(C) ProPublica.
This unaltered story was originally published at ProPublica.org. [1]
Licensed under creative commons by-nc-nd/3.0 [2]
evoa-10k_20191231.htm
Author Name, ProPublica
2021-09
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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
☐ 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.) 2075 West Pinnacle Peak Rd. Suite 130 Phoenix , AZ 85027 (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.
Title of each class Trading Symbol(s) Name of each exchange on which registered
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 every Interactive Data File required to be submitted 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 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.
Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ 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 $ 2.0 million based on the price of $2.00 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.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
As of August 5, 2021, there were 15,212,815 shares of the registrant’s common stock, par value $0.0001, outstanding.
TABLE OF CONTENTS
i
FORWARD-LOOKING STATEMENTS
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”, “expects”, “intends”, “estimates”, “projects”, “target”, “goals”, “plans”, “objectives”, “should”, “future,”, “seek”, “may”, “could”, “likely” or similar expressions or the negative of these terms identify forward-looking statements as they relate to EVO Transportation & Energy Services, Inc., a Delaware corporation (“EVO,” the “Company,” “we,” “us” or “our”), its subsidiaries or management. The forward-looking statements in this report generally relate to: EVO’s growth strategy and potential acquisition candidates, EVO’s relationship with the United States Postal Service, gasoline, diesel, and natural gas prices, management’s expectations regarding market trends and competition in the transportation industry, government tax credits and other incentives, insurance, 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 EVO’s 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:
• 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;
ii
• 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.
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.
iii
PART I
Item 1. Business.
Our Business
EVO Transportation & Energy Services, Inc. is a transportation provider serving the United States Postal Service (“USPS”) and other customers. EVO is the second largest surface transportation company serving the USPS with approximately 1,000 vehicles in operation as of December 31, 2019. Of these, approximately 200 vehicles operate on compressed natural gas (“CNG”) which makes us the largest user of alternative fuels amongst transportation companies serving the USPS. In certain markets, we fuel our vehicles at one of our five dedicated CNG stations which serve other customers as well. We operate from our headquarters in Phoenix, Arizona and from 15 facilities in 17 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. In 2019, on a pro forma basis, assuming all 2019 acquisitions had occurred at the beginning of the year, we generated $217 million in revenues. During 2019, we were awarded 114 additional contracts from the USPS which are expected to generate $15.2 million in annual revenue. We have been actively integrating the acquisitions we have made under common leadership and technology with a goal of operating under a single brand.
We are actively engaged in reducing CO 2 emissions by converting vehicles to operate on CNG or other alternative fuels and by optimizing the routing efficiency of our operations to reduce fuel usage. During the last year, we replaced 33 diesel tractors with 40 CNG tractors. In 2019, on a pro forma basis, we emitted approximately 85,227 metric tons of CO 2 produced while driving approximately 75 million miles, or 0.0011 metric tons per mile. We believe that through operating our CNG vehicles and our sale of approximately 800,000 gas gallon equivalents of fuel to third party customers, we averted 6,565 metric tons of CO 2 emissions in 2019.
Service and Product Offering
Mail Transportation
We transport mail and freight by truck for the USPS and other customers through 315 contracts covering 217,150 average daily route miles in aggregate. We competitively bid on transportation contracts that detail the movement of mail between processing facilities and destination post offices. Customer contracts are typically four years in term and most often are renewed if appropriate service has been performed in accordance with all contract requirements including, but not limited to, USPS performance standards, Service Contract Act requirements, Department of Transportation (“DOT”) regulations (federal and state), and all other applicable local and state regulations.
As of December 31, 2019, we held 289 contracts with the USPS totaling 193,932 average daily route miles of service. Of these, 277 were traditional route contracts covering 139,822 average daily route miles of pre-set route service, and 12 were Dynamic Route Optimization contracts covering 54,110 average daily route miles.
We provide these services through a fleet of 995 tractors and 1,150 drivers as of December 31, 2019. Our mail transportation operations generated $192 million of pro forma revenues in 2019, or 88% of our total pro forma revenues.
Local Mail Delivery
We provide outsourced mail delivery to 115 USPS branches in rural markets. We began this business in 2019 as EVO was awarded 112 contracted delivery supplier (“CDS”) contracts by the USPS. We serve local postmasters with 67 vehicles operated by 78 drivers as of December 31, 2019. Our local mail delivery operations generated $8.1 million of revenues in 2019, or 3.7% of our total revenues.
