Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management's discussion and analysis of financial condition and results of operations should be read together with “Business” in Part I, Item 1 of this Annual Report, as well as the consolidated financial statements and accompanying footnotes in Part II, Item 8 of this Annual Report. This discussion contains forward-looking statements as a result of many factors, including those set forth under Part I, Item 1A. “Risk Factors” and Part I “Forward-looking Statements” of this Annual Report, and elsewhere in this report. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from those discussed.
Company Overview
EVO Transportation & Energy Services, Inc. is a truckload carrier serving the 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 CNG. EVO also operates a brokerage unit that supports the truckload business and services other corporate customers. In select cases, EVO may subcontract 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.
Key Trends & Anticipated Future Trends
Under its “Delivering for America Plan,” the USPS is undergoing a massive transformation of its transportation network. A key component of this is a reorganization around regional processing and distribution centers. In addition, the USPS has transitioned most of its air freight to ground networks. We believe the USPS will favor larger and more reliable suppliers that can ensure continued high service performance and continuity during this transition.
EVO further expects a more active market-based approach to USPS renewals. We believe this approach favors larger suppliers like EVO that can provide competitive pricing by leveraging scale and pricing analytics.
The USPS has also started evaluating insourcing opportunities and transitioning contracts to more asset-light companies. We believe outsourced asset-based ground transportation suppliers will continue to service the vast majority of USPS contracts. In addition, we believe any shift in business to these threats is more likely to come from the smaller suppliers who are unable to compete as cost effectively over the long-term.
We intend to continue bidding on new and existing USPS contract opportunities as they arise. USPS contracts are bid competitively and performed in accordance with various requirements, including, but not limited to requirements under the Service Contract Act, Department of Transportation regulations (federal and state), and other applicable local and state regulations. The USPS evaluates the bids based on price, past performance, operational plans, financial resources, safety scores and the use of innovation or alternative fuels. EVO's USPS contracts typically have two or four year terms and can be renewed with the incumbent carrier after expiration of the initial term.
EVO believes that freight market rates peaked during COVID, reaching multi-year highs. Rates have since reversed and EVO believes they will continue to remain challenging during 2023. We believe this may create new business opportunities as the USPS looks to resolicit many of its contracts and that larger, more cost-efficient carriers are well positioned to gain market share. In addition, we believe the USPS will be heavily focused on service performance and that those suppliers who cannot achieve high on time service scores will fall out of favor. We believe this also creates significant opportunity for EVO in the future.
In addition to growing the USPS business, the Company expects to further diversify its revenue base both organically through new sales and business development efforts and also through M&A transactions. The strategy of acquiring USPS carriers will be deemphasized as the Company looks to create a more balanced business.
Results from Operations
Year Ended December 31, 2022, Compared to Year Ended December 31, 2021
Trucking revenue : The majority of trucking revenue is derived from the USPS. The remainder of the revenue is primarily derived from corporate freight customers. USPS contracts are typically four years in duration and include a monthly fuel adjustment. Trucking revenue was $309.5 million and $268.9 million during the years ended December 31, 2022 and 2021, respectively. The $40.6 million, or 15.1%, increase in trucking revenue from 2021 to 2022 is primarily due to revenue from new USPS contracts, along with increased fuel surcharge revenue as a result of increased fuel prices.
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 and total paid miles 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 drivers and non-drivers. Included in driver compensation is an incremental hourly rate for benefits. Payroll, benefits and related expense was $131.2 million and $107.4 million during the years ended December 31, 2022 and 2021, respectively. The $23.8 million, or 22.2%, increase in payroll, benefits and related expense is primarily due to the 15.1% increase in Trucking revenue combined with an increase in the use of employee drivers versus third-party subcontractors.
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 $46.4 million and $68.8 million during the years ended December 31, 2022 and 2021, respectively. The $22.4 million, or 32.6%, decrease in purchased transportation expense is primarily due to an increased use of employee drivers versus subcontractors.
Fuel: Fuel expense is comprised of diesel, gasoline and CNG fuel required to operate the fleet. The Company manages fuel cost by negotiating volume discounts from rack fuel rates with select vendors. Fuel expense was $48.2 million and $28.2 million during the years ended December 31, 2022 and 2021, respectively. The $20.0 million, or 70.9%, increase in fuel expense is due primarily to the 15.1% increase in Trucking revenue, 32.6% decrease in purchased transportation and an increase in the average DOE fuel price from $3.28 to $5.00 per gallon.
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 $14.6 million and $13.4 million during the years ended December 31, 2022 and 2021, respectively. The $1.2 million, or 9.0%, increase in equipment rent expense 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 $15.8 million and $10.9 million during the years ended December 31, 2022 and 2021, respectively. The $4.9 million, or 45.0%, increase in maintenance and supplies expense 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.
Operating supplies and expenses: Operating and supplies expenses include all other direct costs in the Trucking operation. Operating supplies and expenses was $14.3 million and $15.3 million during the years ended December 31, 2022 and 2021, respectively. The $1.0 million, or 6.5%, decrease in operating supplies and expenses is primarily due to more cost efficient completion of certain routes.
General and administrative: General and administrative expense was $18.0 million and $16.3 million during the years ended December 31, 2022 and 2021, respectively. The $1.7 million, or 10.4%, increase is primarily due to an increase in professional fees and board of director fees and expenses.
Depreciation and amortization: Depreciation and amortization expense was $16.2 million and $15.2 million during the years ended December 31, 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 $33.7 million and $12.7 million during the years ended December 31, 2022 and 2021, respectively. The $21.0 million, or 165.4%, increase in interest expense is primarily due to interest expense of $11.9 million associated with the issuance of warrants and the amortization of the debt discount related to the warrants in connection with the Bridge Loan Agreement, dated March 11, 2022. The increase is further due to a $7.7 million charge to interest expense
associated with the purchase of warrants by Antara Capital in connection with the recapitalization of the company in September 2022. In addition, the increase is due to $1.6 million of finance fees and additional debt issued of $9 million in connection with the Bridge Loan, and an increase in the interest rate on certain floating rate debt. Refer to Note 5, Debt , and 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 year ended December 31, 2022 is primarily due to 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. The $11.0 million gain on extinguishment of debt during the year ended December 31, 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. Refer to Note 5, Debt , for further discussion.
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 $14.4 million and $6.3 million at December 31, 2022 and 2021, respectively. The increase is primarily attributable to cash provided by operating activities during the year ended December 31, 2022.
Operating Activities . Net cash provided by operating activities was $10.6 million during the year ended December 31, 2022. Net cash provided by operating activities was $23.5 million during the year ended December 31, 2021 which included $28.5 million of nonrecurring cash receipts from the USPS settlement agreements. The decrease in net cash provided was primarily attributable to a $32.5 million increase in net loss, partially offset by a $20.1 million increase in accounts receivable collected.
Investing Activities. Net cash used in investing activities was $0.1 million and $7.1 million for the years ended December 31, 2022 and 2021, respectively. The net cash used in investing activities during the years ended December 31, 2022 and 2021, is primarily related to $0.1 million and $7.4 million of capital expenditures, respectively.
Financing Activities . Net cash used in financing activities was $2.4 million and $35.7 million for the years ended December 31, 2022 and 2021, respectively. The cash used in financing activities during the year ended December 31, 2022 primarily consisted of $258.8 million in payments on factoring arrangements, $5.4 million in payments of debt principal, and $8.8 million in payments on finance lease liabilities, partially offset by $247.5 million in advances from factoring receivables, $9.6 million of proceeds from the issuance of debt and $13.8 million of proceeds from the issuance warrants. The cash used in financing activities during the year ended December 31, 2021 primarily consisted of $225.8 million in payments on factoring arrangements, $24.1 million in payments of debt principal, and $5.9 million in payments on finance lease liabilities, partially offset by $214.3 million in advances from factoring receivables and $6.5 million of proceeds from the issuance of debt.
Sources of Liquidity
Our primary historical and future sources of liquidity are cash on hand ($14.4 million at December 31, 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 December 31, 2022, we had a cash balance of $14.4 million, a working capital deficit of $67.2 million, stockholders’ deficit of $15.7 million, and material debt and lease obligations of $105.6 million, which included term loan borrowings under a financing agreement with Antara Capital. During the year ended December 31, 2022, we reported cash provided by operating activities of $10.6 million and net loss of $18.2 million that included a $5.3 million loss on extinguishment of debt.
The following significant transactions and events affecting the Company’s liquidity occurred during the year ended December 31, 2022:
On March 11, 2022, EVO and certain subsidiary guarantors of the Company entered into a Senior Secured Loan and Executive Loan Agreement (the "Bridge Loan Agreement") with Antara Capital and Thomas J. Abood, EVO's former chief executive officer, Damon R. Cuzick, EVO's former chief operating officer, Bridgewest Growth Fund LLC, an entity affiliated with Billy (Trey) Peck Jr., EVO's executive vice president - business development, and Batuta Capital Advisors LLC ("Batuta" and together with Mr. Abood, Mr. Cuzick and Bridgewest Growth Fund LLC, the "Executive Lenders"), an entity affiliated with Alexandre Zyngier, a member of EVO's board of directors (the “Board”). Pursuant to the Bridge Loan Agreement, EVO obtained a bridge loan in the amount of $9.0 million (the "Bridge Loan") from Antara Capital and also borrowed $0.8 million (the "Executive Loans") from the Executive Lenders. Refer to Note 5, Debt , for further discussion. Pursuant to the Bridge Loan Agreement, on March 11, 2022, Antara Capital appointed Michael Bayles as a member of EVO'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, EVO filed a Certificate of Designations of Series C Non-Participating Preferred Stock (the "Series C Certificate of Designations") with the Secretary of State of the State of Delaware, which authorized EVO to issue up to one share of Series C Preferred Stock, and issued to Antara Capital one share of Series C Preferred Stock. Refer to Note 6, Temporary Equity for further discussion.
On March 11, 2022, EVO 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 converted those notes into warrants to purchase 7,533,750 shares of EVO's common stock at an exercise price of $0.01 per share.
On May 31, 2022, EVO, 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, EVO, 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, EVO, 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 EVO shall have duly approved and filed with the Secretary of State of the State of Delaware a Certificate of Designations 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 EVO.
On July 13, 2022, and pursuant to the Third Extension Agreement dated July 8, 2022, EVO filed a Certificate of Designations of Series D Non-Participating Preferred Stock (the "Series D Certificate of Designations") with the Secretary of State of the State of Delaware, which authorized EVO to issue up to one share of Series D Non-Participating Preferred Stock. Refer to Note 6, Stockholders' Deficit for further discussion.
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.
On July 15, 2022, EVO, 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, EVO, 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, EVO, 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, EVO 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 EVO and the cancellation of certain indebtedness in exchange for equity of EVO and/or its subsidiaries. For more information regarding the Securities Purchase Agreement and the transactions, refer to the heading “Securities Purchase Agreement” within Note 1, Description of Business and Summary of Significant Accounting Policies.
On December 23, 2022, Antara Capital, the Executive Lenders, Corbin ERISA Opportunity Fund Ltd ("CEOF") and Hudson Park amended and restated the Bridge Loan to reflect the assigned portions of the Bridge Loan to CEOF and Hudson Park. No changes were made to the Bridge Loan in connection with the assignment to CEOF and Hudson Park and no payments were made to the holders of the debt. This event is a transaction among debt holders.
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;
As of December 31, 2022, the Company is not in compliance with certain covenants in its debt agreements (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 EVO’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:
Cost reduction efforts;
Improvements to operations to gain driver efficiencies;
Purchases of trucks and trailers to reduce purchased transportation and truck rental expenses;
Replacement of older trucks with newer trucks to lower the overall cost of ownership and improve cash flow through reduced maintenance and fuel costs;
Negotiating with related parties and third 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; and
Profitably expanding trucking revenue.
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 within EVO’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, 4, 5 and 9 to the consolidated financial statements for further information regarding our debt, factoring, and lease obligations, including the future maturities of such obligations.
Off-Balance Sheet Arrangements
Refer to Note 10, Commitments and Contingencies – Off Balance Sheet Arrangements – Captive Insurance .
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of consolidated financial statements 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 revenues and expenses recorded during the reporting periods.
On a periodic basis we evaluate our estimates based on historical experience and various other assumptions we believe are reasonable under the circumstances. Actual results could differ from those estimates under different assumptions or conditions. For further information on our significant accounting policies, refer to Note 1, Description of Business and Summary of Significant Accounting Policies , to our consolidated financial statements included in this report.
We believe the following critical accounting policies involve the most significant judgments and estimates used in the preparation of our consolidated financial statements.
Goodwill
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 its 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 impairment test process requires valuation of the reporting unit, which we determine using primarily the income, or discounted cash flows, approach. The assumptions about future cash flows and growth rates are based on the reporting unit's long-term forecast and are subject to review and approval by senior management. A reporting unit’s discount rate is a risk-adjusted weighted average cost of capital, which we believe approximates the rate from a market participant's perspective. The estimated fair value could be impacted by changes in market conditions, interest rates, growth rates, tax rates, costs, pricing and capital expenditures. The fair value determination is categorized as Level 3 in the fair value hierarchy due to its use of internal projections and unobservable measurement inputs.
During the years ended December 31, 2022 and 2021, the annual impairment test did not result in an impairment of goodwill.
Long-Lived Assets
The Company evaluates the recoverability of long-lived assets whenever events or changes in circumstances indicate that an asset’s carrying amount may not be recoverable. Such circumstances could include, but are not limited to (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset. The Company measures the carrying amount of the asset against the estimated undiscounted future cash flows associated with it. Should the sum of the expected future net cash flows be less than the carrying value of the asset being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying value of the asset exceeds its fair value. The fair value is measured based on quoted market prices, if available.
If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including the discounted value of estimated future cash flows. The evaluation of asset impairment requires the Company to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. The assumptions about future cash flows and growth rates are based on the asset group’s long-term forecast and are subject to review and approval by senior management. An asset group’s discount rate is a risk-adjusted weighted average cost of capital, which we believe approximates the rate from a market participant's perspective. The estimated fair value could be impacted by changes in market conditions, interest rates, growth rates, tax rates, costs, pricing and capital expenditures. The fair value determination is categorized as Level 3 in the fair value hierarchy due to its use of internal projections and unobservable measurement inputs.
Fair Valuation of Common Stock, Preferred Stock, Warrants and Stock Options
Our executive officers, directors and principal stockholders beneficially own a substantial majority of EVO’s outstanding common stock. EVO’s common stock does not have an observable quoted market price on the OTC Expert Market because the stock is thinly traded and is not eligible for proprietary broker-dealer quotations. As a result, we must utilize an alternative method to estimate the fair value of our common stock, including when EVO issues other equity instruments for which the common stock is the underlying security. We first use primarily the income or discounted cash flows approach to determine the estimated fair value of our total equity. The assumptions about future cash flows and growth rates are based on the Company's long-term forecast and are subject to review and approval by senior management. The discount rate utilized is a risk-adjusted weighted average cost of capital, which we believe approximates the rate from a market participant's perspective. We then use the option-pricing equity allocation method to allocate the estimated total equity value to our common stock and preferred stock. The inputs and assumptions used in the option-pricing model include: (1) the discount rate; (2) the estimated time to liquidity; (3) EVO's expected stock price volatility; (4) the estimated discount for the lack of marketability; and (5) the risk-free interest rate. The estimated fair value could be impacted by changes in market conditions, interest rates, growth rates, tax rates, costs, pricing and capital expenditures. The fair value determination is categorized as Level 3 in the fair value hierarchy due to its use of internal projections and unobservable measurement inputs. The estimated fair value of EVO’s common stock is a key assumption in the fair valuation of the preferred stock, warrants and stock options EVO 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 Black-Scholes option pricing model requires the use of subjective assumptions, including the estimated fair value of EVO’s common stock, the expected term of the award, the expected stock price volatility, expected dividend yield and the risk-free interest rate for the expected term of the award. The expected term represents the period of time the awards are expected to be outstanding. Due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to otherwise estimate the expected term of the awards, we use the simplified method to estimate the expected term for our stock-based compensation awards. Under the simplified method, the expected term of an award is presumed to be the mid-point between the vesting date and the end of the contractual term. Expected volatility is based on historical volatilities for publicly traded stock of comparable companies over the estimated expected term of the awards. We assume no dividend yield because dividends on our common stock are not expected to be paid in the near future, which is consistent with our history of not paying dividends on our common stock.
