UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of |
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(I.R.S. Employer |
incorporation or organization) |
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Identification No.) |
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act: None.
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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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 ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☐
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 |
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Accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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 registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of August 22, 2023, there were
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
i
EVO TRANSPORTATION & ENERGY SERVICES, INC.
PART I – FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited)
2
Condensed Consolidated Balance Sheets (unaudited)
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September 30, |
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December 31, |
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($ in thousands, except share and per share data) |
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Assets |
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Current assets |
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Cash |
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$ |
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$ |
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Accounts receivable - trade, net |
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Alternative fuels tax credit receivable |
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Due from related party |
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Prepaids and other current assets |
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Total current assets |
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Non-current assets |
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Property and equipment, net |
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Goodwill |
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Intangible assets, net |
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Operating lease right-of-use assets, net |
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Finance lease right-of-use assets, net |
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Deposits and other long-term assets |
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Total non-current assets |
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Total assets |
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$ |
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$ |
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Liabilities, Temporary Equity and Stockholders’ Deficit |
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Current liabilities |
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Accounts payable |
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$ |
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$ |
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Accrued expenses and other current liabilities |
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Accrued interest - related party |
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Embedded derivative liability |
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Warrant liabilities |
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Advances under factoring arrangements, current portion |
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Current portion of long-term debt |
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Current portion of long-term debt - related party |
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Operating lease liabilities, current portion |
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Finance lease liabilities, current portion |
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Total current liabilities |
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Non-current liabilities |
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Advances under factoring arrangements, less current portion |
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Long-term debt, less current portion |
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Long-term debt, less current portion - related party |
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Operating lease liabilities, less current portion |
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Finance lease liabilities, less current portion |
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Deferred tax liability |
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Total non-current liabilities |
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Total liabilities |
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Temporary Equity |
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Series A Redeemable Convertible Preferred stock, $ |
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— |
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Series B Redeemable Convertible Preferred stock, $ |
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— |
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Series C Redeemable Preferred stock, $ |
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Redeemable common stock, at redemption value; |
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— |
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Stockholders’ deficit |
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Series D Non-Redeemable Preferred stock, $ |
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Common stock, $ |
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Common stock issuable |
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Additional paid-in capital |
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Accumulated deficit |
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( |
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( |
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Total stockholders’ deficit |
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( |
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( |
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Total liabilities, temporary equity and stockholders’ deficit |
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$ |
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$ |
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See notes to unaudited condensed consolidated financial statements.
3
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Condensed Consolidated Statements of Operations (Unaudited)
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Three Months Ended |
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Nine Months Ended |
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($ in thousands, except share and per share data) |
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2022 |
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2021 |
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2022 |
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2021 |
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Revenue |
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Trucking |
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$ |
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$ |
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$ |
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$ |
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Other |
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Total revenue |
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Operating expenses |
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Payroll, benefits and related |
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Purchased transportation |
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Fuel |
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Equipment rent |
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Maintenance and supplies |
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General and administrative |
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Operating supplies and expenses |
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Depreciation and amortization |
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Insurance and claims |
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(Gain) loss on sale of fixed assets |
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( |
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CNG expenses |
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Total operating expenses |
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Operating income (loss) |
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( |
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( |
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Other income (expense) |
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Interest expense |
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( |
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( |
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( |
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Change in fair value of embedded derivative liability |
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Change in fair value of warrant liabilities |
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Gain (loss) on extinguishment of debt |
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— |
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( |
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Other miscellaneous income |
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Total other expense |
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( |
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Income (loss) before income taxes |
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( |
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(Provision) benefit for income taxes |
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( |
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( |
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Net (loss) income |
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$ |
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$ |
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$ |
( |
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$ |
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Earnings per share: |
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Basic |
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$ |
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$ |
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$ |
( |
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$ |
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Diluted |
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$ |
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$ |
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$ |
( |
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$ |
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Weighted average shares outstanding: |
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Basic |
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Diluted |
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See notes to unaudited condensed consolidated financial statements.
