Description of Business and Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2019

Accounting Policies [Abstract]

Description of Business and Summary of Significant Accounting Policies

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

Description of Business

EVO Transportation and Energy Services, Inc. ("EVO, Inc." or the "Company") is a holding company based in Phoenix, Arizona, that owns eight operating subsidiaries: W.E. Graham Inc. ("Graham"), EVO Equipment Leasing, LLC ("Leasing"), Titan CNG, LLC ("Titan"), Thunder Ridge Transport, Inc. ("Thunder Ridge"), Ursa Major Corporation ("Ursa"), J.B. Lease Corporation ("JB Lease"), Sheehy Mail Contractors, Inc. ("Sheehy"), and Environmental Alternative Fuels, LLC ("EAF"), which are in the businesses of fulfilling United States Postal Service ("USPS") and corporate contracts for freight trucking services and compressed natural gas ("CNG") service stations. During the second quarter of 2019, the Company owned seven CNG stations located in California, Texas, Arizona, and Wisconsin. Of these stations, four were company operated, two were inactive, and one was operated by a third-party management company. The Company's two reportable segments are Trucking and CNG.

The Company's non-reportable segments include support services that the Company's subsidiaries provide to customers (including repair and maintenance shop services and equipment leasing) as well as corporate expenses.

Sheehy Acquisition

On January 4, 2019, but effective January 2, 2019, the Company acquired all of the outstanding equity interests of Sheehy. See Note 2 – Acquisition – Sheehy for more information regarding the Sheehy Acquisition.

Ursa Acquisition

On February 1, 2019, the Company acquired all of the outstanding equity interests of Ursa and JB Lease. See Note 2 – Acquisition – Ursa and JB Lease for more information regarding the Ursa Acquisition.

Going Concern

As of June 30, 2019, the Company has a working capital deficit of approximately $34.5 million, stockholders' deficit of approximately $9.7 million, and negative operating cash flows of $14.6 million for the six months ended June 30, 2019. Management anticipates rectifying these deficits with additional public and private offerings. Also, the Company is evaluating certain cash flow improvement measures including, consolidating costs with the acquired entities, the purchase of vehicles to reduce purchased transportation, and repricing contracts with USPS. However, there can be no assurance that the Company will be successful in these efforts. Further, for the six months ended June 30, 2019, USPS accounted for substantially all of the Company's total consolidated revenues. The loss of USPS as a customer or a significant reduction in the Company's relationship with USPS would have a material adverse effect on the Company's business.

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern for the next 12 months from the issuance of these condensed consolidated financial statements within this Quarterly Report on Form 10-Q. However, the above conditions raise substantial doubt about the Company's ability to do so. The condensed 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 should the Company be unable to continue as a going concern for the next 12 months from the issuance of the unaudited condensed consolidated financial statements within this Quarterly Report on Form 10-Q.

To meet its current and future obligations, the Company has taken the following steps to capitalize the business and successfully achieve its business plan during 2019:

● Management is working with related party debt holders and equipment lenders to extend or convert existing debt. However, there can be no assurance that the Company will be successful in these efforts.

● During May 2019, the Company completed a private equity placement for approximately $11.4 million. The funds were used in operations and acquisition of companies.

● During September 2019, the Company completed a financing for approximately $24.5 million. Substantially all of the funds from the financing were used to complete the Ritter acquisition as discussed in Note 13.

The cash balance as of June 30, 2019 was $7,564,504. The cash balance, combined with funding received from the debt transactions occurring subsequent to June 30, 2019 (see Note 13 – Subsequent Events), provides the Company sufficient liquidity to cover the negative cash flows generated from operations through the second quarter of 2020 Management is in the process of identifying sources of capital through debt refinancing and equity investments through one or more private placements.

Seasonality

Results of operations generally follow seasonal patterns in the transportation industry. Freight volumes in the first quarter are typically lower due to less consumer demand, consumers reducing shipments following the holiday season, and inclement weather. At the same time, operating costs generally increase, and tractor productivity decreases during the winter months due to decreased fuel efficiency, increased cold weather-related equipment maintenance and repairs, and increased insurance claims and costs due to higher accident frequency from harsh weather. Combined, these factors typically result in lower operating profitability as compared to other periods. Further, beginning in the latter half of the third quarter and continuing into the fourth quarter, the Company typically experiences surges pertaining to online holiday shopping, the length of the holiday season (shopping days between Thanksgiving and Christmas), and holiday surge pricing on USPS contracts.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of EVO, Inc. and its subsidiaries, JB Lease, Ursa, Sheehy, Graham, Leasing, Titan, Thunder Ridge, and EAF; Titan's wholly owned subsidiaries, Titan El Toro, LLC, Titan Diamond Bar, LLC, and Titan Blaine LLC; Thunder Ridge's wholly owned subsidiary, Thunder Ridge Logistics, LLC; and EAF's wholly owned subsidiary, EVO CNG, LLC. All intercompany accounts and transactions have been eliminated upon consolidation.