Freight and Brokerage Services
In addition to our USPS mail transportation and delivery services, we provide freight and brokerage services to various corporate customers. In 2019, we transported freight over 8,474,876 miles through these operations. Our freight and brokerage services generated $29 million of revenues in 2019, or 13.3% of our total revenues.
1
Compressed Natural Gas Fueling
We operate five CNG fueling stations which serve our fleet and other customers. These stations are located in Jurupa Valley, CA; Fort Worth, TX; Oak Creek, WI; Tolleson, AZ; and San Antonio, TX and accommodate class 8 trucks and trailers. Most of our customers fuel at our stations under long term contracts and we have a small number of retail customers. Our CNG fueling operations generated $1.7 million of revenues in 2019, or just under 1% of our total revenues.
History
The Company was incorporated in the State of Delaware on October 22, 2010 under the name “Minn Shares Inc.” From December 2010 until November 2016, Minn Shares Inc. was considered a public “shell” company and dedicated its operations to seeking a potential merger or acquisition partner. On November 22, 2016, the Company and Titan CNG LLC, a Delaware limited liability company in the business of owning and operating compressed natural gas fueling stations (“Titan”), entered into an agreement and plan of securities exchange whereby the members of Titan acquired approximately 90% of the Company’s outstanding shares. Following the closing, 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 August 31, 2017, the Company changed its name from “Minn Shares Inc.” to “EVO Transportation & Energy Services, Inc.”
Following the November 2016 public shell reverse merger transaction, the Company’s primary strategy was to seek growth through acquisitions. The Company completed the following acquisitions subsequent to November 2016:
• On February 1, 2017, the Company acquired Environmental Alternative Fuels, LLC and its wholly owned subsidiary, EVO CNG, LLC. EVO CNG, LLC is engaged in the business of operating compressed natural gas fueling stations.
• On June 1, 2018, the Company acquired Thunder Ridge Transport, Inc. (“Thunder Ridge”). Thunder Ridge is based in Springfield, Missouri and is engaged in the business of fulfilling government contracts for freight trucking services, as well as providing freight trucking services to non-government entities.
• On November 16, 2018, the Company acquired W.E. Graham, Inc., a trucking company based in Memphis, Tennessee engaged in the business of fulfilling government contracts for freight trucking services.
• On January 2, 2019, the Company acquired Sheehy Mail, Inc. (“Sheehy”). Sheehy is based in Waterloo, Wisconsin and is engaged in the business of fulfilling government contracts for freight trucking services, as well as providing freight trucking services to non-government entities.
• On February 1, 2019, the Company acquired Ursa Major Corporation (“Ursa”) and J.B. Lease Corporation (“JB Lease”). Ursa and JB Lease are based in Oak Creek, Wisconsin and are engaged in the business of fulfilling government contracts for freight trucking services, as well as providing freight trucking services to non-government entities.
• On July 15, 2019, the Company acquired Courtlandt and Brown Enterprises L.L.C. (“Courtlandt”) and Finkle Transport Inc. (“Finkle”). Finkle and Courtlandt are based in Newark, New Jersey and are engaged in the business of fulfilling government contracts for freight trucking services, as well as providing freight trucking services to non-government entities.
• On September 16, 2019, the Company, through its wholly-owned subsidiary EVO Holding Company, LLC, acquired John W. Ritter, Inc. (“JWR”), Ritter Transportation Systems, Inc. (“Ritter Transportation”), Ritter Transport, Inc. (“Ritter Transport”), and Johmar Leasing Company, LLC (“Johmar,” and together with JWR, Ritter Transportation, and Ritter Transport, the “Ritter Companies”). The Ritter Companies are based in Laurel, Maryland and are engaged in the business of fulfilling government contracts for freight trucking services, as well as providing freight trucking services to non-government entities.
Strategy
In 2014, the USPS announced that it intends to drastically reduce their supplier base from over 4,000 surface transportation contractors to less than 1,000 by 2022. As part of this consolidation effort, the USPS began implementing the Dynamic Route Optimization (“DRO”) program and consolidated contracts, which is designed to manage fewer relationships and work with larger prime contractors. As a result, it was estimated that over $1 billion in DRO contracts will come available over the next five years.
2
We believe EVO is well positioned to take on more business with the USPS as the postal service consolidates vendors. We have a dedicated team focused on bidding on new contracts and responding to any inquiries from the USPS on existing contracts. We believe we have an industry-leading ability to provide the USPS with the information and service levels they desire as we bid on new contracts. As a result, we won two new contracts with the USPS in 2019. We currently have operations which cover 11% of the USPS transportation portfolio and intend to continue to expand our footprint both organically and through acquisitions to provide greater coverage to the USPS.