Deferred Income Tax Assets and Liabilities
The carrying values of deferred income tax assets and liabilities reflect the application of our income tax accounting policies in accordance with applicable accounting standards and are based on management’s assumptions and estimates regarding future operating results and levels of taxable income, as well as management’s judgment regarding the interpretation of the provisions of applicable accounting standards. The carrying values of liabilities for income taxes currently payable are based on management’s interpretations of applicable tax laws and incorporate management’s assumptions and judgments regarding the
use of tax planning strategies in various taxing jurisdictions. The use of different estimates, assumptions and judgments in connection with accounting for income taxes may result in materially different carrying values of income tax assets and liabilities and results of operations.
We evaluate the recoverability of these deferred tax assets by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources of income inherently rely heavily on estimates. We use our historical experience and our short and long-term business forecasts to provide insight. To the extent we do not consider it more likely than not that a deferred tax asset will be recovered, a valuation allowance is established. As of December 31, 2022, the Company had federal and state net operating losses of approximately $38.4 million and $26.7 million, respectively. As of December 31, 2021, the Company had federal and state net operating losses of approximately $44.7 million and $30.2 million, respectively. As of December 31, 2022, the Company has approximately $0.7 million of federal net operating losses available to offset future taxable income for 20 years and will begin to expire in 2036. The remaining $37.7 million of federal net operating losses are carried forward indefinitely to offset future taxable income up to an 80% limitation of taxable income in the year of use. The state net operating losses began to expire in 2022. These federal and state net operating carryforwards are reserved with a full valuation allowance because, based on the available evidence, we believe it is more likely than not that we would not be to utilize those deferred tax assets in the future. If the actual amounts of taxable income differ from our estimates, the amount of our valuation allowance could be materially impacted.
Recently Issued Accounting Pronouncements
Refer to Note 1, Description of Business and Summary of Significant Accounting Policies , to our consolidated financial statements included in this report.
Seasonality and Inflation
Due to increased USPS volume associated with the holiday rush from the end of November through year end, the Company’s revenue and business activity typically increase during the last quarter of each calendar year. In the winter months, operating expenses generally increase and fuel efficiency declines because of engine idling and harsh weather creating higher accident frequency, increased claims and higher equipment repair expenditures.
The Company also may suffer from weather-related or other events such as tornadoes, hurricanes, blizzards, ice storms, floods, fires, earthquakes and explosions. These events may disrupt fuel supplies, increase fuel costs, disrupt freight shipments or routes, affect regional economies, destroy the Company’s assets or adversely affect the business or financial condition of customers, any of which could adversely affect the Company’s results or make the Company’s results more volatile.
The Company has experienced inflationary pressures in the normal course of business including cost of equipment, driver wages, healthcare and benefits, insurance, parts and supplies and fuel. While the Company receives some revenue offsets from the USPS for costs like wage inflation and fuel, periods with inflationary pressures could adversely affect our financial results.
Item 7A. Quantitative and Qualitat ive Disclosures About Market Risk.
As a smaller reporting company, EVO is not required to provide disclosure under this item.
Item 8. Financial Statemen ts and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm [PCAOB ID Number 248]
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders’ Deficit
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
EVO Transportation & Energy Services, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of EVO Transportation & Energy Services, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, changes in stockholders’ deficit, and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 1 to the financial statements, the Company’s current liabilities exceeded its current assets by $67.2 million and its total liabilities exceeded its total assets by $15.7 million as of December 31, 2022. These conditions, along with other matters as set forth in Note 1, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2021.
Tulsa, Oklahoma
November 16, 2023
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Consolidated B alance Sheets
December 31,
($ in thousands, except share and per share data)
Assets
Current assets
Cash
Accounts receivable - trade, net
Alternative fuels tax credit receivable
Prepaids and other current assets
Total current assets
Non-current assets
Property and equipment, net
Goodwill
Intangible assets, net
Operating lease right-of-use assets, net
Finance lease right-of-use assets, net
Deposits and other long-term assets
Total non-current assets
Total assets
Liabilities, Temporary Equity and Stockholders’ Deficit
Current liabilities
Accounts payable
Accrued expenses and other current liabilities
Accrued interest - related party, current portion
Embedded derivative liability
Warrant liabilities
Advances under factoring arrangements, current portion
Long-term debt, current portion
Long-term debt - related party, current portion
Operating lease liabilities, current portion
Finance lease liabilities, current portion
Total current liabilities
Non-current liabilities
Advances under factoring arrangements, less current portion
Long-term debt, less current portion
Long-term debt - related party, less current portion
Long-term accrued interest - related party, less current portion
Operating lease liabilities, less current portion
Finance lease liabilities, less current portion
Deferred tax liability
Total non-current liabilities
Total liabilities
Commitments and contingencies (Note 10)
Temporary Equity
Series A Redeemable Convertible Preferred stock, $ 0.0001 par value; 10,000,000 shares authorized, 0 (December 31, 2022) and 100,000 (December 31, 2021) shares issued and outstanding, includes accrued and undeclared dividends of $ 0 (December 31, 2022) and $ 134 (December 31, 2021) and liquidation preference of $ 0 (December 31, 2022) and $ 434 (December 31, 2021)
Series B Redeemable Convertible Preferred stock, $ 0.0001 par value; 3,075,000 shares authorized, 0 (December 31, 2022) and 2,050,000 (December 31, 2021) shares issued and outstanding, includes accrued and undeclared dividends of $ 0 (December 31, 2022) and $ 1,090 (December 31, 2021) and liquidation preference of $ 0 (December 31, 2022) and $ 7,240 (December 31, 2021)
Series C Redeemable Preferred stock, $ 0.0001 par value; 1 (December 31, 2022) and 0 (December 31, 2021) share authorized, issued and outstanding, includes accrued and undeclared dividends of $ 0 (December 31, 2022 and December 31, 2021) and liquidation preference of $ 0 (December 31, 2022 and December 31, 2021)
Redeemable common stock, at redemption value; 0 (December 31, 2022) and 2,240,000 (December 31, 2021)
Stockholders’ deficit
Series D Non-Redeemable Preferred stock, $ 0.0001 par value; 1 (December 31, 2022) and 0 (December 31, 2021) share authorized, issued and outstanding, includes liquidation preference of $ 0 (December 31, 2022 and December 31, 2021)
Common stock, $ 0.0001 par value; 600,000,000 (December 31, 2022) and 100,000,000 (December 31, 2021) shares authorized; 436,270,505 (December 31, 2022) and 15,213,145 (December 31, 2021) shares issued and outstanding
Common stock issuable
Additional paid-in capital
Accumulated deficit
Total stockholders’ deficit
Total liabilities, temporary equity, and stockholders’ deficit
See notes to consolidated financial statements.
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Consolidated Statem ents of Operations
For the Years Ended
December 31,
($ in thousands, except share and per share data)
Revenue
Trucking
Other
Total revenue
Operating expenses
Payroll, benefits and related
Purchased transportation
Fuel
General and administrative
Operating supplies and expenses
Depreciation and amortization
Equipment rent
Maintenance and supplies
Insurance and claims
Loss on sale of fixed assets
Other
Total operating expenses
Operating income (loss)
Other income (expense)
Interest expense
Change in fair value of embedded derivative liability
Change in fair value of warrant liabilities
Gain (loss) on extinguishment of debt
Other miscellaneous income
Total other expense
Income (loss) before income taxes
Income tax expense
Net income (loss)
Earnings (loss) per share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
See notes to consolidated financial statements.
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Consolidated Statements of Chan ges in Stockholders’ Deficit
For the Years Ended December 31, 2022 and 2021
Preferred Stock
Common Stock
Common Stock
Additional
Paid-in
Accumulated
Total
Stockholders’
($ in thousands, except share data)
Shares
Amount
Shares
Amount
Issuable
Capital
Deficit
Deficit
Balance - December 31, 2020
Obligation to issue common stock - related party
Issuance of warrants to extinguish debt
Common stock issued for services - related party
Stock-based compensation expense
Series A Redeemable Preferred stock dividend
Series B Redeemable Preferred stock dividend
Net income
Balance - December 31, 2021
Issuance of common stock - related party
Conversion of convertible notes into warrants
Reclassification of warrants from liability classified to equity classified
Issuance of Series D Non-Redeemable Preferred stock
Exercise of warrants into common stock
Issuance of equity classified warrants
Restructuring gain from related parties
Reclassification of redeemable common stock
Stock-based compensation expense
Series A Redeemable Preferred stock dividend
Series B Redeemable Preferred stock dividend
Conversion of Series A Redeemable Preferred stock into common stock
Conversion of Series B Redeemable Preferred stock into common stock
Net loss
Balance - December 31, 2022
See notes to consolidated financial statements.
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Consolidated Statem ents of Cash Flows
For the Years Ended December 31,
($ in thousands)
Cash flows from operating activities
Net income (loss)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization
Non-cash lease expense
Loss on sale of 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
Restructuring gain (loss) on Recapitalization Transaction
(Gain) loss on extinguishment of debt
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 operating activities
Cash flows from investing activities
Purchases of equipment
Proceeds from sale of assets
Net cash 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
Debt extinguishment costs
Advances from factoring arrangements
Payments on factoring arrangements
Debt issuance costs
Payments on finance lease liabilities
Net cash 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 consolidated financial statements.
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidat ed 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 truckload carrier serving the 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 CNG. EVO also operates a brokerage unit that supports the truckload business and services other corporate customers. In select cases, EVO may subcontract 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:
EVO adopted an amendment to the certificate of incorporation to effect the increase in the number of authorized shares of its common stock, par value $ 0.0001 , from 100 million to 600 million (the “Charter Amendment”). See Note 6, Temporary Equity, Stockholders' Deficit and Warrants , for more information.
Antara Capital agreed to pay EVO $ 13.5 million to purchase 22,353,696 immediately exercisable warrants to purchase 22,353,696 shares of common stock of EVO at an exercise price of $ 0.0001 per share, 319,213,143 warrants to purchase 319,213,143 shares of common stock of EVO at an exercise price of $ 0.0001 per share that was exercisable following the adoption of the Charter Amendment, and 1 convertible preferred membership interest in EVO Holding. The Company recorded a $ 7.7 million loss to interest expense for the three and nine months ended September 30, 2022 in connection with the issuance of the warrants. Upon exercise of the warrants, which occurred in November 2022, Antara Capital owned approximately 69 % 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 below under the heading “ Amended and Restated Limited Liability Company Operating Agreement .” EVO Holding maintains the Company’s ownership interests in John W. Ritter Trucking, Inc. and its related companies (the "Ritter Companies"), which provide a material portion of our Trucking revenue. During the years ended December 31, 2022 and 2021 , Ritter provided approximately 18 % and 20 % of our Trucking revenue, respectively. See Note 6, Stockholders’ Deficit and Warrants , for more information regarding the issued warrants.
In connection with the SPA, EVO entered into exchange agreements (the “Exchange Agreements”) with certain creditors, defined in Note 3, Related Party Transactio ns . Pursuant to the Exchange Agreements, the creditors agreed to exchange promissory notes in the aggregate amount of principal and accrued interest of approximately $ 18.3 million for 71,324,670 warrants to purchase common stock and new promissory notes in the aggregate principal amount of approximately $ 3.7 million (the “Takeback Notes”). See Note 3, Related Party Transactions , Note 5, Debt , and Note 6, Stockholders’ Deficit and Warrants , for more information.
EVO issued warrants to purchase 4,754,978 , 9,509,956 and 3,000,000 shares of EVO's common stock at exercise prices of $ 0.0001 , $ 0.53 and $ 1.50 per share, respectively, to two former board members. See Note 6, Stockholders’ Deficit and Warrants , for more information regarding the issued warrants.
EVO issued warrants to purchase 23,224,117 shares of EVO's common stock at an exercise price of $ 0.63 per share to key equity holders and members of management. Each warrant issued may be exercised for cash or on a cashless basis, pursuant to the terms of such warrants, for a period of five years from the date of issuance. See Note 6, Stockholders’ Deficit and Warrants , for more information regarding the issued warrants.
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
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 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 99 % of the common membership interests of EVO Holding. The Conversion Period is defined as each date of determination on which (i) Consolidated EBITDA for EVO and its subsidiaries for the most recently completed fiscal quarter that is the first, second or third fiscal quarter is less than $ 6.0 million, with such determination initially being made with respect to the second fiscal quarter of 2023, (ii) Consolidated EBITDA for EVO and its subsidiaries for the most recent fourth fiscal quarter that is one of the two most recently completed fiscal quarters is less than $ 9.0 million, (iii) EVO or any of its subsidiaries fails to pay any principal or interest due in respect of any debt with an outstanding aggregate principal amount in excess of $ 1.0 million when due, subject to certain cure rights, (iv) any debt of EVO or any of its subsidiaries with an outstanding aggregate principal amount in excess of $ 1.0 million becomes due prior to its stated maturity, (v) EVO has failed to deliver unaudited quarterly financial statements with certain prescribed time periods, or (vi) EVO has to deliver audited annual financial statements within certain prescribed time periods.
Going Concern
As of December 31, 2022, the Company had a cash balance of $ 14.4 million , a working capital deficit of $ 67.2 million , stockholders’ deficit of $ 15.7 million , and material debt and lease obligations of $ 105.6 million , which included term loan borrowings under a financing agreement with Antara Capital. During the year ended December 31, 2022, the Company reported cash provided by operating activities of $ 10.6 million and net loss of $ 18.2 million that included a $ 5.3 million loss on extinguishment of debt.
The following significant transactions and events affecting the Company’s liquidity occurred during the year ended December 31, 2022:
On March 11, 2022, EVO and certain subsidiary guarantors of the Company entered into a Senior Secured Loan and Executive Loan Agreement (the "Bridge Loan Agreement") with Antara Capital and Thomas J. Abood, EVO's former chief executive officer, Damon R. Cuzick, EVO's former chief operating officer, Bridgewest Growth Fund LLC, an entity affiliated with Billy (Trey) Peck Jr., EVO's executive vice president - business development, and Batuta Capital Advisors LLC ("Batuta" and together with Mr. Abood, Mr. Cuzick and Bridgewest Growth Fund LLC, the "Executive Lenders"), an entity affiliated with Alexandre Zyngier, a member of EVO's board of directors (the “Board”). Pursuant to the Bridge Loan Agreement, EVO obtained a bridge loan in the amount of $ 9.0 million (the "Bridge Loan") from Antara Capital and also borrowed $ 0.8 million (the "Executive Loans") from the Executive Lenders. Refer to Note 5, Debt, for further discussion. Pursuant to the Bridge Loan Agreement, on March 11, 2022, Antara Capital appointed Michael Bayles as a member of EVO'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, EVO filed a Series C Certificate of Designations of Series C Non-Participating Preferred Stock with the Secretary of State of the State of Delaware, which authorized EVO to issue up to one share of Series C Preferred Stock, and issued to Antara Capital one share of Series C Preferred Stock. Refer to No te 6, Temporary Equity, Stockholders' Deficit and Warrants for further discussion.
