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Description of Business and Summary of Significant Accounting Policies
 6 Months Ended
Jun. 30, 2020
Accounting Policies [Abstract]  
Description of Business and Summary of Significant Accounting Policies

Note 1 – Description of Business and Summary of Significant Accounting Policies

Description of Business

EVO Transportation & Energy Services, Inc. is a transportation provider serving the United States Postal Service (“USPS”) and other customers. We believe EVO is the second largest surface transportation company serving the USPS, with a diversified fleet of tractors, straight trucks, and other vehicles that currently operate on either diesel fuel or compressed natural gas (“CNG”). In certain markets, we fuel our vehicles at one of our three CNG stations that serve other customers as well. We are actively engaged in reducing CO2 emissions by operating on CNG, pursuing opportunities to use other alternative fuels, and by optimizing the routing efficiency of our operations to reduce fuel usage. 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 10 main terminals located throughout the United States.

We have grown primarily through acquisitions, and we have completed seven acquisitions since our initial business combination in 2016. We have also grown organically by obtaining new contracts from the USPS and other customers.

The Company completed the following acquisitions in 2019:

•
On January 2, 2019, the Company acquired Sheehy Mail Contractors, Inc. (“Sheehy”). Sheehy is based in Waterloo, Wisconsin and 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 February 1, 2019, the Company acquired Ursa Major Corporation (“Ursa”) and JB Lease Corporation (“JB Lease”). Ursa and JB Lease are based in Oak Creek, Wisconsin and are engaged in the business of fulfilling government contracts for freight trucking services, as well as providing freight trucking services to non-government entities.
•
On July 15, 2019, the Company acquired Courtlandt and Brown Enterprises L.L.C. (“Courtlandt”) and Finkle Transport Inc. (“Finkle”). Finkle and Courtlandt are based in Newark, New Jersey and are engaged in the business of fulfilling government contracts for freight trucking services, as well as providing freight trucking services to non-government entities.
•
On September 16, 2019, the Company, through its wholly-owned subsidiary EVO Holding Company, LLC, acquired John W. Ritter, Inc. (“JWR”), Ritter Transportation Systems, Inc. (“Ritter Transportation”), Ritter Transport, Inc. (“Ritter Transport”), and Johmar Leasing Company, LLC (“Johmar,” and together with JWR, Ritter Transportation, and Ritter Transport, the “Ritter Companies”). The Ritter Companies are based in Laurel, Maryland. The Ritter Companies are engaged in the business of fulfilling government contracts for freight trucking services, as well as providing freight trucking services to non-government entities.

Going Concern

As of June 30, 2020, the Company had a cash balance of $5.5 million, a working capital deficit of $97.2 million, stockholders’ deficit of $44.8 million, and material debt and lease obligations of $134.8 million, which include term loan borrowings under a financing agreement with Antara Capital. During the six months ended June 30, 2020, the Company reported cash used in operating activities of $18.4 million and a net loss of $24.2 million.

 

The following significant transactions and events affecting the Company’s liquidity occurred during the six months ended June 30, 2020:

•
During the first quarter of 2020, the Company entered into Forbearance Agreements and Incremental Amendments to the Financing Agreement with Antara Capital and obtained an additional $6.3 million in term loan commitments and the lenders agreed to forbear from exercising certain rights, remedies, powers, privileges, and defenses under the Financing Agreement during the forbearance period. These incremental borrowings were subject to the same terms as the Company’s existing term loan commitments with Antara Capital. During the fourth quarter of 2020, in connection with the Ritter Companies' borrowing under the Main Street Priority Loan Program (as subsequently described), the forbearance period related to the remaining Antara debt was terminated and all existing defaults and events of defaults were waived, and the maturity date of the remaining outstanding term loan balance under the Antara Financing Agreement was extended from September 16, 2022 to the earlier of the date that is ninety-one days after the fifth anniversary of the closing date of the Main Street Loan or the date that is ninety-one days after the date the Main Street Loan is paid in full.
•
During the first quarter of 2020, the Company sold a total of 1,260,000 shares of its common stock and 1,000,000 shares of its Series B preferred stock to related parties for aggregate gross proceeds of $6.2 million pursuant to the terms of subscription agreements.
•
During the second quarter of 2020, the Ritter Companies obtained a loan in the amount of $10.0 million under the Paycheck Protection Program (the “PPP”) of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The Company used the entire loan amount for qualifying expenses, and the entire amount borrowed under the loan, including accrued interest, was forgiven by the United States Small Business Administration (“SBA”) in July 2021, which will be recognized as a gain on extinguishment of the PPP loan in the Company's 2021 financial statements.

