EVOA EVO Transportation and Energy Services Inc (CE)

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

Forward-Looking Statements

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

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

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

Background and Recent Developments

EVO Transportation & Energy Services, Inc., a Delaware corporation formerly named Minn Shares Inc. (“EVO Inc.,” “we,” “us,” “our” or the “Company”), was incorporated on October 22, 2010.  EVO Inc. was incorporated to effect the 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 Exchanges with Titan CNG and Environmental Alternative Fuels, LLC

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

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

On 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 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 principles. You should read the discussion and analysis together with such financial statements and the related notes thereto.

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

General Overview

The Company was incorporated in the State of Delaware on October 22, 2010, and is a holding company based in Peoria, Arizona that owns three operating subsidiaries, Titan, Thunder Ridge and EAF that are in the businesses of compressed natural gas (“CNG”) service stations and fulfilling USPS contracts for freight trucking services. Titan is the management company that oversees operations of the El Toro, Diamond Bar, and Blaine CNG service stations. As of June 30, 2017, El Toro ceased operations. Blaine and Diamond Bar were formed in 2015. In March 2016, Diamond Bar began operations of its CNG station under a lease agreement with the State of California South Coast Air Quality Management District (“SCAQMD”) in Diamond Bar, California. In February 2018, the Company entered into a management agreement with a third party to operate Diamond Bar, and the Company is currently negotiating with the third party for the sale of the station. 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 routes operated for the USPS.

Although we currently plan to continue to operate our existing CNG fueling stations, we are also expanding our operations into interstate contract trucking routes operated for the USPS. We plan to accomplish our expansion into the trucking industry by acquiring existing trucking companies.

Going Concern

The Company is an early stage company in the process of acquiring several businesses with highway contract routes operated for the USPS and CNG fuel stations. As of September 30, 2018, the Company has a working capital deficit of approximately $6.9 million and negative equity of approximately $8.0 million. In addition, the Company is in violation of its bank covenants. Management anticipates rectifying these covenants with additional public and private offerings. Also, the Company is evaluating certain cash flow improvement measures. However, there can be no assurance that the Company will be successful in these efforts.

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

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

On March 2, 2018, the Company issued 1,000,000 Units (the “Units”) at a price of $2.50 per Unit for an aggregate purchase price of $2,500,000 pursuant to the terms of a subscription agreement between the Company and an investor. Each Unit consists of (i) one share of the Company’s common stock, par value $0.0001 per share (“Common Stock”), and (ii) a warrant to purchase one share of Common Stock at an exercise price of $2.50 per share exercisable for five years from the date of issuance.

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

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

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

The Company issued 275,583 common shares in exchange for certain subordinated convertible senior notes payable to stockholders in the aggregate principal and interest amount of approximately $689,000, with the per share price for shares of common stock equal to $2.50.

The Company issued 272,777 common shares in exchange for the subordinated convertible junior notes payable to stockholders in the aggregate principal and interest amount of $1,363,858, with the per share price for shares of common stock equal to $5.00.

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

In July 2018, the Company entered into a Secured Convertible Promissory Note Purchase Agreement, pursuant to which the Company sold secured convertible promissory notes in the principal amount of $4,005,000 during July and August 2018.

In July and August 2018 Thunder Ridge won seven new four-year transportation services contracts with the USPS, under which Thunder Ridge will provide domestic surface transportation services to the USPS at its offices located in Santa Clarita, California, Baton Rouge, Louisiana, Flint, Michigan, Austin, Texas, the Northern Bay in California, Baltimore, Maryland and Pensacola, Florida.

On July 31, 2018, the Company paid approximately $1,072,000 of principle and interest to the subordinated convertible senior notes payable to stockholders.

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 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.

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. Starting on June 1, 2018, with the acquisition of Thunder Ridge, the Company has begun to recognize revenue from highway contract routes. The transportation services include operations in Missouri, Maryland, Kansas, Iowa, Tennessee, New York, Pennsylvania, Texas, Louisiana, Michigan and California. As of June 30, 2017, our El Toro station has ceased operations.

