Management's discussion and analysis of financial condition and results of operations should be read together with "Business" in Part I, Item 1 of this Annual Report, as well as the consolidated financial statements and accompanying footnotes in Part II, Item 8 of this Annual Report. This discussion contains forward-looking statements as a result of many factors, including those set forth under Part I, Item 1A. "Risk Factors" and Part I "Forward-looking Statements" of this Annual Report, and elsewhere in this report. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from those discussed.
EVO Transportation & Energy Services, Inc. is a transportation provider serving the USPS and other customers. We believe we are the second largest surface transportation company serving the USPS, with a diversified fleet of tractors, straight trucks, and other vehicles that currently operate on either diesel fuel or CNG. In certain markets, we fuel our vehicles at one of our three CNG stations that serve other customers as well. We operate from our headquarters in Phoenix, Arizona and from 10 main terminals strategically located throughout the United States.
We have grown primarily through acquisitions, and we have completed seven acquisitions since our initial business combination in 2016. We have also grown organically by obtaining new contracts from the USPS and other customers. We have been actively integrating the acquisitions we have made under common leadership and technology and are now operating under a single brand.
Key Trends & Anticipated Future Trends
The USPS has for more than 100 years contracted with private carriers to transport mail among its processing plants and between such plants and post office locations. In 2016, the USPS began implementing a new Dynamic Route Optimization ("DRO") initiative to retool its private carrier contracting strategy. For decades, the USPS hired private carriers to transport mail over specific routes on a set schedule at fixed prices under its Highway Contract Routes ("HCR") program. The DRO initiative aims to replace fixed-price HCR contracts with rate-per-mile DRO contracts that have varying departure times, lines of travel, and mail types transported based on mail volume. By "optimizing" its routes, the USPS seeks to reduce mileage and lower its transportation costs. The DRO program has evolved since conception and now operates more like the HCR program.
Nonetheless, we believe the USPS's distribution strategy under the DRO initiative is causing a fundamental change to its contracting activity with private carriers. Historically, HCR contracts often were awarded to smaller carriers capable of performing under a limited number of fixed-price, -route, and -cost contracts. In 2014, the USPS had contracts with more than 4,000 carriers, many servicing the same or overlapping territories. With the implementation of the DRO program, the USPS stated the goal to manage fewer relationships and reduce its number of carriers to fewer than 1,000 by 2022. The USPS has stated that it is aiming to consolidate many contracts within a defined geographical area into one contract with a single carrier. Accordingly, DRO contracts are being awarded to carriers with larger service territories that have the capacity to increase or reduce services to adjust for changes in mail volume.
We expect the USPS to continue its contract consolidation efforts in the foreseeable future. In its five-year strategic plan for fiscal years 2020 through 2024, the USPS reported it intends to continue to deploy dynamic routing technologies and processes for plant-to-plant and plant-to-post office transportation and to expand carrier relationships where best aligned to improve service reliability, lower costs, and increase capabilities. We believe the USPS's consolidation efforts can help the Company grow organically through new contracting opportunities.
We believe that the USPS's intent to increase its reliance on surface transportation providers will also help the Company grow organically. In its ten-year strategic plan announced in March of 2021, the USPS outlined its intent to shift a portion of its mail and package volume from air transport to surface transportation. Specifically, over the next ten years the USPS intends to shift up to 43% of its first class mail volume that is transported by air to surface transportation.
We intend to continue bidding on new and existing USPS contract opportunities as they arise. USPS contracts are bid competitively 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. The USPS evaluates the bids based on price, past performance, operational plans, financial resources, and the use of innovation or alternative fuels. USPS contracts typically have four-year terms, but can range from two to six years, and often are renewed with the incumbent carrier after expiration of the initial term.
In addition to organic growth, the Company expects to further increase its footprint into the transportation industry by acquiring, owning, and operating transportation companies. The Company intends to target acquisition candidates 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.
