Description of Business and Summary of Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2022

EVO Transportation & Energy Services, Inc. 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 or compressed natural gas (“CNG”). In certain markets, we fuel our vehicles at one of our three CNG stations that serve other customers as well. We are actively engaged in reducing CO2 emissions by operating on CNG, pursuing opportunities to use other alternative fuels, and by optimizing the routing efficiency of our operations to reduce fuel usage. In connection with providing our mail transportation and delivery services to the USPS and our freight services to other corporate customers, we outsource the transportation of certain loads to third-party carriers. We operate from our headquarters in Phoenix, Arizona and from 9 main terminals located throughout the United States.

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

Going Concern

As of March 31, 2022, the Company had a cash balance of $16.2 million, a working capital deficit of $102.2 million, stockholders’ deficit of $54.1 million, and material debt and lease obligations of $115.9 million, which include term loan borrowings under a financing agreement with Antara Capital. During the three months ended March 31, 2022, the Company reported cash provided by operating activities of $2.9 million and a net loss of $12.8 million.

The following significant transactions and events affecting the Company’s liquidity occurred during the three months ended March 31, 2022:

•

On March 11, 2022, the Company obtained a Bridge Loan in the amount of $9.0 million from Antara Capital and Executive Loans in the aggregate amount of $0.8 million, both as described in Note 5, Debt. Pursuant to the Bridge Loan Agreement, on March 11, 2022, Antara Capital appointed Michael Bayles, a former member of the Company’s board of directors (the “Board”) and a former officer of the Company, as a member of the Company's Board, effective immediately. Mr. Bayles was appointed to fill a newly-created vacancy on the Board.

•

On March 11, 2022, and pursuant to the Bridge Loan Agreement, the Company filed a Certificate of Designations of Series C Non-Participating Preferred Stock with the Secretary of State of the State of Delaware, which authorizes the Company to issue up to one share of Series C Preferred Stock, and issued to Antara Capital one share of Series C Preferred Stock.

Under the Certificate of Designations, prior to Bridge Loan Triggering Event and following 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 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 the Company's common stock as a single class on any Shareholder Matter, and the holder of Series C Preferred Stock will be entitled to cast a number of votes on any Shareholder Matter equal to the total number of votes of all non-holders of Series C Preferred Stock entitled to vote on any such Shareholder Matter plus 10. In addition, the 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 Certificate of Designations will require the consent of the Series C Majority.

In addition, the 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.

•

On March 11, 2022, the Company entered into amendments to certain secured convertible promissory notes in the aggregate principal amount of $9.5 million to permit immediate conversion of those notes, and the holders representative converted those notes into warrants to purchase 7,533,750 shares of common stock of the Company at an exercise price of $0.01 per share.

The following significant transactions and events affecting the Company’s liquidity occurred following the three months ended March 31, 2022:

•

On May 31, 2022, the Company, Antara Capital and the Executive Lenders entered into a Loan Extension Agreement that extended the Bridge Loan maturity date from May 31, 2022 to June 30, 2022 and the Executive Loans maturity date from June 3, 2022 to July 7, 2022.

•

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 June 30, 2022 to July 8, 2022 and the Executive Loans maturity date from July 7, 2022 to July 15, 2022.

•

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 July 8, 2022 to July 15, 2022 and the Executive Loans maturity date from July 15, 2022 to July 22, 2022. In addition, the Third Extension Agreement stipulated that on or before July 13, 2022, the Board of Directors of the Company shall have duly approved and filed with the Secretary of State of the State of Delaware a Certificate of Designation to evidence the issuance of a new series of Series D Non-Participating Preferred Stock, $0.0001 par value that will, upon issuance, entitle Antara Capital (in its capacity as sole holder of the Series D Non-Participating Preferred Stock) to vote such number of votes per share that will allow Antara Capital to exercise 51% of the voting capital stock of the Company.

•

On July 13, 2022, and pursuant to the Third Extension Agreement dated July 8, 2022, the Company filed a Certificate of Designations of Series D Non-Participating Preferred Stock with the Secretary of State of the State of Delaware, which authorizes the Company to issue up to one share of Series D Non-Participating Preferred Stock. Under the 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 the Company's common stock as a single class on any Shareholder Matter, and the holders of Series D Non-Participating Preferred Stock will be entitled to cast a number of votes on any 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. 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.

