Description of Business and Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 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 & Energy Services, Inc. is a transportation provider serving the United States Postal Service (“USPS”) and other customers. We are a surface transportation company serving the USPS with approximately 1,000 vehicles in operation as of December 31, 2019. Of these, approximately 200 vehicles operate on compressed natural gas (“CNG”) which makes us the largest user of alternative fuels amongst transportation companies serving the USPS. In certain markets, we fuel our vehicles at one of our five dedicated CNG stations which serve other customers as well. We operate from our headquarters in Phoenix, Arizona and from 15 facilities in 17 states.

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

The Company completed the following acquisitions subsequent to November 2016:

• On February 1, 2017, the Company acquired Environmental Alternative Fuels, LLC (“EAF”) and its wholly owned subsidiary, EVO CNG, LLC.  EVO CNG, LLC is engaged in the business of operating compressed natural gas fueling stations.

• On June 1, 2018, the Company acquired Thunder Ridge Transport, Inc. (“Thunder Ridge”).  Thunder Ridge is based in Springfield, Missouri and is engaged in the business of fulfilling government contracts for freight trucking services, as well as providing freight trucking services to non-government entities.

• On November 16, 2018, the Company acquired W.E. Graham, Inc., a trucking company based in Memphis, Tennessee that provides freight and shipping services on behalf of the USPS across Tennessee, Georgia, Alabama and Mississippi.

• On January 2, 2019, the Company acquired Sheehy Mail Contractors, Inc. (“Sheehy”). Sheehy is based in Waterloo, Wisconsin and is engaged in the business of fulfilling government contracts for freight trucking services, as well as providing freight trucking services to non-government entities.

• On February 1, 2019, the Company acquired Ursa Major Corporation (“Ursa”) and JB Lease Corporation (“JB Lease”). Ursa and JB Lease are based in Oak Creek, Wisconsin and are engaged in the business of fulfilling government contracts for freight trucking services, as well as providing freight trucking services to non-government entities.

• On July 15, 2019, the Company acquired Courtlandt and Brown Enterprises L.L.C. (“Courtlandt”) and Finkle Transport Inc. (“Finkle”). Finkle and Courtlandt are based in Newark, New Jersey and are engaged in the business of fulfilling government contracts for freight trucking services, as well as providing freight trucking services to non-government entities.

• On September 16, 2019, the Company, through its wholly-owned subsidiary EVO Holding Company, LLC, acquired John W. Ritter, Inc. (“JWR”), Ritter Transportation Systems, Inc. (“Ritter Transportation”), Ritter Transport, Inc. (“Ritter Transport”), and Johmar Leasing Company, LLC (“Johmar,” and together with JWR, Ritter Transportation, and Ritter Transport, the “Ritter Companies”).  The Ritter Companies are based in Laurel, Maryland. The Ritter Companies are engaged in the business of fulfilling government contracts for freight trucking services, as well as providing freight trucking services to non-government entities.

Going Concern

As of December 31, 2019, the Company had a cash balance of $3.3 million, a working capital deficit of $66.2 million, stockholders’ deficit of $12.7 million, and material debt and lease obligations of $72.8 million, which included term loan borrowings under a financing agreement with Antara Capital. During the year ended December 31, 2019, the Company reported cash used in operating activities of $15.2 million and a net loss of $32.7 million.

The following significant transactions and events affecting the Company’s liquidity occurred following the year ended December 31, 2019:

• During the first quarter of 2020, the Company entered into Forbearance Agreements and Incremental Amendments to the Financing Agreement with Antara Capital and obtained an additional $6.3 million in term loan commitments and the lenders agreed to forbear from exercising certain rights, remedies, powers, privileges, and defenses under the Financing Agreement during the forbearance period. These incremental borrowings were subject to the same terms as the Company’s existing term loan commitments with Antara Capital. During the fourth quarter of 2020, in connection with the Company’s borrowing under the Main Street Priority Loan Program (as subsequently discussed), the Company paid down the aggregate principal amount due to Antara, including capitalized interest, from $25.4 million at December 31, 2019 (and $31.7 million after the first quarter 2020 borrowings) to $16.7 million, the forbearance period related to the remaining Antara debt was terminated and all existing defaults and events of defaults were waived, and the maturity date of the remaining outstanding term loan balance under the Antara Financing Agreement was extended from September 16, 2022 to the earlier of the date that is ninety-one days after the fifth anniversary of the closing date of the Main Street Loan or the date that is ninety-one days after the date the Main Street Loan is paid in full.