We experienced significant growth in USPS contract revenue through acquisitions and organic growth from 2018 through 2021. We obtained a total of 237 USPS contracts pursuant to our acquisitions of Thunder Ridge on June 1, 2018, Graham on November 18, 2018, Sheehy Mail on January 2, 2019, Ursa and JB Lease on February 1, 2019, Courtlandt and Finkle on July 15, 2019, and the Ritter Companies on September 16, 2019.
Our USPS trucking operations generates revenue for our trucking segment from transportation services under multi-year contracts with the USPS, generally on a rate per mile basis that adjusts monthly for fuel pricing indexes.
Our freight trucking operations generates revenue for our trucking segment by providing both irregular and dedicated route and cross-border transportation services of various products, goods, and materials for a diverse customer base.
Our CNG station revenue is derived predominately pursuant to contractual fuel purchase commitments. These contracts typically include a stand-ready obligation to supply natural gas daily. The CNG stations are also open to individual consumers. In addition to revenue earned from our customers, we may also earn alternative fuel tax credits through certain federal programs. These programs are generally short-term in nature and require legislation to be passed extending the term.
Year Ended December 31, 2021, Compared to Year Ended December 31, 2020
Trucking revenue: The majority of Trucking revenue is derived from the USPS. The remainder of the revenue is primarily derived from corporate freight hauling. The USPS contracts are typically four years in duration with pricing varying by contract. The vast majority of the USPS contracts include a monthly fuel adjustment. Trucking revenue was $268.9 million and $228.3 million during the years ended December 31, 2021 and 2020, respectively. The $40.6 million, or 17.8%, increase in trucking revenue from 2020 to 2021 is primarily due to revenue from new USPS contracts, along with increased fuel surcharge revenue as a result of fuel prices increasing throughout 2021.
Other revenue: During the first quarter of 2021, the Company entered into agreements with the USPS to settle claims submitted by the Company seeking additional compensation for transportation services provided under certain DRO contracts. The Company received a total of $28.5 million related to these claims and also renegotiated the contractual rates per mile for some of its DRO contracts on a prospective basis. In addition, amounts totaling $6.3 million that were previously paid by the USPS to the Company during 2020 became subject to the terms of the settlement agreements and were recognized as a deferred gain as of December 31, 2020. The aforementioned amounts totaling $34.8 million were recognized as other revenue during the first quarter of 2021 in the consolidated statement of operations. Such amounts are for transportation services provided during 2020 and prior years, are not subject to refund, and are not contingent upon the Company providing future transportation services. Refer to Note 1, Description of Business and Summary of Significant Accounting Policies, for further discussion.
Payroll, benefits and related: Of the Company's approximately 1,700 employees at year-end, approximately 1,500 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 an incremental hourly rate for benefits. Payroll, benefits and related expense was $98.3 million and $105.5 million during the years ended December 31, 2021 and 2020, respectively. Despite a 17.8% increase in trucking revenue from 2020 to 2021, payroll, benefits and related expense was substantially flat from 2020 to 2021 due to a $29.9 million, or 76.9%, increase in purchased transportation expense from 2020 to 2021.
Purchased transportation: Purchased transportation represents payments to subcontracted third-party companies. 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. Purchased transportation expense was $68.8 million and $38.9 million during the years ended December 31, 2021 and 2020, respectively. The $29.9 million, or 76.9%, increase in purchased transportation expense from 2020 to 2021 is primarily due to the use of subcontracted third-party company resources to service the aforementioned new USPS contracts that generated the increase in revenue from 2020 to 2021.
Fuel: Fuel expense is comprised of diesel and CNG fuel required to operate the truck fleet. The Company manages fuel cost by negotiating volume discounts from rack fuel rates with select vendors. Fuel expense was $28.2 million and $22.9 million during the years ended December 31, 2021 and 2020, respectively. The $5.3 million, or 23.1%, increase in fuel expense from 2020 to 2021 is primarily due to the 17.8% increase in trucking revenue combined with an increase in the average DOE fuel price to $3.28 per gallon in 2021 from $2.56 per gallon in 2020.
