Forward-Looking Statements
The following discussion and analysis should be read in conjunction with the
condensed consolidated financial statements and notes thereto included in Item 1
of Part I of this report and the audited consolidated financial statements and
related notes thereto and the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2021. Some of
the statements in this report may contain forward-looking statements that
reflect management's current view about future events, future business, industry
and other conditions, our future performance, and our plans and expectations for
future operations and actions. In some cases you can identify forward-looking
statements by the use of words such as "anticipate," "will," "believe,"
"estimate," "expect," "future," "intend," "plan" and similar expressions or the
negative of these terms. Many of these forward-looking statements are located in
this report under "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations" but they may appear in other sections as
well. The forward-looking statements in this report generally relate to: (i) our
growth strategy and potential acquisition candidates; (ii) management's
expectations regarding market trends and competition in the vehicle fuels
industry, gasoline, diesel, and natural gas prices, government tax credits and
other incentives, and environmental and safety considerations; (iii) our beliefs
regarding the sufficiency of working capital and cash flows, and our continued
ability to renew or obtain financing on reasonable terms when necessary; (iv)
the impact of recently issued accounting pronouncements; (v) our intentions and
beliefs relating to our costs, business strategies, and future performance; (vi)
our expected financial results; and (vii) our expectations concerning our
primary capital and cash flow needs.
Forward-looking statements are based on information available to management at
the time the statements are made and involve known and unknown risks,
uncertainties and other factors that may cause our results, levels of activity,
performance or achievements to be materially different from the information
expressed or implied by the forward-looking statements. Such statements reflect
the current view of management with respect to future events and are subject to
risks, uncertainties, assumptions and other factors (including the risks
contained in the section entitled "Risk Factors" of our Annual Report on Form
10-K for the fiscal year ended December 31, 2021) 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:
•
Our ability to recruit and retain qualified drivers;
•
Future equipment (including tractor and box truck) prices, our equipment
purchasing plans, and our equipment turnover (including expected tractor
trade-ins);
•
The expected freight environment, including freight demand and volumes;
•
Future third-party service provider relationships and availability;
•
Future contracted pay rates with independent contractors and compensation
arrangements with drivers;
•
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 the benefits of
conventional and renewable natural gas relative to gasoline and diesel and other
alternative vehicle fuels and electronically powered vehicles, including with
respect to factors such as supply, cost savings, environmental benefits and
safety;
•
The competitive environment in which we operate, and the nature and impact of
competitive developments in our industry;
•
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;
•
The general strategies adopted by the USPS with respect to its third party
surface transportation suppliers;
•
The impacts of the COVID-19 global pandemic;
•
General political, regulatory, economic and market conditions;
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•
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; and
•
The flexibility of our model to adapt to market conditions.
Although management believes that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Except as required by
applicable law, including the securities laws of the United States, the Company
does not intend to update any of the forward-looking statements to conform these
statements to actual results. We qualify all of our forward-looking statements
by these cautionary statements.
Background and Recent Developments
EVO Transportation & Energy Services, Inc. is a transportation provider serving
the United States Postal Service ("USPS") and other customers. We believe EVO is
one of the largest surface transportation companies serving the USPS, with a
diversified fleet of tractors, straight trucks, and other vehicles that
currently operate on either diesel fuel or compressed natural gas ("CNG"). In
certain markets, we fuel our vehicles at one of our three CNG stations that
serve other customers as well. We are actively engaged in reducing CO2 emissions
by operating on CNG, pursuing opportunities to use other alternative fuels, and
by optimizing the routing efficiency of our operations to reduce fuel usage. We
operate from our headquarters in Phoenix, Arizona and from 9 main terminals
located throughout the United States.
EVO has grown primarily through acquisitions, and we have completed seven
acquisitions since our initial business combination in 2016. We have also grown
organically by obtaining new contracts from the USPS and other customers. During
the six months ended June 30, 2022, we generated $132.9 million in revenues from
the USPS. We have been actively integrating the acquisitions we have made under
common leadership and technology and are now operating under a single umbrella
brand.
Sources of Revenue
Our USPS trucking operations generates revenue for our trucking segment from
transportation services under multi-year contracts with the USPS.