Key Trends

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

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

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

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 and destination post offices. 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 four years and are renewable for additional terms, usually indefinitely. As of September 30, 2017, there were 6,059 routes contracted with the USPS, utilizing 2,718 contractors with contracts totaling $3.1 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, LA. It is estimated that the seven contracts will produce revenue of $18 million annually. Additionally, the new contracts will provide a larger network for the development of new transportation opportunities.

Anticipated Future Trends

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

We believe natural gas fuels are well-suited for use by vehicle fleets that consume high volumes of fuel, refuel at centralized locations or along well-defined routes and/or are increasingly required to reduce emissions. As a result, we believe there will be growth in the consumption of natural gas as a vehicle fuel among vehicle fleets. 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.

In addition, the Company expects to further expand into the transportation industry by owning and operating transportation companies. The Company intends to acquire additional transportation companies that have been awarded contracts to provide trucking services for the USPS.

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 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 acquisitions.

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

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

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

Of our total indebtedness of approximately $25,000,000 as of September 30, 2018, approximately $3,500,000 is classified as current debt. We are in violation of the covenants related to the SBA loan. We did not receive a waiver with respect to those covenant violations for the nine months ended September 30, 2018. Our total consolidated interest expense relating to our indebtedness for the nine months ended September 30, 2018 was approximately $1,550,000, which included debt discount and financing costs of $591,000 and 44,000, respectively.

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

Results from Operations

Three months ended September 30, 2018 as compared with the three months ended September 30, 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). The Company continues to operate public and private CNG filling stations.

Sales for the CNG stations were $414,609 and $622,073 for the three months ended September 30, 2018 and 2017, respectively. EVO CNG, LLC stations’ sales have decreased from prior year due to a Tolleson station’s customer’s discontinuation of its CNG truck fleet. During the third quarter of 2017, that customer generated approximately $121,000 in CNG revenue. No revenue was generated at the Diamond Bar or El Toro stations during the 2018 quarter. The Diamond Bar and El Toro stations’ third quarter 2017 revenue was $87,000 with $35,460 generated from El Toro related to a one-time charge to a customer. Overall the Company experienced a downward trend in CNG demand during 2018.

Thunder Ridge’s third quarter 2018 revenue of $8,235,295 more than doubled from the third quarter of 2017. The increase was the result of organic growth from new mail hauling contracts signed with USPS earlier in the year.

Cost of goods sold. CNG cost of goods sold is comprised of natural gas, electricity, federal excise tax, vendor use fuel tax, and credit cards fees. The margins were 18% and 59% for the three months ended September 30, 2018 and 2017, respectively. The decrease in margin rate was primarily attributable to the fall-off of activity at Diamond Bar since that station has typically achieved a 50% margin in the past as a result of its lower cost of electricity purchased from SCAQMD. The margin decrease is also a result of EVO CNG’s fixed station costs’ not commensurately decreasing in step with decreased CNG demand.

Thunder Ridge’s cost of goods sold is primarily comprised of labor and subcontractor costs, fuel, leasing and rental of trucks and trailers, repairs and maintenance, and insurance. Thunder Ridge’s third quarter margin was negative. Over the past two and a half years, Thunder Ridge has been growing through awards of new USPS mail hauling contracts. This growth was added to an infrastructure that was not yet fully in place to profitably support the operations at the start of the new contracts. Efforts are currently underway to refine the labor model and right-size the fleet to achieve the expected returns.

Operating expenses. General and administrative increased for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 by approximately $1,215,000. The acquisition of Thunder Ridge contributed $623,000 of the increase and $396,000 was from stock option expense, offset by a decrease in accounting and legal fees of approximately $200,000 and a general decrease in expenses. The $48,000 increase in depreciation and amortization expense was a result of a decrease in amortization from EVO CNG, LLC due to the impairment of customer relationships during 2017.

