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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
☐ 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
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
| Common Stock, $0.0001 par value per share |
| (Title of class) |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
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. (Check one):
| 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 ☒
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.
The aggregate market value of the voting and non-voting common equity held by non-affiliates as of the last business day of the Registrant’s most recently completed second fiscal quarter was approximately $420,804 based on the price of $1.00 per share, the price at which the Registrant’s common equity was last sold as of the last business day of the Registrant’s most recently completed second fiscal quarter as reported on the OTC Pink Marketplace and as adjusted for the Registrant’s 50-for-1 reverse stock split.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
As of April 16, 2018, there were 2,062,040 shares of the registrant’s common stock, par value $0.0001, outstanding.
TABLE OF CONTENTS
i
This annual report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements reflect management’s current view about future events. When used in this report, the words “anticipate,” “will,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan” and similar expressions or the negative of these terms identify forward-looking statements as they relate to EVO Transportation & Energy Services, Inc., a Delaware corporation formerly named Minn Shares Inc. (“EVO Inc.,” the “Company,” “we,” “us” or “our”), its subsidiaries or management. The forward-looking statements in this report generally relate to: our growth strategy and potential acquisition candidates, gasoline, diesel, and natural gas prices, management’s expectations regarding market trends and competition in the vehicle fuels industry, government tax credits and other incentives, and environmental and safety considerations.
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 this report) 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:
| ● | Future supply, demand, use and prices of crude oil, gasoline, diesel, natural gas and other vehicle fuels, such as electricity, hydrogen, renewable diesel, biodiesel and ethanol; |
| ● | Our expectations regarding the market’s perception of a need for alternative vehicle fuels generally; |
| ● | Our expectations regarding the market’s perception of the benefits of conventional and renewable natural gas relative to gasoline and diesel and other alternative vehicle fuels, including with respect to factors such as supply, cost savings, environmental benefits and safety; |
| ● | Expected rates and levels of adoption of compressed natural gas (“CNG”) as a vehicle fuel and our ability to capture a significant share of these markets if and when they grow; |
| ● | Our expectations regarding the customer and geographic markets that are well-suited for, and show the most promise for adoption of, natural gas as a vehicle fuel; |
| ● | Projections regarding natural gas vehicle cost, fuel usage, availability, quality, safety, convenience (to fuel and service), design and performance, generally and in our key customer markets and relative to comparable vehicles powered by other fuels; |
| ● | The competitive environment in which we operate, including predictions of increasing competition in the market for vehicle fuels generally, and the nature and impact of competitive developments in our industry, including advances or improvements in non-natural gas vehicle fuels and engines powered by these fuels; |
| ● | The availability and effect on our business of environmental tax or other government regulations, programs or incentives that promote natural gas as a vehicle fuel, such as, for instance, a federal alternative fuels tax credit (“AFTC,” formerly known as VETC) and the programs under which we generate credits by selling CNG, plus credits under the California Low Carbon Fuel Standards. |
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| ● | Potential adoption of government policies or programs that favor vehicles or vehicle fuels other than natural gas, including long-standing support for gasoline and diesel-powered vehicles and growing support for electric and hydrogen-powered vehicles; | |
| ● | The impact of, or potential for changes to, emissions requirements applicable to vehicles powered by gasoline, diesel, natural gas or other vehicle fuels, as well as emissions and other environmental regulations and pressures on crude oil and natural gas drilling, production, importing or transportation methods and fueling stations for these fuels; |
| ● | Developments in our products and services offering, including any new business activities we may pursue in the future; |
| ● | The success and importance of any acquisitions, divestitures, investments or other strategic relationships or transactions; |
| ● | New technologies and improvements to existing technologies in the vehicle fuels markets; |
| ● | General political, regulatory, economic and market conditions; |
| ● | Our need for and access to additional capital to fund our business or repay our debt, through selling assets or pursuing equity, debt or other types of financing; |
The preceding list is not intended to be an exhaustive list of all of the topics addressed by our forward-looking statements. Although the forward-looking statements in this report reflect our good faith judgment based on available information, they are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Factors that might cause or contribute to such differences include, among others, those discussed in this report in Item 1A. Risk Factors. In addition, we operate in a competitive and rapidly evolving industry in which new risks emerge from time to time, and it is not possible for us to predict all of the risks we may face, nor can we assess the impact of all factors on our business or the extent to which any factor or combination of factors could cause actual results to differ from our expectations. As a result of these and other potential risks and uncertainties, our forward-looking statements should not be relied on or viewed as predictions of future events. All forward-looking statements in this report are made only as of the date of this document and, except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason, including to conform these statements to actual results or to changes in our expectations. You should, however, review the factors and risks we describe in the reports we will file from time to time with the Securities and Exchange Commission (the “SEC”) after the date we file this report.
We qualify all of our forward-looking statements by this cautionary note.
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Minn Shares was incorporated in the State of Delaware on October 22, 2010 to effect the reincorporation (the “Reincorporation”) of Minn Shares Inc., a Minnesota corporation (“Minn Shares Minnesota”), in the State of Delaware. On December 1, 2010 the Company entered into an agreement and plan of merger with Minn Shares Minnesota, pursuant to which Minn Shares Minnesota was merged with and into the Company. Following the merger, Minn Shares Minnesota ceased to exist and the Company assumed all of the rights, liabilities and obligations of Minn Shares Minnesota.
Pursuant to an agreement and plan of securities exchange dated November 22, 2016 (the “Titan Exchange Agreement”), by and among Minn Shares, Titan CNG LLC, a Delaware limited liability company (“Titan”), and the holders of 100% of the outstanding equity interests of Titan, the Company acquired all of the issued and outstanding equity interests of Titan in exchange for 248,481 shares (taking into account the Company’s subsequent 50-for-1 reverse stock split) of the Company’s common stock (the “Titan Share Exchange”). The number of shares of common stock issued in the Titan Share Exchange represented approximately 91.25% of the Company’s total outstanding shares of common stock on a post-transaction basis. Accordingly, the Titan Share Exchange resulted in a change in control of the Company.
The Titan Share Exchange was accounted for as a reverse acquisition transaction. Upon completion of the Titan Share Exchange, the business plan of Titan became the business plan of the Company and all former officers of the Company resigned and were replaced by officers designated by Titan.
On November 23, 2016, the Company and Shock Inc., a Delaware corporation owned by John P. Yeros, Kirk S. Honour and Randy Gilbert (“Shock”), entered into an agreement and plan of merger whereby Shock merged with and into the Company (the “Shock Merger”), the separate corporate existence of Shock ceased, and all issued and outstanding shares of common stock of Shock were converted into 44,899 shares (taking into account the Company’s subsequent 50-for-1 reverse stock split) of the Company’s common stock.
On January 11, 2017, the Company entered into a securities 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”), Danny R. Cuzick (“Danny Cuzick”), Damon R. Cuzick, Theril H. Lund and Thomas J. Kiley (together with Danny Cuzick, the “EAF Members”). In accordance with the terms of the securities exchange agreement, the Company acquired all of the membership interests of EAF from the EAF Members and, in exchange, issued a promissory note in the principal amount of $3.8 million to Danny Cuzick and convertible promissory notes in the aggregate principal amount of $9.5 million to the EAF Members (the “EAF Share Exchange”).
Before the Titan Share Exchange, the Shock Merger and the EAF Share Exchange (collectively, the “Restructuring”), the Company had no or nominal operations or assets and could be considered a “shell company” as defined under Rule 405 of the Securities Act and Rule 12b-2 of the Exchange Act. The business and operations of Titan, Shock, EAF and EVO prior to the Restructuring currently constitute a substantial majority of the business and operations of Minn Shares. Consequently, the discussion of historical and planned operations in this report focuses, in large part, on the operations of Titan, Shock, EAF and EVO. Following the Restructuring, Minn Shares continues to be a “smaller reporting company” as defined under the Exchange Act.
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.
Effective August 31, 2017, Minn Shares changed its name to EVO Transportation & Energy Services, Inc.
Business Overview
EVO Inc. and 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”) are engaged in the business of acquiring, building and operating public and private CNG fueling stations. Our strategy is to acquire existing stations and ancillary businesses serving the CNG industry and to grow organically by constructing public and private CNG stations financed, in large part, by long-term customer contracts. Our management team and board of directors has significant experience in acquiring companies, including businesses in distress, and expects to use its acquisition and capital structure experience as well as its operating expertise to create value in the CNG industry.
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Titan
Titan currently owns one CNG fueling station and leases property for a second station. The properties are located at the following addresses:
| ● | 24201 El Toro Road, Lake Forest, California 92630 (“Titan El Toro”); and | |
| ● | 21865 Copley Drive, Diamond Bar, California 91765 (“Titan Diamond Bar”). |
Titan opened its Titan El Toro station in in February 2015 and began operations of its Titan Diamond Bar station under a lease agreement with the State of California South Coast Air Quality Management District (“SCAQMD”) in March 2016. Titan closed its El Toro station in June 2017. Titan was constructing a private station for Walters Recycling & Refuse in Blaine, Minnesota, but the Company did not meet the operational deadline as defined, and the project was cancelled per the Agreement.
EAF
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. The fueling stations are located at the following addresses:
| ● | 8301 West Sherman Street, Tolleson, Arizona 85353 (“EAF Tolleson”); | |
| ● | 7155 South 1st Street, Oak Creek, Wisconsin 53154 (“EAF Oak Creek”); | |
| ● | 9695 Weichold Road, Converse, Texas 78109 (“EAF San Antonio”); | |
| ● | 6900 East Rosedale Street, Ft. Worth, Texas 76109 (“EAF Lake Arlington”); | |
| ● | 3575 Wineville Avenue, Jurupa Valley, California 91752 (“EAF Jurupa Valley”); and | |
| ● | 5200 East Loop 820 South, Fort Worth, Texas 76112 (“EAF Fort Worth”). |
Market Overview
Management believes that there is an immediate opportunity to capture market share in the growing U.S. natural gas vehicle fueling market. According to the United States Department of Energy, in December 2017, natural gas was selling at retail in the United States at approximately $2.17 per gas gallon equivalent (“GGE”) while gasoline and diesel were selling for approximately $2.49 and $2.90 per gallon, respectively. Management expects this disparity to remain intact for the foreseeable future, which would create a strong economic incentive for vehicle operators to switch to CNG. In addition, CNG is a significantly cleaner fuel than is gasoline or diesel and creates less engine wear, thereby making its use even more desirable. Natural Gas Vehicles of America (“NGV America”) estimates that as of December 2017, there were approximately 1,750 natural gas fueling stations, with 153,000 natural gas vehicles, including commercial vehicles in the United States.
Management believes that the natural gas industry is ripe for growth in the United States. According to NGV America, a natural gas trade publication, as of 2016 there were more than 22.4 million natural gas vehicles in the world. Global usage of natural gas vehicles has grown at a compound annual growth rate of 21.6% for the last decade. The United States currently has approximately 250 million total vehicles in operation, of which approximately 150,000 consist of natural gas vehicles. As a result, management expects the United States to experience rapid growth in the NGV and natural gas industries for the foreseeable future.
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Approximately 44 billion gasoline gallon equivalents are consumed by fleet customers in the United States annually. The United States Energy Information Administration’s Annual Energy Outlook 2014 report estimates that the heavy truck market will consume 12 billion diesel gallon equivalents (“DGEs”) annually in the United States by 2040. Natural gas currently represents less than 0.1% of the fuel consumed by the fleet industry, which management views as the largest segment of our current target market.
Traditional natural gas produces up to 21% less greenhouse gases than gasoline and diesel on a well-to-wheels basis according to NGV America. Renewable natural gas can achieve a reduction in greenhouse gases of greater than 100% according to Argonne National Laboratory. At the same time, CNG produces over 90% fewer particulate emissions than diesel according to the Department of Energy. Several municipalities are encouraging the use of natural gas trucks to promote cost savings and quieter, cleaner operations in urban settings.
With the technological advances in natural gas drilling and production, including horizontal drilling techniques and hydraulic fracturing, the natural gas reserves in the United States has made the county the highest volume producer of natural gas in the world. Management expects that corporations and state and local governments in the United States seeking a long-term, reliable, and stably priced transportation fuel source will increasingly look to natural gas as an alternative and viable solution to gasoline and diesel due to the abundance of the resource.
Historically, the federal government and numerous state and local governments have offered grants and tax rebates, and have passed regulations promoting the use of natural gas as an alternative vehicle fuel source. In addition, many state and local governments operate natural gas vehicles and have become anchor customers for public CNG stations to promote CNG usage. AFTC, which was designed to promote natural gas usage in the United States, was reinstated retroactively with the Bipartisan Budget Act of 2018. In addition, management expects federal, state and local governments to offer similar tax credits and other incentives moving forward to promote the use of natural gas due to its economic, safety and environmental benefits.
Natural gas is considered safer than petroleum products because natural gas dissipates into the air when spilled, which significantly reduces the risk of fire caused by spilled fuel. Natural gas ignites at very high temperatures and a very narrow oxygen concentration band, making it less ignitable than gasoline. Also, CNG poses a lesser threat of soil or groundwater contamination as it is stored in above-ground tanks.
The United States has a robust natural gas distribution infrastructure that supplies gas to consumers for purposes of home heating and electrical power generation. Large-diameter, high-pressure gas lines provide natural gas throughout most parts of the country. While pipelines are in place, there are still very few retail CNG fueling stations. California is the current industry leader in developing CNG stations as part of its clean air initiative.
Management believes the opportunity for natural gas as a vehicle fuel source is sustainable and growing in the United States. In particular, fleets, especially those operated by large corporations, are continuing to convert vehicles to run on natural gas as opposed to gasoline or diesel for both environmental and economic reasons. We believe that these trends will continue for the foreseeable future.
Competition
The vehicle fuels market is highly competitive and in a state of rapid development. As a smaller provider of alternative vehicle fuels, we face numerous barriers to market entry. We compete directly with other operators of CNG fueling stations and indirectly with gasoline, diesel and other alternative vehicle fuels markets, including but not limited to ethanol, biodiesel, LNG, hydrogen, hybrid and electric vehicle markets. Gasoline and diesel producers and providers own a vast majority of the market share of the vehicle fuels industry. New developments and improvements to existing technologies continue to create volatility in the alternative fuels markets. Many of our competitors in the gasoline, diesel, and alternative fuels industries have access to greater financial and other resources than Minn Shares. Demand for natural gas in the vehicle fuels industry is subject to price considerations, reliability, availability, convenience and accessibility, environmental considerations, government incentive programs, and safety considerations, among other factors.
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We compete directly with both private and public operators of CNG fueling stations. The private market for CNG fueling solutions is currently served by a few larger operators and a number of smaller operators with a few stations. The following are the primary competitors of EVO Inc. serving the CNG market:
| ● | Large competitors, including Clean Energy, TruStar, Love’s Travel Stops (formerly Trillium), and U.S. Gain; | |
| ● | Smaller competitors, including CNG 4 America, Questar Fueling, Clean N’ Green, IGS CNG Services, Freedom CNG, Sparq, and Piedmont Natural Gas; and | |
| ● | Public operators of CNG fueling stations, including state and local governments. |
Strategy
Our goal is to capitalize on the current and anticipated growth in the use of natural gas vehicle fuels and to advance our leadership position in the vehicle fuels market. To achieve this end, we are pursuing the following strategies:
| ● | Acquire existing CNG stations. EVO Inc. intends to identify, analyze, and acquire CNG fueling stations, with a particular focus on stations in the Midwest, West and Southwest regions of the United States. We will seek to acquire CNG fueling stations that have demonstrated or anticipated above-average sales growth and profit potential. Management analyzes potential acquisition targets based on a set of assessment criteria, which includes the following factors: |
| ● | demographic markets and geographic suitability; |
| ● | status of station performance; |
| ● | potential upside in performance improvement; |
| ● | sales efficiency processes and resources; and |
| ● | service market penetration opportunity. |
As we identify specific acquisition targets, management will analyze each targeted CNG station to determine if it is a suitable acquisition target. If we determine that a potential target meets our criteria, then we will move toward more formal discussions with the target’s ownership. Once negotiations are completed and acquisition documents, including any financing documents, are finalized, we will complete the transaction and begin to implement our operating plans with respect to the acquired station.
| ● | Open public stations on the back of anchor fleet customers. We target high-volume fleet customers such as public transit, refuse haulers, regional trucking companies, vehicle fleets that serve airports and seaports and large national companies with distribution and service vehicles. For example, the Titan Diamond Bar station serves the SCAQMD as an anchor customer. | |
| ● | Open private stations serving fleets under take-or-pay contracts. We intend to leverage our expertise in building and operating CNG stations by serving fleet customers that wish to have their own private station to fuel vehicles overnight using a time-fill system and during the day with a fast-fill capability. | |
| ● | Emphasize superior customer service. We work closely with our customers to understand their specific needs and provide relevant solutions. |
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Our Target Customers
We target corporate and government fleet customers. Our initial focus is on fleet customers with vehicles that run the same or similar routes each day. We believe that these customers will benefit most immediately from the economic advantages available through CNG usage. Specific types of fleets targeted are:
Corporate Fleets:
Class 8 Truck Fleets: Management believes the largest market for CNG is in the Class 8 truck market. Class 8 trucks use more fuel than any other class of vehicle. With more and more trucking operators running dedicated routes for shippers, the Class 8 market will make the biggest impact on adoption of CNG.