We have invested meaningfully in information systems and personnel which allow us to be effective in managing DRO contracts. For example, our use of an industry leading transportation management system has allowed us to meet the scheduling and reporting needs of the USPS under its DRO program. Our acquisitive growth strategy has also enabled us to achieve a greater scale than many of our regional and local competitors, which gives us the ability to competitively bid on a high percentage of available DRO contracts. The Company also intends to compete for awards of long haul and other USPS contracts that become available outside DRO/Consolidation.
Our largest customer, the USPS, adopted a robust environmental sustainability plan that includes a stated commitment to reducing greenhouse gas emissions through increased procurement of services from alternative fuels carriers. We have a dedicated focus on reducing emissions through operating routes as efficiently as possible as well as by operating vehicles on CNG. In 2019, we increased our CNG fleet by 85 tractors and now have approximately 15% of our vehicle fleet operating on CNG. In addition, we operate 5 CNG stations which fuel our vehicles and those of other customers. We intend to continue to convert additional vehicles to alternative fuels. We believe our shared commitment with the USPS to reducing emissions positions the Company to grow our business relationship with the USPS in the future.
We intend to leverage our infrastructure to serve additional customers beyond the USPS. By utilizing our technology platform, nationwide network of terminals, and in some cases an ability to offer freight products with similar next day options, we are able to offer transportation services to corporate customers at competitive rates while also improving margins. We will continue to invest in our technology solutions in order to offer industry-leading service to our customers.
We also plan to increase utilization of our company owned CNG stations by acquiring trucking companies and developing transit lanes utilizing CNG trucks near our CNG stations. Since January 2019, we completed the acquisition of Sheehy of Waterloo, Wisconsin, which operates the largest fleet of CNG trucks servicing the USPS. We also completed the acquisition of Ursa in 2019, which is based one mile from our Oak Creek CNG station.
Market Overview
Competition
The U.S. mail trucking industry is estimated to represent an approximately $5 billion subset of the broader transportation market. The USPS trucking industry is highly competitive and fragmented. In 2014, the USPS had active contracts with over 4,000 transportation contractors, and it has publicly announced that its goal is to reduce that number to below 1,000 by 2022. As a result, the Company estimates that over $1 billion in DRO/Consolidation contracts will come available over the next five years. The Company intends to compete to win new DRO/Consolidation contracts and renew its existing DRO contracts in the future.
The Company competes primarily with other transportation companies for DRO contracts with the USPS. We also compete with other motor carriers for the services of drivers, independent contractors and management employees. Our largest customer, the USPS, typically awards its contracts competitively and often renews contracts with incumbent service providers if appropriate services have been performed. The Company believes that the principal differentiating factors in its business, relative to competition, are service, efficiency, pricing, and its focus on alternative fuels, which aligns with the USPS’s stated preference for contractors who prioritize alternative energy options. Additionally, the Company was an early adopter of the DRO program with the USPS. We believe our existing relationship with the USPS and experience with the DRO program provide the Company an additional competitive advantage when bidding on these contracts.
Our Target Customers
The USPS is our primary target customer, but we also seek to provide freight trucking and brokerage services to various corporate customers.
3
Principal Customers and Suppliers
The USPS is the Company’s primary customer, and for the years ended December 31, 2019 and 2018, the USPS accounted for approximately 88% and 95%, respectively, of the Company’s revenue. As a result, the Company’s trucking operations are highly dependent on the USPS. For a discussion of the risks associated with the possible loss of the USPS as a customer or a significant reduction in the Company’s relationship with the USPS, refer to Item 1A. Risk Factors of this report.
Safety and Risk Management
The DOT requires the Company to perform drug and alcohol testing that meets DOT regulations. The Company’s safety program includes pre-employment, random and post-accident drug testing and all other testing required by the DOT. The Company also has equipped approximately 50% of its company tractors with critical-event recorders and plans to equip the remaining 50%. This helps continually train drivers, so that the Company can prevent or reduce the severity of accidents.
The primary safety-related risks associated with the Company’s business include physical damage to company equipment, damage to buildings and personal property, third party personal injury and property damage and workers’ compensation. The Company periodically reviews insurance limits and retentions. The Company believes that the insurance it currently maintains provides adequate coverage for its operations.
To the extent that the Company subcontracts any portion of its business to third party service providers, those third party service providers operate under their own DOT authority, and provide their own liability insurance and workers compensation insurance which Company has the right to audit from time to time.
