.1 million, or 55.4%, increase in maintenance and supplies expense from the nine months ended September 30, 2021 to the nine months ended September 30, 2022 is primarily due to an increase in the size of the fleet combined with increased maintenance costs for the existing fleet, which the Company is in process of refreshing with newer equipment.
Insurance and claims: Insurance and claims is comprised of auto liability and physical damage expense related to the trucking operations of the business. Insurance and claims expense was $4.8 million and $6.9 million during the nine months ended September 30, 2022 and 2021, respectively. The $2.1 million, or 30.4%, decrease in insurance and claims expense from the nine months ended September 30, 2021 to the nine months ended September 30, 2022 is primarily due to premium adjustments and fewer significant, nonrecurring claims.
Operating supplies and expenses: Operating and supplies expense includes all other direct costs in the trucking operations. Operating supplies and expenses was $10.5 million and $11.3 million during the nine months ended September 30, 2022 and 2021, respectively. The $0.8 million, or 7.1%, decrease in operating supplies and expenses from the nine months ended September 30, 2021 to the nine months ended September 30, 2022 is primarily due to more cost efficient completion of certain routes.
General and administrative: General and administrative expense was $14.7 million and $11.9 million for the nine months ended September 30, 2022 and 2021, respectively. The $2.8 million, or 23.5%, increase is primarily due to an increase in professional fees.
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Depreciation and amortization: Depreciation and amortization expense was $12.1 million and $11.4 million for the nine months ended September 30, 2022 and 2021, respectively. The increase is due to an increase in finance lease right-of-use asset amortization expense, partially offset by a decrease in depreciation expense.
Interest expense: Interest expense was $30.9 million and $9.7 million for the nine months ended September 30, 2022 and 2021, respectively. The $21.2 million, or 218.6%, increase in interest expense from the nine months ended September 30, 2021 to the nine months ended September 30, 2022 is primarily due to the Bridge Loan Agreement, dated March 11, 2022, whereby the Company borrowed $9 million from Antara Capital and granted Antara Capital 11,969,667 warrants to purchase EVO's common stock at an exercise price of $0.01 per share. Interest expense was $2.9 million in connection with the issuance of the warrants and the debt discount associated with the warrants was amortized to interest expense in the amount of $9.0 million for the nine months ended September 30, 2022. Also in connection with the Bridge Loan were finance fees of $1.6 million recorded to interest expense. Refer to Note 5, Debt, for further discussion. The increase is further due to the consummation of certain transactions involving the recapitalization of the company in September 2022, including the Company and its predecessor entity, Minn Shares Minnesota, did not engageAntara Capital entering into a Securities Purchase Agreement, dated September 8, 2022, whereby Antara Capital purchased from the Company 22,353,696 immediately exercisable warrants to purchase Company common stock at an exercise price of $0.0001 per share and an additional 319,213,143 warrants to purchase Company common stock at $0.0001 per share. The Company recorded a $7.7 million loss to interest expense in any business activities other thanconnection with the issuance of the warrants. Refer to Note 6, Temporary Equity, Stockholders’ Deficit and Warrants for further discussion.
Gain (loss) on extinguishment of debt: The $5.3 million loss on extinguishment of debt during the nine months ended September 30, 2022 is due to: (1) the $5.2 million loss on the extinguishment of the four promissory notes with an aggregate principal amount of $9.5 million as a result of the Convertible Note Amendments, dated March 11, 2022; and (2) the $0.2 million loss on extinguishment of the Batuta Secured Convertible Note. The $11.0 million gain on extinguishment of debt during the nine months ended September 30, 2021 is due to: (1) the $10.1 million gain on extinguishment of the outstanding principal and accrued interest on the Paycheck Protection Program Loan, which was forgiven by the SBA in July 2021; (2) the $2.5 million gain on the partial extinguishment of the $4.0 million Secured Convertible Promissory Notes during March and April 2021; and (3) the $1.7 million loss on extinguishment resulting from using all of the net proceeds from the Main Street Loan to pay down the aggregate principal amount due under the Financing Agreement (including capitalized interest) from $33.6 million to $16.7 million during the first quarter of 2021.
Change in fair value of embedded derivative liability: The Financing Agreement contains a mandatory prepayment feature that was determined to be an embedded derivative, requiring bifurcation and fair value recognition for the purposederivative liability. The fair value of collectingthis derivative liability is remeasured at each reporting period, with changes in fair value recognized in the consolidated statement of operations. Refer to Note 5, Debt, and distributing its assets, paying, satisfyingNote 8, Fair Value Measurements, for further discussion.
Change in fair value of warrant liabilities: EVO previously issued certain warrants that are not considered indexed to EVO's common stock and, discharging any existing debts and obligations and doing other actstherefore, are required to liquidatebe classified as liabilities and wind up its businessmeasured at fair value at each reporting date with the change in fair value being recognized in the Company's results of operations during each reporting period. The change in fair value of substantially all of the warrants classified as liabilities is recognized in other income (expense). Refer to Note 6, Stockholders' Deficit and affairs.Warrants, and Note 8, Fair Value Measurements, for further discussion.
Liquidity and Capital Resources
Changes in Liquidity
Cash and Cash Equivalents. Cash and cash equivalents were $15.5 million and $6.3 million at September 30, 2022 and December 31, 2021, respectively. The business purpose of EVO Inc.increase is primarily attributable to cash provided by operating activities, and financing activities during the nine months ended September 30, 2022.
Operating Activities. Net cash provided by operating activities was to seek$5.8 million during the acquisition of or merger with an existing company.
Securities Exchanges with Titan CNG and Environmental Alternative Fuels, LLC
On November 22, 2016,nine months ended September 30, 2022. Net cash provided by operating activities was $10.0 million during the nine months ended September 30, 2021. For the nine months ended September 30, 2022, the Company Titan CNG LLC (“Titan”)had a net loss of $17.9 million. For the nine months ended September 30, 2021, the Company had net income of $27.4 million.
For the nine months ended September 30, 2022, the net loss included $19.8 million in adjustments for non-cash items and $3.8 million of cash provided for changes in working capital. Non-cash items primarily consisted of $12.1 million in depreciation and amortization, $14.1 million in non-cash interest expense, non-cash lease expense of $2.9 million, amortization of debt discount and debt issuance costs of $10.1 million, a loss on extinguishment of debt of $5.3 million, bad debt expense of $0.5 million, and a $25.3 million change in fair value of warrant liabilities.
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For the membersnine months ended September 30, 2021, the net income included $5.9 million in adjustments for non-cash items and $23.3 million of Titancash used for changes in working capital. Non-cash items primarily consisted of $11.4 million in depreciation and amortization, $4.8 million in non-cash interest expense, non-cash lease expense of $2.9 million, stock-based compensation expense of $0.5 million, and amortization of debt discount and debt issuance costs of $0.8 million, partially offset by a gain on extinguishment of debt of $11.0 million, a $2.2 million change in fair value of warrant liabilities, and a $1.4 million change in fair value of embedded derivative liability.
Investing Activities. Net cash used in investing activities was $0 million for the nine months ended September 30, 2022, and net cash used in investing activities was $6.8 million for the nine months ended September 30, 2021. The net cash used in investing activities during the nine months ended September 30, 2021 is primarily related to $7.1 million of capital expenditures.
Financing Activities. Net cash provided by financing activities was $3.4 million for the nine months ended September 30, 2022. Net cash used in financing activities was $23.1 million for the nine months ended September 30, 2021. The cash provided by financing activities during the nine months ended September 30, 2022 primarily consisted of $181.4 million in advances from factoring receivables, $9.6 million of proceeds from the issuance of debt, and $13.6 million of proceeds from the issuance of warrants, partially offset by $191.0 million in payments on factoring arrangements, $3.8 million in payments of debt principal, and $6.0 million in payments on finance lease liabilities. The cash used in financing activities during the nine months ended September 30, 2021 primarily consisted of $149.5 million in payments on factoring arrangements, $22.8 million in payments of debt principal, and $3.1 million in payments on finance lease liabilities, partially offset by $147.2 million in advances from factoring receivables and $5.7 million of proceeds from the issuance of debt.
Sources of Liquidity
Our primary historical and future sources of liquidity are cash on hand ($15.5 million at September 30, 2022), the incurrence of additional indebtedness, the sale of EVO’s common stock or preferred stock, and advances under our accounts receivable factoring arrangements. However, there can be no assurance that we will be able to obtain additional financing in the future via the incurrence of additional indebtedness or the sale of EVO’s common stock or preferred stock.
