UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2018

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

For the transition period from ______________ to _____________

Commission file number 000-54218

EVO Transportation & Energy Services, Inc.

(Exact name of registrant as specified in its charter)

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

Securities registered pursuant to Section 12(b) of the Act:

None.

Securities registered pursuant to Section 12(g) of the Act:

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.

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 $385,660 based on the price of $0.15 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 May 29, 2019, there were 2,278,530 shares of the registrant’s common stock, par value $0.0001, outstanding.

TABLE OF CONTENTS

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 Inc.,” the “Company,” “we,” “us” or “our”), its subsidiaries or management. The forward-looking statements in this report generally relate to: our growth strategy and potential acquisition candidates, gasoline, diesel, and natural gas prices, management’s expectations regarding market trends and competition in the vehicle fuels industry, government tax credits and other incentives, and environmental and safety considerations.

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

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.

PART I

Item 1. Business.

EVO Transportation & Energy Services, Inc. was incorporated in the State of Delaware on October 22, 2010 under the name “Minn Shares Inc.” to effect the reincorporation (the “Reincorporation”) of Minn Shares Inc., a Minnesota corporation (“Minn Shares Minnesota”), in the State of Delaware. On December 1, 2010 the Company entered into an agreement and plan of merger with Minn Shares Minnesota, pursuant to which Minn Shares Minnesota was merged with and into the Company. Following the merger, Minn Shares Minnesota ceased to exist and the Company assumed all of the rights, liabilities, and obligations of Minn Shares Minnesota.

On November 22, 2016, the Company acquired 100% of the outstanding equity interests of Titan CNG LLC, a Delaware limited liability company (“Titan”), under an agreement and plan of securities exchange among the Company, Titan, and Titan’s equity holders. The Company issued 248,481 shares of its common stock to the former equity holders of Titan in connection with the acquisition. Although the Company was the legal acquirer in the transaction, Titan equity holders received as consideration approximately 91.25% of the Company’s total outstanding shares of common stock on a post-transaction basis. As a result, Titan was the accounting acquirer in the transaction and the acquisition resulted in a change in control of the Company. 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 February 1, 2017, the Company acquired Environmental Alternative Fuels, LLC, a Delaware limited liability company (“EAF”), and its wholly owned subsidiary EVO CNG, LLC, a Delaware limited liability company (“EVO CNG”), under a securities exchange agreement among the Company, EAF, EVO CNG, Danny R. Cuzick, Damon R. Cuzick, Theril H. Lund and Thomas J. Kiley (together, the “EAF Members”). In accordance with the terms of the securities exchange agreement, the Company acquired all of the membership interests of EAF from the EAF Members and, in exchange, issued a promissory note in the principal amount of $3.8 million to Danny R. Cuzick and convertible promissory notes in the aggregate principal amount of $9.5 million to the EAF Members (the “EAF Share Exchange”). See Note 2 – Acquisition – EAF for the purchase accounting and related disclosures for this acquisition.

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

Effective August 31, 2017, Minn Shares changed its name to EVO Transportation & Energy Services, Inc.

On June 1, 2018, the Company entered into an equity purchase agreement (the “TR Purchase Agreement”) with Billy (Trey) Peck Jr. (“Peck”) pursuant to which the Company acquired all of the issued and outstanding shares (the “TRT Shares”) in Thunder Ridge Transport, Inc., a Missouri corporation (“Thunder Ridge”), from Peck and Thunder Ridge became a wholly-owned subsidiary of the Company. Thunder Ridge is based in Springfield, Missouri and is engaged in the business of fulfilling government and corporate contracts for freight trucking services. See Note 2 – Acquisition – Thunder Ridge for the purchase accounting and related disclosures for this acquisition.

In connection with closing the agreement, on January 4, 2019, Sheehy Enterprises and Sheehy Mail entered into an equipment lease agreement with an effective date of January 2, 2019, (the “Equipment Lease”), whereby Sheehy Enterprises agreed to lease to Sheehy Mail certain truck and trailer equipment owned by Sheehy Enterprises. The Equipment Lease provides for monthly payments of $91,667 and a term of 48 months.

On November 18, 2018, the Company acquired 100% of the membership interests of W.E. Graham, Inc., (“Graham”) a trucking company based in Memphis, Tennessee that provides freight and shipping services on behalf of the USPS, for $186,000 in cash and a promissory note in the principal amount of $300,000 with an annual interest rate of 3.0% and a maturity date of October 1, 2022. Graham services three USPS mail contracts across Tennessee, Georgia, Alabama and Mississippi.

On December 15, 2018, the Company and EVO Merger Sub, Inc., a Wisconsin corporation and a wholly-owned subsidiary of the Company (“Merger Sub”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Ursa Major Corporation, a Wisconsin corporation (“Ursa Major”), John Lampsa, and Ursula Lampsa (together, the “Lampsas”). The Merger Agreement provided for the merger of Merger Sub with and into Ursa Major, with Ursa Major surviving as a wholly owned subsidiary of the Company (the “Merger”). Ursa Major is based in Oak Creek, Wisconsin and is engaged in the business of fulfilling government and corporate contracts for freight trucking services truck repair services and selling spare truck parts.

Also, on December 15, 2018, EVO Equipment Leasing, LLC, (“EVO Equipment”) a Delaware limited liability company and a wholly-owned subsidiary of the Company, entered into a stock purchase agreement (the “Purchase Agreement”) with the Lampsas pursuant to which EVO Equipment agreed to acquire all of the issued and outstanding shares (the “JBL Shares”) in JB Lease Corporation, a Wisconsin corporation (“JB Lease”), from the Lampsas. JB Lease is based in Oak Creek, Wisconsin, and is engaged in the business of leasing trucks and trailers for freight trucking.

On January 4, 2019, but effective January 2, 2019, the Company exercised its option under an acquisition agreement with Sheehy Enterprises, Inc., a Wisconsin corporation (“Sheehy Enterprises”), John Sheehy, and Robert Sheehy, pursuant to which the Company acquired from Sheehy Enterprises all of the membership interests in Sheehy Mail Contractors, Inc., (“Sheehy Mail”) a Wisconsin corporation and wholly-owned subsidiary of Sheehy Enterprises for 2,240,000 shares of the Company’s common stock. Sheehy Mail is based in Waterloo, Wisconsin and is engaged in the business of fulfilling government and corporate contracts for freight trucking services. Sheehy Mail operates the largest CNG fleet servicing the United States Postal Service (“USPS”). 

On February 1, 2019, the parties to the Merger Agreement and Purchase Agreement consummated the transactions contemplated by the Merger Agreement and Purchase Agreement. Pursuant to the Merger Agreement, at closing each share of common stock of Ursa Major converted into the right to receive a pro rata share of 800,000 shares of common stock, par value $0.0001, of the Company’s common stock. Pursuant to the Purchase Agreement, at closing EVO Equipment paid the Lampsas $2,500,000, assumed approximately $12,000,000 in existing JB Lease indebtedness, and issued a promissory note in the principal amount of approximately $6,430,000 to the Lampsas (the “JB Lease Note”). The JB Lease Note is interest-free until June 1, 2019 and is secured by the JBL Shares and 100% of the equity in Ursa Major. Beginning June 1, 2019, the JB Lease Note bears interest at a rate of 9% per annum and provides for blended monthly principal and interest payments of $50,000 beginning June 1, 2019.

Business Overview

EVO Inc. is an emerging transportation operator and next generation supplier for the USPS. It offers flexible and efficient solutions through a combination of diesel and CNG trucks and tractors across 15 states. EVO Inc. also operates six strategically located CNG refueling stations in Jurupa Valley, CA; Lake Arlington, TX; Fort Worth, TX; Oak Creek, WI; Tolleson, AZ; and San Antonio, TX that accommodate Class 8 trucks and trailers. EVO Inc. has identified a compelling opportunity in an evolving ecosystem of USPS transportation contractors, and we have refocused our corporate strategy to leverage our footprint of CNG stations and relationships with owner-operators to build a national fleet of haulers and in turn drive additional CNG sales to our company-owned stations.

The Company competitively bids on transportation contracts that detail the movement of mail between processing facilities, destination post offices and destination mailing addresses. Customer contracts are long term in nature with contract terms that are typically four-years in duration and often are renewed to the incumbent if appropriate service has been performed. Contracts are bid and performed in accordance with all contract requirements including, but not limited to Service Contract Act requirements, Department of Transportation (“DOT”) regulations (federal and state), and all other applicable local and state regulations.

The Company plans to grow substantially through acquisition and currently has a robust pipeline of potential acquisition candidates. The identification of potential target companies, discussions with, and due diligence of potential target companies is an integral part of the Company’s day-to-day operations.

Market Overview

U.S. Mail Trucking

In 2014, the USPS announced that it intends to drastically reduce their supplier base from over 4,000 contractors to less than 1,000 by 2022. As part of this consolidation effort, the USPS began implementing the Dynamic Route Optimization (“DRO”) program, which is designed to manage fewer relationships and work with larger prime contractors who also prioritize alternative energy transportation options. As a result, it is estimated that over $1 billion in DRO contracts will come available over the next five years.

CNG Fueling Stations

Management believes that there is an immediate opportunity to capture market share in the growing U.S. natural gas vehicle fueling market by repositioning its own fleet of CNG trucks near its company owned CNG stations and seeking trucking company acquisitions or alliances with other CNG users operating near its CNG stations. According to the United States Department of Energy, in December 2018, natural gas was selling at retail in the United States at approximately $2.19 per gas gallon equivalent (“GGE”) while gasoline and diesel were selling for approximately $2.27 and $2.98 per gallon, respectively. Management expects this disparity to remain intact for the foreseeable future, which would create a strong economic incentive for vehicle operators to switch to CNG. In addition, CNG is a significantly cleaner fuel than is gasoline or diesel and creates less engine wear, thereby making its use even more desirable. Natural Gas Vehicles of America (“NGV America”) estimates that as of December 2018, there were approximately 1,700 natural gas fueling stations, with 175,000 natural gas vehicles, including commercial vehicles in the United States.

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 contracts will come available over the next five years. While this will provide additional opportunities for the Company to win new contracts, it may also expose the Company to additional risk of loss on existing contracts as they come up for renewal.

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. A number of the Company’s competitors have greater financial resources than it does. Additionally, the USPS typically renews contracts with incumbent service providers if appropriate services have been performed, which could limit the Company’s ability to win new USPS contracts. The Company believes that the principal differentiating factors in its business, relative to competition, are service, efficiency, pricing, and its focus on CNG equipment, 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. The existing relationship with the USPS and experience with the DRO program, provides the Company an additional competitive advantage when bidding on these contracts.

The vehicle fuels market is highly competitive and in a state of rapid development. As a smaller provider of alternative vehicle fuels, we face numerous barriers to market entry. We compete directly with other operators of CNG fueling stations and indirectly with gasoline, diesel and other alternative vehicle fuels markets, including, but not limited to ethanol, biodiesel, LNG, hydrogen, hybrid and electric vehicle markets. Gasoline and diesel producers and providers own a vast majority of the market share of the vehicle fuels industry. New developments and improvements to existing technologies continue to create volatility in the alternative fuels’ markets. Many of our competitors in the gasoline, diesel, and alternative fuels industries have access to greater financial and other resources than the Company. Demand for natural gas in the vehicle fuels industry is subject to price considerations, reliability, availability, convenience and accessibility, environmental considerations, government incentive programs, and safety considerations, among other factors.

We compete directly with both private and public operators of CNG fueling stations. The private market for CNG fueling solutions is currently served by a few larger operators and a number of smaller operators with a few stations. The following are the primary competitors of EVO Inc. serving the CNG market:

Strategy

Our goal is to create a significant and strategically well-positioned national organization which meets the evolving needs of the USPS, enabling us to capture substantial market share in this industry. The Company competitively bids on transportation contracts that detail the movement of mail between processing facilities, destination post offices and destination mailing addresses. Customer contracts are long term in nature, typically with four-year terms and often are renewed to the incumbent if appropriate service has been performed. Contracts are bid and performed in accordance with all contract requirements including, but not limited to Service Contract Act requirements, DOT regulations (federal and state), and all other applicable local and state regulations.

Another aspect of our strategy is 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 Mail of Waterloo, Wisconsin, which operates the largest fleet of CNG trucks servicing the USPS. We also completed the acquisition of Ursa Major in 2019, which is based one mile from our Oak Creek CNG station and secured freight contracts from Phoenix to Los Angeles which can utilize the Tolleson, Arizona station and eventually the Jurupa Valley, California station.

Our Target Customers

The USPS is our primary target customer in the trucking industry.

In the CNG industry, we target corporate and government fleet customers in addition to generating our own demand with our company owned CNG fleet and further business development efforts for transit lanes near our stations or trucking acquisitions. We believe that fleet operators with vehicles that run the same or similar routes each day (such as mail haulers or point to point freight routes) benefit most immediately from the economic advantages available through CNG usage.

Tax Rebate Opportunity

Historically, the federal government offered AFTC enabling the Company to receive a tax credit of $0.50 per GGE of CNG sold for vehicle fuel use. The AFTC was first offered on October 1, 2006 and expired December 31, 2016. It was reinstated for 2017 and Congress is currently reviewing proposed legislation that would retroactively extend the tax provisions through 2019. Although, we previously availed ourselves of the AFTC, our business is not dependent on tax credits, grants, or other incentives from federal, state or local governments. However, when available, we plan to actively pursue federal and state tax credits and other incentives to lower development and operating costs.

Principal Customers and Suppliers

Trucking 

The USPS is the Company’s primary trucking customer, and for the years ended December 31, 2018 and 2017, the USPS accounted for approximately 95% and 0%, respectively, of the Company’s revenue. As a result, the Company’s trucking operations are highly dependent on the USPS. The loss of the USPS as a customer or a significant reduction in the Company’s relationship with the USPS would have a material adverse effect on the Company’s business.

CNG

The Company historically has targeted high-volume fleet operators to serve as anchor customers at the stations. Once an anchor-customer relationship has been established, we typically seek to minimize construction and sourcing costs by tapping into existing natural gas pipeline infrastructure to supply the customer’s CNG needs. Consequently, we often have a principal customer at our CNG fueling stations. The Company is focusing on generating CNG volume at our stations by repositioning our company owned CNG trucks near our stations that are along trucking routes we serve rather than through additional station expansion.

EAF Tolleson. EAF entered into an incremental natural gas facilities agreement dated February 24, 2014 with Southwest Gas Corporation (“Southwest Gas”). Under the terms of the agreement, Southwest Gas agreed to install a pipeline connecting the station to its existing infrastructure at no upfront cost to EAF, and EAF agreed to use Southwest Gas to transport natural gas to the station through its infrastructure. The term was originally five years but has since been modified to ten years. Each year of the ten-year term, EAF is required to make a payment to Southwest Gas equal to $70,565 minus the amount of delivery and demand charges paid by EAF during the applicable contract year. EAF is required to provide financial security in the form of a letter of credit originally in the amount of $510,763, which amount may decrease annually during the term of the agreement and was equal to $306,458 as of December 31, 2018, and 2017.

EAF Oak Creek. EAF entered into a fuel purchase agreement dated January 11, 2013 with Sheehy Mail to sell CNG to Sheehy Mail at its EAF Oak Creek fueling station, which opened in December 2013, at agreed upon prices set forth in the agreement. The initial term expired in December 2018. The Company did not renew the contract since we acquired Sheehy Mail on January 2, 2019. Integrys Energy Services – Natural Gas, LLC agreed to supply natural gas to the station pursuant to a master retail gas sales agreement with EVO CNG dated November 1, 2013 and a related confirmation agreement dated January 27, 2015. The initial term of the agreement with Integrys Energy Services – Natural Gas, LLC expired in February 2019 and management is in negotiation to extend the terms of the agreement. The Company also has the option to secure an agreement with alternative suppliers at similar terms.

EAF Jurupa Valley. Our principal customer at the EAF Jurupa Valley station was Swift Transportation Co. (“Swift”). Swift owns the real estate underlying the EAF Jurupa Valley station and leases the property to EVO CNG pursuant to an oral month-to-month lease agreement. The founder of Swift is also a shareholder of the Company. Under the terms of the lease agreement, EVO CNG agreed to construct a CNG fueling station and to make provisions for the installation of a natural gas supply line to the property in order to meet Swift’s CNG fueling needs. EVO CNG entered into a line extension contract dated April 3, 2014 with Southern California Gas Company to serve as the supplier of CNG to the station. Southern California Gas Company agreed to install a pipeline connecting its existing infrastructure to the northwest border of the EAF Jurupa Valley property at no cost to EVO CNG or Swift, provided that at least 2.4 million DGE is pumped in any 12-month period during the first three years of operation. EVO CNG paid $290,000 for installation of a pipeline across the property to connect the fueling station to the new line laid by Southern California Gas Company. During December 2017, Swift ended their use of CNG trucks. Management believes it can replace the CNG volume for this location with the new trucking routes it is developing in that area. The station is in a highly industrialized area with significant trucking activity. The Company recently secured a freight route from Phoenix to Los Angeles. Business development efforts are underway to increase freight volume in this lane.

EAF San Antonio. EAF entered into an agreement with Central Freight Lines, Inc. (“Central Freight”) to sell CNG to Central Freight at the EAF San Antonio station at agreed upon prices set forth in the agreement. The agreement had an initial term of five years expiring September 2018. Management is in negotiation to extend the terms of the agreement. EAF entered into a natural gas service and pipeline agreement dated November 12, 2014, with LDC, LLC (“LDC”), pursuant to which LDC agreed to construct a pipeline and deliver natural gas to EAF at the station. EAF agreed that LDC will be its exclusive supplier of natural gas at the facility.

EAF Fort Worth. Central Freight is also our principal customer at the EAF Fort Worth Facility. The fuel purchase agreement for the EAF Fort Worth station has an initial four-year term that expired April 2019. EAF agreed to supply CNG to Central Freight at agreed upon prices set forth in the fuel purchase agreement. The Company is negotiating with Central Freight to extend the agreement.

EAF Lake Arlington. EAF Lake Arlington is a station that management believes is positioned to provide virtual pipeline opportunities. It is in a highly industrialized area and management believes that there is potential to use the station to transport natural gas to customers that may not be able to get natural gas at their facilities due to pipeline constraints.

Safety and Risk Management

The DOT requires that the Company perform drug and alcohol testing that meets DOT regulations. Its safety program includes pre-employment, random and post-accident drug testing and all other testing required by the DOT. The Company also equips its company tractors with critical-event recorders to help 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 damage to cargo hauled, physical damage to company equipment, damage to buildings and personal property, third party personal injury and property damage and workers’ compensation. The Company regularly reviews insurance limits and retentions. The Company believes that the insurance it currently maintains provides adequate coverage for its operations.

To the extent under dispatch and in furtherance of the Company’s business, its owner-operators are covered by the Company’s liability coverage. However, each owner-operator is responsible for physical damage to their own equipment, occupational accident coverage, liability exposure while the truck is used for non-company purposes, and, in the case of fleet operators, any applicable workers’ compensation requirements for their employees.

Fuel

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, 2018 and 2017, the Company recorded liabilities related to commodity hedging instruments in the amount of approximately $11,000 and $32,000, respectively, in the accompanying consolidated balance sheets.

Thunder Ridge signed an agreement with a supplier on August 31, 2017 in which $1,000,000 was advanced and received by Thunder Ridge in 2017. The advance bears interest at 8.5% and is collateralized by substantially all of Thunder Ridge’s assets. As Thunder Ridge purchases fuel from the supplier’s station, Thunder Ridge reduces its fuel advance liability by $0.25 per gallon. 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.

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. The Company also may suffer from weather-related or other events such as tornadoes, hurricanes, blizzards, ice storms, floods, fires, earthquakes and explosions. These events may disrupt fuel supplies, increase fuel costs, disrupt freight shipments or routes, affect regional economies, destroy the Company’s assets or adversely affect the business or financial condition of customers, any of which could adversely affect the Company’s results or make the Company’s results more volatile.