On March 11, 2022, EVO 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 converted those notes into warrants to purchase 7,533,750 shares of EVO's common stock at an exercise price of $ 0.01 per share.
On May 31, 2022, EVO, 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, EVO, 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, EVO, 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 EVO shall have duly approved and filed with the Secretary of State of the State
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
of Delaware a Certificate of Designations to evidence the issuance of a new series of Series D Participating Preferred Stock, $ 0.0001 par value (the “Series D Preferred”) that will, upon issuance, entitle Antara Capital (in its capacity as sole holder of the Series D Preferred) to vote such number of votes per share that will allow Antara Capital to exercise 51 % of the voting capital stock of EVO.
On July 13, 2022, and pursuant to the Third Extension Agreement dated July 8, 2022, EVO filed a Certificate of Designations of Series D Non-Participating Preferred Stock with the Secretary of State of the State of Delaware, which authorized EVO to issue up to one share of Series D Non-Participating Preferred Stock. Refer to No te 6, Stockholders' Deficit and Warrants for further discussion.
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.
On July 15, 2022, EVO, 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, EVO, 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, EVO, Antara Capital and the Executive Lenders, in contemplation of the SPA discussed above, 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, EVO and Antara Capital entered into the SPA and consummated the Recapitalization Transactions. For more information regarding the SPA and the Recapitalization Transactions, refer to the heading “Securities Purchase Agreement” above.
On December 23, 2022, Antara Capital, the Executive Lenders, CEOF and Hudson Park amended and restated the Bridge Loan to reflect the assigned portions of the Bridge Loan to CEOF and Hudson Park. No changes were made to the Bridge Loan in connection with the assignment to CEOF and Hudson Park and no payments were made to the holders of the debt. This event is a transaction among debt holders.
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;
As of December 31, 2022, the Company is not in compliance with certain covenants in its debt agreements (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 EVO’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:
Cost reduction efforts;
Improvements to operations to improve driver productivity;
Purchases of trucks and trailers to reduce purchased transportation and rental vehicles;
Replacement of older trucks with newer trucks to lower the overall cost of ownership and improve cash flow through reduced maintenance and fuel costs;
Negotiating with related parties and third parties to refinance existing debt and lease obligations;
Potential future public or private debt or equity offerings;
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
Acquiring new profitable contracts and negotiating revised pricing for existing contracts; and
Profitably expanding trucking revenue.
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 within EVO’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 4, 5, and 9 to the consolidated financial statements for further information regarding our factoring, debt, and lease obligations, including the future maturities of such obligations. Refer to Note 13, Subsequent Events , for further information regarding changes in the Company’s debt obligations and liquidity subsequent to December 31, 2022.
Consolidation
The accompanying consolidated financial statements include the accounts of EVO and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
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 accounting principles generally accepted in the U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The consolidated financial statements include some amounts that are based on management’s best estimates and judgments. The most significant estimates relate to goodwill and long-lived asset valuations, purchase price allocations related to the Company’s business combinations, valuation allowance on deferred income tax assets, and the valuation of our common stock, preferred stock, warrants and stock-based awards.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company maintains its cash in bank deposit accounts where accounts may exceed federally insured limits at times. There were no cash equivalents as of December 31, 2022 and 2021 .
Restricted Cas h
We had restricted cash of $ 1.0 million as of December 31, 2022 and 2021 which represents cash required to be set aside by a standby letters of credit related to workers’ compensation and general liabilities accrued in our condensed consolidated financials. Restricted cash is included in deposits and other long-term assets on our condensed consolidated balance sheet. See Note 10, Commitments and Contingencies , for further details around the letters of credit.
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
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
possible that the Company’s estimate of the allowance for doubtful accounts will change and that losses ultimately incurred could differ materially from the amounts estimated in determining the allowance. Receivable balances are written off against the allowance for doubtful accounts when, in the judgment of management, they are considered uncollectible.
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, 2022 and 2021, the USPS accounted for 51 % and 47 % of the consolidated trade accounts receivable balance, respectively. During the years ended December 31, 2022 and 2021, the USPS generated revenue represented 90 % and 89 %, respectively, of total trucking revenue and 90 % and 89 %, respectively, of the Company’s consolidated total revenue. The USPS is operated by the United States Federal government; therefore, the Company does not believe there is significant credit or collections risk related to the accounts receivable balance due from the USPS. If the Company were to lose its relationship, or is unable to renew existing contracts, with the USPS, it would have a material adverse effect on the Company’s financial condition and results of operations.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Maintenance and repair expenditures are charged to expense as incurred. Gains and losses on disposals of equipment are included in operations as they are a normal, recurring component of our operations. Depreciation is provided utilizing the straight-line method over the following estimated useful lives.
Years
Tractors
Trailers
Equipment
Leasehold improvements
Goodwill
Goodwill represents the excess of the purchase price of a business acquisition over the net fair value of assets acquired and liabilities assumed. We test goodwill for impairment annually and whenever events or circumstances make it more likely than not that an impairment may have occurred, such as a significant adverse change in the business climate or a decision to sell all or a portion of a reporting unit. We perform our annual goodwill impairment test as of October 1 and monitor for interim triggering events on an ongoing basis. All of the Company’s goodwill is recorded in the Trucking reporting unit, which has a negative carrying value as of December 31, 2022 and 2021.
Goodwill is reviewed for impairment utilizing either a qualitative assessment or a quantitative goodwill impairment test. If we choose to perform a qualitative assessment and determine the fair value more likely than not exceeds the carrying value, no further evaluation is necessary. When we perform the quantitative goodwill impairment test, we compare the fair value of the reporting unit to the carrying value, which includes goodwill. If the fair value of the reporting unit exceeds its carrying value, the goodwill is not considered impaired. If the carrying value is higher than the fair value, the difference would be recognized as an impairment loss.
The Company performed its annual goodwill impairment tests for 2022 and 2021 by completing quantitative impairment analyses of the Trucking reporting unit goodwill, and management concluded the goodwill was not impaired.
Intangible Assets
The Company's intangible assets consist of customer relationships, trade names and non-competition agreements. The Company carries these intangible assets at cost, less accumulated amortization. Amortization is recorded on a straight-line basis over the estimated useful lives of the respective assets. Management reviews its intangible assets for impairment whenever events or circumstances indicate that the carrying amount of the asset may not be recoverable. There were no indefinite-lived intangible assets at December 31, 2022 and 2021 .
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
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
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. There was no impairment of long-lived assets during the years ended December 31, 2022 and 2021 .
Debt Issuance Costs
Certain fees and costs incurred to obtain long-term financing are capitalized and included as a reduction in the carrying value of the related debt in the consolidated balance sheets, net of accumulated amortization. These costs are amortized to interest expense using the effective interest method over the term of the related debt.
Fair Valuation of Common Stock, Preferred Stock, Warrants and Stock Options
Our executive officers, directors and principal stockholders beneficially own a substantial majority of EVO’s outstanding common stock. EVO’s common stock does not have an observable quoted market price on the OTC Expert Market because the stock is thinly traded and is not eligible for proprietary broker-dealer quotations. As a result, we must utilize an alternative method to estimate the fair value of our common stock, including when EVO issues other equity instruments for which the common stock is the underlying security. We first use primarily the income, or discounted cash flows, approach to determine the estimated fair value of our total equity. The assumptions about future cash flows and growth rates are based on the Company's long-term forecast and are subject to review and approval by senior management. The discount rate utilized is a risk-adjusted weighted average cost of capital, which we believe approximates the rate from a market participant's perspective. We then use the option-pricing equity allocation method to allocate the estimated total equity value to our common stock and preferred stock. The inputs and assumptions used in the option-pricing model include: (1) the discount rate; (2) the estimated time to liquidity; (3) EVO's expected stock price volatility; (4) the estimated discount for the lack of marketability; and (5) the risk-free interest rate. The estimated fair value could be impacted by changes in market conditions, interest rates, growth rates, tax rates, costs, pricing and capital expenditures. The fair value determination is categorized as Level 3 in the fair value hierarchy due to its use of internal projections and unobservable measurement inputs. The estimated fair value of EVO’s common stock is a key assumption in the fair valuation of the preferred stock, warrants and stock options EVO issues.
Stock-Based Compensation
The Company accounts for stock-based compensation awards based on the fair value of the award as of the grant date, which is calculated using the Black-Scholes option pricing model. The Company recognizes stock-based compensation expense on a straight-line basis over the awards’ vesting period and accounts for forfeitures as they occur.
Some of EVO’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.
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
Earnings (Loss) per Share of Common Stock
Basic earnings (loss) per share of common stock attributable to common stockholders is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average shares of common stock outstanding for the period. Potentially dilutive shares, which are based on the weighted-average shares of common stock underlying outstanding stock-based awards, warrants and convertible notes payable and preferred stock using the treasury stock method or the if-converted method, as applicable, are included when calculating diluted net loss per share of common stock attributable to common stockholders when their effect is dilutive.
The following table presents the computation of basic and diluted earnings (loss) per share (amounts in thousands, except share data):
For the Years Ended
December 31,
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:
$ 4.0 million Secured Convertible Promissory Notes
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:
$ 4.0 million Secured Convertible Promissory Notes
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:
For the Years Ended
December 31,
Stock options
Warrants
Common stock to be issued upon conversion of Four convertible promissory notes with an aggregate principal amount of $ 9.5 million
Common stock and warrant to be issued for purchase of fixed assets
Total
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
Revenue Recognition
USPS – USPS trucking operations generates revenue from transportation services under multi-year contracts with the USPS.
Contract Identification – Although the Company has master agreements with the USPS, these master agreements only establish general terms. Each delivery represents a distinct service that is a separately identified performance obligation for each contract. A single delivery may comprise multiple stops prior to completion. Therefore, a legally enforceable contract is executed by both parties at the first point of pickup for each delivery.
Performance Obligations – The Company’s performance obligation arises from the annualized contract to transport USPS freight and is satisfied upon completion of each delivery. The Company’s delivery, accessorial, and dedicated truck capacity represent a bundle of services that are highly interdependent and have the same pattern of transfer to the customer. These services are not capable of being distinct from one another. Thus, the Company’s only performance obligation of USPS trucking operations is transportation services.
Transaction Price – The transaction price is based on the awarded agreement for the multi-year contract. The prices are based on miles travelled that adjust monthly for fuel pricing indexes. Depending on the contract, the total transaction price may consist of mileage revenue, fuel adjustments, accessorial fees and fees for additional deliveries outside of the scope of the annual contract. There is no significant financing component in the transaction price, as the USPS generally pays within the contractual payment terms of 30 to 60 days.
Allocating Transaction Price to Performance Obligations – The transaction price is allocated in its entirety to transportation services, as this is the only performance obligation.
Revenue Recognition – Revenues are recognized over time as satisfaction of the promised contractual delivery agreements are completed, in an amount that reflects the fixed price or the rate per mile set in the contract. Generally, the Company does not have material revenue in transit at period end.
Freight
Contract Identification – A legally enforceable contract is executed by both parties at the point of pickup at the shipper’s location, as evidenced by a bill of lading. Although the Company may have master agreements with its customers, these master agreements only establish general terms. There is no financial obligation until the load is tendered/accepted and the Company takes possession of the load.
Performance Obligations – The Company’s only performance obligation for freight trucking operations is transportation services. The Company’s delivery, accessorial, and dedicated truck capacity represent a bundle of services that are highly interdependent and have the same pattern of transfer to the customer. These services are not capable of being distinct from one another and the Company does not offer them on a stand-alone basis.
Transaction Price – Depending on the contract, the total transaction price may consist of mileage revenue, fuel adjustments, and accessorial fees. There is no significant financing component in the transaction price, as the customers generally pay within the contractual payment terms of 30 to 120 days.
Allocating Transaction Price to Performance Obligations – The transaction price is allocated in its entirety to transportation services, as this is the only performance obligation.
Revenue Recognition – Revenues are recognized over time as satisfaction of the promised contractual delivery agreements are completed. Generally, the Company does not have material revenue in transit at period end.
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:
December 31,
($ in thousands)
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 $ 7.1 million to one of EVO’s subsidiaries as additional compensation for transportation services provided to the
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
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: (i) the Company measures profit and loss as a whole; (ii) the principal decision makers do not review information based on any operating segment; (iii) the Company has not chosen to organize its business around different products and services; (iv) the Company has not chosen to organize its business around geographic areas; and (v) the revenues, profits, assets and liabilities of the CNG Fueling Stations are immaterial for all periods presented.
Loss Contingencies
From time to time, we are involved in litigation, claims, contingencies and other legal matters. We record a charge equal to at least the minimum estimated liability for a loss contingency borne by the Company when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the range of the loss can be reasonably estimated. We expense legal costs, including those legal costs expected to be incurred in connection with a loss contingency, as incurred.
Income Taxes
Deferred income taxes are recognized for differences between the basis of assets and liabilities for financial statement and income tax purposes. Deferred tax assets and liabilities represent the future tax consequence for those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are also recognized for operating losses that are available to offset future taxable income.
In evaluating the ultimate realization of deferred income tax assets, management considers whether it is more likely than not that the deferred income tax assets will be realized. Management establishes a valuation allowance if it is more likely than not that all or a portion of the deferred income tax assets will not be utilized. The ultimate realization of deferred income tax assets is dependent on the generation of future taxable income, which must occur prior to the expiration of the net operating loss carryforwards.
The Company accounts for uncertainty in income taxes by recognizing the tax benefit or expense from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The Company measures the tax benefits and expenses recognized in the consolidated financial statements from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The Company has no t identified any material uncertain tax positions as of December 31, 2022 and 2021 , respectively. Interest and penalties associated with tax positions are recorded within income tax expense. Tax years that remain subject to examination include 2019 through the current year for federal and generally 2018 through the current year for state purposes.
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
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 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 no t 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 does not believe this standard will have a material impact 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
Accounts receivable are summarized as follows:
December 31,
($ in thousands)
Accounts receivable – trade
Allowance for doubtful accounts
Property and equipment consist of the following:
December 31,
($ in thousands)
Tractors, trailers and other vehicles
Equipment
Land
Leasehold improvements
Computer equipment
Office equipment
Less accumulated depreciation
Depreciation expense for the years ended December 31, 2022 and 2021, wa s $ 7.7 million and $ 8.2 million, respectively.
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
Intangible assets consist of the following:
December 31, 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 years ended December 31, 2022 and 2021 wa s $ 0.9 million a nd $ 0.9 million, respectively. The weighted-average remaining useful life of the finite-lived intangible assets was 7 .8 years as of December 31, 2022 , of which the weighted-average remaining useful life for the customer relationships was 8.0 years, for the trade names was 7.8 years and for the non-competition agreements was 1.4 years.
Future amortization expense will be approximately as follows:
Year Ending December 31,
($ in thousands)
Thereafter
Goodwill consists of the following:
December 31,
($ in thousands)
Beginning balance
Acquisitions
Impairment
All of the Company's goodwill is included in its Trucking reporting unit.
Accrued expenses and other current liabilities consist of the following:
December 31,
($ in thousands)
Purchased transportation
Compensation, related taxes and benefits
Insurance
Other
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
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 an individual who served as one of the Company’s officers until October 2020. Under the agreement, the Company paid 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 years ended December 31, 2022 and 2021, the Company recognized expense of approximate ly $ 0 million and $ 0.6 million, respectively, related to this software technology, and $ 0 million and $ 0.1 was owed as of December 31, 2022 and 2021, respectively.