Equipment rent: The Company rents and leases a portion of its trucks and trailers through a combination of short-term rental arrangements and long-term lease arrangements. Equipment rent expense was $13.4 million and $10.7 million during the years ended December 31, 2021 and 2020, respectively. The $2.7 million, or 25.2%, increase in equipment rent expense from 2020 to 2021 is primarily due to the need to service the aforementioned new USPS contracts that generated the increase in revenue from 2020 to 2021.
Maintenance and Supplies: Maintenance and supplies expense primarily includes the costs to maintain the fleet. Maintenance and supplies expense was $10.9 million and $10.2 million during the years ended December 31, 2021 and 2020, respectively. The $0.7 million, or 6.9%, increase in maintenance and supplies expense from 2020 to 2021 is primarily due to an increase in the size of the fleet combined with increased maintenance costs for the existing fleet, which the Company is in process of refreshing with newer equipment.
Insurance and claims: Insurance and claims is comprised of auto liability and physical damage and workers compensation expense related to the trucking segment of the business. Insurance and claims expense was $8.9 million and $9.8 million during the years ended December 31, 2021 and 2020, respectively. The $0.9 million, or 9.2%, decrease in insurance and claims expense from 2020 to 2021 is primarily due to lower premiums and fewer significant, nonrecurring claims.
Operating supplies and expenses: Operating supplies and expenses include all other direct costs in the trucking segment. Operating supplies and expenses were $15.3 million and $16.1 million during the years ended December 31, 2021 and 2020, respectively. The $0.8 million, or 5.0%, decrease in operating supplies and expenses from 2020 to 2021 is primarily due to more cost efficient completion of certain routes.
CNG revenue: Revenue for the CNG stations was $0.4 million and $1.0 million during the years ended December 31, 2021 and 2020, respectively.
CNG operating expenses: CNG operating expense is comprised of natural gas, electricity, federal excise tax, vendor use fuel tax and credit card fees. CNG operating expense was $0.3 million and $0.5 million during the years ended December 31, 2021 and 2020, respectively.
Impairment of long-lived assets: Long-lived assets impairment expense was $0 and $2.3 million during the years ended December 31, 2021 and 2020, respectively. Substantially all of the impairment expense during the year ended December 31, 2020 is related to the CNG fueling stations segment and is due primarily to the compression of commodity prices.
General and administrative: General and administrative expense was $25.5 million and $18.5 million during the years ended December 31, 2021 and 2020, respectively. The $7.0 million, or 37.8%, increase in general and administrative expense from 2020 to 2021 is primarily due to the increases in compensation and benefits of $3.9 million and accounting and auditing professional fees by $2.2 million.
Depreciation and amortization: Depreciation and amortization expense was $15.2 million and $14.8 million during the years ended December 31, 2021 and 2020, respectively. The slight increase is due to an increase in finance lease right-of-use asset amortization expense being substantially offset by a decrease in depreciation expense.
Interest expense: Interest expense was $12.7 million and $15.0 million during the years ended December 31, 2021 and 2020, respectively. The $2.3 million, or 15.3%, decrease in interest expense from 2020 to 2021 is primarily due to during the first quarter of 2021 the Company using all of the net proceeds of the Main Street Loan to pay down the aggregate principal amount due under the Antara Financing Agreement, including capitalized interest, from $33.6 million to $16.7 million. Refer to Note 6, Debt, for a description of these activities.
