UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

☒   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2018

 

☐   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______________ to ______________

 

Commission file number 000-54218

 

EVO Transportation & Energy Services, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware		37-1615850
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

 

8285 West Lake Pleasant Parkway Peoria, AZ 85382

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: 877-973-9191

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐ 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐  (do not check if smaller reporting company)	Smaller reporting company	☒
Emerging growth company	☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ 

 

Indicate by check mark whether the issuer is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐  No ☒ 

 

As of May 11, there were 2,067,120 shares of the registrant’s common stock, par value $0.0001, outstanding.

 

 

 

EVO TRANSPORTATION & ENERGY SERVICES, INC.

 

INDEX

 

	Page No.
PART I – FINANCIAL INFORMATION	1
Item 1. Financial Statements	1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	27
Item 3. Quantitative and Qualitative Disclosures About Market Risk.	45
Item 4. Controls and Procedures.	45
PART II – OTHER INFORMATION	46
Item 1. Legal Proceedings.	46
Item 1A. Risk Factors.	46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	46
Item 3. Defaults Upon Senior Securities.	46
Item 4. Mine Safety Disclosures.	46
Item 5. Other Information.	46
Item 6. Exhibits.	46
SIGNATURES	47
EXHIBIT INDEX	48

  

 

EVO TRANSPORTATION & ENERGY SERVICES, INC.

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Consolidated Balance Sheets

 

		March 31, 2018				December 31, 2017
		(unaudited)
Assets
Current assets
Cash and cash equivalents		$	1,466,889			$	83,867
Accounts receivable, net			122,020				150,419
Alternative fuels tax credit receivable			648,029				648,029
Inventory			1,328				1,675
Prepaid			80,000				-
Total current assets			2,318,266				883,990
Non-current assets
Property, equipment and land, net			7,618,895				7,740,423
Assets available for sale			240,000				240,000
Intangibles			303,179				345,284
Deposits and other long-term assets			132,940				132,940
Total non-current assets			8,295,014				8,458,647
Total assets		$	10,613,280			$	9,342,637
Liabilities and Stockholders’ Deficit
Current liabilities
Accounts payable		$	606,642			$	1,784,049
Accounts payable - related party			432,345				409,838
Advances from stockholder			370,359				370,359
Accrued interest - related party			874,966				927,421
Accrued expenses			922,010				1,168,721
Derivative liability			27,659				32,186
Subordinated convertible senior notes payable to stockholders			1,421,556				1,421,556
Working capital notes - related party			250,000				250,000
Current portion of long-term debt			1,063,212				1,093,691
Total current liabilities			5,968,749				7,457,821
Non-current liabilities
Long term subordinated convertible notes payable to stockholders			1,166,373				1,166,373
Convertible promissory notes - related parties less unamortized discount of $4,140,183 (March 31, 2018) and $4,257,358 (December 31, 2017)			5,359,817				5,242,642
Convertible promissory notes - related party			450,451				437,505
Senior promissory note - related party			3,800,000				3,800,000
Promissory note - related party			4,000,000				4,000,000
Deferred rent			-				2,206
Derivative liability, less current portion			5,784				11,420
Total non-current liabilities			14,782,425				14,660,146
Total liabilities			20,751,174				22,117,967
Commitments and contingencies
Stockholders’ deficit
Preferred stock, $.0001 par value; 10,000,000 shares authorized, no shares issued and outstanding			-				-
Common stock, $.0001 par value; 100,000,000 shares authorized; 1,429,308 (March 31, 2018) and 429,308 (December 31, 2017)  shares issued and outstanding			143				43
Additional paid-in capital			3,834,599				1,299,980
Accumulated deficit			(13,972,636	)			(14,075,353	)
Total stockholders’ deficit			(10,137,894	)			(12,775,330	)
Total liabilities and stockholders’ deficit		$	10,613,280			$	9,342,637

  

See notes to unaudited consolidated financial statements.

 

 

EVO TRANSPORTATION & ENERGY SERVICES, INC

 

Consolidated Statements of Operations (Unaudited)

 

		For the Three Months Ended
		March 31,
		2018				2017
Revenue
CNG sales		$	320,796			$	477,227
Total revenue			320,796				477,227
CNG cost of sales			206,394				269,836
Gross profit			114,402				207,391
Operating expenses
General and administrative			262,888				560,589
Depreciation and amortization			163,633				130,231
Total operating expenses			426,521				690,820
Loss from operations			(312,119	)			(483,429	)
Other income (expense)
Interest expense			(369,342	)			(198,665	)
Realized and unrealized gain on derivative liability, net			4,068				(28,007	)
Warrant expense			(34,719	)			-
Gain on extinguishment of related party interest			157,330				-
Gain on extinguishment of liabilities			657,499				-
Total other income (expense)			414,836				(226,672	)
Net income (loss)		$	102,717			$	(710,101	)
Basic weighted average common shares outstanding			440,419				330,385
Basic income (loss) per common share		$	0.23			$	(2.15	)
Diluted weighted average common shares outstanding			440,419				330,385
Diluted income (loss) per common share		$	0.23			$	(2.15	)

  

See notes to unaudited consolidated financial statements.

 

 

EVO TRANSPORTATION & ENERGY SERVICES, INC

 

Consolidated Statements of Cash Flows (Unaudited)

  

		For the Three Months Ended
		March 31,
		2018				2017
Cash flows from operating activities
Net income (loss)		$	102,717			$	(710,101	)
Adjustments to reconcile net income (loss) to net cash used in operating activities
Depreciation and amortization			163,633				130,231
Deferred rent			(2,206	)			-
Allowance for doubtful accounts			(37,007	)			-
Realized loss on derivative liability			6,096				52
Gain on derivative liability			(16,259	)			(28,059	)
Interest expense included in convertible promissory notes- related party			12,946				-
Accretion of debt discount			117,175				17,684
Common stock issued for debt			-				13,187
Warrant expenses			34,719				-
Gain on extinguishment of related party interest			(157,330	)			-
Gain on extinguishment of liabilities			(657,499	)			-
Changes in assets and liabilities
Accounts receivable			65,406				(360,934	)
Alternative fuels tax credit receivable			-				15,214
Inventory			347				(1,255	)
Prepaid			(80,000	)			-
Other long-term assets			-				(11,691	)
Accounts payable			(519,908	)			306,927
Accounts payable - related party			22,507				43,778
Accrued expenses			(246,711	)			73,314
Accrued interest related party			104,875				117,893
			(1,189,216	)			316,341
Net cash used in operating activities			(1,086,499	)			(393,760	)
Cash flows from investing activities
Construction in progress			-				(144,828	)
Net cash used in investing activities			-				(144,828	)
Cash flows from financing activities
Advances from stockholders			-				482,325
Payment of promissory note related party			-				(56,397	)
Proceeds from subordinated convertible senior notes payable to stockholders			-				400,000
Payments of principal on long-term debt			(30,479	)			(29,704	)
Proceeds from sale of common stock			2,500,000				-
Net cash provided by financing activities			2,469,521				796,224
Net increase in cash and cash equivalents			1,383,022				257,636
Cash and cash equivalents - beginning of period			83,867				24,944
Cash and cash equivalents - end of period		$	1,466,889			$	282,580

 

See notes to unaudited consolidated financial statements.

 

 

EVO TRANSPORTATION & ENERGY SERVICES, INC

 

Supplemental disclosure of cash flow information:

 

Cash paid for interest for the three months ended March 31, 2018 and 2017 was $134,377 and $63,088, respectively.

 

Supplemental disclosure of non-cash activity:

  

On February 1, 2017, the Company acquired EVO to further its business relationship alignment with the Company’s business model to acquire existing CNG stations. The following is the allocation of the assets and liabilities as of February 1, 2017:

 

Prepaid assets		$	32,118
Goodwill			3,993,730
Customer list			220,000
Trade mark			86,000
Favorable lease			307,000
Property and equipment			8,154,667
Deposits and other long-term assets			152,117
Derivative liability			(5,821	)
Derivative liability, less current portion			(76,811	)
Promissory notes - related party			(8,050,000	)
Convertible promissory note - related party			(9,500,000	)
Debt discount			4,687,000

  

During the three months ended March 31, 2017, the Company had $246,512 of construction in progress purchases in accounts payable.

 

See notes to unaudited consolidated financial statements.

 

 

EVO TRANSPORTATION & ENERGY SERVICES, INC

 

Notes to Unaudited Consolidated Financial Statements

 

Basis of Presentation and Securities Exchange

 

These financial statements represent the consolidated financial statements of EVO Transportation & Energy Services, Inc., formerly Minn Shares Inc. (“EVO Inc.” or the “Company”), its wholly owned subsidiaries, Titan CNG LLC (“Titan”) and Environmental Alternative Fuels, LLC (“EAF”), Titan’s wholly-owned subsidiaries, Titan El Toro LLC (“El Toro”), Titan Diamond Bar LLC (“Diamond Bar”), and Titan Blaine, LLC (“Blaine”), and EAF’s wholly-owned subsidiary, EVO CNG, LLC (“EVO CNG”).

 

Effective August 31, 2017, the Company amended its certificate of incorporation to change its name from “Minn Shares Inc.” to “EVO Transportation & Energy Services, Inc.” by the filing an amendment to the certificate of incorporation of the Company (the “Charter Amendment”). In connection with the name change, the Company changed its ticker symbol on the OTC Pink Marketplace from “MSHS” to “EVOA.”

 

On February 1, 2017, EVO Inc., EAF, EVO CNG, and Danny R. Cuzick (“Danny Cuzick”), Damon R. Cuzick (“Damon Cuzick”), Theril H. Lund and Thomas J. Kiley (together with Danny Cuzick and Damon Cuzick, the “EAF Members”) consummated the transactions contemplated by that certain Agreement and Plan of Securities Exchange dated January 11, 2017 (the “EAF Exchange Agreement”). Pursuant to the EAF Exchange Agreement, EVO Inc. acquired all of the membership interests in EAF (the “EAF Interests”) from the EAF Members. EAF, together with EVO CNG, is a compressed natural gas fueling station company with six fueling stations in California, Texas, Arizona and Wisconsin.

 

In determining the accounting acquirer in the transactions contemplated by the EAF Exchange Agreement, management considered the Financial Accounting Standards Board’s Accounting Standard Codification (“ASC”) 805—Business Combinations. Specifically, management considered the guidance in ASC 810-10, which generally provides that the acquirer in a business combination transaction is determined by identifying the existence of a controlling financial interest, which can typically be determined by the ownership of a majority voting interest. Because the EVO, Inc. stockholders continued to own all of the outstanding shares of Common Stock on completion of the transactions contemplated by the EAF Exchange Agreement, management determined that EVO Inc. was the accounting acquirer in the EAF transaction. However, because the Convertible Notes issued as consideration pursuant to the EAF Exchange Agreement could convert to a majority of the issued and outstanding Common Stock, management will continue to evaluate the accounting treatment for the EAF transaction.

 

The Condensed Consolidated Statements of Income, Condensed Consolidated Balance Sheets and the Condensed Consolidated Statements of Cash Flows included in this report have been prepared by the Company. In our opinion, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at March 31, 2018 and results of operations and cash flows for all periods have been made.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These Condensed Consolidated Financial Statements (Unaudited) should be read in conjunction with our financial statements and notes thereto included in our Annual Report on form 10-K for the year ended December 31, 2017. The results of operations for the period ended March 31, 2018 are not necessarily indicative of the operating results for the full year.

 

On April 6, 2017, the Company effected a 50-for-1 reverse stock split of its Common Stock pursuant to which each 50 shares of issued and outstanding Common Stock became one share of Common Stock (the “Reverse Split”). No fractional shares were issued as a result of the Reverse Split. All references to numbers of shares of Common Stock and per share amounts give retroactive effect to the Reverse Split for all periods presented.

 

 

EVO TRANSPORTATION & ENERGY SERVICES, INC

 

Notes to Unaudited Consolidated Financial Statements

 

Going Concern

 

The Company is an early stage company in the process of acquiring several businesses in the transportation and vehicle fuels industry. As of March 31, 2018, the Company has a working capital deficit of approximately $3.7 million and negative equity of approximately $10.1 million. In addition, the Company is in violation of its bank covenants. Management anticipates rectifying with additional public and private offerings. Also, the Company is evaluating certain cash flow improvement measures. However, there can be no assurance that the Company will be successful in these efforts.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern; however, the above conditions raise doubt about the Company’s ability to do so. 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 should the Company be unable to continue as a going concern.

 

To meet its current and future obligations the Company has taken the following steps to capitalize the business and successfully achieve its business plan during 2018:

 

On March 2, 2018, the Company issued 1,000,000 Units (the “Units”) at a price of $2.50 per Unit for an aggregate purchase price of $2,500,000 pursuant to the terms of a subscription agreement between the Company and an investor. Each Unit consists of (i) one share of the Company’s common stock, par value $0.0001 per share (“Common Stock”), and (ii) a warrant to purchase one share of Common Stock at an exercise price of $2.50 per share exercisable for five years from the date of issuance. The Company did not pay any commissions in connection with the sale of these Units.