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 drug- and alcohol-testing and hours-of-service. 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. The CSA program affects drivers because their safety performance and compliance impact their safety records and, while working for a carrier, will impact their carrier’s safety record. The methodology for determining a carrier’s DOT safety rating relies upon implementation of Behavioral Analysis and Safety Improvement Categories (“BASIC”) applicable to the on-road safety performance of the carrier’s drivers and certain of those rating results are provided on the FMCSA’s Carrier Safety Measurement System website. As a result, certain current and potential drivers may no longer be eligible to drive for the Company, the Company’s fleet could be ranked poorly as compared to its peer firms, and the Company’s safety rating could be adversely impacted. The occurrence of future deficiencies could affect driver recruiting and retention by causing high-quality drivers to seek employment (in the case of company drivers) or contracts (in the case of owner-operator drivers) with other carriers, or could cause the Company’s customers to direct their business away from the Company and to carriers with better fleet safety rankings, either of which would adversely affect the Company’s results of operations and productivity. Additionally, the Company may incur greater than expected expenses in its attempts to improve its scores as a result of poor rankings. Those carriers and drivers identified under the CSA program as exhibiting poor BASIC scores are prioritized for interventions, such as warning letters and roadside investigations, either of which may adversely affect the Company’s results of operations. 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 continually reviews all safety-related policies, programs and procedures for their effectiveness and revises them, as necessary, to establish positive improvement. However, the Company gives no assurance these measures will be effective.

The methodology used to determine a carrier’s safety rating is subject to possible change by the FMCSA and, as a result, the Company’s acceptable safety rating could be impaired. The Company currently has a “satisfactory” FMCSA rating on 100% of its fleet. If the FMCSA adopts rulemakings in the future that revise the methodology used to determine a carrier’s safety rating in a manner that incorporates more stringent standards, then the Company could be adversely affected.  If the Company were to receive an unsatisfactory DOT safety rating as a result of any changes to the methodology, it could adversely affect the Company’s business.

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 may use 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 must use ELDs starting December 16, 2019.

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; however, there can be no assurance that such costs will not be material in the future or that such future compliance will not have a material adverse effect on the Company’s business and operating results.   If the Company fails to comply with applicable environmental laws or regulations, the Company could be subject to costs and liabilities. Those costs and liabilities may include the assessment of sanctions, including administrative, civil and criminal penalties, the imposition of investigatory, remedial or corrective action obligations, the occurrence of delays in permitting or performance of projects and the issuance of orders enjoining performance of some or all of its operations in a particular area. The occurrence of any one or more of such developments could have a material adverse effect on the Company’s business and operating results.

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.

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 also now subject to greenhouse gas emission limits and fuel efficiency standards. The Company expects that these 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. Such increased costs could adversely affect the Company’s operating results and profitability, particularly if such costs are not offset by potential fuel savings. The Company cannot predict, however, the extent to which its operations and productivity will be adversely impacted.

In addition to federal emissions standards, a number of states have mandated, and may continue to individually mandate, additional emission-control requirements for equipment that could increase equipment or other costs for entire fleets. In order to reduce exhaust emissions, some states and municipalities have also begun to restrict the locations and amount of time where diesel-powered tractors may idle. These 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.

Federal and state lawmakers also have implemented or proposed potential limits on greenhouse gas emissions under a variety of other climate-change initiatives. Compliance with such regulations may increase the cost of new tractors and trailers or require the Company to retrofit its equipment and could impair equipment productivity and increase its operating expenses. These adverse effects, combined with the uncertainty as to the reliability of the newly designed diesel engines and the residual value of these vehicles, could materially increase the Company’s operating expenses or otherwise adversely affect its operations.

Employees

As of December 31, 2018, the Company had approximately 290 employees, consisting of 259 full-time employees and 31 part-time employees. The Company employed 269 drivers as of December 31, 2018. The Company is not a party to any collective bargaining agreements.

The Company also contracts with owner-operator drivers to provide and operate tractors, which provide additional revenue equipment capacity. Independent contractors own their own tractors and are responsible for all associated expenses, including financing costs, fuel, maintenance, insurance and highway use taxes. As of December 31, 2018, the Company had 15 independent contractors, who accounted for approximately 38% of the Company’s total miles for the year ended December 31, 2018.

The Company’s strategy for both company and owner-operator drivers is to (i) hire safe and experienced drivers; (ii) promote retention with a competitive compensation package in the case of company drivers and contracted rates in the case of owner-operator drivers and positive working conditions; and (iii) minimize safety problems through careful screening, mandatory drug testing, continuous training, electronic logging system and rewards for accident-free driving.

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.

Our negative operating cash flows, negative working capital and accumulated deficit raise substantial doubt about our ability to continue as a going concern for the twelve months from the issuance of this Annual Report on Form 10-K. If we are unable to improve our profitability and liquidity position, we might be unable to continue as a going concern. This could significantly reduce the value of our investors’ investment in the Company.

We have a limited operating history on which to base an investment decision.

Titan was organized in 2012 and opened its first CNG station in February 2015. EAF was organized on March 28, 2012 and opened its first CNG station in December 2013. We recently entered the trucking industry by way of our 2018 acquisitions. Thus, we are subject to all the risks associated with any business enterprise with a limited operating history. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stages of operation, especially in a relatively nascent and capital-intensive industry such as ours. We have a limited operating history for you to consider in evaluating our business and prospects. When evaluating our business and prospects, you must consider the risks, expenses and difficulties that we may encounter as a young company in a rapidly evolving consumer market.

We will need substantial additional capital to fund our growth plans and operate our business.

We require substantial additional capital to fund our planned acquisitions, working capital deficiency, capital expenditures, debt service, and 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 developing and operating our trucking segment and implementing our strategic 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. We currently have no committed sources of additional capital and there is no assurance that additional financing will be available in the amounts or at the times required, or if it is, on terms acceptable or favorable to us. If we are unable to obtain additional financing when and if needed, our business will be materially impacted, and you may lose the value of your entire investment.

We have a history of losses and may incur additional losses in the future.

In 2018 and 2017, we incurred net losses of $6,576,692 and $9,160,893, respectively. We may continue to incur losses, the amount of our losses may increase, and we may never achieve or sustain profitability, any of which would adversely affect our business, prospects and financial condition and may cause the price of our common stock to fall. In addition, to try to achieve or sustain profitability, we may take actions that result in material costs or material asset or goodwill impairments. For instance, in 2017, we determined an impairment of the El Toro assets as a result of the station’s closure. Any similar actions in the future could have material adverse consequences, including material negative effects on our financial condition, our results of operations and the trading price of our common stock.

We may experience impairment of our long-lived assets.

Long-lived assets, including property, plant and equipment, are tested for impairment whenever circumstances indicate that the carrying value of these assets may not be recoverable. An asset is considered impaired if the carrying value of the asset exceeds the sum of the future expected undiscounted cash flows to be derived from the asset. Once an asset is considered impaired, an impairment loss is recorded within operating expense for the difference between the asset’s carrying value and its fair value. For assets held and used in the business, management determines fair value using estimated future cash flows to be derived from the asset, discounted to a net present value using an appropriate discount rate. For assets held for sale or for investment purposes, management determines fair value by estimating the proceeds to be received upon sale of the asset, less disposition costs. During the year ended December 31, 2017, we recorded an impairment of $806,217 associated with our El Toro station. In addition, we impaired goodwill and customer lists for $4,100,000. During the year ended December 31, 2018, we impaired a CNG compressor valued at $240,000.

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 for the years ended December 31, 2018, and 2017. 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, 2018, due to the material weaknesses in our internal control over financial reporting described in Item 9A. As a result, we will be required to expend significant resources to develop the necessary documentation and testing procedures required by Section 404, and there is a risk that we will not comply with all of the necessary requirements. If we cannot remediate the material weaknesses in internal controls identified by our current and former independent registered public accounting firms or if we identify additional material weaknesses in internal controls that cannot be remediated in a timely manner, investors and others with whom we do business may lose confidence in the reliability of our financial statements, and in our ability to obtain equity or debt financing could suffer.

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 received grants in the amounts of $400,000 and $100,000 to assist in the construction and equipping of our EAF San Antonio and EAF Fort Worth stations, respectively. The grants must be repaid if EVO CNG sells, transfers, destroys or otherwise loses title, possession, ownership or control of the equipment funded with the grants during the terms of the respective grant agreements. The agreements expire in 2020 and 2019, respectively.

Many of the key personnel on which we depend to operate our company provide their services to us on a part-time basis and have other business or employment obligations.

Our ability to execute our business plans and objectives depends, in large part, on our ability to attract and retain qualified personnel. Competition for personnel is intense and there can be no assurance that we will be able to attract and retain personnel. In particular, we are presently dependent upon the services of our management team. John Yeros, chief executive officer, Damon Cuzick, president, Michael Zientek, chief financial officer, and John Sheehy, chief operating officer are the only full-time members of our management team. Our inability to utilize their services could have an adverse effect on us and there would likely be a difficult transition period in finding replacements for any of them. The execution of our strategic plan will place increasing demands on our management and operations. There can be no assurance that we will be able to effectually manage any expansion of our business. Management’s inability to manage our growth effectively could have a material adverse effect on our business, financial condition and results of operations.

We are controlled by our current executive officers, directors and principal stockholders.

Our executive officers, directors and principal stockholders beneficially own a substantial majority of our outstanding common stock and have the ability to increase their holdings under certain agreements. Accordingly, our executive officers, directors and principal stockholders will have the ability to exert substantial influence over our business affairs, including electing directors, appointing officers, determining officers’ compensation, issuing additional equity securities or incurring additional debt, effecting or preventing a merger, sale of assets or other corporate transaction and amending our articles of incorporation.

We may not successfully manage our planned growth.

We plan on expanding our trucking business through acquiring additional companies that provide contract trucking services to the USPS and leveraging our expanded operations to bid on additional USPS trucking contracts. Any expansion of operations we may undertake will entail risks and such actions may involve specific operational activities that may negatively impact our profitability. Consequently, investors must assume the risk that (i) such expansion may ultimately involve expenditures of funds beyond the resources available to us at that time, and (ii) management of such expanded operations may divert management’s attention and resources away from its existing operations. These factors may have a material adverse effect on our present and prospective business activities.

Risks Related to the Company’s Trucking Operations

The Company’s trucking business is affected by general economic and business risks that are largely beyond its control.

The Company’s trucking business is highly cyclical and is dependent on a number of factors, many of which are beyond our control. The Company believes that some of the most significant of these factors are economic changes that affect supply and demand in transportation markets in general, including excess tractor capacity in comparison with shipping demand and recessionary economic cycles.

The Company also is subject to cost increases outside of its control that could materially reduce its profitability if it is unable to increase its rates sufficiently. Such cost increases include, but are not limited to, increases in fuel prices, driver wages, owner-operator contracted rates, interest rates, taxes, tolls, license and registration fees, insurance, revenue equipment and healthcare for its employees. The USPS contracts include a monthly adjustment for changes in the price of fuel.

The Company’s suppliers’ business levels also may be negatively affected by adverse economic conditions or financial constraints, which could lead to disruptions in the supply and availability of equipment, parts and services critical to its operations. A significant interruption in the Company’s normal supply chain could disrupt its operations, increase its costs and negatively impact its ability to serve its customers.

In addition, events outside the Company’s control, such as strikes or other work stoppages at its facilities or at customer, port, border or other shipping locations, or actual or threatened armed conflicts or terrorist attacks, efforts to combat terrorism, military action against a foreign state or group located in a foreign state, or heightened security requirements could lead to reduced economic demand, reduced availability of credit or temporary closing of the shipping locations or United States borders. Such events or enhanced security measures in connection with such events could impair the Company’s operating efficiency and productivity and result in higher operating costs.

The trucking industry is highly competitive and fragmented, and the Company’s business and results of operations may suffer if it is unable to adequately address downward pricing and other competitive pressures.

The Company competes with many truckload carriers of varying sizes, including some that may have greater access to equipment, a wider range of services, greater capital resources, less indebtedness or other competitive advantages. The Company also competes with smaller, regional service providers that cover specific shipping lanes or that offer niche services. Numerous competitive factors could impair the Company’s ability to maintain or improve its profitability. These factors include the following:

Driver shortages and increases in driver compensation or owner-operator contracted rates could adversely affect the Company’s profitability and ability to maintain or grow its trucking business.

Driver shortages could require the Company to spend more to attract and retain company and owner-operator drivers. The market for qualified drivers is intensely competitive, which may subject the Company to increased payments for driver compensation and owner-operator contracted rates. Also, because of the competition for drivers, the Company may face difficulty maintaining or increasing its number of company and owner-operator drivers. Compliance and enforcement initiatives included in the CSA program implemented by the FMCSA and regulations of the DOT relating to driver time and safety and fitness could also reduce the availability of qualified drivers. In addition, the Company suffers from a high turnover rate of drivers. The high turnover rate requires the Company to continually recruit a substantial number of drivers in order to operate existing revenue equipment. Further, with respect to owner-operator drivers, shortages can result from contractual terms or company policies that make contracting with the Company less desirable to certain owner-operator drivers. Due to the absence of long-term contracts, owner-operators can quickly terminate their relationships with the Company. If the Company is unable to continue to attract and retain a sufficient number of company and owner-operator drivers, it could be required to operate with fewer trucks and face difficulty meeting customer demands or be forced to forego business that would otherwise be available to it, which could adversely affect its profitability and ability to maintain or grow its business.

Seasonality and the impact of weather and other catastrophic events adversely affect the Company’s trucking operations and profitability.

The Company’s tractor productivity decreases during the winter season because inclement weather impedes operations. At the same time, operating expenses increase due to, among other things, a decline in fuel efficiency because of engine idling and harsh weather that creates higher accident frequency, increased claims and higher equipment repair expenditures. The Company also may suffer from weather-related or other events, such as tornadoes, hurricanes, blizzards, ice storms, floods, fires, earthquakes and explosions, which may disrupt fuel supplies, increase fuel costs, disrupt freight shipments or routes, affect regional economies, destroy its assets or the assets of its customers or otherwise adversely affect the business or financial condition of its customers, any of which could adversely affect its results or make its results more volatile.

The Company may be adversely affected by fluctuations in the price or availability of CNG and diesel fuel.

Fuel is one of the Company’s largest operating expenses. Fuel prices fluctuate greatly due to factors beyond the Company’s control, such as political events, price and supply decisions by oil producing countries and cartels, terrorist activities, environmental laws and regulations, armed conflicts, depreciation of the dollar against other currencies, world supply and demand imbalances, and hurricanes and other natural or man-made disasters, each of which may lead to an increase in the cost of fuel. Such events may lead not only to increases in fuel prices, but also to fuel shortages and disruptions in the fuel supply chain. Because the Company’s operations are dependent upon fuel, significant fuel cost increases, shortages or supply disruptions could materially and adversely affect its results of operations and financial condition.

Increased prices for, or decreases in the availability of, new revenue equipment and decreases in the value of used revenue equipment could adversely affect the Company’s results of operations and cash flows.

Investment in new equipment is a significant part of the Company’s annual capital expenditures, and the Company’s trucking business requires an available supply of tractors and trailers from equipment manufacturers to operate and grow its business. In recent years, manufacturers have raised the prices of new revenue equipment significantly due to increased costs of materials and, in part, to offset their costs of compliance with new tractor engine and emission system design requirements mandated by the EPA and various state agencies, which are intended to reduce emissions. Federal and state regulators may continue to individually mandate, additional emission-control requirements for equipment that could increase equipment or other costs for entire fleets. Further, equipment price increases may result from these federal and state requirements. If new equipment prices increase more than anticipated, the Company could incur higher depreciation and rental expenses than anticipated. If the Company is unable to fully offset any such increases in expenses with freight rate increases and/or improved fuel economy, its results of operations and cash flows could be adversely affected.

The Company may also face difficulty in purchasing new equipment due to decreased supply. From time to time, some original equipment manufacturers (OEM) of tractors and trailers may reduce their manufacturing output due to lower demand for their products in economic downturns or a shortage of component parts. Component suppliers may either reduce production or be unable to increase production to meet OEM demand, creating periodic difficulty for OEMs to react in a timely manner to increased demand for new equipment and/or increased demand for replacement components as economic conditions change. In those situations, the Company may face reduced supply levels and increased acquisition costs. An inability to continue to obtain an adequate supply of new tractors or trailers for its operations could have a material adverse effect on its business, results of operations and financial condition.

During prolonged periods of decreased tonnage levels, the Company and other trucking companies may make strategic fleet reductions, which could result in an increase in the supply of used equipment. When the supply exceeds the demand for used revenue equipment, the general market value of used revenue equipment decreases. Used equipment prices are also subject to substantial fluctuations based on availability of financing and commodity prices for scrap metal. A depressed market for used equipment could require the Company to trade its revenue equipment at depressed values or to record losses on disposal or an impairment of the carrying values of its revenue equipment that is not protected by residual value arrangements. Trades at depressed values and decreases in proceeds under equipment disposals and impairment of the carrying values of its revenue equipment could adversely affect its results of operations and financial condition.

The Company has significant ongoing capital expenditure requirements. If the Company is unable to obtain additional capital on favorable terms or at all, it may not be able to execute on its business plans and its business, financial condition, results of operations, cash flows and prospects may be adversely affected.

The Company’s trucking business is capital intensive. Its capital expenditures focus primarily on revenue equipment replacement and, to a lesser extent, facilities, revenue equipment growth, and investments in information technology. The Company also expects to devote substantial financial resources to grow its operations and fund its acquisition activities. As a result of the Company’s funding requirements, it likely will need to raise funds through additional equity or debt securities or seek additional financing through other arrangements to increase its cash resources. Any sale of additional equity or debt securities may result in dilution to its stockholders. Public or private financing may not be available in amounts or on terms acceptable to the Company, if at all.

If the Company is unable to obtain additional financing, it may be required to delay, reduce the scope of, or eliminate future acquisition activities or growth initiatives, which could adversely affect its business, financial condition and operating results. In such case, the Company may also operate its revenue equipment (including tractors and trailers) for longer periods, which would result in increased maintenance costs, which would in turn reduce its operating income.

The trucking industry is highly regulated and changes in existing laws or regulations, or liability under existing or future laws or regulations, could have a material adverse effect on its results of operations and profitability.

The Company operates in the United States pursuant to operating authority granted by the DOT. The Company, as well as its company and owner-operator drivers, must also comply with governmental regulations regarding safety, equipment, environmental protection and operating methods. Examples include regulation of equipment weight, equipment dimensions, fuel emissions, driver hours-of-service, driver eligibility requirements, on-board reporting of operations and ergonomics. The Company may become subject to new or more restrictive regulations relating to such matters that may require changes in its operating practices, influence the demand for transportation services or require it to incur significant additional costs. Possible changes to laws and regulations include:

From time to time, various legislative proposals are introduced, including proposals to increase federal, state or local taxes, including taxes on motor fuels and emissions, which may increase the Company’s or its independent affiliates’ operating costs, require capital expenditures or adversely impact the recruitment of drivers.

Restrictions on greenhouse gas emissions or climate change laws or regulations could also affect the Company’s customers that use significant amounts of energy or burn fossil fuels in producing or delivering the products the Company carries, which, in turn, could adversely impact the demand for the Company’s services as well as its operations. The Company also could lose revenue if its customers divert business from it because it has not complied with their sustainability requirements.

Safety-related evaluations and rankings under the CSA program could adversely impact the Company’s relationships with its trucking customers and its ability to maintain or grow its fleet, each of which could have a material adverse effect on its results of operations and profitability.

The CSA includes compliance and enforcement initiatives designed to monitor and improve commercial motor vehicle safety by measuring the safety record of both the motor carrier and the driver. These measurements are scored and used by the FMCSA to identify potential safety risks and to direct enforcement action. Certain measurements and scores collected by the CSA from transportation companies are available to the general public on the FMCSA’s website.