Waste Haulers: Management believes that waste haulers are a natural target market for CNG. A typical garbage truck has a fuel economy of two to three miles per gallon and returns to its base each day, making the base a logical location for a CNG fueling station. Republic Services and Waste Management, the two largest refuse fleet operators in the United States, have both converted significant portions of their fleets to natural gas.
Oilfield Service Fleets: Oilfield service truck fleets operate in an out-and-back model that we believe is well-suited for a home depot refueling option.
Local Day Job Fleets: We believe that local jobbers that are high mileage users in a defined location represent an excellent target market.
Airport Shuttle Buses: Shuttle bus fleets can leverage common infrastructure around an airport and off-the-shelf engine conversion options.
Government Fleets:
City Buses: Many municipalities, such as Los Angeles, California operate buses that run on CNG.
Municipal Trash Haulers: The same opportunity exists here as for corporate fleets.
Other Government Fleets: Federal, state and local governments operate a wide range of fleet vehicles and could benefit from the economic and environmental advantages of NGVs.
Tax Rebate Opportunity
Historically, the federal government offered AFTC, formerly VETC enabling the Company to receive a tax credit of $.50 per GGE of CNG sold for vehicle fuel use. The AFTC was first offered on October 1, 2006 and expired December 31, 2016, and reinstated for 2017. Although we previously availed ourselves of the AFTC, our business is not dependent on tax credits, grants, or other incentives from federal, state or local governments. However, when available, we plan to pursue actively federal and state tax credits and other incentives to lower development and operating costs.
Principal Customers & Suppliers
When assessing prospective locations for new CNG fueling stations, we often target high-volume fleet operators to serve as anchor customers at the stations. Once an anchor-customer relationship has been established, we typically seek to minimize construction and sourcing costs by tapping into existing natural gas pipeline infrastructure to supply the customer’s CNG needs. Consequently, we often have a principal customer at our CNG fueling stations.
Titan Diamond Bar. The Titan Diamond Bar station was constructed primarily to meet the fueling needs of the SCAQMD (State of California South Coast Air Quality Management District). However, the station services existing and new retail customers as well.
EAF Tolleson. Our primary customer at the EAF Tolleson station is Frito Lay. EAF entered into an incremental natural gas facilities agreement dated February 24, 2014 with Southwest Gas Corporation (“Southwest Gas”). Under the terms of the agreement, Southwest Gas agreed to install a pipeline connecting the station to its existing infrastructure at no upfront cost to EAF, and EAF agreed to use Southwest Gas to transport natural gas to the station through its infrastructure. The term was originally five years but has since been modified to be ten years. Each year of the ten-year term, EAF is required to make a payment to Southwest Gas equal to $70,565 minus the amount of delivery and demand charges paid by EAF during the applicable contract year. EAF is required to provide financial security in the form of a letter of credit originally in the amount of $510,763, which amount decreases each year during the term of the agreement and was equal to $306,458 as of December 31, 2016 and 2017.
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EAF Oak Creek. EAF entered into a fuel purchase agreement dated January 11, 2013 with Sheehy Mail Contractors, Inc. (“Sheehy”) to sell CNG to Sheehy at its EAF Oak Creek fueling station, which opened in December of 2013, at agreed upon prices set forth in the agreement. The initial four-year term expires in December 2018, but management expects to extend the term of the agreement. Integrys Energy Services – Natural Gas, LLC agreed to supply natural gas to the station pursuant to a master retail gas sales agreement with EVO dated November 1, 2013 and a related confirmation agreement dated January 27, 2015. The initial term of the agreement with Integrys Energy Services – Natural Gas, LLC expires February 2019.
EAF Jurupa Valley. Our principal customer at the EAF Jurupa Valley station was Swift. Swift owns the real estate underlying the EAF Jurupa Valley station and leases the property to EVO pursuant to an oral month-to-month lease agreement. Under the terms of the lease agreement, EVO agreed to construct a CNG fueling station and to make provisions for the installation of a natural gas supply line to the property in order to meet Swift’s CNG fueling needs. EVO entered into a line extension contract dated April 3, 2014 with Southern California Gas Company to serve as the supplier of CNG to the station. Southern California Gas Company agreed to install a pipeline connecting its existing infrastructure to the northwest border of the EAF Jurupa Valley property at no cost to EVO or Swift, provided that at least 2.4 million DGE is pumped in any 12-month period during the first three years of operation. EVO agreed to pay $290,000 for installation of a pipeline across the property to connect the fueling station to the new line laid by Southern California Gas Company. During December 2017, Swift ended their use of CNG trucks. Management believes it can replace Swift and is actively marketing the location. The station is in a highly industrialized area with significant trucking activity.
EAF San Antonio. EAF entered into an agreement with Central Freight Lines, Inc. (“Central Freight”) to sell CNG to Central Freight at the EAF San Antonio station at agreed upon prices set forth in the agreement. The agreement has an initial term of five years expiring September 2018. To meet Central Freight’s CNG needs, EAF entered into a natural gas service and pipeline agreement dated November 12, 2014 with LDC, llc (“LDC”), pursuant to which LDC agreed to construct a pipeline and deliver natural gas to EAF at the station. EAF agreed that LDC will be its exclusive supplier of natural gas at the facility.
EAF Fort Worth. Central Freight is also our principal customer at the EAF Fort Worth Facility. The fuel purchase agreement for the EAF Fort Worth station has an initial four-year term expiring April 2019, and EAF agreed to supply CNG to Central Freight at agreed upon prices set forth in the fuel purchase agreement.
EAF Lake Arlington. EAF Lake Arlington is a station that management believes is positioned to provide excellent virtual pipeline opportunities. It is in a highly industrialized area and management believes that there is great potential to be able to use the station to transport natural gas to customers that may not be able to get natural gas at their facilities due to pipeline constraints.
Government Regulation and Environmental Matters
We are subject to regulation under federal, state and local laws related to permitting and licensing, environmental health, accidental release prevention, above-ground storage tanks, hazardous waste and hazardous materials, and station design, among other subject areas. Management believes the Company is in material compliance with all regulatory and environmental compliance requirements. Regulatory compliance costs are difficult to estimate but historically have not had a material effect on our capital expenditures, earnings or competitive position.
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Employees
We currently have two full-time employees. Refer to Item 10 of this annual report for biographical and compensation information about our employees.
Investing in the Company’s common stock involves a high degree of risk. In addition to the other information set forth in this annual report on Form 10-K, you should carefully consider the factors discussed below when considering an investment in our capital stock. If any of the events contemplated by the following discussion of risks should occur, our business, results of operations and financial condition could suffer significantly. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business.
Risks Related to the Company
We have a limited operating history on which to base an investment decision.
Titan was organized in 2012 and opened its first CNG station in February 2015. EAF was organized on March 28, 2012 and opened its first CNG station in December 2013. Thus, we are subject to all the risks associated with any business enterprise with a limited operating history. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stages of operation, especially in a relatively nascent and capital intensive industry such as ours. We have a limited operating history for you to consider in evaluating our business and prospects. When evaluating our business and prospects, you must consider the risks, expenses and difficulties that we may encounter as a young company in a rapidly evolving consumer market. These risks include, but are not limited to:
| ● | we need to develop, protect and market our CNG stations/services successfully; | |
| ● | we need to implement and successfully execute our sales and marketing strategies; | |
| ● | we need to manage our rapidly developing and changing operations; | |
| ● | we may require additional capital to acquire or develop additional CNG stations; | |
| ● | fleet and consumer vehicle preferences are subject to change; and | |
| ● | we need to recruit, build, retain and manage a larger management team. |
We will need substantial additional capital to fund our growth plans and operate our business.
We require substantial additional capital to fund our planned marketing and sales activities, to achieve profitability and to otherwise execute on our business plan. The most likely sources of such additional capital include private placements and public offerings of shares of our capital stock, including shares of our common stock or securities convertible into or exchangeable for our common stock, debt financing or funds from potential strategic transactions. We may seek additional capital from available sources, which may include hedge funds, private equity funds, venture capitalists, lenders/banks and other financial institutions, as well as additional private placements. Any financings in which we sell shares of our capital stock will likely be dilutive to our current stockholders. If we raise additional capital by incurring debt a portion of our cash flow would have to be dedicated to the payment of principal and interest on such indebtedness. In addition, typical loan agreements also might contain restrictive covenants that may impair our operating flexibility. Such loan agreements, loans, or debentures would also provide for default under certain circumstances, such as failure to meet certain financial covenants. A default under a loan agreement could result in the loan becoming immediately due and payable and, if unpaid, a judgment in favor of such lender which would be senior to the rights of our stockholders. A judgment creditor would have the right to foreclose on any of our assets resulting in a material adverse effect on our business, operating results or financial condition.
Our ability to raise additional capital may depend in part on our success in meeting station development, sales and marketing goals. We currently have no committed sources of additional capital and there is no assurance that additional financing will be available in the amounts or at the times required, or if it is, on terms acceptable or favorable to us. If we are unable to obtain additional financing when and if needed, our business will be materially impacted and you may lose the value of your entire investment.
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We have a history of losses and may incur additional losses in the future.
In 2016 and 2017, we incurred pre-tax losses of $3,862,249 and $5,088,749, respectively. We may continue to incur losses, the amount of our losses may increase, and we may never achieve or sustain profitability, any of which would adversely affect our business, prospects and financial condition and may cause the price of our common stock to fall. In addition, to try to achieve or sustain profitability, we may take actions that result in material costs or material asset or goodwill impairments. For instance, in 2017, our determination of an impairment of the El Toro assets as a result of the station’s closure. Any similar actions in the future could have material adverse consequences, including material negative effects on our financial condition, our results of operations and the trading price of our common stock.
We may experience impairment of our long-lived assets.
Long-lived assets, including property, plant and equipment, are tested for impairment whenever circumstances indicate that the carrying value of these assets may not be recoverable. An asset is considered impaired if the carrying value of the asset exceeds the sum of the future expected undiscounted cash flows to be derived from the asset. Once an asset is considered impaired, an impairment loss is recorded within operating expense for the difference between the asset's carrying value and its fair value. For assets held and used in the business, management determines fair value using estimated future cash flows to be derived from the asset, discounted to a net present value using an appropriate discount rate. For assets held for sale or for investment purposes, management determines fair value by estimating the proceeds to be received upon sale of the asset, less disposition costs. During the year ended December 31, 2017, we recorded an impairment of $806,217 associated with our El Toro station. In addition we impaired goodwill and customer lists for $4,1000,000.
If we do not obtain sufficient additional capital or generate substantial revenue, we may be unable to pursue our objectives. This raises doubt related to our ability to continue as a going concern.
Our independent registered public accounting firm has included an explanatory paragraph in their opinion that accompanies our audited financial statements as of and for the year ended December 31, 2017, indicating that our accumulated deficit raises doubt about our ability to continue as a going concern. If we are unable to improve our liquidity position we might be unable to continue as a going concern. This could significantly reduce the value of our investors’ investment in the Company.
We are in default under the terms of certain of our indebtedness documents and those defaults could have a significant adverse effect on the Company, including our ability to remain in business.
As previously disclosed, the Company is in default under the terms of the Company’s Senior Bridge Notes and under the terms of four promissory notes issued by the Company to the former members of Environmental Alternative Fuels, LLC in the aggregate principal amount of $250,000. In addition, the Senior Promissory Note in the principal amount of $3.8 million that the Company issued to Danny Cuzick matured on December 31, 2017. The Company failed to pay the outstanding balance on the Senior Promissory Note at the maturity date, and that note was in default until the Company and Danny Cuzick amended the note subsequent to year end. There can be no assurance that the Company will be able to cure the foregoing defaults or any defaults under the Company’s other financing arrangements caused by the foregoing defaults, and the Company’s failure to cure its defaults could have a significant adverse effect on the Company’s ability to remain in business.
We and certain of our subsidiaries and current and former directors and executive officers are named defendants in a lawsuit that could be expensive and time consuming, and, if resolved adversely, could have a significant 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 and certain of its subsidiaries and current and former directors and executive officers. 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. To the extent that we do not resolve this litigation in a timely manner, or if the litigation is resolved adversely to us, it could have a significant adverse effect on the Company. In addition, this litigation could cause us to incur additional costs and could divert our management’s attention from other operational matters, both of which could have an adverse effect on the Company.
We may incur significant costs to comply with public company reporting requirements and other costs associated with being a public company.
We may incur significant costs associated with our public company reporting requirements and other rules implemented by the Securities and Exchange Commission. We expect all of these applicable rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. As a public company, we are required to comply with rules and regulations of the SEC, including expanded disclosure and more complex accounting rules. We will need to implement additional finance and accounting systems, procedures and controls as we grow to satisfy these reporting requirements. In addition, we may need to hire additional legal and accounting staff to enable us to comply with these reporting requirements. These costs could have an adverse effect on our financial condition and limit our ability to realize our objectives.
We may not be able to meet the internal control reporting requirements imposed by the SEC.
As directed by Section 404 of the Sarbanes-Oxley Act, the SEC adopted rules requiring each public company to include a report of management on the company’s internal controls over financial reporting in its annual reports. While we expect to expend significant resources in developing the necessary documentation and testing procedures required by Section 404 of the Sarbanes-Oxley Act, there is a risk that we may not be able to comply timely with all of the requirements imposed by this rule. If we are unable to timely comply with all of these requirements, potential investors might deem our financial statements to be unreliable and our ability to obtain additional capital could suffer.
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In planning and performing its audit of the consolidated financial statements of the Company as of December 31, 2017, EKS&H LLLP, the independent registered public accounting firm of the Company, identified a number of deficiencies in internal control that it considered to be material weaknesses and other deficiencies that it considered to be significant deficiencies. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or combination of deficiencies in internal controls, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or combination of deficiencies in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. As a result, we will be required to expend significant resources to develop the necessary documentation and testing procedures required by Section 404, and there is a risk that we will not comply with all of the necessary requirements. If we cannot remediate the material weaknesses in internal controls identified by our current and former independent registered public accounting firms or if we identify additional material weaknesses in internal controls that cannot be remediated in a timely manner, investors and others with whom we do business may lose confidence in the reliability of our financial statements, and in our ability to obtain equity or debt financing could suffer.
Our business faces intense competition.
There are numerous other companies that presently compete with us in the CNG fleet fueling station market, such as Clean Energy Fuels, Trillium, TruStar and U.S. Gain amongst others. Many of the companies that compete or may compete with us have greater market exposure, personnel, and financial resources than we do. We also face competition in many of the markets where we operate or intend to operate from natural gas utilities that operate public CNG stations. These utilities have a lower cost of capital and easier access to natural gas lines than we do. There can be no assurance that the Company’s plans for marketing our services will be successful, or that the Company will maintain or grow its share of the highly competitive CNG fleet fueling market.
Our near-term results of operations are dependent on sales from our existing CNG stations.
Our near-term financial success and revenue will result entirely from marketing our services at our existing CNG stations, which will generate all of our near-term net sales. Thus, our financial performance remains dependent on these stations’ success. We were not able to complete the development of the Titan Blaine Station for economic reasons, which makes us more dependent on our existing locations going forward.
We partially funded the construction of certain of our fueling stations using grant funds that we are required to repay if we do not satisfy certain operational metrics.
Titan received grants in the amount of $450,000 in 2013 from the California Energy Commission (“CEC”) to provide funds to assist in the construction and equipping of our Titan El Toro station. We used the grant funds to complete the construction of our Titan El Toro station as contemplated in the grant agreement. The project was completed by an affiliate of the Company, as defined in the grant agreement. The grant proceeds are subject to repayment if we do not satisfy certain operational metrics contained in the grant agreement through September 2018. The Titan El Toro station ceased operations in June 2017, and management is uncertain and cannot provide assurance that we will succeed in satisfying the operational metrics. Our financial condition could be materially adversely affected if we are required to repay the grant proceeds that we used to construct our Titan El Toro station. In addition, the project was completed by an affiliate of the Company, which could be construed as requiring an amendment to the grant agreement or consent from the CEC, neither of which has been obtained by the Company. In addition, EVO received grants in the amounts of $400,000 and $100,000 to assist in the construction and equipping of our EAF San Antonio and EAF Fort Worth stations, respectively. The grants must be repaid if EVO sells, transfers, destroys or otherwise loses title, possession, ownership or control of the equipment funded with the grants during the terms of the respective grant agreements.
Many of the key personnel on which we depend to operate our company provide their services to us on a part-time basis and have other business or employment obligations.