Gain / loss on extinguishment of debt: The $11.0 million gain on extinguishment of debt during the year ended December 31, 2021 is due to: (1) the $10.1 million gain on extinguishment of the outstanding principal and accrued interest on the Paycheck Protection Program Loan, which was forgiven by the SBA in July 2021; (2) the $2.5 million gain on the partial extinguishment of the $4.0 million Secured Convertible Promissory Notes during March and April 2021; and (3) the $1.7 million loss on extinguishment resulting from using all of the net proceeds from the Main Street Loan to pay down the aggregate principal amount due under the Antara Financing Agreement (including capitalized interest) from $33.6 million to $16.7 million during the first quarter of 2021. The $10.0 million loss on extinguishment of debt during the year ended December 31, 2020 is primarily due to the $10.1 million loss on extinguishment of debt relating to the Company's March 31, 2020 Waiver and Agreement to Issue Warrant (the "Waiver Agreement") with Antara Capital and the collateral agent. The Waiver Agreement modified a certain affirmative covenant and waived another affirmative covenant in the Antara Financing Agreement and, in exchange, the Company agreed to issue to Antara Capital a warrant to purchase up to 3,250,000 shares of the Company's Common Stock at an exercise price of $2.50 per share as an incentive. Refer to Note 6, Debt, for further discussion.
Change in fair value of embedded derivative liability: The Antara Financing Agreement contains a mandatory prepayment feature that was determined to be an embedded derivative, requiring bifurcation and fair value recognition for the derivative liability. The fair value of this derivative liability is remeasured at each reporting period, with changes in fair value recognized in the consolidated statement of operations. Refer to Note 6, Debt, and Note 9, Fair Value Measurements, for further discussion.
Change in fair value of warrant liabilities: The Company previously issued certain warrants that are not considered indexed to the Company's common stock and, therefore, are required to be classified as liabilities and measured at fair value at each reporting date with the change in fair value being recognized in the Company's results of operations during each reporting period. The change in fair value of substantially all of the warrants classified as liabilities is recognized in other income (expense). Refer to Note 7, Stockholders' Deficit and Warrants, and Note 9, Fair Value Measurements, for further discussion.
Year Ended December 31, 2021, Compared to Year Ended December 31, 2020
Cash and Cash Equivalents. Cash and cash equivalents were $7.3 million and $26.6 million at December 31, 2021 and 2020, respectively. The decrease is primarily attributable to cash used in financing activities during the year ended December 31, 2021, which includes the Company using the proceeds received from its borrowings under the Main Street Priority Loan Program during the fourth quarter of 2020 to pay down the aggregate principal amount due to Antara, including capitalized interest, from $33.6 million to $16.7 million during the first quarter of 2021.
Operating Activities. Net cash provided by operating activities was $23.5 million during the year ended December 31, 2021, which included $28.5 million of nonrecurring cash receipts from the USPS settlement agreements. Net cash used in operating activities was $10.0 million during the year ended December 31, 2020. For the years ended December 31, 2021 and 2020, the Company had net income of $14.3 million and a net loss of $46.8 million, respectively.
For 2021, the net income included $18.0 million in adjustments for non-cash items and $8.7 million of cash used by changes in working capital. Non-cash items primarily consisted of $15.2 million in depreciation and amortization, $6.0 million in non-cash interest expense, non-cash lease expense of $4.0 million, the $2.5 million change in fair value of warrant liabilities, the amortization of debt discount and debt issuance costs of $1.1 million, $0.2 million loss on sale of assets, and stock-based compensation expense of $0.6 million, partially offset by a $11.0 million gain on extinguishment of debt, the $0.8 million change in fair value of embedded derivative liability, and a $0.1 million adjustment for deferred income taxes.
For 2020, the net loss included $40.2 million in adjustments for non-cash items and $3.4 million of cash provided by changes in working capital. Non-cash items primarily consisted of $14.8 million in depreciation and amortization, $10.0 million in loss on extinguishment of debt, $5.5 million in non-cash interest expense, $2.3 million in impairment charges, non-cash lease expense of $4.5 million, amortization of debt discount and debt issuance costs of $2.1 million, $1.3 million loss on sale of assets, and stock option and warrant-based compensation expense of $0.5 million, partially offset by a $0.4 million adjustment for deferred income taxes.