The Company’s CSA scores are dependent upon its safety and compliance experience, which could change at any time. In addition, the safety standards prescribed in the CSA program or the underlying methodology used by the FMCSA to determine a carrier’s safety rating could change and, as a result, the Company’s ability to maintain an acceptable score could be adversely impacted. If the FMCSA adopts rulemakings in the future that revise the methodology used to determine a carrier’s safety rating in a manner that incorporates more stringent standards, then the Company’s CSA scores could be adversely affected. If the Company receives an unacceptable CSA score, its relationships with customers could be damaged, which could result in a loss of business.

The requirements of CSA could also shrink the trucking industry’s pool of drivers if drivers with unfavorable scores leave the industry. As a result, the costs to attract, train and retain qualified drivers could increase. A shortage of qualified drivers could also increase driver turnover, decrease asset utilization, limit growth and adversely impact the Company’s results of operations and profitability.

The Company is subject to environmental and worker health and safety laws and regulations that may expose it to significant costs and liabilities and have a material adverse effect on its results of operations, competitive position and financial condition.

The Company is subject to stringent and comprehensive federal, state, and local environmental and worker health and safety laws and regulations governing, among other matters, the operation of fuel storage tanks, release of emissions from its vehicles (including engine idling) and facilities, the health and safety of its workers in conducting operations, and adverse impacts to the environment. Under certain environmental laws, the Company could be subject to strict liability, without regard to fault or legality of conduct, for costs relating to contamination at facilities the Company owns or operates or previously owned or operated and at third-party sites where the Company disposed of waste, as well as costs associated with the clean-up of releases arising from accidents involving the Company’s vehicles. The Company often operates in industrial areas, where truck terminals and other industrial activities are located, and where soil, groundwater or other forms of environmental contamination have occurred from historical or recent releases and for which the Company may incur remedial or other environmental liabilities. The Company also maintains aboveground and underground bulk fuel storage tanks and fueling islands at some of its facilities and vehicle maintenance operations at certain of its facilities. The Company’s operations involve the risks of fuel spillage or seepage into the environment, environmental damage and unauthorized hazardous material spills, releases or disposal actions, among others.

Increasing efforts to control air emissions, including greenhouse gases, may have an adverse effect on the Company. Federal and state lawmakers have implemented various climate-change initiatives and greenhouse gas regulations and may implement additional initiatives in the future, all of which could increase the cost of new tractors, impair productivity and increase the Company’s operating expenses.

Compliance with environmental laws and regulations may also increase the price of the Company’s equipment and otherwise affect the economics of the Company’s trucking business by requiring changes in operating practices or by influencing the demand for, or the costs of providing, transportation services. For example, regulations issued by the EPA and various state agencies that require progressive reductions in exhaust emissions from diesel engines have resulted in higher prices for tractors and diesel engines and increased operating and maintenance costs. Also, in order to reduce exhaust emissions, some states and municipalities have begun to restrict the locations and amount of time where diesel-powered tractors, such as the Company’s, may idle. These 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. The Company is also subject to potentially stringent rulemaking related to sustainability practices, including conservation of resources by decreasing fuel consumption. This increased focus on sustainability practices may result in new regulations and/or customer requirements that could adversely impact the Company’s business.

If the Company has operational spills or accidents or if it is found to be in violation of, or otherwise liable under, environmental or worker health or safety laws or regulations, the Company could incur significant costs and liabilities. Those costs and liabilities may include the assessment of sanctions, including administrative, civil and criminal penalties, the imposition of investigatory, remedial or corrective action obligations, the occurrence of delays in permitting or performance of projects, and the issuance of orders enjoining performance of some or all of the Company’s operations in a particular area. The occurrence of any one or more of these developments could have a material adverse effect on our results of operations, competitive position and financial condition. Environmental and worker health and safety laws are becoming increasingly more stringent and there can be no assurances that compliance with, or liabilities under, existing or future environmental and worker health or safety laws or regulations will not have a material adverse effect on the Company’s business, financial condition, results of operations, cash flows or prospects.

Insurance and claims expenses could significantly reduce the Company’s profitability.

The Company is exposed to claims related to cargo loss and damage, property damage, personal injury, workers’ compensation, group health and group dental. The Company has insurance coverage with third-party insurance carriers, but it assumes a significant portion of the risk associated with these claims due to its self-insured retention and deductibles, which can make its insurance and claims expense higher or more volatile. Additionally, the Company faces the risks of increasing premiums and collateral requirements and the risk of carriers or underwriters leaving the transportation sector, which may materially affect its insurance costs or make insurance more difficult to find, as well as increase its collateral requirements. The Company could experience increases in its insurance premiums in the future if it decides to increase its coverage or if its claims experience deteriorates. In addition, the Company is subject to changing conditions and pricing in the insurance marketplace and the cost or availability of various types of insurance may change dramatically in the future. If the Company’s insurance or claims expense increases, and the Company is unable to offset the increase with higher freight rates, its results of operations could be materially and adversely affected. The Company’s results of operations may also be materially and adversely affected if it experiences a claim in excess of its coverage limits, a claim for which coverage is not provided or a covered claim for which its insurance company fails to perform.

The Company derives substantially all of its trucking revenue from one customer, the loss of which would have a material adverse effect on the Company’s business.

Substantially all of the Company’s trucking revenue is generated from the USPS, the loss of which would have a material adverse effect on the Company’s business.

Economic conditions may adversely affect the USPS and its ability to remain solvent. The USPS’s financial difficulties can negatively impact the Company’s results of operations and financial condition and the Company’s ability to comply with the covenants in its debt agreements, especially if the USPS were to delay or default on payments to us. There can be no assurance that the Company’s relationship with the USPS will continue as presently in effect. A reduction in, or termination of, the Company’s services by the USPS would have a material adverse effect on the Company’s business and operating results.

Difficulty in obtaining goods and services from the Company’s vendors and suppliers could adversely affect the Company’s business.

The Company is dependent upon its vendors and suppliers, including equipment manufacturers, for tractors, trailers and other products and materials. The Company believes that it has positive vendor and supplier relationships and is generally able to obtain favorable pricing and other terms from such parties. If the Company fails to maintain amenable relationships with its vendors and suppliers, or if its vendors and suppliers are unable to provide the products and materials the Company needs or undergo financial hardship, the Company could experience difficulty in obtaining needed goods and services, and subsequently, its business and operations could be adversely affected.

The Company’s contractual agreements with its owner-operators expose it to risks that it does not face with its company drivers.

The Company relies, in part, upon independent contractor owner-operators to perform the services for which it contracts with customers. The Company’s reliance on independent contractor owner-operators creates numerous risks for the Company’s business.

If the Company’s independent contractor owner-operators fail to meet the Company’s contractual obligations or otherwise fail to perform in a manner consistent with the Company’s requirements, the Company may be required to utilize alternative service providers at potentially higher prices or with some degree of disruption of the services that the Company provides to customers. If the Company fails to deliver on time, if its contractual obligations are not otherwise met, or if the costs of its services increase, then the Company’s profitability and customer relationships could be harmed.

The financial condition and operating costs of the Company’s independent contractor owner-operators are affected by conditions and events that are beyond the Company’s control and may also be beyond their control. Adverse changes in the financial condition of the Company’s independent contractor owner-operators or increases in their equipment or operating costs could cause them to seek higher revenues or to cease their business relationships with the Company. The prices the Company charges its customers could be impacted by such issues, which may in turn limit pricing flexibility with customers, resulting in fewer customer contracts and decreasing the Company’s revenues.

Independent contractor owner-operators typically use tractors, trailers and other equipment bearing the Company’s trade names and trademarks. If one of the Company’s independent contractor owner-operators is subject to negative publicity, it could reflect on the Company and have a material adverse effect on the Company’s business, brand and financial performance. Under certain laws, the Company could also be subject to allegations of liability for the activities of its independent contractor owner-operators.

Owner-operators are third-party service providers, as compared to company drivers who are employed by the Company. As independent business owners, the Company’s owner-operators may make business or personal decisions that conflict with the Company’s best interests. For example, if a load is unprofitable, route distance is too far from home or personal scheduling conflicts arise, an owner-operator may deny loads of freight from time to time. In these circumstances, the Company must be able to timely deliver the freight in order to maintain relationships with customers.

If the Company’s owner-operators are deemed by regulators or judicial process to be employees, the Company’s business and results of operations could be adversely affected.

Tax and other regulatory authorities have in the past sought to assert that owner-operators in the trucking industry are employees rather than independent contractors. Taxing and other regulatory authorities and courts apply a variety of standards in their determination of independent contractor status. If the Company’s owner-operators are determined to be its employees, it would incur additional exposure under federal and state tax, workers’ compensation, unemployment benefits, labor, employment, and tort laws, including for prior periods, as well as potential liability for employee benefits and tax withholdings.

The Company is dependent on computer and communications systems, and a systems failure or data breach could cause a significant disruption to its business.

The Company’s business depends on the efficient and uninterrupted operation of its computer and communications hardware systems and infrastructure. The Company currently maintains its computer systems at multiple locations, including several of its offices and terminals and third-party data centers, along with computer equipment at each of its terminals. The Company’s operations and those of its technology and communications service providers are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure, terrorist attacks, Internet failures, computer viruses, data breaches (including cyber-attacks or cyber intrusions over the Internet, malware and the like) and other events generally beyond its control. Although the Company believes that it has robust information security procedures and other safeguards in place, as cyber threats continue to evolve, it may be required to expend additional resources to continue to enhance its information security measures and investigate and remediate any information security vulnerabilities. A significant cyber incident, including system failure, security breach, disruption by malware or other damage, could interrupt or delay the Company’s operations, damage its reputation, cause a loss of customers, agents or third party capacity providers, expose the Company to a risk of loss or litigation, or cause the Company to incur significant time and expense to remedy such an event, any of which could have a material adverse impact on its results of operations and financial position.

If the Company’s employees were to unionize, the Company’s operating costs could increase and its ability to compete could be impaired.

None of the Company’s employees are currently represented under a collective bargaining agreement; however, the Company always faces the risk that its employees will try to unionize, and if its owner-operators were ever re-classified as employees, the magnitude of this risk would increase. Further, Congress or one or more states could approve legislation and/or the National Labor Relations Board (the “NLRB”) could render decisions or implement rule changes that could significantly affect the Company’s business and its relationship with employees, including actions that could substantially liberalize the procedures for union organization. For example, in December 2014, the NLRB implemented a final rule amending the agency’s representation-case proceedings that govern the procedures for union representation. Pursuant to this amendment, union elections can now be held within 10 to 21 days after the union requests a vote, which makes it easier for unions to successfully organize all employees, in all industries. In addition, the Company can offer no assurance that the Department of Labor will not adopt new regulations or interpret existing regulations in a manner that would favor the agenda of unions.

Any attempt to organize by the Company’s employees could result in increased legal and other associated costs and divert management attention, and if the Company entered into a collective bargaining agreement, the terms could negatively affect its costs, efficiency and ability to generate acceptable returns on the affected operations. In particular, the unionization of the Company’s employees could have a material adverse effect on its business, financial condition, results of operations, cash flows and prospects because:

Higher health care costs and labor costs could adversely affect the Company’s financial condition and results of operations.

With the passage in 2010 of the United States Patient Protection and Affordable Care Act (the “PPACA”), the Company is required to provide health care benefits to all full-time employees that meet certain minimum requirements of coverage and affordability, or otherwise be subject to a payment per employee based on the affordability criteria set forth in the PPACA. Many of these requirements have been phased in over a period of time, with the majority of the most impactful provisions affecting the Company having begun in the second quarter of 2015. Additionally, some states and localities have passed state and local laws mandating the provision of certain levels of health benefits by some employers. The PPACA also requires individuals to obtain coverage or face individual penalties, so employees who are currently eligible, but have elected not to participate in the Company’s health care plans may ultimately find it more advantageous to do so. It is also possible that by making changes or failing to make changes in the health care plans the Company offers it will have difficulty attracting and retaining employees, including drivers. Finally, implementing the requirements of health care reform is likely to impose additional administrative costs. The costs and other effects of these new healthcare requirements may significantly increase the Company’s health care coverage costs and could materially adversely affect its financial condition and results of operations.

Risks Related to the CNG Industry

Our CNG station success depends on the continued adoption of natural gas as a vehicle fuel.

Our CNG stations solely serve operators of natural gas vehicles (“NGVs”). Our CNG station business model is predicated on the continued purchase of natural gas by existing customers and on the expectation that fleets and other customers will operate more vehicles on natural gas in the future and that new customers will come to our public stations in the future. In the event that demand for CNG does not increase, or even decreases, we will be unlikely to achieve our forecasted results. Reasons for a decrease in demand for CNG could include significant decreases in oil prices or increases in natural gas prices, changes in regulations, alternative technologies being deemed as superior, lack of availability of NGVs and engines for conversion, lack of availability of vehicle servicing, a reduction in the number of CNG stations in the U.S., and our failure to drive incremental purchase activity from our own CNG fleet operating near company-owned stations.

There are a limited number of original manufacturers producing NGVs and NGV fuel tanks, which limits our customer base and sales.

There are a limited number of original equipment manufacturers of NGVs and the engines, fuel tanks and other equipment required to upfit a gasoline or diesel engine to run on natural gas. In the past, manufactures of NGVs have entered the market and then stopped production of NGVs. If existing customers are unable to replace their natural gas vehicles or new customers are unable to obtain NGVs, our business will be adversely affected.

Government incentives promoting CNG may be reduced or eliminated.

We received state government grants to assist us in building our EAF San Antonio and EAF Fort Worth stations and many of our customers received tax incentives to offset part or all of the additional up-front cost to acquire NGVs or convert vehicles to run on natural gas. In addition, many states offer waivers on vehicle weight to allow for NGVs to operate. These and other incentives may not continue. The federal government’s AFTC tax credit program was reinstated for 2017, but if in the future the AFTC tax credit program is not renewed or if other government incentives are discontinued, our business may be adversely affected.

Improvements in technologies relating to gasoline and diesel emission reduction or in electric vehicle power could reduce NGV demand.

We believe that our customers operate NGVs in part due to the lower emissions relative to gasoline and diesel, yet higher power relative to electric or other alternative fuel vehicles. In the event that technologies are developed that either reduce the emissions in gasoline and diesel-powered vehicles or improve the operating capabilities of electric, solar, or other alternative fuel technology vehicles, the demand for NGVs could be significantly reduced. Any such reduction in the demand for NGVs will adversely affect our financial performance.

Our station development could be delayed or have cost overruns due to permitting processes or lack of availability of suitable properties.

We rely on acquiring or leasing suitable properties on which to build our CNG stations. In addition, we are required to obtain a number of permits from various government agencies in order to build and operate our stations. Any inability to find suitable properties in a timely manner and with the right value proposition, or a delay in permitting or a requirement to change our architectural and engineering plans to obtain permits could adversely affect our business.

Breaches in information technology security could harm our business.

In the event that our networks and data are compromised by hackers or other external threats, our ability to operate our business could be harmed. In addition, if our customer data is stolen, we may lose customers. In any such event or related event, our business could be materially harmed or damaged.

Government customers could be subject to reduced funding or a change in mission.

We serve the State of California South Coast Air Quality Management District (“SCAQMD”) as a customer at our Titan Diamond Bar station and will continue to seek long-term CNG contracts with various federal, state and local government entities. If these government agencies no longer receive funding or there is a change in their mission, we may lose them as customers which may adversely affect our business.

CNG stations could experience safety issues.

Our stations operate under high pressure and could potentially explode or catch on fire and cause death or injury. If this were to occur, we could face liabilities that could negatively impact our business.

Risks Related to Our Securities

There is no established trading market for our common stock, and our stockholders may be unable to sell their shares.

There is no established market, private or public, for any of our securities and there can be no assurance that a trading market will ever develop or, if developed, that it will be maintained. There can be no assurance that the Company’s stockholders will ever be able to resell their shares.

Our common stock is subject to the “penny stock” rules of the SEC, which restrict transactions in our stock and may reduce the value of an investment in our stock.

Our common stock is currently regarded as a “penny stock” because our shares are not listed on a national stock exchange or quoted on the NASDAQ Market within the United States and our common stock has a market price less than $5.00 per share. The penny stock rules require a broker-dealer to deliver a standardized risk disclosure document prepared by the SEC, to provide a customer with additional information including current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, monthly account statements showing the market value of each penny stock held in the customer’s account, to make a special written determination that the penny stock is a suitable investment for the purchaser, and receive the purchaser’s written agreement to the transaction. To the extent these requirements may be applicable; they will reduce the level of trading activity in the secondary market for our common stock and may severely and adversely affect the ability of broker-dealers to sell our common stock.

We have never paid and do not expect to pay cash dividends on our shares.

We have never paid cash dividends, and we anticipate that any future profits received from operations will be retained for operations. We do not anticipate the payment of cash dividends on our capital stock in the foreseeable future and any decision to pay dividends will depend upon our profitability, available cash and other factors. Therefore, no assurance can be given that there will ever be any cash dividend or distribution in the future.

We may in the future issue additional shares of our common stock which would reduce investors’ ownership interests in us and which may dilute our share value.

Our certificate of incorporation authorizes the issuance of 110,000,000 shares consisting of: (i) 100,000,000 shares of common stock, par value $0.0001 per share; and (ii) 10,000,000 shares of preferred stock, par value $0.0001 per share. The future issuance of all or part of our remaining authorized common stock or preferred stock may result in substantial dilution in the percentage of our common stock held by our then existing stockholders. We may value any common stock issued in the future on an arbitrary basis. The issuance of common stock for future services or acquisitions or other corporate actions may have the effect of diluting the value of the shares held by our investors and might have an adverse effect on any trading market for our common stock.

The Company’s certificate of incorporation permits the board of directors to issue stock with terms that may subordinate the rights of common stockholders or discourage a third party from acquiring the Company in a manner that might result in a premium price to the Company’s stockholders.

The Company’s board of directors, without any action by the Company’s stockholders, may amend the Company’s certificate of incorporation from time to time to increase or decrease the aggregate number of shares or the number of shares of any class or series of stock that the Company has authority to issue. The board of directors may also classify or reclassify any unissued common stock or preferred stock into other classes or series of stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption of any class or series of stock. Thus, the board of directors could authorize the issuance of preferred stock with terms and conditions that could have a priority as to distributions and amounts payable upon liquidation over the rights of the holders of the Company’s common stock. For example, the Series A Preferred Stock authorized by the board of directors in April 2018 ranks senior in preference and priority to the Company’s common stock with respect to dividend and liquidation rights and, generally votes with the common stock on an as converted basis on all matters presented for a vote of the holders of common stock, including directors, and entitle the holders of Series A Preferred Stock to fifteen votes for each share of Series A Preferred Stock held. The Series A Preferred stock, as well as any other series of preferred stock that the board of directors may authorize in the future could also have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all our assets) that might provide a premium price for holders of the Company’s common stock.

Item 1B. Unresolved Staff Comments.

As a smaller reporting company, EVO Inc. is not required to provide disclosure under this item.

Item 2. Properties.

EVO Inc. utilizes the office space and equipment of a board member at no cost to the Company. Management estimates such amounts to be immaterial. Through its subsidiaries, Titan and EAF, EVO Inc. operates six natural gas fueling stations located in California, Texas, Arizona and Wisconsin.

Thunder Ridge leases approximately 4,300 square feet of office space from 319 N. Main, LLC, a Missouri limited liability company. The lease terminates during July 2020, with monthly rent of approximately $3,400.

We believe all of our properties are suitable and adequate for current operating needs.

Item 3. Legal Proceedings.

On March 19, 2018, Whisler Holdings, LLC, Mitesh Kalthia, and Jean M. Noutary, the owners of the property leased by El Toro for the Company’s El Toro station, initiated a lawsuit in the Superior Court of Orange County, California, related to the lease agreement for the El Toro station. The complaint alleges breach of contract and sought money damages, costs, attorneys’ fees and other appropriate relief. On October 11, 2018, the court issued a default judgement in favor of the plaintiff in the amount of approximately $237,900, which the Company has fully reserved for and is included in accrued expense on the accompanying consolidated balance sheet at December 31, 2018. No payments have been made to date.