 

During April 2018, the Company paid the working capital notes of $250,000 in full.

 

On April 2, 2018, the Company and a related party note holder agreed to extend the maturity date of the $3,800,000 promissory note through July 2019.

 

On April 13, 2018, the Company consummated the following transactions:

 

	The Company issued 275,583 common shares in exchange for certain Senior Bridge Notes in the aggregate principal amount of approximately $689,000, with the per share price for shares of common stock equal to $2.50.
	The Company issued 272,777 common shares in exchange for the Junior Bridge Notes in the aggregate principal amount of approximately $1,363,858, with the per share price for shares of common stock equal to $5.00.

 

On May 14, 2018, the Company issued 93,400 common shares in exchange for accounts payable and related party accounts payable of approximately $280,200, with the per share price of shares of common stock equal to $3.00.

  

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

 

The Company is a holding company based in Peoria, Arizona that owns two operating subsidiaries, Titan and EAF, that compete in the compressed natural gas (“CNG”) service business. Titan is the management company that oversees operations of the El Toro, Diamond Bar, and Blaine CNG service stations. As of June 30, 2017, El Toro ceased operations. Blaine and Diamond Bar were formed in 2015. In March 2016, Diamond Bar began operations of its CNG station under a lease agreement with the State of California South Coast Air Quality Management District (“SCAQMD”) in Diamond Bar, California. The Company discontinued construction of Blaine during the fourth quarter of 2017. EAF was originally organized on March 28, 2012 under the name “Clean-n-Green Alternative Fuels, LLC” in the State of Delaware. Effective May 1, 2012, EAF changed its name to “Environmental Alternative Fuels, LLC.” EVO, EAF’s wholly owned subsidiary, was originally organized in the State of Delaware on April 1, 2013 under the name “EVO Trillium, LLC” and subsequently changed its name to “EVO CNG, LLC” effective March 1, 2016. Together, EAF and EVO operate six compressed natural gas fueling stations located in California, Texas, Arizona and Wisconsin.

 

 

EVO TRANSPORTATION & ENERGY SERVICES, INC

 

Notes to Unaudited Consolidated Financial Statements

 

Although the Company plans to continue to operate its existing CNG fueling stations, the Company also intends to expand its operations into servicing the interstate contract trucking routes operated for the United States Postal Service. The Company plans to accomplish its expansion into the trucking industry, which the Company views as complementary to its CNG fueling operations, by acquiring one or more existing trucking companies.

 

The Company was incorporated in the State of Delaware on October 22, 2010.

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of EVO Transportation & Energy Services, Inc and its subsidiaries, Titan and EAF, Titan’s wholly owned subsidiaries, El Toro, Diamond Bar and Blaine, and EAF’s wholly owned subsidiary, EVO CNG. All intercompany accounts and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“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 revenue recognition, long-lived intangible asset valuations and impairment assessments, debt discount, and contingencies. These estimates may be adjusted as more current information becomes available, and any adjustment could be significant. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

 

EVO TRANSPORTATION & ENERGY SERVICES, INC

 

Notes to Unaudited Consolidated Financial Statements

 

 

Federal Alternative Fuels Tax Credit receivable

 

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

 

Concentrations of Credit Risk

 

The Company grants credit in the normal course of business to customers in the United States. The Company periodically performs credit analysis and monitors the financial condition of its customers to reduce credit risk. As of March 31, 2018 and 2017, three and five customers accounted for 96% and 93% of the Company’s total accounts receivable, respectively, and one and five customers accounted for and 30% and 92% of the Company’s total revenues for the three months ended March 31, 2018 and 2017, respectively.

  

Intangibles

  

Intangible assets consist of finite lived and indefinite lived intangibles. The Company’s finite lived intangibles include favorable leases, customer relationships and the trade name. Finite lived intangibles are amortized over their estimated useful lives. For the Company’s lease related intangibles, the estimated useful life is based on the agreement of a one-time payment of $1 and the term of the mortgages, of the properties owned by the Company of approximately five years. For the Company’s trade names and customer list the estimated lives are based on life cycle of a customer of approximately 5 years, The Company evaluates the recoverability of the finite lived intangibles whenever an impairment indicator is present. For the year ended December 31, 2017 the test results indicated an impairment of $106,270 to customer lists. The Company’s evaluation of intangibles for the three months ended March 31, 2018 and 2017 resulted in no impairment.

 

Assets Held for Sale

 

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

 

 

EVO TRANSPORTATION & ENERGY SERVICES, INC

 

Notes to Unaudited Consolidated Financial Statements

 

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 Company assesses the useful lives and possible impairment of the fixed assets when an event occurs that may trigger such review. Factors considered important which could trigger a review include:

 

·

Significant under performance of the stations relative to historical or projected future operating results;

 

·

Significant negative economic trends in the CNG industry; and

 

·

Identification of other impaired assets within a reporting unit.

 

Determining whether a triggering event has occurred involves significant judgement by the Company

 

There were no impairments of the Company’s long-lived assets for the three months ended March 31, 2018 or 2017.

 

Hedging Activities

 

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

 

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

 

Management of the Company has determined that the administrative effort required to account for derivative instruments as cash flow hedges is greater than the financial statement presentation benefit. As a result, the Company marks its derivative instruments to fair value and records the changes in fair value as a component of other income and expense. Cash settlements from the Company’s price risk management activities are likewise shown as a component of other income and expense and as a component of operating cash flows on the statements of cash flows.

 

 

EVO TRANSPORTATION & ENERGY SERVICES, INC

 

Notes to Unaudited Consolidated Financial Statements

 

Net Income (Loss) per Share of Common Stock

 

Basic income (loss) per share is computed by dividing net income (loss) available to holders of the Company’s common stock by the weighted average number of shares of common stock outstanding for the period. Diluted loss per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the three months ended March 31, 2018 and for the year ended December 31, 2017, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share. 

 

Adoption of the New Revenue Standard

 

On January 1, 2018, the Company adopted Revenue from Contracts with Customers (Accounting Standards Codification Topic 606) ("Topic 606" or "new guidance") retrospectively. The adoption of Topic 606 did not have a material impact to our condensed consolidated financial statements. The adoption of the new guidance does not impact recognition revenue. The new guidance has no impact on the timing or classification of the Company’s cash flows as reported in the Consolidated Statement of Cash Flows and is not expected to have a significant impact on the Company’s Consolidated Statement of Operations in future periods. The Company did not record any adjustments applying Topic 606.

 

Revenue Recognition 

The Company recognizes revenue when control of the promised goods is transferred to its customers, in an amount that reflects the consideration to which it expects to be entitled in exchange for the goods. The Company is generally the principal in its customer contracts as it has control over the goods prior to them being transferred to the customer, and as such, revenue is recognized on a gross basis. We disaggregate revenue by station, as we believe this best depicts the nature, amount, timing and uncertainty of our revenues and cash flows are affected by economic factors.

A performance obligation is a promise in a contract to transfer a distinct good to the customer and is the unit of account in Topic 606. The performance obligations that comprise a majority of the Company's total revenue consist of sale of fuel to a customer. The primary method used to estimate the standalone selling price for fuel is observable standalone sales, and the primary method used to estimate the standalone selling.

The Company’s CNG revenue is sold pursuant to contractual commitments. These contracts typically include a stand-ready obligation to supply natural gas daily. The Company recognizes revenue over time for the fuel sales because the customer receives and consumes the benefits provided by the Company's performance as the stand-ready obligations are being performed.

Payment terms and conditions vary by contract type. For substantially all the Company's contracts under which it receives volume-related revenue, the timing of revenue recognition does not differ from the timing of invoicing; as a result the Company has determined these contracts generally do not include a significant financing component.

There was no impairment loss recognized on any of the receivables arising from customer contracts for the three months ended March 31, 2018.

Alternative Fuels Tax Credit

For 2017 the AFTC credit was $0.50 per gasoline gallon equivalent of CNG that is sold as a vehicle fuel. This incentive originally expired on December 31, 2016, but was retroactively extended through December 31, 2017, with the Bipartisan Budget Act of 2018.

 

Gain on Extinguishment of Liabilities and Interest

 

Gain on extinguishment of liabilities consists of the gain the Company recognized on the extinguishment of accounts payable that were incurred for which the Company deemed the risk of collection to be remote or that management has negotiated a settlement. The Company recognized a gain on extinguishment of liabilities and interest of $657,499 and $157,330, respectively for the three months ended March 31, 2018.

 

 

EVO TRANSPORTATION & ENERGY SERVICES, INC

 

Notes to Unaudited Consolidated Financial Statements

 

Advertising Costs

 

The Company expenses advertising costs as incurred. Advertising expense for the three months ended March 31, 2018 and 2017 was de minimis.

 

Income Taxes

 

The Company recognizes deferred tax liabilities and assets based on the differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. The Company’s temporary differences result primarily from depreciation.

 

The Company evaluates its tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions will more likely than not be sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold are not recorded as a tax benefit or expense in the current year. Interest and penalties, if applicable, are recorded in the period assessed as general and administrative expenses. However, no interest or penalties have been assessed for the three months ended March 31, 2018 or 2017. Tax years that remain subject to examination include 2014 through the current year for federal and state, respectively.

 

Deferred income taxes are provided for temporary differences between the financial reporting and tax basis of assets and liabilities. Deferred taxes are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of the enactment.

 

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 Tax Cuts and Jobs Act (“Tax Act”) was signed into law on December 22, 2017. The Tax Act includes significant changes to the U.S. corporate income tax system, including limitations on the deductibility of interest expense and executive compensation, eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized, changing the rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2018, and the transition of U.S. international taxation from a worldwide tax system to a territorial tax system. The Company’s accounting for the following elements of the Tax Act is incomplete, and it is not yet able to make reasonable estimates of the effects. Therefore, no provisional adjustments were recorded.

 

The Company must assess whether valuation allowances assessments are affected by various aspects of the Tax Act. Since, as discussed above, the Company has recorded no amounts related to certain portions of the Tax Act, any corresponding determination of the need for or change in a valuation allowance has not been completed and no changes to valuation allowances as a result of the Tax Act have been recorded.

 

 

EVO TRANSPORTATION & ENERGY SERVICES, INC

 

Notes to Unaudited Consolidated Financial Statements

 

Recently Issued Accounting Pronouncements

 

In July 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part 1) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Non-public Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception” (“ASU 2017-11”). Part I relates to the accounting for certain financial instruments with down round features in Subtopic 815-40, which is considered in determining whether an equity-linked financial instrument qualifies for a scope exception from derivative accounting. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced based on the pricing of future equity offerings. An entity still is required to determine whether instruments would be classified as equity under the guidance in Subtopic 815-40 in determining whether they qualify for that scope exception. If they do qualify, freestanding instruments with down round features are no longer classified as liabilities. ASU 2017-11 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted, including in an interim period. The Company does not plan early adoption of this update and does not expect the adoption of the update to materially change its current accounting methods and therefore the Company does not expect the adoption to have a material impact on its consolidated financial statements.

 

In March 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), which simplifies several aspects of the accounting for share-based payment award transactions including accounting for income taxes and classification of excess tax benefits on the statement of cash flows, forfeitures and minimum statutory tax withholding requirements. For the Company, ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company does not plan early adoption of this update and does not expect the adoption of the update to materially change its current accounting methods and therefore the Company does not expect the adoption to have a material impact on its consolidated financial statements.

 

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

 

 

EVO TRANSPORTATION & ENERGY SERVICES, INC

 

Notes to Unaudited Consolidated Financial Statements

 

In June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) (“ASU 2016-13”), Measurement of Credit Losses on Financial Instruments. The standard significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For available-for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. It also simplifies the accounting model for purchased credit-impaired debt securities and loans. This ASU is effective for annual periods beginning after December 15, 2019, and interim periods therein. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. The Company does not plan early adoption of this update and does not expect the adoption of the update to materially change its current accounting methods and therefore the Company does not expect the adoption to have a material impact on its consolidated financial statements.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry-specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The amendments in this ASU are effective for reporting periods beginning after December 15, 2016; however, in July 2015, the FASB agreed to delay the effective date by one year. The proposed deferral may permit early adoption but would not allow adoption any earlier than the original effective date of the standard.

 

On January 1, 2018 we adopted ASU 2014-09 using the full retrospective method. The Company completed its review of its material revenue streams and determined that there will be no impact to its consolidated financial statements, results of operations or liquidity. When comparing the Company’s current revenue recognition to the new applied revenue recognition under Accounting Standards Codification (“ASC”) 606, there was no change to the amount or timing of revenue recognized. Therefore, no quantitative adjustment was required to be made to the prior periods presented on the unaudited condensed consolidated financial statements after the adoption of ASC 606

 

In February 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”), which will require lessees to recognize a right-of-use asset and a lease liability for all leases that are not short-term in nature. For a lessor, the accounting applied is also largely unchanged from previous guidance. The new rules will be effective for the Company in the first quarter of 2019. The Company is in the process of evaluating the impact the amendment will have on its consolidated financial position or results of operations.