Investing Activities. Net cash used in investing activities was $7.1 million for the year ended December 31, 2021. Net cash provided by investing activities was $0.9 million for the year ended December 31, 2020. The net cash used in investing activities during 2021 is primarily related to $7.4 million of capital expenditures. The net cash provided by investing activities during 2020 is related to $1.0 million proceeds from the sale of fixed assets offset by $0.1 million of capital expenditures.
Financing Activities. Net cash used in financing activities was $35.7 million for the year ended December 31, 2021 and net cash provided by financing activities was $32.5 million for the year ended December 31, 2020. The cash used in financing activities during 2021 primarily consisted of $225.8 million in payments on factoring arrangements, $24.1 million in payments of debt principal, and $5.9 million in payments on finance lease liabilities, partially offset by $214.3 million in advances from factoring receivables and $6.5 million of proceeds from the issuance of debt. The cash provided by financing activities during 2020 primarily consisted of $185.4 million in advances from factoring receivables, proceeds of $32.8 million from the issuance of debt, and $6.2 million in proceeds from the sale of common stock, preferred stock and warrants, partially offset by $180.8 million in payments on factoring arrangements, $6.8 million in payments of debt principal, and $3.6 million in payments on finance lease liabilities.
Our primary historical and future sources of liquidity are cash on hand ($7.3 million at December 31, 2021), the incurrence of additional indebtedness, the sale of the Company's common stock or preferred stock, and advances under our accounts receivable factoring arrangements. However, there can be no assurance that we will be able to obtain additional financing in the future via the incurrence of additional indebtedness or the sale of the Company's common stock or preferred stock.
Our business requires substantial amounts of cash for operating activities, including salaries and wages paid to our employees, contract payments to independent contractors, and payments for fuel, maintenance and supplies, and other expenses. We also use large amounts of cash and credit for principal and interest payments, as well as operating and finance lease liabilities and capital expenditures to fund the replacement and/or growth in our tractor and trailer fleet.
As of December 31, 2021, we had a cash balance of $7.3 million, a working capital deficit of $93.4 million, stockholders' deficit of $50.9 million, and material debt and lease obligations of $114.4 million, which included term loan borrowings under a financing agreement with Antara Capital. During the year ended December 31, 2021, we reported cash provided by operating activities of $23.5 million that included $28.5 million of nonrecurring cash receipts from the USPS settlement agreements and net income of $14.3 million that included $34.8 million of pre-tax nonrecurring revenue from the USPS settlement agreements and a $11.0 million pre-tax gain on extinguishment of debt.
The following significant transactions and events affecting the Company's liquidity occurred during the year ended December 31, 2021:
During the fourth quarter of 2020, one of the Company's subsidiaries borrowed $17.0 million under the Main Street Priority Loan Program authorized by Section 13(3) of the Federal Reserve Act (the "Main Street Loan") and during the first quarter of 2021 used all of the net proceeds to pay down the aggregate principal amount due under the Antara Financing Agreement, including capitalized interest, from $33.6 million to $16.7 million.
During the first quarter of 2021, the Company entered into agreements with the USPS to settle claims submitted by the Company seeking additional compensation for transportation services provided under certain DRO contracts. The Company received a total of $28.5 million related to these claims and also renegotiated the contractual rates per mile for some of its DRO contracts on a prospective basis.