• During the first quarter of 2020, the Company sold a total of 1,260,000 shares of its common stock and 1,000,000 shares of its Series B preferred stock to related parties for aggregate gross proceeds of $6.2 million pursuant to the terms of subscription agreements.

• During the second quarter of 2020, the Company obtained a loan in the amount of $10.0 million under the Paycheck Protection Program (the “PPP”) of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The principal amount of the loan and accrued interest are eligible for forgiveness, and the Company has submitted a request for such forgiveness.

• During the fourth quarter of 2020, the Company borrowed $17.0 million under the Main Street Priority Loan Program authorized by Section 13(3) of the Federal Reserve Act (the “Main Street Loan”) and used all of the net proceeds to refinance a portion of the amount outstanding under the Antara Financing Agreement and to pay related prepayment premiums. The entire outstanding principal balance of the Main Street Loan, together with all accrued and unpaid interest, is due and payable in full on December 14, 2025.

• During the first quarter of 2021, the Company entered into agreements with the USPS to settle claims submitted by the Company seeking additional compensation for work performed under Dynamic Route Optimization (“DRO”) contracts since 2018. The Company received a total of $28.4 million related to this historical work performed and also renegotiated the contractual rates per mile for some of its DRO contracts on a prospective basis.

• During the first quarter of 2021, the Company entered into an agreement with its factoring lender (“Triumph”) related to the application of $17.5 million of proceeds received from the USPS arising out of prior underpayments on certain DRO contracts. Pursuant to the agreement, the parties agreed that Triumph would remit $11.0 million of net proceeds to the Company and that Triumph would retain approximately $6.9 million of net proceeds and apply that amount to reduce the outstanding principal amount of the Company’s factoring advances. The parties further agreed that the Company will repay the remaining balance of approximately $6.9 million due under the factoring arrangement in 48 equal monthly installments beginning January 1, 2022, and that Triumph will apply funds held in reserve against the approximately $0.8 million remaining balance for advances that Triumph made to the Company in September 2020. The parties also agreed to work together to wind down their factoring relationship, including waiver of any applicable termination fees.

• During the first and second quarters of 2021, the Company entered into agreements with certain noteholders to purchase promissory notes previously issued by the Company in the principal amount of $0.6 million by paying $0.1 million in cash and issuing warrants to purchase an aggregate of up to 231,453 shares of the Company’s common stock at a price of $0.01 per share.

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

In evaluating the Company’s ability to continue as a going concern and its potential need to seek additional financing from outside sources, management also considered the following conditions:

• The counterparty to the Company’s accounts receivable factoring arrangement is not obligated to purchase the Company’s accounts receivable or make advances to the Company under such arrangement;

• The Company is currently in default on certain of its debt obligations; and

• There can be no assurance that the Company will be able to obtain additional financing in the future via the incurrence of additional indebtedness or via the sale of the Company’s common stock or preferred stock.

As a result of the circumstances described above, the Company may not have sufficient liquidity to make the required payments on its debt, factoring or leasing obligations; to satisfy future operating expenses; to make capital expenditures; or to provide for other cash needs.

Management’s plans to mitigate the Company’s current conditions include:

• Negotiating with related parties and 3rd parties to refinance existing debt and lease obligations;

• Potential future public or private debt or equity offerings;

• Acquiring new profitable contracts and negotiating revised pricing for existing contracts;

• Profitably expanding trucking revenue;

• Cost reduction efforts, including eliminating redundant costs across the companies acquired during 2019 and 2018;

• Improvements to operations to gain driver efficiencies;

• Purchases of trucks and trailers to reduce purchased transportation; and

• Replacement of older trucks with newer trucks to lower the overall cost of ownership and improve cash flow through reduced maintenance and fuel costs.

Notwithstanding management’s plans, there can be no assurance that the Company will be successful in its efforts to address its current liquidity and capital resource constraints. These conditions raise substantial doubt about the Company's ability to continue as a going concern for the next twelve months from the issuance of these consolidated financial statements within the Company’s Form 10-K. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result if the Company is unable to continue as a going concern.

Refer to Notes 1, 6, 7, and 11 to the consolidated financial statements for further information regarding the Company’s debt, factoring, and lease obligations, including the future maturities of such obligations. Refer to Note 15 to the consolidated financial statements for further information regarding changes in the Company’s debt obligations and liquidity subsequent to December 31, 2019.