Uses of Liquidity
Our business requires substantial amounts of cash for operating activities, including salaries and wages paid to our employees, contract payments to independent contractors, and payments for fuel, maintenance and supplies, and other expenses. We also use large amounts of cash and credit for principal and interest payments, as well as operating and finance lease liabilities and capital expenditures to fund the replacement and/or growth in our tractor and trailer fleet.
Going Concern
As of September 30, 2022, the Company had a cash balance of $15.5 million, a working capital deficit of $88.6 million, stockholders’ deficit of $36.0 million, and material debt and lease obligations of $101.7 million, which include term loan borrowings under a financing agreement with Antara Capital. During the nine months ended September 30, 2022, the Company reported cash provided by operating activities of $5.8 million and a net loss of $17.9 million.
The following significant transactions and events affecting the Company’s liquidity occurred during the nine months ended September 30, 2022:
On February 1, 2017, the Company, Environmental Alternative Fuels, LLC, a Delaware limited liability company (“EAF”), EVO CNG, LLC, a Delaware limited liability company and a wholly-owned subsidiary of EAF (“EVO CNG”), and Danny R. Cuzick (“Danny Cuzick”),chief executive officer, Damon R. Cuzick, (“Damon Cuzick”)EVO's former chief operating officer, Bridgewest Growth Fund LLC, an entity affiliated with Billy (Trey) Peck Jr., Theril H. LundEVO's executive vice president - business development, and Thomas J. Kiley (togetherBatuta Capital Advisors LLC ("Batuta" and together with DannyMr. Abood, Mr. Cuzick, and Damon Cuzick,Bridgewest Growth Fund LLC, the “EAF Members”"Executive Lenders") consummated the transactions contemplated by that certain Agreement and Plan, an entity affiliated with Alexandre Zyngier, a member of Securities Exchange dated January 11, 2017EVO's board of directors (the “EAF Exchange Agreement”“Board”). Pursuant to the EAF ExchangeBridge Loan Agreement, EVO obtained a bridge loan in the Company acquired allamount of the membership interests in EAF$9.0 million (the “EAF Interests”"Bridge Loan") from Antara Capital and also borrowed $0.8 million (the "Executive Loans") from the EAF Members. EAF, together withExecutive Lenders. Refer to Note 5,
The transactions contemplated by the EAF Exchange Agreement were accounted for as an acquisition. Because the EVO, Inc. stockholders continued to own all of the outstanding shares of Common Stock on completion of the transactions contemplated by the EAF Exchange Agreement, management determined that EVO Inc. was the accounting acquirer in the EAF transaction. However, because the Convertible Notes issued as consideration pursuant to the EAF ExchangeBridge Loan Agreement, could convertEVO filed a Certificate of Designations of Series C Non-Participating Preferred Stock (the "Series C Certificate of Designations") with the Secretary of State of the State of
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Under the Series C Certificate of Designations, prior to a payment default under the Bridge Loan (a "Bridge Loan Triggering Event") and following the date on which all principal and accrued interest (including default interest) payable under the Bridge Loan has been paid-in-full (the date of such payment-in-full, the "Bridge Loan Discharge Date"), the holder of Series C Preferred Stock will have no voting rights except as otherwise required by law. Under the Series C Certificate of Designations, upon the occurrence of a Bridge Loan Triggering Event through and including the Bridge Loan Discharge Date, the holder of Series C Preferred Stock will vote together with the holders of EVO's common stock as a single class on any matter presented to the holders of EVO's common stock for their action or consideration at any meeting of stockholders of EVO (or by written consent of stockholders in lieu of meeting) or on which such holders of common stock are otherwise entitled to act (each, a "Series C Shareholder Matter"), and the holder of Series C Preferred Stock will be entitled to cast a number of votes on any Series C Shareholder Matter equal to the total number of votes of all non-holders of Series C Preferred Stock entitled to vote on any such Series C Shareholder Matter plus 10. In addition, the Series C Certificate of Designations provides that governance mechanisms that could have the effect of limiting, reducing or adversely affecting the Series C Preferred Stockholders’ voting or board-appointment rights under the Series C Certificate of Designations will require the consent of the holders holding majority of the issued and outstanding Commonshares of Series C (the “Series C Majority”).
In addition, the Series C Certificate of Designations grants the Series C Majority the exclusive right, voting separately as a class, to elect or appoint (i) prior to a Bridge Loan Triggering Event, one director to the Board (who shall, unless the majority of the Series C Preferred Stock management will continue to evaluateelects otherwise in its sole discretion, also serve as a member of each Board committee) and (ii) upon the accounting treatment foroccurrence of a Bridge Loan Triggering Event through and including the EAF transaction.Bridge Loan Discharge Date, a majority of the members of the Board.
Effective August 31, 2017,
The following discussion highlights our planSecretary of operations and the principal factors that have affected our financial condition as well as our liquidity and capital resources for the periods described. This discussion contains forward-looking statements. The following discussion and analysis are based on Titan’s financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. You should read the discussion and analysis together with such financial statements and the related notes thereto.
The following discussion and analysis provides information which management believes is relevant for an assessment and understanding of the statements of financial condition and results of operations presented herein. The discussion should be read in conjunction with our audited financial statements and related notes and the other financial information included elsewhere in this Annual Report.
General Overview
The Company is a holding company for two operating subsidiaries, Titan and EAF, that acquire, build and operate public and private compressed natural gas (“CNG”) fueling stations. Titan was formed in July 2012 and is the parent company of the wholly owned subsidiaries Titan Blaine, LLC (“Blaine”), formed in 2015, Titan Diamond Bar LLC (“Diamond Bar”), formed in 2015, and Titan El Toro LLC (“El Toro”), which was formed in 2013 and fully acquired by the Company in 2016. Titan is a natural gas vehicle (“NGV”) fueling company based in Peoria, Arizona. Titan was established to take advantage of the growing U.S. demand for natural gas as a vehicle fuel source. During February 2015 Titan opened its first station, Titan El Toro, in Lake Forest, California. In March 2016 Titan assumed ownership of a CNG station from the State of California South Coast Air Quality Management District (“SCAQMD”) in Diamond Bar, California. We intend to upgrade the capability of this facility and expand it beyond its current client base. We are also investing in the construction and operation of a private station for Walters Recycling & Refuse, Inc. in Blaine, Minnesota.
EAF was originally organized on March 28, 2012 under the name “Clean-n-Green Alternative Fuels, LLC” in the State of Delaware. Effective May 1, 2012, EAF changed its name to “Environmental Alternative Fuels, LLC.” EVO CNG, EAF’s wholly owned subsidiary, was originally organized in the State of Delaware on April 1, 2013a Certificate of Designations to evidence the issuance of a new series of Series D Non-Participating Preferred Stock, $0.0001 par value, that will, upon issuance, entitle Antara Capital (in its capacity as sole holder of the Series D Non-Participating Preferred Stock) to vote such number of votes per share that will allow Antara Capital to exercise 51% of the voting capital stock of EVO.
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The issuance of one share of Series D Non-Participating Preferred Stock to Antara Capital on July 13, 2022 resulted in a change of control of the Company, with Antara Capital having voting control on Series D Shareholder Matters. The consideration for the issuance of Series D Non-Participating Preferred Stock to Antara Capital was Antara Capital's agreement to enter into the Third Extension Agreement, and the Company did not receive any cash consideration.
In evaluating the Company’s ability to continue as a going concern and its namepotential need to “EVO CNG, LLC” effective March 1, 2016. Together, EAF and EVO CNG operate six compressed natural gas fueling stations located in California, Texas, Arizona and Wisconsin.seek additional financing from outside sources, management also considered the following conditions:
Going Concern
As a successful secondary offering beforeresult of the December 31, 2017 due date. As of September 30, 2017,circumstances described above, the Company has a workingmay not have sufficient liquidity to make the required payments on its debt, factoring or leasing obligations; to satisfy future operating expenses; to make capital deficitexpenditures; or to provide for other cash needs.
Management’s plans to mitigate the Company’s current conditions include:
Notwithstanding management’s plans, there can be no assurance that the Company will be successful in these efforts.