4
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Condensed Consolidated Statements of Changes in Stockholders’ Deficit (Unaudited)
For the Nine Months Ended September 30, 2022
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Preferred Stock |
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Common Stock |
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Common Stock |
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Additional |
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Accumulated |
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Total |
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($ in thousands, except share data) |
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Shares |
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Amount |
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Shares |
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Amount |
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Issuable |
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Capital |
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Deficit |
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Deficit |
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Balance - December 31, 2021 |
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— |
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$ |
— |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
( |
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Issuance of common stock - related party |
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— |
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— |
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— |
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( |
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— |
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— |
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Conversion of convertible notes into warrants |
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— |
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— |
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— |
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— |
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— |
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— |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
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— |
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— |
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Series A Redeemable Preferred stock dividend |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Series B Redeemable Preferred stock dividend |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Balance - March 31, 2022 |
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— |
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— |
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( |
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( |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
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— |
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— |
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Series A Redeemable Preferred stock dividend |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Series B Redeemable Preferred stock dividend |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
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( |
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Balance - June 30, 2022 |
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— |
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— |
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( |
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( |
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Reclassification of warrants from liability classified to equity classified |
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— |
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— |
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— |
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— |
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— |
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— |
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Issuance of Series D Non-Redeemable Preferred stock |
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— |
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— |
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— |
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— |
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— |
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Exercise of warrants into common stock |
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— |
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— |
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— |
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— |
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Issuance of equity classified warrants |
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— |
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— |
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— |
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— |
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— |
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— |
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Restructuring gain from related parties |
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— |
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— |
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— |
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— |
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— |
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— |
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Reclassification of redeemable common stock |
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— |
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— |
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— |
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— |
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— |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
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— |
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— |
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Conversion of Series A Redeemable Preferred stock into common stock |
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— |
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— |
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— |
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— |
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— |
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Conversion of Series B Redeemable Preferred stock into common stock |
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— |
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— |
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— |
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— |
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— |
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Net income |
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— |
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— |
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— |
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— |