Consolidation

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

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The consolidated financial statements include some amounts that are based on management’s best estimates and judgments. The most significant estimates relate to goodwill and long-lived asset valuations, purchase price allocations related to the Company’s business combinations, valuation allowance on deferred income tax assets, and the valuation of our common stock, warrants and stock-based awards.

Cash and Cash Equivalents

The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company maintains its cash in bank deposit accounts where accounts may exceed federally insured limits at times. There were no cash equivalents as of December 31, 2019 or 2018.

Accounts Receivable

The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company’s estimate is based on historical collection experience and a review of the current status of the accounts receivable. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change and that losses ultimately incurred could differ materially from the amounts estimated in determining the allowance.

Federal Alternative Fuels Tax Credit Receivable

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

Concentrations of Credit Risk

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

As of December 31, 2019 and 2018, one trucking customer accounted for 65% and 99% of the consolidated trade accounts receivable balance, respectively. During the years ended December 31, 2019 and 2018, this customer generated revenue representing 88% and 97%, respectively, of total trucking revenue and 88% and 95%, respectively, of the Company’s consolidated revenue. This customer is a United States Federal government entity; therefore, the Company does not believe there is significant credit risk related to the accounts receivable balance due from this customer. If the Company were to lose the relationship with this customer or is unable to renew existing contracts with this customer, it would have a material adverse effect on the Company’s financial condition and results of operations.

Property and Equipment

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

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

Goodwill

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

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

The Company performed its annual goodwill impairment test for 2019 by completing a quantitative impairment analysis of the Trucking reporting unit goodwill, and management concluded the goodwill was not impaired. There was also no impairment of goodwill recorded for the year ended December 31, 2018.

Intangibles

The Company's intangible assets primarily consist of customer relationships and trade names. The Company carries these intangibles at cost, less accumulated amortization. Amortization is recorded on a straight-line basis over the estimated useful lives of the respective assets. Management reviews its intangible assets for impairment whenever events or circumstances indicate that the carrying amount of the asset may not be recoverable. No such events were identified during the years ended December 31, 2019 or 2018. There were no indefinite-lived intangible assets at December 31, 2019 or 2018.

Assets Held for Sale

The Company classifies assets as being held for sale when the following criteria are met: Management, having the authority to approve the action, commits to a plan to sell the asset; The asset is available for immediate sale in its present condition; An active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated; The sale of the asset is probable, and transfer of the asset is expected to qualify for recognition as a completed sale, within one year; The asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

Long-Lived Assets

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

The Company recorded long-lived asset impairment charges of $3.6 million and $0.2 million during the years ended December 31, 2019 and 2018, respectively.

Debt Issuance Costs

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

Hedging Activities

The Company periodically enters into commodity derivative contracts to manage its exposure to gas price volatility.

GAAP requires recognition of all derivative instruments on the consolidated balance sheets as either assets or liabilities measured at fair value. Subsequent changes in a derivative’s fair value are recognized currently in earnings unless specific hedge accounting criteria are met. Gains and losses on derivative hedging instruments must be recorded in either other comprehensive income or current earnings, depending on the nature and designation of the instrument.

Management of the Company has determined that the administrative effort required to account for derivative instruments as cash flow hedges is greater than the financial statement presentation benefit. As a result, the Company marks its derivative instruments to fair value and records the changes in fair value as a component of other income and expense. Cash settlements of such instruments are likewise shown as a component of other income and expense and as a component of cash flows from operating activities on the statements of cash flows. The Company’s derivative liability as of December 31, 2019 and 2018 is recorded within accrued expenses on the consolidated balance sheets. The Company settled all of its commodity hedges during the year ended December 31, 2019 and the impact on the Company’s results of operations was immaterial during the years ended December 31, 2019 and 2018.