On January 22, 2018, certain holders of Senior Bridge Notes initiated a lawsuit in the District Court of Hennepin County, Minnesota against the Company, certain of its subsidiaries and certain stockholders. The complaint alleged breach of contract, breach of implied covenant of good faith and fair dealing, fraud/fraudulent misrepresentation, successor liability, unjust enrichment, and breach of fiduciary duty, and sought money damages, interest, costs, disbursements, attorneys’ fees and other equitable relief. On July 31, 2018, the lawsuit was settled for approximately $1,022,000 and paid in full.

Except for the first lawsuit described above, there are no currently pending legal proceedings and, as far as we are aware, no governmental authority is contemplating any proceeding to which we are a party or to which any of our properties is subject.

Item 4. Mine Safety Disclosure.

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Common Stock

Our certificate of incorporation authorizes the issuance of up to 100,000,000 shares of common stock, par value $0.0001 per share. EVO Inc. common stock trades under the symbol “EVOA” on the OTC Pink Marketplace maintained by the OTC Markets Group Inc.; however, no public market has yet developed.

As of May 29, 2019, there were 169 holders of record of our common stock.

Preferred Stock

Our certificate of incorporation authorizes the issuance of up to 10,000,000 shares of preferred stock, par value $0.0001 per share. On April 13, 2018, the Company issued 100,000 shares of Series A Preferred stock containing 15:1 voting rights to a related party for advisory services rendered to the Company. The fair value of the services rendered was assessed at $234,000.

On April 13, 2018, the Company filed a Certificate of Designation of Rights and Preferences of Series A Preferred Stock (the “Certificate of Designation”) with the Secretary of State of the State of Delaware, which authorizes the Company to issue up to 100,000 shares of Series A Preferred Stock, par value $0.0001 per share (“Series A Preferred Stock”). As of May 29, 2019, there were 100,000 shares of Series A Preferred Stock issued and outstanding and one holder of record of Series A Preferred Stock. The Series A Preferred Stock ranks senior in preference and priority to the Company’s common stock with respect to dividend and liquidation rights and, except as provided in the Certificate of Designation or otherwise required by law, will vote with the common stock on an as converted basis on all matters presented for a vote of the holders of common stock, including directors, and are entitled to fifteen votes for each share of Series A Preferred Stock held on the record date for the determination of the stockholders entitled to vote or, if no record date is established, on the date the vote is taken.

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

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

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

Dividend Policy

EVO Inc. has not paid any cash dividends since inception and does not anticipate or contemplate paying dividends in the foreseeable future. The Preferred Stock Series A dividend accrues on a cumulative basis but is payable upon declaration of the board of directors. It is the present intention of management to utilize all available funds for the development of the Company’s business.

Securities Authorized for Issuance under Equity Compensation Plans

See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Stock Options.”

Item 6. Selected Financial Data

As a smaller reporting company, EVO Inc. is not required to provide disclosure under this item.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Statement Regarding Forward-Looking Information

This report contains forward-looking statements. All statements other than statements of historical facts included in this Annual Report on Form 10-K, including without limitation, statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding our financial position, estimated working capital, business strategy, the plans and objectives of our management for future operations and those statements preceded by, followed by or that otherwise include the words “anticipate”, “will”, “believe”, “expects”, “intends”, “estimates,”, “projects”, “target”, “goals”, “plans”, “objectives”, “should”, “future”, “seek”, “may”, “could”, “likely” or similar expressions or variations on such expressions are forward-looking statements. We can give no assurances that the assumptions upon which the forward-looking statements are based will prove to be correct. Because forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements.

Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this Annual Report on Form 10-K to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Background and Recent Developments

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

Securities Exchange with Thunder Ridge Transportation, Inc.

On June 1, 2018, the Company entered into an equity purchase agreement (the “Purchase Agreement”) with Billy (Trey) Peck Jr. (“Peck”) pursuant to which the Company acquired all of the issued and outstanding shares (the “TRT Shares”) in Thunder Ridge Transport, Inc., a Missouri corporation (“Thunder Ridge”), from Peck and Thunder Ridge became a wholly-owned subsidiary of the Company. Thunder Ridge is based in Springfield, Missouri and is engaged in the business of fulfilling government and corporate contracts for freight trucking services.

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

General Overview

The Company was incorporated in the State of Delaware on October 22, 2010, and is a holding company based in Peoria, Arizona that owns operating subsidiaries that are in the businesses of fulfilling government and corporate contracts for freight trucking services and compressed natural gas (“CNG”) service stations. Titan is the management company that oversees operations of the El Toro, Diamond Bar, and Blaine CNG service stations. As of June 30, 2017, El Toro ceased operations and all of the assets related to this site were written off. Blaine and Diamond Bar were formed in 2015. In March 2016, Diamond Bar began operations of its CNG station under a lease agreement with the State of California South Coast Air Quality Management District (“SCAQMD”) in Diamond Bar, California. In February 2018, the Company entered into a management agreement with a third party to operate Diamond Bar. Under the terms of the agreement, the management company is responsible for all operating expenses and thereby receives all revenue related to the site. The Company discontinued construction of Blaine during the fourth quarter of 2017. EAF was originally organized on March 28, 2012 under the name “Clean-n-Green Alternative Fuels, LLC” in the State of Delaware. Effective May 1, 2012, EAF changed its name to “Environmental Alternative Fuels, LLC.” EVO CNG, EAF’s wholly owned subsidiary, was originally organized in the State of Delaware on April 1, 2013 under the name “EVO Trillium, LLC” and subsequently changed its name to “EVO CNG, LLC” effective March 1, 2016. Together, EAF and EVO CNG operate six compressed natural gas fueling stations located in California, Texas, Arizona and Wisconsin.

Thunder Ridge was founded in Missouri during 2000 and its primary business is interstate highway contract trucking routes operated for the USPS. Graham was founded in 1972 and its primary business also is interstate highway contract trucking routes operated for the USPS.

The Company plans to expand operations into interstate contract trucking routes operated for the USPS by acquiring trucking companies that already operate in this market. The USPS has repeatedly stated its desire to reduce cost and streamline service providers. This growth strategy complements our existing CNG business as we believe the USPS strategy to reduce fuel consumption and increase fleet efficiency is beneficial to contract proposals that include alternative fuel options such as CNG. Upon acquiring Sheehy Mail in January 2019, EVO Inc. operates the largest CNG fleet servicing the USPS.

Going Concern

The Company is an early stage company in the process of acquiring several businesses with highway contract routes operated for the United States Postal Service (“USPS”) and Compressed Natural Gas (“CNG”) fuel stations. As of December 31, 2018, the Company has a working capital deficit of approximately $13.0 million, stockholders’ deficit of approximately $10.3 million, and negative operating cashflows of $6.8 million. Management anticipates rectifying these deficits with additional public and private offerings. Also, the Company is evaluating certain cash flow improvement measures by consolidating costs with the acquired entities, the purchase of vehicles to reduce purchased transportation and repricing contracts with USPS. However, there can be no assurance that the Company will be successful in these efforts. Further, for the year ended December 31, 2018, the USPS accounted for 95% of the Company’s total consolidated revenues. The loss of the USPS as a customer, or a significant reduction in the Company’s relationship with the USPS would have a material adverse effect on the Company’s business.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern for the next twelve months from the issuance of these consolidated statements within the Company’s Annual Report on Form 10-K. However, the above conditions raise substantial doubt about the Company’s ability to do so. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern for the next twelve months from the issuance of these consolidated statements within the Company’s Annual Report on Form 10-K.

To meet its current and future obligations, the Company has taken the following steps to capitalize the business and successfully achieve its business plan during 2019:

Management is working with related party debt holders and equipment lenders to extend or convert existing debt. However, there can be no assurance that the Company will be successful in these efforts.

On January 2, 2019, the Company acquired Sheehy Mail a mail contractor headquartered in Waterloo, Wisconsin. Sheehy Mail operates 104 trucks that service 16 USPS contracts across 18 states.

On February 1, 2019, the Company acquired Ursa Major Corporation (“Ursa”) and J.B. Lease Corporation (“J.B. Lease”), a mail contractor located in Milwaukee, Wisconsin. Ursa operates 250 trucks that service 42 USPS contracts across 22 states.

During February 2019, El Toro received a waiver from Tradition Capital Bank of its 2018 defaults of certain debt service coverage ratio, minimum tangible equity, and debt to equity ratio covenants in the El Toro SBA loan, which waiver also eliminates those covenants for 2019 and thereafter.

On April 30, 2019, the Company and Peck entered into a fourth amendment to the Purchase Agreement (the “Fourth Purchase Agreement Amendment”). The Fourth Purchase Agreement Amendment extended the April 30, 2019 portion of the original maturity date to June 30, 2019. As of December 31, 2018, the outstanding balance was $2,386,778.

The cash balance as of December 31, 2018 was $1,630,022 and is sufficient to cover the negative cash flows generated from operations through the first half of 2019. Management is in the process of identifying sources of capital through debt refinancing and equity investments through one or more private placements. Management believes these additional sources will give the Company sufficient liquidity until it achieves projected positive cash flows from operations in the third quarter of 2019.

Sources of Revenue

Titan was founded in 2012 and for the first four years only had management fee revenues. Beginning in 2016 Titan generated revenues from its CNG stations El Toro and Diamond Bar, and with the acquisition of EAF, the Company generated revenue from six stations beginning February 2017. With the acquisition of Thunder Ridge on June 1, 2018, and Graham on November 18, 2018, the Company has begun to recognize revenue from interstate highway contract routes. The transportation services include operations in Alabama, California, Florida, Georgia, Louisiana, Maryland, Michigan, Mississippi, Missouri, Ohio, Pennsylvania, Tennessee, and Texas.

Key Trends

Interstate Highway Contracts

The USPS has for more than 100 years contracted with third parties for the transportation of mail. The contractors competitively bid on transportation contracts that detail the movement of mail between processing facilities destination post offices and destination mailing addresses. The USPS evaluates the bids based on price, past performance, operational plans, financial resources, and the use of innovation or alternative fuels. The contracts are generally two to six years and are renewable for additional terms, usually indefinitely. As of September 30, 2018, there were 5,509 routes contracted with the USPS, utilizing 2,240 contractors with contracts totaling $3.3 billion.

During July and August 2018, Thunder Ridge was awarded seven Dynamic Route Optimization (DRO) contracts with the USPS. These awards expand Thunder Ridge’s operations into five states—California, Louisiana, Florida, Texas, and Michigan. This is in addition to the seven other states it services through 12 contracts with the USPS. Under the seven contracts, operations will include locations in Santa Clarita, California, Flint, Michigan, Austin, Texas, Pensacola, Florida, the Northern Bay of California, Baltimore, Maryland, and Baton Rouge, Louisiana. Additionally, the new contracts will provide a larger network for the development of new transportation opportunities. The annual contract revenues for the seven DRO contracts are approximately $26 million.

As part of the Graham acquisition in November 2018, the Company gained three additional USPS contracts serving Tennessee, Alabama, Georgia, and Mississippi which generate approximately $1.6 million in revenue annually.

CNG

In general, CNG has become the primary alternative fueling choice for truck and bus fleets operating in the $134 billion fleet fueling market. Natural gas is sold on a gas gallon equivalent (“GGE”) basis and as of December 2018 was selling at an average price nationally of approximately $2.19 per GGE versus average prices of gasoline and diesel of $2.27 and $2.98 per gallon, respectively. In addition, CNG is a significantly cleaner fuel than is gasoline or diesel. With increased focus on the environment, the benefits from natural gas-powered vehicles have an immediate positive impact on the issues of air quality, U.S. energy security and public health. Using renewable CNG can result in greater than 95% less greenhouse gases than traditional petroleum products, and because CNG fuel systems are completely sealed, CNG vehicles produce no evaporative emissions, which are a common hazard when using liquid fuel. Also, CNG creates less engine wear, thereby making its use even more desirable. As of December 2018, there were approximately 1,700 public CNG stations in the United States, compared to over 125,000 gasoline stations across the country.

During December 2017 we received a $0.50 per GGE federal tax credit for each GGE sold. In some cases, we share this credit with our CNG customers. The federal tax credit program had not been approved for fiscal year 2018 by the time this Report on Form 10K was available to be issued.

Anticipated Future Trends

In 2014, the USPS announced plans to significantly reduce their number of contractors from over 4,000 in 2014 to less 1,000 by 2022. The USPS’s goal is to manage fewer relationships and work with larger prime contractors. The USPS is in the process of taking all of the contracts in a defined geographical area and consolidating them into one contract. It is estimated that over $1 billion in USPS contracts will become available in the next five years, which affords the opportunity for the Company to grow organically in addition to growing through acquisition.

The Company expects to further increase its footprint into the transportation industry by owning and operating transportation companies. The Company intends to acquire additional transportation companies that have won contracts to provide trucking services for the USPS. Our CNG business complements this expansion strategy since fueling our CNG trucks at our own stations in cases where our routes are located near our CNG facilities will allow us to implement cost saving strategies that will increase profitability and increase our presence in this space.

If we are successful in our future acquisition strategy, we will competitively bid on transportation contracts that detail the movement of mail between processing facilities, destination post offices and destination mailing addresses. Those contracts typically provide for an initial four-year term and are often renewed to the incumbent service provider if appropriate services have been performed. The contracts are bid and performed in accordance with various requirements, including, but not limited to requirements under the Service Contract Act, Department of Transportation regulations (federal and state), and other applicable local and state regulations.

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

We believe natural gas fuels are well-suited for use by vehicle fleets that consume high volumes of fuel, refuel at centralized locations or along well-defined routes and/or are increasingly required to reduce emissions. The nature of our USPS contracts and some of our general freight transit lanes fits this profile. As a result, we believe there will be growth in the consumption of natural gas as a vehicle fuel among certain vehicle fleets. However, we expect competition in the market for natural gas vehicle fuel to remain steady in the near-term. To the extent competition increases, we would be subject to greater pricing pressure, reduced operating margins and potentially fewer expansion opportunities.

Recent Developments

During 2018, the Company converted Titan subordinated notes payable and interest of $1,363,885 (the “Junior Bridge Notes”) into 272,777 shares of common stock.

During 2018, the Company converted Titan promissory notes payable and interest of $688,958 (the “Senior Bridge Notes”) into 275,583 shares of common stock. In addition, two Senior Bridge Notes and the related interest were paid in full for $800,000 and $272,000, respectively. As of December 31, 2018, the outstanding balance of the Senior Bridge notes is $75,000 with interest accruing at 15% per year.

During 2018, the Company converted three promissory notes (the “Minn Shares Notes”) in the aggregate of principal and interest of $468,655 to Joseph H. Whitney, The Globe Resources Group, LLC and Richard E. Gilbert into 187,462 units. Each unit included one share of common stock and one warrant to purchase one share of common stock with an exercise prices of $2.50 exercisable ten years after issuance.

On February 1, 2017, pursuant to the EAF Exchange Agreement, the Company acquired all of the membership interests of EAF. As consideration for the EAF Interests, EVO, Inc. issued a promissory note payable at maturity in the principal amount of $3.8 million to Danny Cuzick (the “Senior Promissory Note”) and convertible promissory notes in the aggregate principal amount of $9.5 million to the EAF Members (the “Convertible Notes”). The Senior Promissory Note bears interest at 7.5% per year with a default interest rate of 12.5% per year and has a maturity date of the earlier of (a) the date that is ten days after the initial closing of a private offering of capital stock of EVO, Inc. in an amount not less than $10 million (a “Private Offering”); (b) December 31, 2017 and (c) declaration by Danny Cuzick of an event of default under the Senior Promissory Note. The Convertible Notes bear interest at 1.5% per year and have a maturity date of February 1, 2026. The Company imputed an interest rate of 5.1% on the convertible promissory notes. During 2018, the Senior Promissory Note maturity date was extended to July 2019. Principal and interest are due at maturity.

The Convertible Notes were initially convertible into 1,400,000 shares (the “Transaction Shares”) of EVO, Inc.’s Common Stock, subject to adjustment for any stock splits, combinations or similar transactions, representing approximately 81.1% of EVO Inc.’s total outstanding shares of Common Stock on a post-transaction basis. Accordingly, the conversion of the Convertible Notes would result in a change in control of EVO Inc. The number of Transaction Shares were subject to increase to equal 70% of the issued and outstanding Common Stock if the issuance of Common Stock pursuant to a private offering of Common Stock of up to $2 million and the conversion of Minn Shares’ and Titan’s junior bridge notes, senior bridge notes, convertible promissory notes, and certain accounts payable into Common Stock would otherwise cause the Transaction Shares to represent less than 70% of the issued and outstanding Common Stock. Pursuant to the terms of the EAF Exchange Agreement, the EAF Members are entitled to demand registration rights and piggyback registration rights with respect to the Transaction Shares upon customary terms, limitations, exceptions and conditions. The Convertible Notes are secured by all of the assets of EAF and the EAF Interests, which EVO, Inc. pledged to the EAF Members as security for the Convertible Notes. In October 2018, the Company amended the Convertible Notes to eliminate the variable number of shares issuable under the conversion feature to a fixed amount of 7,000,000 shares upon conversion.

Each Convertible Note is convertible at the applicable holder’s option upon (1) consummation of a reorganization, merger or similar transaction where the Company is not the surviving or resulting entity or (2) the sale of all or substantially all of the Company’s assets, subject to customary restrictions. The Convertible Notes are also subject to mandatory conversion at the Company’s option beginning on the first anniversary of the issue date if: (i) the closing price of the common stock is greater than $10.00 and (ii) the average daily trading volume of shares of common stock has equaled 100,000 or more for the 30 days prior to the applicable date. Upon a conversion of the Convertible Notes, accrued interest may also be converted into shares of common stock at the greater of (1) 1.357, subject to adjustment for stock splits or combinations, or (2) the closing price of a share of common stock as reported on the business day that immediately precedes the date of the notice of conversion provided by the party making the election.

In connection with the closing of the EAF Exchange Agreement, on February 1, 2017, EVO, Inc. issued promissory notes to the EAF Members in the aggregate principal amount of $250,000. During 2018, the promissory notes were paid in full.

In connection with the closing of the EAF Exchange Agreement, on February 1, 2017, EVO, Inc. assumed a note payable from EAF to Danny Cuzick dated January 30, 2017 in the principal amount of $4.0 million (the “EAF Note”). The EAF Note is secured by all assets of EAF and is guaranteed by EVO, Inc. The EAF Note bears interest at 7.5% per annum with a default rate of 12.5% per annum and has a maturity date of the earlier of (a) February 1, 2020 and (b) declaration by Danny Cuzick of an event of default under the EAF Note. Principal and interest are due at maturity.

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

During July and August 2018, the Company issued $4,005,000 of Secured Convertible Promissory Notes (“Secured Convertible Notes”). The Company paid debt issuance costs commissions of $524,987 in connection with the Secured Convertible Notes. They bear interest at 9.0%, compounded quarterly, and have a maturity date two years after issuance. The holders may agree, at their discretion, to add accrued interest in lieu of payment to the principal balance of the Secured Convertible Notes on the first day of each calendar quarter. The Secured Convertible Notes are secured by all the assets of the Company and are subordinate to the EAF notes. The holder may agree, at its discretion, to add accrued interest to the principal balance of the Secured Convertible Notes on the first day of each calendar quarter. The Secured Convertible Notes may not be prepaid prior to the first anniversary of the date of issuance but may be prepaid without penalty after the first anniversary of the date of issuance.

The Secured Convertible Notes are convertible into shares (the “Note Shares”) of the Company’s common stock at a conversion rate of $2.50 per share of common stock at the holder’s option: 1) at any time after the first anniversary of the date of issuance; or 2) at any time within 90 days after a “triggering event,” including a sale, reorganization, merger, or similar transaction where the Company is not the surviving entity. The Secured Convertible Notes are also subject to mandatory conversion at any time after the first anniversary of the date of issuance if the average volume of shares of common stock traded on the Nasdaq Capital Market, NYSE American Market or a higher tier of either exchange is 100,000 or more for the 10 trading days prior to the applicable date.

