Description of Business and Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2021

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. EVO serves 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. In addition to our USPS mail transportation and delivery services, we provide freight and brokerage services to various corporate customers. 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 December 31, 2021, the Company had a cash balance of $7.3 million, a working capital deficit of $93.4 million, stockholders’ deficit of $50.9 million, and material debt and lease obligations of $114.4 million, which included term loan borrowings under a financing agreement with Antara Capital. During the year ended December 31, 2021, we reported cash provided by operating activities of $23.5 million that included $28.5 million of nonrecurring cash receipts from the USPS settlement agreements and net income of $14.3 million that included $34.8 million of nonrecurring pre-tax revenue from the USPS settlement agreements and a $11.0 million pre-tax gain on extinguishment of debt.

The following significant transactions and events affecting the Company’s liquidity occurred during the year ended December 31, 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 year ended December 31, 2021:

•During the first quarter of 2022, the Company obtained a Bridge Loan and Executive Loans, both as described in Note 14, 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 within the Company’s Form 10-K. 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, 6, and 10 to the consolidated financial statements for further information regarding the Company’s factoring, debt, and lease obligations, including the future maturities of such obligations. Refer to Note 14, Subsequent Events, to the consolidated financial statements for further information regarding changes in the Company’s debt obligations and liquidity subsequent to December 31, 2021.

Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

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.

Cash and Cash Equivalents

The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company maintains its cash in bank deposit accounts where accounts may exceed federally insured limits at times. There were no cash equivalents as of December 31, 2021 and 2020.

Accounts Receivable

The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company’s estimate is based on historical collection experience and a review of the current status of the 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. Receivable balances are written off against the allowance for doubtful accounts when, in the judgment of management, they are considered uncollectible.

Federal Alternative Fuels Tax Credit Receivable

Federal Alternative Fuels Tax Credit (“AFTC”) (formerly known as Volumetric Excise Tax Credit) receivable are the excise tax refunds to be received from the Federal Government on CNG fuel sales.

Concentrations of Credit Risk

The Company grants credit in the normal course of business to customers in the United States. The Company periodically performs credit analysis and monitors the financial condition of its customers to reduce credit risk.

As of December 31, 2021 and 2020, the USPS accounted for 47% and 69% of the consolidated trade accounts receivable balance, respectively. During the years ended December 31, 2021 and 2020, the USPS generated revenue representing 89% and 88%, respectively, of total trucking revenue and 89% and 87%, respectively, of the Company’s consolidated revenue. The USPS is operated by the United States Federal government; therefore, the Company does not believe there is significant credit risk related to the accounts receivable balance due from the USPS. If the Company were to lose its relationship, or is unable to renew existing contracts, with the USPS, it would have a material adverse effect on the Company’s financial condition and results of operations.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Maintenance and repair expenditures are charged to expense as incurred. Gains and losses on disposals of revenue equipment are included in operations as they are a normal, recurring component of our operations. Depreciation is provided utilizing the straight-line method over the following estimated useful lives.

	Years
Tractors		7
Trailers		14
Equipment		5
Buildings		35
Leasehold improvements		5

Goodwill

Goodwill represents the excess of the purchase price of a business acquisition over the net fair value of assets acquired and liabilities assumed. We test goodwill for impairment annually and whenever events or circumstances make it more likely than not that an impairment may have occurred, such as a significant adverse change in the business climate or a decision to sell all or a portion of a reporting unit. We perform our annual goodwill impairment test as of October 1 and monitor for interim triggering events on an ongoing basis. All of the Company’s goodwill is recorded in the Trucking reporting unit, which has a negative carrying value as of December 31, 2021 and 2020.

Goodwill is reviewed for impairment utilizing either a qualitative assessment or a quantitative goodwill impairment test. If we choose to perform a qualitative assessment and determine the fair value more likely than not exceeds the carrying value, no further evaluation is necessary. When we perform the quantitative goodwill impairment test, we compare the fair value of the reporting unit to the carrying value, which includes goodwill. If the fair value of the reporting unit exceeds its carrying value, the goodwill is not considered impaired. If the carrying value is higher than the fair value, the difference would be recognized as an impairment loss.

The Company performed its annual goodwill impairment tests for 2021 and 2020 by completing quantitative impairment analyses of the Trucking reporting unit goodwill, and management concluded the goodwill was not impaired.

Intangible Assets

The Company's intangible assets consist of customer relationships, trade names and non-competition agreements. The Company carries these intangible assets at cost, less accumulated amortization. Amortization is recorded on a straight-line basis over the estimated useful lives of the respective assets. Management reviews its intangible assets for impairment whenever events or circumstances indicate that the carrying amount of the asset may not be recoverable. There were no indefinite-lived intangible assets at December 31, 2021 and 2020.

Assets Held for Sale

The Company classifies assets as being held for sale when the following criteria are met: Management, having the authority to approve the action, commits 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 probable, and transfer of the asset is expected to qualify for recognition as a completed sale, within one year; 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.

Long-Lived Assets

We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Upon such an occurrence, recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to forecasted undiscounted net cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. For long-lived assets held for sale, assets are written down to fair value, less cost to sell. Fair value is determined based on discounted cash flows, appraised values or management's estimates, depending upon the nature of the assets.