 

Note 2 - Acquisition

 

EAF

On February 1, 2017, the Company entered into a securities exchange agreement (the “EAF Exchange Agreement”) with Environmental Alternative Fuels, LLC, a Delaware limited liability company (“EAF”), EVO CNG, LLC, a Delaware limited liability company and a wholly owned subsidiary of EAF (“EVO”), pursuant to which the Company acquired all of the membership interests in EAF (the “EAF Interests”) from the EAF Members. EAF, together with EVO, is a compressed natural gas fueling station company with six fueling stations in California, Texas, Arizona and Wisconsin. The EAF Exchange Agreement further aligns the Company’s business model to acquire existing CNG stations.

 

 

EVO TRANSPORTATION & ENERGY SERVICES, INC

 

Notes to Unaudited Consolidated Financial Statements

 

The following table summarizes the fair value allocation of the assets acquired and liabilities assumed at the acquisition date which were based on the best information available at the time the financial statements were issued and is subject to change.

 

Prepaid assets		$	32,118
Goodwill			3,993,730
Customer list			220,000
Trade mark			86,000
Favorable list			307,000
Property and equipment			8,154,667
Deposits and other long-term assets			152,117
Derivative liability			(5,821	)
Derivative liability, less current portion			(76,811	)
Promissory notes - related party			(8,050,000	)
Convertible promissory note - related party			(9,500,000	)
Debt discount			4,687,000

 

The Company has evaluated and expects the goodwill and other intangibles to be deductible for income tax purposes.

 

The Company engaged a third-party valuation specialist to determine the fair value of the land, buildings, and equipment, and the EAF intangible assets. The Company incurred a total of approximately $250,000 in transaction closing costs, which were expensed as incurred as general and administrative expenses in the consolidated statement of operations, for the years ended December 31, 2017 and 2016.

 

As consideration for the EAF Interests, the Company issued a promissory note to an EAF member in the principal amount of $3.8 million (the “Senior Promissory Note”) that bears interest at 7.5%, with a default interest rate of 12.5% per year and has a maturity date of the earlier of (a) the date that is ten days after the initial closing of a private offering of capital stock of the Company in an amount not less than $10 million (a “Private Offering”); (b) December 31, 2017 or a (c) declaration by the noteholder of an event of default under the Senior Promissory Note. During April 2018 the promissory note’s maturity was extended until July 2019. Also, as consideration for the EAF Interests, the Company issued convertible promissory notes to the EAF Members in the aggregate principal amount of $9.5 million (the “Convertible Notes”). The Convertible Notes bear interest at 1.5% per year and have a maturity date of February 1, 2026. The Convertible Notes are convertible into 1,400,000 shares (the “Transaction Shares”) of the Company’s common stock, par value $0.0001 per share (the “Common Stock”), subject to adjustment for any stock splits, combinations or similar transactions, representing approximately 81.1% of the Company’s total outstanding shares of Common Stock on a post transaction basis. Accordingly, the conversion of the Convertible Notes will result in a change in control of the Company. The number of Transaction Shares will be increased to equal 70% of the issued and outstanding Common Stock if the issuance of Common Stock pursuant to a private offering of Common Stock of up to $2 million and the conversion of the Company’s subordinated notes payable to members and Senior Bridge Notes, convertible promissory notes, and certain accounts payable into Common Stock would otherwise cause the Transaction Shares to represent less than 70% of the issued and outstanding Common Stock. Pursuant to the terms of the Exchange Agreement, the EAF Members are entitled to demand registration rights and piggyback registration rights with respect to the Transaction Shares upon customary terms, limitations, exceptions and conditions. The Convertible Notes are secured by all of the assets of EAF and the EAF Interests, which the Company pledged to the EAF Members as security for the Convertible Notes. 

 

 

EVO TRANSPORTATION & ENERGY SERVICES, INC

 

Notes to Unaudited Consolidated Financial Statements

 

Each Convertible Note is convertible at the applicable holder’s option upon (1) consummation of a reorganization, merger or similar transaction where the Company is not the surviving or resulting entity or (2) the sale of all or substantially all of the Company’s assets, subject to customary restrictions. The Convertible Notes are also subject to mandatory conversion at the Company’s option beginning on the first anniversary of the date of issuance of the Convertible Notes if: (i) the closing price of the Common Stock is greater than (A) 150% of the price at which a share of Common Stock is sold in a Private Offering or (B) $10.00 if a Private Offering has not occurred by December 31, 2017 and (ii) the average daily trading volume of shares of Common Stock has equaled 100,000 or more for the 30 days prior to the applicable date. Upon a conversion of the Convertible Notes, accrued interest may also be converted at the greater of (i) the amount of interest to be converted divided by the exchange ratio of 0.1357, subject to adjustment for stock splits or combinations, or (ii) the amount of interest to be converted divided by the closing price of the Common Stock on the trading day preceding the conversion date.

 

In connection with the closing of the Exchange Agreement, on February 1, 2017, the Company issued promissory notes to the EAF Members in the aggregate principal amount of $250,000 that bear interest at 6% per annum with a default rate of 11% per annum and a maturity date of the earlier of (a) the closing of a Private Offering; (b) 180 days from the date of the notes and (c) declaration by a holder of an event of default under the holder’s note (the “Working Capital Notes”). During April 2018 the notes were paid in full.

 

In connection with the closing of the EAF Exchange Agreement, on February 1, 2017, the Company guaranteed a note from EAF to an EAF member dated January 30, 2017 in the principal amount of $4,000,000 (the “EAF Note”). The EAF Note is secured by all assets of EAF and is guaranteed by EAF. The EAF Note bears interest at 7.5% per annum with a default rate of 12.5% per annum and has a maturity date of the earlier of (a) February 1, 2020 and (b) declaration a declaration by the noteholder of an event of default under the EAF Note.

 

Note 3 - Balance Sheet Disclosures

 

 

Accounts receivable are summarized as follows:

 

		March 31,				December 31,
		2018				2017
Accounts receivable		$	122,020			$	187,426
Allowance for doubtful accounts			-				(37,007	)
		$	122,020			$	150,419

 

 

EVO TRANSPORTATION & ENERGY SERVICES, INC

 

Notes to Unaudited Consolidated Financial Statements

 

Property, equipment and land are summarized as follows:

 

		March 31,				December 31
		2018				2017
Equipment		$	3,919,589			$	3,919,589
Buildings			3,259,179				3,259,179
Land			975,899				975,899
Computer equipment			37,627				37,627
Site development			-				-
Leasehold improvements			-				-
			8,192,294				8,192,294
Less accumulated depreciation			(573,399	)			(451,871	)
		$	7,618,895			$	7,740,423

 

Depreciation expense for the three months ended March 31, 2018 and 2017 was $121,528 and $130,231, respectively.

   

Intangible assets consist of the following:

 

		March 31,				December 31,
		2018				2017
Goodwill		$	3,993,730			$	3,993,730
Favorable lease			307,000				307,000
Customer relationships			113,730				113,730
Trade names			86,000				86,000
			4,500,460				4,500,460
Less Impairment			(4,100,000	)			(4,100,000	)
			400,460				400,460
Less Amortization			(97,281	)			(55,176	)
		$	303,179			$	345,284

 

 

EVO TRANSPORTATION & ENERGY SERVICES, INC

 

Notes to Unaudited Consolidated Financial Statements

 

Amortization expense for the three months ended March 31, 2018 and 2017 was $42,105 and $0, respectively. Future amortization expense will be approximately as follows:

 

Year Ending December 31,
At March 31,
2018		$	75,900
2019			111,100
2020			106,000
2021			10,200
		$	303,200

 

Accrued expenses consist of the following:

 

		March 31,				December 31,
		2018				2017
Federal alternative fuels tax credit and other fuel taxes		$	533,460			$	562,513
Professional fees			292,231				508,028
Compensation and related payroll taxes			72,420				72,420
Deferred rent			12,130				13,233
Credit cards			11,769				12,527
		$	922,010			$	1,168,721

 

Note 4 - Related Party Transactions

 

Accounts Payable - Related Party

 

The Company’s accounts payables - related party consist of guaranteed payments and expense reimbursement to members. Accounts payable - related party was $432,345 and $409,838 as of March 31, 2018 and December 31, 2017, respectively.

 

Advances Related Party

 

During the year ended December 31, 2017, an EVO member advanced $332,859 to the Company.

 

During the year ended December 31, 2016, a Titan member advanced $2,000 to the Company.

 

During the year ended December 31, 2016 an El Toro member advanced $35,500 to the Company.

 

Accrued Interest - Related Party

 

The Company’s accrued interest - related party are the accrued interest payments on stockholders’ and related party debt. Accrued interest - related party was $874,966 and $927,421 as of March 31, 2018 and December 31, 2017, respectively. During April 2018 the Company converted Jr. and Sr Debt and related interest of $2,052,858 into 502,430 shares of common stock. As a result of the conversion the Company realized a gain on the extinguishment of accrued interest of $157,330, which was recognized the three months ended March 31, 2018.

 

 

EVO TRANSPORTATION & ENERGY SERVICES, INC

 

Notes to Unaudited Consolidated Financial Statements

 

Note 5 - Long-Term Debt

 

Long-term debt consists of:

 

		March 31,				December 31,
		2018				2017
$1,300,000 SBA note payable issued December 31, 2014, with interest at 5.50% for the first five years, then adjusted to the SBA LIBOR base rate, plus 2.35% for the remaining five years. The note required interest only payments for the first twelve months and commencing during January 2016 calls for monthly principle and interest payments of $15,288. The note matures March 2024, is secured by substantially all of the Company’s assets and is personally guaranteed by certain members. The note is a co-borrower arrangement between Titan and El Toro with the proceeds received by El Toro. The Company issued to members 35,491 units (equivalent to 31,203 common shares) in Titan as compensation for the guarantee. The Company was in violation of the note’s covenants as of March 31, 2018 and December 31, 2017.		$	1,063,212			$	1,093,691
Six subordinated senior notes payable to stockholders (“Senior Bridge Notes”) with interest at 12%. In connection with the notes payable, the note holders were issued 25,541 Class A Membership Units (equivalent to 22,455 common shares). In the event of a default the Company is required to pay the holder a stated number of Class A Membership Units on the date of default and each 90-day interval thereafter until all amounts due have been paid in full. Effective July 2016, the maturity date of the Senior Bridge Notes was extended to September 30, 2016 and allowed for an interest rate increase from 12% to 16% effective March 14, 2016. The default interest rate was increased from 15% to 18%. As part of the first amendment, the note holders received 3,359 Class A Membership Units (equivalent to 2,953 common shares) in Titan. In September 2016, the Senior Bridge Notes were amended to extend the due date to April 30, 2017 and the Company paid a fee for the extension of 1% of the outstanding principal balance to the note holders. The Company subsequently extended the maturity date of the notes to October 31, 2017. The Company paid a fee of 1% of the outstanding principal balance on the notes on or around each of January 31, 2017, April 30, 2017, and July 31, 2017 to extend the maturity date of the notes. The notes are secured by a subordinate security interest on substantially all of the Company’s assets and are personally guaranteed by two members.  The Senior Bridge Notes were not extended at the maturity. During April 2018, $621,556 of the Senior Bridge Notes and related interest of $67,444 were converted into 275,583 shares of common stock, with a write-off of interest of $73,741.			1,421,556				1,421,556
Nine subordinated notes payable to stockholders (“Junior Bridge Notes”) with interest at 12%, with maturity at December 2020, secured by a subordinate security interest on substantially all assets of the Company.  During April 2018, $1,166,373 of the Junior Bridge Notes and related interest of $197,485 were converted into 272,777 shares of common stock, with a write-off of interest of $83,589			1,166,373				1,166,373
Three convertible promissory notes to stockholders (“Minn Shares Notes”) with interest at 12%, with maturity on or after November 2019. At the next equity financing the holder at their discretion may elect to convert the principal and interest at a conversion price equal to the price per security issued in such offering. These notes are also subject to mandatory conversion in the event that the Senior Bridge Notes and Junior Bridge Notes discussed above convert to equity, and any mandatory conversion will be on the same terms as those received by the holders of the Senior Bridge Notes and Junior Bridge Notes. The promissory notes are unsecured.			450,451				437,505

 

 

EVO TRANSPORTATION & ENERGY SERVICES, INC

 

Notes to Unaudited Consolidated Financial Statements

 

A promissory note to a former EAF member with interest at 7.5%, with maturity during December 2017, ten days after the initial closing of a private offering of capital stock of the Company in an amount not less than $10 million or at discretion of the member.  During April 2018 the promissory note’s maturity date was extended to July 2019.			3,800,000				3,800,000
A promissory note to a former EAF member with interest at 7.5%, with maturity during February 2020, the note is guaranteed by substantially all the assets of the Company.			4,000,000				4,000,000
Four promissory notes to former EAF members with interest at 6%, with maturity upon the earlier of July 2017 or the date of closing a private offering of at least $2 million.  During April 2018, the notes were paid in full.			250,000				250,000
Four promissory notes to former EAF members with interest at 1.5%, with maturity during February 2026.  The promissory notes are convertible into 1,400,000 shares. 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.  See note 2 above for additional discussion regarding the conversion mechanics of these convertible notes.			9,500,000				9,500,000
			21,651,592				21,669,125
Debt discount*			(4,140,183	)			(4,257,358	)
			17,511,409				17,411,767
Less current portion			(2,734,768	)			(2,765,247	)
		$	14,776,641			$	14,646,520