Fuel
In 2019, we used 9,088,278 gallons of diesel and 2,095,691 gas gallon equivalents (“GGEs”) of CNG. Our fuel costs are typically passed on to customers. In 2019 we paid an average of $1.73 per GGE for fuel for our CNG tractors and $2.80 per gallon for our diesel tractors. In addition, we qualify for a retroactive tax credit of $0.50 per GGE for the 2,095,691 GGEs utilized in 2019 and expect this tax credit to continue through 2021.
The Company actively manages its fuel purchasing network in an effort to maintain adequate fuel supplies and reduce its fuel costs. The Company purchases its fuel through a network of retail truck stops with which it has negotiated volume purchasing discounts. The Company seeks to reduce its fuel costs by routing its drivers to truck stops with which the Company has negotiated volume purchase discounts when fuel prices at such stops are lower than the bulk rate paid for fuel at the Company’s terminals. The Company stores fuel in aboveground and underground storage tanks at some of its facilities.
The Company believes the most effective protection against fuel cost increases is to maintain a fuel-efficient fleet by incorporating fuel efficiency measures and focusing on alternative fuel vehicles, particularly CNG vehicles that can leverage the Company’s current and future CNG fueling stations. The Company may periodically enter into various commodity hedging instruments to mitigate a portion of the effect of fuel price fluctuations. As of December 31, 2019 and 2018, the Company recorded liabilities related to commodity hedging instruments in the amount of approximately $0 and $11,000, respectively, in the accompanying consolidated balance sheets. Shortages of fuel, increases in fuel prices, or rationing of petroleum products could have a material adverse effect on the Company’s operations and profitability.
Operations
Fleet
We operate a fleet of 824 tractors, 156 straight trucks, and 67 local delivery vehicles of which 815 were owned, 159 were leased and 73 were rented under short term rental agreements as of December 31, 2019. The average age of our owned and leased fleet is 6 years. Of this fleet, 194 of our vehicles operate with CNG. We intend to continue to replace our existing fleet with more efficient diesel, CNG and other alternative fuel vehicles.
Operations Center
We manage a centralized operations center in Oak Creek, Wisconsin. At this center we utilize our transaction management system to match inbound USPS route manifests and other load orders with driver schedules and coordinate these activities with our fleet, maintenance, safety, payroll, audit and billing departments.
4
Technology
We utilize an industry leading transportation management system and electronic logging device for scheduling and driver rotations, producing driver hours, route tracking, and billing. This system works in connection with a hardware solution mounted on our trucks. As of December 31, 2019, over 90% of our vehicle fleet had these units installed. In 2019, we began an implementation of NetSuite and Salesforce.com across our company. We expect these systems, once fully utilized, to provide increased operational efficiencies via higher utilization of available truck volume.
Seasonality
Due to seasonal increases in USPS volume, the Company’s truck utilization typically increases during the last quarter of each calendar year. At the same time, operating expenses increase, fuel efficiency declines because of engine idling, and harsh weather creates higher accident frequency, increased claims, and higher equipment repair expenditures. Other weather-related or similar events such as tornadoes, hurricanes, blizzards, ice storms, floods, fires, earthquakes and explosions can also impact the Company’s operations by disrupting fuel supplies, increasing fuel costs, disrupting freight shipments or routes, affecting regional economies, destroying the Company’s assets or adversely affecting the business or financial condition of customers.
Government Regulation and Environmental Matters
The Company’s operations are regulated and licensed by various federal, state, and local government agencies. The Company and its drivers must comply with the safety and fitness regulations of the DOT and the agencies within the states that regulate transportation, including those regulations relating to operating authority, safety, drug- and alcohol-testing, hours-of-service, hazardous materials transportation, financial reporting, testing and specification of equipment, and product-handling requirements. Weight and equipment dimensions also are subject to government regulations. The Company also may become subject to new or more restrictive regulations relating to fuel emissions, environmental protection, drivers’ hours-of-service, driver eligibility requirements, on-board reporting of operations, collective bargaining, ergonomics and other matters affecting safety, insurance and operating methods. Other agencies, such as the United States Environmental Protection Agency (“EPA”) and the United States Department of Homeland Security (“DHS”), also regulate the Company’s equipment, operations, drivers and the environment.