Interest Expense . The $538,000 increase in interest expense was a result of an addition of $356,000, from the debt discount in EVO, Inc. and EVO CNG, LLC, plus $44,000 related to amortization of the debt discount. Lastly, Thunder Ridge interest added $120,000 to the third quarter 2018 interest increase from third quarter 2017.

Warrant expense. Warrant expense increased for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017 by approximately $121,000. The warrant expense is connected to the issuance of stock and 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.

Nine months ended September 30, 2018 as compared with the nine months ended September 30, 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). The Company continues to operate public and private CNG filling stations.

Sales for the CNG stations were $1,111,629 and $1,692,787 for the nine months ended September 30, 2018 and 2017, respectively. The decrease resulted from revenue loss of approximately $92,000 from the closure of the El Toro station during 2017, 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.

Thunder Ridge’s revenue for the period of June 1, 2018 through September 30, 2018 was $10,212,227, an increase from prior year of approximately $4,600,000. The increase was the result of organic growth from new mail hauling contracts signed with USPS earlier in the year.

Cost of goods sold. CNG cost of goods sold is comprised of natural gas, electricity, federal excise tax, vendor use fuel tax, and credit cards fees. The margins were 25% and 59% for the nine months ended September 30, 2018 and 2017, respectively. The decrease in margin rate was primarily attributable to the fall-off of activity at Diamond Bar as of the end of January 2018 as that station typically achieved a 50% margin in the past as a result of its lower cost of electricity purchased from SCAQMD. The margin decrease is also a result of EVO CNG’s fixed station costs not commensurately decreasing in step with decreased CNG demand.

Thunder Ridge’s cost of goods sold is primarily comprised of labor and subcontractor costs, fuel, leasing and rental of trucks and trailers, repairs and maintenance, and insurance. Thunder Ridge’s third quarter margin was negative. Over the past two and a half years, Thunder Ridge has been growing through awards of new USPS mail hauling contracts. This growth was added to an infrastructure that was not yet fully in place to profitably support the operations at the start of the new contracts. Efforts are currently underway to refine the labor model and right-size the fleet to achieve the expected returns.

Operating expenses. General and administrative expenses increased for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 by approximately $2,261,000. Factors contributing to this increase included $553,000 from the acquisition of Thunder Ridge, $792,000 from stock option expense, $94,000 from the lawsuit settlement, $250,000 from regulatory filings, $75,000 from additional payroll, and $300,000 from advisory services rendered.

Interest expense. The $674,000 increase in interest expense was a result of an addition of $155,000 from Thunder Ridge, $239,000 from the accretion of the beneficial conversion feature, and $44,000 from the amortization of the deferred financing costs. The remaining increase is due to the EVO CNG, LLC debt discount offset by a $161,000 reduction in interest expense as a result of conversion of Junior and Senior Bridge Notes in April 2018.

Warrant expense. Warrant expense increased for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 by approximately $512,000. The warrant expense is connected to the issuance of stock and is the estimated fair value calculated on the date of issuance of the warrant using the Black-Scholes option pricing model, which requires the input of subjective assumptions, including the expected term of the warrants, expected stock price volatility, and expected dividends. These estimates involve inherent uncertainties and the application of management’s judgment.

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

Gain on extinguishment of liabilities. We recorded a gain of $657,498 on the extinguishment of accounts payable that no longer represented our obligation or that management negotiated a settlement. The liabilities consisted of professional fees and other expenses.

The Company had cash and cash equivalents of $1,121,565 and $83,867 at September 30, 2018 and December 31, 2017, respectively. During the nine months ended September 30, 2018 and 2017, net cash used in operations was $3,995,028 and $487,403, respectively. We have historically funded our operating losses primarily from the issuance of equity, convertible notes payable, stockholder debt, and SBA debt.

Changes in Liquidity

Cash and Cash Equivalents . Cash and cash equivalents were $1,121,565 at September 30, 2018, compared to $83,867 at December 31, 2017. The increase is primarily attributable to the issuance of common stock for $2,500,000 during 2018, along with the proceeds of $4,005,000 from secured convertible debt.