 

*

Of our total indebtedness of approximately $21,652,000 as of March 31, 2018, approximately $2,700,000 is classified as current debt with $850,000 either paid in full or converted to common stock during April 2018. We are in violation of the covenants related to the SBA loan. We have not received a waiver for current violations of these covenants as of March 31, 2018 and through the date of filing of this Form 10-Q. On February 1, 2017, pursuant to the EAF Exchange Agreement, EVO Inc. acquired all of the membership interests of EAF. As consideration for the membership interests, EVO Inc. issued convertible promissory notes to the former members of EAF in the aggregate principal amount of $9.5 million (the “Convertible Notes”). The Convertible Notes bear interest at 1.5% per year and have a maturity date of February 1, 2026. The Convertible Notes are convertible into 1,400,000 shares (the “Transaction Shares”) of EVO Inc. common stock, subject to adjustment for stock splits, combinations or similar transactions, which represents approximately 81.1% of EVO Inc.’s total outstanding shares of common stock on a post-transaction basis. Accordingly, the conversion of the Convertible Notes would result in a change in control of the Company. The number of Transaction Shares will be increased to equal 70% of the issued and outstanding shares of EVO Inc. common stock if the issuance of common stock pursuant to a private offering of common stock of up to $2 million and the conversion into common stock of EVO Inc.’s subordinated notes payable to members, Senior Bridge Notes, convertible promissory notes, and certain accounts payable would otherwise cause the Transaction Shares to represent less than 70% of the issued and outstanding common stock

 

 

EVO TRANSPORTATION & ENERGY SERVICES, INC

 

Notes to Unaudited Consolidated Financial Statements

 

The Company engaged a third-party financial advisory firm to assist in the determination of the purchase price allocation under the guidance of ASC Topic 805. A third-party advisory firm calculated, with assistance and collaboration of management, the value of the $9.5 million-dollar debt to be $4,813,000, generating a debt discount $4,687,000; with accretion at March 31, 2018 the remaining discount is $4,140,183.

 

Maturities of long-term obligations are as follows:

 

Year Ending December 31,		Related Party Notes				Other Notes				Total
At March 31, 2018
2018		$	1,671,556			$	1,063,212			$	2,734,768
2019			4,250,451				-				4,250,451
2020			5,166,373				-				5,166,373
2021			-				-				-
2022			-				-				-
2023			9,500,000				-				9,500,000
		$	20,588,380			$	1,063,212			$	21,651,592

 

Note 6 - Derivative Instruments

 

The Company periodically enters into various commodity hedging instruments to mitigate a portion of the effect of natural gas price fluctuations, as summarized in the table below. Open derivative positions are accounted for on a fair value basis at the consolidated balance sheet date, and any unrealized gain or loss is included in other expense on the consolidated statement of operations. Gains and losses from settled transactions are also recorded in other expense on the consolidated statement of operations. The Company does not have any derivative contracts designated as cash flow hedges. The realized loss and unrealized gain for the three months ended March 31, 2018 was $6,096 and ($10,164), respectively. The following table summarizes the fair value of the derivatives recorded in the consolidated balance sheets, by category.

 

		Fair Value at March 31,
		2018
Current commodity derivative liability		$	27,659
Long-term commodity derivative liability			5,784
Total derivative liability		$	33,443

 

As of March 31, 2018, the Company was party to one open derivative positions outstanding summarized below:

 

Type

Term

Volume Hedged (Dth)

Index

Fixed Price ($/Dth)

Swap

March 2015 - February 2019

95,000

NYM-LDS

$

3.82

 

Note 7 - Fair Value Measurements

 

Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of the inputs as follows:

 

Level 1: Quoted prices are available in active markets for identical assets or liabilities;

 

Level 2: Quoted prices in active markets for similar assets and liabilities that are observable for the asset or liability; or

 

Level 3: Unobservable pricing inputs that are generally less observable from objective sources, such as discounted cash flow models or valuations.

 

 

EVO TRANSPORTATION & ENERGY SERVICES, INC

 

Notes to Unaudited Consolidated Financial Statements

 

The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s policy is to recognize transfers in and/or out of the fair value hierarchy as of the end of the reporting period in which the event or change in circumstances caused the transfer. The Company has consistently applied the valuation techniques discussed below in all periods presented.

 

The following assets are measured at fair value on a recurring basis:

 

Description		Level 1				Level 2				Level 3				Total
Derivative liability		$	-			$	33,443			$	-			$	33,443

 

The fair value of these derivative swap contracts is based on market prices posted on the New York Mercantile Exchange for natural gas. The Company determines the fair value of its derivative instruments under the income approach using a discounted cash flow model. The valuation model requires a variety of inputs, including contractual terms, projected natural gas prices, discount rates, and credit risk adjustments, as appropriate. The Company’s estimates of fair value of derivatives include consideration of the counterparty’s creditworthiness, the Company’s creditworthiness, and the time value of money. The consideration of these factors results in an estimated exit price for each derivative asset or liability under a marketplace participant’s view. All of the significant inputs are observable, either directly or indirectly; therefore, the Company’s derivative instruments are included within the Level 2 fair value hierarchy.

 

Note 8 - Stockholders’ Equity

    

On March 2, 2018, the Company issued 1,000,000 Units (the “Units”) at a price of $2.50 per Unit for an aggregate purchase price of $2,500,000 pursuant to the terms of a subscription agreement between the Company and an investor. Each Unit consists of (i) one share of the Company’s common stock, par value $0.0001 per share (“Common Stock”), and (ii) a warrant to purchase one share of Common Stock at an exercise price of $2.50 per share exercisable for five years from the date of issuance. The Company did not pay any commissions in connection with the sale of these Units.

 

During March 2018, the Company entered into a Share Escrow Agreement (the “Escrow Agreement”) with certain of the Company’s shareholders, including entities affiliated with a director of the Company, and the Company’s former president. Pursuant to the terms of the Escrow Agreement, the shareholders party to the agreement placed an aggregate of 240,000 shares of Common Stock in escrow, to be held by the Company until such time as one or more third parties offer to purchase the escrowed shares and the Company approves such purchase or purchases. 75% of the proceeds of the sale or sales of the escrowed shares will be paid to the Company and will be used by the Company first to repay any amounts outstanding under the SBA loan, and the remaining 25% of the proceeds will be paid pro rata to the shareholders party to the Escrow Agreement. In connection with the Escrow Agreement, the Company issued 240,000 warrants to purchase Common Stock to the shareholders party to the Escrow Agreement, which warrants have an exercise price of $6.11 per share and are exercisable for a period of five years.

 

 

EVO TRANSPORTATION & ENERGY SERVICES, INC

 

Notes to Unaudited Consolidated Financial Statements

 

 

Warrants

 

The fair value of the warrants is estimated on the date of issuance using the Black-Scholes option pricing model, which requires the input of subjective assumptions, including the expected 5-year term of the warrants, expected stock price volatility, and expected dividends. These estimates involve inherent uncertainties and the application of management’s judgment. Expected volatilities used in the valuation model are based on the average volatility of the Company’s stock. 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 following table presents the activity for warrants outstanding:

 

						Weighted
		Number of				Average
		Warrants				Exercise Price
Outstanding - December 31, 2016			-			$	-
Issued			103,334				3.00
Forfeited/canceled			-				-
Exercised			-				-
Outstanding - December 31, 2017			103,334				-
Issued			1,240,000				3.20
Forfeited/canceled			-				-
Exercised			-				-
Outstanding - Mach 31, 2018			1,343,334			$	3.18

 

All of the outstanding warrants are exercisable and have a weighted average remaining contractual life of 4.92.

 

Note 9 - Commitments and Contingencies

 

Operating Leases

 

The Company leased office space in Minnesota on a month to month basis with payments of $977 per month through June 2017.

 

 

EVO TRANSPORTATION & ENERGY SERVICES, INC

 

Notes to Unaudited Consolidated Financial Statements

 

Titan entered into an operating lease agreement which expires in February 2019, with an option to extend to February 2024. In November 2014 the lease was amended to add El Toro, as a co-lessee. The monthly payments range from $10,000 to $11,604. The lease calls for rent increases over the term of the lease. The Company records rent expense on a straight-line basis using average rent for the term of the lease. The excess of the expense over cash rent paid is shown as deferred rent.

 

Rent expense for the three months ended March 31, 2018 and 2017 was approximately $35,000.

 

Future minimum lease payments under these leases are approximately as follows:

 

Year Ending December 31,
Three months ended March 31, 2018
2018		$	104,000
2019			23,000
		$	127,000

 

Litigation

 

In the normal course of business, the Company is party to litigation from time to time. The Company maintains insurance to cover certain actions and believes that resolution of such litigation will not have a material adverse effect on the Company.

 

On January 22, 2018, certain holders of Senior Bridge Notes initiated a lawsuit in the District Court of Hennepin County, Minnesota against the Company, certain of its subsidiaries and certain stockholders. The complaint alleges breach of contract, breach of implied covenant of good faith and fair dealing, fraud/fraudulent misrepresentation, successor liability, unjust enrichment, and breach of fiduciary duty, and seeks money damages, interest, costs, disbursements, attorneys’ fees and other equitable relief.

 

On March 19, 2018, the owners of the property leased by El Toro for the Company’s El Toro station, initiated a lawsuit in the Superior Court of Orange County, California, related to the lease agreement for the El Toro station. The complaint alleges breach of contract and seeks money damages, costs, attorneys’ fees and other appropriate relief. 

 

Grant Agreement

 

In 2013, Titan was the recipient of two grants in the amount of $300,000 and $150,000 from the California Energy Commission (“CEC”) and SCAQMD. The grant funds were used to complete the construction of El Toro as contemplated in the grant agreements. The grant proceeds are subject to repayment if the Company does not satisfy certain operational metrics contained in the grant agreements, and the Company is not in compliance with those metrics. In addition, the use of Titan on the project could be construed as requiring amendments to the grant agreements or consent from the CEC or SCAQMD, neither of which has been obtained by the Company.

 

 

EVO TRANSPORTATION & ENERGY SERVICES, INC

 

Notes to Unaudited Consolidated Financial Statements

 

During 2016, EVO was the recipient of a grant in the amount of $400,000 from the Texas Commission on Environmental Quality. The grant funds were used to complete the construction of the Company’s San Antonio facility as contemplated in the grant agreement. The grant proceeds are subject to repayment if the Company does not satisfy certain operational metrics contained in the grant agreements. The Company believes that it can satisfy these objectives, although it cannot provide assurance that such future events will occur. The grant agreement expires in August 2020. The Company records the grant proceeds as a reduction of the cost of the respective station. SCAQMD In December 2015, Diamond Bar entered into a transfer of ownership and lease arrangement with the SCAQMD. This property has an existing CNG station previously owned and operated by the SCAQMD. Thirty days after the date of the agreement, SCAQMD transferred to Diamond Bar, without charge, all of their rights and interests in the existing assets. The agreement also specifies that Diamond Bar lease the property for $1 and identifies certain commitments agreed to by the parties. Some of the more significant ones are as follows:

 

●

Within 180 days from the contract execution, Diamond Bar, using its best efforts, shall sell any surplus assets and provide SCAQMD with 90% of the net proceeds, as defined. To date Diamond Bar has not had any surplus assets to sell.

 

●

Diamond Bar is also required to comply with certain provisions in the agreement with regards to the operation and maintenance of the station.

 

●

Diamond Bar, at their expense and upon written consent from SCAQMD, can remodel, redecorate or otherwise make improvements and replacements of and to all or any part of the leased premises.

 

●

Diamond Bar is required to install specific station upgrades, as defined, and is responsible for the cost of these upgrades. All upgrades must be completed within eight months of the execution date. Any improvements made to the premises remain the property of Diamond Bar and can be removed by Diamond Bar.

 

●

The fueling rate charged to the SCAQMD will be based on actual utility costs, taxes and a fee not to exceed $0.50 per GGE. Currently the rate charged is substantially equal to the market rate charged to all other customers.

 

●

The contract ends December 31, 2020. SCAQMD can extend the contract for a period not to exceed five years starting January 1, 2021 at no additional cost. Either party may terminate the contract with sixty days’ notice. If the SCAQMD terminates without cause they will be required to either purchase the property necessary for the operation of the CNG station or reimburse Diamond Bar for the cost of removing the property. If Diamond Bar terminates the contract without cause, the SCAQMD shall have the option to either purchase the property necessary for the operation of the station or require Diamond Bar to remove the property at no cost to SCAQMD.

 

During February 2018, the Company entered into a management agreement with a third-party to operate Diamond Bar. The Company is currently negotiating with the third party for the sale of the station.

  

 

EVO TRANSPORTATION & ENERGY SERVICES, INC

 

Notes to Unaudited Consolidated Financial Statements

 

Long-Term Take-or-Pay Natural Gas Supply Contracts

 

At March 31, 2018, the Company had commitments to purchase CNG on a take-or-pay basis of approximately $545,000. It is anticipated these are normal purchases that will be necessary for sales, and no cash settlements will be made related to the purchase commitments.