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— |
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— |
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Balance - September 30, 2022 |
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$ |
— |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
( |
) |
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
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Common Stock |
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Common Stock Subscribed |
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Common Stock |
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Additional |
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Accumulated |
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Total |
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($ in thousands) |
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Shares |
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Amount |
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Shares |
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Amount |
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Issuable |
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Capital |
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Deficit |
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Deficit |
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Balance - December 31, 2020 |
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$ |
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$ |
— |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
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Obligation to issue common stock - related party |
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— |
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— |
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— |
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— |
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— |
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— |
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Issuance of warrants to extinguish debt |
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— |
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— |
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— |
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— |
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— |
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— |
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Common stock issued for services - related party |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Stock-based compensation expense |
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— |
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— |
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— |
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— |
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— |
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— |
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Series A Redeemable Preferred stock dividend |
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— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Series B Redeemable Preferred stock dividend |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Balance - March 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|||||
Issuance of warrants to extinguish debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Series A Redeemable Preferred stock dividend |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Series B Redeemable Preferred stock dividend |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Balance - June 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|||||
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Series A Redeemable Preferred stock dividend |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Series B Redeemable Preferred stock dividend |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Balance - September 30, 2021 |
|
|
|
|
$ |
|
|
|
|
|
$ |
— |
|
|
|
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
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 |
|
|||||
($ in thousands) |
|
2022 |
|
|
2021 |
|
||
Cash flows from operating activities |
|
|
|
|
|
|
||
Net income (loss) |
|
$ |
( |
) |
|
$ |
|
|
Adjustments to reconcile net loss to net cash used in operating activities |
|
|
|
|
|
|
||
Depreciation and amortization |
|
|
|
|
|
|
||
Non-cash lease expense |
|
|
|
|
|
|
||
Loss on sale of fixed assets |
|
|
|
|
|
|
||
Amortization of debt discount and debt issuance costs |
|
|
|
|
|
|
||
Deferred income taxes |
|
|
|
|
|
|
||
Stock-based compensation expense |
|
|
|
|
|
|
||
Non-cash interest expense |
|
|
|
|
|
|
||
Bad debt expense |
|
|
|
|
|
|
||
Change in fair value of embedded derivative liability |
|
|
( |
) |
|
|
( |
) |
Change in fair value of warrant liabilities |
|
|
( |
) |
|
|
( |
) |
(Gain) loss on extinguishment of debt |
|
|
|
|
|
( |
) |
|
Restructuring gain from Recapitalization Transactions |
|
|
( |
) |
|
|
— |
|
Changes in assets and liabilities |
|
|
|
|
|
|
||
Accounts receivable - trade |
|
|
|
|
|
( |
) |
|
Alternative fuels tax credit receivable |
|
|
( |
) |
|
|
|
|
Due from related party |
|
|
— |
|
|
|
|
|
Other assets |
|
|
( |
) |
|
|
( |
) |
Accounts payable |
|
|
( |
) |
|
|
( |
) |
Accrued expenses and other current liabilities |
|
|
( |
) |
|
|
( |
) |
Accrued interest - related party |
|
|
|
|
|
|
||
Operating lease liabilities |
|
|
( |
) |
|
|
( |
) |
Net cash provided by (used in) operating activities |
|
|
|
|
|
|
||
Cash flows from investing activities |
|
|
|
|
|
|
||
Purchases of equipment |
|
|
( |
) |
|
|
( |
) |
Proceeds from sale of assets |
|
|
|
|
|
|
||
Net cash provided by (used in) investing activities |
|
|
( |
) |
|
|
( |
) |
Cash flows from financing activities |
|
|
|
|
|
|
||
Proceeds from sale of common stock, preferred stock and warrants |
|
|
|
|
|
— |
|
|
Proceeds from issuance of debt |
|
|
— |
|
|
|
|
|
Payments of principal on debt |
|
|
( |
) |
|
|
( |
) |
Proceeds from issuance of debt - related party |
|
|
|
|
|
— |
|
|
Payments of principal on debt - related party |
|
|
( |
) |
|
|
( |
) |
Payment of prepayment penalty fees - related party |
|
|
— |
|
|
|
( |
) |
Advances from factoring arrangements |
|
|
|
|
|
|
||
Payments on factoring arrangements |
|
|
( |
) |
|
|
( |
) |
Debt extinguishment costs |
|
|
( |
) |
|
|
— |
|
Payments on finance lease liabilities |
|
|
( |
) |
|
|
( |
) |
Net cash provided by (used in) financing activities |
|
|
|
|
|
( |
) |
|
Net increase (decrease) in cash and restricted cash |
|
|
|
|
|
( |
) |
|
Cash and restricted cash - beginning of year |
|
|
|
|
|
|
||
Cash and restricted cash - end of year |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
||
Income tax paid |
|
$ |
|
|
$ |
|
||
Interest paid |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Supplemental schedule of non-cash investing and financing activities: |
|
|
|
|
|
|
||
Right-of-use assets obtained in exchange for finance lease liabilities |
|
$ |
|
|
$ |
|
||
Right-of-use assets obtained in exchange for operating lease liabilities |
|
$ |
|
|
$ |
|
||
Restructuring gain from Recapitalization Transactions in additional paid-in capital |
|
$ |
|
|
$ |
— |
|
|
Fair value of warrants and common stock issued in connection with financing arrangements |
|
$ |
|
|
$ |
|
See notes to unaudited condensed consolidated financial statements.