Our ability to execute our business plans and objectives depends, in large part, on our ability to attract and retain qualified personnel. Competition for personnel is intense and there can be no assurance that we will be able to attract and retain personnel. In particular, we are presently dependent upon the services of our management team and founder members, most of whom are part-time. John Yeros, chief executive officer and Damon Cuzick, chief operating officer, are the only full-time members of our management team. Our inability to utilize their services could have an adverse effect on us and there would likely be a difficult transition period in finding replacements for any of them. The execution of our strategic plan will place increasing demands on our management and operations. There can be no assurance that we will be able to effectually manage any expansion of our business. Management’s inability to manage our growth effectively could have a material adverse effect on our business, financial condition and results of operations.
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We are controlled by our current executive officers, directors and principal stockholders.
Our executive officers, directors and principal stockholders beneficially own a substantial majority of our outstanding common stock. Accordingly, our executive officers, directors and principal stockholders will have the ability to exert substantial influence over our business affairs, including electing directors, appointing officers, determining officers’ compensation, issuing additional equity securities or incurring additional debt, effecting or preventing a merger, sale of assets or other corporate transaction and amending our articles of incorporation.
We may not successfully manage our planned growth.
We plan on expanding our business through developing additional CNG refueling facilities. Any expansion of operations we may undertake will entail risks and such actions may involve specific operational activities that may negatively impact our profitability. Consequently, investors must assume the risk that (i) such expansion may ultimately involve expenditures of funds beyond the resources available to us at that time, and (ii) management of such expanded operations may divert management’s attention and resources away from its existing operations. These factors may have a material adverse effect on our present and prospective business activities.
Our business is dependent on fluctuating oil prices and general U.S. economic conditions.
Demand for our products is dependent on fluctuating oil prices. Generally, if the price of oil is high, then we expect more demand for CNG, which costs less than gasoline or diesel fuels derived from oil. On the other hand, if oil prices are lower, then we expect that potential users of CNG may feel less compelled to use CNG-fueled vehicles, lowering demand for CNG. Several economic and other factors can cause fluctuations in the price of oil, such as economic recession, inflation, unemployment and interest rates. Such changing conditions could reduce demand in the marketplace for our services. We have no control over these macroeconomic trends or the price of crude oil. Moreover, our operating results may fluctuate significantly from period to period as a result of a variety of factors, including purchasing patterns of customers, partner requirements, competitive pricing, debt service and principal reduction payments and general U.S. economic conditions. Consequently, our revenues may vary by quarter, and our operating results may experience resulting fluctuations that may be material.
RISKS RELATED TO THE CNG INDUSTRY
Our success depends on the continued adoption of natural gas as a vehicle fuel.
We solely serve operators of natural gas vehicles. Our business model is predicated on the continued purchase of natural gas by existing customers and on the expectation that fleets and other customers will operate more vehicles on natural gas in the future and that new customers will come to our public stations in the future. In the event that demand for CNG does not increase, or even decreases, we will be unlikely to achieve our forecasted results. Reasons for a decrease in demand for CNG could include significant decreases in oil prices or increases in natural gas prices, changes in regulations, alternative technologies being deemed as superior, lack of availability of NGVs and engines for conversion, lack of availability of vehicle servicing and a reduction in the number of CNG stations in the U.S.
There are a limited number of original manufacturers producing NGVs and NGV fuel tanks, which limits our customer base and sales.
There are a limited number of original equipment manufacturers of NGVs and the engines, fuel tanks and other equipment required to upfit a gasoline or diesel engine to run on natural gas. In the past, manufactures of NGVs have entered the market and then stopped production of NGVs. If existing customers are unable to replace their natural gas vehicles or new customers are unable to obtain NGVs, our business will be adversely affected.
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Our business is dependent on Class 8 truck use of CNG continuing to develop, which might not happen.
We believe the execution of our strategy is dependent on the development of a meaningful market in the U.S. for heavy-duty natural-gas trucks. Natural gas equipment manufacturers may not produce engines or tanks in the quantities we expect and Class 8 fleet operators may not adopt CNG as rapidly as we expect. If this were to occur, our results would be negatively impacted.
Government incentives promoting CNG may be reduced or eliminated.
We received state government grants to assist us in building our Titan El Toro, EAF San Antonio and EAF Fort Worth stations and many of our customers received tax incentives to offset part or all of the additional up front cost to acquire NGVs or convert vehicles to run on natural gas. In addition, many states offer waivers on vehicle weight to allow for NGVs to operate. These and other incentives may not continue. The federal government’s AFTC tax credit program was reinstated for 2017, but if in the future the AFTC tax credit program is not renewed or if other government incentives are discontinued, our business may be adversely affected.
Improvements in technologies relating to gasoline and diesel emission reduction or in electric vehicle power could reduce NGV demand.
We believe that our customers operate NGVs in part due to the lower emissions relative to gasoline and diesel, yet higher power relative to electric or other alternative fuel vehicles. In the event that technologies are developed that either reduce the emissions in gasoline and diesel powered vehicles or improve the operating capabilities of electric, solar, or other alternative fuel technology vehicles, the demand for NGVs could be significantly reduced. Any such reduction in the demand for NGVs will adversely affect our financial performance.
Our station development could be delayed or have cost overruns due to permitting processes or lack of availability of suitable properties.
We rely on acquiring or leasing suitable properties on which to build our CNG stations. In addition, we are required to obtain a number of permits from various government agencies in order to build and operate our stations. Any inability to find suitable properties in a timely manner and with the right value proposition, or a delay in permitting or a requirement to change our architectural and engineering plans to obtain permits could adversely affect our business.
Breaches in information technology security could harm our business.
In the event that our networks and data are compromised by hackers or other external threats, our ability to operate our business could be harmed. In addition, if our customer data is stolen, we may lose customers. In any such event or related event, our business could be materially harmed or damaged.
Government customers could be subject to reduced funding or a change in mission.
We serve the State of California South Coast Air Quality Management District (“SCAQMD”) as a customer at our Titan Diamond Bar station, and will continue to seek long-term CNG contracts with various federal, state and local government entities. If these government agencies no longer receive funding or there is a change in their mission, we may lose them as customers which may adversely affect our business.
CNG stations could experience safety issues.
Our stations operate under high pressure and could potentially explode or catch on fire and cause death or injury. If this were to occur, we could face liabilities that could negatively impact our business.
Our business is subject to various government regulations that could change in a way that harms our business.
Various aspects of our business are regulated by a variety of federal, state and local government agencies. Compliance with these regulations is difficult and costly. In addition, these regulations change frequently and may become more onerous or costly to comply with. Our failure to comply with these regulations or adjust to regulatory changes could result in costly monetary penalties or prohibit us from providing services to government entities, either of which would negatively impact our business.
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Risks Related to Our Securities
There is no established trading market for our common stock, and our stockholders may be unable to sell their shares.
There is no established market, private or public, for any of our securities and there can be no assurance that a trading market will ever develop or, if developed, that it will be maintained. There can be no assurance that the Company’s stockholders will ever be able to resell their shares.
Our common stock is subject to the “penny stock” rules of the SEC, which restrict transactions in our stock and may reduce the value of an investment in our stock.
Our common stock is currently regarded as a “penny stock” because our shares are not listed on a national stock exchange or quoted on the NASDAQ Market within the United States and our common stock has a market price less than $5.00 per share. The penny stock rules require a broker-dealer to deliver a standardized risk disclosure document prepared by the SEC, to provide a customer with additional information including current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, monthly account statements showing the market value of each penny stock held in the customer's account, to make a special written determination that the penny stock is a suitable investment for the purchaser, and receive the purchaser's written agreement to the transaction. To the extent these requirements may be applicable; they will reduce the level of trading activity in the secondary market for our common stock and may severely and adversely affect the ability of broker-dealers to sell our common stock.
We have never paid and do not expect to pay cash dividends on our shares.
We have never paid cash dividends, and we anticipate that any future profits received from operations will be retained for operations. We do not anticipate the payment of cash dividends on our capital stock in the foreseeable future and any decision to pay dividends will depend upon our profitability, available cash and other factors. Therefore, no assurance can be given that there will ever be any cash dividend or distribution in the future. See “Dividend Policy.”
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We may in the future issue additional shares of our common stock which would reduce investors’ ownership interests in us and which may dilute our share value.
Our certificate of incorporation authorizes the issuance of 110,000,000 shares consisting of: (i) 100,000,000 shares of common stock, par value $0.0001 per share; and (ii) 10,000,000 shares of preferred stock, par value $0.0001 per share. The future issuance of all or part of our remaining authorized common stock or preferred stock may result in substantial dilution in the percentage of our common stock held by our then existing stockholders. We may value any common stock issued in the future on an arbitrary basis. The issuance of common stock for future services or acquisitions or other corporate actions may have the effect of diluting the value of the shares held by our investors, and might have an adverse effect on any trading market for our common stock.
The Company’s certificate of incorporation permits the board of directors to issue stock with terms that may subordinate the rights of common stockholders or discourage a third party from acquiring the Company in a manner that might result in a premium price to the Company’s stockholders.
The Company’s board of directors, without any action by the Company’s stockholders, may amend the Company’s certificate of incorporation from time to time to increase or decrease the aggregate number of shares or the number of shares of any class or series of stock that the Company has authority to issue. The board of directors may also classify or reclassify any unissued common stock or preferred stock into other classes or series of stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption of any class or series of stock. Thus, the board of directors could authorize the issuance of preferred stock with terms and conditions that could have a priority as to distributions and amounts payable upon liquidation over the rights of the holders of the Company’s common stock. Preferred stock could also have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all our assets) that might provide a premium price for holders of the Company’s common stock.
Item 1B. Unresolved Staff Comments.
As a smaller reporting company, EVO Inc. is not required to provide disclosure under this item.
EVO Inc. utilizes the office space and equipment of its management at no cost to the Company. Management estimates such amounts to be immaterial. Through its subsidiaries, Titan and EAF, EVO Inc. owns and operates seven natural gas fueling stations located in California, Texas, Arizona and Wisconsin.
Titan
Titan operates one fueling station—Titan Diamond Bar—located in California.
Titan El Toro. Titan opened the Titan El Toro fueling station in February 2015. Management closed El Toro during 2017.
Titan leases the property for the Titan El Toro station pursuant to a lease agreement dated February 24, 2014 between Titan and Grace Whisler Trust and Whisler Holdings LLC. The lease covers approximately 17,550 rentable square feet and has an initial 5-year term that commenced in July 2014 and expires in February 2019. The lease contains one renewal option for sixty months and a base rent ranging from $10,000 to $11,604 per month through the term of the lease. In addition, the lease requires us to pay certain maintenance and operating expenses, including all costs to maintain and repair the roof and structure of the building.
Titan Diamond Bar. Titan began operating the Titan Diamond Bar station in March 2016. The station is currently fueling 10,000 GGEs per month. The SCAQMD is an ongoing customer, and we serve existing and new retail customers as well. The location of this station is about 30 minutes away from Titan El Toro.
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Titan leases the property for the Titan Diamond Bar station pursuant to a lease agreement effective December 13, 2015 between the SCAQMD and Titan Diamond Bar LLC, a wholly-owned subsidiary of Titan. The lease covers approximately 10,000 rentable square feet and has an initial 5-year term that commenced in December 2015 and expires in December 2020. The lease provides for a base rent of $1 for the entire term of the lease, and the SCAQMD has the right to extend the lease for a period not to exceed five years commencing January 1, 2021. Pursuant to the lease, Titan Diamond Bar LLC supplies the SCAQMD with CNG based on actual costs of CNG fuel, including costs for natural gas and electricity, federal and state of California excise taxes plus a fixed fee not to exceed $0.50 per gas gallon equivalent (“GGE”).
EAF
EAF, through its wholly owned subsidiary, EVO, operates six natural gas fueling stations located in California, Texas, Arizona and Wisconsin. EAF owns the real property at the EAF Tolleson, EAF Oak Creek, EAF San Antonio and EAF Lake Arlington stations and leases the properties to EVO under the terms of oral leases for one-time payments of $1.00. The EAF Tolleson, EAF Oak Creek, EAF San Antonio and EAF Lake Arlington properties are each subject to two mortgages related to the Promissory Note and the Senior Promissory Note for $4,000,000 and $3,800,000, respectively, as described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Annual Report on Form 10-K. The property underlying the EAF Jurupa Valley and EAF Fort Worth stations is leased by EVO from third parties.
EAF Jurupa Valley. EVO leases the property for the Jurupa Valley station from Swift Transportation Co. under the terms of a month-to-month oral lease for a one-time payment of $1.00.
EAF Fort Worth. EVO leases the property for the EAF Fort Worth station from Central Freight under a lease agreement with an initial 10-year term expiring December 2023. Base rent payable by EVO for the initial term consists of a one-time payment equal to $1. Under the terms of the lease, EVO agreed to install and maintain at its own cost a natural gas fuel line, compressors, operating equipment, storage tanks, dispensers and any other equipment necessary to supply the CNG fueling needs of fleet vehicles owned by Central Freight.
We believe all of our properties are suitable and adequate for current operating needs.
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 4. Mine Safety Disclosure.
Not applicable.
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Common Stock
Our certificate of incorporation authorizes the issuance of up to 100,000,000 shares of common stock, par value $0.0001 per share. EVO Inc. common stock trades under the symbol “EVOA” on the OTC Pink Marketplace maintained by the OTC Markets Group Inc.
On April 12, 2018, the high and low bid quotations per share of our common stock was $0.15 and $0.15, respectively, as reported on the OTC Pink Marketplace. The following table sets forth, for the calendar quarters indicated, the reported high and low bid quotations per share of EVO Inc. common stock as reported on the OTC Pink Marketplace, all adjusted to account for the Reverse Split. Such quotations reflect inter-dealer quotations without retail mark-up, markdowns or commissions, and may not necessarily represent actual transactions. Trading in stocks quoted on the OTC Pink Marketplace is often limited and characterized by wide fluctuations in trading prices due to many factors that may have little to do with a company’s operations or business prospects. Bid quotations for shares of EVO Inc. common stock have been limited historically, and we cannot assure you that an active trading market for EVO Inc. common stock will develop in the future.
| High | Low | |||||||
| Fiscal Year Ended December 31, 2016 | ||||||||
| First Quarter | $ | 2.50 | $ | 2.50 | ||||
| Second Quarter | $ | 6.00 | $ | 1.00 | ||||
| Third Quarter | $ | 3.00 | $ | 1.00 | ||||
| Fourth Quarter | $ | 48.00 | $ | 2.00 | ||||
| Fiscal Year Ended December 31, 2017 | ||||||||
| First Quarter | $ | 20.00 | $ | 1.00 | ||||
| Second Quarter | $ | 1.00 | $ | 1.00 | ||||
| Third Quarter | $ | 1.00 | $ | 1.00 | ||||
| Fourth Quarter | $ | 0.02 | $ | 0.02 | ||||
As of April 13, 2018, there were approximately 163 holders of record of our common stock.
Preferred Stock
Our certificate of incorporation authorizes the issuance of up to 10,000,000 shares of preferred stock, par value $0.0001 per share. The Company has not yet issued any of the preferred stock.
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. 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.
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Dividend Policy
EVO Inc. has not paid any cash dividends since inception and does not anticipate or contemplate paying dividends in the foreseeable future. It is the present intention of management to utilize all available funds for the development of the Company’s business.
Securities Authorized for Issuance under Equity Compensation Plans
As of the end of the most recently completed fiscal year, the Company did not have any equity compensation plans or any individual compensation arrangements with respect to its common stock or preferred stock. The issuance of any of our common or preferred stock is within the discretion of our board of directors, which has the power to issue any or all of our authorized but unissued shares without stockholder approval. Following the end of fiscal year 2017, the Company’s board of directors adopted an equity compensation plan to retain and incentivize key personnel to drive the success of the Company. Refer to the discussion in Item 9B of this annual report for a description of the plan.
Item 6. Selected Financial Data
As a smaller reporting company, EVO Inc. is not required to provide disclosure under this item.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Statement Regarding Forward-Looking Information
This report contains forward-looking statements. All statements other than statements of historical facts included in this Annual Report on Form 10-K, including without limitation, statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding our financial position, estimated working capital, business strategy, the plans and objectives of our management for future operations and those statements preceded by, followed by or that otherwise include the words “believe”, “expects”, “anticipates”, “intends”, “estimates”, “projects”, “target”, “goal”, “plans”, “objective”, “should”, or similar expressions or variations on such expressions are forward-looking statements. We can give no assurances that the assumptions upon which the forward-looking statements are based will prove to be correct. Because forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements.
Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this Annual Report on Form 10-K to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
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, the Company, Titan CNG LLC (“Titan”) and the members of Titan entered into a securities exchange agreement and effected a securities exchange, under which the Company acquired 100% of the membership interests of Titan. The former members of Titan owned approximately 91.25% of the combined company following securities exchange and, as a result, Titan was the accounting acquirer in the transaction. The Titan securities exchange was accounted for as a reverse acquisition and, consequently, a discussion of the past financial results of EVO Inc. is not pertinent and the historical financial results of Titan prior to the securities exchange are considered the historical financial results of the Company.