 

Note 10 - Subsequent Events

 

On April 2, 2018, the Company and a related party note holder agreed to extend the maturity date of the $3,800,000 promissory note through July 2019.

 

On April 12, 2018, the Company consummated the following transactions:

 

	●	The Company issued 275,583 common shares in exchange for certain Senior Bridge Notes in the aggregate principal and interest amounts of approximately $689,000, with the per share price for shares of common stock equal to $2.50.
	●	The Company issued 272,777 common shares in exchange for the Junior Bridge Notes in the aggregate principal and interest amounts of approximately $1,363,858, with the per share price for shares of common stock equal to $5.00.

 

On May 14, 2018, the Company issued 93,400 common shares in exchange for accounts payable and related party accounts payable of approximately $280,200, with the per share price of shares of common stock equal to $3.00.

 

The units and common stock described above were offered and sold as part of private placements pursuant to exemptions from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) afforded by Section 4(a)(2) and Rule 506 of Regulation D promulgated thereunder.

 

On April 13, 2018, the Company filed a Certificate of Designation of Rights and Preferences of Series A Preferred Stock (the “Certificate of Designation”) with the Secretary of State of the State of Delaware, which authorizes the Company to issue up to 100,000 shares of Series A Preferred Stock, par value $0.0001 per share (“Series A Preferred Stock”). The Series A Preferred Stock ranks senior in preference and priority to the Company’s common stock with respect to dividend and liquidation rights and, except as provided in the Certificate of Designation or otherwise required by law, will vote with the common stock on an as converted basis on all matters presented for a vote of the holders of common stock, including directors, and are entitled to fifteen votes for each share of Series A Preferred Stock held on the record date for the determination of the stockholders entitled to vote or, if no record date is established, on the date the vote is taken.

 

The Series A Preferred Stock is convertible at any time at the option of the holder or the Company at an initial conversion ratio of one share of Common Stock for each share of Series A Preferred Stock.

 

 

EVO TRANSPORTATION & ENERGY SERVICES, INC

 

Notes to Unaudited Consolidated Financial Statements

 

The initial conversion ratio shall be adjusted in the event of any stock splits, stock dividends and other recapitalizations. In addition, each share of Series A Preferred Stock will automatically convert to one share of Common Stock if the closing price on all domestic securities exchanges on which the Common Stock may at the time be listed exceeds six dollars ($6.00) per share for thirty (30) consecutive trading days and the daily trading volume of the Common Stock is at least twenty thousand (20,000) shares for that same period.

 

The holders of the Series A Preferred Stock are entitled to a liquidation preference of $3.00 per share of Series A Preferred Stock plus any accrued but unpaid dividends upon the liquidation of the Company. The Series A Preferred Stock may be redeemed by the Company at any time at a redemption price equal to $3.00 plus all accrued but unpaid dividends, and each holder of Series A Preferred Stock may cause the Company to redeem the holder’s Series A Preferred Stock at any time after August 1, 2018 at a redemption price equal to $3.00 plus all accrued but unpaid dividends.

 

The approval of the holders of at least a majority of the Series A Preferred Stock, voting together as a separate class, is required for the Company to amend the Certificate of Designation, including by merger or otherwise, to as to alter or repeal the preferences, rights, privileges or powers of the Series A Preferred Stock in a manner that would adversely affect the rights of the holders of the Series A Preferred Stock.

 

On April 12, 2018, the Company approved the issuance of 100,000 shares of Series A Preferred to a member of the Company’s board of directors, as compensation for services rendered to the Company.

 

On April 12, 2018, the Board approved, subject to subsequent shareholder approval, the adoption of the EVO Transportation & Energy Services, Inc. 2018 Stock Incentive Plan (the “Plan”), which provides for the grant of options to purchase up to 4,250,000 shares of the Company’s common stock.

 

Pursuant to the terms and conditions of the Plan, the Board granted 4,000,000 stock options on April 12, 2018. The stock options have an exercise price equal to $2.50 per share, each option shall terminate ten years from the date issued. 25% of the options vested on the grant date, and the remaining options vest in equal annual installments on the first, second and third anniversary of the grant date. However, all unvested options vest immediately upon the Company’s closing on an aggregate of at least $30,000,000 in any combination of public and private equity and debt financings after the grant date.

 

  

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Forward-Looking Statements

 

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto included in Item 1 of Part I of this report and the audited consolidated financial statements and related notes thereto and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017. Some of the statements in this report may contain forward-looking statements that reflect management’s current view about future events, future business, industry and other conditions, our future performance, and our plans and expectations for future operations and actions. In some cases you can identify forward-looking statements by the use of words such as “anticipate,” “will,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan” and similar expressions or the negative of these terms. Many of these forward-looking statements are located in this report under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” but they may appear in other sections as well. The forward-looking statements in this report generally relate to: (i) our growth strategy and potential acquisition candidates; (ii) management’s expectations regarding market trends and competition in the vehicle fuels industry, gasoline, diesel, and natural gas prices, government tax credits and other incentives, and environmental and safety considerations; (iii) our beliefs regarding the sufficiency of working capital and cash flows, and our continued ability to renew or obtain financing on reasonable terms when necessary; (iv) the impact of recently issued accounting pronouncements; (v) our intentions and beliefs relating to our costs, business strategies, and future performance; (vi) our expected financial results; and (vii) our expectations concerning our primary capital and cash flow needs.

 

Forward-looking statements are based on information available to management at the time the statements are made and involve known and unknown risks, uncertainties and other factors that may cause our results, levels of activity, performance or achievements to be materially different from the information expressed or implied by the forward-looking statements. Such statements reflect the current view of management with respect to future events and are subject to risks, uncertainties, assumptions and other factors (including the risks contained in the section entitled “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017) relating to the Company’s industry, its operations and results of operations, and any businesses that may be acquired by it. These factors include, among other factors:

 

●	supply, demand, usage and pricing of natural gas, gasoline, diesel and other alternative vehicle fuels;
●	market trends for natural gas and natural gas vehicles;
●	new technologies and improvements to existing technologies in the vehicle fuels markets;
●	management’s conclusions regarding market perceptions of the environmental, economic and safety benefits of natural gas as an alternative fuel source;

 

 

●	the availability of federal, state and local grants, rebates, tax credits, and other incentives to promote natural gas usage;
●	the impacts of environmental laws on the vehicle fuels industry;
●	our ability to grow through the identification and execution of future acquisitions;
●	driver shortages and increases in driver compensation rates;
●	our ability to recognize the anticipated benefits of recent and future acquisitions;
●	our ability to generate sufficient cash to service our indebtedness; and
●	our ability to raise additional capital.

 

Although management believes that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results. We qualify all of our forward-looking statements by these cautionary statements.

 

Background and Recent Developments

 

EVO Transportation & Energy Services, Inc., a Delaware corporation formerly named Minn Shares Inc. (“EVO Inc.,” “we,” “us,” “our” or the “Company”), was incorporated on October 22, 2010.  EVO Inc. was incorporated to effect the redomestication of Minn Shares Inc., a Minnesota corporation (“Minn Shares Minnesota”), to the State of Delaware. From December 2001 until November 22, 2016, the Company and its predecessor entity, Minn Shares Minnesota, did not engage in any business activities other than for the purpose of collecting and distributing its assets, paying, satisfying and discharging any existing debts and obligations and doing other acts required to liquidate and wind up its business and affairs. The business purpose of EVO Inc. was to seek the acquisition of or merger with an existing company.

 

Securities Exchanges with Titan CNG and Environmental Alternative Fuels, LLC

 

On November 22, 2016, Titan and its members entered into an Agreement and Plan of Securities Exchange with the Company whereby the Company acquired all of the equity interests of Titan and Titan became a wholly-owned subsidiary of the Company (the “Securities Exchange”). El Toro, Diamond Bar and Blaine are wholly-owned subsidiaries of Titan. The Company issued 248,481 shares of its Common Stock to acquire Titan, which resulted in the former Titan equity holders owning approximately 91.25% of the outstanding Common Stock after the consummation of the Securities Exchange.

 

 

At the closing of the Securities Exchange, all of the units issued and outstanding for Titan immediately prior to the closing of the Securities Exchange were converted into 248,481 shares of Common Stock of the Company. Titan did not have any stock options or warrants to purchase its membership interests outstanding at the time of the Securities Exchange.

 

On February 1, 2017, the Company, Environmental Alternative Fuels, LLC, a Delaware limited liability company (“EAF”), EVO CNG, LLC, a Delaware limited liability company and a wholly-owned subsidiary of EAF (“EVO CNG”), and Danny R. Cuzick (“Danny Cuzick”), Damon R. Cuzick (“Damon Cuzick”), Theril H. Lund and Thomas J. Kiley (together with Danny Cuzick and Damon Cuzick, the “EAF Members”) consummated the transactions contemplated by that certain Agreement and Plan of Securities Exchange dated January 11, 2017 (the “EAF Exchange Agreement”). Pursuant to the EAF Exchange Agreement, the Company acquired all of the membership interests in EAF (the “EAF Interests”) from the EAF Members. EAF, together with EVO CNG, is a compressed natural gas fueling station company with six fueling stations in California, Texas, Arizona and Wisconsin.

 

Effective August 31, 2017, the Company amended its certificate of incorporation to change its name from “Minn Shares Inc.” to “EVO Transportation & Energy Services, Inc.” by the filing an amendment to the certificate of incorporation of the Company (the “Charter Amendment”). In connection with the name change, the Company changed its ticker symbol on the OTC Pink Marketplace from “MSHS” to “EVOA.”

 

The following discussion highlights our plan of operations and the principal factors that have affected our financial condition as well as our liquidity and capital resources for the periods described. This discussion contains forward-looking statements. The following discussion and analysis are based on our financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. You should read the discussion and analysis together with such financial statements and the related notes thereto.

 

The following discussion and analysis provides information which management believes is relevant for an assessment and understanding of the statements of financial condition and results of operations presented herein. The discussion should be read in conjunction with our audited financial statements and related notes and the other financial information included elsewhere in this Annual Report. 

 

General Overview

 

The Company is a holding company for two operating subsidiaries, Titan and EAF, that acquire, build and operate public and private compressed natural gas (“CNG”) fueling stations. Titan was formed in July 2012 and is the parent company of the wholly owned subsidiaries Titan Blaine, LLC (“Blaine”), formed in 2015, Titan Diamond Bar LLC (“Diamond Bar”), formed in 2015, and Titan El Toro LLC (“El Toro”), which was formed in 2013 and fully acquired by the Company in 2016. Titan is a natural gas vehicle (“NGV”) fueling company based in Peoria, Arizona. Titan was established to take advantage of the growing U.S. demand for natural gas as a vehicle fuel source. During February 2015 Titan opened its first station, Titan El Toro, in Lake Forest, California. In March 2016 Titan assumed ownership of a CNG station from the State of California South Coast Air Quality Management District (“SCAQMD”) in Diamond Bar, California.

 

  

EAF was originally organized on March 28, 2012 under the name “Clean-n-Green Alternative Fuels, LLC” in the State of Delaware. Effective May 1, 2012, EAF changed its name to “Environmental Alternative Fuels, LLC.” EVO CNG, EAF’s wholly owned subsidiary, was originally organized in the State of Delaware on April 1, 2013 under the name “EVO Trillium, LLC” and subsequently changed its name to “EVO CNG, LLC” effective March 1, 2016. Together, EAF and EVO CNG operate six compressed natural gas fueling stations located in California, Texas, Arizona and Wisconsin.

 

Although we plan to continue to operate our existing CNG fueling stations, we also plan to expand our operations into servicing interstate contract trucking routes operated for the United States Postal Service. We plan to accomplish our expansion into the trucking industry, which we view as complementary to our CNG fueling operations, by acquiring one or more existing trucking companies.

 

Going Concern

  

The Company is an early stage company in the process of acquiring several businesses in the transportation and vehicle fuels industry. As of March 31, 2018, the Company has a working capital deficit of approximately $3.7 million and negative equity of approximately $10.1 million. In addition, the Company is in violation of its bank covenants. Management anticipates rectifying those violations and its working capital deficit with additional public and private offerings. Also, the Company is evaluating certain cash flow improvement measures. However, there can be no assurance that the Company will be successful in these efforts.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern; however, the above conditions raise doubt about the Company’s ability to do so. 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 should the Company be unable to continue as a going concern.

 

To meet its current and future obligations the Company has taken the following steps to capitalize the business and successfully achieve its business plan during 2018:

 

On March 2, 2018, the Company issued 1,000,000 Units (the “Units”) at a price of $2.50 per Unit for an aggregate purchase price of $2,500,000 pursuant to the terms of a subscription agreement between the Company and an investor. Each Unit consists of (i) one share of the Company’s common stock, par value $0.0001 per share (“Common Stock”), and (ii) a warrant to purchase one share of Common Stock at an exercise price of $2.50 per share exercisable for five years from the date of issuance. The Company did not pay any commissions in connection with the sale of these Units.

 

During April 2018, the Company paid the working capital notes of $250,000 in full.