Sheehy Settlement Agreement
On September 27, 2022, EVO, 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 $ 0.1 million over multiple installments through August 31, 2023; (ii) Sheehy agreed to pledge $ 0.8 million in cash collateral held in the SEI captive insurance member account, under the CSPA, on or before March 1, 2024; (iii) modified an equipment lease between Sheehy and SEI; and (iv) SEI waived and agreed to not exercise the $ 1.2 million put right with the receipt of $ 0.1 million over multiple installments through December 31, 2023. Accordingly, EVO is no longer obligated to redeem the common stock held by SEI. As of December 31, 2022 and December 31, 2021 , redeemable common stock was $ 0 and $ 1.2 million, respectively.
Off Balance Sheet Arrangements - Collateral Security Pledge Agreement
On January 2, 2019 EVO 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 $ 0.8 million in cash collateral held in the SEI captive insurance member account, under the CSPA, on or before March 1, 2024, and SEI agreed to continue its collateral pledge until that time.
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 common stock of EVO; (ii) a $ 75,000 payment and (iii) the Takeback Notes resulting in a restructuring gain of approximately $ 9.0 million recorded within additional paid-in-capital as of December 31, 2022.
Amendments to Leases
In connection with the Recapitalization Transactions, Ursa Major Corporation, a wholly-owned subsidiary of EVO (“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, EVO entered into an agreement with an existing stockholder to purchase used CNG tractors in exchange for 1,174,800 shares of EVO’s common stock and a warrant to purchase 1,174,800 shares of EVO’s common stock at an exercise price of $ 2.50 per share. Although the transaction was not consummated, the Company recorded $ 3.5 million related to the tractors within property and equipment, net on its consolidated balance sheets included in this annual report, with an associated $ 3.5 million related to EVO’s obligation to issue the common stock and the warrant to purchase common stock within common stock issuable. In October 2023, EVO, the stockholder and his affiliated company entered into a settlement agreement to mutually rescind the transaction.
For information regarding additional related party transactions, see Note 5, Debt and Note 6, Stockholders’ Deficit and Warrants .
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
Note 4 – Factoring Arrangements
Certain of EVO’s wholly-owned subsidiaries have entered into accounts receivable factoring arrangements with Triumph Business Capital (the “Factor”) with termination dates that started in September 2021 but automatically renew for successive one-year periods (absent either party's written election to terminate, which has not occurred). Pursuant to the terms of the agreements, each factoring subsidiary, from time to time, sells to the Factor certain of its accounts receivable balances on a recourse basis for credit-approved accounts. The Factor remits 95 % of the contracted accounts receivable balance for a given month to the factoring subsidiary (the “Advance Amount”) with the remaining balance, less fees, to be forwarded once the Factor collects the full accounts receivable balance from the factoring customer.
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 $ 6.9 million of net proceeds plus funds held in reserve to the outstanding principal amount of the overadvances. The parties further agreed that the Company will repay the remaining overadvances balance of approximately $ 6.9 million in 48 equal monthly installments beginning January 1, 2022 and that the Factor would apply funds held in reserve against the approximately $ 0.8 million remaining balance of advances made to the Company during September 2020. C omponents included in Advances from the factoring arrangements are as follows:
December 31,
($ in thousands)
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 4 % floor) plus 2.0 % (resulting in a rate of 9.5 % and 6.0 % as of December 31, 2022 and 2021 , respectively). There is also a factor fee of 0.25 % of the face amount of the invoice factored and an associated penalty increase for purchased accounts that remain unpaid for 31 days. Total interest and financing fees for factored receivables for the years ended December 31, 2022 and 2021 w ere $ 1.5 million and $ 1.3 million, respectively. The fees are included in interest expense in the consolidated statements of operations.
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
Note 5 - Debt
Antara Financing Agreement
On September 16, 2019, EVO entered into a $ 24.5 million financing agreement (the “Financing Agreement”) among EVO, each subsidiary of EVO, various lenders from time to time party thereto and Cortland Capital Market Services LLC, as administrative agent and collateral agent. Pursuant to the Financing Agreement, the Company initially borrowed $ 22.4 million and borrowed the remaining $ 2.1 million during October 2019 (the “Term Loan”). All of EVO’s subsidiaries were originally guarantors under the Financing Agreement. The Term Loan is secured by all assets of EVO and its subsidiaries, including pledges of all equity in EVO’s subsidiaries and is not subject to registration rights. The Financing Agreement contains covenants, subject to specific exceptions, that limit (i) the making of investments, (ii) the incurrence of additional indebtedness, (iii) the incurrence of liens, (iv) payments and asset transfers with restricted junior loan parties or subsidiaries, including dividends, (v) transactions with stockholders and affiliates and (vi) asset dispositions and acquisitions, among others. The Term Loan bears interest at 12 % per annum and had an original maturity date of September 16, 2022 . Until December 31, 2019, interest on the Term Loan was paid in kind and capitalized as additional principal, and the Company had the option to pay interest on the capitalized interest in cash or in kind. After December 31, 2019, monthly interest payments were due in cash, and all outstanding principal and interest will be due on the maturity date. The Term Loan may be prepaid at any time, subject to payment of a prepayment premium of (1) 7 % for each early payment made or coming due on or prior to September 16, 2020, (2) after September 16, 2020, 5 % for each early payment made or coming due on or prior to September 16, 2021, and (3) thereafter, no premium shall be due. Proceeds were used (i) to effect the Ritter acquisition, (ii) to refinance and retire existing indebtedness, and (iii) for general working capital needs.
Concurrently, and in connection with the Financing Agreement, EVO issued two warrants (the “$0.01 Warrant” and the “$ 2.50 Warrant” and collectively, the “Antara Warrants”) to Antara Capital to purchase an aggregate of 4,375,000 shares of EVO's common stock (the “Antara Warrant Shares”). The $ 0.01 Warrant grants Antara Capital the right to purchase up to 3,350,000 Antara Warrant Shares at an exercise price of $ 0.01 per share and is exercisable for five years from the date of issuance. The $ 2.50 Warrant grants Antara Capital the right to purchase up to 1,025,000 Antara Warrant Shares at an exercise price of $ 2.50 per share, subject to adjustment for certain distributions, stock splits and issuances of common stock, and is exercisable for ten years from the date of issuance. If the fair market value of the Antara Warrant Shares is greater than the related exercise price at the end of the exercise period (the Antara Warrant Shares are “in the money”), then any outstanding Antara Warrants that are in the money will be automatically deemed to be exercised immediately prior to the end of the exercise period. Pursuant to the Antara Warrants, EVO granted Antara Capital preemptive rights to purchase its pro rata share, determined based on the number of shares held by Antara Capital or into which Antara Capital’s Antara 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 1,500,000 shares of EVO's common stock to Antara at an exercise price of $ 0.01 per share (the “Side Letter Warrant”) subject to the Company's potential acquisition of LoadTrek, a GPS system designed for the trucking industry, owned by a related party. Had the Company successfully completed an acquisition of certain assets of LoadTrek or met financial performance metrics set forth in the warrant agreement, all or a portion of the shares underlying the Side Letter Warrant were subject to cancellation. The Company did not acquire the LoadTrek assets nor did it meet the financial performance metrics and the Side Letter Warrant was subsequently amended to remove the cancellation provision and, therefore, none of the shares underlying the warrant were cancelled.
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 $ 9.0 million debt discount that is amortized to interest expense over the term of the Term Loan.
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
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 $ 3.2 million of term loan commitments (the “Incremental Term Loans”) and borrowed $ 3.2 million from Antara Capital on the same terms as its existing term loan commitments provided under the Financing Agreement. The Incremental Term Loans bear interest at 12 % per annum, with monthly interest payments due in cash and all outstanding principal and interest due on the maturity date. The Incremental Term Loans may be prepaid at any time, subject to payment of a prepayment premium equal to (i) 7 % of each prepayment made on or prior to September 16, 2020, and (ii) 5 % of each prepayment made after September 16, 2020, but on or prior to September 16, 2021, with no premium due after September 16, 2021. Pursuant to the Incremental Amendment, the collateral agent and other lenders agreed to forbear from exercising certain rights, remedies, powers, privileges, and defenses under the Financing Agreement and the other related loan documents during the forbearance period with respect to certain events of default and/or expected or anticipated events of default arising under the Financing Agreement. The Incremental Amendment also suspended the accrual of interest at the post-default rate until the end of the forbearance period. The Company paid a 2 % financing fee in connection with its entry into the Incremental Amendment. The Company also reimbursed the Collateral Agent for $ 0.1 million of fees, costs, and expenses previously accrued under the Financing Agreement and in addition paid fees, costs and expenses of the Collateral Agent and the lenders newly incurred in connection with the Incremental Amendment.
In connection with the Incremental Amendment, EVO issued a warrant (the “Antara Warrant 2020”) to Antara Capital to purchase 3,650,000 shares (the “Antara Warrant Shares 2020”) of EVO’s common stock at an exercise price of $ 2.50 per share, subject to adjustment for certain distributions, stock splits and issuances of common stock, as an incentive. The issuance of this warrant results in an additional debt discount that is amortized to interest expense over the term of the debt using the effective interest method. The Antara Warrant 2020 is exercisable for ten years from the date of issuance. If the fair market value of the Antara Warrant Shares 2020 is greater than $ 2.50 at the end of the exercise period, then the Antara Warrant 2020 will be deemed to be exercised automatically and immediately prior to the end of the exercise period. Pursuant to the Antara Warrant 2020, EVO granted Antara Capital preemptive rights to purchase its pro rata share, determined based on the number of shares held by Antara Capital or into which warrants held by Antara Capital (including the Antara Warrant 2020) are exercisable, of capital stock issued by EVO after the issuance date of the Antara Warrant 2020, subject to certain excepted issuances.
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.
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 $ 3.1 million in term loan commitments (the “Second Incremental Term Loans” and together with the Term Loan and the Incremental Term Loans, the "EVO Term Loans") and borrowed $ 3.1 million from Antara Capital on the same terms as its existing term loan commitments provided under the Financing Agreement. The Second Incremental Term Loans bear interest at 12 % per annum, with monthly interest payments due in cash and all outstanding principal and interest due on the maturity date. The Second Incremental Term Loans may be prepaid at any time, subject to payment of a prepayment premium equal to (i) 7 % of each prepayment made on or prior to September 16, 2020 and (ii) 5 % of each prepayment made after September 16, 2020 but on or prior to September 16, 2021, with no premium due after September 16, 2021. The Second Incremental Amendment also suspends the accrual of interest at the post-default rate until the end of the forbearance period. The forbearance period was scheduled to terminate on the earliest of (a) September 30, 2020, (b) the occurrence of any event of default other than the specified defaults, or (c) the date on which any of any of the conditions or agreements, including without the affirmative covenants, provided in the Incremental Amendment or Second Incremental Amendment occurs. The Company paid all fees, costs and expenses of the collateral agent and the lenders incurred in connection with the Incremental Amendment and the Second Incremental Amendment.
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
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
covenant in the Financing Agreement and, in exchange, EVO agreed to issue to Antara Capital a warrant to purchase up to 3,250,000 shares of EVO’s common stock at an exercise price of $ 2.50 per share as an incentive. The Company accounted for this issuance to Antara Capital as an extinguishment of the existing debt and the execution of a new debt instrument.
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 $ 10,000,000 under the Paycheck Protection Program of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and (iv) extended the timelines under which EVO and its subsidiaries are required to comply with certain affirmative covenants set forth in the Financing Agreement, Incremental Amendment, and Second Incremental Amendment.
The Omnibus Amendment contained the following additional covenants:
EVO was required to either (a) fully consummate the acquisition by EVO Equipment Leasing, LLC of 89 used CNG tractors on or before January 3, 2021 or (b) issue 1,174,800 shares of EVO’s common stock to the lenders. The Company did not fully consummate the acquisition of the used CNG tractors by January 3, 2021 and became obligated on that date to issue the 1,174,800 shares of EVO’s common stock to the lenders.
EVO was required to issue to each of the lenders ratably warrants authorizing each such lender to, on or after January 1, 2021, purchase its ratable share of up to 500,000 shares of EVO's common stock at the pric e of $ 0.01 per share with a 10 year expiration. If EVO or any of its subsidiaries had not repaid or partially repaid the obligations with the net proceeds (in the amount of at least $ 25.0 million) of a financing under the “Main Street Lending Program” on or before December 31, 2020, then EVO was required to issue an additional 1,000,000 warrants to the lenders. The Company had not repaid the $ 25.0 million by December 31, 2020. Therefore, EVO was required to issue warrants to purchase an aggregate of 1,500,000 shares of EVO’s common stock to the lenders.
All warrants previously issued to the lenders, at the election of each lender holding same, were exchanged without any cash consideration for warrants to purchase for $ 0.01 per share of EVO's common stock at the rate of 0.64 warrants per share of EVO's common stock. As a result, warrants to purchase an aggregate of 7,925,000 shares of EVO’s common stock at a price of $ 2.50 per share were exchanged for an aggregate of 5,072,000 shares of EVO’s common stock at a price of $ 0.01 per share.
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 500,000 shares of EVO's common stock at the price of $ 0.01 per share, the change in fair value resulting from the warrant exchange, and the fees paid to Antara Capital on its balance sheet as an additional discount on the Financing Agreement, which is amortized using the effective interest method into interest expense over the term of the Financing Agreement. The Company recognized the estimated fair value of the 1,174,800 shares of EVO's common stock as interest expense during the first quarter of 2021.
The Paycheck Protection Program loan (the “PPP Loan”) was forgiven by the Small Business Adminstration (the “SBA” ) in July 2021, which resulted in a $ 10.1 million gain on extinguishment of debt in July 2021.
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 $ 17.0 million under the Main Street Priority Loan Program authorized by Section 13(3) of the Federal Reserve Act. Pursuant to the Second Omnibus Amendment, the forbearance period was terminated and the collateral agent and other lenders agreed to waive all existing defaults or events of default under the Financing Agreement that occurred and were continuing as of the date of the Second Omnibus Amendment. The Second Omnibus Amendment also removed or revised certain covenants contained in the Financing Agreement and prior amendments to the Financing Agreement, including the EBITDA-based financial covenant included in the Financing Agreement, and extended the maturity date of the term loans under the Financing Agreement to the earlier of (1) March 15, 2026 or (2) the date that is ninety-one days after the date of payment in full in cash of all obligations in respect of the Main Street Loan. Under the Second Omnibus Amendment, interest on the term loans under the Financing Agreement is payable in kind at the rate of 14.5 % per annum for the first eight full or partial calendar quarters following the date of the Second Omnibus Amendment and is payable in cash , subject to of certain unrestricted cash availability requirements , at the rate of 12.0 % per
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
annum commencing with the ninth calendar quarter following the effective date. As a result of the Main Street Loan, the Second Omnibus Amendment, and related agreements, payment of the principal balance of the EVO Term Loans is subject and subordinate to the prior payment in full of all obligations under the Main Street Loan. The Company accounted for the Second Omnibus Amendment as a modification of the Financing Agreement. As of the date of this filing, interest is still being paid in kind at 14.5 %.
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 $ 17.0 million (the “Main Street Loan”) serviced by Commerce Bank of Arizona, Inc. (the “Bank”) as lender under the Main Street Priority Loan Program authorized by Section 13(3) of the Federal Reserve Act. The Borrowers and the Bank subsequently entered into a Modification Agreement to the Loan Agreement dated December 22, 2020 (the “Modification Agreement”) and a Second Modification Agreement to the Loan Agreement dated December 23, 2020 (the “Second Modification Agreement”). During the first quarter of 2021, the Borrowers used all of the net proceeds of the Main Street Loan to refinance a portion of the amount outstanding under the Financing Agreement discussed above under the caption “Forbearance Agreement and Incremental Amendment to Financing Agreement” and to pay related prepayment premiums.