The unaudited financial statements included with this report were prepared assuming thatits efforts to address its current liquidity and capital resource constraints. These conditions raise substantial doubt about the Company willCompany's ability to continue as a going concern; however,concern for the above conditions raise doubt aboutnext 12 months from the Company’s ability to do so.issuance of these consolidated financial statements. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result shouldif the Company beis unable to continue as a going concern.
Sources of Revenue48
Titan was founded in 2012Refer to Notes 4 and 5 to the unaudited condensed consolidated financial statements for further information regarding the first four years only had management fee revenues. Beginning in 2016 Titan generated revenues from its CNG stations El ToroCompany’s factoring and Diamond Bar, and withdebt obligations. Refer to Note 12, Subsequent Events, to the acquisition of EAF the Company generated revenue from six stations beginning February 2017. As of June 30, 2017, our El Toro station has ceased operations.
Investments in Affiliates
Titan was invested in an affiliate through January 1, 2016. The investment was recorded using the equity method of accounting with Titan’s proportionate share of net income or loss of the investee included as a separate line itemconsolidated financial statements for further information regarding changes in the statements of operation. The Company ordinarily would discontinue applying the equity method once the investment (and net advances) were reduced to zero, however Titan was committed to provide further financial support for the investeeCompany’s debt obligations and through the guarantee of substantially all the assets of the Company by a Small Business Administration (“SBA”) note. The affiliate was the following:
Key Trends
In general, CNG has become the primary alternative fueling choice for truck and bus fleets operating in the $134 billion fleet fueling market. Natural gas is sold on a gas gallon equivalent (“GGE”) basis and as of January 2017 was selling at an average price nationally of approximately $2.11 per GGE versus average prices of gasoline and diesel of $2.32 and $2.58 per gallon, respectively. We expect this price advantage to remain intact for the foreseeable future, which creates a strong economic incentive for vehicle operators to switch to CNG. In addition, CNG is a significantly cleaner fuel than is gasoline or diesel. With increased focus on the environment, the benefits from natural gas powered vehicles have an immediate positive impact on the issues of air quality, U.S. energy security and public health. Using renewable CNG can result in greater than 95% less greenhouse gases than traditional petroleum products. And because CNG fuel systems are completely sealed, CNG vehicles produce no evaporative emissions, which are a common hazard when using liquid fuel. Also, CNG creates less engine wear, thereby making its use even more desirable. As of October 2016, there are fewer than 1,000 public CNG stations in the United States, compared to over 124,000 gasoline stations across the country. According to the U.S. Energy Information Administration, demand for natural gas fuels in the United States increased by approximately 45% during the period from January 1, 2012 through December 31, 2015, with the number of total CNG stations growing at a compound annual growth rate of 14% since 2009.
During 2016 and 2017, lower oil prices decreased the pricing advantage of CNG compared to diesel and gasoline. As a result, the adoption of natural gas as a fuel choice for fleets has slowed relative to previous periods, especially amongst smaller fleets. However, this impact is partially offset by a general decrease in the cost of natural gas as well as ongoing adoption of new CNG trucks by larger fleets. In addition, public companies and municipalities in particular are continuing to adopt the use of CNG as a vehicle fuel source for environmental reasons.
The natural gas vehicle industry is the beneficiary of federal and state incentives promoting the use of natural gas as a vehicle fuel choice. Titan received $450,000 of state grants to assist in the development of our El Toro station which was completed for approximately $2 million. In addition, through December 31, 2016 we received a $0.50 per GGE federal tax credit for each GGE sold. In some cases, we share this credit with our customers.
Recent Developments
On January 1, 2016, Titan exchanged ownership and $876,000 in debt and interest for an additional 80% ownership in Titan El Toro, LLC. As a result, Titan now owns 100% of El Toro. With the combination, the debt and interest were converted to notes payable issued by Titan at 12% interest and mature in December 2020.
On January 1, 2016, Titan issued eight subordinated notes payable to members (the “Junior Bridge Notes”) with a maturity date of December 31, 2020 for approximately $876,000, as well as 64,387 (equivalent to 56,608 common shares) Class A Membership Units in Titan. Titan issued an additional Junior Bridge Note on January 1, 2016 for approximately $99,000 to evidence pre-existing indebtedness. The Junior Bridge Notes bear interest at 12% per year with a default rate of 15% per year. The Junior Bridge Notes are secured by a subordinate security interest on substantially all assets of Titan. On October 1, 2017, the Company converted the eight Junior Bridge Notes and related interest totaling $1,363,858 into common stock at a price per share of $5.00 for a total of 272,777 shares.
On February 29, 2016, Titan issued five promissory notes payable to members (the “Senior Bridge Notes”) with an original maturity date of June 28, 2016 for approximately $672,000, as well as 14,762 (equivalent to 18,806 common shares) Class A Membership Units. The Senior Bridge Notes originally bore interest at 12% per year with a default interest rate of 15% per year. Two of the Senior Bridge Notes were originally long-term debt of Titan outstanding at December 31, 2015, and converted into Senior Bridge Notes. In the event of a default under the Senior Bridge Notes, Titan is required to pay the holder a stated number of Class A Membership Units on the date of default and each 90 day interval thereafter until all amounts due have been paid in full. Effective July 2016, the maturity date of the Senior Bridge Notes was extendedliquidity subsequent to September 30, 2016,2022.
Off-Balance Sheet Arrangements
Refer to Note 10, Commitments and effective March 14, 2016, the interest rate was increased from 12% to 16%. The default interest rate was increased from 15% to 18%. As part of that first amendment, the note holders received 3,359 (equivalent to 2,953 common shares) Class A Membership Units in Titan. In September 2016, the Senior Bridge Notes were amended to extend the maturity date to January 31, 2017, and Titan paid a fee for the extension of 1% of the outstanding principal balance to the note holders. The Company subsequently extended the maturity date of the notes to October 31, 2017. The Company paid a fee of 1% of the outstanding principal balance on the notes on or around each of January 31, 2017, April 30, 2017, and July 31, 2017 to extend the maturity date of the notes. The notes are secured by a subordinate security interest on substantially all of the Company’s assets and are personally guaranteed by Scott Honour and Kirk Honour. The Senior Bridge Notes wereContingencies – Captive Insurance.
Critical Accounting Policies
Our critical accounting policies have not extended at the maturity. However, the Company is in negotiations with the noteholders to extend the maturity date of the notes.
On July 26, 2016, Titan issued an additional Senior Bridge Note for $200,000 with 16% interest and an original maturity date of October 2016. In September 2016, this Senior Bridge Note was amended to extend the maturity date to January 31, 2017, and Titan paid a fee for the extension of 1% of the outstanding principal balance to the note holder. The Company paid a 1% fee on or around each of January 31, 2017, April 30, 2017, and July 31, 2017 to extend the due date of this Senior Bridge Note to October 31, 2017. In the event of default the holder is entitled to receive 1,000 (equivalent to 879 common shares) Class A Membership Units. Titan issued 5,000 (equivalent to 4,395 common shares) Class A Membership Units to this noteholder in connection with the issuance of this Senior Bridge Note. The Senior Bridge Notes were not extended at the maturity. However, the Company is in negotiations with the noteholders to extend the maturity date of the notes.
On September 26, 2016, Titan issued an additional Senior Bridge Note for $150,000 with 16% interest and an original maturity date of January 2017. Titan issued 3,750 (equivalent to 3,297 common shares) Class A Membership Units to this noteholder in connection with the issuance of this Senior Bridge Note and received the proceeds from this note in October 2016. Subsequent to March 31, 2017, the Company paid a 1% fee to extend the maturity date of this note to July 31, 2017 and paid an additional 1% fee to extend the maturity date to October 31, 2017. In the event of default the holder of this Senior Bridge Note is entitled to receive 750 (equivalent to 659 common shares) Class A Membership Units. The Senior Bridge Notes were not extended at the maturity. However, the Company is in negotiations with the noteholders to extend the maturity date of the notes.