Operating Activities . Net cash used in operations was $3,995,028 and $487,403 as of September 30, 2018 and 2017, respectively. For the nine months ended September 30, 2018 and 2017, the Company had a net loss of $5,177,325 and $2,584,782, respectively. Significant changes in working capital during these periods included:

Investing Activities . Net cash used in investing was ($229,736) and ($144,828) for the nine months ended September 30, 2018 and 2017, respectively. With the acquisition of Thunder Ridge in 2018, the cash contribution was negative. In 2017, the cash was used to purchase construction in progress assets during 2017.

Financing Activities . Net cash provided by financing activities was $5,262,462 and $698,054 for the nine months ended September 30, 2018 and 2017, respectively. The cash provided by financing activities in 2018 was from the $2,500,000 sale of common stock, proceeds of $4,005,000, net of $524,987 in debt issuance costs from secured convertible debt, and $480,210 from advances from factoring receivables, offset by $134,957 in payments on the SBA and equipment loans, and the $250,000 payment in full on the working capital notes – related party, in addition to $800,000 in payment of the subordinated convertible senior notes payable to stockholders. During the six months ended June 30, 2017 financing activities consisted of $400,000 from subordinated notes payable, $310,000 from the sale of common stock, and $70,258 in advances from stockholders, offset by payments on the SBA loan and related party promissory note.

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

Debt Compliance

Of our total indebtedness of approximately $25,000,000 for the nine months ended September 30, 2018, approximately $3,500,000 is classified as current debt. We are in violation of the covenants related to the SBA loan. We have not received a waiver for current violations of these covenants as of September 30, 2018. Our total consolidated interest payment obligations relating to our indebtedness was approximately $1,550,000 which included the debt discount, debt issuance costs and the beneficial conversion feature of $635,000 for the nine months ended September 30, 2018.

Existing Indebtedness

On December 31, 2014, Titan entered into a co-borrower arrangement for a $1,300,000 U.S. Small Business Administration (SBA) note with El Toro. The proceeds from the note were received by El Toro and the note payable is recorded by El Toro. The note is a ten-year term note with interest fixed at 5.5% for the first five years, then adjusted to the SBA LIBOR Base Rate, plus 2.35% for the remaining five years. The note requires monthly principal and interest payments of $15,288. The note is secured by substantially all of Titan’s business assets and is personally guaranteed by certain former members of Titan. Titan issued 35,491 (equivalent to 31,203 common shares) Class A Membership Units to those members as compensation for the guarantee. The note was obtained pursuant to a loan agreement with a bank dated December 31, 2014 (the facility governed by the loan agreement is hereinafter referred to as the “SBA Facility”). Titan was, as of December 31, 2017, and currently is, in violation of certain covenants under our SBA Facility. We have not received a waiver to remedy the technical non-compliance under our SBA Facility as of September 30, 2018.

In addition to the SBA Facility, on January 1, 2016, Titan issued 64,387 (equivalent to 56,608 common shares) Class A Membership Units and Junior Bridge Notes in the aggregate principal amount of approximately $876,000 to eight accredited investors in exchange for mezzanine debt in El Toro plus approximately 80% of the membership interest in El Toro. Titan issued an additional Junior Bridge Note to a ninth accredited investor on January 1, 2016 for approximately $99,000 to evidence pre-existing indebtedness. The holders of the Junior Bridge Notes are the Alpeter Family Limited Partnership, Brian and Renae Clark, Falcon Capital LLC, Honour Capital LP, James Jackson, John Honour, Kirk Honour, Keith and Janice Clark, and Stephen and Jayne Clark. On April 12, 2018, the Company converted the eight Junior Bridge Notes and related interest totaling $1,363,858 into common stock at a price per share of $5.00 for a total of 272,777 shares.

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

On April 12, 2018, the Company converted four of the Senior Bridge Notes in the aforementioned paragraph and the Senior Bridge Note issued on July 26, 2016 along with related interest totaling $688,958 into common stock at a price per share of $2.50 for a total of 275,583 shares. The remaining Senior Bridge Note and related interest was paid in full on July 31, 2018.