Our freight trucking operations generates revenue for our trucking segment by
providing both irregular and dedicated route and cross-border transportation
services of various products, goods, and materials for a diverse customer base.
Our CNG station revenue is derived predominately from individual consumers. In
addition to revenue earned from our customers, we may also earn alternative fuel
tax credits through certain federal programs. These programs are generally
short-term in nature and require legislation to be passed extending the term.
Results from Operations
Three Months Ended June 30, 2022, as compared with the Three Months Ended June
30, 2021
Trucking revenue: The majority of Trucking revenue is derived from the USPS. The
remainder of the revenue is derived from corporate freight hauling. The USPS
contracts are typically four years in duration and include a monthly fuel
adjustment. Trucking revenue was $75.0 million and $56.4 million during the
three months ended June 30, 2022 and 2021, respectively. The $18.6 million, or
33.0%, increase in Trucking revenue from the three months ended June 30, 2021 to
the three months ended June 30, 2022 is primarily due to revenue from new USPS
contracts, along with increased fuel surcharge revenue as a result of increased
fuel prices.
Payroll, benefits and related: Payroll, benefits, and related expense includes
total compensation of drivers and non-drivers. Included in driver compensation
is an incremental hourly rate for benefits. Payroll, benefits and related
expense was $31.5 million and $23.8 million during the three months ended June
30, 2022 and 2021. The $7.7 million, or 32.4%, increase in payroll, benefits and
related expense is primarily due to the 33.0% increase in Trucking revenue
during the same periods.
Purchased transportation: Purchased transportation represents payments to
subcontracted third-party companies. These contracts are typically negotiated on
a rate per mile basis and the subcontracting company is responsible for
supplying all resources to perform the service including, but not limited to,
labor, equipment, fuel and associated expenses. Purchased transportation expense
was $9.0 million and $11.5 million during the three months ended June 30, 2022
and 2021, respectively. The $2.5 million, or 21.7%, decrease in purchased
transportation expense from the three months ended June 30, 2021 to the three
months ended June 30, 2022 is primarily due to an increased use of employee
drivers rather than subcontracted third-party company resources.
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Fuel: Fuel expense is comprised of diesel and CNG fuel required to operate the
truck fleet. The Company manages fuel cost by negotiating volume discounts from
rack fuel rates with select vendors. Fuel expense was $13.8 million and $6.5
million during the three months ended June 30, 2022 and 2021, respectively. The
$7.3 million, or 112.3%, increase in fuel expense is due primarily to the 33.0%
increase in trucking revenue combined with an increase in the average DOE fuel
price to $5.53 per gallon for the three months ended June 30, 2022 from $3.21
per gallon for the three months ended June 30, 2021.
Equipment rent: The Company rents and leases a portion of its trucks and
trailers through a combination of short-term rental arrangements and long-term
lease arrangements. Equipment rent expense was $4.1 million and $3.0 million
during the three months ended June 30, 2022 and 2021, respectively. The $1.1
million, or 36.7%, increase in equipment rent expense from the three months
ended June 30, 2021 to the three months ended June 30, 2022 is primarily due to
the need to service new USPS contracts by acquiring additional trucks and
trailers via new leasing arrangements.
Maintenance and Supplies: Maintenance and supplies expense primarily includes
the costs to maintain the fleet. Maintenance and supplies expense was $3.9
million and $2.5 million during the three months ended June 30, 2022 and 2021,
respectively. The $1.4 million or 56.0%, increase in maintenance and supplies
expense from the three months ended June 30, 2021 to the three months ended June
30, 2022 is primarily due to an increase in the size of the fleet combined with
increased maintenance costs for the existing fleet, which the Company is in
process of refreshing with newer equipment.
Insurance and claims: Insurance and claims is comprised of auto liability and
physical damage expense related to the trucking segment of the business.
Insurance and claims expense was $2.1 million and $2.4 million during the three
months ended June 30, 2022 and 2021, respectively. The $0.3 million, or 12.5%,
decrease in insurance and claims expense from the three months ended June 30,
2021 to the three months ended June 30, 2022 is primarily due to premium
adjustments and fewer significant, nonrecurring claims.