On November 22, 2016, Titan issued three convertible promissory notes (the “Minn Shares Notes”) in the aggregate principal amount of $405,103 to Joseph H. Whitney, The Globe Resources Group, LLC and Richard E. Gilbert. The Minn Shares Notes bear interest at the rate of 12% per annum and mature in November 2019 unless earlier converted. Each Minn Shares Note is convertible at the holder’s option as follows: (i) upon the sale by the Company of not less than $7,500,000 of its equity securities at a conversion price equal to the price per security issued in such offering, (ii) upon a corporate transaction such as a merger, consolidation or asset sale involving either the sale of all or substantially all of the the Company’s assets or the transfer of at least 50% of the Company’s equity securities at a conversion price equal to the enterprise value of the Company, as established by the consideration payable in the corporate transaction or (iii) on or after the maturity date at a conversion price equal to the quotient of $20 million divided by the number of shares of the Company’s Common Stock outstanding on a fully diluted basis. The Minn Shares Notes are subject to mandatory conversion upon the conversion into equity securities of the Junior Bridge Notes and Senior Bridge Notes upon the same conversion terms as the Junior Bridge Notes and Senior Bridge Notes.
On January 31, 2017, Titan issued an additional Senior Bridge Note in the principal amount of $400,000. This Senior Bridge Note bears interest at 16% per year with a default interest rate of 18% per year and matures on April 30, 2017. In the event of a default under this Senior Bridge Note, the Company is required to issue 1,758 shares of Common Stock to the holder on the date of default and each 90 day interval thereafter until all amounts due have been paid in full. This Senior Bridge Note is secured by a subordinate security interest on substantially all of the Company’s assets. In connection with this Senior Bridge Note, on January 31, 2017, the Company issued 8,792 shares of Common Stock. Subsequent to March 31, 2017, the Company paid a 1% fee to extend the maturity date of this note to July 31, 2017 and paid an additional 1% fee to extend the maturity date to October 31, 2017. The Senior Bridge Notes were not extended at the maturity. However, the Company is in negotiations with the noteholders to extend the maturity date of the notes.
On February 1, 2017, pursuant to the EAF Exchange Agreement, the Company acquired all of the membership interests of EAF. As consideration for the EAF Interests, EVO, Inc. issued a promissory note in the principal amount of $3.8 million to Danny Cuzick (the “Senior Promissory Note”) and convertible promissory notes in the aggregate principal amount of $9.5 million to the EAF Members (the “Convertible Notes”). The Senior Promissory Note bears interest at 7.5% per year with a default interest rate of 12.5% per year and has a maturity date of the earlier of (a) the date that is ten days after the initial closing of a private offering of capital stock of EVO, Inc. in an amount not less than $10 million (a “Private Offering”); (b) December 31, 2017 and (c) declaration by Danny Cuzick of an event of default under the Senior Promissory Note. The Convertible Notes bear interest at 1.5% per year and have a maturity date of February 1, 2026.
The Convertible Notes are convertible into 1,400,000 shares (the “Transaction Shares”) of EVO, Inc.’s Common Stock, subject to adjustment for any stock splits, combinations or similar transactions, representing approximately 81.1% of EVO Inc.’s total outstanding shares of Common Stock on a post-transaction basis. Accordingly, the conversion of the Convertible Notes would result in a change in control of EVO Inc. The number of Transaction Shares will be increased to equal 70% of the issued and outstanding Common Stock if the issuance of Common Stock pursuant to a private offering of Common Stock of up to $2 million and the conversion of Minn Shares’ and Titan’s junior bridge notes, senior bridge notes, convertible promissory notes, and certain accounts payable into Common Stock would otherwise cause the Transaction Shares to represent less than 70% of the issued and outstanding Common Stock. Pursuant to the terms of the EAF Exchange Agreement, the EAF Members are entitled to demand registration rights and piggyback registration rights with respect to the Transaction Shares upon customary terms, limitations, exceptions and conditions. The Convertible Notes are secured by all of the assets of EAF and the EAF Interests, which EVO, Inc. pledged to the EAF Members as security for the Convertible Notes.
Each Convertible Note is convertible at the applicable holder’s option beginning on the first anniversary of the date of issuance of the Convertible Notes, including at any time within 90 days after the holder’s receipt of notice of consummation of (1) a reorganization, merger or similar transaction where EVO Inc. is not the surviving or resulting entity or (2) the sale of all or substantially all of EVO, Inc.’s assets, subject to customary restrictions. Each holder’s conversion option is subject to a monthly limit of the number of shares of Common Stock equal to 10% of the thirty day average trading volume of shares of Common Stock during the prior calendar month. The Convertible Notes are also subject to mandatory conversion at EVO, Inc.’s option beginning on the first anniversary of the date of issuance of the Convertible Notes if: (i) the closing price of the Common Stock is greater than (A) 150% of the price at which a share of Common Stock is sold in a Private Offering or (B) $10.00 if a Private Offering has not occurred by December 31, 2017 and (ii) the average daily trading volume of shares of Common Stock has equaled 100,000 or more for the 30 days prior to the applicable date. Upon a conversion of the Convertible Notes, accrued interest may also be converted at the greater of (i) the amount of interest to be converted divided by the exchange ratio of 0.1357, subject to adjustment for stock splits or combinations, or (ii) the amount of interest to be converted divided by the closing price of the Common Stock on the trading day preceding the conversion date.
In connection with the closing of the EAF Exchange Agreement, on February 1, 2017, EVO, Inc. issued promissory notes to the EAF Members in the aggregate principal amount of $250,000 that bear interest at 6% per annum with a default rate of 11% per annum and a maturity date of the earlier of (a) the closing of a Private Offering; (b) 180 dayschanged from the date of the notes and (c) declaration by a holder of an event of default under the holder’s note. The promissory notes were not extended at the maturity. However, the Company is in negotiations with the noteholders to extend the maturity date of the notes.
In connection with the closing of the EAF Exchange Agreement, on February 1, 2017, EVO, Inc. guaranteed a note from Danny Cuzick to EAF dated January 30, 2017 in the principal amount of $4 million (the “EAF Note”). The EAF Note is secured by all assets of EAF and is guaranteed by EAF. The EAF Note bears interest at 7.5% per annum with a default rate of 12.5% per annum and has a maturity date of the earlier of (a) February 1, 2020 and (b) declaration by Danny Cuzick of an event of default under the EAF Note.
On April 6, 2017, the Company effected a 50-for-1 reverse stock split of its common stock pursuant to which each 50 shares of issued and outstanding common stock became one share of common stock (the “Reverse Split”). No fractional shares were issued as a result of the Reverse Split. All references to numbers of shares of common stock and per share amounts give retroactive effect to the Reverse Split for all periods presented.
Anticipated Future Trends
Although natural gas continues to be less expensive than gasoline and diesel in most markets, the price of natural gas has been significantly closer to the prices of gasoline and diesel in recent years as a result of declining oil prices, thereby reducing the price advantage of natural gas as a vehicle fuel. We anticipate that, over the long term, the prices for gasoline and diesel will continue to be higher than the price of natural gas as a vehicle fuel and will increase overall, which would improve the cost savings of natural gas as a vehicle fuel compared to diesel and gasoline. However, the amount of time needed for oil prices to recover from their recent decline is uncertain and we expect that adoption of natural gas as a vehicle fuel, growthinformation reported in our customer base and gross revenue will be negatively affected until oil prices increase and this price advantage increases. Our belief that natural gas will continue, over the long term, to be a cheaper vehicle fuel than gasoline or diesel is based in large partAnnual Report on the growth in United States natural gas production in recent years.
We believe natural gas fuels are well-suited for use by vehicle fleets that consume high volumes of fuel, refuel at centralized locations or along well-defined routes and/or are increasingly required to reduce emissions. As a result, we believe there will be growth in the consumption of natural gas as a vehicle fuel among vehicle fleets, and our goal is to capitalize on this trend, if and to the extent it materializes, and to enhance our leadership position in these markets. Our business plan calls for expanding our sales of natural gas fuels in the markets in which we operate, including heavy-duty trucking, waste haulers, airports, public transit, industrial and institutional energy users and government fleets, and pursuing additional markets as opportunities arise. If our business grows as we anticipate, our operating costs and capital expenditures may increase, primarily from the anticipated expansion of our station network, as well as the logistics of delivering natural gas fuel to our customers on-site.
We expect competition in the market for natural gas vehicle fuel to remain steady in the near-term. To the extent competition increases, we would be subject to greater pricing pressure, reduced operating margins and potentially fewer expansion opportunities.