The Main Street Loan has a five-year term and bears interest at a rate equal to the sum of (i) 3 % percent per year plus (ii) the rates per year quoted by Bank as Bank’s three-month LIBOR rate based upon quotes of the London Interbank Offered Rate, as quoted for U.S. Dollars by Bloomberg, or other comparable services selected by the Bank (the “LIBOR Index”). Such interest rate will change once every third month on the fifth day of the month and will be the LIBOR Index on the day which is two banking days prior to the date the change becomes effective.
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 quarterly on the 14th day of the last month of each calendar quarter (i.e., March 14, June 14, September 14 and December 14 of each year), with the first interest payment due on March 14, 2022 . In addition, on December 14, 2023 and December 14, 2024, the Borrowers must make an annual payment of principal plus accrued but unpaid interest with the principal in an amount equal to 15 % of the Main Street Loan amount plus capitalized interest. 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 . The Borrowers may prepay the Main Street Loan at any time without incurring any prepayment penalties.
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, EVO contributed 100 % of the issued and outstanding equity of Environmental Alternative Fuels, LLC (“EAF”) to EVO Holding with the consent of Danny Cuzick as the holder of certain previously disclosed promissory notes that are secured in part by the assets of EAF. In consideration of Danny Cuzick’s consent to the contribution, the Company agreed to (a) indemnify Danny Cuzick for up to $ 0.5 million in connection with Danny Cuzick’s guaranty of certain obligations of EVO and its subsidiaries to Mercedes-Benz Financial Services USA LLC and (b) issue to Danny Cuzick a warrant (the “Cuzick Warrant”) to purchase up to 1,000,000 shares of EVO's common stock at the cost of $ 0.01 per share. Danny Cuzick is a former member of EVO’s Board. The Company capitalized the estimated fair value of the Cuzick Warrant on its balance sheet as a discount on the Main Street Loan, which is amortized using the effective interest method into interest expense over the term of the Main Street Loan.
Bridge Loan and Executive Loans
On March 11, 2022, EVO and certain subsidiary guarantors of the Company entered into the Bridge Loan Agreement with Antara Capital and the Executive Lenders.
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
Pursuant to the Bridge Loan Agreement, the Company borrowed $ 9 million from Antara Capital and had the ability to borrow up to an additional $ 3 million from Antara Capital prior to May 31, 2022, and also borrowed $ 0.8 million from the Executive Lenders. $ 0.2 million of the amount the Company borrowed from the Executive Lenders was borrowed in exchange for Batuta's surrender of a Secured Convertible Note in the principal amount of $ 0.2 million dated August 8, 2018 that Batuta previously purchased from Dane Capital Fund LP. The Bridge Loan bears interest at 14% per annum and had an original maturity date of the earlier of (i) demand by Antara Capital at any time prior to the date on which a collateral agent designated by Antara Capital has been granted a valid and enforceable, perfected, first priority lien on the collateral described in the Bridge Loan Agreement, subject only to permitted liens, on terms reasonably acceptable to Antara Capital, and (ii) May 31, 2022. The Executive Loans bear interest at 14 % per annum and had an original maturity date of June 3, 2022 (although all payments in respect of the Executive Loans are subordinated in right and time of payment to all payments in respect of the Bridge Loan) . Interest on the Bridge Loan and Executive Loans will accrue until the principal balances are repaid. No principal and interest payments are due until maturity. Refer to Note 13, Subsequent Events , for discussion regarding the subsequent assignment of certain amounts owed to Antara Capital.
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 $ 0.1 million if the effect of such default is to accelerate the maturity of any such indebtedness; and any representation or warranty made in connection with the Bridge Loan Agreement being materially false.
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, EVO granted Antara Capital 11,969,667 warrants to purchase EVO's common stock at an exercise price of $ 0.01 per share and granted the Executive Lenders an aggregate of 1,097,219 warrants to purchase EVO's common stock at an exercise price of $ 0.01 per share (collectively, the "Bridge Loan Warrants"), subject to certain adjustments. Each Bridge Loan Warrant may be exercised for cash or on a cashless basis, pursuant to the terms of such warrants, for a period of five years from the date of issuance. The estimated fair value of the liability-classified Bridge Loan Warrants upon issuance was $ 12.8 million and a) the Company capitalized $ 9.6 million on its balance sheet as a discount on the Bridge Loan and Executive Loans, which is amortized into interest expense over the term of the Bridge Loan and Executive Loans; b) the Company immediately recorded $ 2.9 million as interest expense, which represents the estimated fair value of the Bridge Loan Warrants in excess of the principal due on the Loan and Executive Loans; and c) the Company recorded a $ 0.2 million on extinguishment of the Batuta Secured Convertible Note.
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 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 EVO 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 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 EVO.
On July 13, 2022, pursuant to the Third Extension Agreement, EVO filed the Series D Certificate of Designations with the Secretary of State of the State of Delaware, which authorized 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,
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
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 Series D 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 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 SPA 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 .
Amended and Restated Bridge Loan
On December 23, 2022, Antara Capital, CEOF, and 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 $ 0.01 and $ 0.0001 to CEOF and Hudson Park. On the same date, Antara Capital, the Executive Lenders, CEOF and Hudson Park amended and restated the Bridge Loan to reflect the assigned portions of the Bridge Loan to CEOF and Hudson Park. No changes were made to the Bridge Loan in connection with the assignment to CEOF and Hudson Park and no payments were made to the holders of the debt. This event is a transaction among debt holders.
Amendments to and Conversion of Secured Convertible Promissory Notes
On March 11, 2022, EVO 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 EVO's common stock or warrants to purchase shares of EVO's common stock at an exercise price of $ 0.01 per share. On March 11, 2022, Danny Cuzick, individually and as holders representative on behalf of each of Damon Cuzick, Thomas Kiley and Theril Lund, exercised the right to convert the Convertible Notes into warrants to purchase shares of EVO's common stock at an exercise price of $ 0.01 per share. As a result, EVO granted Messrs, Cuzick, Cuzick, Kiley and Lund an aggregate of 7,533,750 warrants to purchase EVO's common stock at $ 0.01 per share (collectively, the "Convertible Note Warrants"). Each Convertible Note Warrant may be exercised for cash or on a cashless basis, pursuant to the terms of such warrants, for a period of five years from the date of issuance.
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, t he Company recorded a $ 5.2 million loss on extinguishment of debt, which represents the $ 9.0 million estimated fair value of the amended Convertible Notes in excess of the $ 3.8 million carrying value of the original Convertible Notes. The Company accounted for the issuance of the Convertible Note Warrants as an extinguishment of the new debt instrument. As a result, the Company recorded the $ 9.0 million carrying value of the amended Convertible Notes and the $ 0.7 million of accrued interest as an increase in additional paid-in capital.
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 $ 0.0001 per share that will be exercisable following the adoption of the Charter Amendment, (ii) warrants to purchase shares of EVO's common
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
stock at an exercise price of $ 0.53 per share that will be exercisable following the adoption of the Charter Amendment, (iii) new promissory notes and (iv) to certain Exchanging Creditors, a specified cash payment. Refer to Note 6, Stockholders’ Deficit and Warrants , for discussion regarding the Charter Amendment.
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 $ 18.3 million for (i) warrants to purchase 47,549,779 shares of EVO's common stock at $ 0.0001 per share, (ii) warrants to purchase 23,774,891 shares of EVO's common stock at $ 0.53 per share (collectively, the “Exchanging Creditors Warrants”), and (iii) new promissory notes in the aggregate principal amount of approximately $ 3.7 million (the “Takeback Notes”) and (iv) a cash payment of $ 0.1 million to certain Exchanging Creditors.
Each warrant issued to the Exchanging Creditors at an exercise price of $ 0.0001 per share may be exercised for cash or on a cashless basis, pursuant to the terms of such warrants, for a period of thirty days following October 24, 2022, the date EVO’s Board adopted the Charter Amendment. Each warrant issued to the Exchanging Creditors at an exercise price of $ 0.53 per share may be exercised for cash or on a cashless basis, pursuant to the terms of such warrants, for a period of five years from the date of issuance. The fair value of the warrants, calculated using the Black-Scholes option pricing model, was $ 2.9 million.
The Takeback Notes bear interest at 3 % per annum, are unsecured, and have a maturity date of September 8, 2027 . Interest on the Takeback Notes is payable in cash or in kind, at EVO’s option, the first day of each January, April, July and October. If any amount of the Takeback Notes is not paid when due, then all amounts outstanding shall accrue interest at 4 % per annum ("default date") and shall be payable on demand. EVO may, at any time and from time to time without premium or penalty, prepay all or any portion of the outstanding principal, including accrued and unpaid interest, on the Takeback Notes ("optional prepayment").
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 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 $ 9.2 million. The Company calculated the restructuring gain by comparing the carrying value of the debt, $ 18.2 million, reduced by $ 0.2 million paid in cash and $ 3.1 million of equity instruments issued to the Exchanging Creditors, with the undiscounted future cash flows of the Takeback Notes. When determining the undiscounted future cash flows of the Takeback Notes, the Company assumed that all interest through the life of the Takeback Notes will be paid in kind, included contingent payments of $ 0.8 million, and other sweeteners paid to the Exchanging Creditors. The Company reduced the restructuring gain by $ 0.4 million for legal fees related to the TDR.
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 $ 9.0 million of the restructuring gain recorded within additional paid-in-capital as of December 31, 2022 . The remaining $ 0.2 million was recorded as a restructuring gain in other miscellaneous income for the year ended December 31, 2022. The per share effect of the restructuring gain on both basic and diluted earnings per common share was immaterial for the year ended December 31, 2022. Refer to Note 3, Related Party Transactions , regarding the Exchanging Creditors that are related parties.
Amendment to Loan Agreement (Clean Energy)
On September 2, 2022, EVO, Thunder Ridge Transport, Inc., a wholly-owned subsidiary of EVO (“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,
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
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) $ 0.2 million on or before September 30, 2022, (ii) six payments of $ 0.1 million on or before each of September 30, 2022, October 31, 2022, November 30, 2022, December 31, 2022, January 31, 2023 and February 28, 2023, (iii) $ 0.3 million on or before December 31, 2022, and (iv) $ 0.4 million on or before March 31, 2023.
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.
Debt (with unrelated parties) consists of:
December 31,
($ in thousands)
(a) Main Street Loan
(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 December 31, 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.
Main Street Loan
The $ 17.6 million loan bears interest at a rate equal to 3 % percent per year plus the LIBOR Index. Beginning March 14, 2022 , the Borrowers must make quarterly interest payments, and the Borrowers must make principal payments equal to 15 % of the face amount of the Main Street Loan plus capitalized interest on each of December 14, 2023 and December 14, 2024. The entire outstanding principal balance, together with all accrued and unpaid interest, is due and payable in full on December 14, 2025 .
The Company classified the $ 17.6 million unpaid principal balance, which includes $ 0.6 million of capitalized interest, as a current liability as of December 31, 2022 due to the existence of one or more covenant violations. As of December 31, 2022 and 2021, the unamortized debt discount was $ 0.2 million and $ 0.3 million, respectively, and the unamortized debt issuance costs were $ 0.7 million and $ 0.9 million, respectively.
$1.3 million note payable
The $ 1.3 million note payable was issued December 31, 2014, with interest adjusted to the SBA LIBOR base rate, plus 2.35 %. The note matures March 2024 , is secured by substantially all of Titan’s business assets and is personally guaranteed by certain former members of Titan including a former member of our board of directors and certain of his relatives, and other beneficial owners. The note is a co-borrower arrangement between Titan and El Toro with the proceeds received by El Toro. Refer to Note 13, Subsequent Events , for discussion regarding the loan dispute settlement.
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
$ 4.0 million Secured Convertible Promissory Notes
The Secured Convertible Notes were issued during August 2018. The Company paid debt issuance costs of $ 0.5 million in connection with the Secured Convertible Notes. They bear interest at 9 %, compounded quarterly, with principal due two years after issuance and are secured by all the assets of the Company. The holder may agree, at its discretion, to add accrued interest in lieu of payment to the principal balance of the Secured Convertible Notes on the first day of each calendar quarter.
The Secured Convertible Notes are convertible into shares (the “Note Shares”) of EVO’s common stock at a conversion rate of $ 2.50 per share of common stock at the holder’s option: 1) at any time after the first anniversary of the date of issuance or 2) at any time within 90 days after a “triggering event,” including a sale, reorganization, merger, or similar transaction where the Company is not the surviving entity. The Secured Convertible Notes are also subject to mandatory conversion at any time after the first anniversary of the date of issuance if the average volume of shares of common stock traded on the Nasdaq Capital Market, NYSE 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 1 % of the outstanding principal amount of the Secured Convertible Notes each 30 days if the Registration Statement is not declared effective by the SEC within 180 days of the filing date of the Registration Statement. During the years ended December 31, 2022 and 2021, the Company incurred $ 0.0 million and $ 0.2 million , respectively, and paid $ 0 and $ 0 , respectively, in liquidated damages to noteholders.
As additional consideration for the Secured Convertible Notes, EVO issued warrants to the holders to purchase 1,602,000 shares of EVO's common stock at an exercise price of $ 2.50 per share, exercisable for ten years from the date of issuance. The fair value of the warrants issued determined using the Black-Scholes option pricing model was $ 0.7 million, calculated with a ten-year term; 65 % volatility; 2.89 %, 2.85 % or 3.00 % discount rates and the assumption of no dividends.
In March and April 2021, the Company entered into certain Note Purchase Agreements and Releases (the “Note Purchase Agreements”) between the Company and certain holders (the “Holders”) of the Secured Convertible Notes in the principal amount of $ 0.6 million. The Note Purchase Agreements provide for various releases by the Holders and their respective representatives, successors, and assigns, including releases arising out of or related to the Secured Convertible Notes and the Secured Convertible Note Agreements. Pursuant to the Note Purchase Agreements, the Company agreed to purchase the Secured Convertible Notes and the Secured Convertible Note Agreements from the Holders in exchange for approximately $ 0.1 million in cash to the Holders and to issue to the Holders warrants to purchase an aggregate of up to 231,453 shares of EVO's common stock at a price of $ 0.01 per share. The Company recognized the estimated fair value of the warrants as a $ 0.2 million increase in additional paid-in capital and recognized a $ 0.4 million gain on extinguishment of debt in the consolidated statement of operations for the year ended December 31, 2021. For the year ended December 31, 2021, interest of less than $ 0.1 million was added to the principal balance.
Pursuant to the Bridge Loan Agreement in March 2022, the Company borrowed $ 9 million from Antara Capital and also borrowed $ 0.8 million from the Executive Lenders. $ 0.2 million of the amount the Company borrowed from the Executive Lenders was borrowed in exchange for Batuta's surrender of a Secured Convertible Note in the principal amount of $ 0.2 million dated August 8, 2018, which the Company accounted for as the extinguishment of the $ 0.2 million Secured Convertible Note.
Pursuant to the Exchange Creditor Agreement, the remaining Secured Convertible Notes in the aggregate amount of principal and accrued interest of approximate ly $ 0.4 million were exchanged for warrants and new promissory notes with a principal amount of approximately $ 0.1 million. Refer to the heading "Takeback Notes" for further discussion on the new promissory notes resulting from the Exchange Creditor Agreements.
$0.3 million note payable
The $ 0.3 million note payable to Bill and Deborah Graham was issued during November 2018, with interest at 3 % and a maturity date of October 2022 . The note calls for quarterly principal payments on January, April, July, and October 1st of $ 18,750 plus the related accrued interest.
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
Thunder Ridge supplier advance
Thunder Ridge signed an agreement with a supplier on August 31, 2017, in which $ 1.0 million was advanced to Thunder Ridge during 2017. The advance bears interest at 8.5 %, is collateralized by substantially all of Thunder Ridge’s assets, is guaranteed by a member of management, and has a July 2022 maturity date. On September 2, 2022, the agreement was extended to March 2023.