During the first quarter of 2021, the Company entered into an agreement with the Factor (as defined in Note 5, Factoring Arrangements) related to the application of $17.5 million and $7.1 million of proceeds received from
the USPS in February and January of 2021, respectively, arising out of the settlement agreements described above. Pursuant to the agreement, the parties acknowledged that the Factor previously applied approximately $1.6 of the $7.1 million of proceeds received in January 2021 plus approximately $0.6 million of funds held in reserve against a balance of $3.0 million for advances that the Factor made to the Company in September 2020 (the "Gross Purchase Advance Facility") and agreed that the Factor would remit $11.0 million of net proceeds to the Company and that the Factor would retain approximately $6.9 million of net proceeds and apply that amount to reduce the outstanding principal amount of the Company's factoring advances. The parties further agreed that the Company will repay the remaining balance of approximately $6.9 million due under the factoring arrangement in 48 equal monthly installments beginning January 1, 2022 and that the Factor would apply funds held in reserve against the approximately $0.8 million remaining balance of the Gross Purchase Advance Facility. The parties also agreed to work together to wind down their factoring relationship, including waiver of any applicable termination fees.
During the first and second quarters of 2021, the Company entered into agreements with certain noteholders to purchase promissory notes previously issued by the Company in the principal amount of $4.0 million by paying $0.6 million in cash and issuing warrants to purchase an aggregate of up to 1,481,453 shares of the Company's common stock at a price of $0.01 per share. The Company also agreed to exchange the warrant, previously issued to a noteholder, to purchase up to 1,200,000 shares of common stock of the Company at a price of $2.50 per share for (i) a warrant to purchase up to 950,000 shares of common stock of the Company at a price of $2.50 per share and (ii) a warrant to purchase up to 250,000 shares of common stock of the Company at a price of $0.01 per share.
During the second quarter of 2020, the Company obtained a loan in the amount of $10.0 million under the Paycheck Protection Program (the "PPP") of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act. The Company used the entire loan amount for qualifying expenses, and the entire amount borrowed under the loan, including all accrued interest, was forgiven by the United States Small Business Administration ("SBA") in July 2021.
The following significant transactions and events affecting the Company's liquidity occurred following the year ended December 31, 2021:
During the first quarter of 2022, the Company obtained a Bridge Loan and Executive Loans, both as described in Note 14, Subsequent Events, in the aggregate amount of approximately $9.8 million.
During the first quarter of 2022, the Company entered into amendments to certain secured convertible promissory notes in the aggregate principal amount of $9.5 million to permit immediate conversion of those notes, and the holders representative converted those notes into warrants to purchase 7,553,750 shares of common stock of the Company at a price of $0.01 per share.
As a result of these circumstances, the Company believes its existing cash, together with any positive cash flows from operations, may not be sufficient to support working capital and capital expenditure requirements for the next 12 months, and the Company may be required to seek additional financing from outside sources.
In evaluating the Company's ability to continue as a going concern and its potential need to seek additional financing from outside sources, management also considered the following conditions:
The counterparty to the Company's accounts receivable factoring arrangement is not obligated to purchase the Company's accounts receivable or make advances to the Company under such arrangement;
The Company is currently in default on certain of its debt obligations (Refer to Note 6, Debt, for further discussion); and
There can be no assurance that the Company will be able to obtain additional financing in the future via the incurrence of additional indebtedness or via the sale of the Company's common stock or preferred stock.
As a result of the circumstances described above, the Company may not have sufficient liquidity to make the required payments on its debt, factoring or leasing obligations; to satisfy future operating expenses; to make capital expenditures; or to provide for other cash needs.
Management's plans to mitigate the Company's current conditions include:
Negotiating with related parties and 3rd parties to refinance existing debt and lease obligations;
Potential future public or private debt or equity offerings;
Acquiring new profitable contracts and negotiating revised pricing for existing contracts;
Improvements to operations to gain driver efficiencies;
Purchases of trucks and trailers to reduce purchased transportation and truck rental expenses; and
Replacement of older trucks with newer trucks to lower the overall cost of ownership and improve cash flow through reduced maintenance and fuel costs.
Notwithstanding management's plans, there can be no assurance that the Company will be successful in its efforts to address its current liquidity and capital resource constraints. These conditions raise substantial doubt about the Company's ability to continue as a going concern for the next twelve months from the issuance of these consolidated financial statements within the Company's Form 10-K. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result if the Company is unable to continue as a going concern.