Sources of Liquidity and Anticipated Capital Expenditures and Other Uses of Cash
Historically, our principal sources of liquidity have consisted of cash on hand, cash provided by financing activities, and cash provided by investors. We have recently begun to generate positive cash flow from our Diamond Bar station, which is offset by negative cash flow at our El Toro station. As of June 30, 2017, El Toro ceased operations, and we do not anticipate any future cash flow from our El Toro station. The Company has evaluated El Toro’s assets for impairment and determined an impairment of $679,535. The Company intends to redeploy or sell the assets for an amount equal to or greater than book value.
Our business plan calls for approximately $2,000,000 in additional capital expenditures for 2017, primarily related to the construction and refurbishing of CNG fueling stations and potential acquisitions. Additionally, of our total indebtedness of approximately $17,668,000 as of September 30, 2017, approximately $6,600,000 is classified as current debt. We are in violation of certain covenants related to the SBA loan. We received a waiver with respect to those covenant violationsForm 10-K for the year ended December 31, 2016, but have not received a waiver for current violations of those covenants as of September 30, 2017 and through the date of filing of this Form 10-Q. The subordinated senior notes payable to members were due on October 31, 2017. The notes payable were not extended at the maturity. However, the Company is in negotiations with the noteholders to extend the maturity date of the notes. Our total consolidated interest payment obligations relating to our indebtedness was approximately $661,000 for the nine months ended September 30, 2017.2021.
We may also elect to invest additional amounts in companies, assets or joint ventures in the natural gas fueling infrastructure, vehicle or services industries, or use capital for other activities or pursuits. We will need to raise additional capital to fund any capital expenditures, investments or debt repayments that we cannot fund through available cash or cash generated by operations or that we cannot fund through other sources, such as with the sale of our stock. We may not be able to raise capital when needed on terms that are favorable to us, or at all. Any inability to raise capital may impair our ability to build new stations, develop natural gas fueling infrastructure, invest in strategic transactions or acquisitions or repay our outstanding indebtedness and may reduce our ability to grow our business and generate sustained or increased revenues. See “Liquidity and Capital Resources” below.
Business Risks and Uncertainties
Our business and prospects are exposed to numerous risks and uncertainties. For more information, see “Risk Factors – Risks Related to the Company” and “Risk Factors – Risks Related to the CNG Industry.”
Results from Operations
Three months ended September 30, 2017 as compared with the three months ended September 30, 2016
Revenue.Titan continues to devote substantially all of its efforts on establishing the business and has not generated significant revenues from the core business – to build and operate public and private CNG filling stations under the Titan NGV Fueling brand. El Toro revenue for the three months ended June 30, 2017 and 2016 was $35,460 and $34,296, respectively. El Toro’s quarter three revenue was from the sale of Low Carbon Fuel credits (“LCFS”).LCFS is a rule enacted to reduce carbon intensity in transportation fuels as compared to petroleum fuels, such as gasoline and diesel. The most common low-carbon fuels are alternative fuels and cleaner fossil fuels, such as natural gas (CNG), with California the first state to mandate low-carbon fuel. The Company generated fuel credits with the sale of CNG and is allowed to sell them to conventional users of fuel to meet the California standards. Diamond Bar revenue for the three months ended September 2017 and 2016 was $51,641 and $41,572, respectively. The increase between years is from station downtime for repairs and maintenance during 2016.
Cost of goods sold. Cost of goods sold are comprised of natural gas, electricity, federal excise tax, vendor use fuel tax and credit cards fees. The margin at El Toro for the three months ending September 30, 2016 was approximately 26%, with the margin at Diamond Bar for the three months ending September 30, 2017 and 2016 approximating 3% and 53%. The difference in margins between stations in 2016 is attributable to the electricity expense. El Toro pays for demand electricity in order to turn on the equipment immediately, which adds additional expense to the cost of goods sold. At Diamond Bar the demand feature is not required. In addition, the electricity at Diamond Bar is less expensive because it is purchased directly from SCAQMD, as defined by the lease agreement. Diamond Bar cost of goods in 2016 did not reflect approximately $9,000 in electricity expense from July and the 2017 quarter three electrical expense included expenses from the prior quarter.
Operating expenses.Operating expenses increased for the three months ended September 30, 2017 from the three months ended September 30, 2016 by approximately $680,00 from the impairment of fixed assets and were offset by lower professional fees related to the Company going public in the third quarter of 2016.
Interest expense.Interest expense increased between the three months ended September 30, 2017 and 2016 due to the addition of total related-party debt of over $13,550,000, for which interest expense of approximately $215,000 was due to related parties and approximately $15,000 was paid on the SBA loan.
Nine months ended September 30, 2017 as compared with the nine months ended September 30, 2016.
Revenue.Titan continues to devote substantially all of its efforts on establishing the business and has not generated significant revenues from the core business – to build and operate public and private CNG filling stations under the Titan NGV Fueling brand. With the addition of EVO we had revenues for the nine months ended September 30, 2017 of approximately $1,693,000, with about $1,423,000 generated from EVO. El Toro and Diamond Bar revenues were $270,000 and $295,000 for the nine months ended June 30, 2017 and 2016, respectively.
For the nine months ended September 30, 2016, the Company recognized revenue of $60,263 from volumetric excise tax credit. The tax credit has not been renewed for 2017.
Cost of goods sold. Cost of goods sold are comprised of natural gas, electricity, federal excise tax, vendor use fuel tax and credit cards fees. The margin at El Toro is at approximately 45%, with the margin at Diamond Bar approximating 33%. The difference in margins is attributable to the electricity expense. Diamond Bar recognized approximately $10,000 in electricity expense from 2016 in 2017. In, addition Diamond Bar has been down for maintenance more in 2017 than 2016. EVO’s margin is approximately 50% which is attributable to little down time for station maintenance, the stations are open 24/7 and the price of natural gas has been depressed in 2017.
Operating expenses.Operating expenses increased for the nine months ended September 30, 2017 from the nine months ended September 30, 2016 from approximately $1,300,000 to approximately $2,500,000. The increase is from EVO expenses of $423,000, additional depreciation from EVO assets and amortization of intangibles connected to the EVO acquisition and $680,000 loss on impairment of fixed assets. The increase in the aforementioned expenses was offset by a decrease in professional fees. During 2016 there was a spike in legal and accounting fees related to the Company going public.
Interest expense.Interest expense increased between the nine months ended September 30, 2017 and 2016 due to the addition of total debt of $13,550,000, for which interest expense of approximately $670,000 was due to related parties and approximately $45,000 was paid on the SBA loan.
Loss on acquisition of El Toro. As of January 1, 2016 Titan acquired the remaining 80% of El Toro. As a result of this acquisition, a loss of $717,011 on the deficit acquired from El Toro was recorded.
Nine months ended September 30, 2017 as compared with the nine months ended September 30, 2016
We had cash and cash equivalents of $90,768 and $29,712 at September 30, 2017 and 2016, respectively. During the nine months ended September 30, 2017 and 2016, net cash used in operations was ($487,403) and ($554,466), respectively. We historically funded our operating losses primarily from the issuance of equity, convertible notes payable, member debt and SBA debt.
Changes in Liquidity
Cash and Cash Equivalents. Cash and cash equivalents were $90,768 at September 30, 2017 and $29,712 at September 30, 2016. The increase is primarily attributable to the issuance of equity and notes payable during 2017.
Operating Activities. Net cash used in operations was ($487,403) and ($554,466) as of September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, we had net losses of ($2,584,782) and ($2,076,672), respectively. Significant changes in working capital during these periods included:
Investing Activities. Net cash used in investing was $144,827. The cash was used to purchase construction in progress assets during 2017. The net cash used in the nine months ended September 2016 were from a combination of cash from acquisition and from assets placed into service for total cash used in investing of $98,146.
Financing Activities. Net cash provided by financing activities was $698,054 and $681,966 for the nine months ended September 30, 2017 and 2016, respectively. The cash provided by financing activities in 2017 was from $400,000 in subordinated notes payable, $310,000 from the purchase of common stock and $70,258 from stockholders advances offset by $70,519 in principal payments on the SBA loan and $11,685 in payments on the related party promissory note. The cash provided by financing activities in 2016 was generated from $850,000 subordinated notes payable, offset by a $150,000 payment on the line-of-credit, $75,520 principal payments on the SBA loan and advances from stockholders of $35,500.
Our future liquidity and capital requirements will be influenced by numerous factors, including the extent and duration of future operating losses, the level and timing of future sales and expenditures, working capital required to support our sales growth, the level of our outstanding indebtedness and principal and interest we are obligated to pay on our indebtedness, our capital expenditure requirements (which consist primarily of station construction), the continuing acceptance of our product in the marketplace, competing technologies, market and regulatory developments, ongoing facility requirements, and potential strategic transactions.