The Company recorded long-lived asset impairment charges of $0 and $2.3 million during the years ended December 31, 2021 and 2020, respectively. Substantially all of the impairment charge during the year ended December 31, 2020 is related to the CNG fueling stations segment. Refer to Note 9, Fair Value Measurements, for further details.

Debt Issuance Costs

Certain fees and costs incurred to obtain long-term financing are capitalized and included as a reduction in the carrying value of the related debt in the consolidated balance sheets, net of accumulated amortization. These costs are amortized to interest expense using the effective interest method over the term of the related debt.

Fair Valuation of Common Stock, Preferred Stock, Warrants and Stock Options

Our executive officers, directors and principal stockholders beneficially own a substantial majority of the Company’s outstanding common stock. The Company’s common stock does not have an observable quoted market price on the OTC Expert Market because the stock is thinly traded and is not eligible for proprietary broker-dealer quotations. As a result, we must utilize an alternative method to estimate the fair value of our common stock, including when the Company issues other equity instruments for which the common stock is the underlying security. We first use primarily the income, or discounted cash flows, approach to determine the estimated fair value of our total equity. The assumptions about future cash flows and growth rates are based on the Company's long-term forecast and are subject to review and approval by senior management. The discount rate utilized is a risk-adjusted weighted average cost of capital, which we believe approximates the rate from a market participant's perspective. We then use the option-pricing equity allocation method to allocate the estimated total equity value to our common stock and preferred stock. The inputs and assumptions used in the option-pricing model include: (1) the discount rate; (2) the estimated time to liquidity; (3) the Company's expected stock price volatility; (4) the estimated discount for the lack of marketability; and (5) the risk-free interest rate. The estimated fair value could be impacted by changes in market conditions, interest rates, growth rates, tax rates, costs, pricing and capital expenditures. The fair value determination is categorized as Level 3 in the fair value hierarchy due to its use of internal projections and unobservable measurement inputs. The estimated fair value of the Company’s common stock is a key assumption in the fair valuation of the preferred stock, warrants and stock options the Company issues.

Stock-Based Compensation

The Company accounts for stock-based compensation awards based on the fair value of the award as of the grant date, which is calculated using the Black-Scholes option pricing model. The Company recognizes stock-based compensation expense on a straight-line basis over the awards’ vesting period and accounts for forfeitures as they occur.

Some of the Company’s currently outstanding awards provide for the acceleration of vesting of all shares underlying the award upon the occurrence of the Company completing an aggregate of at least $30 million of any combination of debt and/or equity financing transactions after the date of grant. Since such financing transactions are outside the Company’s control, the Company does not deem the performance condition to be probable of achievement until the cumulative financing transactions have been completed. Once the cumulative financing transactions have been completed and the vesting of the awards is accelerated, the Company accelerates its recognition of stock-based compensation expense and records any previously unrecognized compensation cost associated with the affected awards on such date.

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):

	For the Years Ended December 31,
	2021			2020
Numerator:
Net income (loss)	$	14,253		$	(46,848	)
Accrued and undeclared preferred stock dividends in arrears		(651	)		(532	)
Issuance of warrants as deemed dividend - related party		—			(455	)
Net income (loss) available to common stockholders - numerator for basic EPS		13,602			(47,835	)
Effect of dilutive securities:
$4.0 million Secured Convertible Promissory Notes		285			—
Redeemable Series A Preferred stock		36			—
Redeemable Series B Preferred stock		615			—
Subtotal		936			—
Adjusted net income (loss) available to common stockholders - numerator for diluted EPS	$	14,538		$	(47,835	)
Denominator:
Denominator for basic EPS - weighted average common shares outstanding		30,507,308			21,176,453
Effect of dilutive securities:
$4.0 million Secured Convertible Promissory Notes		527,736			—
Redeemable Series A Preferred stock		132,647			—
Redeemable Series B Preferred stock		2,208,384			—
Subtotal		2,868,767			—
Denominator for diluted EPS - adjusted weighted average common shares outstanding		33,376,075			21,176,453
Basic EPS	$	0.45		$	(2.26	)
Diluted EPS	$	0.44		$	(2.26	)

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:

	For the Years Ended December 31,
	2021		2020
Stock options		10,920,249		9,539,249
Warrants		12,606,255		12,106,255
Common stock to be issued upon conversion of $4.0 million Secured Convertible     Promissory Notes		—		1,751,542
Common stock to be issued upon conversion of Redeemable Series A Preferred stock		—		132,647
Common stock to be issued upon conversion of Redeemable Series B Preferred stock		—		2,208,384
Common stock to be issued upon conversion of Four convertible promissory notes with an     aggregate principal amount of $9.5 million		7,516,250		7,411,250
Common stock and warrant to be issued for purchase of fixed assets		2,348,000		2,348,000
Total		33,390,754		35,497,327

Revenue Recognition

Trucking

USPS – USPS trucking operations generates revenue from transportation services under multi-year contracts with the USPS, generally on a rate per mile basis that adjusts monthly for fuel pricing indexes.