The DOT, through the Federal Motor Carrier Safety Administration (“FMCSA”), imposes safety and fitness regulations on the Company and its drivers, including rules that restrict driver hours-of-service. The FMCSA has adopted a data-driven Compliance, Safety and Accountability (the “CSA”) program as its safety enforcement and compliance model. The CSA program holds motor carries and drivers accountable for their role in safety by evaluating and ranking fleets and individual drivers on certain safety-related standards. To promote improvement in all CSA categories, including those both over and under the established scoring threshold, the Company has procedures in place to address areas where it has exceeded the thresholds and the Company periodically reviews all safety-related policies, programs and procedures for their effectiveness and revises them, as necessary, to establish positive improvement. The Company believes its established policies, programs and procedures are adequate to address any safety-related concerns but can give no assurance these measures will be effective. The FMCSA issues three categories of safety ratings: satisfactory, conditional, and unsatisfactory. The Company currently has a “satisfactory” FMCSA rating on 100% of its fleet.
The FMCSA has also mandated the use of Electronic Logging Devices (“ELDs”) for commercial motor vehicle drivers to measure their compliance with hours-of-service requirements. Motor carriers and drivers were permitted to use an automatic onboard recording device (“AOBRDs”) compliant with existing regulations in lieu of ELDs if the AOBRDs were put into use prior to December 18, 2017; however, all carriers and drivers subject to FMCSA rules have been required use ELDs since December 16, 2019.
The Company is also subject to various labor laws and regulations. The contracts that the Company holds with USPS are subject to the McNamara-O’Hara Service Contract Act (“SCA”) that is administered by the Department of Labor. The SCA, among other things, requires that the Company pay its drivers a minimum hourly wage as determined by the DOL as well as provide a bonified fringe benefit package to its drivers.
The Company is also subject to various environmental laws and regulations governing, among other matters, the operation of fuel storage tanks, release of emissions from its vehicles (including engine idling) and facilities, and adverse impacts to the environment, including to the soil, groundwater and surface water. The Company has implemented programs designed to monitor and address identified environmental risks. Historically, the Company’s environmental compliance costs have not had a material adverse effect on its results of operations.
5
The Company’s operations involve the risks of fuel spillage or seepage into the environment, discharge of contaminants, environmental damage, and unauthorized hazardous material spills, releases or disposal actions, among others. If the Company is found to be responsible for such contamination or spills, the Company could be subject to costs and liabilities, including costs for remediation, environmental natural resource damages and penalties.
Federal and state lawmakers have implemented or proposed potential limits on greenhouse gas emissions under a variety of climate-change initiatives. The EPA regulations limiting exhaust emissions have increasingly become more restrictive in recent years, and the EPA and National Highway Traffic Safety Administration (“NHTSA”) have also developed stricter fuel-efficiency standards for heavy-duty trucks. New trailers are subject to greenhouse gas emission limits and fuel efficiency standards. Some states and municipalities have also begun to restrict the locations and amount of time where diesel-powered tractors may idle. While impossible to predict, the Company expects that these existing and new regulations will result in increased costs for acquiring new tractors and for additional parts and maintenance activities to retrofit its tractors with technology to achieve compliance with such standards, particularly if such costs are not offset by any potential fuel savings. These regulations create uncertainty as to the reliability of the newly designed diesel engines and the residual value of these vehicles. New idling restrictions could force the Company to alter its drivers’ behavior, purchase on-board power units that do not require the engine to idle, or face a decrease in productivity. While we anticipate changing emission-control and fuel-efficiency standards to result in increased costs, the Company cannot predict the extent to which these regulations will impact its operations.
Employees
As of December 31, 2019, the Company had approximately 1,503 employees, consisting of 1,094 full-time employees and 409 part-time employees. The Company employed 1,228 drivers as of December 31, 2019. The Company is not a party to any collective bargaining agreements.
Company Website
The Company’s website may be accessed at www.evotransinc.com. All of our filings with the Securities and Exchange Commission can be accessed free of charge through our website as soon as reasonably practicable after filing. This includes annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports filed or furnished on Form 8-K and all related amendments.
Item 1A. Risk Factors.
Risks Related to the Company
If we do not obtain sufficient additional capital or generate substantial revenue, we may be unable to pursue our objectives. This raises substantial doubt related to our ability to continue as a going concern.
As disclosed in the notes to our consolidated financial statements included in this report, our historical operating losses, net losses and cash used in operations, continued net losses during 2020 and 2021, continued cash used in operations during 2020, continued working capital deficit and stockholders’ deficit as of March 31, 2021, the structure of our factoring arrangement, existing defaults on certain of our debt obligations, and uncertainty regarding our ability to obtain additional financing in the future raise substantial 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 or eliminate the value of our investors’ investment in the Company.