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.
The transactions contemplated by the EAF Exchange Agreement were accounted for as an acquisition. 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.
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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.”
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 Titan’s financial statements, which we have prepared in accordance with U.S. generally accepted accounting
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.
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 December 31, 2017, the Company has a working capital deficit of approximately $6.6 million and negative equity of approximately $12.8 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 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.
During April 2018, the Company paid the working capital notes of $250,000 in full.
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 268,057 common shares in exchange for the Junior Bridge Notes in the aggregate principal amount of approximately $1,340,261, with the per share price for shares of common stock equal to $5.00. |
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 Jerry Moyes. 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 ten years from the date of issuance. The Company did not pay any commissions in connection with the sale of these Units.
Sources of Revenue
Titan was founded in 2012 and for the first four years only had management fee revenues. Beginning in 2015 Titan generated revenues from its CNG station El Toro and in 2016 Diamond Bar began operations. 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.
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Investments in Affiliates
Titan was invested in an affiliate through January 1, 2016. The investment was recorded using the equity method of accounting with Titan’s proportionate share of net income or loss of the investee included as a separate line item in the statements of operation. The Company ordinarily would discontinue applying the equity method once the investment (and net advances) were reduced to zero, however Titan was committed to provide further financial support for the investee and through the guarantee of substantially all the assets of the Company by a Small Business Administration (“SBA”) note. The affiliate was the following:
| 1. | El Toro, of which Titan currently owns 100% and from El Toro’s formation in 2013 until January 1, 2016, owned 20%. El Toro is located in California and is an unmanned CNG station. As of June 30, 2017, El Toro ceased operations. The Company has evaluated El Toro’s assets for impairment and determined to record an impairment of $806,217. |
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 2016 and 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.
Recent Developments
On January 1, 2016, Titan exchanged ownership and $876,000 in debt and interest for an additional 80% ownership in Titan El Toro, LLC. As a result, Titan now owns 100% of El Toro. With the combination, the debt and interest were converted to notes payable issued by Titan at 12% interest and mature in December 2020.
On January 1, 2016, Titan issued eight subordinated notes payable to members (the “Junior Bridge Notes”) with a maturity date of December 31, 2020 for approximately $876,000, as well as 64,387 (equivalent to 56,608 common shares) Class A Membership Units in Titan. Titan issued an additional Junior Bridge Note on January 1, 2016 for approximately $99,000 to evidence pre-existing indebtedness. The Junior Bridge Notes bear interest at 12% per year with a default rate of 15% per year. The Junior Bridge Notes are secured by a subordinate security interest on substantially all assets of Titan. Subsequent to year approximately $1,340,261 of the junior bridge notes and related interest were converted into 268,507 shares of common stock.
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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 14,762 (equivalent to 18,806 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.
On July 26, 2016, Titan 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 4,395 common shares) Class A Membership Units to this noteholder in connection with the issuance of this Senior Bridge Note.
On September 26, 2016, Titan issued an additional Senior Bridge Note for $150,000 with 16% interest and 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.
On November 22, 2016, Titan issued three convertible promissory notes (the “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 during November 2019 unless earlier converted. Each Minn Shares Note is convertible at the holder’s option as follows: (i) upon the sale by the Company 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 Company’s assets or the transfer of at least 50% of the Company’s equity securities at a conversion price equal to the enterprise value of the Company, 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 the Company’s Common 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, the Company 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 Company’s assets. In connection with this Senior Bridge Note, on January 31, 2017, the Company issued 8,791 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.
Subsequent to year end approximately $689,000 of the Senior Bridge Notes and related interest were converted into 275,583 shares of common stock.
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On February 1, 2017, pursuant to the EAF Exchange Agreement, the Company acquired all of the membership interests of EAF. As consideration for the EAF Interests, EVO, Inc. issued a promissory note in the principal amount of $3.8 million to Danny Cuzick (the “Senior Promissory Note”) and convertible promissory notes in the aggregate principal amount of $9.5 million to the EAF Members (the “Convertible Notes”). 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. Subsequent to year end the Senior Promissory Note maturity date was extended to July 2019.
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 EVO Inc. 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 Minn Shares’ and Titan’s junior bridge notes, 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 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 EVO, Inc. 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.’s 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 EVO, Inc.’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, EVO, Inc. 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. Subsequent to year the notes were paid in full.
In connection with the closing of the EAF Exchange Agreement, on February 1, 2017, EVO, Inc. issued a note from Danny Cuzick to EAF 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 Danny Cuzick of an event of default under the EAF Note.
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.
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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.
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 $21,669,000 as of December 31, 2017, approximately $2,800,000 is classified as current debt. We are in violation of the covenants related to the SBA loan. We received a waiver with respect to those covenant violations for the year ended December 31, 2016, but 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-K. Our total consolidated interest payment obligations relating to our indebtedness was approximately $1,640,000, which included the debt discount of $4,687,000 for the year ended December 31, 2017.
We may also elect to invest additional amounts in companies, assets or joint ventures in the natural gas fueling infrastructure, vehicle or services industries, 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 – Risks Related to the Company” and “Risk Factors – Risks Related to the CNG Industry.”
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Results from Operations
Fiscal Year Ended December 31, 2017 Compared to Fiscal Year Ended December 31, 2016
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 $383,874 and $353,346, for the years ended December 31, 2017 and 2016, respectively. El Toro’s quarter three revenue was from the sale of Low Carbon Fuel credits (“LCFS”). LCFS is a rule enacted to reduce carbon intensity in transportation fuels as compared to petroleum fuels, such as gasoline and diesel. The most common low-carbon fuels are alternative fuels and cleaner fossil fuels, such as natural gas (CNG), with California the first state to mandate low-carbon fuel. The Company generated fuel credits with the sale of CNG and is allowed to sell them to conventional users of fuel to meet the California standards. EVO stations generated sales of $1,713,029 for the year ended December 31, 2017.
The Company is eligible to receive, at times, a federal alternative fuels tax credit ("AFTC") (formerly known as Volumetric Excise Tax Credit) The Company records its AFTC credits, if any, as revenue in its statements of operations as the credits are fully refundable.
Cost of goods sold. Cost of goods sold are comprised of natural gas, electricity, federal excise tax, vendor use fuel tax and credit card fees. The margins at the Titan and EVO stations were approximately 48% and 24%, respectively. The differences in margins is attributable to the fact that sales have decreased at the EVO stations, but the cost of the management fee for the stations has remained constant.
Operating expense. General and administrative expenses increased from $1,760,374 in 2016 to $2,431,916 in 2017. The increase is primarily generated from the acquisition of EVO for $1.3 million in additional expense offset by decreases in legal, accounting and consulting fees related to preparing the Company to be a public company. General and administrative expenses are comprised of professional fees, payroll and related, depreciation, rent, repairs and maintenance and other operational expenses of utilities, insurance, janitorial and administrative costs.
Depreciation and amortization expense increased from $210,892 in 2016 to $711,076 in 2017 from the acquisition of EVO. EVO depreciation expense was $438,702, offset by a decrease in deprecation expense for El Toro with the impairment of assets.
Impairment of assets relates to writing off goodwill for $3,993,730, impairing customer lists for $106,270 and impairing El Toro’s assets for $806,217.
Interest expense. Interest expense increased from $1,266,806 in 2016 to $1,642,259 in 2017. This increase correlates to the increase in debt generated from the EVO acquisition and the addition of a Senior Bridge Notes. Interest paid on the SBA loan was approximately $62,000, the subordinated notes payable to stockholders’ interest was approximately $424,000, approximately $46,000 in interest from the Minn Shares Notes, and the interest related to the debt from the acquisition was $680,625. In addition, the Company incurred $429,462 of debt discount during 2017.
Loss in investment of affiliate. As of January 1, 2016 Titan acquired the remaining 80% of El Toro. As a result of this acquisition, we recorded a loss of $717,011 on the deficit acquired from El Toro.
Liquidity and Capital Resources
Fiscal Year Ended December 31, 2017 Compared to Fiscal Year Ended December 31, 2016
We had cash and cash equivalents of $83,867 and $24,944 at December 31, 2017 and 2016, respectively. During the years ended December 31, 2017 and 2016, net cash used by operations was ($891,395)) and ($636,968), respectively. We historically funded our operating losses primarily from the issuance of equity, convertible notes payable, and stockholder debt.
Changes in Liquidity
Cash and Cash Equivalents. Cash and cash equivalents were $83,867 at December 31, 2017 and $24,944 at December 31, 2016. The increase is primarily attributable to financing activities.
Operating Activities. Net cash used in operations was ($891,395) and ($636,968) as of December 31, 2017 and 2016, respectively. For the years ended December 31, 2017 and 2016, we had a net loss of ($9,160,893) and ($2,933,543), respectively. Significant changes in working capital during these periods included:
| ● | Depreciation and amortization increased from $210,892 to $711,076 between December 31, 2016 and December 31, 2017 due to the assets additions from the acquisition of EVO. | |
| ● | The Company impaired the assets of El Toro for $806,217, along with goodwill for $3,993,730, customer lists for $106,270. |
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| ● | Accretion of the debt discount in connection with the EVO acquisition total $429,642. |
| ● | The net accounts receivable and the AFTC receivable increased over prior year by $783,234. The increase was generated from EVO receivables and the 2017 AFTC receivable, which was retroactively extended with the Bipartisan Budget Act of 2018. |
Investing Activities. Net cash used in investing was $8,757 from the return of a security deposit. The cash used in investing in 2016 related to purchases of equipment for $41,524, and $79,354 for construction in progress.
Financing Activities. Net cash provided by financing activities was $941,561, for the year ended December 31, 2017. The financing activities were $332,859 in stockholders’ advances, $310,000 from the sale of $103,334 shares of stock; $400,000 from additional senior debt, and offset by $101,298 in principal payments on the SBA loan. For the year ended December 31, 2016 and 2015, respectively. The cash provided for in 2016 was from $1,000,000 in subordinated notes payable, offset by $105,011 in principal payments on the SBA loan, $37,500 in stockholder’s advances and $150,000 in payments on the line of credit.
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 $21,669,000 as of December 31, 2017, approximately $2,800,000 is classified as current debt. We are in violation of the covenants related to the SBA loan. We received a waiver with respect to those covenant violations for the year ended December 31, 2016, but 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-K. Our total consolidated interest payment obligations relating to our indebtedness was approximately $1,640,000, which included the debt discount of $4,687,000 for the year ended December 31, 2017.
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, 2016, and currently is, in violation of certain covenants under our SBA Facility. We received a waiver to remedy the technical non-compliance under our SBA Facility for the year ended December 31, 2016, but have not received a waiver for current non-compliance.
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 $1,340,261 into common stock at a price per share of $5.00 for a total of 268,057 shares.
Subsequent to year approximately $1,340,261 of the Junior Bridge Notes and related interest were converted into 268,507 shares of common stock.
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 18,806 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.
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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 1,120 common shares) Class A Membership Units. Titan issued 5,000 (equivalent to 5,600 common shares) Class A Membership Units to this noteholder in connection with the issuance of this Senior Bridge Note.
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 4,200 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 840 common shares) Class A Membership Units.
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.
Subsequent to year end approximately $689,000 of the 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. Subsequent to year end the Senior Promissory Note’s maturity was extended to June 2019.
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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”). Subsequent to year end 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.
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Members’ Deficit
As of December 31, 2015 there were 38,608 (equivalent to 33,944 common shares) Class A Membership Units outstanding. On January 1, 2016, certain accredited investors contributed their current membership interests, as well as mezzanine debt and other liabilities totaling approximately $975,000 owed to Titan El Toro, LLC in exchange for Junior Bridge Notes in the amount of $975,000 and 64,387 (equivalent to 56,608 common shares) Class A Membership Units in Titan.
On January 1, 2016 Members of El Toro also agreed to contribute their membership interests in exchange for 10,892 (equivalent to 9,576 common shares) Class A Membership Units in Titan.
In February 2016, the Senior Bridge Notes were issued and Titan issued 16,791 (equivalent to 14,762 common shares) Class A Membership Units to the note holders.
In July 2016, the Senior Bridge Notes were extended and Titan issued 3,359 (equivalent to 2,953 common shares) Class A Membership Units to the note holders.
In July and September 2016, Titan issued additional Senior Bridge Notes and Titan issued 5,000 and 3,750 Class A Membership Units, respectively, (equivalent to 4,396 and 3,297 common shares, respectively,) to the note holders.
On October 1, 2016 Titan issued 139,839 Class A Membership Units (equivalent to 122,945 commons shares) to members.
On November 22, 2016, Titan and its members entered into an Agreement and Plan of Securities Exchange with Minn Shares whereby Minn Shares acquired all of the equity interests of Titan and Titan became a wholly-owned subsidiary of Minn Shares (the “Securities Exchange”). El Toro, Diamond Bar and Blaine are wholly-owned subsidiaries of Titan. Minn Shares 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 Minn Shares. Titan did not have any stock options or warrants to purchase its membership interests outstanding at the time of the Securities Exchange.
On January 31, 2017, another Senior Bridge Note was issued and EVO Inc. with 8,791 shares of common stock.
During March 2017, four investors contributed $310,000 for 103,334 shares of common stock. In connection with the stock purchase there was a 5-year warrant attached to purchase one share of common stock with the warrant's exercise price at $5.00.
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 warrants were valued at $77,500 with all of the outstanding warrants exercisable and have a weighted average remaining contractual life of 4.25 years.
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On February 21, 2018 the Company received $2,500,000 from an investor for 1,000,000 shares of common stock and warrants to purchase 1,000,000 shares of common stock at an exercise price of $2.50 per share.
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”).
On November 22, 2016, Titan and its members entered into an Agreement and Plan of Securities Exchange with EVO Inc. whereby EVO Inc. acquired all of the equity interests of Titan and Titan became a wholly-owned subsidiary of EVO Inc. (the “Titan Securities Exchange”). The Company issued 248,481 shares of common stock, par value $0.0001 per share (“Common Stock”), to acquire Titan, which resulted in the former Titan equity holders owning approximately 91.25% of the outstanding shares of the Company’s Common Stock after the consummation of the Titan Securities Exchange.
At the closing of the Titan Securities Exchange, all of the issued and outstanding units of Titan immediately prior to the closing of the Titan Securities Exchange were converted into 248,481 shares of the Company’s Common Stock. The Company did not have any stock options or warrants to purchase shares of its capital stock outstanding at the time of the Titan Securities Exchange.
Because the former members of Titan owned approximately 91.25% of the combined company on completion of the Titan Securities Exchange, the transaction was accounted for as a recapitalization through a reverse acquisition, with no goodwill or other intangibles recorded. As such, the consolidated financial information reflects the historical financial information of Titan, Diamond Bar and Blaine and the remaining assets and liabilities of EVO Inc. brought over at historical cost. EVO Inc.’s results of operations, which were de minimis, are included in the Company’s consolidated financial statements from the date of acquisition, November 22, 2016. Costs of the transaction have been charged to operations. The capital structure of the Company has been retroactively adjusted to reflect that of EVO Inc. with all shares being adjusted based on the exchange ratio of equity interest in connection with the Titan Securities Exchange.
As a result of the Titan Securities Exchange, EVO Inc. acquired the business of Titan and its subsidiaries Diamond Bar, Blaine and El Toro as of November 22, 2016, and continued the existing business operations of Titan as a publicly traded company under the name EVO Transportation & Energy Services, Inc.
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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 December 31, 2017, the Company has a working capital deficit of approximately $6.5 million and negative equity of approximately $12.8 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:
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 268,057 common shares in exchange for the Junior Bridge Notes in the aggregate principal amount of approximately $1,340,261, with the per share price for shares of common stock equal to $5.00. |
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 Jerry Moyes. 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 ten years from the date of issuance. The Company did not pay any commissions in connection with the sale of these Units.
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.
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Accounts Receivable
The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company's estimate is based on historical collection experience and a review of the current status of the accounts receivable. It is reasonably possible that the Company's estimate of the allowance for doubtful accounts will change and that losses ultimately incurred could differ materially from the amounts estimated in determining the allowance. As of December 31, 2017 and 2016, the Company has recorded an allowance of $37,007 and $0, respectively
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.
Property, Equipment and Land
Property and equipment are stated at cost. Depreciation is provided utilizing the straight-line method over the estimated useful lives for owned assets, ranging from five to 15 years.