On July 26, 2016, we issued an additional Senior Bridge Note for $200,000 with 16% interest and an original maturity date of October 2016. In September 2016, this Senior Bridge Note was amended to extend the maturity date to January 31, 2017 and Titan paid a fee for the extension of 1% of the outstanding principal balance to the note holder. The Company paid a 1% fee on or around each of January 31, 2017, April 30, 2017, and July 31, 2017 to extend the due date of this Senior Bridge Note to October 31, 2017. In the event of default, the holder is entitled to receive 1,000 (equivalent to 879 common shares) Class A Membership Units. Titan issued 5,000 (equivalent to 4,396 common shares) Class A Membership Units to this noteholder in connection with the issuance of this Senior Bridge Note. The note is secured by a subordinate security interest on substantially all of the Company’s assets and are personally guaranteed by Scott Honour and Kirk Honour. The note was not extended at maturity. On April 12, 2018, the Company converted the Senior Bridge Note issued on July 26, 2016 and four of the Senior Bridge Notes issued on February 29, 2016 along with related interest totaling $688,958 into common stock at a price per share of $2.50 for a total of 275,583 shares.

On September 26, 2016, Titan issued an additional Senior Bridge Note for $150,000 with 16% interest and an original maturity date of January 2017. Titan issued 3,750 (equivalent to 3,297 common shares) Class A Membership Units to this noteholder in connection with the issuance of this Senior Bridge Note and received the proceeds from this note in October 2016. Subsequent to March 31, 2017, the Company paid a 1% fee to extend the maturity date of this note to July 31, 2017 and paid an additional 1% fee to extend the maturity date to October 31, 2017. In the event of default, the holder of this Senior Bridge Note is entitled to receive 750 (equivalent to 659 common shares) Class A Membership Units. The note is secured by a subordinate security interest on substantially all of the Company’s assets. The note was not extended at maturity. On July 31, 2018 the Senior Bridge note was paid in full.

On November 22, 2016, EVO, Inc. issued Convertible promissory notes – related party (the “Minn Shares Notes”) in the aggregate principal amount of $463,928 to Joseph H. Whitney, The Globe Resources Group, LLC and Richard E. Gilbert. The Minn Shares notes bear interest at the rate of 12% per annum and mature in November 2019 unless earlier converted. Each Minn Shares Note is convertible at the holder’s option as follows: (i) upon the sale by EVO, Inc. of not less than $7,500,000 of its equity securities at a conversion price equal to the price per security issued in such offering, (ii) upon a corporate transaction such as a merger, consolidation or asset sale involving either the sale of all or substantially all of the EVO, Inc. assets or the transfer of at least 50% of EVO, Inc.’s equity securities at a conversion price equal to the enterprise value of EVO, Inc.’s, as established by the consideration payable in the corporate transaction or (iii) on or after the maturity date at a conversion price equal to the quotient of $20 million divided by the number of shares of EVO, Inc.’s stock outstanding on a fully diluted basis. The Minn Shares Notes are subject to mandatory conversion upon the conversion into equity securities of the Junior Bridge Notes and Senior Bridge Notes upon the same conversion terms as the Junior Bridge Notes and Senior Bridge Notes.

On January 31, 2017, Titan issued an additional Senior Bridge Note in the principal amount of $400,000. This Senior Bridge Note bears interest at 16% per year with a default interest rate of 18% per year and matures on April 30, 2017. In the event of a default under this Senior Bridge Note, EVO, Inc. is required to issue 1,758 shares of Common Stock to the holder on the date of default and each 90-day interval thereafter until all amounts due have been paid in full. This Senior Bridge Note is secured by a subordinate security interest on substantially all of the EVO, Inc.’s assets. In connection with this Senior Bridge Note, on January 31, 2017, EVO, Inc. issued 8,792 shares of Common Stock. Subsequent to March 31, 2017, the Company paid a 1% fee to extend the maturity date of this note to July 31, 2017 and paid an additional 1% fee to extend the maturity date to October 31, 2017. The note is secured by a subordinate security interest on substantially all of the Company’s assets. The note was not extended at maturity. On July 31, 2018 the Senior Bridge note was paid in full.