Fair Valuation of Common Stock, Warrants, and Stock Options

The Company’s executive officers, directors and principal stockholders beneficially own a substantial majority of the Company’s outstanding common stock. The Company’s common stock does not have an observable quoted market price on the OTC Pink Marketplace because the stock is thinly traded. As a result, the Company must utilize an alternative method to estimate the fair value of its common stock, including when the Company issues other equity instruments for which the common stock is the underlying security. One commonly accepted approach to valuing the equity of a company in similar circumstances, including a distressed or highly-leveraged company, is viewing the equity as a call option on the debt. The equity of a company is a residual claim to all cash flows remaining after other financial claim-holders (e.g., debt) have been satisfied. If a company is liquidated, the same principle applies in which equity investors receive cash flows remaining in a company after all outstanding debts and other financial claims are settled. Therefore, equity can be viewed as a call option on a company and valued using the Black-Scholes option pricing model. Accordingly, the Company applies the Black-Scholes option pricing model to the assets and debt of the Company as of each valuation date to estimate the fair value of the Company’s common stock. The key assumptions utilized in the Black-Scholes option pricing model for the fair valuation of the Company’s common stock are: i) an exercise price equal to the Company’s total liabilities; ii) a stock price equal to the Company’s total assets; iii) an estimated expected term or holding period; iv) an estimated stock price volatility based upon comparable companies; and v) an estimated risk-free interest rate. The estimated fair value of the Company’s common stock is a key assumption in the fair valuation of the warrants and stock options the Company issues.

Stock-based Compensation

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

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

Net Loss per Share of Common Stock

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

	For the Years Ended December 31,
	2019		2018
Stock options		6,269,250		4,700,000
Warrants		9,881,255		4,296,255
Common stock to be issued upon conversion of    Secured convertible promissory notes		1,602,000		1,615,350
Common stock to be issued upon conversion of    Redeemable Series A Preferred stock		113,764		100,000
Common stock to be issued upon conversion of    Subordinated convertible senior notes payable to    stockholders		—		33,445
Contingent common stock to be issued upon    conversion of related-party accounts payable		—		89,092
Common stock to be issued upon conversion of    Convertible promissory notes - related parties		7,306,250		7,000,000
Common stock and warrant to be issued for purchase of fixed assets		2,348,000		—
Total		27,520,519		17,834,142

Revenue Recognition

On January 1, 2018, the Company adopted Revenue from Contracts with Customers (Accounting Standards Codification Topic 606) (“Topic 606” or “new guidance”) retrospectively. The adoption of Topic 606 did not have a material impact on the Company’s consolidated financial statements as the Company recorded no cumulative effect adjustments from the adoption of Topic 606. Further, the new guidance has no impact on the timing or classification of the Company’s cash flows as reported in the consolidated statements of cash flows.

Trucking

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

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

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

• Transaction Price – The transaction price is based on the awarded agreement for the multi-year contract. The prices are based on miles travelled that adjusts monthly for fuel pricing indexes. Depending on the contract, the total transaction price may consist of mileage revenue, fuel adjustments, accessorial fees and fees for additional deliveries outside of the scope of the annual contract.

There is no significant financing component in the transaction price, as the USPS generally pays within the contractual payment terms of 30 to 60 days.

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

• Revenue Recognition – Revenues are recognized over time as satisfaction of the promised contractual delivery agreements are completed, in an amount that reflects the rate per mile set in the contract.

Freight 

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

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

• Transaction Price – Depending on the contract, the total transaction price may consist of mileage revenue, fuel adjustments, and accessorial fees. There is no significant financing component in the transaction price, as the customers generally pay within the contractual payment terms of 30 to 60 days.

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

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

CNG Fueling Stations

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

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

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

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

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

• Revenue Recognition – The Company recognizes revenue over time for the fuel sales as the customer receives and consumes the benefits. This does not represent a change from the Company’s historical accounting policy in effect prior to the adoption of Topic 606.

Management has determined that that the Company acts as the principal (rather than the agent) with respect to its Trucking and CNG operations. Accordingly, the Company recognizes revenue on a gross basis.

Loss Contingencies

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

Income Taxes

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

In evaluating the ultimate realization of deferred income tax assets, management considers whether it is more likely than not that the deferred income tax assets will be realized. Management establishes a valuation allowance if it is more likely than not that all or a portion of the deferred income tax assets will not be utilized.  The ultimate realization of deferred income tax assets is dependent on the generation of future taxable income, which must occur prior to the expiration of the net operating loss carryforwards.

The Company accounts for uncertainty in income taxes by recognizing the tax benefit or expense from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The Company measures the tax benefits and expenses recognized in the consolidated financial statements from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The Company has not identified any material uncertain tax positions as of December 31, 2019 and 2018, respectively. Interest and penalties associated with tax positions are recorded within income tax expense. Tax years that remain subject to examination include 2016 through the current year for federal and generally 2015 through the current year for state purposes.

The Tax Cuts and Jobs Act (“Tax Act”) was signed into law on December 22, 2017. The Tax Act includes significant changes to the U.S. corporate income tax system, including limitations on the deductibility of interest expense and executive compensation, eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized, changing the rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017, and the transition of U.S. international taxation from a worldwide tax system to a territorial tax system.