Goodwill and Intangibles
The Company evaluates goodwill on an annual basis in the fourth quarter or more frequently if management believes indicators of impairment exist. Such indicators could include, but are not limited to 1) a significant adverse change in legal factors or in business climate, 2) unanticipated competition, or 3) an adverse action or assessment by a regulator. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If management concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, management conducts a two-step quantitative goodwill impairment test. The first step of the impairment test involves comparing the fair value of the applicable reporting unit with its carrying value. The Company estimates the fair values of its reporting units using a combination of the income or discounted cash flows approach and the market approach, which utilizes comparable companies' data. If the carrying amount of a reporting unit exceeds the reporting unit's fair value, management performs the second step of the goodwill impairment test. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit's goodwill with the carrying value of that goodwill. The amount by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as an impairment loss. The Company's evaluation of goodwill completed during the year resulted in an impairment of $3,993,730.
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, with 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,
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.
During the year ended December 31, 2017, the Company recorded asset impairment charges of $806,217 related to El Toro. There were no impairments of the Company’s long-lived assets for the year ended December 31, 2016.
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Revenue Recognition
The Company's revenues primarily consist of CNG fuel sales. These revenues are recognized in accordance with GAAP, which requires that the following four criteria must be met before revenue can be recognized:
(i) persuasive evidence of an arrangement exists;
(ii) delivery has occurred and title and the risks and rewards of ownership have been transferred to the customer or services have been rendered;
(iii) the price is fixed or determinable; and
(iv) collectability is reasonably assured.
Applying these factors, the Company typically recognizes revenue from the sale of natural gas fuel at the time the fuel is dispensed. The Company is eligible to receive, at times, a federal alternative fuels tax credit ("AFTC") when a gasoline gallon equivalent of CNG is sold as vehicle fuel. Based on the service relationship with its customers, either the Company or its customers claims the credit. The Company records its alternative minimum fuel credits if any, as revenue in its statements of operations as the credits are fully refundable.
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 7A. Quantitative and Qualitative Disclosures About Market Risk.
As a smaller reporting company, EVO, Inc. is not required to provide disclosure under this item.
Item 8. Financial Statements and Supplementary Data.
Audited financial statements begin on the next page of this report.
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EVO TRANSPORTATION & ENERGY SERVICES, INC.
Consolidated Financial Statements
and
Independent Auditors’ Report
December 31, 2017 and 2016
EVO TRANSPORTATION & ENERGY SERVICES, INC
Page | ||
| Independent Auditors’ Report | F-2 | |
| Consolidated Financial Statements | ||
| Consolidated Balance Sheets | F-3 | |
| Consolidated Statements of Operations | F-4 | |
| Consolidated Statement of Changes in Members' and Stockholders’ Deficit | F-5 | |
| Consolidated Statements of Cash Flows | F-6 | |
| Notes to Consolidated Financial Statements | F-9 |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FRIM
To the Board of Directors and Stockholders
EVO Transportation & Energy Services, Inc.
Peoria, Arizona
OPINION ON THE FINANCIAL STATEMENTS
We have audited the accompanying consolidated balance sheets of EVO Transportation & Energy Services, Inc. (the "Company") as of December 31, 2017 and 2016, and the related consolidated statements of operations, stockholders' equity, and cash flows, for each year in the two-year period ended December 31, 2017, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each year in the two-year period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
SUBSTANTIAL DOUBT ABOUT THE COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
BASIS FOR OPINION
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
EKS&H LLLP
Denver, Colorado
April 17, 2018
We have served as the Company's auditor since 2017.
F-2
EVO TRANSPORTATION & ENERGY SERVICES, INC
Consolidated Balance Sheets
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 83,867 | $ | 24,944 | ||||
| Accounts receivable, net | 150,419 | - | ||||||
| Alternative fuels tax credit receivable | 648,029 | 15,214 | ||||||
| Other assets | 1,675 | 11,576 | ||||||
| Total current assets | 883,990 | 51,734 | ||||||
| Non-current assets | ||||||||
| Property, equipment and land, net | 7,740,423 | 1,102,249 | ||||||
| Assets available for sale | 240,000 | - | ||||||
| Construction in progress | - | 79,354 | ||||||
| Intangibles | 345,284 | - | ||||||
| Deposits and other long-term assets | 132,940 | 39,646 | ||||||
| Total non-current assets | 8,458,647 | 1,221,249 | ||||||
| Total assets | $ | 9,342,637 | $ | 1,272,983 | ||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 1,784,049 | $ | 822,829 | ||||
| Accounts payable - related party | 409,838 | 261,060 | ||||||
| Advances from stockholder | 370,359 | 37,500 | ||||||
| Accrued interest - related party | 927,421 | 164,368 | ||||||
| Accrued expenses | 1,168,721 | 127,596 | ||||||
| Derivative liability | 32,186 | - | ||||||
| Subordinated convertible senior notes payable to stockholders | 1,421,556 | 1,021,556 | ||||||
| Working capital notes - related party | 250,000 | - | ||||||
| Current portion of long-term debt | 1,093,691 | 121,299 | ||||||
| Total current liabilities | 7,457,821 | 2,556,208 | ||||||
| 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 $4,257,358 (2017) and $0 (2016) | 5,680,147 | 405,103 | ||||||
| Senior promissory note - related party | 3,800,000 | - | ||||||
| Promissory note - related party | 4,000,000 | |||||||
| Long term debt, less current portion | - | 1,073,690 | ||||||
| Deferred rent | 2,206 | 15,439 | ||||||
| Deferred tax liability | - | 71,294 | ||||||
| Derivative liability, less current portion | 11,420 | - | ||||||
| Total non-current liabilities | 14,660,146 | 2,731,899 | ||||||
| Total liabilities | 22,117,967 | 5,288,107 | ||||||
| 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; 429,308 (2017) and 317,183 (2016) shares issued and outstanding | 43 | 32 | ||||||
| Additional paid-in capital | 1,299,980 | 899,304 | ||||||
| Accumulated deficit | (14,075,353 | ) | (4,914,460 | ) | ||||
| Total stockholders’ deficit | (12,775,330 | ) | (4,015,124 | ) | ||||
| Total liabilities and stockholders’ deficit | $ | 9,342,637 | $ | 1,272,983 | ||||
See notes to consolidated financial statements.
F-3
EVO TRANSPORTATION & ENERGY SERVICES, INC
Consolidated Statements of Operations
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Revenue | ||||||||
| CNG sales | $ | 1,968,563 | $ | 353,346 | ||||
| Federal alternative fuels tax credit | 128,340 | 129,549 | ||||||
| Total revenue | 2,096,903 | 482,895 | ||||||
| CNG cost of sales | 1,499,876 | 281,441 | ||||||
| Gross profit | 597,027 | 201,454 | ||||||
| Operating expenses | ||||||||
| General and administrative | 2,431,916 | 1,760,347 | ||||||
| Impairment | 4,906,217 | 0 | ||||||
| Depreciation and amortization | 711,076 | 210,892 | ||||||
| Total operating expenses | 8,049,209 | 1,971,239 | ||||||
| Other expense | ||||||||
| Interest expense | (1,642,259 | ) | (375,453 | ) | ||||
| Loss on acquisition of El Toro | - | (717,011 | ) | |||||
| Realized and unrealized gain on derivative liability, net | (60,246 | ) | - | |||||
| Warrant expense | (77,500 | ) | - | |||||
| Total other expense | (1,780,005 | ) | (1,092,464 | ) | ||||
| Income tax expense | ||||||||
| Deferred tax expense | 71,294 | (71,294 | ) | |||||
| Total income tax expense | 71,294 | (71,294 | ) | |||||
| Net loss | $ | (9,160,893 | ) | $ | (2,933,543 | ) | ||
| Basic weighted average common shares outstanding | 396,717 | 317,183 | ||||||
| Basic loss per common share | $ | (23.09 | ) | $ | (9.25 | ) | ||
| Diluted weighted average common shares outstanding | 396,717 | 317,183 | ||||||
| Diluted loss per common share | $ | (23.09 | ) | $ | (9.25 | ) | ||
See notes to consolidated financial statements.
F-4
EVO TRANSPORTATION & ENERGY SERVICES, INC
Consolidated Statement of Changes in Members’ and Stockholders’ Deficit
For the Years Ended December 31, 2017 and 2016
| LLC | Common Stock | |||||||||||||||||||||||||||
| Class A Membership Units | Amount | Shares | Amount | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Deficit | ||||||||||||||||||||||
| Balance - December 31, 2015 | $ | 38,608 | $ | 140,500 | - | $ | - | $ | - | $ | (771,913 | ) | $ | (631,413 | ) | |||||||||||||
| Titan El Toro, LLC contributed membership interests, as well as mezzanine debt and other liabilities | 64,387 | - | - | - | - | - | - | |||||||||||||||||||||
| Members of Titan El Toro, LLC membership interest in exchange for Class A Membership Units | 10,892 | - | - | - | - | - | - | |||||||||||||||||||||
| Issuance of units for subordinated senior notes payable | 28,900 | - | - | - | - | - | - | |||||||||||||||||||||
| Issuance of units for services | 139,839 | 5,594 | - | - | - | - | 5,594 | |||||||||||||||||||||
| Reverse acquisition | (282,626 | ) | (146,094 | ) | 317,183 | 32 | 899,304 | (1,209,004 | ) | (455,762 | ) | |||||||||||||||||
| Net loss | - | - | - | - | - | (2,933,543 | ) | (2,933,543 | ) | |||||||||||||||||||
| Balance - December 31, 2016 | - | - | 317,183 | 32 | 899,304 | (4,914,460 | ) | (4,015,124 | ) | |||||||||||||||||||
| Issuance of stock for subordinated senior notes payable | - | - | 8,791 | 1 | 13,186 | - | 13,187 | |||||||||||||||||||||
| Issuance of stock for cash | - | - | 103,334 | 10 | 309,990 | - | 310,000 | |||||||||||||||||||||
| Warrants issued with stock | - | - | - | - | 77,500 | - | 77,500 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (9,160,893 | ) | (9,160,893 | ) | |||||||||||||||||||
| Balance - December 31, 2017 | $ | - | $ | - | 429,308 | $ | 43 | $ | 1,299,980 | $ | (14,075,353 | ) | $ | (12,775,330 | ) | |||||||||||||
See notes to consolidated financial statements.
F-5
EVO TRANSPORTATION & ENERGY SERVICES, INC
Consolidated Statements of Cash Flows
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | (9,160,893 | ) | $ | (2,933,543 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
| Allowance for doubtful accounts | 37,007 | - | ||||||
| Depreciation and amortization | 711,076 | 210,892 | ||||||
| Impairment | 4,906,217 | - | ||||||
| Deferred rent | (13,233 | ) | (8,708 | ) | ||||
| Realized loss on derivative liability | (60,246 | ) | - | |||||
| Gain on derivative liability | 21,220 | - | ||||||
| Interest expense converted to promissory notes - related party | 32,402 | - | ||||||
| Accretion of debt discount | 429,642 | - | ||||||
| Common stock issued for debt | 13,187 | - | ||||||
| Warrant expenses | 77,500 | - | ||||||
| Loss on acquisition of El Toro | - | 717,011 | ||||||
| Consulting expense converted to subordinated notes payable to stockholders | - | 217,008 | ||||||
| Amortization of deferred financing costs | - | 57,388 | ||||||
| Units issued with debt | - | 5,594 | ||||||
| Deferred tax liability | (71,294 | ) | 71,294 | |||||
| Changes in assets and liabilities | ||||||||
| Accounts receivable | (187,426 | ) | - | |||||
| Alternative fuels tax credit receivable | (632,815 | ) | (15,214 | ) | ||||
| Other assets | 42,019 | 22,711 | ||||||
| Other long-term assets | 50,066 | |||||||
| Due from related parties | - | 21,986 | ||||||
| Accounts payable | 961,220 | 653,841 | ||||||
| Accounts payable - related party | 148,778 | 218,409 | ||||||
| Accrued expenses | 1,041,125 | 93,766 | ||||||
| Accrued interest related party | 763,053 | 30,597 | ||||||
8,269,498 | 2,296,575 | |||||||
| Net cash provided by (used in) operating activities | (891,395 | ) | (636,968 | ) | ||||
| Cash flows from investing activities | ||||||||
| Purchase of equipment | - | (41,524 | ) | |||||
| Construction in progress | - | (79,354 | ) | |||||
| Cash from acquisition | - | (57 | ) | |||||
| Deposits | 8,757 | - | ||||||
| Net cash used in investing activities | 8,757 | (120,935 | ) | |||||
| Cash flows from financing activities | ||||||||
| Advances from stockholders | 332,859 | 37,500 | ||||||
| Proceeds from sale of common stock | 310,000 | - | ||||||
| Subordinated senior notes payable to stockholders | 400,000 | 1,000,000 | ||||||
| Payments of principal on long-term debt | (101,298 | ) | (105,011 | ) | ||||
| Line-of-credit | - | (150,000 | ) | |||||
| Net cash provided by financing activities | 941,561 | 782,489 | ||||||
| Net increase in cash and cash equivalents | 58,923 | 24,586 | ||||||
| Cash and cash equivalents - beginning of year | 24,944 | 358 | ||||||
| Cash and cash equivalents - end of year | $ | 83,867 | $ | 24,944 | ||||
See notes to consolidated financial statements.
F-6
EVO TRANSPORTATION & ENERGY SERVICES, INC
Supplemental disclosure of cash flow information:
Cash paid for interest for the years ended December 31, 2017 and 2016 was $449,564 and $222,279, respectively.
Supplemental disclosure of non-cash activity:
On February 1, 2017, the Company acquired EVO to further its business model to acquire existing CNG stations. The following is the allocation of the assets and liabilities as of February 1, 2017:
| Prepaid | $ | 32,118 | ||
| Goodwill and other intangibles | 4,606,730 | |||
| Property and equipment | 8,154,667 | |||
| Deposits and other long-term assets | 152,117 | |||
| Derivative liability | (82,632 | ) | ||
| Promissory notes – related party | (8,050,000 | ) | ||
| Convertible promissory note - related party | (9,500,000 | ) | ||
| Debt discount | 4,687,000 |
During the year ended December 31, 2016, Titan converted $217,008 of consulting expense into subordinated notes payable to stockholders.
During the year ended December 31, 2016, Titan converted $127,108 of accounts payable - related party into subordinated notes payable to members.
During the year ended December 31, 2016, the Company had $310,887 construction in progress purchases in accounts payable.
During the year ended December 31, 2016, Titan converted $85,599 of long term notes payable related into $21,556 and $64,043 of subordinated senior notes payable to stockholders and subordinated notes payable to stockholders, respectively.
See notes to consolidated financial statements.
F-7
EVO TRANSPORTATION & ENERGY SERVICES, INC
Titan acquired the remaining 80% of El Toro to further its business model to acquire existing CNG stations. The following is the allocation of the 80% interest of the assets and liabilities as of January 1, 2016:
| Prepaid rent | $ | 34,287 | ||
| Property and equipment | 1,271,617 | |||
| Deposits | 38,669 | |||
| 1,344,573 | ||||
| Checks written in excess of bank balance | 3,434 | |||
| Accounts payable | 68,145 | |||
| Accounts payable - related party | 55,249 | |||
| Deferred rent | 24,147 | |||
| Accrued expenses | 1,566 | |||
| Accrued interest - related party | 122,582 | |||
| Subordinated notes payable to members | 700,826 | |||
| Long-term debt | 1,300,000 | |||
| Net liabilities acquired | $ | (931,376 | ) |
On November 22, 2016, Titan and the holders of 100% of the outstanding equity interests of Titan entered into an Agreement and Plan of Securities Exchange with EVO Inc. EVO Inc. acquired 100% of the equity interests in Titan and Titan became a wholly owned subsidiary of EVO Inc. The following is the allocation of the assets and liabilities acquired:
| Cash and cash equivalents | $ | 3,377 | ||
| Accounts payable | (54,036 | ) | ||
| Convertible promissory note - related party | (405,103 | ) | ||
| Reverse acquisition | $ | (455,762 | ) |
See notes to consolidated financial statements.
F-8
EVO TRANSPORTATION & ENERGY SERVICES, INC
Notes to 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”).
On November 22, 2016, Titan and its members entered into an Agreement and Plan of Securities Exchange with EVO Inc. whereby EVO Inc. acquired all of the equity interests of Titan and Titan became a wholly-owned subsidiary of EVO Inc. (the “Titan Securities Exchange”). The Company issued 248,481 shares of common stock, par value $0.0001 per share (“Common Stock”), to acquire Titan, which resulted in the former Titan equity holders owning approximately 91.25% of the outstanding shares of the Company’s Common Stock after the consummation of the Titan Securities Exchange.