Debt Compliance
We have previously been and are out of compliance with technical covenants with our SBA Loan. We received a waiver to remedy the technical non-compliance under our SBA Loan for the year ended December 31, 2016, but have not received a waiver for current non-compliance as of September 30, 2017 and through the date of filing of this Form 10-Q. We expect to refinance the SBA Loan in the near term.
Existing Indebtedness
On December 31, 2014, Titan entered into a co-borrower arrangement for a $1,300,000 U.S. Small Business Administration (SBA) note with El Toro. The proceeds from the note were received by El Toro and the note payable is recorded by El Toro. The note is a ten year term note with interest fixed at 5.50% for the first five years, then adjusted to the SBA LIBOR Base Rate, plus 2.35% for the remaining five years. The note requires monthly principal and interest payments of $15,288. The note is secured by substantially all of Titan’s business assets and is personally guaranteed by certain former members of Titan. Titan issued 35,491 (equivalent to 31,203 common shares) Class A Membership Units to those members as compensation for the guarantee. The note was obtained pursuant to a Loan Agreement with a bank dated December 31, 2014 (the facility governed by the Loan Agreement is hereinafter referred to as the “SBA Facility”). Titan was, as of December 31, 2016, and currently is, in violation of certain covenants under our SBA Facility. We received a waiver to remedy the technical non-compliance under our SBA Facility for the year ended December 31, 2016, but have not received a waiver for current non-compliance.
In addition to the SBA Facility, on January 1, 2016, Titan issued 64,387 (equivalent to 56,608 common shares) Class A Membership Units and Junior Bridge Notes in the aggregate principal amount of approximately $876,000 to eight accredited investors in exchange for mezzanine debt in El Toro plus approximately 80% of the membership interest in El Toro. Titan issued an additional Junior Bridge Note to a ninth accredited investor on January 1, 2016 for approximately $99,000 to evidence pre-existing indebtedness. The Junior Bridge Notes bear interest at the annual rate of 12% and mature on December 31, 2020. The Junior Bridge Notes are secured by a subordinate security interest on substantially all of Titan’s assets, including accounts receivable and rights to payment, which will remain in effect until such notes are repaid. The holders of the Junior Bridge Notes are the Alpeter Family Limited Partnership, Brian and Renae Clark, Falcon Capital LLC, Honour Capital LP, James Jackson, John Honour, Kirk Honour, Keith and Janice Clark, and Stephen and Jayne Clark. On October 1, 2017, the Company converted the eight Junior Bridge Notes and related interest totaling $1,363,858 into common stock at a price per share of $5.00 for a total of 272,777 shares.
On February 29, 2016, Titan issued five promissory notes payable to members (the “Senior Bridge Notes”) with an original maturity date of June 28, 2016 for approximately $672,000, as well as 16,791 (equivalent to 18,806 common shares) Class A Membership Units. The Senior Bridge Notes originally bore interest at 12% per year with a default interest rate of 15% per year. Two of the Senior Bridge Notes were originally long-term debt of Titan outstanding at December 31, 2015 and converted into Senior Bridge Notes. In the event of a default under the Senior Bridge Notes, Titan is required to pay the holder a stated number of Class A Membership Units on the date of default and each 90 day interval thereafter until all amounts due have been paid in full. Effective July 2016, the maturity date of the Senior Bridge Notes was extended to September 30, 2016 and effective March 14, 2016 the interest rate was increased from 12% to 16%. The default interest rate was increased from 15% to 18%. As part of that first amendment, the note holders received 3,359 (equivalent to 2,953 common shares) Class A Membership Units in Titan. In September 2016, the Senior Bridge Notes were amended to extend the maturity date to January 31, 2017 and Titan paid a fee for the extension of 1% of the outstanding principal balance to the note holders. The Company subsequently extended the maturity date of the notes to October 31, 2017. The Company paid a fee of 1% of the outstanding principal balance on the notes on or around each of January 31, 2017, April 30, 2017, and July 31, 2017 to extend the maturity date of the notes. The notes are secured by a subordinate security interest on substantially all of the Company’s assets and are personally guaranteed by Scott Honour and Kirk Honour.
On July 26, 2016, we issued an additional Senior Bridge Note for $200,000 with 16% interest and an original maturity date of October 2016. In September 2016, this Senior Bridge Note was amended to extend the maturity date to January 31, 2017 and Titan paid a fee for the extension of 1% of the outstanding principal balance to the note holder. The Company paid a 1% fee on or around each of January 31, 2017, April 30, 2017, and July 31, 2017 to extend the due date of this Senior Bridge Note to October 31, 2017. In the event of default the holder is entitled to receive 1,000 (equivalent to 1,120 common shares) Class A Membership Units. Titan issued 5,000 (equivalent to 5,600 common shares) Class A Membership Units to this noteholder in connection with the issuance of this Senior Bridge Note. The Senior Bridge Notes were not extended at the maturity. However, the Company is in negotiations with the noteholders to extend the maturity date of the notes.
On September 26, 2016, Titan issued an additional Senior Bridge Note for $150,000 with 16% interest an original maturity date of January 2017. Titan issued 3,750 (equivalent to 4,200 common shares) Class A Membership Units to this noteholder in connection with the issuance of this Senior Bridge Note and received the proceeds from this note in October 2016. Subsequent to March 31, 2017, the Company paid a 1% fee to extend the maturity date of this note to July 31, 2017 and paid an additional 1% fee to extend the maturity date to October 31, 2017. In the event of default the holder of this Senior Bridge Note is entitled to receive 750 (equivalent to 840 common shares) Class A Membership Units. The Senior Bridge Notes were not extended at the maturity. However, the Company is in negotiations with the noteholders to extend the maturity date of the notes.
On November 22, 2016, EVO, Inc. issued Minn Shares Notes in the aggregate principal amount of $405,103 to Joseph H. Whitney, The Globe Resources Group, LLC and Richard E. Gilbert. The Minn Shares notes bear interest at the rate of 12% per annum and mature in November 2019 unless earlier converted. Each Minn Shares Note is convertible at the holder’s option as follows: (i) upon the sale by EVO, Inc. of not less than $7,500,000 of its equity securities at a conversion price equal to the price per security issued in such offering, (ii) upon a corporate transaction such as a merger, consolidation or asset sale involving either the sale of all or substantially all of the EVO, Inc. assets or the transfer of at least 50% of EVO, Inc.’s equity securities at a conversion price equal to the enterprise value of EVO, Inc.’s, as established by the consideration payable in the corporate transaction or (iii) on or after the maturity date at a conversion price equal to the quotient of $20 million divided by the number of shares of EVO, Inc.’s stock outstanding on a fully diluted basis. The Minn Shares Notes are subject to mandatory conversion upon the conversion into equity securities of the Junior Bridge Notes and Senior Bridge Notes upon the same conversion terms as the Junior Bridge Notes and Senior Bridge Notes.
On January 31, 2017, Titan issued an additional Senior Bridge Note in the principal amount of $400,000. This Senior Bridge Note bears interest at 16% per year with a default interest rate of 18% per year and matures on April 30, 2017. In the event of a default under this Senior Bridge Note, EVO, Inc. is required to issue 1,758 shares of Common Stock to the holder on the date of default and each 90 day interval thereafter until all amounts due have been paid in full. This Senior Bridge Note is secured by a subordinate security interest on substantially all of the EVO, Inc.’s assets. In connection with this Senior Bridge Note, on January 31, 2017, EVO, Inc. issued 8,792 shares of Common Stock. Subsequent to March 31, 2017, the Company paid a 1% fee to extend the maturity date of this note to July 31, 2017 and paid an additional 1% fee to extend the maturity date to October 31, 2017. The Senior Bridge Notes were not extended at the maturity. However, the Company is in negotiations with the noteholders to extend the maturity date of the notes.
On February 1, 2017, EVO, Inc. issued the Senior Promissory Note in the principal amount of $3.8 million to Danny Cuzick and Convertible Notes in the aggregate principal amount of $9.5 million to the EAF Members. The Senior Promissory Note bears interest at 7.5% per year with a default interest rate of 12.5% per year and has a maturity date of the earlier of (a) the date that is ten days after the initial closing of a private offering of capital stock of EVO, Inc. in an amount not less than $10 million (a “Private Offering”); (b) December 31, 2017 and (c) declaration by Danny Cuzick of an event of default under the Senior Promissory Note. The Convertible Notes bear interest at 1.5% per year and have a maturity date of February 1, 2026.