7
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 – Description of Business and Summary of Significant Accounting Policies
Description of Business
EVO Transportation & Energy Services, Inc. (“EVO” and, together with its direct and indirect subsidiaries, the “Company”) 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 either diesel fuel, gasoline, or compressed natural gas (“CNG”). 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
Going Concern
As of September 30, 2022, the Company had a cash balance of $
The following significant transactions and events affecting the Company’s liquidity occurred during the nine months ended September 30, 2022:
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,
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
10
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes 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 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 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 TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Basis of Presentation
Pushdown Accounting
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 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):
12
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) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Accrued and undeclared preferred stock dividends in arrears |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Inducement to convert preferred stock into common stock |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
Net income (loss) available to common stockholders - numerator for basic EPS |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
$ |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Series A Redeemable Convertible Preferred stock |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Series B Redeemable Convertible Preferred stock |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Subtotal |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Adjusted net income (loss) available to common stockholders - numerator for diluted EPS |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Denominator for basic EPS - weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
$ |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|||
Series A Redeemable Convertible Preferred stock |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Series B Redeemable Convertible Preferred stock |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Subtotal |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|||
Denominator for diluted EPS - adjusted weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic EPS |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Diluted EPS |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Common stock to be issued upon conversion of |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Common stock and warrant to be issued for purchase |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Freight revenue |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other revenue |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total Trucking revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
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 $
Segment Reporting
The Company uses 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 Company's operations. Historically, the Company had
Restricted Cash
We had restricted cash of $
Recently Issued Accounting Pronouncements
Accounting Pronouncements Adopted
In May 2021, the Financial Accounting Standards Board (“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
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, 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.
Note 2 - Balance Sheet Disclosures
Goodwill consists of the following:
($ in thousands) |
|
September 30, |
|
|
December 31, |
|
||
Beginning balance |
|
$ |
|
|
$ |
|
||
Acquisitions |
|
|
|
|
|
|
||
Impairment |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
Intangible assets consist of the following:
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
||||||||||||||||||
($ in thousands) |
|
Gross |
|
|
Accumulated Amortization |
|
|
Net |
|
|
Gross |
|
|
Accumulated Amortization |
|
|
Net |
|
||||||
Customer relationships |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||
Trade names |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||
Non-competition agreements |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
Amortization expense for the three months ended September 30, 2022 and 2021 was $
Note 3 - 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
Accrued Interest - Related Party
The Company’s accrued interest - related party consists of the accrued interest payments on stockholders’ and related party debt. Accrued interest - related party was $
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 $
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 $
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 $
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
For information regarding additional related party transactions, see Note 5, Debt, and Note 6, Stockholders’ Deficit and Warrants.
Note 4 – Factoring Arrangements
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 $
($ in thousands) |
|
September 30, |
|
|
December 31, |
|
||
Purchased accounts receivable |
|
$ |
|
|
$ |
|
||
Overadvances |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
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
Note 5 - Debt
Antara Financing Agreement
On September 16, 2019, EVO
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
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 $
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 $
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.
18
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 $
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
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 $
The Omnibus Amendment contained the following additional covenants:
19
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
The Paycheck Protection Program loan (the “PPP Loan”) was forgiven by the Small Business Administration (the “SBA”) in July 2021, which resulted in a $
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 $
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 $
The Main Street Loan has a
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
20
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
principal amount equal to fifteen percent (
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
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 $
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 $
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
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 $