Various notes payable acquired from JB Lease
The various notes payable acquired from JB Lease were issued to multiple lenders with interest rates ranging from 3.9 % to 5.1 % per annum. The notes have maturity dates ranging from September 2019 to August 2024 . These notes are collateralized by transportation equipment and guaranteed by certain stockholders of the Company.
$0.8 million note payable
The $ 0.8 million note payable to a First Fidelity Bank was issued February 11, 2019, with interest at 10.2 % per annum and a maturity date of February 11, 2023 . The note is collateralized by certain equipment and guaranteed by a former member of management. During December 2021, a $ 0.4 million note payable was issued to the same financing company that is collateralized by the same equipment. Such note payable bears interest at 6 % per annum and has a maturity date of November 2025 .
$3.8 million note payable
The $ 3.8 million note payable to Commerce Bank of Arizona was issued January 23, 2019, with interest at 10.1 % per annum and a maturity date of February 23, 2024 . The note is collateralized by certain equipment and guaranteed by a former member of management.
Failed sale-leaseback obligations
Certain notes payable acquired from Sheehy were payable to a bank with interest rates of 4.35 % to 4.375 % per annum and were scheduled to mature between September 2020 and December 2021 . During September 2020, the Company sold certain assets that are collateral for the notes payable to Equipment Leasing Services, LLC ("ELS") for aggregate proceeds of $ 0.7 million, used such proceeds to extinguish the notes payable, and entered into a lease agreement with ELS under which the Company agreed to lease back the assets. In addition, during 2021 the Company entered into five sale-leaseback arrangements to provide approximately $ 5.2 million in cash proceeds for previously purchased equipment. Because these leasebacks are classified as finance leases, the Company determined that it did not relinquish control of the assets to the buyer-lessor. Therefore, the Company accounted for the transactions as failed sale-leasebacks whereby the Company continues to depreciate the assets and recorded financing obligations for the consideration received from the buyer-lessor. No gain or loss was recognized on these transactions.
Notes payable to three financing companies
The Company issued notes payable to three financing companies in February and October 2019 and the fourth quarter of 2021 with maturity dates in March 2023 , October 2024 and the fourth quarter of 2025 , respectively. The interest rates range from 4.5 % to 8.94 %, and the notes are collateralized by certain equipment.
Finkle equipment notes
The Company issued equipment notes payable to several financing companies with interest rates ranging from 5.2 % to 11.8 % and maturity dates between May 2020 and September 2025 . The notes are collateralized by equipment.
Non-Related Party Takeback Notes - two promissory notes with an aggregate principal amount of $ 0.1 million
The Company issued two promissory notes with an aggregate principal amount of $ 0.1 million in September 2022. The Takeback Notes bear interest at 3 % per annum, are unsecured, and have a maturity date of September 8, 2027. Interest on the Takeback Notes is payable in cash or in kind, at the Company’s option, the first day of each January, April, July and October. In connection with the Exchange Creditor Agreements, the exchange constituted as a TDR, and 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.
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
Debt (with related parties) consists of:
December 31,
($ in thousands)
(a) Antara Financing Agreement
(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
(e) $4.0 million senior promissory note
(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 December 31, 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.
Antara Financing Agreement
The $ 18.7 million of EVO Term Loans, under the Antara Financing Agreement, bear interest at 14.5 % per annum. The maturity date is the earlier of (1) March 15, 2026 or (2) the date that is ninety-one days after the date of payment in full in cash of all obligations in respect of the Main Street Loan. Beginning with the Omnibus Amendment and ending on December 14, 2020, interest was paid in kind at a rate of 17 % per annum. Beginning December 14, 2020, interest on the EVO Term Loans is payable in kind at 14.5 % per annum for the first eight full or partial calendar quarters following December 14, 2020 and is payable in cash at the rate of 12.0 % per annum commencing October 1, 2022 if certain conditions relating to prepayment of the Main Street Loan are met. All outstanding principal and interest is due on the maturity date. D uring the first quarter of 2021, the Company used all of the net proceeds from the Main Street Loan to pay down the aggregate principal amount due under the Antara Financing Agreement (including capitalized interest) from $ 33.6 million to $ 16.7 million, which resulted in an approximately $ 1.7 million loss on extinguishment of debt (which includes $ 0.8 million of prepayment penalty fees) being recognized in the consolidated statement of operations for the year ended December 31, 2021.
The Company classified t he $ 20.9 million and $ 18.7 million unpaid principal balance, which includes capitalized interest, as current liabilities as of December 31, 2022 and December 31, 2021, respectively, due to the existence of one or more covenant violations. As of December 31, 2022 and 2021, the unamortized debt discoun t was $ 0.9 million a nd $ 1.0 million, respectively.
Four promissory notes with an aggregate principal amount of $9.5 million
The four promissory notes were issued to the former EAF members on February 1, 2017, bear interest at 1.5 % per annum and mature February 1, 2026 . These convertible promissory notes are secured by substantially all of the assets of EAF. The Company imputed an interest rate of 5.1 % on the promissory notes. The discount is accreted over the period from the date of issuance to the date the promissory notes are due using the effective interest rate method. These promissory notes were convertible into 7,000,000 shares of EVO's common stock. The holder’s conversion option was limited on a monthly basis to the number of shares of common stock equal to 10 % of the 30 day average trading volume of shares of common stock during the prior calendar month. Further, $ 35,000 was the minimum amount of principal or capitalized interest the holder must convert per conversion.
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 December 31, 2022 and 2021 , the unamortized debt discount was $ 0.0 million and $ 5.8 million, respectively.
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
Bridge Loan and Executive Loans
On March 11, 2022, the $ 9 million Bridge Loan was issued to Antara Capital and the $ 0.8 million Executive Loans were issued to the Executive Lenders. The Bridge Loan bears interest at 14 % per annum and has an original maturity date of the earlier of (i) demand by Antara Capital at any time prior to the date on which a collateral agent designated by Antara Capital has been granted a valid and enforceable, perfected, first priority lien on the collateral described in the Bridge Loan Agreement, subject only to permitted liens, on terms reasonably acceptable to Antara Capital, and (ii) May 31, 2022 . The Executive Loans bear interest at 14 % per annum and had an original maturity date of June 3, 2022 (although all payments in respect of the Executive Loans are subordinated in right and time of payment to all payments in respect of the Bridge Loan). Interest on the Bridge Loan and Executive Loans will accrue until the principal balances are repaid. No principal and interest payments are due until maturity. On September 8, 2022, the maturity dates for the Bridge Loan and the Executive Loans were extended to December 29, 2023 and January 5, 2024 , respectively.
$ 3.8 million senior promissory note
The $ 3.8 million senior promissory note was issued on February 1, 2017, to a former EAF member with interest at 7.5 % per annum and default interest of 12.5 % per annum, and had an original maturity date of the earlier of (a) December 2017 ; (b) ten days after the initial closing of a private offering of capital stock of EVO in an amount not less than $ 10 million; or (c) an event of default. During April 2018, the senior promissory note’s maturity date was extended to July 2019 . The senior promissory note is unsecured. No principal and interest payments are due until maturity.
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 $ 3.8 million senior promissory note and the $ 4.0 million senior promissory note described below, EVO issued a warrant to the holder to purchase an aggregate of 350,000 shares of EVO's common stock at an exercise price of $ 0.01 per share. The warrant is exercisable for five years from the date of issuance. The Company calculated the fair value of the warrant using the Black-Scholes option pricing model, and the portion of the fair value attributable to the $ 3.8 million senior promissory note was $ 0.2 million.
Pursuant to the Exchange Creditor Agreement, the $ 3.8 million senior promissory note and the $ 4.0 million senior promissory note, described below, in the aggregate amount of principal and accrued interest of approximately $ 9.3 million were exchanged for warrants and a new promissory note with a principal amount of approximately $ 1.9 million. Refer to the heading "Takeback Notes" for further discussion on the new promissory notes resulting from the Exchange Creditor Agreements.
As of December 31, 2022 and 2021, the remaining unamortized debt discount w as $ 0.0 million and $ 0.1 million, respectively. The Company classified the $ 3.8 million unpaid principal balance as a current liability as of December 31, 2022 and 2021 due to the existence of one or more covenant violations.
$ 4.0 million senior promissory note
The $ 4.0 million promissory note was issued on February 1, 2017, to a former EAF member with interest at 7.5 % per annum and had an original maturity date of February 2020 . The note is guaranteed by substantially all the assets of EAF and the Company. No principal and interest payments are due until maturity.
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 $ 4.0 million senior promissory note and the $ 3.8 million senior promissory note described above, EVO issued a warrant to the holder to purchase an aggregate of 350,000 shares of EVO's common stock at an exercise price of $ 0.01 per share. The warrant is exercisable for five years from the date of issuance. The Company calculated the fair value of the warrant using the
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
Black-Scholes option pricing model, and the portion of the fair value attributable to the $ 4.0 million senior promissory note was $ 0.3 million.
Pursuant to the Exchange Creditor Agreement, the $ 3.8 and $ 4.0 million senior promissory notes in the aggregate amount of principal and accrued interest of approximately $ 9.3 million were exchanged for warrants and a new promissory note with a principal amount of approximately $ 1.9 million. Refer to the heading "Takeback Notes" for further discussion on the new promissory notes resulting from the Exchange Creditor Agreements.
As of December 31, 2022 and 2021, the remaining unamortized debt discount w as $ 0.0 million an d $ 0.1 million, respectively. The Company classified the $ 4.0 million unpaid principal balance as a current liability as of December 31, 2022 and 2021 due to the existence of one or more covenant violations.
$ 2.5 million promissory note - stockholder
In connection with EVO's June 1, 2018 acquisition of all of the issued and outstanding shares of Thunder Ridge, this $ 2.5 million promissory note was issued to Mr. Peck, with interest at 6 % per annum (interest in the event of a default at 9 % per annum) and a maturity date of the earlier of (a) the date the Company raises $ 40.0 million in public or private offerings of debt or equity; (b) December 31, 2018 , or (c) termination of Mr. Peck’s employment with the Company by the Company without cause or by Peck for good reason. The note is collateralized by all of the assets of Thunder Ridge and is also secured by the Thunder Ridge Shares (“TR Shares”). The maturity date of the promissory note has been subsequently amended to extend it to November 30, 2022 . Effective with the most recent extension in August 2019 , the Company paid Peck approximately $ 0.15 million in principal and increased the monthly principal payments to $ 20,000 . The note calls for monthly principal payments, with all accrued and unpaid interest due and payable on the maturity date. If the Company fails to repay the amounts outstanding under the note on or before November 30, 2022, then at the option of Peck, the Company shall immediately surrender all right, title and interest in all of the outstanding shares of stock in Thunder Ridge to Peck.
Pursuant to the Exchange Creditor Agreement, the promissory note in the aggregate amount of principal and accrued interest of approximately $ 1.9 million was exchanged for warrants and a new promissory note with a principal amount of approximately $ 0.4 million. Refer to the heading "Takeback Notes" for further discussion on the new promissory note resulting from the Exchange Creditor Agreements.
$ 6.4 million promissory note – stockholder
The $ 6.4 million promissory note was issued February 2, 2019 to a stockholder, with interest at 9 % per annum and an original maturity date of August 31, 2020 . The note is collateralized by all of the assets of Ursa and JB Lease. Principal and interest payments commenced June 1, 2019 , with a final payment of $ 6.4 million due at maturity. On August 30, 2019 , the note maturity was extended to November 2022 .
Pursuant to the Exchange Creditor Agreement, the senior promissory notes in the aggregate amount of principal and accrued interest of approximately $ 6.4 million were exchanged for warrants and a new promissory note with a principal amount of approximately $ 1.3 million. Refer to the heading "Takeback Notes" for further discussion on the new promissory note resulting from the Exchange Creditor Agreements.
Note payable acquired from Ritter
Note payable to a related party were assumed as a liability in the Ritter acquisition. The note has an interest rate of 7.0 % and matures in December 2028 .
Related Party Takeback Notes - three promissory notes with an aggregate principal amount of $ 3.6 million
The Company issued three promissory notes with an aggregate principal amount of $ 3.6 million. The Takeback Notes originally bear interest at 3 % per annum, are unsecured, and have a maturity date of September 8, 2027 . Interest on the Takeback Notes is payable in cash or in kind, at the Company’s option, the first day of each January, April, July and October. In connection with the Exchange Creditor Agreements, the exchange constituted as a troubled debt restructuring, 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.
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
Maturities of long-term obligations are as follows:
Year Ending December 31,
Related Party
Notes
Other Notes
Total
($ in thousands)
Thereafter
Total debt issuance costs and debt discount
(1) Includes $ 2.6 million, $ 2.2 million, $ 12.6 million and $ 21.6 million in 2023, 2024, 2025 and 2026, respectively, of loans payable classified as current liabilities as of December 31, 2022 due to the existence of one or more covenant violations
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 $ 0.0001 , from 100 million to 600 million. The amendment became effective October 25, 2022.
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 $ 0.63 per share and provided other consideration as an inducment. In consideration for the issuance of the warrants and other consideration, the holders agreed to tender the Series A Redeemable Convertible Preferred stock and Series B Redeemable Convertible Preferred stock for retirement and cancellation by EVO. The holders converted the Series A Redeemable Convertible Preferred stock and Series B Redeemable Convertible Preferred stock into shares of EVO's common stock and subsequently the Series A Redeemable Convertible Preferred stock and Series B Redeemable Convertible Preferred stock were retired and removed from EVO’s articles of incorporation as an authorized class of preferred stock In connection with the conversion. the holders waived the conversion of dividends that would have accrued from June 30, 2022 through September 8, 2022, the date of conversion. The Company recorded $ 0.2 million of inducement costs as a dividend in additional paid-in capital as of December 31, 2022.
Redeemable Common Stock
Pursuant to the Sheehy Agreement, SEI waived and agreed to not exercise the $ 1.2 million put right in exchange for $ 0.1 million over multiple installments through December 31, 2023. Accordingly, the Company is no longer obligated to redeem the common stock held by SEI. The waiver resulted in a reclassification of the $ 1.2 million out of temporary equity into permanent equity. As of December 31, 2022 and December 31, 2021 , redeemable common stock was $ 0 and $ 1.2 million, respectively. The Sheehy Agreement is further described in Note 3, Related Party Transactions.
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 one share of Series C Preferred Stock, and issued to Antara Capital one share of Series C Preferred Stock.
Dividends
A dividend accrues on the Series C Preferred Stock at a rate of 5 % per annum on its liquidation preference. The dividend is payable, if and when declared by the Board of Directors, quarterly in arrears in cash commencing on March 31, 2022. Such dividends begin to accrue as of the date on which the Series C Preferred Stock was issued, and will accrue whether or not declared and whether or not there will be funds legally available for the payment of dividends. The Series C Preferred Stock
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
shall not be entitled to participate in any distributions or payments to the holders of the common stock or any other class of stock of EVO.
Liquidation Preference
The holders of the Series C Preferred Stock are entitled to a liquidation preference of $ 1.00 per share of Series C Preferred Stock plus any accrued but unpaid dividends upon the liquidation of the Company.
Redemption
The Series C Preferred Stock may be redeemed by EVO on the Bridge Loan Discharge Date at a redemption price equal to $ 1.00 plus all accrued but unpaid dividends. The redemption rights require the Company to present the Series C Preferred Stock in temporary equity in the accompanying balance sheet.
Voting Rights
Under the Series C Certificate of Designations, prior to a 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 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 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 Stock holders’ voting or board-appointment rights under the Series C Certificate of Designations will require the consent of 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.