 

On April 2, 2018, the Company and a related party note holder agreed to extend the maturity date of the $3,800,000 promissory note through July 2019.

 

 

On April 13, 2018, the Company consummated the following transactions:

 

●	The Company issued 275,583 common shares in exchange for certain Senior Bridge Notes in the aggregate principal amount of approximately $689,000, with the per share price for shares of common stock equal to $2.50.

 

●	The Company issued 272,777 common shares in exchange for the Junior Bridge Notes in the aggregate principal amount of approximately $1,363,858, with the per share price for shares of common stock equal to $5.00.

 

On May 14, 2018, the Company issued 93,400 common shares in exchange for accounts payable and related party accounts payable of approximately $280,200, with the per share price of shares of common stock equal to $3.00.

 

Sources of Revenue

 

Titan was founded in 2012 and for the first four years only had management fee revenues. Beginning in 2016 Titan generated revenues from its CNG stations El Toro and Diamond Bar, and with the acquisition of EAF the Company generated revenue from six stations beginning February 2017. As of June 30, 2017, our El Toro station has ceased operations.

 

Key Trends

 

In general, CNG has become the primary alternative fueling choice for truck and bus fleets operating in the $134 billion fleet fueling market. Natural gas is sold on a gas gallon equivalent (“GGE”) basis and as of December 2017 was selling at an average price nationally of approximately $2.17 per GGE versus average prices of gasoline and diesel of $2.49 and $2.90 per gallon, respectively. We expect this price advantage to remain intact for the foreseeable future, which creates a strong economic incentive for vehicle operators to switch to CNG. In addition, CNG is a significantly cleaner fuel than is gasoline or diesel. With increased focus on the environment, the benefits from natural gas-powered vehicles have an immediate positive impact on the issues of air quality, U.S. energy security and public health. Using renewable CNG can result in greater than 95% less greenhouse gases than traditional petroleum products, and because CNG fuel systems are completely sealed, CNG vehicles produce no evaporative emissions, which are a common hazard when using liquid fuel. Also, CNG creates less engine wear, thereby making its use even more desirable. As of December 2017, there are fewer than 1,700 public CNG stations in the United States, compared to over 124,000 gasoline stations across the country.

 

During 2017, lower oil prices decreased the pricing advantage of CNG compared to diesel and gasoline. As a result, the adoption of natural gas as a fuel choice for fleets has slowed relative to previous periods, especially amongst smaller fleets. However, this impact is partially offset by a general decrease in the cost of natural gas as well as ongoing adoption of new CNG trucks by larger fleets. In addition, public companies and municipalities in particular are continuing to adopt the use of CNG as a vehicle fuel source for environmental reasons.

 

The natural gas vehicle industry is the beneficiary of federal and state incentives promoting the use of natural gas as a vehicle fuel choice. Titan received $450,000 of state grants to assist in the development of our El Toro station which was completed for approximately $2 million and during 2016 EVO received $400,000 to complete the construction of the San Antonio station. In addition, during December 2017 and 2016 we received a $0.50 per GGE federal tax credit for each GGE sold. In some cases, we share this credit with our customers. 

 

 

  

Anticipated Future Trends

 

Although natural gas continues to be less expensive than gasoline and diesel in most markets, the price of natural gas has been significantly closer to the prices of gasoline and diesel in recent years as a result of declining oil prices, thereby reducing the price advantage of natural gas as a vehicle fuel. We anticipate that, over the long term, the prices for gasoline and diesel will continue to be higher than the price of natural gas as a vehicle fuel and will increase overall, which would improve the cost savings of natural gas as a vehicle fuel compared to diesel and gasoline. However, the amount of time needed for oil prices to recover from their recent decline is uncertain and we expect that adoption of natural gas as a vehicle fuel, growth in our customer base and gross revenue will be negatively affected until oil prices increase and this price advantage increases. Our belief that natural gas will continue, over the long term, to be a cheaper vehicle fuel than gasoline or diesel is based in large part on the growth in United States natural gas production in recent years.

 

We believe natural gas fuels are well-suited for use by vehicle fleets that consume high volumes of fuel, refuel at centralized locations or along well-defined routes and/or are increasingly required to reduce emissions. As a result, we believe there will be growth in the consumption of natural gas as a vehicle fuel among vehicle fleets, and our goal is to capitalize on this trend, if and to the extent it materializes, and to enhance our leadership position in these markets. Our business plan calls for expanding our sales of natural gas fuels in the markets in which we operate, including heavy-duty trucking, waste haulers, airports, public transit, industrial and institutional energy users and government fleets, and pursuing additional markets as opportunities arise. If our business grows as we anticipate, our operating costs and capital expenditures may increase, primarily from the anticipated expansion of our station network, as well as the logistics of delivering natural gas fuel to our customers on-site.

 

We expect competition in the market for natural gas vehicle fuel to remain steady in the near-term. To the extent competition increases, we would be subject to greater pricing pressure, reduced operating margins and potentially fewer expansion opportunities.

 

In addition, the Company expects to expand into the transportation industry by owning and operating transportation companies. The Company intends to acquire one or more transportation companies that have been awarded contracts to provide trucking services for the United States Postal Service.

 

 

If we are successful in acquiring one or more trucking companies, we will competitively bid on transportation contracts that detail the movement of mail between processing facilities and destination post offices. Those contracts typically provide for an initial four-year term and are often renewed to the incumbent service provider if appropriate services have been performed. The contracts are bid 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.

 

We believe the Company’s expansion into interstate contract routes will complement our CNG business and develop efficiency within the interstate contract routes through the consolidation of routes.

 

Sources of Liquidity and Anticipated Capital Expenditures and Other Uses of Cash

 

Historically, our principal sources of liquidity have consisted of cash on hand, cash provided by financing activities, and cash provided by investors.

 

Of our total indebtedness of approximately $21,652,000 as of March 31, 2018, approximately $2,700,000 is classified as current debt. We are in violation of the covenants related to the SBA loan. We did not receive a waiver with respect to those covenant violations for the year ended December 31, 2017, and through the date of filing of this Form 10-Q. Our total consolidated interest payment obligations relating to our indebtedness for the three months ended March 31, 2018 was approximately $369,000, which included the debt discount of $117,175.

 

We may also elect to invest additional amounts in companies, assets or joint ventures in the natural gas fueling infrastructure, interstate contract routes, or use capital for other activities or pursuits. We will need to raise additional capital to fund any capital expenditures, investments or debt repayments that we cannot fund through available cash or cash generated by operations or that we cannot fund through other sources, such as with the sale of our stock. We may not be able to raise capital when needed on terms that are favorable to us, or at all. Any inability to raise capital may impair our ability to build new stations, develop natural gas fueling infrastructure, invest in strategic transactions or acquisitions or repay our outstanding indebtedness and may reduce our ability to grow our business and generate sustained or increased revenues. See “Liquidity and Capital Resources” below. 

 

Business Risks and Uncertainties

 

Our business and prospects are exposed to numerous risks and uncertainties. For more information, see “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

 

 

Results from Operations

 

Three months ended March 31, 2018 as compared with the three months ended March 31, 2017

 

Revenue. EVO Inc. has devoted substantially all of its efforts on establishing the business and has generated minimal revenues from the core business – to build and operate public and private CNG filling stations.

 

Sales for the Titan stations were $8,718 and $64,470, for the three months ended March 31, 2018 and 2017, respectively. The decrease is generated from the closure of El Toro during 2017 and the 2018 revenue reflects one month of revenue from Diamond Bar before the Company implemented the management agreement. EVO stations generated sales of approximately $312,000 during the first three months of 2018, while the approximate revenue for February and March 2017 was $383,000. The decrease between years is from a customer terminating the use of CNG trucks at the Tolleson station and the Company experiencing a downward trend in sales over the past year.

  

Cost of goods sold. Cost of goods sold are comprised of natural gas, electricity, federal excise tax, vendor use fuel tax and credit cards fees. The margins were 36% and 43% for the three months ended March 31, 2018 and 2017, respectively. The decrease in margins was from the station mix. For the three months ended March 31, 2017, Diamond Bar’s margins were around 50% due to the lower cost of electricity from SCAQMD. With one month of sales reflected in 2018 the Company did not capture the 50% margin. In addition, the decrease is also from EVO’s fixed costs connected with the stations that do not decrease with decreased demand of CNG.

 

Operating expenses. Operating expenses decreased for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 by approximately $265,000. The Company decreased professional fees related to public company expenses in 2018, along with decrease in member payments. The aforementioned decreases were offset by an increase in depreciation and amortization generated from the amortization of intangibles. The 2018 depreciation expense reflects three months of expense from EVO versus two months of expense in 2017. In addition, there was no depreciation expense from El Toro in 2018 due to the impairment of assets during 2017 from the closure of the station.

 

Interest expense. Interest expense increased between the three months ended March 31, 2018 and 2017 due to $117,175 from the debt discount. The increase was off-set due to the decrease in interest on the Jr. and Sr. Bridge notes conversion.

 

Warrant expense. The warrant expense is connected to the issuance of stock and is the estimated fair value calculated on the date of issuance of the warrant using the Black-Scholes option pricing model, which requires the input of subjective assumptions, including the expected 5-year term of the warrants, expected stock price volatility, and expected dividends. These estimates involve inherent uncertainties and the application of management’s judgment.

 

Gain extinguishment related party interest. As a result of the conversion of related party debt during April 2018, the company realized a gain on the extinguishment of related party interest.

 

Gain on extinguishment of liabilities. We recorded a gain of approximately $657,499 on the extinguishment of accounts payable that no longer represented our obligation or that management negotiated a settlement. The liabilities consisted of professional fees and other expenses.

 

 

We had cash and cash equivalents of $1,466,889 and $83,867 at March 31, 2018 and December 31, 2017, respectively. During the three months ended March 31, 2018 and 2017, net cash used in operations was ($1,086,499) and ($393,760), respectively. We historically funded our operating losses primarily from the issuance of equity, convertible notes payable, stockholder debt and SBA debt.

 

Changes in Liquidity

 

Cash and Cash Equivalents. Cash and cash equivalents were $1,466,889 at March 31, 2018 compared to $83,867 at December 31, 2017. The increase is primarily attributable to the issuance of common stock for $2,500,000 during 2018.

 

Operating Activities. Net cash used in operations was ($1,086,499) and ($393,760) as of March 31, 2018 and 2017, respectively. For the three months ended March 31, 2018 and 2017, we had net income (loss) of $102,717 and ($710,101), respectively. Significant changes in working capital during these periods included:

 

●	Accounts receivable decreased by $65,406 from the decreased revenues generated by EVO through customer billings.

 

●	Accounts payable, accounts payable-related party, advances from related parties, accrued interest and accrued liabilities decreased in aggregate by $640,000, primarily due to the $2,500,000 sale of common stock, and the extinguishment of liabilities and related party interest.

 

●	The non-cash transaction included the add back from the accretion of the debt discount for $117,175 and $163,633 from depreciation and amortization, offset by the gains in extinguishment of related party interest and liabilities for a total of $814,829.

  

Investing Activities. Net cash used in investing was $144,828 for the three months ended March 31, 2017. The cash was used to purchase construction in progress assets during 2017. There were no investing activities during the three months ended March 31, 2018.

 

Financing Activities. Net cash provided by financing activities was $2,469,521 and $796,224 for the three months ended March 31, 2018 and 2017, respectively. The cash provided by financing activities in 2018 was from $2,500,000 sale of common stock offset by $30,479 in payment on the SBA loan. During the three months ended March 31, 2017 financing activities consisted of $400,000 from subordinated notes payable and $482,325 in advances from stockholders, offset by payments on the SBA loan and related party promissory note.

 

Our future liquidity and capital requirements will be influenced by numerous factors, including the extent and duration of future operating losses, the level and timing of future sales and expenditures, working capital required to support our sales growth, the level of our outstanding indebtedness and principal and interest we are obligated to pay on our indebtedness, our capital expenditure requirements (which consist primarily of station construction), the continuing acceptance of our product in the marketplace, competing technologies, market and regulatory developments, ongoing facility requirements, and potential strategic transactions.

 

 

Debt Compliance

 

Of our total indebtedness of approximately $21,652,000 for the three months ended March 31, 2018, approximately $2,700,000 is classified as current debt. We are in violation of the covenants related to the SBA loan. We have not received a waiver for current violations of these covenants as of December 31, 2017 and through the date of filing of this Form 10-Q. Our total consolidated interest payment obligations relating to our indebtedness was approximately $369,000 which included the debt discount of $117,175 for the three months ended March 31, 2018.

  

Existing Indebtedness

 

On December 31, 2014, Titan entered into a co-borrower arrangement for a $1,300,000 U.S. Small Business Administration (SBA) note with El Toro. The proceeds from the note were received by El Toro and the note payable is recorded by El Toro. The note is a ten-year term note with interest fixed at 5.50% for the first five years, then adjusted to the SBA LIBOR Base Rate, plus 2.35% for the remaining five years. The note requires monthly principal and interest payments of $15,288. The note is secured by substantially all of Titan’s business assets and is personally guaranteed by certain former members of Titan. Titan issued 35,491 (equivalent to 31,203 common shares) Class A Membership Units to those members as compensation for the guarantee. The note was obtained pursuant to a Loan Agreement with a bank dated December 31, 2014 (the facility governed by the Loan Agreement is hereinafter referred to as the “SBA Facility”). Titan was, as of December 31, 2017, and currently is, in violation of certain covenants under our SBA Facility. We have not received a waiver to remedy the technical non-compliance under our SBA Facility for the year ended December 31, 2017, and through the date of filing of this Form 10-Q.