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
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
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
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
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
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 $
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 $
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 $
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 $
Each warrant issued to the Exchanging Creditors at an exercise price of $
The Takeback Notes bear interest at
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 $
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 $
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) $
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 |
|
$ |
|
(1) |
$ |
|
(2) |
||
(b) $1.3 million note payable |
|
|
|
|
|
|
|
||
(c) $4.0 million Secured Convertible Promissory Notes (“Secured Convertible Notes”) |
|
|
— |
|
|
|
|
|
|
(d) $0.3 million note payable |
|
|
|
|
|
|
|
||
(e) Thunder Ridge supplier advance |
|
|
|
|
|
|
|
||
(f) Various notes payable acquired from J.B. Lease Corporation ("JB Lease") |
|
|
|
|
|
|
|
||
(g) $0.8 million note payable |
|
|
|
|
|
|
|
||
(h) $3.8 million note payable |
|
|
|
|
|
|
|
||
(i) Failed sale-leaseback obligations |
|
|
|
|
|
|
|
||
(j) Notes payable to three financing companies |
|
|
|
|
|
|
|
||
(k) Finkle equipment notes |
|
|
|
|
|
|
|
||
(l) Takeback Notes |
|
|
|
|
|
— |
|
|
|
Total before debt issuance costs and debt discount |
|
|
|
|
|
|
|
||
Debt issuance costs |
|
|
( |
) |
|
|
( |
) |
|
Debt premiums / (discounts), net |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
||
Less current portion |
|
|
( |
) |
|
|
( |
) |
|
Long-term debt, less current portion |
|
$ |
|
|
$ |
|
|
(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 $
The Company classified the $
The Secured Convertible Notes were issued during August 2018. The Company paid debt issuance costs of $
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
Pursuant to the Bridge Loan Agreement in March 2022, the Company borrowed $
Pursuant to the Exchange Creditor Agreement, the remaining Secured Convertible Notes in the aggregate amount of principal and accrued interest of approximately $
The $
The various notes payable acquired from JB Lease were issued to multiple lenders with interest rates ranging from
The $
The $
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
The Company issued notes payable to three financing companies in February and October 2019 and the fourth quarter of 2021 with maturity dates in
The Company issued equipment notes payable to several financing companies with interest rates ranging from
The Company issued two promissory notes with an aggregate principal amount of $
Debt (with related parties) consists of:
($ in thousands) |
|
September 30, |
|
|
December 31, |
|
|
||
(a) Antara Financing Agreement |
|
$ |
|
(1) |
$ |
|
(2) |
||
(b) Four promissory notes with an aggregate principal amount of $9.5 million |
|
|
— |
|
|
|
|
|
|
(c) Bridge Loan and Executive Loans |
|
|
|
|
|
— |
|
|
|
(d) $3.8 million senior promissory note |
|
|
— |
|
|
|
|
(2) |
|
(e) $4.0 million senior promissory note |
|
|
— |
|
|
|
|
(2) |
|
(f) $2.5 million promissory note - stockholder |
|
|
— |
|
|
|
|
|
|
(g) $6.4 million promissory note - stockholder |
|
|
— |
|
|
|
|
|
|
(h) Note payable acquired from Ritter |
|
|
|
|
|
|
|
||
(i) Takeback Notes |
|
|
|
|
|
— |
|
|
|
Total before debt issuance costs and debt discount |
|
|
|
|
|
|
|
||
Debt issuance costs |
|
|
( |
) |
|
|
( |
) |
|
Debt premiums / (discounts), net |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
||
Less current portion |
|
|
( |
) |
|
|
( |
) |
|
Long-term debt, less current portion - related party |
|
$ |
|
|
$ |
|
|
(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, 2020 due to the probability of recurrence of covenant violations, other than the EBITDA-based covenant, during 2021.
The $
27
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
per annum for the first eight full or partial calendar quarters following December 14, 2020 and is payable in cash at the rate of
The Company classified the $
Refer to the discussion above regarding the Convertible Note Amendments, dated March 11, 2022, which resulted in the 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 $
On March 11, 2022, the $
The $
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 $
Pursuant to the Exchange Creditor Agreement, the $
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 $
As of September 30, 2022 and December 31, 2021, the remaining unamortized debt discount was $
The $
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 $
Pursuant to the Exchange Creditor Agreement, the $
As of September 30, 2022 and December 31, 2021, the remaining unamortized debt discount was $
In connection with the Company's June 1, 2018 acquisition of all of the issued and outstanding shares of Thunder Ridge, this $
Pursuant to the Exchange Creditor Agreement, the promissory note in the aggregate amount of principal and accrued interest of approximately $
The $
29
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
commenced June 1, 2019, with a final payment of $
Pursuant to the Exchange Creditor Agreement, the senior promissory notes in the aggregate amount of principal and accrued interest of approximately $
Note payable to a related party were assumed as a liability in the Ritter acquisition. The note has an interest rate of
The Company issued three promissory notes with an aggregate principal amount of $
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, par value $
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 $
Redeemable Common Stock
Pursuant to the Sheehy Agreement, SEI waived and agreed to not exercise the $
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
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
Liquidation Preference
The holders of the Series C Preferred Stock are entitled to a liquidation preference of $
Redemption
The Series C Preferred Stock may be redeemed by the Company on the Bridge Loan Discharge Date at a redemption price equal to $
Voting Rights
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,
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
Dividends
A dividend accrues on the Series D Non-Participating Preferred Stock at a rate of
Liquidation Preference
The holders of the Series D Non-Participating Preferred Stock are entitled to a liquidation preference of $
Voting Rights
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:
As further described in Note 5, Debt, in connection with the December 2020 Main Street Loan, the Company contributed