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 one share of Series D Non-Participating Preferred Stock, and issued to Antara Capital one share of Series D Non-Participating Preferred Stock.
Dividends
A dividend accrues on the Series D Non-Participating Preferred Stock at a rate of 5 % per annum on its liquidation preference. The dividend is payable, if and when declared by the Board of Directors, quarterly in arrears in cash commencing on September 30, 2022. Such dividends begin to accrue as of the date on which the Series D Non-Participating Preferred Stock was issued, and will accrue whether or not declared and whether or not there will be funds legally available for the payment of dividends. The Series D Non-Participating Preferred Stock shall not be entitled to participate in any distributions or payments to the holders of the common stock or any other class of stock of EVO.
Liquidation Preference
The holders of the Series D Non-Participating Preferred Stock are entitled to a liquidation preference of $ 1.00 per share of Series D Non-Participating Preferred Stock plus any accrued but unpaid dividends upon the liquidation of the Company.
Voting Rights
Under the Certificate of Designations, prior to a Bridge Loan Triggering Event and on and following 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. Under the 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 Series D Shareholder Matter plus 10. In addition, the Series D Certificate of Designations provides that governance mechanisms that could have the effect of
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
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 the Series D Majority.
Warrants
As further described in Note 5, Debt , EVO issued the following warrants in connection with the Financing Agreement:
In September 2019, EVO issued warrants to purchase an aggregate of 4,375,000 shares of EVO’s common stock to the lenders. EVO also issued the Side Letter Warrant to the lenders to purchase an additional 1,500,000 shares of EVO’s common stock. The total fair value of these warrants of $ 7.4 million, which the Company recorded as an additional debt discount, will be amortized to interest expense over the remaining term of the Financing Agreement.
In September 2019, as consideration for the subordination of previously issued promissory notes, EVO issued a warrant to the noteholder to purchase an aggregate of 350,000 shares of EVO’s common stock at an exercise price of $ 0.01 per share. The total fair value of this warrant of $ 0.5 million, which the Company recorded as an additional debt discount on the promissory notes, will be amortized to interest expense over the remaining term of the promissory notes.
In February 2020, as a result of the Incremental Amendment, EVO issued the Antara Warrant 2020 to Antara Capital to purchase 3,650,000 shares of EVO’s common stock at an exercise price of $ 2.50 per share.
In March 2020, as a result of the Waiver Agreement, EVO issued to Antara Capital a warrant to purchase up to 3,250,000 shares of EVO’s common Stock at an exercise price of $ 2.50 per share.
In October 2020, as a result of the O mnibus Amendment, EVO issued to the lenders warrants to purchase an aggregate of up to 500,000 shares of EVO's common stock at the price of $ 0.01 per share.
In October 2020, as a result of the O mnibus Amendment, EVO exchanged, without any cash consideration, all warrants previously issued to the lenders for warrants to purchase for $ 0.01 per share of EVO's common stock at the rate of 0.64 warrants per share of EVO's common stock. As a result, warrants to purchase an aggregate of 7,925,000 shares of EVO’s common stock at a price of $ 2.50 per share were exchanged for an aggregate of 5,072,000 shares of EVO’s common stock at a price of $ 0.01 per share.
In December 2020, as a result of failing to timely repay certain obligations under the Financing Agreement with the net proceeds (in the amount of at least $ 25.0 million) of a financing under the "Main Street Lending Program” on or before December 31, 2020, EVO issued to the lenders warrants to purchase an aggregate of up to 1,000,000 shares of EVO's common stock at the price of $ 0.01 per share. The Company recorded the $ 0.8 million estimated fair value of the warrants as an increase to interest expense in the fourth quarter of 2020.
As further described in Note 5, Debt , in connection with the December 2020 Main Street Loan, EVO contributed 100 % of the issued and outstanding equity of EAF to EVO Holding with the consent of Danny Cuzick as the holder of certain previously disclosed promissory notes that are secured in part by the assets of EAF. In consideration of Danny Cuzick’s consent to the contribution, EVO issued to him the Cuzick Warrant to purchase up to 1,000,000 shares of EVO's common stock at the cost of $ 0.01 per share. Danny Cuzick is a former member of EVO’s Board. The Company did no t pay any underwriter discounts or commissions in connection with the issuance of the Cuzick Warrant.
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 13,066,886 shares of EVO's common stock at an exercise price of $ 0.01 per share.
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 7,533,750 shares of EVO's common stock at an exercise price of $ 0.01 per share.
The following warrants were issued and exercised in connection with the SPA:
On September 8, 2022, Antara Capital exercised previously issued warrants to purchase 3,500,000 shares of EVO's common stock at $ 0.01 per share in connection with the consideration of the SPA.
On September 8, 2022, Antara Capital purchased from EVO (i) immediately exercisable warrants to purchase 22,353,696 shares EVO's common stock at an exercise price of $ 0.0001 per share and (ii) warrants to purchase 319,213,143 shares of EVO's common stock at an exercise price of $ 0.0001 per share that will be exercisable
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
following the adoption of the Charter Amendment. Each warrant issued to Antara Capital may be exercised for cash or on a cashless basis, for a period of five years from the date of issuance.
On September 8, 2022, as a result of the SPA and Exchanging Creditor Agreements, EVO issued the Exchanging Creditor Warrants to purchase 47,549,779 and 23,774,891 shares of EVO's common stock at exercise prices of $ 0.0001 and $ 0.53 per share, respectively.
On September 8, 2022, EVO issued warrants to purchase 4,754,978 and 9,509,956 shares of EVO's common stock at exercise prices of $ 0.0001 and $ 0.53 per share, respectively, to a former board member.
On September 8, 2022, EVO issued warrants to purchase 23,224,117 shares of EVO's common stock at an exercise price of $ 0.63 per share to key equity holders and members of management. Each warrant issued may be exercised for cash or on a cashless basis, pursuant to the terms of such warrants, for a period of five years from the date of issuance.
On September 8, 2022, EVO issued warrants to purchase 3,000,000 shares of EVO's common stock at an exercise price of $ 1.50 per share to a former board member and employee. Each warrant issued may be exercised for cash or on a cashless basis, pursuant to the terms of such warrants, for a period of five years from the date of issuance.
On November 14, 2022, Antara Capital exercised previously issued warrants to purchase 19,317,489 and 341,566,839 shares of EVO's common stock at $ 0.01 and $ 0.0001 per share, respectively.
On November 16, 2022, Corbin ERISA Opportunity Fund exercised previously issued warrants to purchase 527,837 shares of EVO's common stock at $ 0.01 per share, respectively.
From November 18 through 24, 2022, the Exchanging Creditors exercised warrants to purchase 52,304,757 shares of EVO's common stock at $ 0.0001 per share, respectively.
A summary of warrants activity for the year ended December 31, 2021 and 2022 is as follows:
Number of Warrants
Equity Classified
Liability Classified
Balance at December 31, 2021
Issued in 2021
Balance at December 31, 2021
Issued in 2022
Reclassified in 2022
Exercised in 2022
Forfeited in 2022
Balance at December 31, 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. The following table summarizes such warrants outstanding and exercisable as of December 31, 2022 and 2021 that are liability-classified. The Company reclassified to equity all of its liability classified warrants with exercise prices greater than $ 0.01 on September 8, 2022. The warrants were amended to modify certain anti-dilution features and they became indexed to EVO’s common stock.
Number of Shares
Weighted
Average
Exercise Price
Weighted
Average
Remaining
Contractual Term
December 31, 2022:
Outstanding
Exercisable
December 31, 2021:
Outstanding
Exercisable
In addition to the liability-classified warrants, EVO has issued warrants with different terms that are considered indexed to EVOs common stock and, therefore, are classified in additional paid-in capital and are not required to be measured at fair value
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
at each reporting date. The following table summarizes such equity-classified warrants outstanding and exercisable as of December 31, 2022 and 2021 and is inclusive of the warrants disclosed in Note 7, Stock-Based Compensation , that are equity-classified:
Number of Shares
Weighted
Average
Exercise Price
Weighted
Average
Remaining
Contractual Term
December 31, 2022:
Outstanding
Exercisable
December 31, 2021:
Outstanding
Exercisable
Note 7 – Stock-Based Compensation
Stock Options
On April 12, 2018, EVO’s board of directors approved the EVO Transportation and Energy Services, Inc. 2018 Stock Incentive Plan (the “2018 Plan”) pursuant to which a total of 4,250,000 shares of EVO's common stock have been reserved for issuance to eligible employees, consultants, and directors of the Company. Further, on August 13, 2018, EVO's Board approved the Company’s Amended and Restated 2018 Stock Incentive Plan (the “Amended 2018 Plan”), which amends and restates the Company’s 2018 Stock Incentive Plan. The Amended 2018 Plan increased options available for grant to 6,250,000 . During February 2020, EVO's Board approved an increase of the number of available options in the Stock Incentive Plan to a total of 9,250,000 options. During April 2020, EVO's Board approved an additional increase in the number of available options under the Stock Incentive Plan to a total of 12,000,000 options.
The Amended 2018 Plan provides for awards of non-statutory stock options, incentive stock options, and restricted stock awards within the meaning of Section 422 of the Internal Revenue Code and stock purchase rights to purchase shares of EVO’s common stock.
The Amended 2018 Plan is administered by the Compensation Committee of the Board of Directors, which has the authority to select the individuals to whom awards will be granted and to determine whether and to what extent stock options and stock purchase rights are to be granted, the number of shares of EVO's common stock to be covered by each award, the vesting schedule of stock options and all other terms and conditions of each award. Stock options have a maximum term of ten years , and it is the Company’s practice to grant options to employees with exercise prices equal to or greater than the estimated fair market value of its common stock.
The fair value of each award is estimated on the date of grant. Stock option values are estimated using the Black-Scholes option-pricing model, which requires the input of subjective assumptions, including the expected term of the option award, expected stock price volatility, and expected dividends. These estimates involve inherent uncertainties and the application of management’s judgment. The expected option terms are calculated based on the “simplified” method for “plain vanilla” options due to our limited exercise information. The “simplified method” calculates the expected term as the average of the vesting term and the original contractual term of the options. Expected volatilities used in the valuation model are based on the selected comparable companies. The risk-free rate for the expected term of the option is based on the United States Treasury yield curve in effect at the time of grant. The valuation model assumes no dividends. There is no estimated forfeiture rate.
As described in Note 1 , Description of Business and Summary of Significant Accounting Policies , some of EVO’s stock options contain a provision that provides for the acceleration of vesting upon t he Company completing an aggregate of at least $ 30 million of any combination of debt and/or equity financing transactions after the date of grant. During the years ended December 31, 2022 and 2021 , the number of stock options for which vesting accelerated as a result of this provision were 0 and 0 , respectively.
From February 2020 through December 2020, EVO's Board approved the grant of 3,394,999 stock options with an exercise price of $ 2.50 per share and a 10-year life. For 1,450,000 of the stock options granted, one-quarter (1/4) vested and became exercisable on the grant date, with the remainder vesting and becoming exercisable ratably on the first, second, and third anniversaries of the date of grant. The remaining 1,944,999 stock options granted were fully vested and exercisable on the grant date. During February 2020, EVO's Board also granted 70,000 stock options as compensation to board members with an exercise price of $ 2.50 per share and a 10-year life. The options vest ratably over three years . One-quarter (1/4) of the options
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
vested and became exercisable on the grant date. The remaining vest and become exercisable ratably on the first, second, and third anniversaries of the date of grant.
During the third quarter of 2021, EVO reduced the exercise price of certain stock options previously granted to certain named executive officers of the Company and other key employees from an original exercise price of $ 2.50 per share to an exercise price of $ 1.50 per share, which the board of directors determined was equal to or greater than the fair market value of EVO’s common stock. A total of 4,394,999 options were subject to the exercise price reduction. The repricing was accounted for as a stock option modification whereby the incremental fair value of each option was determined using the Black-Scholes option pricing model at the date of the modification, and $ 0.2 million was recognized related to vested options as incremental compensation expense during the three months ended September 30, 2021. The Company will recognize the remaining $ 0.1 million of incremental compensation expense resulting from the modification on a straight-line basis over the remaining requisite service periods.
During the third quarter of 2021, EVO's Board approved the grant to an employee of 750,000 stock options with an exercise price of $ 1.50 per share and a 10-year life. One-third (1/3) of the options vested and became exercisable on the grant date, one-third (1/3) vest and become exercisable approximately 11 months after the date of grant, and one-third (1/3) vest and become exercisable approximately 23 months after the date of grant. During the third quarter of 2021, EVO's Board also granted 211,000 stock options as compensation to board members with an exercise price of $ 1.50 and a 10-year life. 111,000 of the options vested and became exercisable on the grant date. The remaining 100,000 stock options vest and become exercisable on the first anniversary of the date of grant. During the fourth quarter of 2021, EVO's Board approved the grant to an employee of 500,000 stock options with an exercise price of $ 1.50 per share and a 10-year life. One-quarter (1/4) of the options vested and became exercisable on the grant date. The remaining 375,000 stock option vest and become exercisable ratably on the first, second and third anniversaries of the date of grant.
During the years ended December 31, 2022 and 2021, the Company recognized stock-based compensation expense of $ 0.1 million and $ 0.3 million, respectively, related to stock options. As of December 31, 2022, the Company h ad $ 0.2 million of unrecognized stock-based compensation expense related to the unvested portions of outstanding stock options.
The following table presents the stock option activity for the year ended December 31, 2022:
Number of Shares
Weighted
Average
Exercise Price
Weighted
Average
Remaining
Contractual Term
Aggregate
Intrinsic
Value
(in thousands)
Outstanding - December 31, 2021
Granted
Exercised
Expired
Outstanding - December 31, 2022
Exercisable - December 31, 2022
The following table summarizes the assumptions used to estimate the fair value of stock options granted during the years ended December 31:
Approximate risk-free rate
Expected life (in years)
Dividend yield
Volatility
The weighted-average grant-date fair value of options granted was $0 .13 and $ 0.15 per share during the years ended December 31, 2022 and 2021, respectively. The total fair value of options vested during the years ended December 31, 2022 and 2021 was $ 0.1 million.
Warrants – Stock-Based Compensation
During the first quarter of 2021, EVO issued to an employee warrants to purchase 750,000 shares of EVO’s common stock. The warrants were issued with a 10-year life and an exercise price equal to the lesser of $ 2.50 per share and the price at which stock options were to be granted to the Company's officers in 2021. One-third (1/3) of the warrants vested and became
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
exercisable on the grant date, one-third (1/3) vested and became exercisable on March 31, 2021, and one-third (1/3) vested and became exercisable on June 30, 2021. During the third quarter of 2021, the exercise price of the warrants was set at $ 1.50 per share pursuant to the terms of the warrant agreement. Except for the reduction in exercise price, all terms and conditions of the warrants remain the same. During the year ended December 31, 2021, the Company recorded stock-based compensation expense of $ 0.2 million related to these warrants.
During the third quarter of 2022, in connection with the Recapitalization Transaction, EVO issued warrants to purchase 5,983,825 shares of EVO's common stock to compensate certain key members of management. The warrants were issued with a 5-year life and an exercise price of $ 0.63 per share. During the year ended December 31, 2022 , the Company recorded stock-based compensation expense of less than $ 0.1 million related to these warrants.
The following table presents information related to stock-based compensation warrants outstanding and exercisable as of December 31, 2022 and 2021:
Number of Shares
Weighted
Average
Exercise Price
Weighted
Average
Remaining
Contractual Term
Aggregate
Intrinsic
Value
(in thousands)
Outstanding - December 31, 2021
Outstanding - December 31, 2022
Exercisable - December 31, 2022
Note 8 – F air 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.