The Secured Convertible Notes also provide that the Company will prepare and file with the Securities and Exchange Commission (“SEC”), as promptly as reasonably practical following the issuance date of the Secured Convertible Notes, but in no event later than 45 days following the issuance date, a registration statement on Form S-1 (the “Registration Statement”) covering the resale of the common stock and the warrant shares and as soon as reasonably practical thereafter effect such registration. As of the filing date, the Registration Statement, which was filed on February 11, 2019 and has not been declared effective. The Company will be required to pay liquidated damages of 1.0% of the outstanding principal amount of the Secured Convertible Notes each 30 days if the Registration Statement is not declared effective by the SEC within 180 days of the filing date of the Registration Statement.

As additional consideration for the Secured Convertible Notes, the Company issued warrants to the holders to purchase 1,602,000 shares of common stock at an exercise price of $2.50 per share, exercisable for ten years from the date of issuance.

On June 1, 2018, Company entered into an equity purchase agreement (the “Purchase Agreement”) with Billy (Trey) Peck Jr. (“Peck”) pursuant to which the Company acquired all of the issued and outstanding shares (the “TR Shares”) in Thunder Ridge Transport, Inc., a Missouri corporation (“Thunder Ridge”), from Peck and Thunder Ridge became a wholly-owned subsidiary of the Company. Thunder Ridge is based in Springfield, Missouri and is engaged in the business of fulfilling government and corporate contracts for freight trucking services.

As consideration for the TR Shares, the Company issued a promissory note dated June 1, 2018, in the principal amount of $2,500,000 to Peck (the “TR Note”). The TR Note bears interest at 6% per year with a default interest rate of 9% per year and had an original maturity date of the earlier of (a) the date the Company raises $40,000,000 in public or private offerings of debt or equity; (b) December 31, 2018, and (c) termination of Peck’s employment with the Company by the Company without cause or by Peck for good reason. The TR Note is secured by all of the assets of Thunder Ridge pursuant to a security agreement dated June 1, 2018, between the Company, Thunder Ridge, and Peck (the “Security Agreement”), and is also secured by the TR Shares, which the Company pledged to Peck pursuant to a stock pledge agreement dated June 1, 2018, between the Company and Peck (the “Pledge Agreement”). On December 26, 2018, the Company and Peck entered into an amendment to the Purchase Agreement (the “First Purchase Agreement Amendment”). The First Purchase Agreement Amendment extended the December 31, 2018, portion of the original maturity date to February 28, 2019. On February 28, 2019, the Company and Peck entered into a second amendment to the Purchase Agreement (the “Second Purchase Agreement Amendment”). The Second Purchase Agreement Amendment extended the December 31, 2018, portion of the original maturity date to April 30, 2019, On April 30, 2019, the Company and Peck entered into a fourth amendment to the Purchase Agreement (the “Fourth Purchase Agreement Amendment”). The Fourth Purchase Agreement Amendment extended the April 30, 2019, portion of the original maturity date to June 30, 2019. The note calls for monthly principal payments of $14,000. All accrued and unpaid interest is due at maturity.

If the Company fails to repay the amounts outstanding under the TR Note on or before June 30, 2019, Peck has the right to require the Company to return the TR Shares and effectively rescind the sale of the TR Shares to the Company.

On April 12, 2019, the Company and Peck entered into a third amendment to the Purchase Agreement (“Third Purchase Agreement Amendment”) to delete and replace the working capital exhibit to the equity purchase agreement. Pursuant to the Third Purchase Agreement Amendment, target working capital was reduced from $(638,094) to $(1,620,022).

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

Historically, our principal sources of liquidity have consisted of cash on hand, cash provided by financing activities, and cash provided by investors. Our cash position at December 31, 2018, was approximately $1,600,000 and we had a working capital deficit of $13 million. Our current liquidity will be impacted by the results of current operations; the ability to raise funds; and ability to manage the maturities of our debt obligations. The December 31, 2018 cash balance is sufficient to cover the negative cash flows generated from operations through the first half of 2019. Management is in the process of identifying sources of capital through debt refinancing and equity investments through one or more private placements. Management believes these additional sources will give the Company sufficient liquidity until it achieves projected positive cash flows from operations in the third quarter of 2019. There is no assurance that we will be able to raise sufficient capital or renegotiate our existing debt arrangements.

We incur liquidity risk as trucking is a capital-intensive operation. As we acquire additional assets, contractual awards, joint ventures, or new acquisitions, our liquidity objective is to maintain access to a diverse set of on and off-balance sheet liquidity sources. We seek to maintain liquidity sources to maintain our expected future obligations in the event we are not able to raise new funding due to our funding efforts. The liquidity risks that we are exposed to could arise from a variety of scenarios. Our liquidity management strategy includes a number of elements, including, but not limited to:

As of December 31, 2018, the Company had total indebtedness of approximately $26,000,000 (net of approximately $8,100,000 of unamortized debt discount and debt issuance costs), of which approximately $6,900,000 is classified as current debt. Our total consolidated interest payment obligations relating to our indebtedness was approximately $1,900,000, which included amortization of debt discount and debt issuance costs of approximately $500,000 for the year ended December 31, 2018.

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

Business Risks and Uncertainties

Our business and prospects are exposed to numerous risks and uncertainties. For more information, see “Risk Factors – Risks Related to the Company;” “Risks Related to the Company’s Trucking Operations;” and “Risk Factors – Risks Related to the CNG Industry.”

Results from Operations   

Fiscal Year Ended December 31, 2018, Compared to Fiscal Year Ended December 31, 2017    

Revenue. EVO Inc. has refocused its corporate strategy to leverage our footprint of CNG stations and relationships with owner-operators to build a national fleet of haulers primarily focused on servicing the U.S. Postal Service (USPS). While we expect the vast majority of our future sales growth in the trucking segment, our CNG stations will remain as a complementary part of our strategy. The CNG stations provide us with a cost effective fueling source for our own fleet and enable us to respond to the USPS’ preference for environmentally-friendly fuel alternatives in the contract bidding process. We continue to operate public and private CNG filling stations.

The combination of the company’s recent pivot into the trucking industry and acquisitions of Thunder Ridge and Graham in June 2018 and November 2018, respectively, make many of the traditional year over year variance comparisons irrelevant for this reporting period. Variance commentary of the CNG segment, which operated throughout 2018 and 2017 is as follows:

CNG revenue: Sales for the CNG stations were $1,348,301 and $1,968,563 for the years December 31, 2018 and 2017, respectively. The decrease resulted from revenue loss of approximately $169,000 from the Diamond Bar station due to the third-party management agreement implemented during 2018, and approximately $340,000 at the Tolleson station due to a customer’s discontinuation of its CNG fleet. In addition, the Company experienced an overall downward trend in CNG sales over the past year.

The third-party management agreement was executed with the management company to work with SCAQMD to renegotiate ownership of the CNG station. Upon SCAQMD’s approval, the Company will transfer ownership to the management company.

CNG operating expense: We changed the format of the statement of operations to mirror the trucking industry presentation norms since trucking now represents 95% of our revenue. Costs formerly classified as CNG cost of sales have now been moved to the Operating Expense section with the label CNG expenses. This expense line is comprised of natural gas, electricity, federal excise tax, vendor use fuel tax and credit card fees. The margins at the Titan and EVO CNG stations were approximately 33% and 24% for the years ended December 31, 2018 and 2017, respectively. Margins decreased primarily because the site management fee to operate the stations remained fixed while sales volume fell.

Trucking revenue: The Company earned trucking revenue for the first time in 2018 as a result of the Thunder Ridge and Graham acquisitions in June and November 2018, respectively. Approximately 95% of the trucking revenue is derived from contracts with the USPS to haul U.S. mail. The remainder of the revenue is derived from corporate freight hauling. The USPS contracts are typically four years in duration and are priced on a rate per mile basis which varies by contract. The USPS contracts also include a monthly fuel adjustment.

Payroll: Of the Company’s 290 employees at year-end, 269 were drivers. Driver wages are fixed per contract with USPS and are eligible for renegotiation with USPS on a bi-annual basis. In addition to an hourly wage that is set by the Department of Labor, drivers also earn a $5.11 hourly rate for benefits. The Company is installing transportation management automation in its fleet to improve driver scheduling and more closely manage labor productivity.

Purchased transportation: Purchased transportation represents payments to subcontracted third party companies that serve as independent contractors for particular routes. These contracts are 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. As of December 31, 2018, the Company had 15 independent contractors, who accounted for approximately 38% of the Company’s total miles for the year ended December 31, 2018.

General and administrative expenses were $3,294,111 and $2,416,071 for the year ended December 31, 2018 and 2017, respectively. Approximately $592,000 of the increase is attributable to Thunder Ridge expenses and $391,000 is attributable to business license and regulatory fees.

Equipment rent: Presently, the Company rents and leases the majority of its trucks and trailers through a combination of short and long-term arrangements. Efforts are currently underway to rebalance the fleet towards having more company-owned assets to achieve the expected returns, subject to financing availability

Insurance and Claims: Insurance and claims is comprised of auto liability and workers comp expense related to the trucking segment of the business.

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.

Depreciation and amortization: Approximately $655,000 of the Company’s expense is related to its CNG stations and approximately $304,000 is related to the trucking segment.

Maintenance and Supplies: Maintenance and supplies expense primarily includes the costs to maintain the fleet.

Operating Supplies and Expense: Operating and supplies expense includes all other direct costs in the trucking segment such as onboard technology (approximately $178,000), truck parking (approximately $130,000) and tolls (approximately $50,000).

Impairment: During the year, the Company impaired a $240,000 CNG asset that was previously held for sale. Impairment charges in 2017 totaled $4,906,217, comprised of $3,993,730 for goodwill, $106,270 for customer lists and $806,217 for El Toro’s fixed assets.

Interest expense. Interest expense increased to $1,892,375 in 2018 from $1,658,104 in 2017. Interest expense incurred during 2018 included $157,000 from Thunder Ridge from factoring and the fuel discount.

Warrant expense. Warrant expense increased to $171,813 in 2018 from $77,500 in 2017. The warrant expense is primarily for issuance of warrants for acquisitions and warrants issued with capital raised in equity transactions. Warrant expense represents the estimated fair value calculated on the date of issuance of the warrant using the Black-Scholes option pricing model, which requires the input of subjective assumptions, including the expected term of warrants, expected stock price volatility, and expected dividends. These estimates involve inherent uncertainties and the application of management’s judgment.

Liquidity and Capital Resources

Fiscal Year Ended December 31, 2018, Compared to Fiscal Year Ended December 31, 2017

We had cash and cash equivalents of $1,630,022 and $83,867 at December 31, 2018 and 2017, respectively. During the years ended December 31, 2018 and 2017, net cash used by operations was $6,782,936 and $891,395, respectively. We historically funded our operating losses primarily from the issuance of equity, convertible notes payable, and stockholder debt.

Changes in Liquidity

Cash and Cash Equivalents. Cash and cash equivalents were $1,630,022 and $83,867 at December 31, 2018 and 2017, respectively. The increase is primarily attributable to financing activities.

Operating Activities. Net cash used in operations was $6,782,936 and $891,395 as of December 31, 2018 and 2017, respectively. For the years ended December 31, 2018 and 2017, the Company had a net loss of $6,576,692 and $9,160,893, respectively. Significant changes in cash used in operations during these periods included:

Investing Activities. Net cash (used in)/provided by investing was $(170,000) and $8,757 for the years ended December 31, 2018 and 2017, respectively. The Company purchased $204,000 of equipment and received $34,000 in proceeds from the sale of assets in 2018. The 2017 investing activity was de minimis.

Financing Activities. Net cash provided by financing activities was $8,499,091 and $941,561 for the years ended December 31, 2018 and 2017, respectively. The cash provided by financing activities in 2018 consisted of $2,500,000 from the sale of common stock, gross proceeds of $4,005,000, less $524,987 in debt issuance costs from secured convertible debt, and $4,100,341 from advances from factoring receivables. Cash received in 2018 was reduced by $247,909 in payments on the SBA and equipment loans, $19,052 in payments towards the fuel advance, $250,000 used to fully repay the working capital notes – related party, $45,930 in loan payments to related parties, $113,222 in payments on notes to shareholders, and $800,000 in payments on the subordinated convertible senior notes payable to stockholders. Cash provided by financing activities in 2017 consisted of $332,859 in stockholders’ advances, $310,000 in proceeds from the sale of common stock, and proceeds of $400,000 from issuance of senior debt. Cash received in 2017 was partially offset by $101,298 in payments on the SBA loan.

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

Debt Compliance

As of December 31, 2018, the Company had total indebtedness of approximately $26,000,000, (net of approximately $8,100,000 of unamortized debt discount and debt issuance costs), of which approximately $6,900,000 is classified as current debt. Our total consolidated interest payment obligations relating to our indebtedness was approximately $1,900,000 which included the amortization of debt discount and debt issue costs of approximately $500,000 for the year ended December 31, 2018. For the year ending December 31, 2018 the Subordinated convertible senior note payable to stockholders was in default for $75,000. Subsequent to year end, the financial ratio covenants with the SBA loan were waived for 2018 and eliminated for all future periods.

Existing Indebtedness  

On December 31, 2014, Titan entered into a co-borrower arrangement with El Toro for a $1,300,000 U.S. Small Business Administration (SBA) note (the “SBA Agreement”). The proceeds from the note were received by El Toro. The note bears interest at 5.50% for the first five years, then adjusted to the SBA LIBOR base rate, plus 2.35% for the remaining five years. The note requires interest only payments for the first twelve months. Commencing January 2016, the note requires monthly principal and interest payments of $15,288. The note matures March 2024, is secured by substantially all of Titan’s business assets and is personally guaranteed by certain former members of Titan. The Company issued 35,491 units (equivalent to 31,203 common shares) to those members as compensation for the guarantee. As of December 31, 2018, the outstanding balance was $950,582. The Company was not in compliance with the financial ratio covenants at December 31, 2018. Subsequent to year end, the financial ratio covenants were waived for 2018 and eliminated for all future periods.

On February 1, 2017, EVO, Inc. issued the Senior Promissory Note in the principal amount of $3,800,000 to a former EAF member. The Senior Promissory Note bears interest at 7.5% per year with a default interest rate of 12.5% per year and has a maturity date of the earlier of (a) the date that is ten days after the initial closing of a private offering of capital stock of EVO, Inc. in an amount not less than $10 million (a “Private Offering”); (b) December 31, 2017 and (c) declaration by the note holder of an event of default under the Senior Promissory Note. During April 2018, the Senior Promissory Note’s maturity was extended to June 2019 from December 31, 2017. The Senior Promissory Note is unsecured. No principal or interest payments are due until maturity.

On February 1, 2017, EVO, Inc. issued four Convertible Notes in the aggregate principal amount of $9,500,000 to the EAF Members. The Convertible Notes bear interest at 1.5% per year and have a maturity date of February 1, 2026. The Company imputed an interest rate of 5.1% on the convertible promissory notes. The Convertible Notes are secured by all of the assets of EAF and the EAF Interests, which the Company pledged to the EAF Members as security for the Convertible Notes.

The Convertible Notes were initially convertible into 1,400,000 shares (the “Transaction Shares”) of EVO, Inc.’s Common Stock, subject to adjustment for any stock splits, combinations or similar transactions, representing approximately 81.1% of EVO, Inc.’s total outstanding shares of Common Stock on a post-transaction basis. Accordingly, the conversion of the Convertible Notes would result in a change in control of the Company. The number of Transaction Shares will be increased to equal 70% of the issued and outstanding Common Stock if the issuance of Common Stock pursuant to a private offering of Common Stock of up to $2 million and the conversion into Common Stock of the Company’s subordinated notes payable to members, Senior Bridge Notes, convertible promissory notes, and certain accounts payable would otherwise cause the Transaction Shares to represent less than 70% of the issued and outstanding Common Stock. Pursuant to the terms of the EAF Exchange Agreement, the EAF Members are entitled to demand registration rights and piggyback registration rights with respect to the Transaction Shares upon customary terms, limitations, exceptions and conditions. During October 2018 the Company amended the Convertible Notes to eliminate the variable number of shares issuable under the conversion feature to a fixed amount of 7,000,000 shares upon conversion.

Each Convertible Note is convertible at the applicable holder’s option upon (1) consummation of a reorganization, merger or similar transaction where the Company is not the surviving or resulting entity or (2) the sale of all or substantially all of the Company’s assets, subject to customary restrictions. The Convertible Notes are also subject to mandatory conversion at the Company’s option beginning on the first anniversary of the issue date if: (i) the closing price of the common stock is greater than $10.00 and (ii) the average daily trading volume of shares of common stock has equaled 100,000 or more for the 30 days prior to the applicable date. Upon a conversion of the Convertible Notes, accrued interest may also be converted into shares of common stock at the greater of (1) 1.357, subject to adjustment for stock splits or combinations, or (2) the closing price of a share of common stock as reported on the business day that immediately precedes the date of the notice of conversion provided by the party making the election.

On August 31, 2017, Thunder Ridge signed an agreement with a supplier on by which $1,000,000 was advanced to Thunder Ridge during 2017. The advance bears interest at 8.5% and is collateralized by substantially all of Thunder Ridge’s assets. As Thunder Ridge purchases fuel from the supplier’s station, Thunder Ridge reduces its fuel advance liability by $0.25 per gallon purchase. Purchases made during the year ended December 31, 2018, were nominal. With the Thunder Ridge acquisition, the maturity date was extended from December 31, 2018 to June 2021.

On June 1, 2018, as part of the acquisition of Thunder Ridge, a $2,500,000 promissory note – stockholder was issued.  The promissory note - stockholder bears interest at 6% and has a maturity date of the earlier of (a) the date the Company raises $40,000,000 in public or private offerings of debt or equity; (b) December 31, 2018, and (c) termination of Peck’s employment with the Company, either by the Company without cause or by Peck for good reason. The note is collateralized by all of the assets of Thunder Ridge. On December 26, 2018, the Company and Peck entered into an amendment to the Purchase Agreement (“First Purchase Agreement Amendment”). The First Purchase Agreement Amendment extended the December 31, 2018, portion of the original maturity date to February 28, 2019. On February 28, 2019, the Company and Peck entered into a second amendment to the Purchase Agreement (the “Second Purchase Agreement Amendment”). The Second Purchase Agreement Amendment extended the December 31, 2018, portion of the original maturity date to April 30, 2019. On April 30, 2019, the Company and Peck entered into a fourth amendment to the Purchase Agreement (the “Fourth Purchase Agreement Amendment”). The Fourth Purchase Agreement Amendment extended the April 30, 2019, portion of the original maturity date to June 30, 2019. The note calls for monthly principal payments of $14,000. All accrued and unpaid interest is due at maturity. As of December 31, 2018, the outstanding balance was $2,386,778.

If the Company fails to repay the amounts outstanding under the TR Note on or before June 30, 2019, Peck has the right to require the Company to return the TR Shares and effectively rescind the sale of the TR Shares to the Company.

The Company has two line-of-credit agreements with a bank that provided for a borrowing capacity of approximately $425,000. Amounts outstanding bear interest at 6.75% and are secured by equipment. During October 2018, the Company paid the $100,000 line-of-credit in full and extended the $321,739 line-of-credit’s maturity to April 2019. As of December 31, 2018, the outstanding balance was $316,589. On April 1, 2019, the Company paid the line-of-credit in full.

As part of the Thunder Ridge acquisition, the Company holds three notes payable to a bank with interest ranging from 2.99% to 6.92%, with monthly payments of principal and interest in aggregate of $2,633, and maturity dates between September 2020 and January 2023. The notes are collateralized by equipment. As of December 31, 2018, the outstanding balance was $100,966.

In connection with the closing of the EAF Exchange Agreement, on February 1, 2017, the Company guaranteed a note from EAF to a former EAF member dated January 30, 2017 in the principal amount of $4,000,000 (the “EAF Note”). The EAF Note guaranteed by substantially all of the assets of EAF. The EAF Note bears interest at 7.5% per annum with a default rate of 12.5% per annum and has a maturity date of the earlier of (a) February 1, 2020 and (b) declaration by the noteholder of an event of default under the EAF Note. No principal and interest payments are due until maturity.