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

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

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

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 by the Company without cause or by Peck for good reason. The note is collateralized by all of the assets of Thunder Ridge.

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. Subsequent to September 30, 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.

Five notes payable to banks with interest ranging from 2.99% to 6.92%, with monthly payments of principal and interest ranging between $477 and $1,678, and maturity dates between June 2020 and January 2023.  The notes are collateralized by equipment.

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

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

During July and August 2018, the Company received $4,005,000 in proceeds from Secured Convertible Promissory Notes (“Convertible Notes”). The Company paid commissions of $524,987 in connection with the Convertible Notes. The Convertible Notes bears interest at 9%, compounded quarterly, and have a maturity date two years after issuance. The 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 Convertible Notes on the first day of each calendar quarter. The 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 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 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 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 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% of the outstanding principal amount of the 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 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. The Company recorded a beneficial conversion feature of $2,861,192. The beneficial conversion feature will be amortized to interest expense through the maturity of the Convertible Notes.

During the nine months ended September 30, 2018 and the year ended December 31, 2017, the remaining debt discount was $2,622,106 and $0, respectively. In addition, during the nine months ended September 30, 2018 and the year ended December 31, 2017, remaining debt issuance costs were $481,238 and $0, respectively.

Stockholders’ Deficit

On March 2, 2018, the Company issued 1,000,000 Units (the “Units”) at a price of $2.50 per Unit for an aggregate purchase price of $2,500,000 pursuant to the terms of a subscription agreement between the Company and an investor. Each Unit consists of (i) one share of the Company’s common stock, and (ii) a detachable warrant to purchase one share of common stock at an exercise price of $2.50 per share exercisable for five years from the date of issuance. The Company estimated the value of the warrants to be approximately $1,088,000 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 stockholder’s, 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.

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 has not been rendered and the stock has not been issued as of September 30, 2018. The balances are included in 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 $300,000.

Dividends

Generally, 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 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 nine months ended September 30, 2018, the Company accrued $11,178 in dividends. 

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

At the option of the holder and upon written notice to the Company, the Preferred Stock will be redeemable 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. 

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. The conversion rights require the Company to present the Preferred Stock in the mezzanine level of the accompanying balance sheet.

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 amends and restates 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 no 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 September 30, 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. The forfeiture rate has been estimated at 5%. During the nine months ended September 30, 2018, the Company has recorded stock-based compensation expense of $792,924 associated with stock options. As of September 30, 2018, the Company has estimated approximately $7,400,000 of future compensation costs related to the unvested portions of outstanding 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

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 condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”). The preparation of condensed 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 condensed 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 condensed 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 condensed consolidated financial statements.

Basis of Presentation

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

The Condensed Consolidated Statements of Operations, Condensed Consolidated Balance Sheets and the Condensed Consolidated Statements of Cash Flows included in this report are unaudited and have been prepared by the Company. In our opinion, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at September 30, 2018 and results of operations and cash flows for all periods have been made.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These Condensed Consolidated Financial Statements (Unaudited) should be read in conjunction with our financial statements and notes thereto included in our Annual Report on form 10-K for the year ended December 31, 2017. The results of operations for the period ended September 30, 2018 are not necessarily indicative of the operating results for the full year.

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, a Missouri corporation 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 contracts for freight trucking services.

Going Concern

The Company is an early stage company in the process of acquiring several businesses with highway contract routes operated for the USPS and CNG fuel stations. As of September 30, 2018, the Company has a working capital deficit of approximately $6.9 million and negative equity of approximately $8.0 million. In addition, the Company is in violation of its bank covenants. Management anticipates rectifying these covenant violations with additional public and private offerings. Also, the Company is evaluating certain cash flow improvement measures. However, there can be no assurance that the Company will be successful in these efforts. 