Operating supplies and expenses: Operating and supplies expense includes all
other direct costs in the Trucking segment. Operating supplies and expenses was
$3.1 million and $3.5 million during the three months ended June 30, 2022 and
2021, respectively. The $0.4 million, or 11.4%, decrease in operating supplies
and expenses from the three months ended June 30, 2021 to the three months ended
June 30, 2022 is primarily due to more cost efficient completion of certain
routes.
General and administrative: General and administrative expense was $4.2 million
and $4.2 million for the three months ended June 30, 2022 and 2021,
respectively.
Depreciation and amortization: Depreciation and amortization expense was $4.2
million and $3.7 million for the three months ended June 30, 2022 and 2021,
respectively. The increase is due to an increase in finance lease right-of-use
asset amortization expense.
Interest expense: Interest expense was $10.3 million and $2.8 million for the
three months ended June 30, 2022 and 2021, respectively. The $7.5 million, or
267.9%, increase in interest expense from the three months ended June 30, 2021
to the three months ended June 30, 2022 is primarily due to the Bridge Loan
Agreement, dated March 11, 2022, whereby the Company borrowed $9 million from
Antara Capital and granted Antara Capital 11,969,667 warrants to purchase
Company common stock at an exercise price of $0.01 per share. Refer to Note 5,
Debt, for further discussion.
Change in fair value of embedded derivative liability: The Antara Financing
Agreement contains a mandatory prepayment feature that was determined to be an
embedded derivative, requiring bifurcation and fair value recognition for the
derivative liability. The fair value of this derivative liability is remeasured
at each reporting period, with changes in fair value recognized in the
consolidated statement of operations. Refer to Note 5, Debt, and Note 8, Fair
Value Measurements, for further discussion.
Change in fair value of warrant liabilities: The Company previously issued
certain warrants that are not considered indexed to the Company's common stock
and, therefore, are required to be classified as liabilities and measured at
fair value at each reporting date with the change in fair value being recognized
in the Company's results of operations during each reporting period. The change
in fair value of substantially all of the warrants classified as liabilities is
recognized in other income (expense). Refer to Note 6, Stockholders' Deficit and
Warrants, and Note 8, Fair Value Measurements, for further discussion.
Six Months Ended June 30, 2022, as compared with the Six Months Ended June 30,
2021
Trucking revenue: The majority of Trucking revenue is derived from the USPS. The
remainder of the revenue is derived from corporate freight hauling. The USPS
contracts are typically four years in duration and include a monthly fuel
adjustment. Trucking revenue was $147.5 million and $110.4 million during the
six months ended June 30, 2022 and 2021, respectively. The $37.1 million, or
33.6%, increase in Trucking revenue from the six months ended June 30, 2021 to
the six months ended June 30, 2022 is primarily due to revenue from new USPS
contracts, along with increased fuel surcharge revenue as a result of increased
fuel prices.
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Other revenue: During the first quarter of 2021, the Company entered into
agreements with the USPS to settle claims submitted by the Company seeking
additional compensation for transportation services provided under certain DRO
contracts. The Company received a total of $28.5 million related to these claims
and also renegotiated the contractual rates per mile for some of its DRO
contracts on a prospective basis. In addition, amounts totaling $6.3 million
that were previously paid by the USPS to the Company during 2020 became subject
to the terms of the settlement agreements and were recognized as a deferred gain
as of December 31, 2020. The aforementioned amounts totaling $34.8 million were
recognized as other revenue during the first quarter of 2021 in the consolidated
statement of operations. Such amounts are for transportation services provided
during 2020 and prior years, are not subject to refund, and are not contingent
upon the Company providing future transportation services. Refer to Note 1,
Description of Business and Summary of Significant Accounting Policies, for
further discussion.
Payroll, benefits and related: Payroll, benefits, and related expense includes
total compensation of drivers and non-drivers. Included in driver compensation
is an incremental hourly rate for benefits. Payroll, benefits and related
expense was $64.1 million and $46.7 million during the six months ended June 30,
2022 and 2021, respectively, which corresponds to revenue for these periods. The
$17.4 million, or 37.3%, increase in payroll, benefit and related expense is
primarily due to the 33.6% increase in Trucking revenue during the same periods.