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 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 July 15, 2022 to August 15, 2022 and the Executive Loans maturity date from July 22, 2022 to August 22, 2022.

•

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 August 15, 2022 to September 15, 2022 and the Executive Loans maturity date from August 22, 2022 to September 22, 2022.

•

On September 8, 2022, the Company, Antara Capital and the Executive Lenders, in contemplation of the Securities Purchase Agreement discussed below, entered into a Sixth Extension Agreement that extended the Bridge Loan maturity date from September 15, 2022 to December 29, 2023 and the Executive Loans maturity date from September 22, 2022 to January 5, 2024.

•

On September 8, 2022, the Company and Antara Capital entered into a Securities Purchase Agreement and consummated certain transactions involving the recapitalization of the Company. This includes the sale and issuance of new equity by the Company and the cancellation of certain indebtedness in exchange for equity of the Company and or its subsidiaries (collectively the “Recapitalization Transactions”). In connection with the Recapitalization Transactions, Antara Capital agreed to pay the Company $13.5 million to purchase 341,566,839 warrants to purchase common stock and 1 share of convertible preferred stock in EVO Holding Company, LLC (“EVO Holding”) (the “Preferred Interest”). Upon exercise of the warrants Antara Capital will own approximately 64% of the Company on a fully diluted basis. The Preferred Interest is convertible into 99% of the common membership interests of EVO Holding, if the Company fails to meet certain financial conditions, at Antara Capital’s election during the Conversion Period, defined in Note 12, Subsequent Events, under the heading “Amended and Restated Limited Liability Company Operating Agreement.” EVO Holding maintains the Company’s ownership interests in the Ritter Companies, which provide a material portion of our Trucking revenue. During the three months ended March 31, 2022 and 2021, the Ritter Companies provided approximately 19% of our Trucking

revenue. Refer to Note 12, Subsequent Events, for further discussion regarding the Recapitalization Transactions and the rights and privileges surrounding the Preferred Interest.

Despite the occurrence of the Recapitalization Transactions, the Company believes its existing cash, together with any positive cash flows from operations, may not be sufficient to support working capital and capital expenditure requirements for the next 12 months, and the Company may be required to seek additional financing from outside sources.

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

•

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

•

The Company is currently in default on certain of its debt obligations (Refer to Note 5, Debt, for further discussion); and

•

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

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

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

•

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

•

Potential future public or private debt or equity offerings;

•

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

•

Profitably expanding trucking revenue;

•

Cost reduction efforts;

•

Improvements to operations to gain driver efficiencies;

•

Purchases of trucks and trailers to reduce purchased transportation and rental vehicles; and

•

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

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

Refer to Notes 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 March 31, 2022.

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, 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.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and therefore should be read in conjunction with the Company’s December 31, 2021 Annual Report on Form 10-K. In the opinion of management, all adjustments considered necessary for a fair presentation, consisting of normal recurring adjustments, have been included. Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. The balance sheet at December 31, 2021 has been derived from the audited consolidated financial statements at that date, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

Reclassifications

Reclassification

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

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

Earnings (Loss) per Share of Common Stock

Basic earnings (loss) per share of common stock attributable to common stockholders is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average shares of common stock outstanding for the period. Potentially dilutive shares, which are based on the weighted-average shares of common stock underlying outstanding stock-based awards, warrants and convertible notes payable and preferred stock using the treasury stock method or the if-converted method, as applicable, are included when calculating diluted net loss per share of common stock attributable to common stockholders when their effect is dilutive.

The following table presents the computation of basic and diluted earnings (loss) per share (amounts in thousands, except share data):


	Three Months Ended March 31,
	2022			2021
Numerator:
Net income (loss)	$	(12,763	)	$	31,223
Accrued and undeclared preferred stock dividends in arrears		(161	)		(161	)
Net income (loss) available to common stockholders - numerator for basic EPS		(12,924	)		31,062
Effect of dilutive securities:
$4.0 million Secured Convertible Promissory Notes		—			202
Redeemable Series A Preferred stock		—			9
Redeemable Series B Preferred stock		—			152
Subtotal		—			363
Adjusted net income (loss) available to common stockholders - numerator for diluted EPS	$	(12,924	)	$	31,425