Basis of Presentation

The condensed consolidated financial statements have been prepared by the Company, without audit, pursuant to interim financial reporting guidelines and the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company's management, all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the financial position and the results of operations for the periods presented have been included. These condensed consolidated financial statements and the accompanying notes should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on May 30, 2019. The results of operations for the six months ended June 30, 2019, are not necessarily indicative of the operating results to be expected for the full fiscal year or any future periods.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The condensed consolidated financial statements include amounts that are based on management's best estimates and judgments. The most significant estimates relate to revenue recognition; goodwill and long-lived intangible asset valuations; fixed-asset impairment assessments; debt discount; contingencies; valuations of stock consideration paid for acquisitions related to Ursa, JB Lease, and Sheehy; and going concern. These estimates may be adjusted as more current information becomes available, and any adjustment could be significant.

Recently Issued Accounting Pronouncements

Accounting Pronouncement Adopted in 2019

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

In July 2018, the FASB issued ASU 2018-11, Leases (ASC Topic 842): Targeted Improvements, which addresses certain issues related to the implementation of ASC Topic 842, including, presentation on the statement of cash flows for sales type and direct financing leases, and transition disclosures related to ASC Topic 250. The transition disclosures related to ASC Topic 250 clarify that entities are not required to disclose the impacts of adopting ASC Topic 842 on net income or related per share amounts in both interim and annual reporting periods. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, but can be early adopted.

Adoption Method and Approach – The Company adopted ASU 2016-02 and ASU 2018-11, Leases (ASC Topic 842), on January 1, 2019, by applying the ASC Topic 840 Comparative Approach, resulting in the recognition of right-of-use assets and lease liabilities related to its operating and financing leases. Comparative information related to periods prior to January 1, 2019, continues to be reported under the legacy guidance in ASC Topic 840.

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

● Lease Identification – An entity need not reassess whether any expired or existing contracts are or contain leases.

● Lease Classification – An entity need not reassess the lease classification for any expired or existing leases (for example, all existing leases that were classified as operating leases in accordance with ASC Topic 840 are now classified as operating leases, and all existing leases that were classified as capital leases in accordance with ASC Topic 840 are now classified as finance leases).

● Initial Direct Costs – An entity need not reassess initial direct costs for any existing leases.

Adoption Date Impact – The required disclosures regarding the adoption date impact of ASC Topic 842 on the condensed consolidated balance sheet are presented below.

	December 31,		Opening Balance			January 1
	2018		Adjustments			2019
Assets
Operating lease right-of-use assets	$	-	$	4,380,571		$	4,380,571
Favorable lease, net	$	141,799	$	(141,799	)	$	-
Liabilities
Operating lease liabilities	$	-	$	4,238,772		$	4,238,772

The required disclosures regarding the current period impact of adopting ASC Topic 842 on the condensed consolidated balance sheet are presented below:

	As Reported under ASC Topic 842		If Reported under ASC Topic 840		Effect of Change to ASC Topic 842
Assets
Operating lease right-of-use assets	$	4,380,571	$	-	$	4,380,571
Favorable lease, net	$	-	$	141,799	$	-
Liabilities
Operating lease liabilities	$	4,238,772	$	-	$	4,238,772

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

Accounting Pronouncements Not Yet Adopted

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the amendments eliminate Step 2 from the goodwill impairment test. The annual or interim goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not plan early adoption of this update and does not expect the adoption of the update to materially change its current accounting methods; therefore, the Company does not expect the adoption to have a material impact on its consolidated financial statements. In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement, which modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. This new accounting standard will be effective for annual periods beginning after December 15, 2019. Early adoption is permitted. When effective, the Company does not anticipate that ASU 2017-04 will have a material impact on its future consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement, which modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. This new accounting standard will be effective for annual periods beginning after December 15, 2019. Early adoption is permitted. The Company is evaluating the effects that the adoption of this guidance will have on its disclosures.

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

Reclassifications

Certain amounts in the 2018 condensed consolidated financial statements have been reclassified to conform to the 2019 presentation. These reclassifications had no effect on previously reported results of operations or retained deficit.