Purchased transportation: Purchased transportation represents payments to
subcontracted third-party companies. These contracts are typically negotiated on
a rate per mile basis and the subcontracting company is responsible for
supplying all resources to perform the service including, but not limited to,
labor, equipment, fuel and associated expenses. Purchased transportation expense
was $22.4 million and $20.7 million during the six months ended June 30, 2022
and 2021, respectively. The $1.7 million, or 8.2%, increase in purchased
transportation expense from the six months ended June 30, 2021 to the six months
ended June 30, 2022 is primarily due to an increased use of subcontracted
third-party companies rather than employee drivers.
Fuel: Fuel expense is comprised of diesel and CNG fuel required to operate the
truck fleet. The Company manages fuel cost by negotiating volume discounts from
rack fuel rates with select vendors. Fuel expense was $24.6 million and $11.9
million during the six months ended June 30, 2022 and 2021, respectively. The
12.7 million, or 106.7%, increase in fuel expense is due primarily to the 33.6%
increase in trucking revenue combined with an increase in the average DOE fuel
price to $4.95 per gallon for the six months ended June 30, 2022 from $3.06 per
gallon for the six months ended June 30, 2021.
Equipment rent: The Company rents and leases a portion of its trucks and
trailers through a combination of short-term rental arrangements and long-term
lease arrangements. Equipment rent expense was $8.4 million and $5.5 million
during the six months ended June 30, 2022 and 2021, respectively. The $2.9
million, or 52.7%, increase in equipment rent expense from the six months ended
June 30, 2021 to the six months ended June 30, 2022 is primarily due to the need
to service new USPS contracts by acquiring additional trucks and trailers via
new leasing arrangements.
Maintenance and Supplies: Maintenance and supplies expense primarily includes
the costs to maintain the fleet. Maintenance and supplies expense was $7.6
million and $4.7 million during the six months ended June 30, 2022 and 2021,
respectively. The $2.9 million, or 61.7%, increase in maintenance and supplies
expense from the six months ended June 30, 2021 to the six months ended June 30,
2022 is primarily due to an increase in the size of the fleet combined with
increased maintenance costs for the existing fleet, which the Company is in
process of refreshing with newer equipment.
Insurance and claims: Insurance and claims is comprised of auto liability and
physical damage expense related to the trucking segment of the business.
Insurance and claims expense was $3.4 million and $5.0 million during the six
months ended June 30, 2022 and 2021, respectively. The $1.6 million, or 32.0%,
decrease in insurance and claims expense from the six months ended June 30, 2021
to the six months ended June 30, 2022 is primarily due to premium adjustments
and fewer significant, nonrecurring claims.
Operating supplies and expenses: Operating and supplies expense includes all
other direct costs in the Trucking segment. Operating supplies and expenses was
$6.4 million and $7.6 million during the six months ended June 30, 2022 and
2021, respectively. The $1.2 million, or 15.8%, decrease in operating supplies
and expenses from the six months ended June 30, 2021 to the six months ended
June 30, 2022 is primarily due to more cost efficient completion of certain
routes.
General and administrative: General and administrative expense was $8.3 million
and $7.8 million for the six months ended June 30, 2022 and 2021, respectively.
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Depreciation and amortization: Depreciation and amortization expense was $8.1
million and $7.4 million for the six months ended June 30, 2022 and 2021,
respectively. The increase is due to an increase in finance lease right-of-use
asset amortization expense being substantially offset by a decrease in
depreciation expense.
Interest expense: Interest expense was $20.1 million and $6.9 million for the
six months ended June 30, 2022 and 2021, respectively. The $13.2 million, or
191.3%, increase in interest expense from the six months ended June 30, 2021 to
the six months ended June 30, 2022 is primarily due to the Bridge Loan
Agreement, dated March 11, 2022, whereby the Company borrowed $9 million from
Antara Capital and granted Antara Capital 11,969,667 warrants to purchase
Company common stock at an exercise price of $0.01 per share. Refer to Note 5,
Debt, for further discussion.