At the closing of the Titan Securities Exchange, all of the issued and outstanding units of Titan immediately prior to the closing of the Titan Securities Exchange were converted into 248,481 shares of the Company’s Common Stock. The Company did not have any stock options or warrants to purchase shares of its capital stock outstanding at the time of the Titan Securities Exchange.
| Cash and cash equivalents | $ | 3,377 | ||
| Accounts payable | (54,036 | ) | ||
| Convertible promissory note - related party | (405,103 | ) | ||
| Reverse acquisition | $ | 455,762 |
Because the former members of Titan owned approximately 91.25% of the combined company on completion of the Titan Securities Exchange, the transaction was accounted for as a recapitalization through a reverse acquisition, with no goodwill or other intangibles recorded. As such, the consolidated financial information reflects the historical financial information of Titan, El Toro, Diamond Bar and Blaine and the remaining assets and liabilities of EVO Inc. brought over at historical cost. EVO Inc.’s results of operations, which were de minimis, are included in the Company’s consolidated financial statements from the date of acquisition, November 22, 2016. Costs of the transaction have been charged to operations. The capital structure of the Company has been retroactively adjusted to reflect that of EVO Inc. with all shares being adjusted based on the exchange ratio of equity interest in connection with the Titan Securities Exchange.
As a result of the Titan Securities Exchange, EVO Inc. acquired the business of Titan and its subsidiaries Diamond Bar, Blaine and El Toro as of November 22, 2016, and continued the existing business operations of Titan as a publicly traded company under the name EVO Transportation & Energy Services, Inc.
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.”
F-9
EVO TRANSPORTATION & ENERGY SERVICES, INC
Notes to Consolidated Financial Statements
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 December 31, 2017, the Company has a working capital deficit of approximately $6.6 million and negative equity of approximately $12.8 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:
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 268,057 common shares in exchange for the Junior Bridge Notes in the aggregate principal amount of approximately $1,340,261, with the per share price for shares of common stock equal to $5.00. |
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 Jerry Moyes. 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 ten years from the date of issuance. The Company did not pay any commissions in connection with the sale of these Units.
F-10
EVO TRANSPORTATION & ENERGY SERVICES, INC
Notes to Consolidated Financial Statements
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. El Toro was formed during 2013 and began operations during 2015. El Toro, located in Lake Forest, California, operated as a comprehensive natural gas vehicle solutions provider that offered products and services to corporate and municipal fleet operators as well as individual consumers. 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 the private CNG station for Walters Recycling & Refuse, Inc. (“Walters”) in Blaine, Minnesota, during the fourth quarter of 2017.
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, goodwill and long-lived intangible asset valuations and impairment assessments, business combinations, 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.
F-11
EVO TRANSPORTATION & ENERGY SERVICES, INC
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests.
Accounts Receivable
The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company's estimate is based on historical collection experience and a review of the current status of the accounts receivable. It is reasonably possible that the Company's estimate of the allowance for doubtful accounts will change and that losses ultimately incurred could differ materially from the amounts estimated in determining the allowance. As of December 31, 2017 and 2016, the Company has recorded an allowance of $37,007 and $0, respectively
Federal Alternative Fuels Tax Credit receivable
Federal Alternative Fuels Tax Credit ("AFTC") (formerly known as Volumetric Excise Tax Credit or VETC) receivable are the excise tax refunds to be received from the Federal Government on CNG fuel sales.
Concentrations of Credit Risk
The Company grants credit in the normal course of business to customers in the United States. The Company periodically performs credit analysis and monitors the financial condition of its customers to reduce credit risk. As of December 31, 2017 three customers accounted for 75% of the Company's total accounts receivable, and four and one customer accounted for and 76% and 13% of the Company's total revenues for the years ended December 31, 2017 and 2016, respectively.
Property, Equipment and Land
Property, equipment and land are stated at cost. Depreciation is provided utilizing the straight-line method over the estimated useful lives for owned assets, ranging from five to 15 years.
F-12
EVO TRANSPORTATION & ENERGY SERVICES, INC
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)
Goodwill and Intangible Assets
The Company evaluates goodwill on an annual basis in the fourth quarter or more frequently if management believes indicators of impairment exist. Such indicators could include, but are not limited to 1) a significant adverse change in legal factors or in business climate, 2) unanticipated competition, or 3) an adverse action or assessment by a regulator. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If management concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, management conducts a two-step quantitative goodwill impairment test. The first step of the impairment test involves comparing the fair value of the applicable reporting unit with its carrying value. The Company estimates the fair values of its reporting units using a combination of the income or discounted cash flows approach and the market approach, which utilizes comparable companies' data. If the carrying amount of a reporting unit exceeds the reporting unit's fair value, management performs the second step of the goodwill impairment test. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit's goodwill with the carrying value of that goodwill. The amount by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as an impairment loss. The Company's evaluation of goodwill completed during the year resulted in an impairment of $3,993,730.
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, with 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.
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.
Deposits
Deposits consist of a security deposit for the El Toro lease and other deposits which are contractually required and of a long-term nature.
F-13
EVO TRANSPORTATION & ENERGY SERVICES, INC
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)
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.
During the year ended December 31, 2017, the Company recorded asset impairment charges of $806,217 related to El Toro and Blaine. There were no impairments of the Company’s long-lived assets for the year ended December 31, 2016.
F-14
EVO TRANSPORTATION & ENERGY SERVICES, INC
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)
Deferred Rent Obligation
The Company has entered into operating lease agreements for a CNG station which contain provisions for future rent increases or periods in which rent payments are reduced. The Company records monthly rent expense equal to the total of the payments due over the lease term, divided by the number of months of the lease term. The difference between rent expense recorded and the amount paid is credited or charged to deferred rent obligation, which is reflected as a separate line item in the accompanying balance sheets.
Hedging Activities
The Company periodically enters into commodity derivative contracts to manage its exposure to gas price volatility.
GAAP require 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.
Net Loss per Share of Common Stock
Basic loss per share is computed by dividing net 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 years presented, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share.
Revenue Recognition
The Company's revenues primarily consist of CNG fuel sales. These revenues are recognized in accordance with GAAP, which requires that the following four criteria must be met before revenue can be recognized:
(i) persuasive evidence of an arrangement exists;
(ii) delivery has occurred and title and the risks and rewards of ownership have been transferred to the customer or services have been rendered;
F-15
EVO TRANSPORTATION & ENERGY SERVICES, INC
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)
(iii) the price is fixed or determinable; and
(iv) collectability is reasonably assured.
Applying these factors, the Company typically recognizes revenue from the sale of natural gas fuel at the time the fuel is dispensed. The Company is eligible to receive, at times, a federal alternative fuels tax credit ("AFTC") when a gasoline gallon equivalent of CNG is sold as vehicle fuel. Based on the service relationship with its customers, either the Company or its customers claims the credit. The Company records its alternative minimum fuel credits if any, as revenue in its statements of operations as the credits are fully refundable.
Alternative Fuels Tax Credit
For 2017 and 2016, the AFTC credit was $0.50 per gasoline gallon equivalent of CNG that is sold as a vehicle fuel. AFTC revenues for the years ended December 31, 2017 and 2016, were $128,340 and $129,549 respectively. This incentive originally expired on December 31, 2016, but was retroactively extended through December 31, 2017, with the Bipartisan Budget Act of 2018.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense for the years ended December 31, 2017 and 2016 was de minimis.
F-16
EVO TRANSPORTATION & ENERGY SERVICES, INC
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)
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 as of December 31, 2017 and 2016. 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, 2017, 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.
F-17
EVO TRANSPORTATION & ENERGY SERVICES, INC
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)
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.
F-18
EVO TRANSPORTATION & ENERGY SERVICES, INC
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)
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. Based on our current revenue streams we do not expect the adoption of ASU 2014-09 to have a material impact on the amount and timing of our revenue recognition from the superseded revenue standard. We have identified other changes primarily related to the presentation and disclosure of revenues.
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.
Subsequent Events
The Company has evaluated all subsequent events through the auditors' report date, which is the date the financial statements were available for issuance. With the exception of those matters discussed in Note 5 and Note 10, there were no material subsequent events that required recognition or additional disclosure in these financial statements.
F-19
EVO TRANSPORTATION & ENERGY SERVICES, INC
Notes to Consolidated Financial Statements
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.
The following table summarizes the fair value allocation of the assets acquired and liabilities assumed at the acquisition date.
| 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 | (82,632 | ) | ||
| 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 will most likely 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 year ended December 31, 2016.
The following unaudited pro forma summary presents consolidated information of the Company as if the business combination had occurred on January 1, 2016. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisition been consummated as of that time or that may result in the future.
F-20
EVO TRANSPORTATION & ENERGY SERVICES, INC
Notes to Consolidated Financial Statements
Note 2 - Acquisition (continued)
| Year ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| (unaudited) | (unaudited) | |||||||
| Revenues: | ||||||||
| As reported | $ | 2,096,903 | $ | 482,895 | ||||
| Proforma (uaudited) | $ | 2,283,906 | $ | 3,128,509 | ||||
| Net loss: | ||||||||
| As reported | $ | (9,160,893 | ) | $ | (2,933,543 | ) | ||
| Proforma (unaudited) | $ | (9,168,596 | ) | $ | (3,348,579 | ) | ||
| Basic and diluted net loss per share: | ||||||||
| As reported | $ | (23.09 | ) | $ | (9.25 | ) | ||
| Proforma (unaudited) | $ | (23.11 | ) | $ | (10.56 | ) | ||
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. Subsequent to year end the promissory note's maturity was extended until July 2019.
Also, as consideration for the EAF Interests, the Company 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.
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.
F-21
EVO TRANSPORTATION & ENERGY SERVICES, INC
Notes to Consolidated Financial Statements
Note 2 - Acquisition (continued)
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”). Subsequent to year end 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 by the noteholder of an event of default under the EAF Note.
El Toro
On January 1, 2016, certain accredited investors contributed their current membership interests, as well as mezzanine debt and other liabilities totaling approximately $973,000 owed to Titan El Toro, LLC in exchange for Junior Bridge Notes in the amount of $973,000 and 64,387 Class A Membership Units in Titan CNG, LLC. In addition, members of El Toro agreed to contribute their membership interest in exchange for 10,892 Class A Membership Units in the Company. The Company acquired the remaining 80% of El Toro to further its business relationship in alignment with the Company’s business model to acquire existing CNG stations.
F-22
EVO TRANSPORTATION & ENERGY SERVICES, INC
Notes to Consolidated Financial Statements
Note 2 - Acquisition (continued)
As required by ASC 805, Accounting for Business Combinations, when a company has a pre-existing ownership in another company and an acquisition is completed where control is obtained of the acquired company, the buyer must first measure the acquisition-date fair value of its previously held equity interest in the acquired company and recognize either (1) a gain for the excess of the fair value of the previously held interest over its carrying value or (2) a loss for the excess of carrying value over fair value. As a result of this acquisition, the Company recorded a $28,090 gain for the excess fair value over its carrying cost of El Toro. Management determined that the asset approach was the most appropriate methodology to determine the estimated fair value at the date of acquisition. As a result of the recentness of the procurement of El Toro’s assets and debt, management has determined that the estimated fair value is not materially different than the historical carrying values. The fair value of El Toro was as follows:
| January 1, 2016 | ||||
| Prepaid rent | $ | 34,287 | ||
| Property and equipment | 1,271,617 | |||
| Deposits | 38,669 | |||
| Total assets acquired | 1,344,573 | |||
| Checks written in excess of bank balance | 3,434 | |||
| Accounts payable | 68,145 | |||
| Accounts payable - related party | 55,249 | |||
| Deferred rent | 24,147 | |||
| Accrued expenses | 1,566 | |||
| Accrued interest - related party | 122,582 | |||
| Subordinated notes payable to members | 700,826 | |||
| Long-term debt | 1,300,000 | |||
| Net liabilities acquired | $ | (931,376 | ) | |
Note 3 - Balance Sheet Disclosures
Accounts receivable are summarized as follows:
| December 31, | ||||
| 2017 | ||||
| Accounts receivable | $ | 187,426 | ||
| Allowance for doubtful accounts | (37,007 | ) | ||
| $ | 150,419 | |||
Property, equipment and land are summarized as follows:
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Equipment | $ | 3,919,589 | $ | 664,276 | ||||
| Buildings | 3,259,179 | 161,467 | ||||||
| Land | 975,899 | - | ||||||
| Computer equipment | 37,627 | 42,109 | ||||||
| Site development | - | 401,462 | ||||||
| Leasehold improvements | - | 46,728 | ||||||
| 8,192,294 | 1,316,042 | |||||||
| Less accumulated depreciation | (451,871 | ) | (213,793 | ) | ||||
| $ | 7,740,423 | $ | 1,102,249 | |||||
F-23
EVO TRANSPORTATION & ENERGY SERVICES, INC
Notes to Consolidated Financial Statements
Note 3 - Balance Sheet Disclosures (continued)
Depreciation expense for the years ended December 31, 2017 and 2016 was $549,630 and $210,892, respectively.
During the year ended December 31, 2017 the Company recorded impairment of $806,217 for El Toro’s fixed assets and construction in progress
Construction in progress contains amounts accrued for construction of the Blaine CNG station that had not been placed into service as of December 31, 2016.
During the year ended December 31, 2017 the construction of the Blaine CNG Station was terminated.
Intangible assets consist of the following:
| 2017 | ||||
| Goodwill | $ | 3,993,730 | ||
| Favorable lease | 307,000 | |||
| Customer relationships | 113,730 | |||
| Trade name | 86,000 | |||
| 4,606,730 | ||||
| Less Impairment | (4,100,000 | ) | ||
506,730 | ||||
| Less Amortization | (161,446 | ) | ||
| $ | 345,284 | |||
During the year ended December 31, 2017 the Company impaired total goodwill of $3,993,73 and customer lists for $106,270. Amortization expense for the years ended December 31, 2017 and 2016 was $161,446 and $0, respectively. Future amortization expense will be approximately as follows:
| Year Ending December 31, | ||||
| 2018 | $ | 118,000 | ||
| 2019 | 111,100 | |||
| 2020 | 106,000 | |||
| 2021 | 10,200 | |||
| $ | 345,300 | |||
Accrued expenses consist of the following:
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Federal alternative fuels tax credit | $ | 562,513 | $ | - | ||||
| Accounting fees | 290,438 | 56,839 | ||||||
| Legal fees | 217,590 | 25,547 | ||||||
| Compensation and related payroll taxes | 72,420 | - | ||||||
| Deferred rent | 13,233 | 13,149 | ||||||
| Credit cards | 12,527 | 32,061 | ||||||
| $ | 1,168,720 | $ | 127,596 | |||||
F-24
EVO TRANSPORTATION & ENERGY SERVICES, INC
Notes to Consolidated Financial Statements
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 $409,838 and $261,060 for the years ended December 31, 2017 and 2016, 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 $927,421 and $164,368 for the years ended December 31, 2017 and 2016, respectively.
F-25
EVO TRANSPORTATION & ENERGY SERVICES, INC
Notes to Consolidated Financial Statements
Note 5 - Long-Term Debt
Long-term debt consists of:
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| $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 business 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 December 31, 2017 and 2016. | $ | 1,093,691 | $ | 1,194,989 | ||||
| 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 stockholders. The Senior Bridge Notes were not extended at the maturity. Subsequent to year end approximately $689,000 of the Senior Bridge Notes and related interest were converted into 275,583 shares of common stock. | 1,421,556 | 1,021,556 | ||||||
| Nine subordinated notes payable to stockholders with interest at 12%, with maturity at December 2020, secured by a subordinate security interest on substantially all assets of the Company. Subsequent to year approximately $1,166,373 of the junior bridge notes and related interest of $173,888 were converted into 268,507 shares of common stock. | 1,166,373 | 1,166,373 | ||||||
| Three convertible promissory notes to stockholders 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 subordinated 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 subordinated notes. The promissory notes are unsecured. | 437,505 | 405,103 | ||||||
| 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. Subsequent to year end the promissory note's maturity date was extended to July 2019. | 3,800,000 | - | ||||||
| A senior 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 | - | ||||||
| Four working capital 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. Subsequent to year end the working capital notes were paid in full. | 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 | - | ||||||
| Debt discount* | (4,257,358 | ) | - | |||||
| 17,411,767 | 3,788,021 | |||||||
| Less current portion | (2,765,247 | ) | (1,142,855 | ) | ||||
| $ | 14,646,520 | $ | 2,645,166 | |||||
| * | Of our total indebtedness of approximately $21,669,000 as of December 31, 2017, approximately $2,800,000 is classified as current debt. We are in violation of the covenants related to the SBA loan. We received a waiver with respect to those covenant violations for the year ended December 31, 2016, but 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-K. 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 |
F-26
EVO TRANSPORTATION & ENERGY SERVICES, INC
Notes to Consolidated Financial Statements
Note 5 - Long-Term Debt (continued)
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. The 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 December 31, 2017 the remaining discount is $4,257,358.
Maturities of long-term obligations are as follows:
| Year Ending December 31, | Related Party Notes | Other Notes | Total | |||||||||
| 2018 | $ | 1,671,556 | $ | 1,093,691 | $ | 2,765,517 | ||||||
| 2019 | 4,237,505 | - | 4,237,505 | |||||||||
| 2020 | 5,166,373 | - | 5,166,373 | |||||||||
| 2021 | - | - | - | |||||||||
| 2022 | - | - | - | |||||||||
| Thereafter | 9,500,000 | - | 9,500,000 | |||||||||
| $ | 20,575,434 | $ | 1,093,691 | $ | 21,669,125 | |||||||
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 loss for the year ended December 31, 2017 was $21,220 and $39,026, respectively.