 

In addition to the SBA Facility, on January 1, 2016, Titan issued 64,387 (equivalent to 56,608 common shares) Class A Membership Units and Junior Bridge Notes in the aggregate principal amount of approximately $876,000 to eight accredited investors in exchange for mezzanine debt in El Toro plus approximately 80% of the membership interest in El Toro. Titan issued an additional Junior Bridge Note to a ninth accredited investor on January 1, 2016 for approximately $99,000 to evidence pre-existing indebtedness. The Junior Bridge Notes bear interest at the annual rate of 12% and mature on December 31, 2020. The Junior Bridge Notes are secured by a subordinate security interest on substantially all of Titan’s assets, including accounts receivable and rights to payment, which will remain in effect until such notes are repaid. The holders of the Junior Bridge Notes are the Alpeter Family Limited Partnership, Brian and Renae Clark, Falcon Capital LLC, Honour Capital LP, James Jackson, John Honour, Kirk Honour, Keith and Janice Clark, and Stephen and Jayne Clark. On April 12, 2018, the Company converted the eight Junior Bridge Notes and related interest totaling $1,363,858 into common stock at a price per share of $5.00 for a total of 272,777 shares.

 

On February 29, 2016, Titan issued five promissory notes payable to members (the “Senior Bridge Notes”) with an original maturity date of June 28, 2016 for approximately $672,000, as well as 16,791 (equivalent to 14,762 common shares) Class A Membership Units. The Senior Bridge Notes originally bore interest at 12% per year with a default interest rate of 15% per year. Two of the Senior Bridge Notes were originally long-term debt of Titan outstanding at December 31, 2015 and converted into Senior Bridge Notes. In the event of a default under the Senior Bridge Notes, Titan is required to pay the holder a stated number of Class A Membership Units on the date of default and each 90-day interval thereafter until all amounts due have been paid in full. Effective July 2016, the maturity date of the Senior Bridge Notes was extended to September 30, 2016 and effective March 14, 2016 the interest rate was increased from 12% to 16%. The default interest rate was increased from 15% to 18%. As part of that first amendment, the note holders received 3,359 (equivalent to 2,953 common shares) Class A Membership Units in Titan. In September 2016, the Senior Bridge Notes were amended to extend the maturity date to January 31, 2017 and Titan paid a fee for the extension of 1% of the outstanding principal balance to the note holders. The Company subsequently extended the maturity date of the notes to October 31, 2017. The Company paid a fee of 1% of the outstanding principal balance on the notes on or around each of January 31, 2017, April 30, 2017, and July 31, 2017 to extend the maturity date of the notes. The notes are secured by a subordinate security interest on substantially all of the Company’s assets and are personally guaranteed by Scott Honour and Kirk Honour. The notes were not extended at maturity.

 

 

On July 26, 2016, we issued an additional Senior Bridge Note for $200,000 with 16% interest and an original maturity date of October 2016. In September 2016, this Senior Bridge Note was amended to extend the maturity date to January 31, 2017 and Titan paid a fee for the extension of 1% of the outstanding principal balance to the note holder. The Company paid a 1% fee on or around each of January 31, 2017, April 30, 2017, and July 31, 2017 to extend the due date of this Senior Bridge Note to October 31, 2017. In the event of default, the holder is entitled to receive 1,000 (equivalent to 879 common shares) Class A Membership Units. Titan issued 5,000 (equivalent to 4,396 common shares) Class A Membership Units to this noteholder in connection with the issuance of this Senior Bridge Note. The note is secured by a subordinate security interest on substantially all of the Company’s assets and are personally guaranteed by Scott Honour and Kirk Honour. The note was not extended at maturity.

 

On September 26, 2016, Titan issued an additional Senior Bridge Note for $150,000 with 16% interest an original maturity date of January 2017. Titan issued 3,750 (equivalent to 3,297 common shares) Class A Membership Units to this noteholder in connection with the issuance of this Senior Bridge Note and received the proceeds from this note in October 2016. Subsequent to March 31, 2017, the Company paid a 1% fee to extend the maturity date of this note to July 31, 2017 and paid an additional 1% fee to extend the maturity date to October 31, 2017. In the event of default, the holder of this Senior Bridge Note is entitled to receive 750 (equivalent to 659 common shares) Class A Membership Units. The note is secured by a subordinate security interest on substantially all of the Company’s assets. The note was not extended at maturity.

 

On November 22, 2016, EVO, Inc. issued Minn Shares Notes in the aggregate principal amount of $437,505 to Joseph H. Whitney, The Globe Resources Group, LLC and Richard E. Gilbert. The Minn Shares notes bear interest at the rate of 12% per annum and mature in November 2019 unless earlier converted. Each Minn Shares Note is convertible at the holder’s option as follows: (i) upon the sale by EVO, Inc. of not less than $7,500,000 of its equity securities at a conversion price equal to the price per security issued in such offering, (ii) upon a corporate transaction such as a merger, consolidation or asset sale involving either the sale of all or substantially all of the EVO, Inc. assets or the transfer of at least 50% of EVO, Inc.’s equity securities at a conversion price equal to the enterprise value of EVO, Inc.’s, as established by the consideration payable in the corporate transaction or (iii) on or after the maturity date at a conversion price equal to the quotient of $20 million divided by the number of shares of EVO, Inc.’s stock outstanding on a fully diluted basis. The Minn Shares Notes are subject to mandatory conversion upon the conversion into equity securities of the Junior Bridge Notes and Senior Bridge Notes upon the same conversion terms as the Junior Bridge Notes and Senior Bridge Notes.

 

On January 31, 2017, Titan issued an additional Senior Bridge Note in the principal amount of $400,000. This Senior Bridge Note bears interest at 16% per year with a default interest rate of 18% per year and matures on April 30, 2017. In the event of a default under this Senior Bridge Note, EVO, Inc. is required to issue 1,758 shares of Common Stock to the holder on the date of default and each 90-day interval thereafter until all amounts due have been paid in full. This Senior Bridge Note is secured by a subordinate security interest on substantially all of the EVO, Inc.’s assets. In connection with this Senior Bridge Note, on January 31, 2017, EVO, Inc. issued 8,792 shares of Common Stock. Subsequent to March 31, 2017, the Company paid a 1% fee to extend the maturity date of this note to July 31, 2017 and paid an additional 1% fee to extend the maturity date to October 31, 2017. The note is secured by a subordinate security interest on substantially all of the Company’s assets. The note was not extended at maturity.

 

 

During April 2018, approximately $689,000 of certain senior bridge notes and related interest were converted into 275,583 shares of common stock.

 

On February 1, 2017, EVO, Inc. issued the Senior Promissory Note in the principal amount of $3.8 million to Danny Cuzick and Convertible Notes in the aggregate principal amount of $9.5 million to the EAF Members. The Senior Promissory Note bears interest at 7.5% per year with a default interest rate of 12.5% per year and has a maturity date of the earlier of (a) the date that is ten days after the initial closing of a private offering of capital stock of EVO, Inc. in an amount not less than $10 million (a “Private Offering”); (b) December 31, 2017 and (c) declaration by Danny Cuzick of an event of default under the Senior Promissory Note. The Convertible Notes bear interest at 1.5% per year and have a maturity date of February 1, 2026. During April 2018 the Senior Promissory Note’s maturity was extended to June 2019 from December 31, 2017.  

 

The Convertible Notes are convertible into 1,400,000 shares (the “Transaction Shares”) of EVO, Inc.’s Common Stock, subject to adjustment for any stock splits, combinations or similar transactions, representing approximately 81.1% of EVO, Inc.’s total outstanding shares of Common Stock on a post-transaction basis. Accordingly, the conversion of the Convertible Notes would result in a change in control of the Company. The number of Transaction Shares will be increased to equal 70% of the issued and outstanding Common Stock if the issuance of Common Stock pursuant to a private offering of Common Stock of up to $2 million and the conversion into Common Stock of the Company’s subordinated notes payable to members, Senior Bridge Notes, convertible promissory notes, and certain accounts payable would otherwise cause the Transaction Shares to represent less than 70% of the issued and outstanding Common Stock. Pursuant to the terms of the EAF Exchange Agreement, the EAF Members are entitled to demand registration rights and piggyback registration rights with respect to the Transaction Shares upon customary terms, limitations, exceptions and conditions. The Convertible Notes are secured by all of the assets of EAF and the EAF Interests, which the Company pledged to the EAF Members as security for the Convertible Notes.

 

Each Convertible Note is convertible at the applicable holder’s option beginning on the first anniversary of the date of issuance of the Convertible Notes, including at any time within 90 days after the holder’s receipt of notice of consummation of (1) a reorganization, merger or similar transaction where EVO, Inc. is not the surviving or resulting entity or (2) the sale of all or substantially all of EVO, Inc. assets, subject to customary restrictions. Each holder’s conversion option is subject to a monthly limit of the number of shares of Common Stock equal to 10% of the thirty-day average trading volume of shares of Common Stock during the prior calendar month. The Convertible Notes are also subject to mandatory conversion at the Company’s option beginning on the first anniversary of the date of issuance of the Convertible Notes if: (i) the closing price of the Common Stock is greater than (A) 150% of the price at which a share of Common Stock is sold in a Private Offering or (B) $10.00 if a Private Offering has not occurred by December 31, 2017 and (ii) the average daily trading volume of shares of Common Stock has equaled 100,000 or more for the 30 days prior to the applicable date. Upon a conversion of the Convertible Notes, accrued interest may also be converted at the greater of (i) the amount of interest to be converted divided by the exchange ratio of 0.1357, subject to adjustment for stock splits or combinations, or (ii) the amount of interest to be converted divided by the closing price of the Common Stock on the trading day preceding the conversion date.

 

 

In connection with the closing of the EAF Exchange Agreement, on February 1, 2017, the Company issued promissory notes to the EAF Members in the aggregate principal amount of $250,000 that bear interest at 6% per annum with a default rate of 11% per annum and a maturity date of the earlier of (a) the closing of a Private Offering; (b) 180 days from the date of the notes and (c) declaration by a holder of an event of default under the holder’s note (the “Working Capital Notes”). During April 2018 the Working Capital Notes were paid in full.

 

In connection with the closing of the EAF Exchange Agreement, on February 1, 2017, the Company guaranteed a note from EAF to an EAF member dated January 30, 2017 in the principal amount of $4 million (the “EAF Note”). The EAF Note is secured by all assets of EAF and is guaranteed by EAF. The EAF Note bears interest at 7.5% per annum with a default rate of 12.5% per annum and has a maturity date of the earlier of (a) February 1, 2020 and (b) declaration by the noteholder of an event of default under the EAF Note.

 

Stockholders’ Deficit

 

On March 2, 2018, the Company issued 1,000,000 Units (the “Units”) at a price of $2.50 per Unit for an aggregate purchase price of $2,500,000 pursuant to the terms of a subscription agreement between the Company and an investor. Each Unit consists of (i) one share of the Company’s common stock, par value $0.0001 per share (“Common Stock”), and (ii) a warrant to purchase one share of Common Stock at an exercise price of $2.50 per share exercisable for five years from the date of issuance. The Company did not pay any commissions in connection with the sale of these Units.

 

During March 2018, the Company entered into a Share Escrow Agreement (the “Escrow Agreement”) with certain of the Company’s shareholders, including entities affiliated with a director of the Company, and the Company’s former president. Pursuant to the terms of the Escrow Agreement, the shareholders party to the agreement placed an aggregate of 240,000 shares of Common Stock in escrow, to be held by the Company until such time as one or more third parties offer to purchase the escrowed shares and the Company approves such purchase or purchases. 75% of the proceeds of the sale or sales of the escrowed shares will be paid to the Company and will be used by the Company first to repay any amounts outstanding under the SBA loan, and the remaining 25% of the proceeds will be paid pro rata to the shareholders party to the Escrow Agreement. In connection with the Escrow Agreement, the Company issued 240,000 warrants to purchase Common Stock to the shareholders party to the Escrow Agreement, which warrants have an exercise price of $6.11 per share and are exercisable for a period of five years.

 

Warrants

 

The fair value of the warrants is estimated on the date of issuance using the Black-Scholes option pricing model, which requires the input of subjective assumptions, including the expected 5-year term of the warrants, expected stock price volatility, and expected dividends. These estimates involve inherent uncertainties and the application of management’s judgment. Expected volatilities used in the valuation model are based on the average volatility of the Company’s stock. 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 following table presents the activity for warrants outstanding:

 

						Weighted
		Number of				Average
		Warrants				Exercise Price
Outstanding - December 31, 2016			-			$	-
Issued			103,334				3.00
Forfeited/canceled			-				-
Exercised			-				-
Outstanding - December 31, 2017			103,334				-
Issued			1,240,000				3.20
Forfeited/canceled			-				-
Exercised			-				-
Outstanding - Mach 31, 2018			1,343,334			$	3.18

 

All of the outstanding warrants are exercisable and have a weighted average remaining contractual life of 4.92.