Gain (loss) on extinguishment of debt: The $5.3 million loss on extinguishment
of debt during the six months ended June 30, 2022 is due to: (1) the $5.2
million loss on the extinguishment of the four promissory notes with an
aggregate principal amount of $9.5 million as a result of the Convertible Note
Amendments, dated March 11, 2022; and (2) the $0.2 million loss on
extinguishment of the Batuta Secured Convertible Note. The $0.8 million gain on
extinguishment of debt during the six months ended June 30, 2021 is due to: (1)
the $2.5 million gain on the partial extinguishment of the $4.0 million Secured
Convertible Promissory Notes during March and April 2021; and (2) the $1.7
million loss on extinguishment resulting from using all of the net proceeds from
the Main Street Loan to pay down the aggregate principal amount due under the
Antara Financing Agreement (including capitalized interest) from $33.6 million
to $16.7 million during the first quarter of 2021.
Change in fair value of embedded derivative liability: The Antara Financing
Agreement contains a mandatory prepayment feature that was determined to be an
embedded derivative, requiring bifurcation and fair value recognition for the
derivative liability. The fair value of this derivative liability is remeasured
at each reporting period, with changes in fair value recognized in the
consolidated statement of operations. Refer to Note 5, Debt, and Note 8, Fair
Value Measurements, for further discussion.
Change in fair value of warrant liabilities: The Company previously issued
certain warrants that are not considered indexed to the Company's common stock
and, therefore, are required to be classified as liabilities and measured at
fair value at each reporting date with the change in fair value being recognized
in the Company's results of operations during each reporting period. The change
in fair value of substantially all of the warrants classified as liabilities is
recognized in other income (expense). Refer to Note 6, Stockholders' Deficit and
Warrants, and Note 8, Fair Value Measurements, for further discussion.
Liquidity and Capital Resources
Changes in Liquidity
Cash and Cash Equivalents. Cash and cash equivalents were $10.4 million and $7.3
million at June 30, 2022 and December 31, 2021, respectively. The increase is
primarily attributable to the cash provided by operating activities during the
six months ended June 30, 2022.
Operating Activities. Net cash provided by operating activities was $5.6 million
during the six months ended June 30, 2022. Net cash provided by operating
activities was $11.6 million during the six months ended June 30, 2021. For the
six months ended June 30, 2022, the Company had a net loss of $20.1 million. For
the six months ended June 30, 2021, the Company had net income of $22.1 million.
For six months ended June 30, 2022, the net loss included $18.8 million in
adjustments for non-cash items and $6.9 million of cash provided for changes in
working capital. Non-cash items primarily consisted of $8.1 million in
depreciation and amortization, $5.1 million in non-cash interest expense,
non-cash lease expense of $2.2 million, amortization of debt discount and debt
issuance costs of $10.0 million, a loss on extinguishment of debt of $5.3
million and a $5.9 million change in fair value of the embedded derivative
liability, partially offset by a $18.4 million change in fair value of warrant
liabilities.
For the six months ended June 30, 2021, the net income included $10.9 million in
adjustments for non-cash items and $21.4 million of cash used for changes in
working capital. Non-cash items primarily consisted of $7.4 million in
depreciation and amortization, $3.7 million in non-cash interest expense,
non-cash lease expense of $1.6 million, stock option and warrant-based
compensation expense of $0.3 million, and amortization of debt discount and debt
issuance costs of $0.5 million, partially offset by a $1.8 million change in
fair value of warrant liabilities and a gain on extinguishment of debt of $0.8
million.
Investing Activities. Net cash used in investing activities was $0 million for
the six months ended June 30, 2022, and net cash used in investing activities
was $4.6 million for the six months ended June 30, 2021. The net cash used in
investing activities during the six months ended June 30, 2021 is primarily
related to $4.8 million of capital expenditures.
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Financing Activities. Net cash used in financing activities was $2.5 million for
the six months ended June 30, 2022. Net cash used in financing activities was
$21.2 million for the six months ended June 30, 2021. The cash used in financing
activities during the six months ended June 30, 2022 primarily consisted of
$129.1 million in payments on factoring arrangements, $2.4 million in payments
of debt principal, and $4.0 million in payments on finance lease liabilities,
partially offset by $123.4 million in advances from factoring receivables and
$9.6 million of proceeds from the issuance of debt. The cash used in financing
activities during the six months ended June 30, 2021 primarily consisted of
$105.4 million in payments on factoring arrangements, $21.4 million in payments
of debt principal, and $1.3 million in payments on finance lease liabilities,
partially offset by $103.9 million in advances from factoring receivables and
$3.7 million of proceeds from the issuance of debt.