As further described in Note 5, 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
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
The following warrants were issued and exercised in connection with the SPA:
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, 2022 is as follows:
|
|
Number of Warrants |
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|||||
|
|
Equity Classified |
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|
Liability Classified |
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|
||
Balance at December 31, 2020 |
|
|
|
|
|
|
|
||
Issued in 2021 |
|
|
|
|
|
— |
|
|
|
Balance at December 31, 2021 |
|
|
|
|
|
|
|
||
Issued in the nine months ended September 30, 2022 |
|
|
|
|
|
|
|
||
Reclassified in the nine months ended September 30, 2022 |
|
|
|
|
|
( |
) |
|
|
Exercised in the nine months ended September 30, 2022 |
|
|
( |
) |
|
|
— |
|
|
Forfeited in the nine months ended September 30, 2022 |
|
|
( |
) |
|
|
— |
|
|
Balance at September 30, 2022 |
|
|
|
|
|
|
|
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.
|
|
Number of |
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|
Weighted |
|
|
Weighted |
|
|||
September 30, 2022 |
|
|
|
|
|
|
|
|
|
|||
Outstanding |
|
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|
$ |
|
|
|
|
|||
Exercisable |
|
|
|
|
$ |
|
|
|
|
|||
December 31, 2021 |
|
|
|
|
|
|
|
|
|
|||
Outstanding |
|
|
|
|
$ |
|
|
|
|
|||
Exercisable |
|
|
|
|
$ |
|
|
|
|
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 |
|
|
|
|
$ |
|
|
|
|
|||
Exercisable |
|
|
|
|
$ |
|
|
|
|
|||
December 31, 2021 |
|
|
|
|
|
|
|
|
|
|||
Outstanding |
|
|
|
|
$ |
|
|
|
|
|||
Exercisable |
|
|
|
|
$ |
|
|
|
|
Note 7 – Stock-Based Compensation
Warrants – Stock-Based Compensation
During the first quarter of 2021, EVO
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 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., 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. 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 Company's liability-classified warrants issued with an exercise price of $
The Company's liability-classified warrants issued with an exercise price of greater than $
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 |
|
$ |
|
|
$ |
|
||
Issuances |
|
|
— |
|
|
|
|
|
Reclassification of warrants from liability classified to equity classified |
|
|
— |
|
|
|
( |
) |
Net change in fair value |
|
|
( |
) |
|
|
( |
) |
Balance at September 30, 2022 |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Balance at December 31, 2020 |
|
$ |
|
|
$ |
— |
|
|
Issuances |
|
|
— |
|
|
|
|
|
Net change in fair value |
|
|
( |
) |
|
|
( |
) |
Balance at September 30, 2021 |
|
$ |
|
|
$ |
|
There were
The Company’s obligations under its debt agreements are carried at amortized cost. The fair value of the Company’s obligations under its convertible
Note 9 – Leases
Related Party Leases
The Company has various lease obligations with related parties for trucks, office space and terminals expiring at various dates through
35
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
($ in thousands) |
|
Classification |
|
September 30, |
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December 31, |
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||
Assets |
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Operating leases |
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Right-of-use-asset |
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$ |
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$ |
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||
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Liabilities |
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Current: |
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|
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Operating leases |
|
Operating lease liabilities, current portion |
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||
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Non-current: |
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|
||
Operating leases |
|
Operating lease liabilities, less current portion |
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|
|
|
|
Note 10 – Commitments and Contingencies
Legal Contingencies
In the normal course of business, the Company is party to legal proceedings from time to time. The Company maintains insurance to cover certain actions and it establishes reserves for specific legal proceedings when the Company determines that the likelihood of an 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 lawsuit in the Superior Court of Orange County, California, related to the lease agreement for the El Toro station. The complaint alleges breach of contract 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 approximately $
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 Select Subcommittee on the Coronavirus Crisis of the U.S. House of Representatives demanding that we return the $
Long-Term Take-or-Pay Natural Gas Supply Contracts
As of September 30, 2022 and December 31, 2021, the Company had commitments to purchase natural gas on a take-or-pay basis with
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
36
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 $
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
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 $
Note 11 - Income Taxes
The Company recognizes deferred tax liabilities and assets for the 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 12 - Subsequent Events
Amended and Restated Bridge Loan
On 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 Bridge Loan and warrants with an exercise price per share of $
Warrant Exercises
On November 14, 2022, Antara Capital exercised warrants to purchase
37
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
Loan Dispute Settlement
On April 14, 2023, EVO, Titan CNG LLC, a wholly-owned subsidiary of 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 $
The Promissory Note matures on
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 :1.00 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
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 $
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
38
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 annual bonus opportunities to be granted to EVO’s executive officers and other participating employees. The purposes of the AIP are to provide additional incentives for employees who contribute to the improvement of operating results of the Company and to reward outstanding performance on the part 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,
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,
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 $