Refer to Notes 1, 5, 6 and 10 to the consolidated financial statements for further information regarding our debt, factoring, and lease obligations, including the future maturities of such obligations. Refer to Note 14, Subsequent Events, to the consolidated financial statements for further information regarding changes in our debt obligations and liquidity subsequent to December 31, 2021.
Refer to Note 11, Commitments and Contingencies - Off Balance Sheet Arrangements - Captive Insurance.
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, refer to Note 1, Description of Business and Summary of Significant Accounting Policies, 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.
We are required to estimate the fair value of the assets acquired and liabilities assumed in business combinations as of the acquisition date, including identified intangible assets. The amount of purchase price paid in excess of the net assets acquired is recorded as goodwill. The fair values are estimated in accordance with accounting standards which define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The fair values of the net assets acquired are determined primarily using Level 3 inputs (inputs that are unobservable to the marketplace participant).
The most significant fair value estimates include intangible assets (customer relationships and trade names) subject to amortization that were determined based primarily on the acquiree's projected cash flows. The projected cash flows include various assumptions, including estimated revenue growth rates, operating margins, customer attrition rates, royalty rates, and the appropriate risk-adjusted discount rates used to discount the projected cash flows.
We test goodwill for impairment annually and whenever events or circumstances make it more likely than not that an impairment may have occurred, such as a significant adverse change in the business climate or a decision to sell all or a portion of a reporting unit. We perform our annual goodwill impairment test as of October 1 and monitor for interim triggering events on an ongoing basis. All of the Company's goodwill is recorded in its Trucking reporting unit.
Goodwill is reviewed for impairment utilizing either a qualitative assessment or a quantitative goodwill impairment test. If we choose to perform a qualitative assessment and determine the fair value more likely than not exceeds the carrying value, no further evaluation is necessary. When we perform the quantitative goodwill impairment test, we compare the fair value of the reporting unit to the carrying value, which includes goodwill. If the fair value of the reporting unit exceeds its carrying value, the goodwill is not considered impaired. If the carrying value is higher than the fair value, the difference would be recognized as an impairment loss.
The impairment test process requires valuation of the reporting unit, which we determine using primarily the income, or discounted cash flows, approach. The assumptions about future cash flows and growth rates are based on the reporting unit's long-term forecast and are subject to review and approval by senior management. A reporting unit's discount rate is a risk-adjusted weighted average cost of capital, which we believe approximates the rate from a market participant's perspective. The estimated fair value could be impacted by changes in market conditions, interest rates, growth rates, tax rates, costs, pricing and capital expenditures. The fair value determination is categorized as Level 3 in the fair value hierarchy due to its use of internal projections and unobservable measurement inputs.
During the years ended December 31, 2021 and 2020, the annual impairment test did not result in an impairment of goodwill.
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 assumptions about future cash flows and growth rates are based on the asset group's long-term forecast and are subject to review and approval by senior management. An asset group's discount rate is a risk-adjusted weighted average cost of capital, which we believe approximates the rate from a market participant's perspective. The estimated fair value could be impacted by changes in market conditions, interest rates, growth rates, tax rates, costs, pricing and capital expenditures. The fair value determination is categorized as Level 3 in the fair value hierarchy due to its use of internal projections and unobservable measurement inputs.
Impairment expense of $2.3 million was recorded during the year ended December 31, 2020 related to the CNG Fueling Stations asset group.