Sources of Liquidity
Our primary historical and future sources of liquidity are cash on hand ($10.4
million at June 30, 2022), the incurrence of additional indebtedness, the sale
of the Company's common stock or preferred stock, and advances under our
accounts receivable factoring arrangements. However, there can be no assurance
that we will be able to obtain additional financing in the future via the
incurrence of additional indebtedness or the sale of the Company's common stock
or preferred stock.
Uses of Liquidity
Our business requires substantial amounts of cash for operating activities,
including salaries and wages paid to our employees, contract payments to
independent contractors, and payments for fuel, maintenance and supplies, and
other expenses. We also use large amounts of cash and credit for principal and
interest payments, as well as operating and finance lease liabilities and
capital expenditures to fund the replacement and/or growth in our tractor and
trailer fleet.
Going Concern
As of June 30, 2022, the Company had a cash balance of $10.4 million, a working
capital deficit of $108.2 million, stockholders' deficit of $61.6 million, and
material debt and lease obligations of $117.4 million, which include term loan
borrowings under a financing agreement with Antara Capital. During the six
months ended June 30, 2022, the Company reported cash provided by operating
activities of $5.6 million and a net loss of $20.1 million.
The following significant transactions and events affecting the Company's
liquidity occurred during the six months ended June 30, 2022:
•
On March 11, 2022, the Company obtained a Bridge Loan in the amount of $9.0
million from Antara Capital and Executive Loans in the aggregate amount of $0.8
million, both as described in Note 5, Debt. Pursuant to the Bridge Loan
Agreement, on March 11, 2022, Antara Capital appointed Michael Bayles, a former
member of the Company's board of directors (the "Board") and a former officer of
the Company, as a member of the Company's Board, effective immediately. Mr.
Bayles was appointed to fill a newly-created vacancy on the Board.
•
On March 11, 2022, and pursuant to the Bridge Loan Agreement, the Company filed
a Certificate of Designations of Series C Non-Participating Preferred Stock with
the Secretary of State of the State of Delaware, which authorizes the Company to
issue up to one share of Series C Preferred Stock, and issued to Antara Capital
one share of Series C Preferred Stock.
Under the Certificate of Designations, prior to Bridge Loan Triggering Event and
following the Bridge Loan Discharge Date, the holder of Series C Preferred Stock
will have no voting rights except as otherwise required by law. Under the
Certificate of Designations, upon the occurrence of a Bridge Loan Triggering
Event through and including the Bridge Loan Discharge Date, the holder of Series
C Preferred Stock will vote together with the holders of the Company's common
stock as a single class on any Shareholder Matter, and the holder of Series C
Preferred Stock will be entitled to cast a number of votes on any Shareholder
Matter equal to the total number of votes of all non-holders of Series C
Preferred Stock entitled to vote on any such Shareholder Matter plus 10. In
addition, the Certificate of Designations provides that governance mechanisms
that could have the effect of limiting, reducing or adversely affecting the
Series C Preferred Stockholders' voting or board-appointment rights under the
Certificate of Designations will require the consent of the Series C Majority.
In addition, the Certificate of Designations grants the Series C Majority the
exclusive right, voting separately as a class, to elect or appoint (i) prior to
a Bridge Loan Triggering Event, one director to the Board (who shall, unless the
majority of the Series C Preferred Stock elects otherwise in its sole
discretion, also serve as a member of each Board committee) and (ii) upon the
occurrence of a Bridge Loan Triggering Event through and including the Bridge
Loan Discharge Date, a majority of the members of the Board.
•
On March 11, 2022, the Company entered into amendments to certain secured
convertible promissory notes in the aggregate principal amount of $9.5 million
to permit immediate conversion of those notes, and the holders representative
converted
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those notes into warrants to purchase 7,533,750 shares of common stock of the
Company at an exercise price of $0.01 per share.
•
On May 31, 2022, the Company, Antara Capital and the Executive Lenders entered
into a Loan Extension Agreement that extended the Bridge Loan maturity date from
May 31, 2022 to June 30, 2022 and the Executive Loans maturity date from June 3,
2022 to July 7, 2022.