Denominator:
Denominator for basic EPS - weighted average common shares outstanding		35,469,317			29,342,042
Effect of dilutive securities:
$4.0 million Secured Convertible Promissory Notes		—			1,531,634
Redeemable Series A Preferred stock		—			132,647
Redeemable Series B Preferred stock		—			2,208,384
Subtotal		—			3,872,665
Denominator for diluted EPS - adjusted weighted average common shares outstanding		35,469,317			33,214,707
Basic EPS	$	(0.36	)	$	1.06
Diluted EPS	$	(0.36	)	$	0.95

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 March 31,
	2022		2021
Stock options		10,905,711		9,539,249
Warrants		12,606,255		12,606,255
Common stock to be issued upon conversion of $4.0 million Secured Convertible Promissory Notes		122,204		—
Common stock to be issued upon conversion of Redeemable Series A Preferred stock		147,606		—
Common stock to be issued upon conversion of Redeemable Series B Preferred stock		2,463,932		—
Common stock to be issued upon conversion of four convertible promissory notes with an aggregate principal amount of $9.5 million		—		7,437,500
Common stock and warrant to be issued for purchase of fixed assets		2,348,000		2,348,000
Total		28,593,708		31,931,004

Revenue Recognition

In accordance with ASC 606-10-50, the Company disaggregates Trucking revenue from contracts with its customers between USPS revenue and Freight revenue as follows:


($ in thousands)	For the Three Months Ended March 31,
	2022		2021
USPS revenue	$	64,913	$	47,151
Freight revenue		5,781		6,561
Other revenue		1,850		240
Total Trucking revenue	$	72,544	$	53,952

United States Postal Service Settlement

On January 19, 2021, the Company and the USPS entered into a settlement agreement whereby the USPS agreed to pay approximately $7.1 million to one of the Company’s subsidiaries as additional compensation for transportation services provided to the USPS under certain DRO contracts. Subsequently, on February 19, 2021, the Company and the USPS entered into an additional settlement agreement whereby the USPS agreed to pay approximately $17.5 million to certain other Company subsidiaries as additional compensation for transportation services provided to the USPS under other DRO contracts. In connection with the settlement agreements, the Company and the USPS agreed to make certain adjustments to the Company’s DRO contracts, including rate adjustments effective for the fourth quarter of 2020 and future periods. As a result of those adjustments, the USPS agreed to pay an additional $3.8 million to the Company for transportation services provided in the fourth quarter of 2020. The USPS has made all payments associated with these settlement agreements and they were received by the Factor (as defined in Note 4, Factoring Arrangements) on behalf of the Company during the first quarter of 2021. In addition, amounts totaling $6.3 million that were previously paid by the USPS to the Company during 2020 became subject to the terms of the settlement agreements and were recognized as a deferred gain as of December 31, 2020. All aforementioned amounts totaling $34.8 million were recognized as other revenue during the first quarter of 2021 in the consolidated statement of operations. Such amounts are for transportation services provided during 2020 and prior years, are not subject to refund, and are not contingent upon the Company providing future transportation services.

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 two reportable segments—Trucking and CNG Fueling Stations. Effective January 1, 2022, the Company determined that its business operates as one reportable segment because: a) the Company measures profit and loss as a whole; b) the principal decision makers do not review information based on any operating segment; c) the Company has not chosen to organize its business around different products and services; d) the Company has not chosen to organize its business around geographic areas; and e) the revenues, profits, assets and liabilities of the CNG Fueling Stations are immaterial for all periods presented.

Recently Issued Accounting Pronouncements

Accounting Pronouncements Adopted

In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt - Modifications and Extinguishments (Topic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40), which clarifies existing guidance for freestanding written call options which are equity classified and remain so after they are modified or exchanged in order to reduce diversity in practice. The standard is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The adoption of this guidance on January 1, 2022 did not have a material impact on the Company’s consolidated financial statements.

Accounting Pronouncements to be Adopted

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

In August 2020, the FASB issued ASU 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. Under ASU 2020-06, the embedded conversion features are no longer separated from the host contract for convertible

instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. The new guidance also requires the if-converted method be applied for all convertible instruments. ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, with early adoption permitted. Adoption of the standard requires using either the modified retrospective or the retrospective approach. The Company is currently evaluating and assessing the impact this guidance will have on its consolidated financial statements.