Fair Valuation of Common Stock, Preferred Stock, Warrants and Stock Options
Our executive officers, directors and principal stockholders beneficially own a substantial majority of the Company's outstanding common stock. The Company's common stock does not have an observable quoted market price on the OTC Expert Market because the stock is thinly traded and is not eligible for proprietary broker-dealer quotations. As a result, we must utilize an alternative method to estimate the fair value of our common stock, including when the Company issues other equity instruments for which the common stock is the underlying security. We first use primarily the income, or discounted cash flows, approach to determine the estimated fair value of our total equity. The assumptions about future cash flows and growth rates are based on the Company's long-term forecast and are subject to review and approval by senior management. The discount rate utilized is a risk-adjusted weighted average cost of capital, which we believe approximates the rate from a market participant's perspective. We then use the option-pricing equity allocation method to allocate the estimated total equity value to our common stock and preferred stock. The inputs and assumptions used in the option-pricing model include: (1) the discount rate; (2) the estimated time to liquidity; (3) the Company's expected stock price volatility; (4) the estimated discount for the lack of marketability; and (5) the risk-free interest rate. The estimated fair value could be impacted by changes in market conditions, interest rates, growth rates, tax rates, costs, pricing and capital expenditures. The fair value determination is categorized as Level 3 in the fair value hierarchy due to its use of internal projections and unobservable measurement inputs.
The estimated fair value of the Company's common stock is a key assumption in the fair valuation of the preferred stock, warrants and stock options the Company issues.
The Company accounts for stock-based compensation awards based on the fair value of the award as of the grant date, which is calculated using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires the use of subjective assumptions, including the estimated fair value of the Company's common stock, the expected term of the award, the expected stock price volatility, expected dividend yield and the risk-free interest rate for the expected term of the award. The expected term represents the period of time the awards are expected to be outstanding. Due to the lack of sufficient historical exercise data to provide a reasonable basis upon which to otherwise estimate the expected term of the awards, we use the simplified method to estimate the expected term for our stock-based compensation awards. Under the simplified method, the expected term of an award is presumed to be the mid-point between the vesting date and the end of the contractual term. Expected volatility is based on historical volatilities for publicly traded stock of comparable companies over the estimated expected term of the awards. We assume no dividend yield because dividends on our common stock are not expected to be paid in the near future, which is consistent with our history of not paying dividends on our common stock.
Deferred Income Tax Assets and Liabilities
The carrying values of deferred income tax assets and liabilities reflect the application of our income tax accounting policies in accordance with applicable accounting standards and are based on management's assumptions and estimates regarding future operating results and levels of taxable income, as well as management's judgment regarding the interpretation of the provisions of applicable accounting standards. The carrying values of liabilities for income taxes currently payable are based on management's interpretations of applicable tax laws and incorporate management's assumptions and judgments regarding the use of tax planning strategies in various taxing jurisdictions. The use of different estimates, assumptions and judgments in connection with accounting for income taxes may result in materially different carrying values of income tax assets and liabilities and results of operations.
We evaluate the recoverability of these deferred tax assets by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources of income inherently rely heavily on estimates. We use our historical experience and our short and long-term business forecasts to provide insight. To the extent we do not consider it more likely than not that a deferred tax asset will be recovered, a valuation allowance is established. As of December 31, 2021, the Company had federal and state net operating losses of approximately $44.7 million and $30.2 million, respectively. As of December 31, 2020, the Company had federal and state net operating losses of approximately $50.5 million and $30.1 million, respectively. As of December 31, 2021, the Company has approximately $3.6 million of federal net operating losses available to offset future taxable income for 20 years and will begin to expire in 2036. The remaining $41.1 million of federal net operating losses are carried forward indefinitely to offset future taxable income up to an 80% limitation of taxable income in the year of use. The state net operating losses began to expire in 2022. These federal and state net operating loss carryforwards are reserved with a full valuation allowance because, based on the available evidence, we believe it is more likely than not that we would not be able to utilize those deferred tax assets in the future. If the actual amounts of taxable income differ from our estimates, the amount of our valuation allowance could be materially impacted.
Refer to Note 1, Description of Business and Summary of Significant Accounting Policies, to our consolidated financial statements included in this report.
Due to increased USPS volume, the Company's revenue and activity typically increase 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.
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