During July and August 2018, the Company received $4,005,000 in proceeds from Secured Convertible Promissory Notes (“Secured Convertible Notes”). The Company paid debt issuance costs of $524,987 in connection with the Secured Convertible Notes. They bear interest at 9.0%, compounded quarterly, and have a maturity date two years after issuance. The Secured Convertible Notes are secured by all the assets of the Company. Each holder may agree, at its discretion, to add accrued interest to the principal balance of the Secured Convertible Notes on the first day of each calendar quarter. The Secured Convertible Notes may not be prepaid prior to the first anniversary of the date of issuance but may be prepaid without penalty after the first anniversary of the date of issuance. For the year ended December 31, 2018 and 2017, $34,630 and zero, respectively, of interest was added to the principal balance. At December 31, 2018, the Secured Convertible Notes had a balance, net of debt issuance costs of $415,614, of $3,624,016.

The Secured Convertible Notes are convertible into shares (the “Note Shares”) of the Company’s common stock at a conversion rate of $2.50 per share of common stock at each holder’s option: 1) at any time after the first anniversary of the date of issuance or 2) at any time within 90 days after a “triggering event,” including a sale, reorganization, merger, or similar transaction where the Company is not the surviving entity. The Secured Convertible Notes are also subject to mandatory conversion at any time after the first anniversary of the date of issuance if the average volume of shares of common stock traded on the Nasdaq Capital Market, NYSE American Market or a higher tier of either exchange is 100,000 or more for the 10 trading days prior to the applicable date.

The Secured Convertible Notes also provide that the Company will prepare and file with the Securities and Exchange Commission (“SEC”), as promptly as reasonably practical following the issuance date of the Secured Convertible Notes, but in no event later than 45 days following the issuance date, a registration statement on Form S-1 (the “Registration Statement”) covering the resale of the common stock and the warrant shares and as soon as reasonably practical thereafter effect such registration. The Company will be required to pay liquidated damages of 1.0% of the outstanding principal amount of the Secured Convertible Notes each 30 days if the Registration Statement is not declared effective by the SEC within 180 days of the filing date of the Registration Statement.

As additional consideration for the Secured Convertible Notes, the Company issued warrants to the holders to purchase 1,602,000 shares of common stock at an exercise price of $2.50 per share, exercisable for ten years from the date of issuance.

On November 18, 2018, as part of the Graham acquisition, the Company issued a $300,000 note payable with interest at 3% and a maturity date of October 2022.  The note calls for quarterly principal payments on January, April, July and October 1st of $18,750 plus the related accrued interest. At December 31, 2018, the outstanding balance was $281,250.

Stockholders’ Deficit   

On January 31, 2017, 8,791 shares of common stock were issued by the Company in connection with a Senior Bridge Note with a principal amount of $400,000.

During March 2017, four investors contributed an aggregate of $310,000 for 103,334 shares of common stock. In connection with the stock purchase there was a 5-year warrant attached to purchase one share of common stock with the warrant’s exercise price at $5.00.

The fair value of the warrants is estimated on the date of issuance using the Black-Scholes option pricing model, which requires the input of subjective assumptions, including the expected 5-year term of the warrants, expected stock price volatility, and expected dividends. These estimates involve inherent uncertainties and the application of management’s judgment. Expected volatilities used in the valuation model are based on the average volatility of the Company’s stock. The risk-free rate for the expected term of the option is based on the United States Treasury yield curve in effect at the time of grant. The warrants were valued at $77,500 with all of the outstanding warrants exercisable and have a weighted average remaining contractual life of 3.45 years.

On March 2, 2018, the Company issued 1,000,000 Units (the “Units”) at a price of $2.50 per Unit for an aggregate purchase price of $2,500,000 pursuant to the terms of a subscription agreement between the Company and an investor. Each Unit consists of (i) one share of the Company’s common stock, and (ii) a detachable warrant to purchase one share of common stock at an exercise price of $2.50 per share exercisable for ten years from the date of issuance. The Company estimated the value of the warrants to be approximately $393,356 through the Black Scholes Pricing Model. The Company did not pay any commissions in connection with the sale of these Units.

During March 2018, the Company entered into a Share Escrow Agreement (the “Escrow Agreement”) with certain of the Company’s stockholders including entities affiliated with a director of the Company, and the Company’s former president. Pursuant to the terms of the Escrow Agreement, the stockholders party to the agreement placed an aggregate of 240,000 shares of Common Stock in escrow, to be held by the Company until such time as one or more third parties offer to purchase the escrowed shares and the Company approves such purchase or purchases. Seventy-five percent of the proceeds of the sale or sales of the escrowed shares will be paid to the Company and will be used by the Company first to repay any amounts outstanding under the SBA loan, and the remaining 25% of the proceeds will be paid pro rata to the stockholders party to the Escrow Agreement. In connection with the Escrow Agreement, the Company issued 240,000 warrants to purchase common stock to the stockholders party to the Escrow Agreement, which warrants have an exercise price of $6.11 per share and are exercisable for a period of five years. The Company estimated the value of the warrants to be $9,179 through the Black Scholes Pricing Model calculated with a five-year term; 49% volatility; 2.85% discount rate and the assumption of no dividends.

On April 12, 2018, the Company granted an aggregate of 4,100,000 10-year non-qualified stock options to certain directors and officers of the Company to purchase shares of the Company’s common stock at an exercise price of $2.50 per share pursuant to the EVO Transportation and Energy Services, Inc. 2018 Stock Incentive Plan (the “2018 Plan”).

On April 13, 2018, the Company issued 275,583 shares of Common Stock in exchange for the Senior Bridge Note issued in 2018 to a board member and three other unrelated parties for approximately $300,000 and $389,000, respectively. The Company recorded a gain of approximately $259,000 from this conversion.

On April 13, 2018, the Company issued 272,777 shares of Common Stock in exchange for the Junior Bridge Notes in the aggregate principal amount of approximately $1,363,885. The company recorded a gain of approximately $54,000 from the conversion.

On April 13, 2018, the Company issued 100,000 shares of Series A Preferred Stock containing 15:1 voting rights to a related party for advisory services rendered to the Company. The fair value of the services rendered was assessed at $234,000.

On May 14, 2018, the Company issued 93,400 shares of Common Stock to consultants and officers in exchange for accounts payable and related party accounts payable of approximately $280,200.

On June 1, 2018, as part of the acquisition of Thunder Ridge, the Company agreed to issue 500,000 shares of common stock fair valued at $415,000 to Peck.

On July 20, 2018, the Company issued warrants to purchase up to 1,200,000 common shares in connection with a Secured Convertible Promissory Note Purchase Agreement (the “Note Purchase Agreement”) with an investor, pursuant to which the Company sold a secured convertible promissory note in the principal amount of $3,000,000. The Company estimates the fair value of the warrants to be $559,310, The Company paid debt issuance costs of $375,856 in connection with the Purchase Agreement and sale of the Note.

During August 2018, the Company issued 161,000 warrants for services with an exercise price of $2.50 per share exercisable for ten years from the date of issuance. The Company estimated the fair value of the warrants to be $75,340 as stock compensation.

On August 13, 2018, in connection with their appointment to serve as members of the Company’s board of directors, the Company granted an aggregate of 300,000 10-year non-qualified stock options to purchase shares of the Company’s common stock at an exercise price of $2.50 per share pursuant to the Amended 2018 Plan. The Company estimated the fair value of the stock options to be $133,938 as stock compensation. Options vest ratably over 3 years. One quarter (1/4) of the options vest and become exercisable on the grant date. The remaining vest and become exercisable ratably on the first, second, and third anniversary of the date of grant.

During August 2018, the Company entered into subscription agreements effective as of July 31, 2018 to issue 187,462 units (the “Units”) at a price of $2.50 per Unit in exchange for the Company’s promissory notes - stockholders in the aggregate principal amount of $468,655. Each Unit consists of (i) one share of the Company’s common stock and (ii) a warrant to purchase one share of common stock at an exercise price of $2.50 per share exercisable for ten years from the date of issuance. The Company estimated the fair value of the warrants to be $87,294.

On August 30, 2018, the Company issued warrants to purchase up to an aggregate of 402,000 shares of Common Stock in connection with additional convertible promissory notes in the aggregate principal amount of $1,005,000 to a board member and eight other unrelated parties pursuant to the terms of the Note Purchase Agreement. Of the $1,005,000 aggregate principal amount, $100,000 is held by a board member and the remaining $905,000 is held by eight unrelated parties. The Company paid debt issuance costs of $105,000 in connection with the sale of these notes. The Company estimated the fair value of the warrants to be $187,914 recorded as debt discount.

On January 4, 2019, but effective January 2, 2019, as part of the acquisition of Sheehy Mail, the Company issued 2,240,000 shares of Common Stock to Sheehy Enterprises, Inc.

On February 1, 2019, as part of the acquisition of Ursa Major, the Company issued 800,000 shares of common stock to John Lampsa and Ursula Lampsa, the principal shareholders of Ursa Major.

The foregoing issuances were made in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act, because the issuances did not involve a public offering, the recipients took the securities issued for investment and not resale and the Company took appropriate measures to restrict transfer.

On October 9, 2017, management of the Company terminated the employment of the Company’s president. In connection with his termination, the Company and former president entered into a Mutual Separation Agreement dated October 9, 2017 (the “Separation Agreement”). Pursuant to the Separation Agreement, the Company and former president agreed that (i) his last day of employment with the Company was October 9, 2017, (ii) he will be paid an aggregate of $97,069 within ten business days after the Company raises an aggregate of $2 million in any combination of public or private debt or equity securities offerings, and (iii) in satisfaction of $240,276 of deferred compensation, the Company will issue 89,092 shares of its common stock within ten business days after the Company raises an aggregate of $2 million in any combination of public or private debt or equity securities offerings. The $97,069 payment, whose conditions have been met, has not been rendered and the stock has not been issued as of December 31, 2018. The balances are included in accounts payable – related party at December 31, 2018. On April 1, 2019, the Company agreed to issue 117,092 shares of common stock to settle the Separation Agreement which includes the $97,069 accounts payable – related party.

Series A Preferred Stock

On April 13, 2018, the Company issued 100,000 shares of Series A Preferred stock (“Preferred Stock”) to a related party in return for advisory services rendered to the Company. The fair value of the services rendered was assessed at $234,000.

Dividends

The holders of the Preferred Stock are entitled to receive if, when, and as declared by the board of directors, an annual non-compounding dividend, payable at the rate of 8% and payable quarterly in arrears in cash, or, at the Company’s option, an annual non-compounding dividend of 12%, payable quarterly in arrears in the form of shares of Preferred Stock at a rate of $3.00 per share. Such dividends will begin to accrue as of the date on which the Preferred Stock is issued and will accrue whether or not declared and whether or not there will be funds legally available for the payment of dividends. For the year ended December 31, 2018, the Company accrued $17,227 in dividends at 8%.

Accrued and unpaid dividends upon conversion will automatically be converted into shares of the Company’s common stock, par value $0.0001 per share. An assumed value of $3.00 per share of common stock will be used to determine the number of shares of common stock to be issued for such accrued and unpaid dividends.

Liquidation Preference

In the event of any liquidation the holders of record of shares of Preferred Stock will be entitled to receive, prior and in preference to any distributions of any assets of the Company to the holders of the common stock out of the assets of the Company legally available therefore, $3.00 per share of Preferred Stock, plus accrued and unpaid dividends on each share of Preferred Stock.

Redemption

The holder, upon written notice to the Company, can elect to put to the Company   the Preferred Stock at any time after August 1, 2018, at the liquidation price plus all declared and unpaid dividends. In addition, the Company will have an ongoing right to purchase all or any portion of the outstanding shares of the Preferred Stock at $3.00 per share. The conversion rights require the Company to present the Preferred Stock in the mezzanine level of the accompanying balance sheet.

Voting Rights

Generally, holders of shares of Preferred Stock are entitled to vote with the holders of common stock as a single class on all matters submitted to a vote of the stockholders and are entitled to 15 votes for each share of Preferred Stock held on the record date for the determination of the stockholders entitled to vote or, if no record date is established, on the date the vote is taken.

Conversion Rights

Each share of Preferred Stock will convert to one fully paid and nonassessable share of the Company’s common stock at any time at the option of the holder or the Company, subject to adjustments for stock dividends, splits, combinations and similar events. If the closing price on all domestic securities exchanges on which the Common Stock may at the time be listed exceeds $6.00 per share for 30 consecutive trading days and the daily trading volume of the common stock is at least 20,000 shares for that same period, each share of Preferred Stock will automatically convert to one share of the Company’s common stock.

Stock Options

On April 12, 2018, the Company’s board of directors approved the EVO Transportation and Energy Services, Inc. 2018 Stock Incentive Plan (the “2018 Plan”) pursuant to which a total of 4,250,000 shares of common stock have been reserved for issuance to eligible employees, consultants, and directors of the Company. Further, on August 13, 2018, the board of directors approved the Company’s Amended and Restated 2018 Stock Incentive Plan (the “Amended 2018 Plan”), which amended and restated the Company’s 2018 Stock Incentive Plan. The Amended 2018 Plan increased options available for grant to 6,250,000.

The Amended 2018 Plan provides for awards of non-statutory stock options, incentive stock options, and restrictive stock awards within the meaning of Section 422 of the IRC and stock purchase rights to purchase shares of the Company’s common stock.

The Amended 2018 Plan is administered by the board of directors, which has the authority to select the individuals to whom awards will be granted and to determine whether and to what extent stock options and stock purchase rights are to be granted, the number of shares of common stock to be covered by each award, the vesting schedule of stock options (generally straight-line over a period of four years), and all other terms and conditions of each award. Stock options have a maximum term of ten years, and it is the Company’s practice to grant options to employees with exercise prices equal to or greater than the estimated fair market value of its common stock.

The board of directors may suspend or terminate the Amended 2018 Plan or any portion thereof at any time, and may amend the Amended 2018 Plan from time to time in such respects as the board of directors may deem advisable in order that incentive awards under the Amended 2018 Plan will conform to any change in applicable laws or regulations or in any other respect the board of directors may deem to be in the best interests of the Company; provided, however, that amendments to the Amended 2018 Plan will not be effective without approval of the stockholders of the Company if stockholder approval of the amendment is then required pursuant to Section 422 of the Code or the rules of any stock exchange or Nasdaq or similar regulatory body. No termination, suspension or amendment of the Amended 2018 Plan may adversely affect any outstanding incentive award without the consent of the affected participant.

Restricted stock awards are made by the issuance to the participant of the actual shares represented by that grant. Any shares of restricted stock issued are registered in the name of the participant and bear an appropriate legend referring to the terms, conditions, and restrictions applicable to the award. Shares of restricted stock granted under the Amended 2018 Plan may not be sold, transferred, pledged, or assigned until the termination of the applicable period of restriction. After the last day of the period of restriction, shares of restricted stock become freely transferable by the participant. During the period of restriction, a participant holding shares of restricted stock granted under the Amended 2018 Plan may exercise full voting rights with respect to those shares, unless otherwise specified in the applicable award agreement. As of December 31, 2018, there were no shares of restricted stock outstanding.

The fair value of each award is estimated on the date of grant. Stock option values are estimated using the Black-Scholes option-pricing model, which requires the input of subjective assumptions, including the expected term of the option award, expected stock price volatility, and expected dividends. These estimates involve inherent uncertainties and the application of management’s judgment. For purposes of estimating the expected term of options granted, the Company aggregates option recipients into groups that have similar option exercise behavioral traits. Expected volatilities used in the valuation model are based on the average volatility of the Company’s stock. The risk-free rate for the expected term of the option is based on the United States Treasury yield curve in effect at the time of grant. The valuation model assumes no dividends. There is no estimated forfeiture rate. During the year ended December 31, 2018, the Company has recorded stock-based compensation expense of $459,735 associated with stock options. As of December 31, 2018, the Company has estimated approximately $798,000 of future compensation cost related to the unvested portions of outstanding stock options. Options vest ratably over 3 years. One quarter (1/4) of the options vest and become exercisable on the grant date. The remaining vest and become exercisable ratably on the first, second, and third anniversary of the date of grant. As of December 31, 2018, there was no intrinsic value to the stock options.

Warrants

The fair value of the warrants is estimated on the date of issuance using the Black-Scholes option pricing model, which requires the input of subjective assumptions, including the expected term of the warrants, expected stock price volatility, and expected dividends. These estimates involve inherent uncertainties and the application of management’s judgment. Expected volatilities used in the valuation model are based on the average volatility of the Company’s stock. The risk-free rate for the expected term of the option is based on the United States Treasury yield curve in effect at the time of grant.

Off-Balance Sheet Arrangements    

Operating Leases

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

Thunder Ridge leases approximately 4,300 square feet of office space from 319 N. Main, LLC, a Missouri limited liability company. The lease terminates during July 2020, with monthly rent of approximately $3,400.

Thunder Ridge leases equipment and vehicles under monthly and non-cancelable operating leases. Payments on these leases range between $249 and $2,254 and mature between January 2019 and September 2024.

Property rent expense for the years ended December 31, 2018 and 2017, was approximately $135,000 and $132,000, respectively.

Truck lease expense for the years ended December 31, 2018 and 2017, was approximately $1,217,000 and $0, respectively.

Other than the above operating leases, we have no off-balance sheet arrangements.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”). The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements, and revenues and expenses recorded during the reporting periods.

On a periodic basis we evaluate our estimates based on historical experience and various other assumptions we believe are reasonable under the circumstances. Actual results could differ from those estimates under different assumptions or conditions. For further information on our significant accounting policies, see note 1 to our consolidated financial statements included in this report.

We believe the following critical accounting policies involve the most significant judgments and estimates used in the preparation of our consolidated financial statements.

Basis of Presentation

These financial statements represent the consolidated financial statements of EVO Transportation & Energy Services, Inc. (“EVO Inc.” or the “Company”), and its wholly owned subsidiaries.

Going Concern

The Company is an early stage company in the process of acquiring several businesses with highway contract routes operated for the United States Postal Service (“USPS”) and Compressed Natural Gas (“CNG”) fuel stations. As of December 31, 2018, the Company has a working capital deficit of approximately $13.0 million, stockholders’ deficit of approximately $10.3 million, and negative operating cashflows of $6.8 million. Management anticipates rectifying these deficits with additional public and private offerings. Also, the Company is evaluating certain cash flow improvement measures by consolidating costs with the acquired entities, the purchase of vehicles to reduce purchased transportation and repricing contracts with USPS. However, there can be no assurance that the Company will be successful in these efforts. Further, for the year ended December 31, 2018, the USPS accounted for 95% of the Company’s total consolidated revenues. The loss of the USPS as a customer, or a significant reduction in the Company’s relationship with the USPS would have a material adverse effect on the Company’s business.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern from the issuance of these consolidated statements within the Company’s Annual Report on Form 10-K. However, the above conditions raise substantial doubt about the Company’s ability to do so. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern from the issuance of these consolidated statements within the Company’s Annual Report on Form 10-K.

To meet its current and future obligations, the Company has taken the following steps to capitalize the business and successfully achieve its business plan during 2019:

Management is working with related party debt holders and equipment lenders to extend or convert existing debt. However, there can be no assurance that the Company will be successful in these efforts.

On January 2, 2019, the Company acquired Sheehy Mail a mail contractor headquartered in Waterloo, Wisconsin. Sheehy Mail operates 104 trucks that service 16 USPS contracts across 18 states.

On February 1, 2019, the Company acquired Ursa Major Corporation (“Ursa”) and J.B. Lease Corporation (“J.B. Lease”), a mail contractor located in Milwaukee, Wisconsin. Ursa operates 250 trucks that service 42 USPS contracts across 22 states.

During February 2019, El Toro received a waiver from Tradition Capital Bank of its 2018 defaults of certain debt service coverage ratio, minimum tangible equity, and debt to equity ratio covenants in the El Toro SBA loan, which waiver also eliminates those covenants for 2019 and thereafter.

On April 1, 2019, the Company issued 117,092 shares of common stock to settle the Separation Agreement with the former officer. The settlement included reimbursement of the $37,500 of advances from the related party and approximately $300,000 of the accounts payable - related party.