The Convertible Notes are convertible into 1,400,000 shares (the “Transaction Shares”) of EVO, Inc.’s Common Stock, subject to adjustment for any stock splits, combinations or similar transactions, representing approximately 81.1% of EVO, Inc.’s total outstanding shares of Common Stock on a post-transaction basis. Accordingly, the conversion of the Convertible Notes would result in a change in control of the Company. The number of Transaction Shares will be increased to equal 70% of the issued and outstanding Common Stock if the issuance of Common Stock pursuant to a private offering of Common Stock of up to $2 million and the conversion into Common Stock of the Company’s subordinated notes payable to members, Senior Bridge Notes, convertible promissory notes, and certain accounts payable would otherwise cause the Transaction Shares to represent less than 70% of the issued and outstanding Common Stock. Pursuant to the terms of the EAF Exchange Agreement, the EAF Members are entitled to demand registration rights and piggyback registration rights with respect to the Transaction Shares upon customary terms, limitations, exceptions and conditions. The Convertible Notes are secured by all of the assets of EAF and the EAF Interests, which the Company pledged to the EAF Members as security for the Convertible Notes.
Each Convertible Note is convertible at the applicable holder’s option beginning on the first anniversary of the date of issuance of the Convertible Notes, including at any time within 90 days after the holder’s receipt of notice of consummation of (1) a reorganization, merger or similar transaction where EVO, Inc. is not the surviving or resulting entity or (2) the sale of all or substantially all of EVO, Inc. assets, subject to customary restrictions. Each holder’s conversion option is subject to a monthly limit of the number of shares of Common Stock equal to 10% of the thirty day average trading volume of shares of Common Stock during the prior calendar month. The Convertible Notes are also subject to mandatory conversion at the Company’s option beginning on the first anniversary of the date of issuance of the Convertible Notes if: (i) the closing price of the Common Stock is greater than (A) 150% of the price at which a share of Common Stock is sold in a Private Offering or (B) $10.00 if a Private Offering has not occurred by December 31, 2017 and (ii) the average daily trading volume of shares of Common Stock has equaled 100,000 or more for the 30 days prior to the applicable date. Upon a conversion of the Convertible Notes, accrued interest may also be converted at the greater of (i) the amount of interest to be converted divided by the exchange ratio of 0.1357, subject to adjustment for stock splits or combinations, or (ii) the amount of interest to be converted divided by the closing price of the Common Stock on the trading day preceding the conversion date.
In connection with the closing of the EAF Exchange Agreement, on February 1, 2017, the Company issued promissory notes to the EAF Members in the aggregate principal amount of $250,000 that bear interest at 6% per annum with a default rate of 11% per annum and a maturity date of the earlier of (a) the closing of a Private Offering; (b) 180 days from the date of the notes and (c) declaration by a holder of an event of default under the holder’s note (the “Working Capital Notes”). The Company failed to pay the outstanding balance on these notes by July 31, 2017, and as a result these notes are in default. However, the Company is in negotiations with the noteholders of these notes to extend the maturity date of these notes.
In connection with the closing of the EAF Exchange Agreement, on February 1, 2017, the Company guaranteed a note from an EAF member to EAF dated January 30, 2017 in the principal amount of $4 million (the “EAF Note”). The EAF Note is secured by all assets of EAF and is guaranteed by EAF. The EAF Note bears interest at 7.5% per annum with a default rate of 12.5% per annum and has a maturity date of the earlier of (a) February 1, 2020 and (b) declaration by the noteholder of an event of default under the EAF Note.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”). The preparation of consolidated financial statements 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 revenues and expenses recorded during the reporting periods.
On a periodic basis we evaluate our estimates based on historical experience and various other assumptions we believe are reasonable under the circumstances. Actual results could differ from those estimates under different assumptions or conditions. For further information on our significant accounting policies, see note 1 to our consolidated financial statements included in this report.
We believe the following critical accounting policies involve the most significant judgments and estimates used in the preparation of our consolidated financial statements.
Basis of Presentation
Theses financial statements represent the consolidated financial statements of EVO Inc., its wholly owned subsidiaries, Titan and EAF, Titan’s wholly-owned subsidiaries, El Toro, Diamond Bar, and Blaine, and EAF’s wholly-owned subsidiary, EVO CNG. On November 22, 2016, Titan and its members entered into an Agreement and Plan of Securities Exchange with the Company whereby the Company acquired all of the equity interests of Titan and Titan became a wholly-owned subsidiary of the Company (the “Titan Securities Exchange”). The Company issued 248,481 shares of its Common Stock to acquire Titan, which resulted in the former Titan equity holders owning approximately 91.25% of the outstanding Common Stock after the consummation of the Titan Securities Exchange.
At the closing of the Titan Securities Exchange, all of the units issued and outstanding for Titan immediately prior to the closing of the Titan Securities Exchange were converted into 248,481 shares of Common Stock of the Company. Titan did not have any stock options or warrants to purchase its membership interests outstanding at the time of the Titan Securities Exchange.
Because the former members of Titan owned approximately 91.25% of the combined company on completion of the Titan Securities Exchange, the transaction was accounted for as a recapitalization through a reverse acquisition, with no goodwill or other intangibles recorded. As such, the financial information reflects the historical financial information of Titan, Diamond Bar and Blaine and the remaining assets and liabilities of EVO, Inc. brought over at historical cost. EVO, Inc.’s results of operation, which were de minimis, are included in the Company’s financial statements from the date of acquisition, November 22, 2016. Costs of the transaction have been charged to operations. The capital structure of the Company has been retroactively adjusted to reflect that of EVO, Inc. with all shares being adjusted based on the exchange ratio of equity interest in connection with the Titan Securities Exchange.
As a result of the Titan Securities Exchange, EVO Inc. acquired the business of Titan and its subsidiaries Diamond Bar, Blaine and El Toro as of November 22, 2016, and will continue the existing business operations of Titan, Diamond Bar, Blaine and possibly El Toro as a publicly traded company under the name EVO Transportation & Energy Services, Inc. The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
In determining the accounting acquirer in the transactions contemplated by the EAF Exchange Agreement, management considered the Financial Accounting Standards Board’s Accounting Standard Codification (“ASC”) 805—Business Combinations. Specifically, management considered the guidance in ASC 810-10, which generally provides that the acquirer in a business combination transaction is determined by identifying the existence of a controlling financial interest, which can typically be determined by the ownership of a majority voting interest. Because the EVO, Inc. stockholders continued to own all of the outstanding shares of Common Stock on completion of the transactions contemplated by the EAF Exchange Agreement, management determined that EVO, Inc. was the accounting acquirer in the EAF transaction.
Going Concern
The Company is an early stage company in the process of acquiring several businesses in the vehicle fuels industry. As of September 30, 2017 the Company acquired EAF, which was financed through approximately $13.6 million of debt, of which $3.8 million is contemplated to be repaid through a successful secondary offering before the December 31, 2017 due date. As of September 30, 2017, the Company has a working capital deficit of approximately $8.4 million which management anticipates rectifying with additional public or private offerings. Also, the Company is evaluating certain cash flow improvement measures. However, there can be no assurance that the Company will be successful in these efforts.
The unaudited financial statements included with this report were prepared assuming that the Company will continue as a going concern; however, the above conditions raise doubt about the Company’s ability to do so. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.
Property, Equipment and Land
Property and equipment are stated at cost. Depreciation is provided utilizing the straight-line method over the estimated useful lives for owned assets, ranging from five to 40 years, and the shorter of the estimated economic life or related lease terms for leasehold improvements.
Long-Lived Assets
The Company evaluates the recoverability of long-lived assets whenever events or changes in circumstances indicate that an asset’s carrying amount may not be recoverable. Such circumstances could include, but are not limited to (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset. The Company measures the carrying amount of the asset against the estimated undiscounted future cash flows associated with it. Should the sum of the expected future net cash flows be less than the carrying value of the asset being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying value of the asset exceeds its fair value. The fair value is measured based on quoted market prices, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including the discounted value of estimated future cash flows. The evaluation of asset impairment requires the Company to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. During the nine months ended September 30, 2017, the Company determined that fixed assets and construction in progress were impaired, recording a loss of $679,535.