•
On June 30, 2022, the Company, Antara Capital and the Executive Lenders entered
into a Second Extension Agreement that extended the Bridge Loan maturity date
from June 30, 2022 to July 8, 2022 and the Executive Loans maturity date from
July 7, 2022 to July 15, 2022.
The following significant transactions and events affecting the Company's
liquidity occurred following the six months ended June 30, 2022:
•
On July 8, 2022, the Company, Antara Capital and the Executive Lenders entered
into a Third Extension Agreement that extended the Bridge Loan maturity date
from July 8, 2022 to July 15, 2022 and the Executive Loans maturity date from
July 15, 2022 to July 22, 2022. In addition, the Third Extension Agreement
stipulated that on or before July 13, 2022, the Board of Directors of the
Company shall have duly approved and filed with the Secretary of State of the
State of Delaware a Certificate of Designation to evidence the issuance of a new
series of Series D Non-Participating Preferred Stock, $0.0001 par value that
will, upon issuance, entitle Antara Capital (in its capacity as sole holder of
the Series D Non-Participating Preferred Stock) to vote such number of votes per
share that will allow Antara Capital to exercise 51% of the voting capital stock
of the Company.
•
On July 13, 2022, and pursuant to the Third Extension Agreement dated July 8,
2022, the Company filed a Certificate of Designations of Series D
Non-Participating Preferred Stock with the Secretary of State of the State of
Delaware, which authorizes the Company to issue up to one share of Series D
Non-Participating Preferred Stock. Under the Certificate of Designations, prior
to a Bridge Loan Triggering Event and on and following the "Bridge Loan
Discharge Date, the holders of Series D Non-Participating Preferred Stock will
vote together with the holders of the Company's common stock as a single class
on any Shareholder Matter, and the holders of Series D Non-Participating
Preferred Stock will be entitled to cast a number of votes on any Shareholder
Matter equal to the total number of votes of all non-holders of Series D
Non-Participating Preferred Stock entitled to vote on any such Shareholder
Matter plus 10. From the occurrence of a Bridge Loan Triggering Event to (but
excluding) the Bridge Loan Discharge Date, the holders of Series D
Non-Participating Preferred Stock (in their capacity as such) will have no
voting rights except as otherwise required by law.
The issuance of one share of Series D Non-Participating Preferred Stock to
Antara Capital on July 13, 2022 resulted in a change of control of the Company,
with Antara Capital having voting control on Shareholder Matters. The
consideration for the issuance of Series D Non-Participating Preferred Stock to
Antara Capital was Antara Capital's agreement to enter into the Third Extension
Agreement, and the Company did not receive any cash consideration.
•
On July 15, 2022, the Company, Antara Capital and the Executive Lenders entered
into a Fourth Extension Agreement that extended the Bridge Loan maturity date
from July 15, 2022 to August 15, 2022 and the Executive Loans maturity date from
July 22, 2022 to August 22, 2022.
•
On August 12, 2022, the Company, Antara Capital and the Executive Lenders
entered into a Fifth Extension Agreement that extended the Bridge Loan maturity
date from August 15, 2022 to September 15, 2022 and the Executive Loans maturity
date from August 22, 2022 to September 22, 2022.
•
On September 8, 2022, the Company, Antara Capital and the Executive Lenders, in
contemplation of the Securities Purchase Agreement discussed below, entered into
a Sixth Extension Agreement that extended the Bridge Loan maturity date from
September 15, 2022 to December 29, 2023 and the Executive Loans maturity date
from September 22, 2022 to January 5, 2024.
•
On September 8, 2022, the Company and Antara Capital entered into a Securities
Purchase Agreement and consummated certain transactions involving the
recapitalization of the Company. This includes the sale and issuance of new
equity by the Company and the cancellation of certain indebtedness in exchange
for equity of the Company and or its subsidiaries (collectively the
"Recapitalization Transactions"). In connection with the Recapitalization
Transactions, Antara Capital agreed to pay the Company $13.5 million to purchase
341,566,839 warrants to purchase common stock and 1 share of convertible
preferred stock in EVO Holding Company, LLC ("EVO Holding") (the "Preferred
Interest"). Upon exercise of the warrants Antara Capital will own approximately
64% of the Company on a fully diluted basis. The Preferred Interest is
convertible into 99% of the common membership interests of EVO Holding, if the
Company fails to meet certain financial conditions, at Antara Capital's election
during the Conversion Period, defined in Note 12, Subsequent Events, under the
heading "Amended and Restated Limited Liability Company Operating Agreement."