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 used 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 sell certain equipment and other assets located in Fort Worth, Texas for a purchase price of $
The 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
39
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 $
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.
40
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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, 2021. 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 foregoing. In some cases you may 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.
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, 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:
41
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. (“EVO” and, together with its direct and indirect subsidiaries, the “Company”) 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 either diesel fuel, gasoline or compressed natural gas (“CNG”). 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.
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
42
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 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 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 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 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 $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 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.
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 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 $5.8 million during the 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 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 nine months ended September 30, 2021, the net income included $5.9 million in adjustments for non-cash items and $23.3 million of cash 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:
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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 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 (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.
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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 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 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.
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Refer to Notes 4 and 5 to the unaudited condensed consolidated financial statements for further information regarding the Company’s factoring and debt obligations. Refer to Note 12, Subsequent Events, to the consolidated financial statements for further information regarding changes in the Company’s debt obligations and liquidity subsequent to September 30, 2022.
Off-Balance Sheet Arrangements
Refer to Note 10, Commitments and Contingencies – Captive Insurance.
Critical Accounting Policies
Our critical accounting policies have not changed from the information reported in our Annual Report on Form 10-K for the year ended December 31, 2021.
Recently Adopted Accounting Changes and Recently Issued and Adopted Accounting Standards
See Note 1 to the unaudited condensed consolidated financial statements, included in Part 1, Item 1 of this Quarterly Report, incorporated by reference herein.
Seasonality
Discussion 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 other costs to increase, which would adversely affect our results of operations unless freight and rates correspondingly increased.
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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.
In 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 financial officers regarding the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2022, the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Company’s management, including its principal executive and financial officers have concluded that our disclosure controls and procedures were not effective as of September 30, 2022, due to the material weaknesses in our internal control over financial reporting described below in “Evaluation of Internal Controls and Procedures” including limitations in management’s evaluation of internal controls as a result of insufficient documentation of internal controls under the standards of the Committee 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 our financial statements were prepared in accordance with U.S. generally accepted accounting principles. Accordingly, management believes that the financial statements included in this Quarterly 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 the 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 in the section 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 completed 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 to monitor the effectiveness of 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.
See Part 1, Item 1, Note 10, Commitment and Contingencies, to 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, 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.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
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
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10.17 |
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101.INS |
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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 |
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Inline XBRL Taxonomy Extension Schema Document |
101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 |
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Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* Filed herewith
+ Management contract or compensatory plan or arrangement.
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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.
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EVO TRANSPORTATION & ENERGY SERVICES, INC. |
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Date: August 22, 2023 |
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/s/ Michael Bayles |
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Michael Bayles |
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Chief Executive Officer |
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Principal Executive Officer |
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Date: August 22, 2023 |
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/s/ Raj Kapur |
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Raj Kapur |
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Chief Accounting Officer |
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Principal Accounting & Financial Officer |
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