The following table summarizes the fair value of the derivatives recorded in the consolidated balance sheets, by category.
| Fair Value at December 31, | ||||
| 2017 | ||||
| Current commodity derivative liability | $ | 32,186 | ||
| Long-term commodity derivative liability | 11,420 | |||
| Total derivative liability | $ | 43,606 | ||
F-27
EVO TRANSPORTATION & ENERGY SERVICES, INC
Notes to Consolidated Financial Statements
Note 6 - Derivative Instruments (continued)
As of December 31, 2017, 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 - Stockholders' Equity
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.
During the year ended December 31, 2017, the Company issued 103,334 units for $3.00 per unit, with each unit consisting of one share of common stock and one equity-classified warrant to purchase one share of common stock.
During the year ended December 31,2017, the Company issued 8,791 shares of common stock in connection with the issuance of a senior bridge note.
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 warrants were valued at $77,500 with all of the outstanding warrants exercisable and have a weighted average remaining contractual life of 4.25 years.
In connection with the completion of the Titan Securities Exchange, 104,179 outstanding Class A units were valued at predecessor cost, which resulted in no value to the units with the resulting liability assumed recorded at a loss in the statement of operations.
As of December 31, 2017, the authorized share capital of the Company consisted of 100,000,000 shares of common stock with a par value of $0.0001 per share. There were 429,308 and 317,183 shares of common stock issued and outstanding as of December 31, 2017 and 2016.
As of December 31, 2017, the authorized share capital of the Company consisted of 10,000,000 shares of preferred stock with a par value of $0.0001 per share. There were no shares of preferred stock issued and outstanding as of December 31, 2017.
F-28
EVO TRANSPORTATION & ENERGY SERVICES, INC
Notes to Consolidated Financial Statements
Note 8 - 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.
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 years ended December 31, 2017 and 2016 was approximately $132,000 and $138,000, respectively.
EAF leases the properties to EVO under the terms of oral leases for one-time payments of $1.00. The EAF Tolleson, EAF Oak Creek, EAF San Antonio and EAF Lake Arlington properties are each subject to two mortgages related to the Promissory Note and the Senior Promissory Note for $4,000,000 and $3,800,000, respectively. The property underlying the EAF Jurupa Valley and EAF Fort Worth stations is leased by EVO from third parties.
EAF Jurupa Valley. EVO leases the property for the Jurupa Valley station from a third-party under the terms of a month-to-month oral lease for a one-time payment of $1.00.
EAF Fort Worth. EVO leases the property for the EAF Fort Worth station from a third-party under a lease agreement with an initial 10-year term expiring December 2023. Base rent payable by EVO for the initial term consists of a one-time payment equal to $1. Under the terms of the lease, EVO agreed to install and maintain at its own cost a natural gas fuel line, compressors, operating equipment, storage tanks, dispensers and any other equipment necessary to supply the CNG fueling needs of fleet vehicles owned by the third party.
Future minimum lease payments under these leases are approximately as follows:
| Year Ending December 31, | ||||
| 2018 | $ | 139,000 | ||
| 2019 | 23,000 | |||
| $ | 162,000 | |||
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 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.
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 a facility on El Toro Road 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.
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.
F-29
EVO TRANSPORTATION & ENERGY SERVICES, INC
Notes to Consolidated Financial Statements
Note 8 - Commitments and Contingencies (continued)
Walters Recycling and Refuse Station
In June 2016 Blaine entered into a compressed natural gas fuel station agreement (the “Agreement”) with Walters, an unrelated third party. Under the Agreement Blaine agreed to construct, at its sole expense, a CNG dispensing system (the “System”) on a portion of the property owned by Walters. Titan was required to have the System fully operational by June 2017. Titan did not meet the operational deadline as defined, and the project was cancelled per the Agreement.
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 was required, within eight months of the execution date, to install specific station upgrades, as defined, and was 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 is 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. |
Long-Term Take-or-Pay Natural Gas Supply Contracts
At December 31, 2017, the Company had commitments to purchase CNG on a take-or-pay basis of approximately $545,000, which has not been enforced by the Company. 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.
F-30
EVO TRANSPORTATION & ENERGY SERVICES, INC
Notes to Consolidated Financial Statements
Note 9 - Income Taxes
Deferred income tax assets have been reduced by a valuation allowance as it is more likely than not that they will not be realized because it cannot demonstrate that it is more likely than not that it will realize the benefit of that asset. In addition, future utilization of the available net operating loss carryforward may be limited under Internal Revenue Code Section 382 as a result of changes in ownership. In November 2016, the Company experienced an ownership change as a result of an issuance of its common stock. Utilization of the Company's net operating loss may be subject to substantial limitation.
There are no significant matters determined to be unrecognized tax benefits taken or expected to be taken in a tax return, in accordance with ASC 740 “Income Taxes” (“ASC 740”), which clarifies the accounting for uncertainty in income taxes recognized in the financial statements, that have been recorded on the Company’s financial statements for the years ended December 31, 2017 and 2016. The Company does not anticipate a material change to unrecognized tax benefits in the next twelve months.
It is the Company’s practice to recognize penalties and/or interest related to income tax matters in the interest and penalties expense. There are no interest and penalties recognized in the statements of operations or accrued on the balance sheets.
The Company files tax returns in the United States, in various states including California, Colorado and Minnesota. The Company’s United States federal income tax filings for tax years 2043 through 2017 remain open to examination. In general, the Company’s various state tax filings remain open for tax years 2013 to 2017.
As of December 31, 2017 and 2016, the Company had federal net operating loss carry forwards of approximately $4.8 million and $197,000, respectively, for income tax purposes that expire starting in 2037.
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Net operating loss | $ | (9,232,187 | ) | $ | (2,862,249 | ) | ||
Summary of deferred tax assets and liabilities are as follows:
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Deferred tax asset | ||||||||
| Accrued expenses and other | $ | 21,898 | $ | - | ||||
| Depreciation | 1,323,599 | - | ||||||
| Stock based compensation | 22,320 | - | ||||||
| Loss carryforwards | 2,675,488 | 79,953 | ||||||
| Total deferred tax assets | 4,043,305 | 79,953 | ||||||
| Valuation allowance | (2,817,186 | ) | - | |||||
| Net deferred tax asset | $ | 1,226,119 | $ | 79,953 | ||||
| Deferred tax liability | ||||||||
| Debt discount | $ | (1,226,119 | ) | $ | - | |||
| Depreciation | $ | - | $ | (151,247 | ) | |||
| Total deferred tax liability | $ | - | $ | (71,294 | ) | |||
F-31
EVO TRANSPORTATION & ENERGY SERVICES, INC
Notes to Consolidated Financial Statements
Note 9 - Income Taxes (continued)
Components reflected in the consolidated statements of operations are as follows:
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Current | ||||||||
| Federal | $ | - | $ | - | ||||
| State and local | - | - | ||||||
| - | - | |||||||
| Deferred | ||||||||
| Federal | (2,449,137 | ) | 59,852 | |||||
| State and local | (439,343 | ) | 11,442 | |||||
| Valuation allowance | 2,817,186 | - | ||||||
| (71,294 | ) | 71,294 | ||||||
| Total income tax provision | $ | (71,294 | ) | $ | 71,294 | |||
The following is a reconciliation of the statutory federal income tax rate applied to pre-tax accounting net loss compared to the income taxes in the consolidated statements of operations:
| For the Years Ended | ||||||||
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Income tax benefit at the statutory rate | (3,138,943 | ) | $ | (974,581 | ) | |||
| Change resulting from | ||||||||
| State and local income taxes, net of federal income tax | (333,592 | ) | (186,317 | ) | ||||
| Deferred tax liabilities | - | 193,375 | ||||||
| Pre-acquisition loss | - | 1,025,765 | ||||||
| Change in tax rate | 576,444 | - | ||||||
| Change in valuation | 2,817,186 | - | ||||||
| Non-deductible and other | 7,611 | 13,052 | ||||||
| $ | (71,294 | ) | $ | 71,294 | ||||
Note 10 - Subsequent Events
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 Jerry Moyes. 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 ten years from the date of issuance. The Company did not pay any commissions in connection with the sale of these Units.
In connection with the sale of Units, the Company issued 89,092 shares of Common Stock on March 2, 2018, to Kirk Honour, the Company’s former president, pursuant to the terms of the Separation Agreement between the Company and Kirk Honour dated October 9, 2017.
On or about March 20, 2018, the Company entered into a Share Escrow Agreement (the “Escrow Agreement”) with certain of the Company’s shareholders, including entities affiliated with Scott Honour, a director of the Company, and Kirk Honour, 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 offers 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 Tradition Capital Bank loan facility, 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.
F-32
EVO TRANSPORTATION & ENERGY SERVICES, INC
Notes to Consolidated Financial Statements
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 amount of approximately $689,000, with the per share price for shares of common stock equal to $2.50. | |
| ● | The Company issued 268,057 common shares in exchange for the Junior Bridge Notes in the aggregate principal amount of approximately $1,340,261, with the per share price for shares of common stock equal to $5.00. |
The Units and Common Stock described above were offered and sold as part of private placements solely to “accredited investors” as that term is defined under Rule 501(a) under the Securities Act of 1933, as amended (the “Securities Act”), 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.
The foregoing summary of the material terms of the subscription agreements and warrant is not complete and is qualified in its entirety by reference to the subscription agreements included as exhibits to this annual report on Form 10-K.
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. 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.
A copy of the Certificate of Designation is attached hereto and is incorporated herein by reference.
On April 12, 2018, the Company approved the issuance of 100,000 shares of Series A Preferred to Danny R. Cuzick, 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.
During February 2018, the Company entered into a management agreement with a third-party to operate Titan Diamond Bar. The Company is currently negotiating with the third party for the sale of station.
F-33
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
As previously disclosed in a current report filed with the SEC on February 8, 2017, our board of directors approved the engagement of EKS&H LLLP (“EKS&H”) as our independent registered public accounting firm for the fiscal year ended December 31, 2016. The engagement of EKS&H also resulted in the end of our relationship with Lurie, LLP (“Lurie”) as our independent registered public accounting firm effective February 7, 2017.
Lurie’s audit reports on the financial statements of the Company as of and for the years ended December 31, 2014 and 2015 did not contain any adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles, except that Lurie’s reports for the years ended December 31, 2014 and 2015 (i) contained an explanatory paragraph concerning the Company’s ability to continue as a going concern, and (ii) were qualified by a statement that the Company’s consolidated financial statements were prepared assuming the Company would continue as a going concern and did not include any adjustments that might have resulted from the outcome of this uncertainty. In addition, because the Company was not required to have, and Lurie was not engaged to perform, an audit of the Company’s internal control over financial reporting, Lurie did not express an opinion on the effectiveness of the Company’s internal control over financial reporting.
During the Company’s two most recent fiscal years prior to Lurie’s dismissal and the subsequent interim period from January 1, 2017 through the date of Lurie’s dismissal, there were no disagreements with Lurie on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of Lurie, would have caused Lurie to make reference to the subject matter of the disagreement(s) in connection with its report on the Company’s consolidated financial statements and there were no “reportable events” as that term is defined in Regulation S-K, Item 304(a)(1)(v).
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of its principal executive and principal financial officers, is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that is designed to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
In accordance with Exchange Act rules 13a-15 and 15d-15, an evaluation was completed under the supervision and with the participation of the Company’s management, including the Company’s principal executive of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this annual report on Form 10-K. Based on that evaluation, the Company’s management, including its principal executive have concluded that our disclosure controls and procedures were not effective as of December 31, 2017, due to the material weaknesses in our internal control over financial reporting described below in “Evaluation of Internal Controls and Procedures.” In light of these material weaknesses, we performed additional analysis as deemed necessary to ensure that our financial statements were prepared in accordance with U.S. generally accepted accounting principles. Accordingly, management believes that the financial statements included in this Annual Report on Form 10-K present fairly in all material respects our financial position, results of operations and cash flows for the period presented.
Evaluation of Internal Controls and Procedures
The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a set of processes designed by, or under the supervision of, a company’s principal executive designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
The Company’s internal control over financial reporting includes those policies and procedures that:
| ● | Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; | |
| ● | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and | |
| ● | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. It should be noted that any system of internal control, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
31
Under the supervision and with the participation of management, including our principal executive officer management assessed the design and operating effectiveness of our internal control over financial reporting as of December 31, 2017 based on the framework in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on its evaluation and the identification of certain material weaknesses in internal control over financial reporting described below, management concluded that our internal control over financial reporting was not effective as a result of the material weaknesses in controls described below.
In connection with the assessment described above, management identified the following control deficiencies that represent material weaknesses at December 31, 2017:
| ● | The Company failed to maintain an effective control environment and had insufficient oversight of the design and operating effectiveness of the Company’s disclosure controls and internal controls over financial reporting. | |
| ● | The Company failed to maintain effective controls over the period-end financial reporting process, including controls with respect to journal entries, account reconciliations and proper segregation of duties. Journal entries, both recurring and nonrecurring, were not always accompanied by sufficient supporting documentation and were not adequately reviewed and approved for validity, completeness and accuracy. | |
| ● | The Company did not maintain proper segregation of duties. In certain instances, persons responsible to review transactions for validity, completeness and accuracy were also responsible for preparation. | |
| ● | The Company’s financial reporting team did not possess the requisite skill sets, knowledge, education or experience to prepare the consolidated financial statements and notes to consolidated financial statements in accordance with US GAAP or to review the financial statements and notes to the financial statements prepared by external consultants and professionals to ensure accuracy and completeness. |
Changes in Internal Controls over Financial Reporting
There have been no significant changes to the Company’s internal controls over financial reporting that occurred during our last fiscal quarter of the year ended December 31, 2017, that materially affected, or were reasonably likely to materially affect, our internal controls over financial reporting. Our management intends to implement the remediation steps discussed below to address the material weaknesses and to improve our internal control over financial reporting.
Management’s Remediation Plan
In light of the control deficiencies identified at December 31, 2017 and described in the section titled “Evaluation of Internal Controls and Procedures, we have designed and plan to implement the specific remediation initiatives described below:
| ● | We plan to design and implement more robust corporate governance including: (1) direct oversight of our internal controls by an audit committee of our board of directors; (2) review of our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q by our audit committee, when formed, prior to filing with the SEC; (3) communication of our Code of Business Conduct and Ethics to our employees and consultants; and (4) adoption of a charter for our audit committee. | |
| ● | We intend to implement a procedure that ensures timely review of the consolidated financial statements, notes to our consolidated financial statements, and our Annual and Quarterly Reports on Forms 10-K and 10-Q by our chief executive officer and our board of directors, and, when formed, our audit committee, prior to filing with the SEC. | |
| ● | We will design and implement a formalized financial reporting process that includes balance sheet reconciliations, properly prepared, supported and reviewed journal entries, properly segregated duties, and properly completed and approved close checklist and calendar. | |
| ● | We intend to hire additional experienced individuals to prepare and approve the consolidated financial statements and footnote disclosures in accordance with US GAAP. | |
| ● | We have relied and will continue to rely upon outside professionals to assist with our external reporting requirements to ensure timely filing of our required reports with the SEC. | |
| ● | We intend to initiate efforts to ensure our employees understand the continued importance of internal controls and compliance with corporate policies and procedures. We will implement a reporting and certification process for management involved in the performance of internal controls and the preparation of the Company’s consolidated financial statements. This certification process will be conducted quarterly and managed by our internal audit consultant. |
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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 Jerry Moyes. 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 ten years from the date of issuance. The Company did not pay any commissions in connection with the sale of these Units.
In connection with the sale of Units, the Company issued 89,092 shares of Common Stock on March 2, 2018, to Kirk Honour, the Company’s former president, pursuant to the terms of the Separation Agreement between the Company and Kirk Honour dated October 9, 2017.
On or about March 20, 2018, the Company entered into a Share Escrow Agreement (the “Escrow Agreement”) with certain of the Company’s shareholders, including entities affiliated with Scott Honour, a director of the Company, and Kirk Honour, 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 offers 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 Tradition Capital Bank loan facility, 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.
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 268,057 common shares in exchange for the Junior Bridge Notes in the aggregate principal amount of approximately $1,340,261, with the per share price for shares of common stock equal to $5.00. |
The Units and Common Stock described above were offered and sold as part of private placements solely to “accredited investors” as that term is defined under Rule 501(a) under the Securities Act of 1933, as amended (the “Securities Act”), 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.
The foregoing summary of the material terms of the subscription agreements and warrant is not complete and is qualified in its entirety by reference to the subscription agreements included as exhibits to this annual report on Form 10-K.