EVO Holding maintains the Company's ownership interests in the Ritter Companies,
which provide a material portion of our Trucking revenue. During
42
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the three and six months ended June 30, 2022, the Ritter Companies provided
approximately 18% and 19% of our Trucking revenue, respectively. During the
three and six months ended June 30, 2021, the Ritter Companies provided
approximately 19% of our Trucking revenue. Refer to Note 12, Subsequent Events,
for further discussion regarding the Recapitalization Transactions and the
rights and privileges surrounding the Preferred Interest.
Despite the occurrence of the Recapitalization Transactions, the Company
believes its existing cash, together with any positive cash flows from
operations, may not be sufficient to support working capital and capital
expenditure requirements for the next 12 months, and the Company may be required
to seek additional financing from outside sources.
In evaluating the Company's ability to continue as a going concern and its
potential need to seek additional financing from outside sources, management
also considered the following conditions:
•
The counterparty to the Company's accounts receivable factoring arrangement is
not obligated to purchase the Company's accounts receivable or make advances to
the Company under such arrangement;
•
The Company is currently in default on certain of its debt obligations (Refer to
Note 5, Debt, for further discussion); and
•
There can be no assurance that the Company will be able to obtain additional
financing in the future via the incurrence of additional indebtedness or via the
sale of the Company's common stock or preferred stock.
As a result of the circumstances described above, the Company may not have
sufficient liquidity to make the required payments on its debt, factoring or
leasing obligations; to satisfy future operating expenses; to make capital
expenditures; or to provide for other cash needs.
Management's plans to mitigate the Company's current conditions include:
•
Negotiating with related parties and 3rd parties to refinance existing debt and
lease obligations;
•
Potential future public or private debt or equity offerings;
•
Acquiring new profitable contracts and negotiating revised pricing for existing
contracts;
•
Profitably expanding trucking revenue;
•
Cost reduction efforts;
•
Improvements to operations to gain driver efficiencies;
•
Purchases of trucks and trailers to reduce purchased transportation and rental
vehicles; and
•
Replacement of older trucks with newer trucks to lower the overall cost of
ownership and improve cash flow through reduced maintenance and fuel costs.
Notwithstanding management's plans, there can be no assurance that the Company
will be successful in its efforts to address its current liquidity and capital
resource constraints. These conditions raise substantial doubt about the
Company's ability to continue as a going concern for the next twelve months from
the issuance of these consolidated financial statements. The consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classifications of liabilities that may result if the Company is unable to
continue as a going concern.
Refer to Notes 4 and 5 to the unaudited condensed consolidated financial
statements for further information regarding the Company's factoring and debt
obligations. Refer to Note 12, Subsequent Events, to the unaudited condensed
consolidated financial statements for further information regarding changes in
the Company's debt obligations and liquidity subsequent to June 30, 2022.
Off-Balance Sheet Arrangements
Refer to Note 10, Commitments and Contingencies - Captive Insurance.
Critical Accounting Policies
Our critical accounting policies have not changed from the information reported
in our Annual Report on Form 10-K for the year ended December 31, 2021.
Recently Adopted Accounting Changes and Recently Issued and Adopted Accounting
Standards
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See Note 1 to the unaudited condensed consolidated financial statements,
included in Part 1, Item 1 of this Quarterly Report, incorporated by reference
herein.
Seasonality
Discussion regarding the impact of seasonality on our business is included in
Note 1 to the unaudited condensed consolidated financial statements, included in
Part 1, Item 1 of this Quarterly Report, incorporated by reference herein.
Inflation
Inflation can have an impact on our operating costs. A prolonged period of
inflation could cause interest rates, fuel, wages, and other costs to increase,
which would adversely affect our results of operations unless freight and rates
correspondingly increased.
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EVO TRANSPORTATION & ENERGY SERVICES, INC. 