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
The Company's liability-classified warrants issued with an exercise price of $ 0.01 per share are measured at fair value using the Black-Scholes option pricing model and are classified as a Level 3 liability of the fair value hierarchy due to the use of significant unobservable inputs. The warrant liabilities are presented as current liabilities on the consolidated balance sheets and are 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 inputs and assumptions used in the Black-Scholes option pricing model include: (1) EVO's stock price; (2) the exercise price of the warrant; (3) the expected term of the warrant; (4) EVO's expected stock price volatility; (5) EVO's expected dividends; and (6) the risk-free interest rate.
The Company's liability-classified warrants issued with an exercise price of greater than $ 0.01 per share are measured at fair value using the Monte Carlo simulation model and are classified as a Level 3 liability of the fair value hierarchy due to the use of significant unobservable inputs. The warrant liabilities are presented as current liabilities on the consolidated balance sheets and are 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) or as compensation expense in its consolidated statements of operations. The inputs and assumptions used in the Monte Carlo model include: (1) EVO's stock price; (2) EVO's expected stock price volatility; and (3) the risk-free interest rate. The Company reclassified to equity all of its liability classified warrants with exercise prices greater than $ 0.01 on September 8, 2022. The warrants were amended to modify certain anti-dilution features and they became indexed to EVO’s common stock.
The following table provides a reconciliation for the opening and closing balances of both liabilities from December 31, 2020 to December 31, 2022:
($ in thousands)
Derivative Liability
Warrant Liabilities
Balance at December 31, 2020
Issuances
Net change in fair value
Balance at December 31, 2021
Issuances
Exercises
Net change in fair value
Reclassification of warrants from liability classified to equity classified
Balance at December 31, 2022
There were no transfers between Level 1, Level 2, and Level 3 during the periods presented.
The Company’s obligations under its debt agreements are carried at amortized cost. The fair value of the Company’s obligations under its convertible no tes and the EVO Term Loans are considered Level 3 liabilities of the fair value hierarchy because fair value was estimated using significant unobservable inputs. The fair value of the Company’s other debt arrangements are considered Level 2 liabilities of the fair value hierarchy because fair value is estimated using inputs other than quoted prices that are observable for the liability such as interest rates and yield curves. The estimated fair value of the EVO Term Loans was $ 11.7 million as of December 31, 2022, and its carrying value w as $ 20.8 million a s of December 31, 2022. The estimated fair value of the EVO Term Loans was $ 9.7 million as of December 31, 2021, and its carrying value was $ 17.7 million as of December 31, 2021. The carrying value of the Company’s remaining debt obligations approximates fair value a nd was $ 40.0 million a nd $ 49.0 million at December 31, 2022 and 2021, respectively.
Nonrecurring Fair Value Measurements
Certain non-financial assets, primarily property and equipment, lease right-of-use assets, goodwill and intangible assets, are not required to be measured at fair value on a recurring basis and are reported at carrying value. However, these assets are required to be assessed for impairment whenever events or circumstances indicate that their carrying value may not be fully recoverable, and at least annually for goodwill. In the event an impairment is required, the asset is adjusted to fair value, using market-based assumptions.
Note 9 – Leases
The Company determines if an arrangement is a lease at inception. The Company has various obligations under operating and finance lease arrangements related primarily to the rental of trucks and trailers, maintenance and support facilities, office space, and parking yards. Many of these leases include one or more options, at the Company’s discretion, to renew and extend the agreement beyond the current lease expiration date. These options are included in the calculation of the Company’s lease liability when it becomes reasonably certain the option will be exercised. The Company’s lease agreements typically do not
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
include options to purchase the leased property, nor do they contain material residual value guarantees or material restrictive covenants. 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 ROU assets and lease liabilities.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease, and are recognized at the lease commencement date based on the present value of the lease payments over the lease term. When available, the Company uses the rate implicit in the lease to discount lease payments; however, the implicit rate in the lease is not readily determinable for all the leases. In such cases, the Company uses an estimate of the incremental borrowing rate to discount lease payments based on information available at lease commencement.
Operating lease costs are recognized on a straight-line basis over the term of the lease within operating supplies and expenses, equipment rent expense, and general and administrative expense. Finance lease costs consist of amortization expense and interest expense. Finance lease right-of-use assets are amortized on a straight-line basis over the shorter of the expected useful life or the lease term to amortization expense, and the carrying amount of the lease liability is adjusted to reflect interest expense. Variable lease payments that are not based on an index or that result from changes to an index subsequent to the initial measurement of the corresponding lease liability are not included in the measurement of lease ROU assets or liabilities and instead are recognized in equipment rent in the period in which the obligation for those payments is incurred.
At December 31, 2022 and 2021, the Company had the following balances recorded in the consolidated balance sheets related to its lease arrangements:
($ in thousands)
Classification
December 31,
December 31,
Assets
Operating leases
Right-of-use-asset
Finance leases
Right-of-use-asset
Liabilities
Current:
Operating leases
Operating lease liabilities, current portion
Finance leases
Finance lease liabilities, current portion
Non-current:
Operating leases
Operating lease liabilities, less current portion
Finance leases
Finance lease liabilities, less current portion
Components of lease cost are as follows:
($ in thousands)
Year Ended
December 31,
Year Ended
December 31,
Finance lease costs:
Amortization of ROU assets
Interest on lease assets
Operating lease costs
Short-term lease costs
Variable lease costs
Total
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
Supplemental cash flow information and non-cash activity related to our leases are as follows:
($ in thousands)
Year Ended
December 31,
Year Ended
December 31,
Supplemental cash flow information
Cash paid for amounts included in the measurement of lease liabilities:
Financing cash flows from finance leases
Operating cash flows from finance lease interest expense
Operating cash flows from operating leases
Non-cash activity
Right-of-use assets obtained in exchange for lease obligations:
Finance leases
Operating leases
Weighted-average remaining lease term and discount rate for our leases are as follows:
December 31, 2022
December 31, 2021
Weighted-average remaining lease term (years)
Finance leases
Operating leases
Weighted-average discount rate
Finance leases
Operating leases
Maturities of lease liabilities by fiscal year for our leases are as follows:
($ in thousands)
Operating
Leases
Finance
Leases
Thereafter
Total lease payments
Less: Imputed interest
Present value of lease liabilities
Related Party Leases
The Company has various lease obligations with related parties for trucks, office space and terminals expiring at various dates through January 2029 . The Company incurred approximately $ 1.4 million an d $ 1.5 million in lease costs with related parties during the years ended December 31, 2022 and 2021 , respectively. At December 31, 2022 and 2021, the Company had the following balances recorded in the consolidated balance sheets related to its lease arrangements with related parties:
($ in thousands)
Classification
December 31,
December 31,
Assets
Operating leases
Right-of-use-asset
Liabilities
Current:
Operating leases
Operating lease liabilities, current portion
Non-current:
Operating leases
Operating lease liabilities, less current portion
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
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.
See Note 13, Subsequent Events , for descriptions of the settlement of the legal proceeding relating to Falcon Capital, LLC and Scott Honour and the settlement of the legal proceeding relating to Raymond James & Associates, Inc.
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 $ 10.0 million PPP Loan that we applied for and received under the CARES Act in April 2020. We elected not to return the PPP Loan proceeds as requested and our PPP Loan was subsequently forgiven in July 2021. Also, the United States Small Business Administration ("SBA") has stated that it intends to audit the PPP Loan application of any company, like us, that received PPP Loan proceeds of more than $ 2 million. However, we are not currently party to or aware of any contemplated proceeding with the Select Subcommittee, the SBA, or any other governmental authority with respect to the PPP Loan.
Long-Term Take-or-Pay Natural Gas Supply Contracts
At December 31, 2022 and 2021 , the Company had commitments to purchase natural gas on a take-or-pay basis with three vendors. It is anticipated these are normal purchases that will be necessary for sales, and that any penalties for failing to meet minimum volume requirements will be immaterial. As of December 31, 2022 and 2021, the estimated remaining liability under the take-or-pay arrangements was approximately $ 0.2 million and $ 0.2 million, respectively.
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 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 $ 0.8 million in cash collateral held in the SEI captive insurance member account, under the CSPA, on or before March 1, 2024. See Note 3, Related Parties – Off Balance Sheet Arrangements – Collateral Security Pledge Agreement , for terms of the agreement. The Company is also responsible for providing any additional collateral that may be requested by the captive.
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 no upfront cost to EAF, and EAF agreed to use Southwest Gas to transport natural gas to the station through its infrastructure. The term was originally five years but has since been modified to ten years. Each year of the ten-year term, EAF is required to make a payment to Southwest Gas equal to $ 0.1 million minus the amount of delivery and demand charges paid by EAF during the applicable contract year. EAF is required to provide financial security in the form of a letter of credit originally in the amount of $ 0.5 million, which amount may decrease annually during the term of the agreement and was equal to $ 0.2 million as of December 31, 2022 and 2021 .
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
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 December 31, 2022 and 2021 , we had $ 0.6 million of the standby letter of credit related to workers’ compensation and general liabilities accrued in our condensed consolidated financial statements.
Note 11 - Employee Benefit Plan
The Company maintains a 401(a) plan for contractors that are eligible under the Department of Labor Service Contract Act and a 401(k) plan for other salaried employees. Contractors earn contributions that are based on all eligible hours up to the maximum of 40 hours per week and reflect the hourly rates set by the Department of Labor. The designated rates vary based on the contractor’s work location and specific vehicle type. Employer contributions to the 401(a) plan for the years ended December 31, 2022 and 2021 were approximately $ 1.0 million and $ 4.2 million, respectively.
Note 12 - 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, 2022 and 2021, respectively. Interest and penalties associated with tax positions are recorded as general and administrative expenses. Tax years that remain subject to examination include 2019 through the current year for federal and generally 2018 through the current year for state purposes.
Income tax expense reported in the consolidated statements of operations is comprised of the following:
For the Years Ended
December 31,
($ in thousands)
Current income tax expense
Federal
State, net of state tax credits
Total current income tax expense
Deferred income tax expense
Federal
State and local
Valuation allowance
Total deferred income tax expense
Total income tax expense
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
The following is a reconciliation of the statutory federal income tax rate applied to pre-tax accounting net income (loss), compared to the income tax expense in the consolidated statements of operations:
For the Years Ended
December 31,
($ in thousands)
Expected federal tax (benefit)
State tax provision, net of federal benefit
Prior year true up
Change in tax rate
Effect of increase in valuation allowance
Change in fair value of warrant liability
Equity-related interest
Debt extinguishment
PPP loan forgiveness
Interest
Other permanent differences
Income tax expense
The effective tax rates for the income tax expense for the years ended December 31, 2022 and 2021 are - 3.8 % and 9.8 % , respectively. The differences are primarily due to state taxes and the change in valuation allowance, the change in the fair value of warrant liabilities and equity related interest.
The following are the components of the Company’s net deferred taxes for federal and state income taxes:
December 31,
($ in thousands)
Deferred tax assets
Accrued expenses and other
Debt discount
Interest
Stock-based compensation
Lease liabilities
Loss carryforwards
Total deferred tax assets
Valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Prepaid expenses
Lease assets
Fixed assets and intangible assets
Total deferred tax liabilities
Net non-current deferred tax liability
Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the lack of sustained profitability in recent years. Such objective evidence limits the ability to consider other subjective evidence, such as the Company's projections for future growth.
On the basis of this evaluation, as of December 31, 2022 and 2021, a valuation allowance of $ 16.8 million a nd $ 16.7 million, respectively, has been recorded to recognize only the portion of the deferred tax asset that is more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted based on changes in objective and subjective evidence in future years. If and when the Company determines the valuation allowance should be released (i.e., reduced), the adjustment would result in a tax benefit reported in that period’s consolidated statement of operations, the effect of which would be an increase in reported net income. The amount of any such tax benefit associated with release of the Company's valuation allowance in a particular reporting period may be material.
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
As of December 31, 2022, the Company had federal and state net operating losses of approximately $ 38.4 million and $ 26.7 million, respectively. As of December 31, 2021, the Company had federal and state net operating losses of approximately $ 44.7 million and $ 30.2 million, respectively. As of December 31, 2022, the Company has approximately $ 0.7 million of federal net operating losses available to offset future taxable income for 20 years and will begin to expire in 2036 . The remain ing $ 37.7 million of fe deral net operating losses are carried forward indefinitely to offset future taxable income up to an 80 % limitation of taxable income in the year of use. The state net operating losses began to expire in 2022 . These federal and state net operating loss carryforwards are reserved with a full valuation allowance because, based on the available evidence, we believe it is more likely than not that we would not be able to utilize those deferred tax assets in the future. If the actual amounts of taxable income differ from our estimates, the amount of our valuation allowance could be materially impacted.
For the years ended December 31, 2022 and 2021 , the Company had no uncertain tax positions or interest and penalties related to uncertain tax positions. Interest and penalties associated with tax positions are recorded in the period assessed as general and administrative expenses, if any.
Note 13 - Subsequent Events
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 $ 60,000 , (iii) EVO issued Falcon an unsecured promissory note in the principal amount of $ 250,000 (the “Promissory Note”), (iv) Falcon released all security interests and liens in all physical property of EVO and Titan CNG, (v) the parties agreed on a process by which to sell the equipment and on the distribution of net proceeds from such sale and (vi) Falcon and Honour released all right, title and interest in and to Titan CNG, EVO and EVO’s subsidiaries. Falcon is entitled to file a confession of judgment if EVO fails to timely cure a missed payment to Falcon or makes more than three untimely payments.
The Promissory Note matures on September 30, 2027 and bears interest at a rate of 6.0 % per annum. On January 1, 2024, interest only on the outstanding principal amount will be due and payable in arrears. On February 1, 2024, and on the first day of each month thereafter, principal and interest will be due and payable in arrears. The Promissory Note has customary events of default.
Modification Agreement 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 1.20 :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 25 basis points per annum. Accrual of interest at the modified interest rate commenced on July 1, 2023.
Annual Incentive Plan
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.
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
The Compensation Committee approved the following annual bonus opportunities for 2023 under the AIP: (i) to Mr. Bayles, 30 % to 65 % of annual base salary and (ii) to other executive officers, 15 % to 50 % of annual base salary. The performance metric for 2023 is adjusted EBITDA, and payment of incentive awards under the AIP is dependent upon achievement of defined goals for the performance metric. The Compensation Committee retains the discretion to adjust any award that becomes payable under the AIP.
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, 14,264,934 RSUs, (ii) to other executive officers, 998,545 to 2,377,489 RSUs and (iii) to non-employee directors of EVO, 950,996 to 1,188,744 RSUs.
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 $ 1.2 million. The Oak Creek Agreement provides for the sale of EAF’s real property in Oak Creek, Wisconsin and the compressed natural gas fuel station located thereon to Clean Energy for a purchase price of $ 1.2 million.
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 fourth 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 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 $ 0.8 million. The sale under the Equipment Agreement closed in August 2023.
The net proceeds from the sale under the Equipment Agreement were used for mandatory pay down of the Main Street Loan.
Sale of San Antonio, Texas Property
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 $ 1.2 million. The sale under the San Antonio Agreement closed in October 2023. The net proceeds from the sale under the San Antonio Agreement were used for mandatory pay down of the Main Street Loan.
Raymond James Settlement
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 $ 3.3 million in fees and expenses.
EVO TRANSPORTATION & ENERGY SERVICES, INC.
Notes to Consolidated Financial Statements
On August 31, 2023, EVO and Raymond James agreed to settle all claims brought by Raymond James against EVO in the arbitration. In connection therewith, EVO made a payment of $ 1.5 million to Raymond James on September 27, 2023.