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern; however, the above conditions raise doubt about the Company’s ability to do so. The condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern. 

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

On March 2, 2018, the Company issued 1,000,000 Units (the “Units”) at a price of $2.50 per Unit for an aggregate purchase price of $2,500,000 pursuant to the terms of a subscription agreement between the Company and an investor. Each Unit consists of (i) one share of the Company’s common stock, par value $0.0001 per share (“Common Stock”), and (ii) a warrant to purchase one share of Common Stock at an exercise price of $2.50 per share exercisable for five years from the date of issuance.

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

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

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

The Company issued 275,583 common shares in exchange for certain subordinated convertible senior notes payable to stockholders in the aggregate principal and interest amount of approximately $689,000, with the per share price for shares of common stock equal to $2.50.

The Company issued 272,777 common shares in exchange for the subordinated convertible junior notes payable to stockholders in the aggregate principal and interest amount of $1,363,858, with the per share price for shares of common stock equal to $5.00.

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

In July 2018, the Company entered into a Secured Convertible Promissory Note Purchase Agreement, pursuant to which the Company sold secured convertible promissory notes in the principal amount of $4,005,000 during July and August 2018.

Thunder Ridge, won seven new four-year transportation services contracts with the USPS, under which Thunder Ridge will provide domestic surface transportation services to the USPS at its offices located in Santa Clarita, California, Baton Rouge, Louisiana, Flint, Michigan, Austin, Texas, the Northern Bay in California Baltimore, Maryland, and Pensacola, Florida. 

On July 31, 2018, the Company paid approximately $1,072,000 of principal and interest to the subordinated convertible senior notes payable to stockholders. 

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 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. 

Use of Estimates

The preparation of condensed 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 

The condensed 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 along with long-lived intangible asset valuations, fixed assets and 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.

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. For the nine months ended September 30, 2018 and the year ended December 31, 2017, the Company has recorded an allowance of $26,000 and $37,007, respectively.

Goodwill and Intangibles

Goodwill

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 year ended December 31, 2017 the Company’s evaluation of goodwill resulted in an impairment of $3,993,730. The Company’s evaluation of goodwill for the nine months ended September 30, 2018 resulted in no impairment.

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 names. 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 the 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 nine months ended September 30, 2018 resulted in no impairment.

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:

During the year ended December 31, 2017, the Company recorded asset impairment charges of $806,217 related to El Toro and $4,100,000 impairment of goodwill and customer lists related to EVO CNG, LLC. No triggering events occurred during the nine months ended September 30, 2018 that required an impairment analysis for long-lived assets. Accordingly, no impairment loss was recorded.

Revenue Recognition  

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

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

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

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

There was no impairment loss recognized on any of the CNG receivables arising from customer contracts for the nine months ended September 30, 2018.

Thunder Ridge generates revenue from transportation services under contracts with customers, generally on a rate per mile basis from the point of origin to the destination of the delivery. The Company’s performance obligation arises from the annualized contract to transport a customer’s freight and is satisfied upon delivery. The transaction price is based on the awarded agreement for the multi-year contract that adjusts monthly for fuel pricing indexes. Each delivery represents a distinct service that is a separately identified performance obligation for each contract. The Company often provides additional deliveries for customers outside of the annual contract. That revenue is recognized upon delivery on a rate per mile basis.

Revenues are recognized over time as satisfaction of the promised contractual delivery agreements are completed, in an amount that reflects the rate per mile set in the contract. The revenue recognition methods described align with the recognition of the Company’s associated expenses contained in the statement of operations.

Based on preliminary analysis there are no major revenue adjustments related to Topic 606, but management is continuing to evaluate the guidance.

Recently Adopted Accounting Changes and Recently Issued and Adopted Accounting Standards

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

Seasonality and Inflation

To some extent, we experience seasonality in our results of operations. Natural gas vehicle fuel amounts consumed by some of our customers tend to be higher in summer months when 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.