 

The following significant transactions and events affecting the Company’s liquidity occurred following the six months ended June 30, 2020:

•
During the fourth quarter of 2020, the Company borrowed $17.0 million under the Main Street Priority Loan Program authorized by Section 13(3) of the Federal Reserve Act (the “Main Street Loan”) and used all of the net proceeds to refinance a portion of the amount outstanding under the Antara Financing Agreement and to pay related prepayment premiums. 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.
•
During the first quarter of 2021, the Company used the proceeds from its borrowings under the Main Street Priority Loan Program to pay down the aggregate principal amount due to Antara, including capitalized interest, from $31.7 million to $16.7 million.
•
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 Dynamic Route Optimization (“DRO”) contracts. The Company received a total of $28.4 million related to these claims and also renegotiated the contractual rates per mile for some of its DRO contracts on a prospective basis.
•
During the first quarter of 2021, the Company entered into an agreement with its factoring lender (“Triumph”) related to the application of $17.5 million and $7.1 million of proceeds received from the USPS in February and January of 2021, respectively, arising out of the settlement agreements described above. Pursuant to the agreement, the parties acknowledged that Triumph previously applied approximately $1.6 of the $7.1 million of proceeds received in January 2021 plus approximately $0.6 million of funds held in reserve against a balance of $3.0 million for advances that Triumph made to the Company in September 2020 (the “Gross Purchase Advance Facility”) and agreed that Triumph would remit $11.0 million of net proceeds to the Company and that Triumph would retain approximately $6.9 million of net proceeds and apply that amount to reduce the outstanding principal amount of the Company’s factoring advances. The parties further agreed that the Company will repay the remaining balance of approximately $6.9 million due under the factoring arrangement in 48 equal monthly installments beginning January 1, 2022 and that Triumph would apply funds held in reserve against the approximately $0.8 million remaining balance of the Gross Purchase Advance Facility. The parties also agreed to work together to wind down their factoring relationship, including waiver of any applicable termination fees.
•
During the first and second quarters of 2021, the Company entered into agreements with certain noteholders to purchase promissory notes previously issued by the Company in the principal amount of $0.6 million by paying $0.1 million in cash and issuing warrants to purchase an aggregate of up to 231,453 shares of the Company’s common stock at a price of $0.01 per share.

 

While these transactions and events resulted in an overall increase in the Company’s cash balance as of December 31, 2021, an overall reduction in the Company’s working capital deficit as of December 31, 2021, and an overall extension of the maturity dates for the Company’s debt obligations, the Company continues to have a working capital deficit and stockholders’ deficit as of December 31, 2021 and (after excluding the impacts of the USPS settlement agreements and the forgiveness of the PPP loan discussed above) continues to incur net losses during 2021. As a result of these circumstances, the Company believes its existing cash, together with any positive cash flows from operations, may not be sufficient to support working capital and capital expenditure requirements for the next 12 months, and the Company may be required to seek additional financing from outside sources.

 

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:

•
The counterparty to the Company’s accounts receivable factoring arrangement is not obligated to purchase the Company’s accounts receivable or make advances to the Company under such arrangement;
•
The Company is currently in default on certain of its debt obligations (Refer to Note 7, Debt, for further discussion); and
•
There can be no assurance that the Company will be able to obtain additional financing in the future via the incurrence of additional indebtedness or via the sale of the Company’s common stock or preferred stock.

 

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:

•
Negotiating with related parties and 3rd parties to refinance existing debt and lease obligations;
•
Potential future public or private debt or equity offerings;
•
Acquiring new profitable contracts and negotiating revised pricing for existing contracts;
•
Profitably expanding trucking revenue;
•
Cost reduction efforts, including eliminating redundant costs across the companies acquired during 2019 and 2018;
•
Improvements to operations to gain driver efficiencies;
•
Purchases of trucks and trailers to reduce purchased transportation and rental vehicles; and
•
Replacement of older trucks with newer trucks to lower the overall cost of ownership and improve cash flow through reduced maintenance and fuel costs.

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 twelve months from the 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 if the Company is unable to continue as a going concern.

 

Refer to Notes 6 and 7 to the unaudited condensed consolidated financial statements for further information regarding the Company’s debt and factoring obligations. Refer to Note 13 to the consolidated financial statements for further information regarding changes in the Company’s debt obligations and liquidity subsequent to June 30, 2020.