On April 30, 2019, the Company and Peck entered into a fourth amendment to the Purchase Agreement (the “Fourth Purchase Agreement Amendment”). The Fourth Purchase Agreement Amendment extended the April 30, 2019 portion of the original maturity date to June 30, 2019. As of December 31, 2018, the outstanding balance was $2,386,778.

The cash balance as of December 31, 2018 was $1,630,022 and is sufficient to cover the negative cash flows generated from operations through the first half of 2019. Management is in the process of identifying sources of capital through debt refinancing and equity investments with private placement of the common stock. Management believes these additional sources will give the Company sufficient liquidity until it achieves projected positive cash flows from operations in the third quarter of 2019.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The consolidated financial statements include some amounts that are based on management’s best estimates and judgments. The most significant estimates relate to revenue recognition, goodwill and long-lived intangible asset valuations, fixed asset impairment assessments, debt discount, beneficial conversion feature, contingencies, purchase price allocation related to the Thunder Ridge acquisition, and going concern. These estimates may be adjusted as more current information becomes available, and any adjustment could be significant. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Accounts Receivable

The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company’s estimate is based on historical collection experience and a review of the current status of the accounts receivable. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change and that losses ultimately incurred could differ materially from the amounts estimated in determining the allowance.

Property, Equipment and Land

Property and equipment are stated at cost. Depreciation is provided utilizing the straight-line method over the estimated useful lives for owned assets, ranging from five to 15 years.

Goodwill and Intangibles

Goodwill

Goodwill represents the excess of the purchase price of a business acquisition over the net fair value of assets acquired and liabilities assumed. Goodwill and intangible assets that do not have finite lives are not amortized, but rather are assessed for impairment at least annually or more frequently if certain impairment indicators are present.

The Company evaluates goodwill on an annual basis in the fourth quarter or more frequently if management believes indicators of impairment exist. Such indicators could include but are not limited to 1) a significant adverse change in legal factors or in business climate, 2) unanticipated competition, or 3) an adverse action or assessment by a regulator. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If management concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, management conducts a two-step quantitative goodwill impairment test. The first step of the impairment test involves comparing the fair value of the applicable reporting unit with its carrying value. The Company estimates the fair values of its reporting units using a combination of the income or discounted cash flows approach and the market approach, which utilizes comparable companies’ data. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, management performs the second step of the goodwill impairment test. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill. The amount by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as an impairment loss.

Intangibles

Intangible assets consist of finite lived and indefinite lived intangibles. The Company’s finite lived intangibles include favorable leases, customer relationships and the trade name. Finite lived intangibles are amortized over their estimated useful lives. For the Company’s lease related intangibles, the estimated useful life is based on the agreement of a one-time payment of $1 and the term of the mortgages, of the properties owned by the Company of approximately five years. For the Company’s trade names and customer list the estimated lives are based on life cycle of a customer of approximately five years.

Long-Lived Assets

The Company evaluates the recoverability of long-lived assets whenever events or changes in circumstances indicate that an asset’s carrying amount may not be recoverable. Such circumstances could include, but are not limited to (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset. The Company measures the carrying amount of the asset against the estimated undiscounted future cash flows associated with it. Should the sum of the expected future net cash flows be less than the carrying value of the asset being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying value of the asset exceeds its fair value. The fair value is measured based on quoted market prices, if available.

If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including the discounted value of estimated future cash flows. The evaluation of asset impairment requires the Company to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. The Company assesses the useful lives and possible impairment of the fixed assets or goodwill and intangibles when an event occurs that may trigger such review. Factors considered important which could trigger a review include:

Significant under-performance of the stations or transportation service contracts relative to historical or projected future operating results;

Significant negative economic trends in the CNG industry or freight trucking services industry; and

Identification of other impaired assets within a reporting unit.

Adoption of New Standard Related to Revenue Recognition and Revenue Recognition

Adoption of New Standard Related to Revenue Recognition

On January 1, 2018, the Company adopted Revenue from Contracts with Customers (Accounting Standards Codification Topic 606) (“Topic 606” or “new guidance”) retrospectively. The adoption of Topic 606 did not have a material impact on the consolidated financial statements. The new guidance had no impact on the timing or classification of the Company’s cash flows as reported in the Consolidated Statement of Cash Flows. The Company did not record any adjustments as a result of applying Topic 606.

Revenue Recognition

Trucking Operations

USPS – USPS trucking operations generates revenue from transportation services under multi-year contracts with the USPS, generally on a rate per mile basis that adjusts monthly for fuel pricing indexes.

Freight 

CNG Operations

The Company’s CNG is sold predominately pursuant to contractual commitments. These contracts typically include a stand-ready obligation to supply natural gas daily.

There was no change in management’s determination that the Company acts as the principal (rather than the agent) with respect to revenue recognition within its logistics businesses, under ASC 606, compared to ASC 605. Accordingly, the Company continues to recognize revenue on a gross basis, consistent with past practices.

Significant judgments involved in the Company’s revenue recognition and corresponding accounts receivable balances include:

Recently Issued Accounting Pronouncements

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

Seasonality and Inflation

Due to increased USPS volume, the Company’s tractor productivity typically increases during the last quarter of each calendar year. At the same time, operating expenses increase and fuel efficiency declines because of engine idling and harsh weather creating higher accident frequency, increased claims and higher equipment repair expenditures. The Company also may suffer from weather-related or other events such as tornadoes, hurricanes, blizzards, ice storms, floods, fires, earthquakes and explosions. These events may disrupt fuel supplies, increase fuel costs, disrupt freight shipments or routes, affect regional economies, destroy the Company’s assets or adversely affect the business or financial condition of customers, any of which could adversely affect the Company’s results or make the Company’s results more volatile.

To some extent, we experience seasonality with the CNG business. Natural gas vehicle fuel amounts consumed by some of our customers tend to be higher in summer months when fleet vehicles use more fuel to power their air conditioning systems. Natural gas commodity prices tend to be higher in the fall and winter months due to increased overall demand for natural gas for heating during these periods. With the USPS contracts the trucking segment experiences a significant increase in business from the last week of November through the end of December

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

As a smaller reporting company, EVO, Inc. is not required to provide disclosure under this item.

Item 8. Financial Statements and Supplementary Data.

Audited financial statements begin on the next page of this report.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors of

Evo Transportation & Energy Services, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Evo Transportation & Energy Services, Inc. (the “Company”) as of December 31, 2018, the related consolidated statements of operations, changes in stockholders’ deficit and cash flows for the year ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for the year ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

Explanatory Paragraph – Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1, the Company has a significant working capital deficiency, has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

/s/ Marcum LLP

We have served as the Company’s auditor since 2019.

Houston, Texas

May 29, 2019

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FRIM

To the Board of Directors and Stockholders

EVO Transportation & Energy Services, Inc.

Peoria, Arizona

OPINION ON THE FINANCIAL STATEMENTS

We have audited the accompanying consolidated balance sheets of EVO Transportation & Energy Services, Inc. (the "Company") as of December 31, 2017 and the related consolidated statements of operations, stockholders' equity, and cash flows, for each year ended December 31, 2017, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and the results of its operations and its cash flows for the year ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

SUBSTANTIAL DOUBT ABOUT THE COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

BASIS FOR OPINION

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

EKS&H LLLP

Denver, Colorado

April 17, 2018

We have served as the Company's auditor since 2017.

EVO TRANSPORTATION & ENERGY SERVICES, INC.

Consolidated Balance Sheets

See notes to consolidated financial statements.

EVO TRANSPORTATION & ENERGY SERVICES, INC.

Consolidated Statements of Operations

See notes to consolidated financial statements.

EVO TRANSPORTATION & ENERGY SERVICES, INC.

Consolidated Statement of Changes in Stockholders’ Deficit

For the Years Ended December 31, 2018 and 2017

See notes to consolidated financial statements.

EVO TRANSPORTATION & ENERGY SERVICES, INC.

Consolidated Statements of Cash Flows

See notes to consolidated financial statements.

EVO TRANSPORTATION & ENERGY SERVICES, INC.

Consolidated Statements of Cash Flows (Continued)

See notes to consolidated financial statements.

EVO TRANSPORTATION & ENERGY SERVICES, INC.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

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

Description of Business

The Company is a holding company based in Peoria, Arizona that owns seven operating subsidiaries; Graham, Leasing, Titan, Thunder Ridge, Ursa Major, Sheehy and EAF, which are in the businesses of compressed natural gas (“CNG”) service stations or fulfilling USPS and corporate contracts for freight trucking services.

The Company purchased all 100% of the outstanding member interests of Graham, on November 18, 2018 for a $186,000 cash payment and a $300,000 note payable.

Leasing was organized to own the Company’s trucks, trailers and vans. The company was formed on November 2, 2018, but did not start operations as of December 31, 2018.

Titan is the management company that oversees operations of the El Toro, Diamond Bar, and Blaine CNG service stations. Blaine and Diamond Bar were formed in 2015. In March 2016, Diamond Bar began operations of its CNG station under a lease agreement with the State of California South Coast Air Quality Management District (“SCAQMD”) in Diamond Bar, California. As of June 30, 2017, El Toro ceased operations. The Company discontinued construction of Blaine during the fourth quarter of 2017. During February 2018, the Company entered into a management agreement with a third-party to operate Diamond Bar.

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

The Company acquired Thunder Ridge on June 1, 2018. Thunder Ridge was founded in Missouri in 2000 and is engaged in the business of fulfilling government and corporate contracts for freight trucking services.

EVO, Inc. was incorporated in the State of Delaware on October 22, 2010.

Basis of Presentation

These financial statements represent the consolidated financial statements of EVO Transportation & Energy Services, Inc. (“EVO Inc.” or the “Company”), its wholly owned subsidiaries, Titan CNG LLC (“Titan”), W.E. Graham (“Graham”), EVO Equipment Leasing, LLC (“Leasing”), Thunder Ridge Transport, Inc. (“Thunder Ridge”) and Environmental Alternative Fuels, LLC (“EAF”), Titan’s wholly-owned subsidiaries, Titan El Toro LLC (“El Toro”), Titan Diamond Bar LLC (“Diamond Bar”), and Titan Blaine, LLC (“Blaine”), Thunder Ridge’s wholly-owned subsidiary, Thunder Ridge Logistics, LLC, (“Logistics”), and EAF’s wholly-owned subsidiary, EVO CNG, LLC (“EVO CNG”). Subsequent to year end the Company formed EVO Services Group, LLC.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of EVO, Inc. and its subsidiaries, Graham, Leasing, Titan, Thunder Ridge and EAF, Titan’s wholly owned subsidiaries, El Toro, Diamond Bar and Blaine, Thunder Ridge’s wholly owned subsidiary, Logistics, and EAF’s wholly owned subsidiary, EVO CNG. All intercompany accounts and transactions have been eliminated upon consolidation.

EVO TRANSPORTATION & ENERGY SERVICES, INC.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)

Going Concern

The Company is an early stage company in the process of acquiring several businesses with highway contract routes operated for the United States Postal Service (“USPS”) and Compressed Natural Gas (“CNG”) fuel stations. As of December 31, 2018, the Company has a working capital deficit of approximately $13.0 million, stockholders’ deficit of approximately $10.3 million, and negative operating cashflows of $6.8 million. Management anticipates rectifying these deficits with additional public and private offerings. Also, the Company is evaluating certain cash flow improvement measures by consolidating costs with the acquired entities, the purchase of vehicles to reduce purchased transportation and repricing contracts with USPS. However, there can be no assurance that the Company will be successful in these efforts. Further, for the year ended December 31, 2018, the USPS accounted for 95% of the Company’s total consolidated revenues. The loss of the USPS as a customer, or a significant reduction in the Company’s relationship with the USPS would have a material adverse effect on the Company’s business.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern for the next twelve months from the issuance of these consolidated statements within the Company’s Annual Report on Form 10-K. However, the above conditions raise substantial doubt about the Company’s ability to do so. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern for the next twelve months from the issuance of these consolidated statements within the Company’s Annual Report on Form 10-K.

To meet its current and future obligations, the Company has taken the following steps to capitalize the business and successfully achieve its business plan during 2019:

Management is working with related party debt holders and equipment lenders to extend or convert existing debt. However, there can be no assurance that the Company will be successful in these efforts.

On January 2, 2019, the Company acquired Sheehy Mail a mail contractor headquartered in Waterloo, Wisconsin. Sheehy Mail operates 104 trucks that service 16 USPS contracts across 18 states.

On February 1, 2019, the Company acquired Ursa Major Corporation (“Ursa”) and J.B. Lease (“J.B. Lease”) Corporation a mail contractor located in Milwaukee, Wisconsin. Ursa operates 250 trucks that service 42 USPS contracts across 22 states.

During February 2019, El Toro received a waiver from Tradition Capital Bank of its 2018 defaults of certain debt service coverage ratio, minimum tangible equity, and debt to equity ratio covenants in the El Toro SBA loan, which waiver also eliminates those covenants for 2019 and thereafter.

On April 30, 2019, the Company and Peck entered into a fourth amendment to the Purchase Agreement (the “Fourth Purchase Agreement Amendment”). The Fourth Purchase Agreement Amendment extended the April 30, 2019 portion of the original maturity date to June 30, 2019. As of December 31, 2018, the outstanding balance was $2,386,778.

The cash balance as of December 31, 2018 was $1,630,022 and is sufficient to cover the negative cash flows generated from operations through the first half of 2019. Management is in the process of identifying sources of capital through debt refinancing and equity investments through one or more private placements Management believes these additional sources will give the Company sufficient liquidity until it achieves projected positive cash flows from operations in the third quarter of 2019.

EVO TRANSPORTATION & ENERGY SERVICES, INC.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The consolidated financial statements include some amounts that are based on management’s best estimates and judgments. The most significant estimates relate to revenue recognition, goodwill and long-lived intangible asset valuations, fixed asset impairment assessments, debt discount, beneficial conversion feature, contingencies, purchase price allocation related to the Thunder Ridge acquisition, and going concern. These estimates may be adjusted as more current information becomes available, and any adjustment could be significant.

Cash

The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests.

Accounts Receivable

The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company’s estimate is based on historical collection experience and a review of the current status of the accounts receivable. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change and that losses ultimately incurred could differ materially from the amounts estimated in determining the allowance. As of December 31, 2018, and 2017, the Company has recorded an allowance of $0 and $37,007, respectively.

Federal Alternative Fuels Tax Credit Receivable

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

Concentrations of Credit Risk

The Company grants credit in the normal course of business to customers in the United States. The Company periodically performs credit analysis and monitors the financial condition of its customers to reduce credit risk.

As of December 31, 2018, and 2017, the CNG stations had four and three customers that accounted for 98% and 75% of CNG related accounts receivable, respectively. As of December 31, 2018, and 2017, CNG accounts receivable accounted for 1% and 100%, respectively of the Company’s total consolidated accounts receivable balance. For the years ended December 31, 2018 and 2017, two and four customers accounted for 61% and 76% of CNG revenues, respectively. For the years ended December 31, 2018 and 2017, CNG revenues accounted for 5% and 100% of the Company’s total consolidated revenue, respectively.

As of December 31, 2018, one trucking customer accounted for 99% of the trucking and total consolidated accounts receivable balance. This customer generated revenues representing 97% of total trucking revenues and 95% of the Company’s consolidated revenues from 12 different contract locations for the year ended December 31, 2018. Approximately 17%, 13%, and 11% of total consolidated revenues were generated from three of the contract locations for the year ended December 31, 2018. The Company did not have trucking operations in 2017. This customer is a government entity; therefore, the Company does not believe there is significant credit risk related to the accounts receivable balance from this customer. The Company plans on expanding its relationship with this customer. If the Company were to lose the relationship with this customer or is unable to renew existing contracts, it would have a significant adverse effect on the Company’s ability to continue operations.

Property, Equipment and Land

Property and equipment are stated at cost. Depreciation is provided utilizing the straight-line method over the estimated useful lives for owned assets. Maintenance and repair expenditures are charged to operations. Gains and losses on disposals of revenue equipment are included in operations as they are a normal, recurring component of our operations.

EVO TRANSPORTATION & ENERGY SERVICES, INC.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)

Goodwill and Intangibles

Goodwill

Goodwill represents the excess of the purchase price of a business acquisition over the net fair value of assets acquired and liabilities assumed. Goodwill and intangible assets that do not have finite lives are not amortized, but rather are assessed for impairment at least annually or more frequently if certain impairment indicators are present.

The Company evaluates goodwill on an annual basis in the fourth quarter or more frequently if management believes indicators of impairment exist. Such indicators could include but are not limited to 1) a significant adverse change in legal factors or in business climate, 2) unanticipated competition, or 3) an adverse action or assessment by a regulator. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If management concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, management conducts a two-step quantitative goodwill impairment test. The first step of the impairment test involves comparing the fair value of the applicable reporting unit with its carrying value. The Company estimates the fair values of its reporting units using a combination of the income or discounted cash flows approach and the market approach, which utilizes comparable companies’ data. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, management performs the second step of the goodwill impairment test. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill. The amount by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as an impairment loss. For the years ended December 31, 2018 and 2017, the Company’s evaluation of goodwill resulted in an impairment of zero and $3,993,730, respectively.

Intangibles

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

Assets Held for Sale

The Company classifies assets as being held for sale when the following criteria are met: management has committed to a plan to sell the asset; the asset is available for immediate sale in its present condition; an active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated; the sale of the asset is highly probable, and transfer of the asset is expected to qualify for recognition as a completed sale, within one year; the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. For the year ended December 31, 2018, the Company evaluated the asset held for sale and determined an impairment of $240,000 for the full amount of its carrying value.

EVO TRANSPORTATION & ENERGY SERVICES, INC.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)

Long-Lived Assets

The Company evaluates the recoverability of long-lived assets whenever events or changes in circumstances indicate that an asset’s carrying amount may not be recoverable. Such circumstances could include, but are not limited to (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset. The Company measures the carrying amount of the asset against the estimated undiscounted future cash flows associated with it. Should the sum of the expected future net cash flows be less than the carrying value of the asset being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying value of the asset exceeds its fair value. The fair value is measured based on quoted market prices, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including the discounted value of estimated future cash flows. The evaluation of asset impairment requires the Company to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts.

The Company recorded no asset impairment charges in 2018 and an asset impairment charge of $806,217 in 2017 which was related to El Toro fixed assets.

Debt Issuance Costs

Certain fees and costs incurred to obtain long-term financing are capitalized and included as a reduction in the net carrying value of secured convertible promissory notes in the consolidated balance sheet, net of accumulated amortization. These costs are amortized to interest expense over the term of the related debt. As of December 31, 2018, and 2017, the Company capitalized $524,987 and zero, respectively, of debt issuance costs. The Company recorded $109,373 and zero of amortization of these costs for the years ended December 31, 2018 and 2017, respectively, and is included in interest expense in the consolidated statement of operations.

Hedging Activities

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

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

Management of the Company has determined that the administrative effort required to account for derivative instruments as cash flow hedges is greater than the financial statement presentation benefit. As a result, the Company marks its derivative instruments to fair value and records the changes in fair value as a component of other income and expense. Cash settlements from the Company’s price risk management activities are likewise shown as a component of other income and expense and as a component of operating cash flows on the statements of cash flows. The Company settled all of its commodity hedges during 2019 and the activity has been immaterial for 2018 and 2017.

EVO TRANSPORTATION & ENERGY SERVICES, INC.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)

Net Loss per Share of Common Stock

Basic net loss per share of common stock attributable to common stockholders is calculated by dividing net loss attributable to common stockholders by the weighted-average shares of common stock outstanding for the period. Potentially dilutive shares, which are based on the weighted-average shares of common stock underlying outstanding stock-based awards, warrants and convertible senior notes using the treasury stock method or the if-converted method, as applicable, are included when calculating diluted net loss per share of common stock attributable to common stockholders when their effect is dilutive. The following table presents the potentially dilutive shares that were excluded from the computation of diluted net loss per share of common stock attributable to common stockholders, because their effect was anti-dilutive:

Adoption of New Revenue Recognition

On January 1, 2018, the Company adopted Revenue from Contracts with Customers (Accounting Standards Codification Topic 606) (“Topic 606” or “new guidance”) retrospectively. The adoption of Topic 606 did not have a material impact on the consolidated financial statements. The new guidance has no impact on the timing or classification of the Company’s cash flows as reported in the Consolidated Statement of Cash Flows. The Company did not record any adjustments as a result of applying Topic 606.