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Stock Option Plan and Option Grants
On April 12, 2018, the Board approved the Company's 2018 Stock Incentive Plan (the “2018 Plan”). The principal provisions of the 2018 Plan are summarized below. This summary is not a complete description of all the 2018 Plan's provisions, and is qualified in its entirety by reference to the 2018 Plan, which is filed as an exhibit to this annual report. Capitalized terms used but not defined herein will be as defined in the 2018 Plan.
Administration
The Board will initially be the administrator of the 2018 Plan, but the Board may delegate the administration of the 2018 Plan to a committee of the Board. The Board and any Committee to which it may delegate the administration of the 2018 Plan are collectively referred to in the 2018 Plan as the “Administrator.”
The Administrator may delegate to one or more Committees and/or sub-Committees, or to one or more officers of the Company such administrative duties or powers as it may deem advisable. The Administrator may, by resolution, authorize one or more officers of the Company to do one or both of the following on the same basis as the Administrator: (i) designate employees to be recipients of awards under the 2018 Plan and (ii) determine the size of any such awards; provided, however, that the Committee may not delegate such responsibilities to any such officer for awards granted to an employee who is an officer or director of the Company or the beneficial owner of more than 10% of the Company’s common stock; the resolution providing such authorization sets forth the total number of awards such officer(s) may grant; and the officer(s) must report periodically to the Administrator regarding the nature and scope of the awards granted pursuant to the authority delegated.
Except as otherwise provided in the 2018 Plan, the Administrator will have all of the powers vested in it under the provisions of the 2018 Plan, including but not limited to exclusive authority to determine, in its sole discretion, whether an award will be granted; the individuals to whom, and the time or times at which, awards will be granted; the number of shares subject to each award; the exercise price of Options granted hereunder; and the performance criteria, if any, and any other terms and conditions of each award. The Administrator will have full power and authority to administer and interpret the 2018 Plan, to make and amend rules, regulations and guidelines for administering the 2018 Plan, to prescribe the form and conditions of the respective Agreements evidencing each award (which may vary from Participant to Participant), to amend or revise Agreements evidencing any award (to the extent the amended terms would be permitted by the 2018 Plan and provided that no such revision or amendment, except as is authorized in Section 14 of the 2018 Plan, may impair the terms and conditions of any award that is outstanding on the date of such revision or amendment to the material detriment of the Participant in the absence of the consent of the Participant), and to make all other determinations necessary or advisable for the administration of the 2018 Plan (including to correct any defect, omission or inconsistency in the 2018 Plan or any Agreement, to the extent permitted by law and the 2018 Plan). The Administrator’s interpretation of the 2018 Plan, and all actions taken and determinations made by the Administrator pursuant to the power vested in it under the 2018 Plan will be conclusive and binding on all parties concerned.
Eligibility
Any employee, director, or consultant may participate in the 2018 Plan; provided, however, that only employees are eligible to receive incentive stock options. Additionally, the Company may grant certain performance-based awards to “covered employees” in compliance with Section 162(m) of the Internal Revenue Code. These covered employees include our executive officers. Section 162(m) generally limits the corporate tax deduction for compensation paid to executive officers that is not “performance-based” to $1,000,000 per executive officer. “Performance-based” compensation meeting certain requirements is not counted against the $1,000,000 limit and generally remains fully deductible for tax purposes.
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Shares Available for Awards
The stock to be awarded or optioned under the Plan (the “share authorization”) will consist of authorized but unissued or reacquired shares of common stock. The maximum aggregate number of shares of common stock reserved and available for awards under the 2018 Plan is 4,250,000 shares, subject to adjustment for any reorganization, merger, consolidation, recapitalization, liquidation, reclassification, stock dividend, stock split, combination of shares, rights offering, divestiture or extraordinary dividend (including a spin-off) or any other similar change in the corporate structure or shares of the Company. Any adjustment determination made by the Administrator will be final, binding and conclusive.
Type of Awards and Terms and Conditions
The 2018 Stock Plan provides that the Administrator may grant awards to eligible participants in any of the following forms, subject to such terms, conditions and provisions as the Administrator may determine to be necessary or desirable:
| ● | stock options, including both incentive stock options (“ISOs”) and non-qualified stock options; |
| ● | stock appreciation rights; |
| ● | restricted stock; |
| ● | performance awards; and |
| ● | stock bonuses. |
Options. Options may either be incentive stock options, which are specifically designated as such for purposes of compliance with Section 422 of the Internal Revenue Code, or non-qualified stock options. Options vest as determined by the Administrator, subject to applicable performance objectives and statutory limitations regarding the maximum term of ISOs and the maximum value of ISOs that may vest in one year. The exercise price of each share subject to an ISO will be equal to or greater than the fair market value of a share on the date of the grant of the ISO, except in the case of an ISO grant to a stockholder who owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or its parent or any subsidiary, the exercise price will be equal to or greater than 110% of the fair market value of a share on the grant date. Non-qualified stock options vest as determined by the Administrator, subject to applicable performance objectives and statutory limitations regarding the maximum term of non-qualified stock options. The exercise price of each share subject to a non-qualified stock option will be determined by the Administrator at the time of grant but must be equal to or greater than the fair market value of a share on the date of grant. Recipients of options have no rights as stockholders with respect to any shares covered by the award until the award is exercised and a stock certificate or book entry evidencing such shares is issued or made, respectively.
Restricted Stock Awards. Restricted stock awards consist of shares granted to a participant that are subject to one or more risks of forfeiture. Restricted stock awards may be subject to risk of forfeiture based on the passage of time or the satisfaction of other criteria, such as continued employment or Company performance. Recipients of restricted stock awards are entitled to vote and receive dividends attributable to the shares underlying the awards beginning on the grant date, but have no other rights as stockholders with respect to such shares.
Performance Awards. Performance awards, which may be denominated in cash or shares, are earned upon achievement of performance objectives during a performance period established by the Administrator. Recipients of performance awards have no rights as stockholders with respect to any shares covered by the awards until the date a stock certificate or book entry evidencing such shares is issued or made, respectively.
Stock Appreciation Rights. A stock appreciation right may be granted independent of, or in tandem with, a previously or contemporaneously granted stock option, as determined by the Administrator. Generally, upon exercise of a stock appreciation right, the recipient will receive cash, shares of Company stock, or a combination of cash and stock, with a value equal to the excess of: (i) the fair market value of a specified number of shares of Company stock on the date of the exercise, over (ii) a specified exercise price. Stock appreciation rights vest as determined by the Administrator, subject to applicable performance objectives and statutory limitations regarding the maximum term of stock appreciation rights. Recipients of stock appreciation rights have no rights as a stockholder with respect to any shares covered by the award until the date a stock certificate or book entry evidencing such shares is issued or made, respectively.
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Stock Bonuses. Stock bonuses consist of awards of shares granted to a participant subject to such terms and conditions as determined by the Administrator. Recipients of stock bonuses have all rights of stockholders with respect to such shares, provided that the Administrator may impose restrictions on the assignment or transfer of stock bonuses.
Amendments of the 2018 Plan
The Board may from time to time, insofar as permitted by law, suspend or discontinue the 2018 Plan or revise or amend it in any respect. However, to the extent required by applicable law or regulation or as except as provided under the 2018 Plan itself, the Board may not, without stockholder approval, revise or amend the 2018 Plan to (i) materially increase the number of shares subject to the 2018 Plan, (ii) change the designation of participants, including the class of employees, eligible to receive awards, (iii) decrease the price at which options or stock appreciation rights may be granted, (iv) cancel, regrant, repurchase for cash, or replace options or stock appreciation rights that have an exercise price in excess of the fair market value of the common stock with other awards, or amend the terms of outstanding options or stock appreciation rights to reduce their exercise price, (v) materially increase the benefits accruing to participants under the 2018 Plan, or (vi) make any modification that will cause incentive stock options to fail to meet the requirements of Internal Revenue Code Section 422.
Term
The Administrator may grant awards pursuant to the 2018 Plan until it is discontinued or terminated; provided, however, that ISOs may not be granted after April 12, 2028.
Change of Control
Unless otherwise provided in the terms of an award, upon a change of control of the Company, as defined in the 2018 Plan, the Administrator may provide for one or more of the following: (i) the acceleration of the exercisability, vesting, or lapse of the risks of forfeiture of any or all awards (or portions thereof); (ii) the complete termination of the 2018 Plan and the cancellation of any or all awards (or portions thereof) that have not been exercised, have not vested, or remain subject to risks of forfeiture, as applicable in each case as of the effective date of the change of control; (iii) that the entity succeeding the Company by reason of such change of control, or the parent of such entity, must assume or continue any or all awards (or portions thereof) outstanding immediately prior to the change of control or substitute for any or all such awards (or portions thereof) a substantially equivalent award with respect to the securities of such successor entity, as determined in accordance with applicable laws and regulations; or (iv) that participants holding outstanding awards will become entitled to receive, with respect to each share of common stock subject to such award (whether vested or unvested, as determined by the Administrator pursuant to the 2018 Plan) as of the effective date of any such change of control, cash in an amount equal to (1) for participants holding options or stock appreciation rights, the excess of the fair market value of such common stock on the date immediately preceding the effective date of such change of control over the exercise price per share of options or stock appreciation rights, or (2) for participants holding awards other than options or stock appreciation rights, the fair market value of such common stock on the date immediately preceding the effective date of such change of control. The Administrator need not take the same action with respect to all awards (or portions thereof) or with respect to all participants.
Payment
Upon exercise of an option granted under the 2018 Plan, and as permitted in the Administrator’s discretion, the option holder may pay the exercise price in cash (or cash equivalent), by surrendering previously-acquired unencumbered shares of Company common stock, by withholding shares of Company common stock from the number of shares that would otherwise be issuable upon exercise of the option (e.g., a net share settlement), through broker-assisted cashless exercise (if compliant with applicable securities laws and any insider trading policies of the Company), another form of payment authorized by the Administrator, or a combination of any of the foregoing. If the exercise price is paid, in whole or in part, with Company common stock, the then-current fair market value of the stock delivered or withheld will be used to calculate the number of shares required to be delivered or withheld.
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Transfer Restrictions
Unless permitted by law and expressly permitted by the 2018 Plan or underlying award agreement, no award will be transferable, other than by will or by the laws of descent and distribution. The Administrator may permit a recipient of a non-qualified stock option to transfer the award by gift to his or her “immediate family” or to certain trusts or partnerships (as defined and permitted by applicable federal securities law).
Forms of Agreement
The Administrator has approved forms of agreement to govern incentive stock options, non-qualified stock options, restricted stock awards and restricted stock units. The foregoing summaries of the 2018 Plan and the forms of the agreements do not purport to be complete and are qualified in their entirety by reference to the text of the 2018 Plan and to the text of the forms of agreement, all of which are filed as exhibits to this annual report.
Option Grants
On April 12, 2018, the Company granted 10-year non-qualified stock options to purchase shares of the Company’s common stock pursuant to the 2018 Plan as follows:
| Name | Options Granted | ||
| Damon R. Cuzick | 1,000,000 | ||
| John P. Yeros | 1,200,000 | ||
| Danny R. Cuzick | 1,500,000 | ||
| Tim Gorry | 200,000 | ||
| Scott M. Honour | 100,000 | ||
| Thomas J. Abood | 100,000 |
The options are exercisable at a price of $2.50 per share, which the Board determined was the fair market value of the Company’s common stock on the grant date. 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.
Certificate of Designation
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. 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.
A copy of the Certificate of Designation is attached hereto and is incorporated herein by reference.
Issuance of Preferred Stock
On April 12, 2018, the Company approved the issuance of 100,000 shares of Series A Preferred to Danny R. Cuzick, a member of the Company’s board of directors, as compensation for services rendered to the Company.
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Item 10. Directors, Executive Officers, and Corporate Governance.
The information required by item 10 of this report is incorporated by reference to the discussions under the headings “Election of Directors,” “Executive Officers,” “Corporate Governance,” “Meetings and Committees of the Board of Directors,” “Qualifications of Candidates for Election to the Board,” “Stockholder Recommendations for Directors,” “Stockholder Communications with the Board of Directors,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in a later filed definitive proxy or information statement involving the election of directors or in an amendment to this Form 10-K.
Item 11. Executive Compensation.
The information required by item 11 of this report is incorporated by reference to the discussions under the headings “Executive Compensation” and “Director Compensation” in a later filed definitive proxy or information statement involving the election of directors or in an amendment to this Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by item 12 of this report is incorporated by reference to the discussions under the headings “Beneficial Ownership of Common Stock” and “Securities Authorized for Issuance Under Equity Compensation Plans” in a later filed definitive proxy or information statement involving the election of directors or in an amendment to this Form 10-K.
Item 13. Certain Relationships, Related Transactions, and Director Independence.
The information required by item 13 of this report is incorporated by reference to the discussions under the headings “Corporate Governance” and “Certain Relationships and Related Transactions” in a later filed definitive proxy or information statement involving the election of directors or in an amendment to this Form 10-K.
Item 14. Principal Accounting Fees and Services
The information required by item 14 of this report is incorporated by reference to the discussions under the headings “Audit and Non-Audit Services and Fees Billed to Company by Independent Registered Public Accounting Firm,” included in the proposal to ratify the appointment of our independent registered public accounting firm in a later filed definitive proxy or information statement involving the election of directors or in an amendment to this Form 10-K.
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Item 15. Exhibits, Financial Statement Schedules.
Financial Statements
| Statement | Page* | |
| Table of Contents | F-1 | |
| Report of Independent Registered Public Accounting Firm | F-2 | |
| Balance Sheets | F-3 | |
| Statements of Operations | F-4 | |
| Statement of Stockholders’ Deficit | F-5 | |
| Statements of Cash Flows | F-6 | |
| Notes to Financial Statements | F-9 |
Financial Statement Schedules
None.
Exhibits
See the Exhibit Index immediately following the signature page to this annual report on Form 10-K, which incorporated herein by reference.
| 39 |
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, 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: April 17, 2018 | By: | /s/ John P. Yeros |
| John P. Yeros | ||
| Chief Executive Officer | ||
| Principal
Executive Officer and Principal Financial Officer | ||
Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Title | Date | |||
| /s/ John P. Yeros | Chief Executive Officer | April 17, 2018 | ||
| John P. Yeros | ||||
| /s/ Thomas J. Abood | Director | April 17, 2018 | ||
| Thomas J. Abood | ||||
| /s/ Danny Cuzick | Director | April 17, 2018 | ||
| Danny Cuzick | ||||
| /s/ Scott M. Honour | Director | April 17, 2018 | ||
| Scott M. Honour |
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The exhibits listed below are filed with this annual report on Form 10-K. Certain exhibits and schedules to the documents listed below have been omitted pursuant to Item 601 of Regulation S-K. The Company hereby undertakes to furnish supplemental copies of any omitted exhibits and schedules upon request to the SEC; provided, however, that the Company may request confidential treatment pursuant to Rule 24b-2 of the Exchange Act for any exhibits or schedules so furnished.
| 41 |
| 42 |
| Exhibit | Description | |
| 16.2 | Letter from Lurie, LLP to the Securities and Exchange Commission dated April 17, 2017 (7) | |
| 21.1* | Subsidiaries of EVO Transportation & Energy Services, Inc. | |
| 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, with respect to the registrant’s annual report on Form 10-K for the year ended December 31, 2017* | |
| 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(8) | |
| 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 |
| + | Management contract or compensatory plan or arrangement. |
| (1) | Filed as an exhibit to the Company’s registration statement on Form 10, as filed with the SEC on December 10, 2010 and incorporated herein by this reference. |
| (2) | Filed as an exhibit to the Company’s current report on Form 8-K filed with the SEC on November 29, 2016 and incorporated herein by reference. |
| (3) | Filed as an exhibit to the Company’s current report on Form 8-K filed with the SEC on January 18, 2017 and incorporated herein by reference. |
| (4) | Filed as an exhibit to the Company’s current report on Form 8-K filed with the SEC on February 6, 2017 and incorporated herein by reference. |
| (5) | Filed as an exhibit to the Company’s annual report on Form 10-K filed with the SEC on March 28, 2011 and incorporated herein by this reference. |
| (6) | Filed as an exhibit to the Company's current report on Form 8-K filed with the SEC on February 8, 2017 and incorporated herein by reference. |
| (7) | Filed as an exhibit to the Company's amended current report on Form 8-K filed with the SEC on April 18, 2017 and incorporated herein by reference. |
| (8) | Filed as an exhibit to the Company's annual report on Form 10-K filed with the SEC on April 18, 2017 and incorporated herein by reference. |
| (9) | Filed as an exhibit to the Company's current report on Form 8-K filed with the SEC on June 7, 2017 and incorporated herein by reference. |
| (10) | Filed as an exhibit to the Company's current report on Form 8-K filed with the SEC on September 1, 2017 and incorporated herein by reference. |
| (11) | Filed as an exhibit to the Company's current report on Form 8-K filed with the SEC on October 13, 2017 and incorporated herein by reference. |
| (12) | Filed as an exhibit to the Company's quarterly report on Form 10-Q filed with the SEC on November 20, 2017 and incorporated herein by reference. |
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