Seasonality

Results of operations generally follow seasonal patterns in the transportation industry. Freight volumes in the first quarter are typically lower due to less consumer demand, 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. Combined, these factors typically result in lower operating profitability as compared to other periods. Further, beginning in the latter half of the third quarter and continuing into 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.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance 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 the 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, 2019 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 six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The balance sheet at December 31, 2019 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.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“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 goodwill and long-lived asset valuations, purchase price allocations related to the Company’s business combinations, valuation allowance on deferred income tax assets, and the valuation of our common stock, preferred stock, warrants and stock-based awards.

Net Loss per Share of Common Stock

Basic net loss per share of common stock attributable to common stockholders is calculated by dividing net loss attributable to common stockholders by the weighted-average shares of common stock outstanding for the period. Potentially dilutive shares, which are based on the weighted-average shares of common stock underlying outstanding stock-based awards, warrants and convertible notes payable and preferred stock using the treasury stock method or the if-converted method, as 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 potentially dilutive shares that were excluded from the computation of diluted net loss per share of common stock attributable to common stockholders, because their effect was anti-dilutive:

 

 

 

Three and
Six Months
Ended
June 30,
2020

 

 

Three and
Six Months
Ended
June 30,
2019

 

Stock options

 

 

9,354,250

 

 

 

4,819,250

 

Warrants

 

 

20,031,255

 

 

 

8,856,255

 

Common stock to be issued upon conversion of
   Secured convertible promissory notes

 

 

1,674,699

 

 

 

1,636,394

 

Common stock to be issued upon conversion of
   Redeemable Series A Preferred stock

 

 

126,597

 

 

 

108,820

 

Common stock to be issued upon conversion of
   Redeemable Series B Preferred stock

 

 

2,105,041

 

 

 

—

 

Common stock to be issued upon conversion of
   Convertible promissory notes - related parties

 

 

7,358,750

 

 

 

7,253,750

 

Common stock and warrant to be issued for purchase
   of fixed assets

 

 

2,348,000

 

 

 

—

 

Total

 

 

42,998,593

 

 

 

22,674,469

 

 

 

Revenue Recognition

In accordance with ASC 606-10-50, the Company disaggregates Trucking revenue from contracts with its customers between USPS revenue and Freight revenue as follows:

 

($ in thousands)

 

For the Three Months
Ended June 30,

 

 

For the Six Months
Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

USPS revenue

 

$

45,358

 

 

$

32,867

 

 

$

93,541

 

 

$

58,111

 

Freight revenue

 

 

5,985

 

 

 

3,258

 

 

 

12,560

 

 

 

6,105

 

Other revenue

 

 

376

 

 

 

—

 

 

 

1,024

 

 

 

—

 

Total Trucking revenue

 

$

51,719

 

 

$

36,125

 

 

$

107,125

 

 

$

64,216

 

 

Recently Issued Accounting Pronouncements

Accounting Pronouncements Adopted

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02 – Leases (ASC Topic 842), which established the new Accounting Standards Codification (“ASC”) Topic 842, Leases, standard. The new standard requires lessees to recognize assets and liabilities arising from both operating and financing leases on the balance sheet. For public business entities, the new standard was effective for fiscal years beginning after December 15, 2018. Companies may apply the amendments in ASU 2016-02 using a modified retrospective approach with an adjustment to accumulated deficit as of either the beginning of the current year (“ASC Topic 840 Comparative Approach”) or the beginning of the earliest period presented (“ASC Topic 842 Comparative Approach”).

 

Adoption Method and Approach – The Company adopted ASU 2016-02 Leases (ASC Topic 842), on January 1, 2019 by applying the ASC Topic 840 Comparative Approach, resulting in the recognition of right-of-use assets and lease liabilities related to its operating and financing leases.

 

Practical Expedients – As permitted under ASU 2016-02 (and related ASUs), management elected to apply the package of practical expedients:

•
Lease Identification – An entity need not reassess whether any expired or existing contracts are, or contain, leases
•
Lease Classification – An entity need not reassess the lease classification for any expired or existing leases (for example, all existing leases that were classified as operating leases in accordance with ASC Topic 840 are now classified as operating leases, and all existing leases that were classified as capital leases in accordance with ASC Topic 840 are now classified as finance leases).
•
Initial Direct Costs – An entity need not reassess initial direct costs for any existing leases.

From a lessee perspective, the Company elected the practical expedient related to treating lease and non-lease components as a single lease component for all leases as well as electing a policy exclusion permitting leases with an original lease term of less than one year to be excluded from the Right-of-Use (“ROU”) assets and lease liabilities.