Recently Issued Accounting Pronouncements 

Accounting Pronouncements Adopted

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

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

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

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

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

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

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

	December 31,		Opening Balance			January 1,
	2018		Adjustments			2019
Assets
Operating lease right-of-use assets	$	-	$	4,381		$	4,381
Favorable lease, net	$	142	$	(142	)	$	-
Liabilities
Operating lease liabilities	$	-	$	4,239		$	4,239

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

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350) (“ASU 2017-04”), Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the amendments eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company early adopted the guidance for the year ended December 31, 2019 on a prospective basis. Such adoption did not have a material impact on its consolidated financial statements.

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

Accounting Pronouncements to be Adopted 

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

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which requires an entity (customer) in a hosting arrangement that is a service contract to follow the guidance to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. This ASU requires up-front implementation costs incurred in a cloud computing arrangement (or hosting arrangement) that is a service contract to be amortized to hosting expense over the term of the arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. This new accounting standard will be effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The guidance may be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The adoption of this guidance in the 2020 annual period did not have a material impact on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326). The new guidance changes the accounting for estimated credit losses pertaining to certain types of financial instruments including, but not limited to, trade and lease receivables. This pronouncement will be effective for fiscal years beginning after December 15, 2022. Early adoption of the guidance is permitted for fiscal years beginning after December 15, 2018. The Company is currently evaluating and assessing the impact this guidance will have on its consolidated financial statements.

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

Revision of Previously Issued Financial Statements

During the preparation of the consolidated financial statements for the period ended September 30, 2019, the Company identified an error related to an unrecorded liability within the previously issued financial statements for the year ended December 31, 2017. The previously disclosed amount for net loss for the year ended December 31, 2017 was understated by $1.4 million. Additionally, the previously disclosed amounts for current liabilities and accumulated deficit were understated by $1.4 million as of December 31, 2017 and at each of the subsequent annual and quarterly balance sheet dates through June 30, 2019. The error had no impact on earnings or earnings per share for the interim or annual periods of 2018 and subsequent years.

The Company assessed the materiality of the error, both quantitatively and qualitatively, and concluded that the error was not material to any of its previously reported financial statements for annual or interim periods based upon qualitative aspects of the error. However, as the error was large quantitatively, the Company determined that the correction of this error would have a material effect on the financial results for the three and nine months ended September 30, 2019. Accordingly, previously issued financial statements have been revised to correct the error. The revision applies to the previously reported amount for accumulated deficit in the consolidated statement of stockholders’ deficit as of January 1, 2018 and the previously reported amounts for current liabilities and accumulated deficit in the consolidated balance sheets as of March 31, 2018, June 30, 2018, September 30, 2018, December 31, 2018, March 31, 2019, and June 30, 2019.

The effect of this revision on the Company’s consolidated balance sheet information is as follows:

	As of January 1, 2018
(in thousands)	Previously Reported			Adjustment			As Revised
Accumulated deficit	$	(14,075	)	$	(1,388	)	$	(15,463	)

	As of March 31, 2018
(in thousands)	Previously Reported			Adjustment			As Revised
Current liabilities	$	5,969		$	1,388		$	7,357
Accumulated deficit		(13,973	)		(1,388	)		(15,361	)

	As of June 30, 2018
(in thousands)	Previously Reported			Adjustment			As Revised
Current liabilities	$	11,434		$	1,388		$	12,822
Accumulated deficit		(16,626	)		(1,388	)		(18,014	)

	As of September 30, 2018
(in thousands)	Previously Reported			Adjustment			As Revised
Current liabilities	$	12,534		$	1,388		$	13,922
Accumulated deficit		(19,845	)		(1,388	)		(21,233	)

	As of December 31, 2018
(in thousands)	Previously Reported			Adjustment			As Revised
Current liabilities	$	21,599		$	1,388		$	22,987
Accumulated deficit		(20,669	)		(1,388	)		(22,057	)

	As of March 31, 2019
(in thousands)	Previously Reported			Adjustment			As Revised
Current liabilities	$	50,370		$	1,388		$	51,758
Accumulated deficit		(28,110	)		(1,388	)		(29,498	)

	As of June 30, 2019
(in thousands)	Previously Reported			Adjustment			As Revised
Current liabilities	$	51,427		$	1,388		$	52,815
Accumulated deficit		(35,123	)		(1,388	)		(36,511	)

Reclassifications 

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