Revenue Recognition
For the year ended December 31, 2016, the Company generated revenue from the sale of natural gas and a federal excise tax refund of $0.50 per GGE. The Company commences revenue recognition at the time the gas is dispensed as all of the following criteria have been met:
Applying these factors, we typically recognize revenue from the sale of natural gas fuel at the time it is dispensed.
Recently Adopted Accounting Changes and Recently Issued and Adopted Accounting Standards
See noteNote 1 to ourthe unaudited condensed consolidated financial statements, included in Part 1, Item 1 of this report.Quarterly Report, incorporated by reference herein.
Seasonality
SeasonalityDiscussion regarding the impact of seasonality on our business is included in Note 1 to the unaudited condensed consolidated financial statements, included in Part 1, Item 1 of this Quarterly Report, incorporated by reference herein.
Inflation
Inflation can have an impact on our operating costs. A prolonged period of inflation could cause interest rates, fuel, wages, and Inflation
To some extent, we experience seasonality inother costs to increase, which would adversely affect our results of operations. Natural gas vehicle fuel amounts consumed by some of our customers tend to be higher in summer months when busesoperations unless freight and other fleet vehicles use more fuel to power their air conditioning systems. Natural gas commodity prices tend to be higher in the fall and winter months due to increased overall demand for natural gas for heating during these periods.rates correspondingly increased.
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Since our inception, inflation has not significantly affected our operating results. However, costs for construction, repairs, maintenance, electricity and insurance are all subject to inflationary pressures, which could affect our ability to maintain our stations adequately, build new stations, expand our existing facilities or pursue additional CNG production projects, or could materially increase our operating costs.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
As a smaller reporting company, we are not required to provide disclosure under this item.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of its principal executive and principal financial officers, is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) ("Exchange Act") that is designed to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
TheIn accordance with Exchange Act rules 13a-15 and 15d-15, the Company performed an evaluation under the supervision and with the participation of the Company’s management, including the Company’s principal executive and principal financial officers have evaluatedregarding the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e), as of September 30, 2022, the end of the period subject tocovered by this Quarterly Report based on the framework in “Internal Control-Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission.Form 10-Q. Based on thisthat evaluation, the Company’s management, including its principal executive and principal financial officers hashave concluded that our disclosure controls and procedures were not effective as of September 30, 20172022, due to the material weaknesses in our internal control over financial reporting described below in Item 9A“Evaluation of our Annual Report on Form 10-K forInternal Controls and Procedures” including limitations in management’s evaluation of internal controls as a result of insufficient documentation of internal controls under the year ended December 31, 2016 filed withstandards of the SEC on April 18, 2017. NotwithstandingCommittee of Sponsoring Organizations of the Treadway Commission (COSO) (2013 Framework). In light of these material weaknesses, we performed additional analysis as deemed necessary to ensure that existed as of December 31, 2016 and September 30, 2017,our financial statements were prepared in accordance with U.S. generally accepted accounting principles. Accordingly, management believes that the financial statements included in this reportQuarterly Report on Form 10-Q present fairly in all material respects our financial position, results of operations and cash flows for the period presented.
Evaluation of Internal Controls and Procedures
The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a set of processes designed by, or under the supervision of, a company’s principal executive designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
The Company’s internal control over financial reporting includes those policies and procedures that:
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. It should be noted that any system of internal control, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Based on the Company’s evaluation, it identified material weaknesses in internal control over financial reporting described below, and management concluded that our internal control over financial reporting was not effective as described below. The Company also took steps seeking to mitigate and remediate these material weaknesses as described under “Management’s Remediation Plan and Status of Remediation Efforts” below.
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The matters involving internal controls and procedures that the Company’s management considered to be material weaknesses were:
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Management intends to implement certainthe remediation steps discussed below to address the material weaknesses and to improve our internal control over financial reporting.
Management’s Remediation Plan
In light of the control deficiencies identified at September 30, 2022, and described above as disclosed in the Company’ssection titled “Evaluation of Internal Controls and Procedures,” we have designed and plan to implement the specific remediation initiatives described below:
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While the Company believes the steps taken to date and those planned for implementation will improve the effectiveness of its internal control over financial reporting, it has not yet implemented those remediation steps and expectscompleted all remediation efforts identified above. Accordingly, the Company has and will continue to perform additional procedures and employ additional tools and resources it determines necessary to ensure that its consolidated financial statements are fairly stated in all material respects.
The Company believes the remediation measures will strengthen the Company’s internal control over financial reporting and remediate the material weaknesses identified. Management will continue throughto monitor the remaindereffectiveness of fiscal year 2017.these remediation measures and will make changes and take other actions that are appropriate given the circumstances.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
We are currently not a partySee Part 1, Item 1, Note 10, Commitment and Contingencies, to any material pending legal proceedings.the Unaudited Condensed Consolidated Financial Statements included herein.
Item 1A. Risk Factors.
For a detailed discussion of certain risk factors that could affect the Company’s operations, financial condition or results for future periods, see Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Refer to the heading “Securities Purchase Agreement” within Note 1, Description of Business and Summary of Significant Accounting Policies, for information regarding the warrants issued to Antara, Exchanging Creditors, two former board members and to key equity holders and members of management in connection with the Recapitalization Transactions.
None.
Item 3. Defaults Upon Senior Securities.
None.
The terms of the Senior Bridge Notes required principal of approximately $1,222,000 and accrued interest of approximately $200,000 to be repaid on or before November 7, 2017, which is two business days after the fifth calendar day after October 31, 2017, the maturity date. The Company did not make these required payments, and this nonpayment by the Company constitutes an event of default under the Senior Bridge Notes. The Company and the Senior Bridge Note holders are negotiating extension terms for the Senior Bridge Notes, but there can be no assurance that the Company and the Senior Bridge Note holders will be able to agree on extension terms.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
On October 1, 2017, the Company issued 272,777 shares of the its common stock at a price of $5.00 per share pursuant to the terms of a subscription agreement with certain accredited investors in exchange for the cancellation of $1,363,858 in principal and interest outstanding under the Company’s Junior Bridge Notes. The common stock was offered and sold as part of a private placement solely to “accredited investors” as that term is defined under Rule 501(a) under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to exemptions from the registration requirements of the Securities Act afforded by Section 4(a)(2) and Rule 506 of Regulation D promulgated thereunder.
The foregoing summary of the material terms of the subscription agreement is not complete and is qualified in its entirety by reference to the form of subscription agreement included as an exhibit to this Quarterly Report on Form 10-Q.
Item 6. Exhibits.
See the Exhibit Index immediately following the signature page to this report, which is incorporated herein by reference.
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EVO TRANSPORTATION & ENERGY SERVICES, INC.
EXHIBIT INDEX
Form 10-Q for the Quarterly Period Ended SEPTEMBER 30, 2022
Exhibit | Description | |
3.1 | ||
4.1 | ||
4.2 | ||
4.3 | ||
4.4 | ||
10.1 | ||
10.2 | ||
10.3 | ||
10.4 | ||
10.5 | ||
10.6 | ||
10.7 | ||
10.8 | ||
10.9 | ||
10.10 | ||
10.11 | ||
10.12 | ||
10.13 | ||
10.14 | ||
10.15 | ||
10.16 | ||
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10.17 | ||
10.18 | ||
10.19 | ||
10.20 | ||
10.21 | ||
10.22 | ||
10.23 | ||
10.24 | ||
10.25 | ||
10.26 | ||
10.27 | ||
10.28 | ||
31.1 | ||
31.2 | ||
32.1 | ||
32.2 | ||
101.INS | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* Filed herewith
+ Management contract or compensatory plan or arrangement.
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SIGNATURES55
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
EVO TRANSPORTATION & ENERGY SERVICES, INC. | ||||
Date: | By: | /s/ | ||
Michael Bayles | ||||
Chief Executive Officer | ||||
Principal Executive Officer | ||||
Date: | By: | /s/ | ||
Raj Kapur | ||||
Chief Accounting Officer | ||||
Principal Accounting & Financial Officer | ||||
|
EVO TRANSPORTATION & ENERGY SERVICES, INC.
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EXHIBIT INDEX
Form 10-Q for the Quarterly Period Ended SEPTEMBER 30, 2017
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