 

The Company’s adoption of ASU No. 2016-02 did not have a material impact to the Company’s consolidated statements of operations or its consolidated statements of cash flows, and the Company determined there was no cumulative-effect adjustment to beginning accumulated deficit on its January 1, 2019 consolidated balance sheet.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350) (“ASU 2017-04”), Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the amendments eliminate Step 2 from the goodwill impairment test. 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 guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company early adopted the guidance for the year ended December 31, 2019 on a prospective basis. Such adoption did not have a material impact on its consolidated financial statements.

 

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees and supersedes the guidance in Subtopic 505-50, Equity - Equity-Based Payments to Non-Employees. Under ASU 2018-07, equity-classified nonemployee share-based payment awards are measured at the grant date fair value on the grant date. The probability of satisfying performance conditions must be considered for equity-classified nonemployee share-based payment awards with such conditions. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The adoption of this standard on January 1, 2019 did not have a material impact to the Company’s consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement, which modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. This new accounting standard will be effective for annual periods beginning after December 15, 2019. Early adoption is permitted. The adoption of this guidance on January 1, 2020 did not have a material impact on the Company’s disclosures.

 

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which requires an entity (customer) in a hosting arrangement that is a service contract to follow the guidance to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. This ASU requires up-front implementation costs incurred in a cloud computing arrangement (or hosting arrangement) that is a service contract to be amortized to hosting expense over the term of the arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. This new accounting standard will be effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The guidance may be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The prospective adoption of this guidance on January 1, 2020 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 receivables. This pronouncement will be effective for fiscal years beginning after December 15, 2022. Early adoption of the guidance is permitted for fiscal years beginning after December 15, 2018. The Company is currently evaluating and assessing the impact this guidance will have on its consolidated financial statements.

 

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 is intended to simplify accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. The Company is currently evaluating and assessing the impact this guidance will have on its consolidated financial statements.

 

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 that 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 if-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 standard requires using either the modified retrospective or the retrospective approach. The Company is currently evaluating and assessing the impact this guidance will have on its consolidated financial statements.

 

In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt - Modifications and Extinguishments (Topic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40), which clarifies existing guidance for 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 standard is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating and assessing the impact this guidance will have on its consolidated financial statements.

Reclassifications

Certain amounts in the 2019 consolidated financial statements have been reclassified to conform to the 2020 presentation, which include $16.3 million reclassified from current portion of long-term debt to current portion of long-term debt - related party, $0.9 million reclassified from advances from suppliers to long-term debt, $2.7 million reclassified from long-term debt to long-term debt - related party, and $2.5 million reclassified from accrued expenses and other current liabilities to accounts payable. The reclassifications had no effect on previously reported results of operations or accumulated deficit.

Out of Period Adjustments

In the course of preparing our first quarter 2020 unaudited condensed consolidated financial statements, we revisited our previous accounting classification for warrants and identified an error related to the presentation of certain warrants resulting in an understatement of noncurrent liabilities and their related change in fair value from September 16, 2019 to December 31, 2019. The underlying warrant agreements contain an anti-dilution protection feature for the warrant holders (commonly referred to as a “down round”) that does not meet the U.S. GAAP definition of a "down round." As a result, these warrants do not meet the criterion to be indexed to valuation inputs based on the Company’s own stock and must be classified as a liability 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. Accordingly, we corrected this error during the first quarter of 2020 by recording a $7.7 million decrease in additional paid-in capital, a $0.6 million increase in debt discount and a $5.7 million increase in noncurrent warrant liabilities in the consolidated balance sheet, and a $2.6 million change in fair value of warrant liabilities in the statement of operations. In addition, during the first quarter of 2020 we recognized $2.05 million of Trucking revenue that should have been recorded during the fourth quarter of 2019. Finally, we applied the incorrect incremental borrowing rate to certain leases during the period from September 16, 2019 through December 31, 2019 and recognized a $1.3 million increase in finance lease ROU assets and lease liabilities and a $0.6 million increase in operating lease ROU assets and lease liabilities during the first quarter of 2020.

 

Based on consideration of both the quantitative and qualitative factors within the provisions of SEC Staff Accounting Bulletin No. 99, Materiality, and Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, we determined that the errors, individually and in the aggregate, are not material to our previously issued annual and interim consolidated financial statements. Furthermore, we determined that correcting the errors in the current period would not materially misstate our annual or interim consolidated financial statements. Therefore, no restatement or revision of our prior period annual or interim consolidated financial statements is required.