Revenue Recognition

Trucking Operations

USPS – USPS trucking operations generates revenue from transportation services under multi-year contracts with the USPS, generally on a rate per mile basis that adjusts monthly for fuel pricing indexes.

EVO TRANSPORTATION & ENERGY SERVICES, INC.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)

Freight 

CNG Operations

The Company’s CNG is sold predominately pursuant to contractual commitments. These contracts typically include a stand-ready obligation to supply natural gas daily.

There was no change in management’s determination that the Company acts as the principal (rather than the agent) with respect to revenue recognition within its logistics businesses, under ASC 606, compared to ASC 605. Accordingly, the Company continues to recognize revenue on a gross basis, consistent with past practices.

Significant judgments involved in the Company’s revenue recognition and corresponding accounts receivable balances include:

EVO TRANSPORTATION & ENERGY SERVICES, INC.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)

Income Taxes

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

The Company evaluates its tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions will more likely than not be sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold are not recorded as a tax benefit or expense in the current year. Interest and penalties, if applicable, are recorded in the period assessed as general and administrative expenses. However, no interest or penalties have been assessed as of December 31, 2018 and 2017. Tax years that remain subject to examination include 2015 through the current year for federal and state, respectively.

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

In evaluating the ultimate realization of deferred income tax assets, management considers whether it is more likely than not that the deferred income tax assets will be realized. Management establishes a valuation allowance if it is more likely than not that all or a portion of the deferred income tax assets will not be utilized.  The ultimate realization of deferred income tax assets is dependent on the generation of future taxable income, which must occur prior to the expiration of the net operating loss carryforwards.

The Tax Cuts and Jobs Act (“Tax Act”) was signed into law on December 22, 2017. The Tax Act includes significant changes to the U.S. corporate income tax system, including limitations on the deductibility of interest expense and executive compensation, eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized, changing the rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017, and the transition of U.S. international taxation from a worldwide tax system to a territorial tax system.

The Company must assess whether valuation allowances assessments are affected by various aspects of the Tax Act. Since, as discussed above, the Company has recorded no amounts related to certain portions of the Tax Act, and no changes to valuation allowances as a result of the Tax Act have been recorded.

Fair Value Measurements

Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value is determined for assets and liabilities and establishes a hierarchy for which these assets and liabilities must be grouped, based on significant levels of inputs as follows:

The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

EVO TRANSPORTATION & ENERGY SERVICES, INC.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

Note 1 - Description of Business and Summary of Significant Accounting Policies (continued)

Recently Issued Accounting Pronouncements 

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

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), (“ASU 2016-02”) in order to increase transparency and comparability among organizations by, among other provisions, recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous U.S. GAAP. For public companies, ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (including interim periods within those periods) using a modified retrospective approach and early adoption is permitted.  In transition, entities may also elect a package of practical expedients that must be applied in its entirety to all leases commencing before the adoption date, unless the lease is modified, and permits entities to not reassess (a) the existence of a lease, (b) lease classification or (c) determination of initial direct costs, as of the adoption date, which effectively allows entities to carryforward accounting conclusions under previous U.S. GAAP. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides entities an optional transition method to apply the guidance under Topic 842 as of the adoption date, rather than as of the earliest period presented.  The Company will adopt Topic 842 effective on January 1, 2019, using the optional transition method to apply the new guidance rather than as of the earliest period presented, and elected the package of practical expedients described above. The Company is in the process of completing its implementation efforts and upon adoption, expects to recognize additional operating liabilities of approximately $4 million, with corresponding right-to-use assets of approximately the same amount as of January 1, 2019 based on the present value of the remaining lease payments.

In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. This standard amends Accounting Standards Codification 740, Income Taxes (ASC 740) to provide guidance on accounting for the tax effects of the Tax Cuts and Jobs Act (the Tax Reform Act) pursuant to Staff Accounting Bulletin No. 118, which allows companies to complete the accounting under ASC 740 within a one-year measurement period from the Tax Act enactment date. This standard is effective upon issuance. As described in the footnotes to the Annual Report on Form 10-K, the Company’s accounting for the tax effects of enactment of the Tax Reform Act is being assessed.

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees and supersedes the guidance in Subtopic 505-50,  Equity - Equity-Based Payments to Non-Employees. Under ASU 2018-07, equity-classified nonemployee share-based payment awards are measured at the grant date fair value on the grant date. The probability of satisfying performance conditions must be considered for equity-classified nonemployee share-based payment awards with such conditions. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of the new standard on the Company’s Consolidated Financial Statements.  

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement, which modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. This new accounting standard will be effective for annual periods beginning after December 15, 2019. Early adoption is permitted. We are evaluating the effects that the adoption of this guidance will have on our disclosures.

Reclassifications 

Certain amounts in the 2017 consolidated financial statements have been reclassified to conform to the 2018 presentation. The reclassifications had no effect on previously reported results of operations or retained deficit. 

Subsequent Events 

The Company has evaluated all subsequent events through the auditors’ report date, which is the date the consolidated financial statements were available for issuance. With the exception of those matters discussed in Notes 8, 9 and 13, there were no material subsequent events that required recognition or additional disclosure in these consolidated financial statements. 

EVO TRANSPORTATION & ENERGY SERVICES, INC.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

Note 2 - Acquisition

The acquisitions described below were each accounted for as business combinations which requires, among other things, that assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date on the balance sheet. Transaction costs are expensed as incurred. Any excess of the consideration transferred over the assigned values of the net assets acquired is recorded as goodwill.

Thunder Ridge

On June 1, 2018, pursuant to the Thunder Ridge Purchase Agreement, the Company acquired all of the issued and outstanding shares of Thunder Ridge for total consideration of $2,915,000 as outlined below. Thunder Ridge is based in Springfield, Missouri and is engaged in the business of fulfilling government and contracts for freight trucking services and includes operations in Missouri, Kansas, Iowa, Tennessee, New York, Pennsylvania, Maryland and Texas. With the acquisition, Thunder Ridge became a wholly-owned subsidiary of EVO, Inc.

The Company expects the acquisition to increase the Company’s scale and improve margins due to combined revenues and operations, which will produce operational synergies with the CNG stations and the freight trucking services, which is the basis for the acquisition and comprises the resulting recording of goodwill. In addition, acquired intangible assets include USPS contracts, the trademark and the non-compete agreement.

As consideration for the Thunder Ridge shares, the Company issued a promissory note dated June 1, 2018, in the principal amount of $2,500,000 (the “TR Note”). The TR Note bears interest at 6% per year with a default interest rate of 9% per year and had an original maturity date of the earlier of (a) the date the Company raises $40,000,000 in public or private offerings of debt or equity; (b) December 31, 2018, or (c) termination of Billy (Trey) Peck’s (“Peck”) employment with the Company by the Company without cause or by Peck for good reason. The TR Note is secured by all of the assets of Thunder Ridge pursuant to a security agreement dated June 1, 2018, between the Company, Thunder Ridge, and Peck and is also secured by the Thunder Ridge Shares (“TR Shares”). On December 26, 2018, the Company and Peck entered into an amendment to the Purchase Agreement (the “First Purchase Agreement Amendment”). The First Purchase Agreement Amendment extends the December 31, 2018, portion of the original maturity date to February 28, 2019. On February 28, 2019, the Company and Peck entered into another amendment to the Purchase Agreement (the “Second Purchase Agreement Amendment”). The Second Purchase Agreement Amendment extends the December 31, 2018, portion of the original maturity date to April 30, 2019. On April 30, 2019, the Company and Peck entered into a fourth amendment to the Purchase Agreement (the “Fourth Purchase Agreement Amendment”). The Fourth Purchase Agreement Amendment extended the April 30, 2019, portion of the original maturity date to June 30, 2019. As of December 31, 2018, the outstanding balance was $2,386,778.

If the Company fails to repay the amounts outstanding under the TR Note on or before June 30, 2019, Peck has the right to require the Company to return the TR Shares and effectively rescind the sale of the TR Shares to the Company.

 As additional consideration for the TR Shares and pursuant to a subscription agreement with Peck, on June 1, 2018, the Company agreed to issue to Peck (a) 500,000 shares of common stock, par value $0.0001 per share (“Common Stock”) (which remain unissued) valued at $415,000.

Further, Peck received warrants for employment to be issued upon the first anniversary: (i) a warrant to purchase 333,333 shares of common stock at an exercise price of $3.00 per share (the “$3.00 Warrant”), (ii) on the second anniversary a warrant to purchase 333,333 shares of common stock at an exercise price of $5.00 per share (the “$5.00 Warrant”), and (iii) on the third anniversary a warrant to purchase 333,333 shares of common stock at an exercise price of $7.00 per share (the “$7.00 Warrant,” and together with the $3.00 Warrant and $5.00 Warrant, the (“Warrants”). The Company estimates the fair value of the warrants to be approximately $149,000. The Warrants are exercisable five years from the issuance date.

EVO TRANSPORTATION & ENERGY SERVICES, INC.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

Note 2 - Acquisition (continued)

The following table summarizes the fair value allocation of the assets acquired and liabilities assumed at the acquisition date and the consideration paid for the acquisition.

The amount of revenue and net loss from Thunder Ridge included in the Company’s consolidated statement of operations for the period from June 1, 2018 to December 31, 2018 was $24,031,386 and $(3,343,961), respectively.

The Company has evaluated goodwill and other intangibles expects the balances will most likely be deductible for income tax purposes.

The Company engaged a third-party valuation specialist to determine the fair value of the Thunder Ridge intangible assets. The Company incurred a total of approximately $50,000 in transaction closing costs, which were expensed as incurred and included in general and administrative expenses in the consolidated statement of operations, for the year ended December 31, 2018.

EVO TRANSPORTATION & ENERGY SERVICES, INC.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

Note 2 - Acquisition (continued)

W.E. Graham

The Company purchased 100% of the outstanding member interests of Graham, on November 18, 2018, for a $186,000 cash payment and a $300,000 note payable. This was an insignificant acquisition.

EAF

On February 1, 2017, the Company entered into a securities exchange agreement (the “EAF Exchange Agreement”) with Environmental Alternative Fuels, LLC, a Delaware limited liability company (“EAF”), EVO CNG, LLC, a Delaware limited liability company and a wholly owned subsidiary of EAF (“EVO CNG”), pursuant to which the Company acquired all of the membership interests in EAF (the “EAF Interests”) from the EAF Members. EAF, together with EVO CNG, is a compressed natural gas fueling station company with six fueling stations in California, Texas, Arizona and Wisconsin, for total consideration of $12,863,000 as outlined below.

The Company has evaluated goodwill and other intangibles expects the balances will most likely be deductible for income tax purposes.

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

EVO TRANSPORTATION & ENERGY SERVICES, INC.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

Note 2 - Acquisition (continued)

As consideration for the EAF Interests, the Company issued a promissory note to an EAF member in the principal amount of $3.8 million (the “Senior Promissory Note”) that bears interest at 7.5%, with a default interest rate of 12.5% per year and has a maturity date of the earlier of (a) the date that is ten days after the initial closing of a private offering of capital stock of the Company in an amount not less than $10 million (a “Private Offering”); (b) December 31, 2017 or a (c) declaration by the noteholder of an event of default under the Senior Promissory Note. During 2018, the promissory note’s maturity was extended until July 2019. Principal and interest are due at maturity.

As consideration for the EAF Interests, the Company guaranteed a note from EAF to a former EAF member dated January 30, 2017 in the principal amount of $4,000,000 (the “EAF Note”). The EAF Note guaranteed by substantially all of the assets of EAF. The EAF Note bears interest at 7.5% per annum with a default rate of 12.5% per annum and has a maturity date of the earlier of (a) February 1, 2020 and (b) declaration by the noteholder of an event of default under the EAF Note. Principal and interest are due at maturity.

Also, as consideration for the EAF Interests, the Company issued convertible promissory notes to the EAF Members in the aggregate principal amount of $9.5 million (the “Convertible Notes”). The Convertible Notes bear interest at 1.5% per year and have a maturity date of February 1, 2026. The Convertible Notes were originally initially convertible into 1,400,000  shares (the “Transaction Shares”) of the Company’s common stock, (the “Common Stock”), subject to adjustment for any stock splits, combinations or similar transactions, representing approximately 81.1% of the Company’s total outstanding shares of Common Stock on a post transaction basis. Accordingly, conversion of the Convertible Notes would result in a change in control of the Company. The number of Transaction Shares was subject to increase to equal 70% of the issued and outstanding Common Stock if the issuance of Common Stock pursuant to a private offering of Common Stock of up to $2 million and the conversion of the Company’s subordinated notes payable to members and Senior Bridge Notes, convertible promissory notes, and certain accounts payable into Common Stock would otherwise cause the Transaction Shares to represent less than 70% of the issued and outstanding Common Stock. The Company evaluated the embedded conversion feature under ASC 815 for the variable number of shares issuable and determined that, at the date of issuance, the conversion feature had no value as it was substantially out of the money and there was no market for the shares. During October 2018, the Company amended the Convertible Notes to eliminate the variable number of shares issuable under the conversion feature to a fixed amount of 7,000,000 shares upon conversion. The Company recorded a gain on extinguishment of debt at the date of the amendment of the Convertible Notes at the fair value of the original 1,400,000 shares issuable of $(928,227), a discount on debt of $2,546,294 for the new conversion feature and a discount on debt of $5,009,885 related to imputed interest at 12.8%.

Pursuant to the terms of the Exchange Agreement, the EAF Members are entitled to demand registration rights and piggyback registration rights with respect to the Transaction Shares. The Convertible Notes are secured by all of the assets of EAF and the EAF Interests, which the Company pledged to the EAF Members as security for the Convertible Notes.

Each Convertible Note is convertible at the applicable holder’s option upon (1) consummation of a reorganization, merger or similar transaction where the Company is not the surviving or resulting entity or (2) the sale of all or substantially all of the Company’s assets, subject to customary restrictions. The Convertible Notes are also subject to mandatory conversion at the Company’s option beginning on the first anniversary of the issue date if: (i) the closing price of the common stock is greater than $10.00 and (ii) the average daily trading volume of shares of common stock has equaled 100,000 or more for the 30 days prior to the applicable date. Upon a conversion of the Convertible Notes, accrued interest may also be converted into shares of common stock at the greater of (1) 1.357, subject to adjustment for stock splits or combinations, or (2) the closing price of a share of common stock as reported on the business day that immediately precedes the date of the notice of conversion provided by the party making the election.

EVO TRANSPORTATION & ENERGY SERVICES, INC.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

Note 2 - Acquisition (continued)

The following unaudited pro forma summary presents condensed consolidated information of the Company as if the business combinations had occurred on January 1, 2017. The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisition been consummated as of that time or that may result in the future. The following table does not include pro forma financial information for Graham, as historical results were not available.

EVO TRANSPORTATION & ENERGY SERVICES, INC.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

Note 3 - Balance Sheet Disclosures

Accounts receivable are summarized as follows:

Bad debt expense for the years ended December 31, 2018 and 2017 was $0 and $37,007, respectively.

Property, equipment and land are summarized as follows:

Depreciation expense for the years ended December 31, 2018, and 2017, was $520,400 and $549,630, respectively.

During the year ended December 31, 2018, the Company did not identify impairment of long-lived assets to be held and used. During the year ended December 31, 2017, the Company recorded an impairment of $806,217 for El Toro’s fixed assets.

EVO TRANSPORTATION & ENERGY SERVICES, INC.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

Note 3 - Balance Sheet Disclosures (continued)

Intangible assets consist of the following:

During the year ended December 31, 2018, the Company did not record impairment of its intangible assets. During the year ended December 31, 2017, the Company impaired $106,270 related to customer lists.

Amortization expense for the years ended December 31, 2018 and 2017, was $438,545 and $161,446, respectively.

Future amortization expense will be approximately as follows:

Goodwill consists of the following:

During the year ended December 31, 2018, the Company recognized goodwill of $2,887,281 related to the Thunder Ridge acquisition and did not record impairment of goodwill. During the year ended December 31, 2017, the Company impaired total goodwill for $3,993,730.

Accrued expenses consist of the following:

EVO TRANSPORTATION & ENERGY SERVICES, INC.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

Note 4 - Segment Reporting

The Company’s two reportable segments are Trucking and CNG Fueling Stations.

Trucking. Trucking is comprised of domestic freight trucking and surface transportation services.

CNG Fueling Stations. The Company operates six CNG fueling stations located in California, Texas, Arizona and Wisconsin. Revenue is derived from agreements with high-volume fleet operators. In most instances each station has a principal customer.

In determining its reportable segments, the Company’s management focuses on financial information, such as operating revenue, operating expense categories, operating ratios and operating income, as well as on key operating statistics, to make operating decisions.

The trucking segment includes $2,887,281 of goodwill in the year ended December 31, 2018.

The following tables summarize operating revenue, operating loss, and depreciation and amortization by segment.

For the year ended December 31, 2018, the revenues from one customer accounted for approximately 95% of total consolidated revenues. The Company did not have trucking revenues in 2017.

The following tables summarize total assets by segment:

EVO TRANSPORTATION & ENERGY SERVICES, INC.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

Note 5 - Related Party Transactions

Accounts Payable - Related Party

The Company’s accounts payables - related party consist of guaranteed payments and expense reimbursement to stockholder. Accounts payable - related party was $337,345 and $409,838 for the years ended December 31, 2018 and 2017, respectively.

Advances Related Party

During the years ended December 31, 2018 and 2017, an EAF member advanced $286,929 and $332,859 to the Company and due on demand.

A Titan member advanced $2,000 to the Company for operating expenses. As of December 31, 2018, and 2017 the outstanding balance was $2,000 and due on demand.

An El Toro member advanced $35,500 to the Company for operating expenses. As of December 31, 2018, and 2017 the outstanding balance was $35,500 and due on demand.

On April 1, 2019, the Company issued 117,092 shares of common stock to settle the Separation Agreement with the former officer. The settlement included reimbursement of the $37,500 of advances from the related party and approximately $300,000 of the accounts payable - related party.

Accrued Interest - Related Party.

The Company’s accrued interest - related party represents the accrued interest payments on stockholders’ and related party debt. Accrued interest - related party was $1,060,068 and $917,526 for the years ended December 31, 2018 and 2017, respectively.

For further information regarding related-party transactions, see Note 2 for acquisitions. In addition, the Company entered into multiple related-party transactions as described in Note 8.

Accounts Receivable – Related Party

During the year ended December 31, 2018, the Company sold CNG to an officer’s company and recognized revenue of $96,039. For the year ended December 31, 2018, accounts receivable – related party was $40,571.

Note 6 – Factoring Arrangements

Thunder Ridge has an accounts receivable factoring arrangement with a financial institution (the “Factor”) which has been extended to February 18, 2021. Pursuant to the terms of the agreement, Thunder Ridge, from time to time, sells to the Factor certain of its accounts receivable balances on a recourse basis for credit-approved accounts. The Factor remits 95% of the accounts receivable balance to Thunder Ridge (the “Advance Amount”), with the remaining balance, less fees to be forwarded to Thunder Ridge once the Factor collects the full accounts receivable balance from the customer. Financing costs are comprised of an interest rate of Prime + 3.75% plus a factor fee of 0.85% of the face amount of the invoice factored based upon number of days to the Advance Amount remains outstanding. Interest and factoring costs are included in interest expense. Total financing fees for factored receivables since the acquisition of Thunder Ridge were $275,933 in 2018 and is included in interest expense in the consolidated statement of operations.

EVO TRANSPORTATION & ENERGY SERVICES, INC.

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

Note 7 - Line-of-Credit