Description of Business and Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2021

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.

Going Concern

As of June 30, 2021, the Company had a cash balance of $12.4 million, a working capital deficit of $78.1 million, stockholders’ deficit of $43.0 million, and material debt and lease obligations of $132.3 million, which include term loan borrowings under a financing agreement with Antara Capital. During the six months ended June 30, 2021, the Company reported cash provided by operating activities of $11.6 million that included $28.5 million of nonrecurring cash receipts from the USPS settlement agreements and net income of $22.1 million that included $34.8 million of pre-tax nonrecurring revenue from the USPS settlement agreements and a $0.8 million pre-tax gain on extinguishment of debt.

The following significant transactions and events affecting the Company’s liquidity occurred during the six months ended June 30, 2021:

•

During the fourth quarter of 2020, one of the Company's subsidiaries 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 during the first quarter of 2021 used all of the net proceeds to pay down the aggregate principal amount due under the Antara Financing Agreement, including capitalized interest, from $33.6 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 $28.5 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 the Factor (as defined in Note 5, Factoring Arrangements) 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 the Factor 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 the Factor made to the Company in September 2020 (the “Gross Purchase Advance Facility”) and agreed that the Factor would remit $11.0 million of net proceeds to the Company and that the Factor 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 the Factor 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 $4.0 million by paying $0.6 million in cash and issuing warrants to purchase an aggregate of up to 1,481,453 shares of the Company’s common stock at a price of $0.01 per share. The Company also agreed to exchange the warrant, previously issued to a noteholder, to purchase up to 1,200,000 shares of common stock of the Company at a price of $2.50 per share for (i) a warrant to purchase up to 950,000 shares of common stock of the Company at a price of $2.50 per share and (ii) a warrant to purchase up to 250,000 shares of common stock of the Company at a price of $0.01 per share.

•

During the second quarter of 2020, the Company 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 all accrued interest, was forgiven by the United States Small Business Administration (“SBA”) in July 2021.

The following significant transactions and events affecting the Company’s liquidity occurred following the six months ended June 30, 2021:

•

During the first quarter of 2022, the Company obtained a Bridge Loan and Executive Loans, both as described in Note 13, Subsequent Events, in the aggregate amount of approximately $9.8 million.

•

During the first quarter of 2022, the Company entered into amendments to certain secured convertible promissory notes in the aggregate principal amount of $9.5 million to permit immediate conversion of those notes, and the holders representative converted those notes into warrants to purchase 7,553,750 shares of common stock of the Company at a price of $0.01 per share.

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 6, 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;

•

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 5 and 6 for further information regarding the Company’s factoring and debt obligations. Refer to Note 13, Subsequent Events, for further information regarding changes in the Company’s debt obligations and liquidity subsequent to June 30, 2021.

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, 2020 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, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The balance sheet at December 31, 2020 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.

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 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 computation of basic and diluted earnings (loss) per share (amounts in thousands, except share data):


	Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020
Numerator:
Net income (loss)	$	(9,154	)	$	(10,508	)	$	22,069		$	(24,210	)
Accrued and undeclared preferred stock dividends in arrears		(162	)		(162	)		(323	)		(204	)
Issuance of warrants as deemed dividend - related party		—			—			—			(455	)
Net income (loss) available to common stockholders - numerator for basic EPS		(9,316	)		(10,670	)		21,746			(24,869	)
Effect of dilutive securities:
$4.0 million Secured Convertible Promissory Notes		—			—			231			—
Redeemable Series A Preferred stock		—			—			18			—
Redeemable Series B Preferred stock		—			—			305			—
Subtotal		—			—			554			—
Adjusted net income (loss) available to common stockholders - numerator for diluted EPS	$	(9,316	)	$	(10,670	)	$	22,300		$	(24,869	)

Denominator:
Denominator for basic EPS - weighted average common shares outstanding		30,883,149			19,542,498			30,116,853			19,722,498
Effect of dilutive securities:
$4.0 million Secured Convertible Promissory Notes		—			—			864,155			—
Redeemable Series A Preferred stock		—			—			132,647			—
Redeemable Series B Preferred stock		—			—			2,208,384			—
Subtotal		—			—			3,205,186			—
Denominator for diluted EPS - adjusted weighted average common shares outstanding		30,883,149			19,542,498			33,322,039			19,722,498
Basic EPS	$	(0.30	)	$	(0.55	)	$	0.72		$	(1.26	)
Diluted EPS	$	(0.30	)	$	(0.55	)	$	0.67		$	(1.26	)

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 June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Stock options		9,459,249		9,354,250		9,459,249		9,354,250
Warrants		12,606,255		20,031,255		12,606,255		20,031,255
Common stock to be issued upon conversion of $4.0 million Secured Convertible Promissory Notes		205,705		1,674,699		—		1,674,699
Common stock to be issued upon conversion of Redeemable Series A Preferred stock		138,597		126,597		—		126,597
Common stock to be issued upon conversion of Redeemable Series B Preferred stock		2,310,041		2,105,041		—		2,105,041
Common stock to be issued upon conversion of Four convertible promissory notes with an aggregate principal amount of $9.5 million		7,463,750		7,358,750		7,463,750		7,358,750
Common stock and warrant to be issued for purchase of fixed assets		2,348,000		2,348,000		2,348,000		2,348,000
Total		34,531,597		42,998,593		31,877,254		42,998,593

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,
	2021		2020		2021		2020
USPS revenue	$	49,153	$	45,358	$	96,304	$	93,541
Freight revenue		6,561		5,985		13,122		12,560
Other revenue		725		376		965		1,024
Total Trucking revenue	$	56,439	$	51,719	$	110,391	$	107,125

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 the Company’s subsidiaries as additional compensation for transportation services provided to the USPS under certain 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 5, 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.

Recently Issued Accounting Pronouncements

Accounting Pronouncements Adopted

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 adoption of this guidance on January 1, 2021 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 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.