 

 

  

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

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 (“US 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, see note 1 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.

 

Basis of Presentation

 

These financial statements represent the consolidated financial statements of EVO Transportation & Energy Services, Inc., formerly Minn Shares Inc. (“EVO Inc.” or the “Company”), its wholly owned subsidiaries, Titan CNG LLC (“Titan”) and Environmental Alternative Fuels, LLC (“EAF”), Titan’s wholly-owned subsidiaries, Titan El Toro LLC (“El Toro”), Titan Diamond Bar LLC (“Diamond Bar”), and Titan Blaine, LLC (“Blaine”), and EAF’s wholly-owned subsidiary, EVO CNG, LLC (“EVO CNG”).

 

 

Effective August 31, 2017, the Company amended its certificate of incorporation to change its name from “Minn Shares Inc.” to “EVO Transportation & Energy Services, Inc.” by filing an amendment to the certificate of incorporation of the Company. In connection with the name change, the Company changed its ticker symbol on the OTC Pink Marketplace from “MSHS” to “EVOA.”

 

On February 1, 2017, EVO Inc., EAF, EVO CNG, and Danny R. Cuzick (“Danny Cuzick”), Damon R. Cuzick (“Damon Cuzick”), Theril H. Lund and Thomas J. Kiley (together with Danny Cuzick and Damon Cuzick, the “EAF Members”) consummated the transactions contemplated by that certain Agreement and Plan of Securities Exchange dated January 11, 2017 (the “EAF Exchange Agreement”). Pursuant to the EAF Exchange Agreement, EVO Inc. acquired all of the membership interests in EAF (the “EAF Interests”) from the EAF Members. EAF, together with EVO CNG, is a compressed natural gas fueling station company with six fueling stations in California, Texas, Arizona and Wisconsin.

 

In determining the accounting acquirer in the transactions contemplated by the EAF Exchange Agreement, management considered the Financial Accounting Standards Board’s Accounting Standard Codification (“ASC”) 805—Business Combinations. Specifically, management considered the guidance in ASC 810-10, which generally provides that the acquirer in a business combination transaction is determined by identifying the existence of a controlling financial interest, which can typically be determined by the ownership of a majority voting interest. Because the EVO, Inc. stockholders continued to own all of the outstanding shares of Common Stock on completion of the transactions contemplated by the EAF Exchange Agreement, management determined that EVO Inc. was the accounting acquirer in the EAF transaction. However, because the Convertible Notes issued as consideration pursuant to the EAF Exchange Agreement could convert to a majority of the issued and outstanding Common Stock, management will continue to evaluate the accounting treatment for the EAF transaction.

 

On April 6, 2017, the Company effected a 50-for-1 reverse stock split of its Common Stock pursuant to which each 50 shares of issued and outstanding Common Stock became one share of Common Stock (the “Reverse Split”). No fractional shares were issued as a result of the Reverse Split. All references to numbers of shares of Common Stock and per share amounts give retroactive effect to the Reverse Split for all periods presented. 

 

Going Concern

 

The Company is an early stage company in the process of acquiring several businesses in the transportation and vehicle fuels industry. As of March 31, 2018, the Company has a working capital deficit of approximately $3.7 million and negative equity of approximately $10.1 million. In addition, the Company is in violation of its bank covenants. Management anticipates rectifying those violations and its working capital deficit with additional public and private offerings. Also, the Company is evaluating certain cash flow improvement measures. However, there can be no assurance that the Company will be successful in these efforts.

 

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern; however, the above conditions raise doubt about the Company’s ability to do so. 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 should the Company be unable to continue as a going concern.

 

To meet its current and future obligations the Company has taken the following steps to capitalize the business and successfully achieve its business plan during 2018:

 

On March 2, 2018, the Company issued 1,000,000 Units (the “Units”) at a price of $2.50 per Unit for an aggregate purchase price of $2,500,000 pursuant to the terms of a subscription agreement between the Company and an investor. Each Unit consists of (i) one share of the Company’s common stock, par value $0.0001 per share (“Common Stock”), and (ii) a warrant to purchase one share of Common Stock at an exercise price of $2.50 per share exercisable for five years from the date of issuance. The Company did not pay any commissions in connection with the sale of these Units. 

 

During April 2018, the Company paid the working capital notes of $250,000 in full.

 

On April 2, 2018, the Company and a related party note holder agreed to extend the maturity date of the $3,800,000 promissory note through July 2019.

 

On April 13, 2018, the Company consummated the following transactions:

 

●	The Company issued 275,583 common shares in exchange for certain Senior Bridge Notes in the aggregate principal amount of approximately $689,000, with the per share price for shares of common stock equal to $2.50.

 

●	The Company issued 272,777 common shares in exchange for the Junior Bridge Notes in the aggregate principal amount of approximately $1,363,858, with the per share price for shares of common stock equal to $5.00.

 

On May 14, 2018, the Company issued 93,400 common shares in exchange for accounts payable and related party accounts payable of approximately $280,200, with the per share price of shares of common stock equal to $3.00.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“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 revenue recognition, goodwill, business combinations, and long-lived intangible asset valuations and impairment assessments, debt discount, and contingencies. These estimates may be adjusted as more current information becomes available, and any adjustment could be significant. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

 

Intangibles

 

Intangible assets consist of finite lived and indefinite lived intangibles. The Company’s finite lived intangibles include favorable leases, customer relationships and the trade name. Finite lived intangibles are amortized over their estimated useful lives. For the Company’s lease related intangibles, the estimated useful life is based on the agreement of a one-time payment of $1 and the term of the mortgages, of the properties owned by the Company of approximately five years. For the Company’s trade names and customer list the estimated lives are based on life cycle of a customer of approximately 5 years, The Company evaluates the recoverability of the finite lived intangibles whenever an impairment indicator is present. The Company’s evaluation of intangibles resulted in an impairment of $106,270 to customer lists for the year ended December 31, 2017.

 

 

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 Company assesses the useful lives and possible impairment of the fixed assets when an event occurs that may trigger such review. Factors considered important which could trigger a review include:

 

·

Significant under performance of the stations relative to historical or projected future operating results;

 

·

Significant negative economic trends in the CNG industry; and

 

·

Identification of other impaired assets within a reporting unit.

 

Determining whether a triggering event has occurred involves significant judgement by the Company

 

Adoption of the New Revenue Standard

 

On January 1, 2018, the Company adopted Revenue from Contracts with Customers (Accounting Standards Codification Topic 606) ("Topic 606" or "new guidance") retrospectively. The adoption of Topic 606 did not have a material impact to our condensed consolidated financial statements. The adoption of the new guidance does not impact recognition revenue. The new guidance has no impact on the timing or classification of the Company’s cash flows as reported in the Consolidated Statement of Cash Flows and is not expected to have a significant impact on the Company’s Consolidated Statement of Operations in future periods. The Company did not record any adjustments applying Topic 606.

 

Revenue Recognition

 

The Company recognizes revenue when control of the promised goods is transferred to its customers, in an amount that reflects the consideration to which it expects to be entitled in exchange for the goods. The Company is generally the principal in its customer contracts as it has control over the goods prior to them being transferred to the customer, and as such, revenue is recognized on a gross basis. We disaggregate revenue by station, as we believe this best depicts the nature, amount, timing and uncertainty of our revenues and cash flows are affected by economic factors.

A performance obligation is a promise in a contract to transfer a distinct good to the customer and is the unit of account in Topic 606. The performance obligations that comprise a majority of the Company's total revenue consist of sale of fuel to a customer. The primary method used to estimate the standalone selling price for fuel is observable standalone sales, and the primary method used to estimate the standalone selling.

The Company’s CNG revenue is sold pursuant to contractual commitments. These contracts typically include a stand-ready obligation to supply natural gas daily. The Company recognizes revenue over time for the fuel sales because the customer receives and consumes the benefits provided by the Company's performance as the stand-ready obligations are being performed.

Payment terms and conditions vary by contract type. For substantially all the Company's contracts under which it receives volume -related revenue, the timing of revenue recognition does not differ from the timing of invoicing; as a result the Company has determined these contracts generally do not include a significant financing component.

There was no impairment loss recognized on any of the receivables arising from customer contracts for the three months ended March 31, 2018.

Recently Adopted Accounting Changes and Recently Issued and Adopted Accounting Standards

 

See note 1 to our consolidated financial statements included in this report.

 

Seasonality and Inflation

 

To some extent, we experience seasonality in our results of operations. Natural gas vehicle fuel amounts consumed by some of our customers tend to be higher in summer months when buses and other fleet vehicles use more fuel to power their air conditioning systems. Natural gas commodity prices tend to be higher in the fall and winter months due to increased overall demand for natural gas for heating during these periods.

 

Since our inception, inflation has not significantly affected our operating results. However, costs for construction, repairs, maintenance, electricity and insurance are all subject to inflationary pressures, which could affect our ability to maintain our stations adequately, build new stations, expand our existing facilities or pursue additional CNG production projects, or could materially increase our operating costs.

 

  

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

As a smaller reporting company, we are not required to provide disclosure under this item.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

The Company’s management, including the Company’s principal executive and principal financial officers, have evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e), as of the end of the period subject to this Report based on the framework in “Internal Control-Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on this evaluation, the Company’s management, including its principal executive and principal financial officer, has concluded that our disclosure controls and procedures were not effective as of March 31, 2018 due to the material weaknesses in our internal control over financial reporting described in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on April 17, 2018. Notwithstanding the material weaknesses that existed as of December 31, 2017 and March 31, 2018, management believes that the financial statements included in this report present fairly in all material respects our financial position, results of operations and cash flows for the period presented.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Management intends to implement certain remediation steps to address the material weaknesses described above as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. However, management has not yet implemented those remediation steps and expects remediation efforts to continue through the remainder of fiscal year 2018.

 

  

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

On January 22, 2018, certain holders of Senior Bridge Notes initiated a lawsuit in the District Court of Hennepin County, Minnesota against the Company, certain of its subsidiaries and Scott Honour, Kirk Honour, and John Yeros. The complaint alleges breach of contract, breach of implied covenant of good faith and fair dealing, fraud/fraudulent misrepresentation, successor liability, unjust enrichment, and breach of fiduciary duty, and seeks money damages, interest, costs, disbursements, attorneys’ fees and other equitable relief.

 

On March 19, 2018, Whisler Holdings, LLC, Mitesh Kalthia, and Jean M. Noutary, the owners of the property leased by El Toro for the Company’s El Toro station, initiated a lawsuit in the Superior Court of Orange County, California, related to the lease agreement for the El Toro station. The complaint alleges breach of contract and seeks money damages, costs, attorneys’ fees and other appropriate relief.

 

Item 1A. Risk Factors.

 

For a detailed discussion of certain risk factors that could affect the Company’s operations, financial condition or results for future periods, see Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None that have not been previously reported.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

On May 14, 2018, the Company issued 93,400 common shares in exchange for accounts payable and related party accounts payable of approximately $280,200, with the per share price of shares of common stock equal to $3.00. The common stock was offered and sold as part of a private placement pursuant to exemptions from the registration requirements of the Securities Act afforded by Section 4(a)(2) and Rule 506 of Regulation D promulgated thereunder.

 

Item 6. Exhibits.

 

See the Exhibit Index immediately following the signature page to this report, which is incorporated herein by reference.

 

  

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	EVO TRANSPORTATION & ENERGY SERVICES, INC.
Date: May 18, 2018	By:	/s/ John P. Yeros
		John P. Yeros
		Chief Executive Officer
		Principal Executive Officer and Principal Financial Officer

  

  

EVO TRANSPORTATION & ENERGY SERVICES, INC.

 

EXHIBIT INDEX

Form 10-Q for the Quarterly Period Ended March 31, 2018

 

Exhibit		Description
10.1		Subscription Agreement, dated March 2, 2018, between EVO Transportation & Energy Services, Inc. and Jerry Moyes (1)
10.2		Share Escrow Agreement, dated March 20, 2018, between EVO Transportation & Energy Services, Inc. and the shareholders party thereto (1)
10.3		Form of Subscription Agreement*
31.1		Certification of the Company’s Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1		Certification of the Company’s Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002*
101.INS		XBRL INSTANCE DOCUMENT
101.SCH		XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
101.CAL		XBRL TAXONOMY CALCULATION LINKBASE DOCUMENT
101.LAB		XBRL TAXONOMY LABEL LINKBASE DOCUMENT
101.PRE		XBRL TAXONOMY PRESENTATION LINKBASE DOCUMENT

 

*	Filed herewith

 

(1)	Filed as an exhibit to the Company’s annual report on Form 10-K filed with the SEC on April 17, 2018 and incorporated herein by reference.
(2)	Filed as an exhibit to the Company’s current report on Form 8-K filed with the SEC on October 9, 2017 and incorporated herein by reference.

 

 

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