The Company’s level of indebtedness could adversely affect its financial condition and its ability to fulfill its obligations and operate its business.
The Company has incurred significant liabilities, and the Company’s ongoing capital needs are extensive relative to its current cash position. Unless the Company is able to restructure some or all of its outstanding debt and/or raise sufficient capital to fund its continued operations and its debt obligations, the Company will be unable to pay these obligations as they become due. The Company has been unable to pay its obligations under its liabilities as they have become due in the past.
The Company is heavily reliant on its factoring arrangement, and any reductions to the Company’s ability to obtain credit under its factoring arrangement could significantly impact the Company’s liquidity.
The Company obtains liquidity under an accounts receivable factoring arrangement with a financial institution (the “Factor”). Pursuant to the terms of the agreement, the Company, from time to time, sells to the Factor certain of its accounts receivable balances on a recourse basis for approved accounts. The Factor may also advance payment, in its discretion, for unearned future contract amounts. The Factor remits 95% of the purchased accounts receivable balance and accepted unearned future contract amounts for a given month to the Company (the “Advance Amount”) with the remaining balance, less fees, to be forwarded once the Factor collects the full accounts receivable balance or unearned future contract amount, as applicable, from the customer. This is one of our primary sources of liquidity.
6
The Factor has no obligation to purchase the full amount of accounts receivable balances or unearned future contract amounts that the Company offers to sell, and there can be no assurance that the Factor will continue to purchase accounts receivable or unearned future contract amounts at the same levels as it has in the past. If the Factor determines in its sole discretion to decrease the amount it advances under the factoring arrangement or to terminate the factoring agreement entirely and we are unable to obtain a replacement source of credit on substantially similar terms, it would significantly decrease the Company’s liquidity, which would likely have a material adverse effect on our business, operating results, and financial condition.
We have a limited operating history on which to base an investment decision.
EVO did not begin trucking operations until June 2018. 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. We have a limited relevant 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 company that acquired substantially all of its operations in the past two years.
We will need substantial additional capital to fund our growth plans and operate our business.
We require substantial additional capital to fund our working capital deficiency, capital expenditures, debt service, 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 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 our investors may lose the value of their entire investment.
Our response to a letter from the Select Subcommittee on the Coronavirus Crisis of the U.S. House of Representatives could have a significant adverse effect on us and our financial condition.
On May 8, 2020, we received a letter from the Select Subcommittee on the Coronavirus Crisis of the U.S. House of Representatives demanding that we return the Paycheck Protection Program (“PPP”) loan that we applied for and received under the CARES Act. We elected not to return the PPP loan proceeds as requested and do not intend to do so. Our decision to retain the PPP loan may require members of our management team to devote attention to future correspondence and requests from the Select Subcommittee, which would reduce the amount of time available to management to focus on our operations and strategic initiatives. Additionally, if we are required to return the PPP loan proceeds that we received it would result in a material adverse effect on our business and financial condition.
The Company has applied for forgiveness with respect to the PPP loan. Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loans granted under the PPP. Eligibility for forgiveness is determined, subject to limitations, based on the use of loan proceeds for payment of permitted and program-eligible expenses. No assurance is provided that the Company will obtain forgiveness of the PPP loan in whole or in part. The Company will be obligated to repay any portion of the principal amount of the Loan that is not forgiven together with accrued interest.
7
We have a history of losses and may incur additional losses in the future.
In 2019 and 2018, we incurred net losses of $32.7 million and $6.6 million, 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.
We may experience impairment of our long-lived assets and our goodwill.
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. Long-lived assets are 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. We also periodically evaluate our goodwill for potential impairment. When we perform the quantitative goodwill impairment test, we compare the fair value of the reporting unit to the carrying value, which includes goodwill. If the carrying value is higher than the fair value, the goodwill is considered impaired. 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 generally 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.
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 costlier. 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.
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. In addition, the Company’s management has concluded that our disclosure controls and procedures were not effective as of December 31, 2019 due to the material weaknesses in our internal control over financial reporting described in Item 9A of this Annual Report on Form 10-K. 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 independent registered public accounting firm 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.
8
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.
EVO CNG, LLC received grants in the amounts of $0.4 million and $0.1 million to assist in the construction and equipping of our San Antonio and Fort Worth fueling stations, respectively. The grants must be repaid if EVO CNG, LLC sells, transfers, destroys or otherwise loses title, possession, ownership or control of the equipment funded with
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