•Contract Identification – Although the Company has master agreements with the USPS, these master agreements only establish general terms. Each delivery represents a distinct service that is a separately identified performance obligation for each contract. A single delivery may comprise multiple stops prior to completion. Therefore, a legally enforceable contract is executed by both parties at the first point of pickup for each delivery.

•Performance Obligations – The Company’s performance obligation arises from the annualized contract to transport USPS freight and is satisfied upon completion of each delivery. The Company’s delivery, accessorial, and dedicated truck capacity represent a bundle of services that are highly interdependent and have the same pattern of transfer to the customer. These services are not capable of being distinct from one another. Thus, the Company’s only performance obligation of USPS trucking operations is transportation services.

•Transaction Price – The transaction price is based on the awarded agreement for the multi-year contract. The prices are based on miles travelled that adjust monthly for fuel pricing indexes. Depending on the contract, the total transaction price may consist of mileage revenue, fuel adjustments, accessorial fees and fees for additional deliveries outside of the scope of the annual contract. There is no significant financing component in the transaction price, as the USPS generally pays within the contractual payment terms of 30 to 60 days.

•Allocating Transaction Price to Performance Obligations – The transaction price is allocated in its entirety to transportation services, as this is the only performance obligation.

•Revenue Recognition – Revenues are recognized over time as satisfaction of the promised contractual delivery agreements are completed, in an amount that reflects the rate per mile set in the contract. Generally, the Company does not have material revenue in transit at period end.

Freight

•Contract Identification – A legally enforceable contract is executed by both parties at the point of pickup at the shipper’s location, as evidenced by a bill of lading. Although the Company may have master agreements with its customers, these master agreements only establish general terms. There is no financial obligation until the load is tendered/accepted and the Company takes possession of the load.

•Performance Obligations – The Company’s only performance obligation for freight trucking operations is transportation services. The Company’s delivery, accessorial, and dedicated truck capacity represent a bundle of services that are highly interdependent and have the same pattern of transfer to the customer. These services are not capable of being distinct from one another and the Company does not offer them on a stand-alone basis.

•Transaction Price – Depending on the contract, the total transaction price may consist of mileage revenue, fuel adjustments, and accessorial fees. There is no significant financing component in the transaction price, as the customers generally pay within the contractual payment terms of 30 to 90 days.

•Allocating Transaction Price to Performance Obligations – The transaction price is allocated in its entirety to transportation services, as this is the only performance obligation.

•Revenue Recognition – Revenues are recognized over time as satisfaction of the promised contractual delivery agreements are completed. Generally, the Company does not have material revenue in transit at period end.

CNG Fueling Stations

The Company’s CNG is sold predominately pursuant to contractual commitments. These contracts typically include a stand-ready obligation to supply natural gas daily.

•Contract Identification – A legally enforceable contract is executed by both parties at the time a customer pumps the fuel from the station. Although the Company may have contractual agreements, these agreements only establish general terms. There is no financial obligation until the customer receives and consumes the benefits provided by the Company’s performance as the stand-ready obligations are being satisfied.

•Performance Obligations – The Company’s performance obligation arises from the sale of fuel to the customer. Thus, the Company’s only performance obligation of CNG operations is CNG sales.

•Transaction Price – The transaction price is based on the stand-alone selling price for fuel. The primary method used to estimate the stand-alone selling price for fuel is observable stand-alone sales.

•Allocating Transaction Price to Performance Obligations – The transaction price is allocated in its entirety to CNG sales, as this is the only performance obligation.

•Revenue Recognition – The Company recognizes revenue for fuel sales at the point in time the customer receives and consumes the benefits.

Management has determined that that the Company acts as the principal (rather than the agent) with respect to its Trucking and CNG operations because it is primarily responsible for fulfilling the promise to provide the specified good or service and has discretion in establishing the price for the specified good or service. Accordingly, the Company recognizes revenue on a gross basis. 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:

	December 31,
($ in thousands)	2021		2020
USPS revenue	$	235,926	$	200,494
Freight revenue		26,578		26,179
Other revenue		6,409		1,603
Total Trucking revenue	$	268,913	$	228,276

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.

Loss Contingencies

From time to time, we are involved in litigation, claims, contingencies and other legal matters. We record a charge equal to at least the minimum estimated liability for a loss contingency borne by the Company when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the range of the loss can be reasonably estimated. We expense legal costs, including those legal costs expected to be incurred in connection with a loss contingency, as incurred.

Income Taxes

Deferred income taxes are recognized for differences between the basis of assets and liabilities for financial statement and income tax purposes. Deferred tax assets and liabilities represent the future tax consequence for those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset future taxable income.

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.

The Company accounts for uncertainty in income taxes by recognizing the tax benefit or expense from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The Company measures the tax benefits and expenses recognized in the consolidated financial statements from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The Company has not identified any material uncertain tax positions as of December 31, 2021 and 2020, respectively. Interest and penalties associated with tax positions are recorded within income tax expense. Tax years that remain subject to examination include 2018 through the current year for federal and generally 2017 through the current year for state purposes.

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.